TOYOTA SUPPLY CHAIN MANAGEMENT
A STRATEGIC APPROACH TO THE PRINCIPLES OF TOYOTA’S RENOWNED SYSTEMBy ANANTH V. IYER SRIDHAR SESHADRI ROY VASHER
The McGraw-Hill Companies, Inc.
Copyright © 2009 Ananth V. Iyer, Sridhar Seshadri, and Roy Vasher
All right reserved.
ISBN: 978-0-07-161549-5
Contents
Chapter One
Toyota Learning Principles and the v4L Framework
Toyota is well known for its approach to problem solving and continuous improvement. Articles by practitioners, researchers, and participants have made the tools and techniques of continuous improvement familiar to every business executive. For example, phrases such as andon, heijunka, and kanban have become part of the day-to-day vocabulary of managers. In an insightful commentary on these tools and techniques, Jeffrey Liker writes that Toyota’s success goes beyond these tools and techniques to what he calls “The Toyota Way.”
Liker presents the Toyota Way as an all-encompassing method for designing and managing processes. Every student of Toyota also knows that the Toyota Way is unique, not only in its approach to problem solving but also in perpetuating its way of thinking across different types of operations, organizations (including suppliers, logistics providers, and dealers), and worldwide locations. Underlying the success of Toyota is the company’s approach to scientifically examining problems, solving them, learning from the experience, and passing on that knowledge to others.
Toyota is a global auto company with many products and markets. The company encompasses markets across the globe with different characteristics (e.g., the United States, Europe, and Japan) that warrant different supply chain configurations. In addition, differences among the Toyota, Lexus, and Scion vehicles warrant different supply chain processes. Although common processes underpin these supply chains, variations across these supply chains provide additional insights. We believe that an understanding of how all these supply chains coexist in one company provides an excellent learning opportunity for a practicing supply chain manager to apply the v4L framework to his or her work.
v4L Framework
Performance at Toyota is evaluated with equal weight given to both the process used to derive performance and the results achieved. This process focus aims to generate a balance of key supply chain parametersvariety of products offered, velocity of product flow, variability of outcomes against forecast, and visibility of processes to enable learning. The learning follows a carefully documented process that promotes continuous improvement. At the end of every chapter a reflection section will be included that links the chapter to the v4L framework: balancing variety, velocity, variability, and visibility across the supply chain. One way for managers to understand Toyota’s concepts is to first ask how their company’s supply chain achieves this balance. Often, variety is chosen with a focus on marketing benefits with scant attention to supply chain implications, velocity, variability, and the like. This off-optimal choice of variety can have severe repercussions across the supply chain, which is often difficult to untangle. A careful choice of v4L parameters enables superior supply chain performance at Toyota.
Learning (L) Principles
Toyota has mastered the art of learning and believes that the principles to attain mastery are universal. Moreover, Toyota has spread these ideas throughout its supply chain in its leadership role. We shall review these ideas in later chapters and provide a summary of methods that makes learning a practical and ongoing process at every level and every task in Toyota. Toyota’s way of making learning happen not only conforms to the theory of learning (as we mention in Chapter 11) but can be simply explained (as is often the case with things that are very hard to accomplish!). The following are the main principles:
* Create awareness. Unless problems are seen, they will not be solved. Systems need to be in place to report ideas, problems, deviations, and potential issues to a direct team leader with no delay.
* Establish capability. Unless someone is capable of solving a problem that might arise within the system boundaries set for him or her, that person will be unable to contribute to the problem-solving process and will be unable to recognize the need for specialized help.
* Make action protocols. Actions have to be taken within a set of constraints, and they must conform to certain standards. Doing so will help in the identification of the relation between action and results. It will aid in the codification of the knowledge for future use, with the same language and format used as well as similar content.
* Generate system-level awareness. As experience with solving problems is obtained, greater awareness of other areas that might be affected by actions or that might impact one’s own performance needs to be created.
* Produce the ability to teach. As system-level awareness and experience accumulate, the capability to teach others about these methods needs to be in place.
v4L Principles
The v4L learning principles are combined across all Toyota supply chain management processes to systematically focus on the v4L balance:
* Variety is carefully chosen to balance market demands and operational efficiency. Awareness of the impact of variety on the market demand and on manufacturing and supply chain costs enables all the entities across the supply chain to be considered when decisions regarding variety are being made. In one sense, variety represents a crucial supply chain design choice that has an impact across all supply chain participants. A key issue when variety is being chosen is the need to have feedback loops to ensure that the selected variety represents the best response to current market conditions. As we will discuss in each of the chapters, this is where the learning features of Toyota’s process enable the constant loop of Plan, Do, Check, and Act (PDCA).
* Velocity of supply chain flows is the next key concept, and it manifests itself in all processes across the supply chain. A focus on maintaining a steady flow throughout the system enables capacity planning to be synchronized across the supply chain. The detailed process descriptions in the following chapters will highlight how a rate-based approach serves as a linchpin for the planning processes across the system.
* Variability of orders or deliveries across the supply chain is minimized by how the individual processes are executed. Reducing variability enables all of the supply chain flows to operate with low levels of inventory. It also enables quality improvement processes to operate without interruption, thus enabling continuous cost reductions and quality improvements. Notice that variety, velocity, and variability all interact to stabilize supply chain performance.
* Visibility of all processes is ensured with use of the right metrics and the requirement that a consensus be reached before plans are changed. At Toyota, performance metrics have a 50 percent weight for results and a 50 percent weight for process compliance. In other words, the goal is to reward not only short-term successes but also ensure that the correct processes are followed. Such an approach ensures that bottlenecks are visible and responses immediate, changes are deliberate, velocity is maintained, variety is synchronized to demand, and variability is minimized. Visibility enables continuous learning and feedback, thus guaranteeing that execution of processes remains synchronized with market realities.
We suggest that v4L highlight the intricate balance of all supply chain processes. How each of them is balanced by vehicle type or geography is a business choice that reflects Toyota’s competitiveness in that market. The choice of the v4L and the actions required to implement these choices are guided by the learning principles. All companies should be asking themselves how their current choices reflect the impact of the v4L. A way to remember this concept is to ask, is the supply chain’s v4L engine at my company appropriately tuned for competitive performance?
Chapter Two
Comprehensive Overview of Supply Chain
The Toyota Production System (TPS) is the benchmark used throughout the world as the foundation for “lean” thinking. At Toyota, the TPS practices and principles extend well beyond the factory walls to include the extended supply chain and require some crucial choices to ensure supply chain efficiency. This chapter explains how Toyota plans and operates its supply chains globally. But first, a brief look at the extended global automobile supply chain is in order, which will enable you to understand the processes described in the following chapters.
The automotive supply chain is very complex and consists of many processes that, when linked together, form a supply chain from the customer back to the various tiers of suppliers. The physical processes consist of the production of parts at the suppliers, transportation of these parts to the assembly plant of the original equipment manufacturer (OEM), assembly of parts into a completed vehicle, distribution of completed vehicles to dealers, and finally delivery to a customer. In addition to the physical processes, there are both preproduction and day-to-day operational support processes. To fully understand these processes, some background on the auto industry is necessary. The following questions need to be answered:
* What is the product?
* Who are the customers?
* What are the distribution models?
What Is the Product?
A car or a truck can be described with its specifications. Each OEM uses a slightly different terminology to define a vehicle’s specifications. Toyota uses a hierarchical method of vehicle specifications. The typical hierarchy of the vehicle specifications is shown in Table 2-1. The following are some examples of vehicle specifications:
* Make. Toyota, Lexus
* Models. Camry, Avalon, Tundra, Sienna, etc.
* Body style. Four-door sedan, two-door coupe, convertible, crew cab, double cab, etc.
* Grade. XLE, LE, SE, etc. When a grade is selected, it usually includes several standard equipment items. Typically the higher-grade vehicles include many standard items. Sometimes when the grade is selected, the engine and transmission combination is included as standard equipment.
* Engine. Six-cylinder, four-cylinder, etc.
* Transmission. Automatic, five-speed, etc.
* Factory options. Engine, transmission, sunroof, air-conditioning, navigation, radio, power windows, etc.
* Accessories. These items are like options, but they can be installed in the factory or added after the vehicle is built. Examples are spoiler, tow hitch, roof rack, and pinstripes.
In addition to the above specifications, exterior and interior colors must be included to complete the vehicle build specifications:
* Exterior color. The outside color is usually one color; however, it could be two- toned.
* Interior trim/color. The interior colors (e.g., black leather and gray cloth) are usually coordinated with exterior ones, but not all interior colors always will be available with all exterior colors.
So each vehicle is built with a unique set of specifications called a “build combination.” If all possible build combinations were produced, then the total build combinations for a model would be in the millions. This variety would make managing the supply chain an extremely complex and costly process; therefore, many automotive companies limit the number of build combinations offered in each market area. Toyota has been extremely successful in balancing the combinations that are made and sold by sales area. For example, one approach used at Toyota to reduce the build combinations is to include many standard equipment options based on the model and grade that is selected. The methodology on how to choose profitable levels of variety to be offered across market areas is explained in Chapter 3.
Who Are the Customers?
Automobile companies have several categories of customers that need to be considered. The following is a list of the types of customers and a brief description of each:
* Retail consumers. The retail segment is the largest segment of customers, and it is also the one in which the automotive companies make the most profits. Although not all retail customers are the same, as yet there are not clear classifications for groups of customers. Figure 2-1 illustrates how various customer types can be plotted along a continuum: at one end is the serious buyer and at the other is the serious shopper.
* The serious buyer is a person who needs a vehicle within a short time frame. This type of buyer shops for price and value and will compromise on vehicle specifications. Some reasons that this type of buyer is in the market for a vehicle are that a vehicle needs replacement because of an accident, the current vehicle needs major repair, or the lease is expiring. This type of customer wants to walk into a dealership and drive out with a new vehicle.
* The serious shopper is a person who has done homework and knows exactly what he or she wants. This type of shopper has researched several vehicle models and options prior to visiting the dealership and then proceeds to the dealer with the complete vehicle specification in hand. Because the serious shopper is very particular about the vehicle he or she wants, this customer will shop around or perhaps wait until a vehicle can be ordered “fresh from the factory.” Examples of the serious shopper are a consumer who is young, a first-time buyer, and a car enthusiast.
* The area on the continuum from the serious buyer to the serious shopper is by far where most customers can be found. Indeed, most customers who walk into a dealership have not made up their minds on the exact vehicle specification or even if they are ready to buy a vehicle.
* Employees/suppliers:
* Employees. Automotive companies allow employees, relatives, and (in some cases) friends to purchase a limited number of vehicles per year at a substantial discount. The employees must receive prior approval before proceeding to a dealer to make a purchase or place an order. The purchase price is calculated automatically based on the discount allowed. The dealer may also receive some rebate to ensure that the dealer margin is maintained.
* Suppliers. Automotive companies may offer selected employees of suppliers a vehicle purchase program. This arrangement is similar to the employee purchase program in that the purchaser must get prior approval before proceeding to a dealer to purchase a vehicle. The purchase price is calculated automatically based on the discount allowed. The dealer may also receive some rebate to guarantee that the dealer margin is maintained.
* Fleet:
* Rental companies. The rental companies (Hertz, Avis, Enterprise, etc.) negotiate a contract with each automobile company for annual volume of each model. The detailed specifications of each monthly vehicle order are submitted in advance, and the vehicles are scheduled for production based on the delivery schedule requested by the rental companies. Because space at most rental facilities is limited, the rental companies need to minimize the overlap of new vehicles arriving and the used vehicles being shipped out for auction or resale.
* Commercial fleet. These are private companies that provide a company car for selected employees who require a vehicle to perform their job or for certain executives as a perk. Examples are senior management, sales representatives, taxi drivers, and delivery persons. These smaller fleet customers may negotiate a deal with the automotive company or a dealer. In some cases there may be a long-term contract with multiple automotive companies to provide specific models for a company vehicle program. The company may offer employees an option to select from a list of vehicles with specified options from multiple automotive companies. Then, either based on a lease period or on mileage, the employee will order a replacement vehicle.
* Government entities. All levels of governmentfederal, state, and localpurchase vehicles from the automotive companies. Contracts are usually negotiated with the automotive companies to provide vehicles over a period of time. In many cases, special orders may need to be placed for vehicles with unique equipment such as police cars and fire trucks.
Clearly, streamlining the supply chain requires an understanding of the customer types and relative size and profitability of each segment. The following are some examples that show how the customer types affect the supply chain:
* At Toyota plants in Japan, a large percentage of the production orders are exported to countries all around the world. So these order requirements are fixed and scheduled at least one month in advance for production. Toyota’s advantage is that it can allow its domestic dealers in Japan to change a greater percentage of orders closer to production because the export orders do not change. The export orders create a buffer to absorb the domestic changes in orders.
* At Dell, about 85 percent of the orders are for corporate customers. Corporate orders are forecast in advance and can be scheduled based on the lead time for each corporate customer. The retail orders coming through the Internet can be fulfilled quickly even if demand is highly volatile, because the corporate orders can be shifted slightly to absorb the variability in retail customer demand.
* At Ford, when Hertz was a wholly owned subsidiary, at least 40 percent of some models were sold to Hertz. This arrangement enabled Ford to use the Hertz volume to fill in the valleys in demand during the year when retail sales were slow.
Thus, customer types and order characteristics can be used to build a more flexible supply chain.
(Continues…)
Excerpted from TOYOTA SUPPLY CHAIN MANAGEMENTby ANANTH V. IYER SRIDHAR SESHADRI ROY VASHER Copyright © 2009 by Ananth V. Iyer, Sridhar Seshadri, and Roy Vasher. Excerpted by permission of The McGraw-Hill Companies, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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