Supply Chain Management at Toyota Motors - Case Study Example

? SUPPLY CHAIN MANAGEMENT AT TOYOTA MOTORS HISTORICAL BACKGROUND OF TOYOTA Toyota Motor Limited is a Japanese automotive company which ranks second globally after General Motors of the United States. The company has its headquarter in Toyota, Bunkyo Tokyo, Japan. In net revenue and profitability index, Toyota ranks first a head of other market share dominating automotive firms. Toyota Motor Corporation (Toyota) was founded by Kiichiro Toyoda in 1937 as a spinoff from Toyoda Automatic Loom Works (owned by his father Sakichi Toyoda). However, Toyota commenced its automobile manufacturing as early as 1934 functioning under Toyota Industries (Toyota, 1996). The first product of the company was Type A engines and Toyota AA passengers car which were manufactured in 1936. The company is celebrated as one of the world’s largest automakers mainly because of the company’s stupendous sales record over the last two decades. Toyota also ventures into the financial service provision, an exercise supervised by Toyota Financial Services. The company also produces robots. Alongside the father company (Toyota Industries), Toyota forms the majority shareholders in Toyota Group. Being the Leading shareholder in Daihatsu Motors, Toyota owns the operations of Lexus, Scion, and Toyota brands. The company is also the minority shareholder in Isuzu Motors, Fuji Heavy Industries, Hino Motors, Mitsubishi Aircraft Corporation, and Yamaha Motors and craft manufacturers. In india, Toyota established a partnership agreement with Kirloskar Group to forming Toyota Kirloskar Motor Private Limited (TKM); a company formed with sole objectives of creating employment to the unemployed youths as well as serving the automobile industry. As at March 2012, Toyota had about 529 subsidiaries globally, and manufactured more than 11.5 million vehicles (Toyota, 1996). SUPPLY CHAIN MANAGEMENT IN TOYOTA        Toyota supply chain management is one of the elements of the operational strategy which is founded on Toyota Production System (TPS). The system was proposed by Taiichi Ohno and Shigeo Shingo in 1940’s as the company gained global success in the automotive industry. TPS was founded on the principle “lean manufacturing”. The two partners indentified the components of this tool as: mutual trust and understanding, interlocking structures, compatible capabilities, control systems, joint improvement activities, learning, and information sharing. As stated by Krajewski, Ritzman & Malhotra (2009), “JIT system – a system that organizes the resources information flows and decision rules that enable a firm to realize the benefits of JIT principles” (Burnes & New, 1996). Total Quality Management, reduces waste, and inventory by involving suppliers in continuous improvement, planning process, focusing on co-operation and improving machinery. The capacity planning method adopted by Toyota was based on inventory elimination. To achieve a zero-inventory, the company heavily depended on pull systems. Toyota also pioneered an operational excellence commonly referred to as “Lean Concept”. This concept was adopted by a number of companies in the manufacturing sector. The philosophy of this principle (lean philosophy) aimed at eliminating all wastes, and prioritizes customer care (Burnes & New, 1997). Lean philosophy closed linked with the JIS inventory management system to add to the competitive edge of Toyota. Therefore, the production of new material was only possible when the existing stock of inventory is exhausted. Toyota operated under “non-value-adding waste in business and manufacturing” (Liker, 2004) which were overproduction, unnecessary transport/ conveyance, waiting, over-processing, unnecessary movement, excess inventory, unused employee creativity, and defects. The improvements in the supply chain management at Toyota are cited as the key element for the increased competitiveness of the company in the fierce motor market. Besides, the improvements made in the supply chain department of Toyota were very critical in reducing the cost of operations, increasing the efficiency, and advancing the necessary strategic approach towards economic success of Toyota (Farris & Hutchinson, 2001). In summary, the company practices the following supply chain management principles; just in time, lean manufacturing, Kanban, and Kaizen model. Like other systems, JIT is criticized based on a numbers of limitations. The major concern of the critics is the possibility of an interruption in the supply flow especially during calamities and political unrests periods (Burnes & New, 1997). Even a very slight gap in the system would be very costly to the organization as it would results into massive financial losses in resources. The New Products at Toyota During the WWII, Toyota Motors Corporation mainly focused on manufacturing trucks and lorries for the Imperial Japanese Army. These war trucks were designed in such a manner that they only had one headlight at the hood centre. Immediately after the end of the WWII, the company suffered a major setback as its Aichi headquarter was bombed by the Allied. Post the far, Toyota diversified its production line to manufacturing of commercial auto-engines, which has since then proved very lucrative (Toyota, 1996). However, the company’s first international recognition test came in early 1980s after Toyota had received the Japanese Quality Control Award. Toyota Motor Company formed a merger with Toyota Motor Sales and became the popular Toyota Motor Corporation in 1982. The success of the merger was evidenced in 1989 when the company manufactured Lexus, the first luxury automobile car to be produced by Toyota. In 1990s, the company was successful in developing more luxuries engines including T100, full-sized pickup, SUVs (and other sporting cars), the Scion brand, and Camry Solara: which were very affordable and economical (Burnes & New, 1996). Following the increasing competition in the automobile industry, Toyota conducted a market based research in 1997. It is from the research outcome that the company produced ‘the Prius’, the best selling modern car in the world. By 2010, Toyota produces more affordable models such as Fortuner, Land Cruiser, Yaris, and Camry (Cox, Hughes & Ralf, 1996). The supply chain management played a key role in the development and manufacturing of the recent models. These roles covered from suppliers of raw material from the steel industries to the distribution of the final products (the cars) to the customers’ premises. If not for their magnificent contribution of the supply chains department, Toyota would have not been very successful in achieving market dominance. Therefore, the supply chains and management department closely works together (Farris & Hutchinson, 2001). PROCUREMENT PROCEDURE To enjoy mutual benefits and realize amicable relationships, the tendering and procurement exercise of Toyota is based on fairness and competitiveness. The company engages in a series of businesses and procures materials, parts, and equipments from suppliers across the globe. The company demands its suppliers to deliver quality items in time and at low prices. Through the company’s corporate social responsibility policy, Toyota cooperates with the suppliers in order to promote environmental conservation and meet the demands of the general public (Farris & Hutchinson, 2001). Toyota therefore adopts ‘open door fair competition’ procurement policy which gives room to all the willing and potential suppliers, irrespective of their nationality, experience, and size, equal chance to provide the company with their services or products. In selecting business partners, Toyota bases their reasoning on economic principles of quality, volume, price, and efficiency (Burnes & New, 1997). In addition, Toyota considers other comprehensive aspects of business like technological development ability, environmental awareness, and financial stability before forming any partnership deal with any firm. The company’s philosophy on the relationship with the suppliers is described as “amicable relationship founded on mutual trust and benefits”. The tendering and procurement assignment of the Toyota also emphasizes on friendly communication between the company and the suppliers. Given the “Green Procurement” policy of the firm, Toyota procures parts, equipments and materials with low environmental impact so as to manufacture environmentally-friendly products in accordance with the green procurement philosophy (Burnes & New, 1997). Legal issues It is the core value of the company to strictly comply with the spirit and letter of the laws and regulations that governs its operations. As stated in the Sale of Goods Act 1979 “Goods will be of satisfactory quality if they meet the standard that a reasonable person would regard as being satisfactory, taking into account any description of the goods, the price (if relevant) and all the other relevant circumstances” (Burt, 2010) In case of disputes, the company through its legal department either oversees an arbitrator or seeks justice in the legal institutions within its country of operation. LOGISTICS, DEMAND AND SUPPLY CHAIN Toyota Motor limited is a global automobile company which produces a number of automobile engines and markets. The company dominates the automobile markets globally by utilizing product differentiation with different supply chain configurations aimed at satisfying the divergent needs, income, and terrains. Besides, variations among the Toyota, Scion, and Lexus engines warrant different and divergent supply chain process. Although the supply chain management processes are underpinned by common process, variations along these supply chains management provides the needed additional insight into the entire process of supplies and chaining (Burnes & New, 1996). Therefore, a deeper understanding on the coexistence and the working of the supply chains provides an opportune environment for management of stocks and inventories (Bowman, 2001). Toyota Motor Company has mastered the concept of learning which are attainable through a universal approach to the market and supply chain dynamics. The company therefore had focused on spreading the ideology of universal chain supply systems in the leadership roles. Automotive supply chain management system is a very complex process that links all the stakeholders covering from suppliers to consumers at different tiers. The physical exercise entails production, transportation, assembling of the parts, distribution and delivery of the final products to the consumers (Cox, Hughes & Ralf, 1996). The company focuses on leadership and learning among its employees founded on ten following fundamental principles: Creating awareness: this involves identification of the problem and establishing institutions of solving the problem. Therefore, the corporation has set systems in place to help identify problems and ideas. Capacity establishment: all the members of the organization are responsible for controlling their working places by identifying the needs or potential solutions to the problems (Liker, 2005). Making action protocol: all the actions undertaken by the corporation must conform to the set standards within the supply chains department. The supply systems of the Toyota Motor Limited are also founded on the principles of 4v balance as described herein. Variety is carefully made in order to balance the demands in the market with the operational efficiency. Market awareness and manufacturing supply chain demands are balanced in order to meet the divergent and competing needs of the market (Farris & Hutchinson, 2001). Practically, variety constitutes a crucial design of the supply chain which impacts on all the leading stakeholders in the supply chain management. In choosing the varieties, feedback loops are considered by the Toyota to ensure that the choice of the variety is a representation of the market conditions. Velocity is an essential concept within the supply chain flows in an organization. Toyota focuses on maintaining a steady flow within all the systems which further enhances capacity planning synchronization across the entire supply chain departments (Cox, Hughes & Ralf, 1996). Variability of deliveries and orders across the chains and supplies are minimized through executions in duties and responsibilities at Toyota. By reducing variability in the supplies and deliveries, the company operates with the least inventory levels. This also enhances quality improved quality and reduced interruptions in the ordering and delivery processes, which further produces reduced cost of operation. It the stability in the supply chains at Toyota is attained through the interaction between variability, variety, and velocity (Farris & Hutchinson, 2001). Visibility of the supply chain processes at Toyota is maintained by using the correct metrics. These metrics used by the Toyota have 50% weight results and 50% purpose compliance outcomes. This would ensure synchronization of variety and demand, and minimization of variability in the supply process. Besides, visibility ensures continuous response to the changing market dynamics (Liker, 2005). Sustainable logistic process increases environmental sustainability and operational efficiency in the logistics and transport sectors of an organization. The logistics proposal made by Toyota Motor Company emphases on removing obstacles and business opportunities so as to enhance the competitiveness and sustainability of the corporation (Farris & Hutchinson, 2001). Besides, knowledge developed by Toyota reduces transportation and logistics expenditure without negatively impacting on the economic and industrial competitiveness. The example used by the Toyota serves as a perfect example for the transport and operations departments in moving towards a feasible and sustainable logistics system (Burnes & New, 1996). The major challenges related to logistics sustainability practices would imply identification and creation of realistic strategies for marketing sustainability and economic effectiveness in Toyota. Therefore, by applying life cycle evaluation as the leading implementation logistics strategy at Toyota, the outcome in the supply chain will results into change in the product line design and logistical efficiency. In addition, such mechanisms present sustainable reduction in costs, building positive legitimacy and reputation, and repositioning the chain (Burt, 2010). PRODUCTION AND INVENTORY CONTROL MEASURES Production and Inventory Control is an essential tool in any business enterprise, especially manufacturing firms. Toyota therefore has to strike a balance between cost incurred in stock taking, ordering and carrying (Cox, Hughes & Ralf, 1996). Just in Time Inventory (JIT) inventory control management (popularly referred to as Toyota Production System) is the method of managing logistics and inventories pioneered by Toyota. This system operates with the philosophy of “zero inventory storage” (Burt, 2010). This philosophy as applied in the JIT contradicts the traditional accounting and costing principle of stock, which assumes inventory and stocks as the store of value. JIT inventory philosophy treats inventory as “a unit of cost and a vehicle of waste of capital”. Therefore just in time (JIT) attempts to dispose excess inventory with no economic and immediate use at any given point in the process of manufacturing. It is this philosophy that Toyota uses in managing and controlling their inventory (Burt, 2010). In the manufacturing outfit like Toyota, the implementation process of the JIT is very revamping and requires a lot of coordination and constant communication between all the departments. At Toyota, the company has a well structured clockwise coordination involving all the manufacturing sectors and the supplies departments. Kanban/signals are transmitted to all the production sectors so as to convey and pass the information regarding the current manufacturing status. This allows the subsequent processes to be undertaken simultaneously. It is this prior intimation that enables each processor/department to order for the exact amount of the inventory required to terminate and facilitate the production process (Liker, 2005; Farris & Hutchinson, 2001). In effect, such quantity precision is characterized by optimal resource utilization, hence fasters and efficient production. Conclusion The success of the Toyota Motor Corporation in the automobile and motor engine industry is attributed to the supply chain management policies and the general management policies adjourned by the company. Just-in-Time and zero-inventory policy practiced by the procurement sector is identified as the leading foundation behind the increased profitability and by-share motor market dominance by Toyota. Additionally, the competitive-free and fair tendering process undertaken by the company adds to the company’s image, success, and cost-effectiveness (Farris & Hutchinson, 2001). References Bowman, R. (2001). From Cash to Cash: The Ultimate Supply-Chain Measurement Tool. Supply Chain Brain. Burnes, B. & New, S. (1996). Understanding supply chain improvement, European Journal of Purchasing & Supply Management, 2 (1), pp 21-30. Burnes, B. & New, S. (1997). Collaboration in customer-supplier relationships: strategy, operations and function of rhetoric, International Journal of Purchasing and Materials Management, v33, n4 p.10. Burt, D. N., Doble, D. W., Pinkerton, R. L., Petcavage, S., & Pinderton, R. (2010). The Key to Supply Chain Management (8th ed.). Columbus, OH: McGraw-Hill Companies, Inc. Cox, C., Hughes, J. & Ralf, M. (1996). Influencing the Strategic Agenda, Purchasing and Supply Management, September, pp 36-41. Farris, M. & Hutchinson, P. (2002). Cash to Cash: The New Supply Chain Metric. International Journal of Physical Distribution and Logistics Management, Vol. 32. No. 4. pp. 288-298. Krajewski, L., Ritzman, M., & Malhotra, N. (2006). Operations Management: Processes and Value Chains. (8th edition). Prentice Hall. Liker, J. (2005). “The Toyota Way and Supply Chain Management”, Presentation for OESA Lean to Survive Program, The University of Michigan. Liker, J.K. (2004). “The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer”, The McGraw-Hill Companies. Toyota. (1996). Suppliers Guide for doing business with Toyota. Toyota Motor Corporation, Japan. Read More