The Automotive Industry

Supply Chain Management for Honda and Toyota

Angeerjeet Goswami - 09
Ankit Maheshwari - 10
Rajat Anand - 52
Raveesh Verma - 54
Richa Bidasaria - 56
Rishi Rathi - 57
The Automotive Industry
 The Automotive industry is
one of the largest industries
in the United States
 New and used automotive
sales and repairs generates
over $200 billion dollars of the GDP each year.
 New car and light weight truck sales generated
$699 billion dollars in revenue in 2003.
Trends in the Industry

 Traditionally, domestic manufacturers

have dominated the market in the United
States.
 The top three domestic manufacturers
include:
 General Motors
 Ford
 DaimlerChrysler
Trends in the Industry
 In recent years, these
top domestic manufacturers
have concentrated on the
market for sport utility
vehicles and light trucks.
 This narrow concentration
has allowed foreign manufacturers, primarily
Japanese manufacturers, to steal some of the
market share for cars.
The Market Today
 In the past few years, General Motors, Ford, and
DaimlerChrysler’s market share for cars has been cut in
half.

 While domestic manufacturers still dominate their foreign

competitors, the Japanese market share of cars is
growing.
 Consumers are choosing Japanese cars over domestic
because of their competitive price, and high quality
reputations.
 These advantages are results of a very organized and
innovative way of doing business.
Honda
 Honda’s Operational practices show a
great example of the innovations the
Japanese automobile manufacturers
perform.
Operational Strategies
 Careful site selection of their US manufacturing
plants
 Greenfield Manufacturing Plants

 In- depth supplier relationship

 Close and interactive, similar to a
partnership
 Autonomic organizational structure
 Japanese/North American manager mix
 New entrants focus on more established
products and processes
Honda Purchasing

 Suppliers are involved with development

and design of new products
 Relationship is much like a partnership
 Requires an in-depth supplier selection
process
Honda Supply Chain

 Honda uses their economies of scale by

working with their parts suppliers to
order raw materials in large quantities.
 Example Honda Supply Chain
Honda
Honda Parts Supplier
Purchasing
Purchasing Honda Trading
Parts Supplier

Parts Supplier

Raw Materials Parts Supplier Honda

Mill Assembly
Plant
Parts Supplier
Honda
Parts Supplier Assembly
Plant
Structural Characteristics

 Also known as executional drivers that

reduce operating costs and increase
productivity
 Economy of Scale – All purchasing done
by Honda Trading America Corp.
 Technology – Multipurpose machinery
 Capacity Utilization – Honda operates
facilities in every major market they enter
Market Characteristics

 IT advancements
 3rdwave distribution software by Blinco
Systems
 Assures parts quality, controls availability,
guarantees delivery, provides consistent
materials pricing
 External factors
 Increasing oil prices effect transportation
costs for all markets
Competitive Characteristics

 Strategic and operational variables that

must be factored into the design of a
company’s global value chain
 Global value chain
 Demand chain (marketing, sales, service)
 Supply chain (sourcing, manufacturing,
logistics)
 Product development (R&D, design,
engineering, development, and launch)
Supply Chain Characteristics

 The key element for Honda is the flow of

information with their suppliers
 12 steps:
 Initial
contact, preparation/investigation of
Honda parts, quotations, initial plant visit,
prototype development, testing and
evaluation, mass production quotation,
preparation for mass production, trial run,
Quality Assurance Visit, agreement, purchase
order
 In-house guest engineers
Company Specific
Characteristics
 Strategic sourcing – “maximizing the
value added through your external
suppliers”
 Will chose highest supplier in overall
service (not just lowest price)
 “Target pricing”
 Price table for parts
 If price cannot be met, Honda will work
with supplier to get costs down
Q.C.D.D.M

 Customer Satisfaction is top priority

 Accomplished through suppliers
competitiveness in quality, cost, delivery,
development, and management
(Q.C.D.D.M.)
 Quality
 Most important factor
 Must be built into production process
Q.C.D.D.M cont’d

 Cost
 Suppliers are given target costs
 Cost reductions through own ideas,
technology, improved productivity, along
with joint efforts with Honda in value
engineering, and value analysis
 Delivery
 Suppliers must use just-in-time production
system
Q.C.D.D.M cont’d

 Development
 Uniqueness in design and specifications
 Helps create identity for Honda
 Management
 Positive attitude
 Measured by Q.C.D.D
 Feedback
 Grade cards for suppliers
Honda Quality and Efficiency
 Quality and Continuous Improvement
 Employee Driven “Kaizen”
 “Quality Circles”
 “Domestic Trouble Reports” (DTRs)
 MRP II and Web-based Ordering for
Supplier Base as a whole
 Extent of Efficiency in Supply Chain
 Honda Trading “Soybean Example”
 New Honda Ridgeline Composite Bed/Box
Foreign Automakers Share A
Similar Philosophy
 Customer Service is key
 Provides more predictable demand
schedule
 Allows for a stronger relationship with
Suppliers
Keys to achieving Cost
Effective Customer Service
 Monopsonistic Purchasing Power
 Strong Financial Health
 Able to ask more from Suppliers
 Understanding of global Economic
environment
Able To Get More Out of
Suppliers
 Toyota- Dedicated Manufacturing
Facilities
 Nissan- Supplier Parks
 Suppliers willing to do so because of
Foreign Automakers’ Financial Health.
 Postponement

 The Suppliers have practiced

postponement, in order to minimize
localized investment.
Main Local
Manufacturing Manufacturing
Facility (60%) facility (40%)
 Foreign Sourcing

 China: Wage Rate = 20-30 cents / hour

 Poor Industrial part output
 India: Wage Rate = 40-60 cents / hour
 High levels of Technology and knowledge
 Mexico: Wage Rate = $2-$3 / hour
 Use of domestic warehouses

Landed Cost is the ultimate cost factor: Logistics is key

 Complete Supply Chain:

Assembly
Main Plant Local Plant
facility

Asian Suppliers Warehouse

Mexican Suppliers
Forecasting Is Key

 Demand for Suppliers is Derived

 High Customer Service Levels
 Very Important for Foreign Suppliers
 A Lot of Statistical Information
 Overall Unit Movement
 Supplier Specific Unit Movements
Comparison With Domestic
Automakers
 More of a collaborative relationship
 High levels of information sharing
 Better information
 Lower inventory levels
 The financial health of Suppliers is
extremely important
 Sharing of Financial prosperity & follies
The Toyota Way
JIT Logistics System
 Cash to Cash: Toyota, Inventory
Management and Heijunka
 Both Accounting and Supply Chain professionals rely on Cash to
Cash (C2C) measures to make processes more efficient and cost-
effective.

 C2C is generally the number of days it takes to convert the expenses

for raw materials into payment for the finished product (1).

 Many factors influence this, including inventory management, supplier

performance, and collection of accounts receivable. In accounting,
C2C is a good measurement of liquidity of the firm.

 For supply chain professionals, it measures the efficiency of the

entire process, from suppliers, to manufacturing, through to order
fulfillment (2).
 A company can take three
actions to decrease the C2C
cycle:
 Extend average accounts payable

 Reduce inventory by reducing the production

cycle

 Decrease average accounts receivable

 Internal Structure
 One organization that has successfully implemented a C2C system
is Japanese automaker Toyota. Its operational success is often
attributed to the focus on reduction in inventory.

 The term Toyota uses for their system is “heijunka”. Translated from
Japanese, it means “make flat and level.” In particular, it refers to
eliminating spikes in demand, but also creating operational efficiency
and reducing overall supply chain costs.

 Toyota’s lean operation focuses on the idea of buy one, sell one.
Toyota is able to manufacture vehicles in about the same order
customers buy them . This adaptability to demand has given Toyota
the advantage of carrying the least inventory in the field of Japanese
auto manufacturers .
 Working with suppliers
 This concept is one that Toyota uses internally and it also requires of
its suppliers to improve the overall C2C cycle.

 In the North American auto supply market, suppliers working with

Japanese-owned automakers perform at higher levels than those
working with U.S. automakers.

 Toyota works with U.S. suppliers to teach them the lean

manufacturing techniques used in Toyota’s manufacturing facilities
(4). These techniques ensure a short amount of time between when
Toyota needs an item and when the supplier makes it.
 Using small batch production, this short lead-time can be achieved.
Rather than running large batches and keeping excess inventory,
plants quickly run a small batch and keep inventory low.

 For Toyota, this translates to being able to better meet customers’

demands because manufacturing facilities do not have to wait on a
particular part before beginning production on a vehicle .
 Benefits of Heijunka
 Toyota’s improvement in its supply chain benefits the
automaker in many ways:

 Inventory levels at parts distribution centers have

decreased by 53 percent from stocking levels in the
1980s.

 Since 1994, the inventory turn of parts in the average

dealership has increased from 3.7 to 5.7.
 •Toyota dealerships have achieved 20 percent to 40
percent reductions in floor space utilization.

 The time spent improving the systems of U.S. suppliers

shows results as well.

 From 1997 to 2000 alone, supplier on-time delivery

increased from 76 percent to 93 percent.
 Sixty-six percent of suppliers on daily order status
are able to deliver within five days or less.

 While inventory management is an effective way

to reduce the C2C cycle, it not only requires
efficient manufacturing, but also effective
forecasting.
 RV – Intro Honda (Honda PPT)
 Richa – Slides 7-15
 Ankit – 16 – 28
 RV – Toyota intro 29
 Rajat - 30- 37
 Angir – 38 - 44
 Rishi – 45-50
Questions?