How the supply chain of Toyota is superior to its competitors’?

Toyota Motor Corporation, founded by Kiichiro Toyoda in years 1937 is a Japanese multinational automaker, headquartered in Aichi, Japan (Toyota, 2019). It currently employs more than 370,000 people worldwide and was the third-largest automobile manufacturer in 2019 (Statista, 2020). Toyota’s management philosophy has evolved from the country’s origins and has been reflected in the terms “Lean Manufacturing” and “Just in Time Production”, which was instrumental in developing.

Toyota’s managerial values and business methods are collectively known as the ‘Toyota Way’. The Toyota Way has four components (Liker, 2004):

1. Long-term thinking as a basis for management decisions.
2. A process for problem-solving.
3. Adding value to the organization by developing its people.
4. Recognizing that continuously solving root problems drives organizational learning.

Supply chain management in the automotive industry

The automotive industry can be regarded as the world’s largest manufacturing industry utilizing 15% of the world’s steel, 75% of the world’s rubber, and 25% of the world’s glass (Antonio and Alicia, 2015). Other than the raw material utilized for manufacturing; the industry utilizes 40% of the world’s annual oil output.

Today, the supply chain management system in the automotive industry is in a transitionary period where every chain is tied to forecasts. It is a circle, where the manufacturer has to manage supplies with demands from the first chain: raw materials, to the last chain: car buyers. The new direction for the automotive supply chain is still based in part:

1. on the forecast and,
2. on the capable and responsive supply chain with a greater strategic emphasis on the logistics operations (Miemezyk and Holweg, 2004).

Supply chain management at Toyota

The Toyota Production System acts as a benchmark around the globe as the foundation of “lean thinking” (Lee, Peleg and Whang, 2005). At Toyota, the production practices and principles extend well beyond the factory walls. It includes the extended supply chain and requires some crucial choices to ensure supply chains globally. The supply chain in the automotive industry is a complex process where many chains are linked together to form a complete supply chain from the customer back to the various tiers of suppliers (Lee, Peleg, and Whang, 2005). The physical process consists of:

• the production of parts,
• transportation of parts,
• the assembly in the plant into a completed vehicle and,
• distribution of completed vehicles to dealers and to the customers.

To fully understand the process, it is necessary to understand the components of Supply chain management at Toyota. The supply chain has both physical components as well as operational and planning processes. The next section would explain both, the physical and operational components of the supply chain at Toyota.

Physical Components of the supply chain at Toyota

The diagrammatical representation of physical components of the supply chain at Toyota is provided in the figure below. The parts are produced by the suppliers and transported by inbound logistics to the assembly plant. The assembly plant is further divided into four subdivisions i.e. body shop, paint shop, assembly, and inspection. Once the inbound logistic operations are performed the vehicle is transported to dealers via outbound logistics.

Although the process seems simple on paper, it is indeed complex because a vehicle is very large and bulky and assembled from thousands of pieces, produced by hundreds of suppliers to produce millions of fully assembled vehicles (Iyer, Seshadri, and Vasher, 2009).

The suppliers of Toyota

Suppliers are the first step in the whole supply chain and provide parts and components that are assembled later into vehicles. These parts are received via inbound logistics from tier 1 suppliers. They are the ones that make parts and ship directly to the assembly plant. This designation becomes necessary because suppliers themselves have their own suppliers and are designated as tier 2, tier 3, and so on. Toyota’s suppliers are located in different parts of the world which further complicates the process  (Iyer, Seshadri, and Vasher, 2009).

Inbound logistics

Once the parts have been manufactured by the suppliers in a given time, they are shipped to the assembly plants through the process called “Inbound Logistics”. The overseas parts coming from Japan are first shipped via vessels which are then loaded into the rail car. This rail car offloads the container into a truck at an assembly plant from where it is delivered to assembly dock. On the other hand, the local suppliers ship the parts using trucks via dedicated logistics partners. Toyota takes full responsibility for inbound logistics by organizing the suppliers into clusters based on geographic proximity.

Once the trucks arrive at the cross-dock, the parts are unloaded and staged for each assembly plant. The trucks are loaded for each assembly plant and unloaded on the basis of the progress in the plant. Thereafter, the trucks are reloaded with returnable containers to be returned to suppliers for their reuse in future shipments  (Iyer, Seshadri, and Vasher, 2009).

Production process

The production of vehicles takes place in a typical assembly plant that has one or more separate lines on which the body parts are assembled. The frame and body of the vehicle are produced in the body shop, while the stamping is done in the stamping shop by pressing. Once the body is assembled, the vehicles move to the paint shop, where the external body is painted. The vehicle then moves for a final assembly where the supplier-provided parts are installed to make the finished vehicle. After the final assembly is accomplished, fuel is added and the vehicle is driven off the assembly line. Finally, the vehicle is subjected to several quality checks and final inspections. Only after this, the vehicle is released from the factory for shipment to the dealer ((Iyer, Seshadri, and Vasher, 2009).

Outbound logistics at Toyota

The process by which the final product is transferred to the dealer for sale is known as “outbound logistics” (Kwateng, Manso and Osei-Mensah, 2014). The vehicles can be transported either by a railcar or trucks. In the Toyota Way, first, the distances are covered via railcar and then they are loaded onto trucks for delivery to dealers. In some cases like Europe, ships are also used for delivery when there is a large waterway to be crossed.

The vehicles are picked from the “marshalling yards.” As per the Toyota Way, marshalling yards is the area where three prime functions are performed:

1. accessories installation,
2. final quality assurance check and,
3. staging vehicles for shipment (Iyer, Seshadri, and Vasher, 2009).

Most of the vehicles transported by trucks are delivered within 2 days of shipment from the factory. To ensure that both the trucking and rail companies have adequate capacity to ship vehicles, the assembly plant needs to provide a day-to-day forecast of volume by destination.

Dealers

Dealers play a key role in the supply chain because they are representing Toyota to the customers and are also responsible for the sales. They are also important because they have an extremely important influence on customer satisfaction. The customer satisfaction level is checked in two categories; initial vehicle quality and the selling process.

Therefore, it is critical that the customers are satisfied not only with the vehicle but also with their buying experience. The time of delivery of vehicles is also important, as the dealers accept vehicles only during business hours however not during customer interaction times. Therefore, the outbound logistics companies need to tie up with the dealers and understand the delivery time windows and schedule for each of its dealers.

The 80-20 inventory rule

Toyota’s sales model is designed so that a high percentage of vehicles are sold from a relatively low level of dealer stock. The objective is to stock 20 percent of build combinations that represent 80 percent of the sales for each market area. Some of the techniques that a dealer uses to achieve this end include advertising and promoting only the popular models.

Once the vehicle is sold, final ‘prep’ work is done like installing wheel covers, washing and cleaning the vehicle, filling the tank and inspecting the vehicle for defects. After the vehicle is delivered, the dealer submits a sales transaction to the manufacturer, which will relieve the stock, provide the dealer with credit for the sale, and start the customer warranty date  (Iyer, Seshadri, and Vasher, 2009).

Reduced takt time than competitors makes Toyota’s supply chain management superior

It can be inferred that the difference between Toyota’s supply chain and other automobile organizations is that inside Toyota plants, vehicles move down the main assembly line at a constant speed or “takt time” (Fiallo and Howell, 2012). Takt time is the average amount of time taken between starting the production of two units, to match consumer demand (Suri, 1998).

For example, while in one area of the plant, seats are arriving by truck to be installed in the vehicles in the correct sequence, and at the same time, the staging yard is loading trucks for delivery simultaneously. Therefore, repeated cycles of work are going around which looks like the supply chain functions like clockwork. It is synchronized and integrated to perform as a lean supply chain. Nevertheless, it produces sufficient variety and at a sufficient pace to satisfy customer demands.

References

• Antonio, V. C. and Alicia, V. C. (2015) Thanatia: The Destiny Of The Earth’s Mineral Resources. Singapore: World Scientific Publishing Co.
• Fiallo, M. and Howell, G. (2012) ‘USING PRODUCTION SYSTEM DESIGN AND TAKT TIME TO IMPROVE PROJECT PERFORMANCE’, in Proceedings for the 20th Annual Conference of the International Group for Lean Construction. San Diego.
• Iyer, A., Seshadri, S. and Vasher, R. (2009) Toyota Supply Chain Management. New Delhi: Mc Graw Hill.
• Kwateng, K. O., Manso, J. F. and Osei-Mensah, R. (2014) ‘OUTBOUND LOGISTICS MANAGEMENT IN MANUFACTURING COMPANIES IN GHANA’, REVIEW OF BUSINESS AND FINANCE STUDIES, 5(1), pp. 83–92.
• Lee, H., Peleg, B. and Whang, S. (2005) Toyota: Service Chain Management. Stanford.
• Liker, J. (2004) The Toyota Way, 14 management principles from the world greates manufacturer. New york: Mc Graw Hill.
• Miemezyk, J. and Holweg, M. (2004) ‘Building cars to customer order – what does it mean for inbound logistics operations?’, Journal of Business Logisitcs, 25(2), pp. 191–197.
• Statista (2020) Consolidated number of Toyota Motor Corporation employees from FY 2012 to FY 2019, Statista.
• Suri, R. (1998) Quick Response Manufacturing: A Companywide Approach to Reducing Lead Times. Portland: Productivity Press.
• Toyota (2019) Profile, Toyota. Available at: https://global.toyot/en/company/profile/ (Accessed: 24 April 2020).