Toyota Motor Corp.: Efficient Supply Chain Management

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Introduction

Supply Chain Management is the management of activities (both up-stream and down-stream) involved in the production of goods and services for the ultimate consumption of the end-user. The management of these activities plays a very important role in the profitability and survival of an organization, to such an extent that its failure may mean the failure of the organization.

This is especially true in the present competitive business environment. Toyota motor industry has realized the importance of efficiently managing its supply chain in order to keep its costs and prices low and ultimately remain competitive in the overall motor vehicle industry from experience.

Toyota has achieved this so successfully that other organizations, even those outside the industry, have taken its measures and implemented them in their own production systems (Toyota, 2011).

History and Background of Toyota

Japanese known as Kiichiro Toyoda started Toyota in 1937. The company first landed in America in 1957. Seven years later, it was already competing with the domestic manufactures quite fairly. Toyota has since grown to become the leading carmaker in the world, ahead of other giants in the industry, for instance, General Motors.

It has since started manufacturing plants in North American states such as Alabama, Indiana, Texas, Mississippi, Kentucky, California and West Virginia. Its growth has also seen the increase in the models of vehicles it produces for instance Prius, Corolla, Innova, landcruiser, Lexus, Camry, Fortuner and many more (Toyota, 2011).

To say the least, Toyota has redefined the motor vehicle manufacturing industry through low cost production, numerous models and the spread of its activities around the globe.

The Toyota Way/Toyota Production System has not only transformed the motor vehicle manufacturing industry but has been providing guidance on management issues for the past 5 decades or so. Other firms across all industries are increasingly adopting the principles provided in the Toyota Production System in their quest for managerial effectiveness and efficiency (Toyota, 2011).

Supply Chain in Toyota

Toyota has a reputation world over for its unique Supply Chain Management system known as the Just-In-Time system or the Toyota Production System. Theirs is a method of obtaining raw materials at exact time of need and in exactly the amount required and producing finished products in exactly the right quantity.

This helps to avoid overproduction. Selling them at the right time to the right customer minimizes waste. This method identified wastes that otherwise go unnoticed as waste. However, its impact to the cost of production is tremendous.

They include; transportation, motion, wait, inventory, over production, over processing and defects. Its main goal involves avoiding these wastes. Kiichiro Toyoda first introduced this method and besides starting the Toyota Company, it is perhaps his greatest contribution.

In addition to the JIT system, Toyota applies the V4L principles in managing its supply chain. The V4L principles include the following (Toyota, 2011).

1. Variety in the products developed in order to meet a wide range of market demand therefore ensuring that Toyota has a large market share. Variety also ensures that all the stakeholders (suppliers included) are involved to ensure that the information provided clearly depicts the needs of the market.

As a result, Toyota is able to produce/manufacture vehicles that are suitable for use by different members of the population across the globe. This involvement of different stakeholders in the development of new products creates balance in the production system by helping to avoid waste and consequently reduces the cost of production (Halldorsson et al. 2007).

2. Velocity of the production flow is another key principle. Toyota uses a rate-based approach in enhancing the speed of production. Along with high levels of automation, this approach enables Toyota to mass produce vehicles and is therefore able to deliver its products, according to demand.

Toyota also has established distribution channels structured around its numerous manufacturing plants all around the globe and therefore ensuring efficiency and effectiveness in the distribution of its automobiles (Burt, Petcavage and Pinkerton, 2010).

3. Toyota is also very keen when it comes to the variability of deliveries and orders. It seeks to reduce variability and consequently reduce supply cost.

For instance, most of its vehicles spare parts. With this concept, the number of suppliers greatly reduces and the cost involved too. Visibility- this means that Toyota scientifically controls all processes to ensure that they are right and to enhance the process of learning from the processes (Burt, Petcavage and Pinkerton, 2010).

Development of New Products

Toyota is among the leading investors in research and development with their research and development budget being billions of dollars in North America alone per year. However, this is not the only avenue that Toyota relies on when it comes to developing new products.

It relies heavily on the information that the various stakeholders collect from the market. With this information, Toyota is able to produce products that suit the diverse needs of its customers.

Supply Chain Management ensures quality in new products development through supplying quality raw materials, employing superior material handling methods to avoid damage, acquiring the services of reliable suppliers and providing feedback to enhance production (Toyota, 2011).

Purchase of Capital Equipment

Toyota applies its lean system of Supply Chain Management in all its production area. Purchasing of capital equipment is amongst those areas. Toyota buys machines, plant and hires employees on a need-to basis.

This involves replacing the machines and hiring employees in a controlled manner to continue with optimum production immediately and at the same time avoid idle machines and labor. Toyota procures capital equipment mainly through tendering or using previous suppliers who have had a relationship with the company in the past.

Outsourcing

Outsourcing has become a trend in today’s business environment and Toyota is no exception of the firms that are increasingly outsourcing goods and services.

It is not possible for the firm to produce every component that it requires in the production of its vehicles and even if it was possible to produce all this components it would be more expensive as it may mean having other all different plans and work set-ups (Halldorsson et al. 2007).

Outsourcing also allows the firm to concentrate on the core business of the firm and hence giving the firm room to be more efficient and effective in doing its core business.

It also allows the firm to gain access to higher-level expertise and experience. This may be unavailable within its staff or which is expensive to employ. Other benefits include legality of the process done on contractual basis, risk avoidance, tax benefit, commoditization and many more.

An example of components that the firm outsources includes wheels and oil. Toyota, a multi-national company, gets its suppliers all over the word as long as they provide what the company requires and for a reasonable price in accordance with the firm’s intentions (Liker, 2004).

Legal and Contract Issues

Since Toyota is a multinational company, it has to be very carefully in the implications of the different legal climates on its activities. It also has to take caution so that its activities do not adversely affect any third party and the environment in which it operates.

Therefore, Toyota exercises careful measure such as signing of contracts between the firm and its customers before effecting transactions and bearing losses that may arise from the sale of erroneous vehicles.

To this effect, Toyota has severally recalled defective vehicles for repair consequently incurring the costs involved in order to avoid lawsuits (Halldorsson et al. 2007).

Toyota is also a heavy investor in the campaign on preserving the environment. It is in fact among the first automobile manufacturer to direct its efforts at manufacturing eco-friendly vehicles especially with the introduction of its Prius model.

Moreover, it has a very strong legal department, which irons out any legal issues that the firm may face. In addition, all of its transactions with outside parties are on contractual basis. This helps to seal any legal loopholes that may arise.

Production and Inventory Control Measures

Toyota Production System requires great measure in controlling the inventory. This is because the firm operates at the least inventory level possible. If not well managed Toyota Production System could end achieving the exact opposite of what it was initially intended to achieve. This could be in form of very low inventory levels such that it leads to production paralysis.

This could lead to delayed delivery of finished goods to customers and therefore loss of market share and goodwill and ultimately the risk of having to stop operating altogether. Therefore, Toyota employs Toyota Production System carefully so that the firm does not risk falling out of business.

Moreover, the firm has to have trusted suppliers for it to implement the Toyota Production System successfully. This is because suppliers are an integral part of this type of supply chain in that they tend to interact with the firm on a more frequent basis unlike in other Supply Chain Management Systems (Toyota, 2011).

Scheduling

Scheduling involves deciding when to make a certain program and which staff and machines to use in the process of making the product. It is a very important function of a production process because it helps to reduce the costs of production and the time used in the production of a certain product.

This process perfectly fits into the Toyota Production System as it seeks to eliminate waste of both time and costs same as the Toyota Production System.

Toyota use both forward and backward scheduling, whereby it produce some vehicles based on the orders placed (backward scheduling) and others it produces based on resources availability (forward scheduling).

This ensures that it delivers the vehicle ordered on time and at the most efficient cost possible and at the same time produce other vehicles such as new unknown models to cater for those customers who have not placed orders.

However, with the increased demand for customization of vehicles and other goods for that matter, backward scheduling is better preferred to forward scheduling to achieve customer satisfaction (Halldorsson et al. 2007).

Product scheduling helps to increase efficiency in the production process by saving both time and resources. It also helps achieve customer satisfaction and hence loyalty by helping to fulfill the firm’s delivery dates immediately, this helps the firm to maintain its market share.

Proper scheduling also helps to keep inventory very low and as a result saves costs (Halldorsson et al. 2007).

Demand Systems

The Toyota Production System operates on the principles of pull demand systems. This is where the firm seeks to find out what the consumer wants and then goes ahead to produce based on that information.

This is possible because of the fact that customers can place their orders and then wait for the manufacture of their vehicles. With the help of the internet and the efforts towards market research, Toyota has been able to operate in this type demand system to achieve its high sales.

However, Toyota also employs the push system of demand especially when selling new models and selling to those customers who have not placed their orders. The pull system’s intention is to avoid overproduction, which in itself is a waste.

Inventory Functions and Analysis

The Toyota Production System highly discourages keeping or holding any kind of inventory unless it is necessary to do so.

Along with transportation, motion, overproduction, over processing, defect and wait, inventory is seen as capital outlays that has not borne any profit or return to the firm and for this reason its highly discourage.

This system of production encourages the firm to keep minimal levels of inventory in order to avoid incurring inventory costs, which include keeping capital idle (Halldorsson et al. 2007).

However, it is almost impossible for a firm to operate with zero levels of inventory. At one particular time the firm will require more resources than it can deplete in a day and it will therefore hold the extra even if it’s just overnight.

Another time the firm will not complete it work on a product in one day and will therefore keep holding it until it has finished working on it. Normally when the firm has finished working on a product, the product does not go on sale immediately and as a result, the firm has to hold the product until it can sell it or send it to the distributors.

The above examples show that holding inventory is sometimes necessary and important. In addition, the firm holds inventory to cushion itself against any unforeseen demand change and avoid missing new markets.

Relationship between Supply, Demand, and Logistics in Toyota

Part of the major roles of the Supply Chain Management Department is to be able to harmonize demand and supply of the products affecting the firm. In Toyota, it is not any different. The demand for vehicles has been rising exponentially over the past decades this has prompted Toyota to respond by increasing its supply of vehicles to the market.

Toyota opened plants in countries all over the world. In some countries, the company opens multiple plants. This development has seen Toyota rise to become the leading automobile producer in the world. This is mainly because of its efforts to manufacture vehicles even for low-income earners in economies across the globe (Hanson et al. 2011).

Logistics is the process of managing the flow of activities, goods and services that are involved in the production process. It involves transportation of the resources and people from one point to the other, holding and managing inventory, packaging and security.

The Toyota Production System discourages any unnecessary transportation either within or outside the plants. Therefore, it seeks to design work lay outs that minimize the amount of movement while a product is being worked on.

It has also built plants all over the globe nearer to the resources in order to avoid transporting the raw materials over long distances. This effort enables Toyota to keep its production costs at a very low level and with this in place; it is able to sell its vehicles at a reasonable lower price than most of its competitors (Hanson et al. 2011).

Conclusion

Toyota Production System has really revolutionized the Supply Chain Management of the whole world.

It has led to companies avoiding waste, reducing the lead-time, improvements in quality assurance and greatly strengthened the relationships between firms, its suppliers and customers by providing an avenue for interactions. It has also helped reduce uncertainty as firms can now produce their products according to orders (Toyota, 2011).

Strengths

Toyota Production System has many benefits to the organization in which it is applied. Firstly, it strengthens the relationship between the organization and its suppliers as the suppliers are busily involved in the development of the vehicles.

Secondly, it reduces waste (muda) involved in the production process, which may be in terms of inventory, motion, transportation et cetera.

Thirdly, it ensures maximum utilization of the available resources such as maximum employment of machines to ensure optimum production and having employees with multiple skills working at different sections of the production process allowing workers to work where they are required when they are required.

Lastly, Toyota Production System allows regular supply over the production process, this allows for modification of the supplies to suit the demand. It is therefore easier to customize the vehicles to meet customer demands (Toyota, 2011).

Weaknesses

Toyota Production System advocates keeping very low or no inventory. This means that replenishing inventory should be continuous. However, uncertainty affects this process, which may lead to the interruption of the production process.

In addition to the interruptions, the constant buying of inventory may see varying prices of the inventory due to variations of demand, which occur almost daily. It is also not possible to clearly ascertain what to order, in what quantity and when in all the processes of supply chain.

This is because some products are not in Toyota’s control entirely. For instance, a farmer who deals with wheat cannot exactly determine the amount of wheat he is going to harvest in the next season because he depends on the rain to which he has no control.

Moreover, demand is highly uncertain and companies have to keep some level of inventory in order to cushion themselves from unforeseen changes in demand. Even with the Toyota Production System, Toyota has to hold inventory to some level. For instance, Toyota’s iron or steel mining is not possible for any particular order specification. However, mining and storage for future use is possible (Liker, 2004).

References

Burt, D. N. Petcavage, S. D. & Pinkerton, R. L. (2010). Supply Chain Management. London: Prentice Hall.

Halldorsson, A. et al. (2007). Complementary Theories to Supply Chain Management. Supply Chain Management: An International Journal, Volume 12(4): 284-296.

Hanson, D. et al. (2011). Strategic Management: Competitiveness and Globalization. Southbank, Victoria: Cengage.

Liker, J. (2004). The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer. New York: Prentice Hall FT.

Toyota. (2011). Toyota Company Website. Retrieved from https://www.toyota.com/

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