Kojima, Yuji

Expurma

Toyota’s Supply Chain Procurement

The topic selected is (Strategic Procurement & Supply Chain Management). For this study, I
have selected Toyota Motor Corporations as my company of choice. Toyota is without doubt the best in
the world, with its many philosophies and principles on how to make the best out of the least; JIT, lean
production and elimination of waste and the desire for continuous improvement are just a few ways
how Toyota has become the best in the auto industry. Toyota as a name, a company, and as a brand has
become synonymous with Quality.
Across the world, Toyota participates enthusiastically in community activities ranging from the
sponsorship of educational and cultural programmes to international exchange and research. Toyota has
the fastest product development process in the world. New cars and trucks take 12 months or less to
design, while competitors typically require two to three years. Toyota is benchmarked as the best in
class by all of its peers and competitors throughout the world for high quality, high productivity,
manufacturing speed, and flexibility. Toyota automobiles have consistently been at the top of quality
rankings. At the heart of its success, lie family values that have been passed down; a norm that has
become the Organizational Culture of Toyota – The Quest for Excellence, and The Passion to Lead.
Toyota’s achievement of excellence stems from implementing lean production, or which they refer to as
‘The Toyota Way’. The most visible product of Toyota’s quest for excellence is its manufacturing
philosophy, called the Toyota Production System (TPS). I have selected to apply this topic to Toyota,
because to perfect their way of lean production, they work on it from the root; i.e. their suppliers, and
purchasing strategy. Scope of Project Analyzing the strategies of Toyota, and how they implement it in
their purchasing and procurement policy. Also, analyzing how Toyota selects it suppliers and what
selection processes do they go through; and also conducting an analysis of Toyota’s supply chain and its
supply chain management. Limitations This study was really difficult to attain, as personal interviews or
interactions with Toyota’s direct employees was beyond our budgets to conduct. This study is a result of
hard work and extensive internet and textual or written research from more than ten websites and
three books. Also, the study of Toyota was too large and very difficult to summarize into the limited
requirements of this paper.
Toyota’s Core Competencies Toyota has several core competencies which they could utilize
to further gain advantage over their competitors. In January of 2009, Toyota overtook the U.S. auto
giant General Motors, to become the market leader in the automotive industry. One core competency
of Toyota is their brand management. The strength of their automotive marketing has been such that
their brand is known even in the parts of the world where cars are not the common medium of
transportation. Another core competency is their supply chain management, which shows their ability to
maintain a steady stream of raw material coming in for production, because of their long-term good
relationships with their steel, glass, plastics and other raw material suppliers. Another thing that forms
part of their core competencies is their highly coordinated logistics system, which is outsourced; and
leads to excellent inventory management and always on schedule production activities. Another major
core competency of Toyota is their ability at the moving assembly line. Not only this; The Toyota Way of
lean production, its JIT and TQM approach; all are part of its core competencies. Being the pioneer of
such mass production and waste elimination system, they were able to get ahead of the competitors
manufacturing process-wise and were also able to save on cost and time. Yet another core competency
is Toyota’s focusing on its product development technology under a single product-information-
management program through standardizing and incorporating them; thus highlighting Toyota’s work
and effort on the development of sustainable production, and their commitment to perform
environmentally. Toyota and its suppliers Toyota has basically 14 management principles, which
combine to make ‘The Toyota Way’. Of those 14 principles, Principle 11 states that: “Respect your
Extended Network of Partners and Suppliers by Challenging them and Helping Them Improve”. This is
merely a small sentence, but is more than enough to illustrate the importance of its suppliers to Toyota,
and how it sees them as strategic partners and a part of its organization. Toyota in its early days was
very small, and didn’t have a lot of business or production. It didn’t have the resources, capital or
equipment to design and make the myriad of components that go into the making of a car. Toyota’s
offer to its suppliers was small. It was the opportunity for all partners to grow the business together and
mutually benefit in the long term. So, like the associates who work inside Toyota, suppliers became part
of the extended family who grew and learned the Toyota Production System. Even when Toyota became
a global powerhouse, it maintained its supplier partnerships. One way that Toyota has honed its skills in
applying TPS is by working on projects with suppliers. Toyota needs its suppliers to be as capable as its
own plants at building and delivering high-quality components just in time. Moreover, Toyota cannot cut
costs unless suppliers cut costs, lest Toyota simply push cost reductions onto suppliers, which is not the
Toyota Way. Since Toyota does not view parts as commodities to be sourced on the market through
open bidding, it is critical that it works with highly capable suppliers that are following TPS or an
equivalent system. Toyota’s purchasing department has its own quality and TPS experts to work with
suppliers when there are problems. Toyota pays careful attention to its suppliers and their performance.
It provides ample hands-on assistance and monitoring to avoid problems; or in the case of an
occurrence of a problem, to correct it as soon as possible. If problems do occur, Toyota sends a team of
its experts to address the problem and to create the action plan. Whereas other companies would
threaten problem suppliers—“Fix the problems or we will drop you”—Toyota nurses them out of their
“sickness” in a very holistic way. There are several advantages for Toyota in treating suppliers as
strategic partners or part of the Toyota family. First of all Toyota’s JIT system is a practiced specimen, of
how important and beneficial supplier relationships truly are. This system would have never been truly
effective if successful integration with suppliers had not taken place. Parts and components arrive just
when they are needed and hence Toyota saves on storage and warehouse costs. Toyota’s suppliers are
integral to the just-in-time philosophy, both when it is working smoothly and when there is a breakdown
in the system. Toyota also saves money on its logistics, and this as well roots from careful integration
with suppliers. Also the TQM system of Toyota can be traced back to Toyota’s supply chain
management. Toyota outsources almost 70% of the components that go into its cars, and it maintains
close relationships with its key suppliers, so as to procure quality parts and components. Toyota has
been rewarded time and time again for its serious investment in building a network of highly capable
suppliers that is truly integrated into Toyota’s extended lean enterprise. Much of the award winning
quality that distinguishes Toyota and Lexus results from the excellence in innovation, engineering,
manufacture, and overall reliability of Toyota’s suppliers. Toyota’s Purchasing Strategy Toyota’s
Purchasing/Procurement Policy The ultimate objective of Toyota is to produce vehicles that fully satisfy
the customer. To this end, Toyota has developed three basic principles that guide its relationship with
suppliers with a view to optimizing its purchases in a global context. These principles are the following:
i) Fair competition based on an open door policy Toyota is open to any potential supplier,
regardless of nationality, size or whether this company is a first-time supplier or not. Toyota’s
co-operation with suppliers is solely based on business considerations, which include an
assessment of the overall economic and technological capacities of the potential supplier.
Critical parameters of this evaluation are quality, cost, technological capabilities and reliability
 regarding the on-time delivery of the required quantities of inputs, as well as the
entrepreneur’s ability to implement a kaizen strategy, which means the continued
improvement and enhancement of products, services and management.
ii) Mutual benefit based on mutual trust Toyota believes in developing mutually beneficial, long-
term relationships with suppliers based on trust and confidence. Close and wide-ranging
communication with them is considered a key factor in building and maintaining trust.
iii) Contribution to local economic development through localization and good corporate
governance As part of the on-going globalisation efforts, Toyota is relocating a larger part of its
production to other countries. It is its objective to contribute to the host country’s economic
development in line with Toyota’s market presence by purchasing parts and other inputs from
local suppliers. This is a Flowchart of the Toyota’s Purchasing Process Toyota’s Supply Chain
Management Toyota’s Supplier Consideration and the Selection Process At Toyota, choosing a
supplier is a long, drawn-out process that involves verifying whether the supplier will mesh with
the supply network. In some cases, suppliers are selected because they have innovations that
improve processes or decrease costs. Both new and existing suppliers are expected to share
their innovations with other suppliers that supply similar products. As a basic rule, Toyota
expects its suppliers to excel in quality, cost, delivery, and engineering, including technology,
and management. These are the five key areas that shape competitive entrepreneurs and make
them successful in a competitive environment. Thus, Toyota requires suppliers to maintain
consistently high quality levels which can be measured in terms of the number of defect parts
per million. In addition, suppliers need to build and to maintain a strong position regarding
unique designs or special technologies, while being cost- competitive. They also need to follow
and to monitor trends in information technology and be able to harmoniously amalgamate
state-of-the-art technology with their business organization. It is often necessary that potential
suppliers undergo a preparatory process before entering a business partnership with Toyota.
During this period, the management should attach particular emphasis on the following issues:
* Encouragement of an enterprise culture of creativity, continuous learning and improvement;
* Particular attention on R & D, which should go beyond technological issues to include an
analysis of both customers’ needs and competitors’ competitive potential; * Improvement of
employees’ satisfaction in order to promote creativity and strengthen organizational
development; * Strengthening the management information system to help executives to take
informed and effective decisions. Toyota views new suppliers cautiously and gives only very
small orders. They must prove their sincerity and commitment to Toyota’s high performance
standards for quality, cost, and delivery. If they demonstrate this for early orders, they will get
increasingly larger orders. Toyota will teach them the Toyota Way and adopt them into the
family. This is a model of what Toyota expects from its suppliers. Toyota’s suppliers have to
show excellence in areas that Toyota sees as critical. These areas are cost, delivery, engineering,
management and quality. Toyota’s philosophy is that suppliers have to excel in these areas if
they wish to stand out amongst other suppliers and to be successful with global
competitiveness Tiered Supplier Organizations Toyota like many auto carmakers is a network of
suppliers. Tier 1 suppliers are Toyota’s direct suppliers, which is followed by Tier 2 suppliers and
so on. Lastly, there are the Tier 4 suppliers. These are generally small in size, but are critical to
the suppliers that are supplying Toyota. Toyota, to maintain the smooth flow in its supply chain,
even handles when problem exist in these Tiers. An example of this can be a situation in which a
government regulation required a change in antirust coatings. More than 4,000 parts were
impacted by this change, but there were only a small number of suppliers that supplied the
coating materials. Thus, Toyota was able to focus attention on a few suppliers to develop the
new coating materials to be provided to suppliers that coated the 4,000 parts. Working with
these lower-tier suppliers was the key to making the necessary changes in a timely and efficient
manner. Toyota chooses suppliers across multiple tiers so as to guarantee availability of
innovative solutions across the supply chain. Pressure on Suppliers to Perform Toyota’s
suppliers are always at their toes. They do not get complacent or feel that they can ease-out,
even if they are considered as Toyota’s trusted suppliers and have been supplying Toyota
quality materials for a number of years. Even suppliers who have acquired long-term contracts
from Toyota, for supplying specific components for a model or set of models have to prove that
they are worth the trust to have been given the contract. Otherwise they would jeopardize their
opportunity of continuing as Toyota’s suppliers or risk not acquiring such a contract in future
models. The depth of Toyota’s Supplier Relationship Toyota’s suppliers suggest that Toyota’s
processes have a few characteristics that enable their success, namely: * Pervasive
collaboration tools that have common standards and are compatible with one another *
Visibility and visual control not fogged by analysis * Trust to share intellectual property without
fear of abuse * Modular view of teams and processes and flexible planning to keep goals
aligned with customer needs * Encouragement of teams as a vehicle to solve problems Assisting
and Helping Suppliers A key feature of Toyota’s supply chain is the automaker’s role in supplier
capability development. This point has already been addressed earlier in this project, how
Toyota provides assistance to its suppliers and helps them learn. Supplier Location Decisions
Toyota’s planning for assembly plant sites assumes that most suppliers will be located at a
reasonable distance from the assembly plant and that their delivery schedules will permit
efficient operation of the assembly plant to produce vehicles based on the final vehicle mix and
sequence. The low lot sizes of assembly plant parts orders imply that suppliers need to be
located close to the assembly plant. Many suppliers choose to be located close to an assembly
plant. In Japan, 85 percent of the volume comes from suppliers located within a 50-mile radius
of a plant (i.e., within a one-hour drive). In North America and Europe, the goal is for 80 percent
of the parts to be delivered within three to five days lead time. The Toyota Target Value System
The Toyota Target Value System is a complex system that is continuously applied in Toyota-
supplier relationships. Under this system, Toyota and a supplier agree on a number of long-term
issues and objectives to strengthen the supplier’s competitiveness. In the course of intense
consultations, the long-range objectives are scaled down to annual targets, the so-called “target
values”. On this basis, the supplier undertakes appropriate steps and measures to reach these
goals as agreed. Progress is regularly evaluated in terms of organization, effort and
achievement and the assessment is communicated to the supplier. Suppliers that succeed in
raising their levels of competitiveness receive awards. In case suppliers experience difficulties in
their efforts to attain the agreed targets, Toyota provides expertise to analyze the problems and
to design measures to remedy the situation. The continuing circle of improvement, attainment
and further improvement enables suppliers to improve their competitive edge, while laying the
foundation for a stable and long-term business relationship with Toyota, as well as for a
broadened range of business opportunities. This long-term approach also helps to overcome
problems emanating from economic recession and turmoil. Environmentally-Friendly Products
Based on “Green Procurement” In order to produce environmentally-friendly products, Toyota
aims to procure parts, materials and equipment that have low environmental impact from
suppliers that always give sufficient consideration to the environment. Toyota’s Supplier
Strategies: Strengths and Weaknesses Strengths Suppliers are considered part of Toyota’s value
chain. Having strong relationships with partners provides Toyota with certain advantages. Its
lean production methods are directly integrated with the efficiency of suppliers. The
advantages that Toyota acquires of its supplier strategies include the inventory that Toyota
receives JIT from its suppliers. Toyota’s suppliers work hand in hand with Toyota to improve
processes and the quality of its products. These supplier strategies also help Toyota shed its
costs. The work that Toyota has done with its suppliers has helped the suppliers in eliminating
waste from their factory floors; shedding cost and getting the best out of the least. All these
savings and reductions in costs are passed on to Toyota as low priced – high quality parts and
components. These supplier strategies have also increased Toyota’s quality, and have
decreased defects to a bare minimum. Another visible advantage of Toyota’s supplier strategies
is that the company has decreased its time-to-market for its new or developing products.
Suppliers respect Toyota and share common interests and mutual benefits with Toyota. These
strong ties also help improve Toyota’s insight on the occurrence of problems and avoiding
them, as it goes beyond just handling its direct suppliers; in fact it also deals with its Tier 2, Tier
3 and Tier 4 suppliers. Also, Toyota’s decision to select most of its suppliers that are
geographically located near to it, also helps solve logistics problem and brings a large reduction
in the cost of transporting the parts or components to its plants. Weaknesses (Toyota has a very
studied and planned organizational structure. Its departments are perfectly set and planned.
We as students did not have the ample resources to conduct a study on the weaknesses of
Toyota – so what we mention here are just assumptions.) Recent recalls that Toyota has
suffered, have been to some extent blamed on its suppliers and Toyota’s Supplier Management.
There is a wide speculation that since Toyota, after overtaking GM as the largest auto
manufacturer set its goal to increase its market share from 11% to 15%. Due to this Toyota lost
sight of its core philosophies, and grew complacent in its supplier selection process. Thus,
summarizing that Toyota is only as good as its network of suppliers. Denso, a core supplier of
Toyota, which conducts more than 30% of its business with Toyota is said to be somewhat
frustrated with the closeness that Toyota maintains with it. This is due to the reason being that
Denso also supplies to other customers which are also car manufacturers. These customers are
namely Honda, Nissan and Mazda etc. and are considered by Toyota as its main competitors;
especially Honda and Nissan. These deviating relationships might possibly hurt or damage
Toyota in the long run; if corrective measures are not taken. Also, some suppliers complain that
although Toyota is their best customer, it doesn’t let go of its bargaining power; meaning that
Toyota keeps an upper hand over everything. It can also be argued that having low inventories,
if not managed well can cause problems in the production line. Corrective Actions Required
Knowing how Toyota works, if these problems come into existence; Toyota will have a carefully
planned approach to solving them. To begin with Toyota would first clarify the problem and see
the comparison between the current and the ideal or required state. Then as second step, it
would grasp the actual situation and see the gaps, which have caused the problem to occur. A
third step would be to break down the problem and set targets to correct them bit by bit.
Finally, it would conduct an analysis of the underlying causes. What Toyota should do to
prevent the problems mentioned in the (Weaknesses) section above is that Toyota must
improve its supplier management process and make some corrections to its supply chain.
Conclusion Japanese carmakers have always been considered the benchmarks in their industry,
and Toyota is the best among the Japanese car manufacturers, establishing it as the benchmark
of benchmarks. Toyota has excellence embedded deep in its core and has helped and
developed its suppliers to do the same, by integrating and applying a scope of mutual learning
and development. Fun Fact As a full stop to this project, we would leave you with a fun fact to
think over. Today, Toyota is the world's largest manufacturer of automobiles in unit sales and in
net sales. It is by far the largest Japanese automotive manufacturer, producing more than 10
million vehicles per year, equivalent to one every six seconds. In the time it has taken you to
read this paragraph, Toyota would have produced at least another three or four cars!
Sources:

http://www.economist.com/node/15576506 2. www.toyota-industries.com 3. http://www.strategicsourceror.com/2011/04/toyota-supply-of-

cars-will-be-impacted.html 4. www.toyota-global.com 5. http://blogs.gxs.com/morleym/2010/02/improving-visibility-across-
toyota%E2%80%99s-supply-chain.html 6. http://thethrivingsmallbusiness.com/articles/what-can-we-learn-from-the-toyota-crisis/ 7.
www.businessweek.com 8. http://www.toyota.co.nz 9. www.toyotasupplier.com 10.
http://www.industryweek.com/articles/toyotas_real_secret_hint_its_not_tps_13432.aspx 11.
http://www.autoweek.com/article/20060818/free/60816004 12. www.inc.com 13.
http://www.businessweek.com/bwdaily/dnflash/content/jan2010/db20100128_907800.htm 14. http://www.bnet.com/blog/mba/lessoned-
learned-from-