Supply Chain Ideas based on Toyotas Approach

Based on a book on Toyota Supply Chain Management

Ananth Iyer
Susan Bulkeley Butler Chair in Operations Management Krannert School of Management, Purdue University aiyer@purdue.edu
Sridhar Seshadri University of Texas, Austin, Texas Roy Vasher Retired Senior Executive, Toyota Motor Manufacturing, NA

Now Available in
Japanese Traditional Chinese Portuguese Spanish Korean India Version Tata McGraw Hill

KEY IDEAS
Velocity Variability Visibility Variety Leadership v4L v4L is a framework to understand Toyotas Supply Chain Managment
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v4L Principles
Variety: Variety of products offered = Careful selection
y Variability: Variability of outcomes against forecast = minimize variability y Visibility: Visibility of processes to enable learning = increase visibility across the SC

y Velocity: Velocity of Product Flow = Steady Flow

y KEY POINT Balance variety, velocity, variability & visibility across the supply chain and apply the learning principles for each 4v's y THINK How does your Companys supply chain achieve this balance? y How does Choosing or focusing only on Variety affect Velocity, Variability, Visibility and Total Cost down the supply chain ?
Toyota SCM

For different industries lets identify the v4 metrics

Industries/Products Consumer Products (toothpaste, paper towels, detergents) Apparel Grocery Consumer Durables Restaurants V4 impact

Toyota Learning Principles and the v4L framework

Learning (L) Principles at Toyota will not be Create Awareness Unless problems are seen, they


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 betn action and results. Aid in the codification of knowledge for future use. 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

Toyota SCM

For your company think about the following questions

How would you measure velocity ? Does this rate of sales vary over time ? Is the variation predictable ? How is it accomodated ? How much visibility do you have over the supply chain ? What is the impact of this visibility on the variability ? What is the level of product variety ? How does variety impact visibility and variability ? Does it impact variety ? What is the level of L in your company what changes would improve supply chain performance for your firm ?

Why Study the Toyota Supply Chain ?

It has a large fraction of outsourced suppliers It is global in scope Product quality and reputation Continuous Improvement Technology Supply base knowledge management Is there a Toyota DNA ? Repeated successful performance see next page
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Outline
Examples of Excellence of the Toyota Supply Chain Data regarding WRI, Aisin Seiki, Prius, CCC21 Supply Chain Insights Links to ideas for other contexts

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Some examples of Successful performance

Toyota Supplier Working Relations Index Mix Planning Supplier Coordination Aisin Seiki Fire response CCC21 Initiative Prius Introduction

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Supplier WRI
John Henke from Planning Perspectives created Supplier Working Relations Index based on analysis of ``supplier trust of the OEM, open and honest communication, timely information, degree of help to decrease costs, extent of late engineering changes, early involvement in the product development process, flexibility to recover from canceled or delayed engineering programs etc (Max value = 500)

OEM\YEAR Toyota Honda Nissan Chrysler Ford GM

2002 314 292 225 176 166 164

2003 334 307 262 180 161 157

2004 399 384 294 186 163 150

2005 415 375 298 196 157 114

2006 407 368 300 218 174 131

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What do we learn from the previous slide ?

Impact across competitors Impact of Time Reasons for the difference

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Why do suppliers matter ?

An OESA/McKinsey study suggests that Interface costs can be estimated as 5.2 % of program cost. The interface costs include all of the issues included in the WRI above. The study also estimates that 80 % of the waste was due to poor supplier management OESA Original Equipment Suppliers Association US Industry sales around $ 400 billion

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Reasons and Impact

Reasons poor product specifications, part complexity and ineffective coordination of capacity and demand. The estimated cost due to this waste to the US auto industry was estimated to be $ 10 billion. What is the opportunity in your company ?

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Toyota Manages Suppliers differently.. Published reports suggest that Japanese auto suppliers won renewal of their contracts 90 % of the time vs 71 % for suppliers to US auto OEMs. The typical Toyota plant had only 125 suppliers compared to 800 for the typical General Motors plant. At the firm level, Toyota had 224 suppliers compared to 5500 suppliers for General Motors.
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And more..
Japanese OEMs make about 27 % of their components in-house vs 54 % for US auto OEMs. While Japanese automakers accounted for 33 % of world output in 2002, Japanese suppliers accounted for less than 19 of the world's top 100 auto suppliers. This suggests that Japanese suppliers are smaller than their US counterparts.
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Managing Suppliers
Imagine, You are a supplier to Toyota
What is your role in the Toyota Supply Chain? What is your expected productivity improvements over time? How would your experience as a part of Toyotas supply chain differ from your experience supplying to other auto OEMs? How would your processes have to operate to synchronize with Toyotas system? How would you have to adjust organizationally to collaborate with other suppliers to Toyota? How can the v4L framework enable an understanding of Toyotas supplier management system and its impact across the supply chain?
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Managing Suppliers
Toyota Supplier Selection
A Supplier must meet extreme tough conditions to qualify Main Evaluation factors are Assessment of Management Attitudes Production Facilities (Control & Engineering) Quality Levels R&D capabilities Manufacturing (Capacity, Operation Efficiency) Excessive Amount of Information Sharing Value Engineering Capability etc Toyota chooses suppliers across multiple tiers so as to guarantee availability of innovative solutions across the supply chain (Tiered Supplier Organization)
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Supplier Tiering
Nishiguchi source

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Managing Suppliers
Assisting Suppliers
Two Types of Assistance are provided
Individual Individual Assistance is to get some quick results Focus is to deal with an immediate supplier problem such as share drop in profits or difficulty in keeping up with a model launch Toyota Experts go to supplier, observe and suggest improvements Group The Jishuken Group develops supplier personnel and also assists Toyota. It is a closely knit gathering of middle-level production technologists from a stable group of companies who jointly develop better capabilities for applying the TPS through mutual criticism and concrete application This approach enhances Toyotas Capability to do target costing a technique to manage and reduce costs over a Toyota SCM 21 products life cycle

Managing Suppliers
Assisting Suppliers Examples
Toyota Supplier Support Center (TSSC) Suppliers are encourage to share their best practices among the supply chain Ability to see a working solution increases the chance that suppliers can replicate that knowledge. Toyota Consultants visited XYZ company every day for 4 months to provide ongoing support for the next five years TSSC suppliers have seen productivity (output per worker) increase by 123%, and inventory reduced by 74%. A supplier of metal Stampings, found only 4 value-added steps out of 30, but with TSSC and Company jointly reconfigured the production system and through process changes, eliminated 19 steps. Setups were reduced from 2hours to 12minutes Suppliers also go to keep all their benefits Ultimately, Toyota does reap benefits during the annual price reviews through a target pricing in which customer price is defined Toyota SCM and used to work backward to a supplier cost target. 22

Managing Suppliers
Assisting Suppliers
CCC21 System 30% Cost Reduction Target ($10Billion Savings in five year from 2000) Supplier Guest Engineers & Quality Resident Engineers Supplier Location Decision Planning Rule: 50-mile-per-hour travel time In Japan, 85% of Suppliers are located within 50 mile radius of a plant with one-hour drive In NA & EU, 80% of the parts are delivered within 3-4days lead time Supplier Location Closer to Toyota results in lower inventories for the supplier and assembly plant So, Toyota Expectation from New Supplier is to consider building factories near Toyota Plants.
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What would you expect ? More Levels Less central ownership Suggests more variability (bullwhip) and more contractual complexity BUT WHAT IF YOU HAVE.. Standardized processes, frequent communication, fragile system, common goals, long term contracts..??
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The Aisin Seiki Fire and the Supply Chains Response

At 4:18 am on Saturday, February 1, 1997 a fire erupted in the Aisin Seiki Kariya plant # 1. By 8:52 am the lines devoted to P-valves and two other brake parts were completely destroyed. The P-valve is a small rectangular object that controls pressure on real wheels, preventing skidding of the car. The P-valve was sole sourced to Aisin Seiki. The plant was responsible for delivering 32,500 P-valves to Toyota and to other companies such as Mitsubishi, Isuzu and Suzuki. Because of JIT delivery of parts to Toyota, only 2 to 3 days of inventory existed in the system. The fire on February 1 caused Toyota to start idling plants within two days i.e., by February 3.
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What Happened then

At 5:30am Aisin Seiki created an emergency response team that later contacted all suppliers to ask for assistance in producing P-valves About 62 firms responded, including 22 of Aisins suppliers, Toyota itself, 36 of Toyotas regular suppliers and 4 nonregular suppliers including a sewing machine manufacturer Because there were 100 different types of P-valves, Aisin had to decide who would supply which valve type. Each of the suppliers used different supply chain processes to produce the Pvalve. Denso decided to outsource its existing production to free up capacity to produce P-valves on over 40 machines. Taiho met with its suppliers and chose 11 suppliers to assist, providing machining centers at its plants. Toyota pulled employees from its experimental prototype division and set up a temporary production facility. Kayaba outsourced the P-valves to three of its suppliers and produced no valves itself.

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Quick response
One supplier started delivering prototypes three days after the fire. Denso delivered their prototype on February 5, followed by two other large suppliers the same day. Kayaba delivered prototypes on February 6 from one supplier and February 7 and 8 from the other two suppliers. Volume production began within a day or the same day as prototype approval. 80% of supplies restored within one week Aisin back by mid March with full supplies How did all this happen so quickly ? Who paid the bills ? How did this happen with so little central coordination ? Was this the Toyota Supply Chains capability ?
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Collaboration Rules
Compare the Toyota Supply Chain with Open Source Linux programmers Quick response to crisis Organic response with no central control Standardized protocols Inherent resilience due to agility and flexible capacity How do you develop such a supply chain capability that is competitive ?
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The CCC21 program

In 2000, Toyota announced a plan to cut costs by 30 % across the board for parts it buys to guarantee that it retains its competitive edge. 30 % was regarded as the China price by US automakers By 2005, the program had already saved $ 10 billion over five years but had done so while improving quality The Japanese term for this is kawaita zokin wo shiboru (wringing drops from a dry towel). In one case, the team disassembled the horns made by a Japanese supplier and found ways to eliminate 28 components, thus decreasing costs by 40 %. Interior grips above the door had 35 variants these have been decreased to three across all the 90 model lines. To counter the rise in steel prices, the team is focused on decreasing the number of steel parts in a car from 610 to about 500 by turning to substitutes such as aluminum and plastic. CCC21 Construction of Cost Competitiveness for the 21st Century How do you set achievable goals for the supply chain ? Grandmaster How do you get everyone to follow process while attaining these goals ?
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Designing the Prius

Original Goals 50 % greater fuel economy than basic Corolla, increased to 100 % later Focus on natural resources and environment Start discussions in 1993, clay model in July 1996, launch in October 1997 (15 month product development) Hybrid permitted use of the best of battery and engine capability Parallel model development, late stage finalization of design Suppliers co-opted for technology development Toyota has an 80 % market share for hybrids Significant push exactly when Toyota was most profitable considered by top management to be most vulnerable Are these processes consistent with Toyotas supply chain processes ?
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Lean Supply Chain

Low to zero inventories Frequent deliveries Milk runs Planned 50 mph speed for suppliers Prescribed routes for supplier trucks, adjusted for weather Plan detailed vehicle build sequence including specific options for a two week period (or a month) Release orders per lead time
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Mix Planning
Mix Planning at Toyota deals with choosing the specific mix of vehicles that will be offered at sales regions across the country. The goal is to manage dealer-level product demand so as to enable stable production at the manufacturing plant. This also translates into stable orders to suppliers.
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Mix Planning
Choose a subset of colors/options to offer in each region Coordinate marketing, brochures, sales effort to synchronize with major offerings Longer lead time for special requests Dealer deliveries push system. 80 % of the deliveries stable remaining adjusted by dealer swaps or by build sequence adjustment (last resort) Centralized control of shipments to stabilize assembly plant production and supplier orders Periodic adjustments to synchronize demand and supply Effect: Toyota spends about $500 per car vs $ 2000 per car in promotions, Toyota car inventories about 15 days vs 30-45 for others, fewer dealers for Toyota, customer pull of products, cars pushed to dealers
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How does Mix Planning Work

Offer a small set of choices in each region The choices are the 20 % of SKUs with 80 % of the volume Offer this set in TV ads, print ads, dealer showroom, web etc to draw in customers Offer a higher level of features in this set This smaller set decreases supplier variability In other words, Variety control enables lower variability
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Mix Planning

Mix Planning by Sales Region

Sales Division works with each sales region to choose the subset of vehicle mix that will be the high-volume sellers in each region
Guidelines
Limit SKUs (stock keeping units) : Determine which variants will be stocked by a sales region Analyze Past Sales, competition offerings, and local regulations to predict demand for future sales 80/20 Rule: 20% of SKUs accounts to 80% of sales Target Marketing Plans or Campaigns to support mix planning by region Manage unpredicted demand: It is better to lose a sale than to have an unhappy customer through Guided Selling Sales Technique
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Toyota SCM

Mix Planning

Reflection Points
So How does Variety hurt a company? Variety: Selected by Region (Local to Global) representing the popular mix demanded. Velocity: Is maintained by Limiting Variety by choosing variants accounting to 80% of the demanded Offerings. Faster Response to Customer with decreased rate of Inventory Turns at dealer Variability: Is reduced by synchronizing Sales and Operations Planning to focus on a FEW VARIANTS (~20%) by REGION. These choices are adjusted in response to observed sales. Visibility: Of this Planning Process across Sales & Operations enables ACCURATE DEMAND FORECASTING, LIMITING THE IMPACT OF UNPREDICTABILITY OF LOW VOLUME VARIANTS, & STABILISING THE OPERATIONS & SUPPLY CHAIN

Toyota SCM

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The examples consist of Approaches to deal with disaster Approaches to deal with projects such as new products Approaches to deal with cost reduction Approaches to manage repetitive operations

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Executing Strategy
Careful consideration of the operational aspects of strategy choice Choose achievable but stretch goals Play the role of a Guiding Hand for the supply chain Provide supplier assistance but use logical target costing approach to get cost reductions Training/Assistance to suppliers at no cost Guarantee stability, assist to achieve results
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Is this applicable to your company ? How significant a role do suppliers play ? How are suppliers managed ? How are projects managed ? How much value is released by the supply chain ? Can v4L release value in your supply chain ?
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THANK YOU
Ananth V Iyer aiyer@purdue.edu (765)-494-4514
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