Purchasing and supply chain management

Toyota Production System

Defining the Toyota Production System

How the Toyota Production System Plans and Manage Spare Parts Production

Assessment of the Current Economic Conditions and Toyota's Position

Toyota Motor Corp. Income Statement Analysis (2005 -- 2009)

Toyota Motor Corp. Ratio Analysis (2003 -- 2009)

Toyota Production System

The Toyota Production System (TPS) is a globally-based supply chain planning, management and forecasting system that seeks to nurture and actively promote shared knowledge between suppliers and Toyota. There are many highly differentiated aspects to the TPS, with the active support and continual promoting of collaboration between suppliers being one of the most significant, given how highly competitive and price-focused the auto industry is (Shook, 2009). Toyota firmly believes however that in creating their TPS so that it allows for intra-supplier collaboration that a learning ecosystem begins to develop that significantly increases collaboration, increases accuracy, and reduces risk (Dyer, Nobeoka, 2000). After a study of the TPS and analysis of its impact on supplier integration to the Toyota supply chain Dyer & Nobeoka (2000) concluded that the level of inter-supplier collaboration in fact significantly increases trust and as a result, transaction velocity and shared ownership. The TPS has both been described as a series of supply chain processes and also as a philosophy of how to manage suppliers to obtain consistently optimal results (Shook, 2009). The intent of this analysis is to evaluate the TPS from the standpoint of Toyota manages its end-to-end supply chain and how the company relies on this system for planning and ordering car parts as well. The recent financial difficulties Toyota has had will also be discussed, as they are related to how middle management in Toyota's factories have over time grown in arrogance and neglected to rely on the TPS for insight into how they could continually improve.

Defining the Toyota Production System

The origins of the TPS are in lean manufacturing principles specifically designed to alleviate waste in the supply chain, sourcing, procurement and manufacturing processes. Toyota had studied the American approaches to mass production and deemed them to be ineffective in managing the high variability of demand and product variations necessary to compete in the Japanese market (Hassler, 2008). Despite the economies of scale inherent in the mass production methods of General Motors, Ford and other American manufacturers, Toyota faced the challenge of how to cut costs while also manufacturing small numbers of many different configurations of cars (Kotani, Ito, Ohno, 2004). Toyota therefore set the strategic objective of producing many models is small quantities, which would give Japanese consumers the option of purchasing cars that reflected their preferences (Kotani, Ito, Ohno, 2004).

To accomplish these strategic initiatives, Toyota realized that there would need to be new product plans, forecasts, and sales results shared throughout the entire supply chain if it was to be as synchronized as possible (Dyer, Nobeoka, 2000). The TPS is specifically designed to reduce and eliminate seven different types of manufacturing waste from the sourcing, supply chain, manufacturing and fulfillment processes. These seven areas of waste include overproduction, inappropriate or inaccurate processing, waiting or lost time, transportation inefficiencies, motion inefficiencies, inventory, defects, and underutilization of employees (Kotani, Ito, Ohno, 2004). Taking into account high variability of production planning by deliberately looking to design these seven areas of waste out of the systemic processes and tasks required the TPS to be inordinately more focused on inter-supplier collaboration (Alukal, 2007). Toyota reasoned that to manage a very high level of variability in product demand there would need to be correspondingly high levels of suppler synchronization and communication throughout its supply chains globally (Dyer, Hatch, 2004). The TPS was specifically designed to drive variability out of supply chain, manufacturing and fulfillment processes through the use of knowledge, so much so that the TPS over time became a learning ecosystem (Dyer, Nobeoka, 2000). As the benefits of the TPS as a learning ecosystem became clear, the TPS started to be defined both from a technique or strategy as well as a philosophy. The implications of these two definitions are shown in Figure 1.

Figure 1: Definitions of the Toyota Production System

Sources: (Based on analysis of (Dyer, Nobeoka, 2000;

(Black, 2007;

(Kotani, Ito, Ohno, 2004)

The TPS has matured from philosophy to strategy with the goal being the elimination of all possible waste from supply chain, manufacturing and logistics processes. With the goal being the elimination of waste, two pillars of the Toyota Production System House of Quality, shown in Figure 2 are Just in Time Inventory and its related processes balanced by Jidoka or built-in quality. Just-in-Time and Jidoka are balanced by the foundation of Operational Stability which includes standardized work processes, supplier integration and involvement, preventative maintenance and a passionate pursuit of the 5S of quality. Toyota has practically made a religion out of the 5S of quality which include sort, set in order, shine, standardize, and sustain. It is evident when visiting Toyota Manufacturing centers that the 5S approach to managing operations permeates the organization (Kotani, Ito, Ohno, 2004). The commitment to continual quality improvement is also seen in the center of the house of quality, with Kaizen being the leading value of its structure and organization. Figure 2 illustrates the Toyota Production System House of Quality.

Figure 2: Toyota Production System House of Quality

Sources: (Based on analysis of (Dyer, Nobeoka, 2000;

(Black, 2007;

(Kotani, Ito, Ohno, 2004)

Just-in-Time (JIT) is defined as having the right goods at the right quantity at the right time to satisfy demand (Kotani, Ito, Ohno, 2004). As the managers of Toyota Motor Company studied American car manufacturers they realized how much of a risk each had in the inventory carrying costs and the lack of shared risk when it came to inventory valuations (Black, 2007). The senior managers at Toyota realized that there was no way they could finance the larger parts inventories that American auto manufacturers had, and second, they did not have the space to store inventory positions of parts, components, and subassemblies. Realizing that the inventory costs and space were at a premium and that the American production model would not scale for the needs of the Japanese market, Toyota managers quickly defined assembly sequences that sought to optimize only the parts, components and subassemblies needed to complete a given car at its intended completion date. The focus then of the TPS quickly shifted to having the right part, in the right amount, at the right time (Kotani, Ito, Ohno, 2004) which became the foundational element of JIT in the Toyota Production System House of Quality. The TPS was further refined to minimize waste, unevenness of production and unreasonableness of customized orders that were unprofitable to produce (Alukal, 2007).

As a result of these lessons learned from studying American manufacturers, Toyota's Production System designers concentrated on creating lean manufacturing tools and techniques including continuous flow, production leveling, pull systems, quick changeover, takt time, and production leveling (Kotani, Ito, Ohno, 2004). All of these tools combined served to minimize the variation in product demand while increasing product quality due to variation in production processes and quality being minimized.

In conjunction with the focus on JIT the TPS was also specifically designed dot ensure designed-ion quality was attained in every Toyota car produced. Jidoka or the integration of the concept of build-in quality had been in the Toyota culture since the launch of the company. At the center of Jidoka is the concept of creating machines with intelligent features, ones that could potentially predict quality shortfalls and compensate for them, without intervention of operators or manufacturing engineers (Kotani, Ito, Ohno, 2004). This continues to be a core value of Toyota today as the philosophy of having machines intelligent enough to discern smaller or binary-level problems and solve them puts manufacturing engineering in control of the machine, rather than vice versa (Kotani, Ito, Ohno, 2004). Jidoka has been such a successful concept due to its focus on time and labor savings by having machines interpret and respond to lower-level quality problems and either halt production or make slight variations on production processes to alleviate the problem. Given the prominence in the Toyota culture, this is why Jidoka is the second pillar in the Toyota Production Systems House of Quality.

Implicit in the Toyota culture is the passionate pursuit of continual process improvement and perfection. One of Toyota's core values is that if they are not continually improving over time, they are falling behind their competitors and leaving open the potential of losing market share, customers, and long-term profitable growth (Kotani, Ito, Ohno, 2004). That is why Kaizen anchors the Toyota Production System House of Quality. For Toyota, standing still is actually falling behind competitors; that that is why the TPS must continually be focused on improvement both from a JIT and Jidoka standpoint, in addition to the foundations of operational stability as well. As a result of this mindset Kaizen within the Toyota culture is focused on teams of employees who continually update and revise work standards, processes and procedures to attain achievements in accuracy, efficiency and production and service quality over time (Alukal, 2007). Kaizen is so engrained in the Toyota culture and the corresponding House of Quality that internally when planned results are not achieved it is considered more of a failure of process and execution (Gong, Wang, Lai, 2009). This is where the TPS varies significantly from American-based approaches to managing variation in results and failure to attain results as well. The Kaizen approach systematically analyzes why a process did not result in the intended goal being attained, and often there is Six Sigma and root cause analyses performed to understand the factors that led to the process not delivering the planned for results (Harrington, 2003).

All of these factors that comprise the TPS are often duplicated by competitors (Dyer, Nobeoka, 2000) so much so that there are often attempts to emulate down to the use of continuous flow, production leveling, pull systems, quick changeover, takt time, and production leveling (Kotani, Ito, Ohno, 2004). Yet the many attempts to bring more predictability and less variation into those industries that have inherently higher levels of demand variability often fail (Dyer, Hatch, 2004). There are many factors behind why companies attempting to emulate the TPS do not attain the same or higher levels of performance and foremost among them is that many companies cannot make the transition to the philosophy of Toyota regarding this system. Toyota sees TPS as a manufacturing philosophy that can short the time between when a customer places and order and receives their car, taking into account make-to-order and highly customized aspects of each auto produced (Kotani, Ito, Ohno, 2004). Toyota specifically targets the engineering out of wasted time, resources, and steps in getting a customers' order completed on time (Shook, 2009). There is a high level of intensity and urgency to getting customers' orders out accurately, to the highest quality possible and with minimal if any interruption due to waste. This philosophy pervades the TPS implementations across supplier partners and is directly responsible for how quickly Toyota is able to create long-term learning ecosystems (Dyer, Nobeoka, 2000).

How the Toyota Production System Plans and Manage Spare Parts Production

The catalyst of the TPS development, implementation and continual refinement through Kaizen and integration to Jidoka is in minimizing variations in demand for limited or small production runs (Kotani, Ito, Ohno, 2004). As spare parts have a greater degree of uniformity given the requirements of the JIT systems used for product planning and development, Toyota has been able to attain high levels of accuracy, quality, and repeatability of production processes as a result. JIT techniques are used to standardized spare parts within models families and between product model generations as much as possible to minimize any potential of stock-outs and variations in quality. JIT is then used as a spare parts planning system as well to ensure highest possible levels of parts commonality across product models and when possible, across product generations. Standardization of parts has also been possible given supplier collaboration (Dyer, Nobeoka, 2000). The TPS was designed to withstand much greater levels of product variability than spare parts and Maintenance, Repair and Overhaul (MRO) product design and production (Hassler, 2008).

As a result the process workflows have been continually improved to reduce waste, attaining high levels of lean manufacturing performance. The steps that Toyota takes in planning, procuring and collaborating with suppliers for spare parts follow this sequence of steps. First, existing workflows are evaluated from a supplier collaboration and fulfillment standpoint to see if there is the potential to significantly reduce time, costs, or material use. The use of Kaizen-based principles also apply to the supplier collaboration planning, production and execution of sample and full production run orders (Myers, Cheung, 2008). In conjunction with this first phase of supplier coordination and supply chain planning, quality management goals and objectives are defined, in addition to minimal acceptable quality levels which are essential for Jidoka-based strategies to be in place prior to the spare parts being produced. Next, the initial production schedules are defined through constraint-based systems that take into account forecasts, lead times, quality standards, takt time and production leveling. Using their Enterprise Resource Planning (ERP) system in conjunction with a Demand Management suite of applications, Toyota works with its suppliers to create a Value Stream Map. The intent of the map is to define how spare parts workflows will be used within inventory services in addition to order processing for fulfillment of service depot and dealer orders (Black, 2007). Figure 3, Value Stream Mapping for Spare Parts illustrates the outcome of an iterative series of process improvement cycles and the development of staging and storage locations throughout the distribution center. The centralization of processing and pick sheets is automated through the use of Toyota's ERP systems and its Demand Management modules that coordinate forecast and orders and pull-based replenishment. The result is a value stream map which illustrates how all potential wasted time, materials and movement are taken out of the spare parts procurement, manufacturing and fulfillment process. As processing is managed by the centralized ERP system Toyota relies on to automate Kanban (Wee, Wu, 2009) calculate Takt Time (Kotani, Ito, Ohno, 2004) and manage pull-based replenishment (Hassler, 2008) this entire process is measured and evaluated continually to see how it can be improved over time. Figure 3 shows an advanced iteration of value stream mapping specifically for spare parts sourcing and fulfillment.

Figure 3: Value Stream Mapping for Spare Parts -- Macro View

Once a value stream map has been defined for each specific spare part, Toyota will next standardize on the most optimized workflow possible and integrate it into the broader TPS.

While Toyota still relies on batch-oriented transaction approaches to integrating with suppliers including Electronic Data Interchange (EDI) (Kotani, Ito, Ohno, 2004) the latest advancements have been in the development of online portals which are part of the broader TPS Intranet that is global in scope (Gong, Wang, Lai, 2009). The purpose of the portals on the TPS Intranet is to coordinate and manage all data needed by a supplier to collaborate with Toyota and with other suppliers as well. The portals deliver financial forecast data, pricing agreements; also include copies of contracts and specific data about contract performance. In addition the portals also provide suppliers with insights into new product demands and invite them to bid on new product plans. The use of the portal as a cross-supplier collaboration platform is also designed into the TPS global intranet. Using applications that are designed to allow for integration to suppliers the intranet becomes the foundation for the TPS-based knowledge network (Dyer, Nobeoka, 2000).

Figure 5: Supplier Transaction Workflow

What is also included in the portal are an entire series of metrics or key performance indicators (KPIs) that provide each supplier with real-time feedback as to their performance on each program they participate in. There is a balanced scorecard by vehicle model, programs that include multiple vehicles and aftermarket program performance as well (Dyer, Nobeoka, 2000) (Dyer, Hatch, 2004). Suppliers also get analysis tools to understand which specific lots of their products did or did not meet the minimum levels of quality performance and criteria as defined by Toyota as well. It is important to note that the teams responsible for on-boarding suppliers to the Toyota Production System invest a year or longer teaching suppliers how to use the metrics and KPIs to bring about significant change in their own organizations (Dyer, Nobeoka, 2000). Toyota specifically does this to bring the culture of quality and the TPS core values into the cultures and organizational values of their suppliers. This also has been found to be an enabler of greater levels of trust across suppliers as well, as many receive this full year of support for no charge and often suppliers will go through the same learning processes at the same time (Dyer, Hatch, 2004) (Dyer, Nobeoka, 2000).

Toyota then strives to create a cultural fit as much as a system and process fit with its suppliers, and given the inventory and transaction velocities for spare parts, the extent to which there is tight process integration is the extent to which an optimal level of performance can be achieved. For Toyota, trust and the value of relationships with suppliers, and the shared ownership of performance is just as critical if not more so than systems and IT-based integration as well (Dyer, Nobeoka, 2000). What occurs therefore is more of an acclimation process supported by technology rather than vice versa, which is often the case in American auto manufacturers who concentrate primarily on technology enablement first. Despite the recent quality management problems that Toyota has had globally, the TPS has set a solid foundation for recovery by combining JIT and Jidoka, orchestrated by the use of Kaizen processes that seek to continually improve the entire ecosystem.

Assessment of the Current Economic Conditions and Toyota's Position

The combined effects of the subprime mortgage crisis and its effects on interest rates, in conjunction with the reduction in employment globally quickly impacted industries that rely on consumer credit as the catalyst of their growth. As a result the auto industry in late 2008 and the beginning months of 2009 contracted rapidly. Higher interest rates slowed sales significantly leading to overcapacity and price cutting, which further impacted Toyota's and other manufacturers' profitability (Haldis, 2008). As the recession began to gather more momentum in 2009, second-tier auto manufacturers including Suzuki and others discontinued their financing programs, leaving dealers to arrange financing on their own for customers (DiBenedetto, 2009). The net effect of all these factors led to consumers losing trust in auto manufacturers as there was a major concern over their viability.