Toyota's Global Supply Chain

The theory that is used in this study is the transaction cost theory because it looks at the cost reduction measures that a supply chain can employ and the governance methods used to streamline the operations in the supply chain. Toyota a very streamlined supply chain that is based on the just-in-time philosophy. Advanced data collection is used to create a production plan that ensures only the required raw materials are delivered by the suppliers and the specified number of cars are assembled in a specific production plan. Other concepts like Kanban allow the supply chain to be accurately monitored to help in streamlining inbound logistics with outbound logistics. Additionally, the Jidoka approach is used in automation to reduce the operational cost by allowing one person to oversee an entire assembly division using the ‘Andon’ displays. The production and distribution are segmented into regions. As a result, the firm can keep delivery times without relying on warehouses and inventory. The main advancement that Toyota is considering is adding Big Data into their supply chain. It will make the production plan more detailed and informed.

Toyota Supply Chain

Introduction

Global supply chains are made up of numerous different stakeholders ranging from suppliers all the way to retailers and distributors. These supply chains combine different methods of procurements and logistics to ensure that the goods sold overseas arrive in time while keeping costs low. Toyota is one of the largest automobile manufacturers in the world with a global presence. Since its creation in 1937, the firm has had to live up to the, “Moving Forward” motto in design, production and supply chain management(Toyota, 2017). The firm has had to develop its supply chain to ensure that it remains competitive while remaining robust enough to survive disruption. Even to date, the firm is adopting modern technology with the aim of improving the supply chain. The paper investigates the dynamics of Toyota’s global supply chain by investigating the sourcing decisions, the strategy used and the future adoption of new technology.

Theoretical Framework

Analysis of a specific global supply chain requires basing the arguments on a specific theory. In this paper, the transaction cost economics theory is the most viable. The transaction cost theory tries to explain the relationship between the main firm and the other stakeholders in the supply chain. The main firms are mainly interested in reducing the cost of production, sourcing and distribution of its products. As a result, it enters contractional relationships that can help it achieve these goals(Williamson, 2008). The suppliers, agents and retailers that the firm chooses to go into business with have a responsibility of ensuring that the contractual requirements are met barring unforeseen circumstances.

Additionally, transaction cost economics in global supply chain management also looks at the governance structure that is used. Toyota uses a centralized supply chain management structure that is more responsive. The supply chain approach used allows Toyota to make minute adjustments in procurement and distribution to ensure that the final customer always has a wide range of Toyota vehicles to choose from without compromising on the reliability and durability that Toyota cars are known for in the automobile industry(Garfamy, 2013). The centralized governance of the supply chain also enables Toyota to make some decisions that will aid in reducing costs. The firm adopted automation to reduce manufacturing and operation costs while reducing errors.

Learning in the Supply Chain

Toyota has one of the most complex supply chains on earth. The firm has three main different types of cars that are sold all over the world. They include Scion, Toyota and Lexus. These products are different and they are sold to different target customers. As a result, the supply chains are different even though they share some aspects together. An example is a chassis for the Lexus harrier and the Toyota harrier are the same but the interior finish and some of the mechanical components are different. Toyota relies on the V4L principles to provide balance in the supply chain(Stewart & Raman, 2007). The first is variety which refers to how the operational efficiency and the market demands are balanced to ensure that firm can respond to changes in preferences without losing the efficiency in the supply chain. The second is velocity where the firm maintains a steady flow in the supply chain by synchronizing the different aspects to ensure that everything is interconnected and running. The third is variability where the variability of the orders made is minimized and controlled by providing relatively uniform products that require little modification. As stated, many cars in the firm use the same chassis. The conformity in the chassis used allows the firm to simply make minor adjustments to cars to meet the needs of different customers(Stewart & Raman, 2007). As a result, the variability in the creation of the chassis remains the same. The final aspect is the visibility of the supply chain. When the supply chain is visible, adjustments can be made based on the trends in customer preferences. The visibility reduces waste in the supply chain. The V4L framework used by Toyota ensures that the supply chain is running smoothly.

Production and Distribution Models

Since Toyota is a global model, it must adjust to the changes in regulations and preferences in different regions. The strategy used to reduce costs of distribution and overwhelming the one production site with all the responsibility to make the cars is by creating production lines in specific regions. Using different production lines means that the regional unit is responsible for producing and distributing the vehicles required in a smaller region(Takeuchi, Osono, & Shimizu, 2008). The approach eliminates variables like importation costs, shipping delays and other problems that other global supply chains face. There are five main hubs for production and distribution.

The first is the North American production hub. North America has different vehicle regulations and the customers prefer SUVs and trucks. Since the taste is different, the firm opted to launch a production plant in North America. The vehicles are produced and then moved to the marshalling yard where the vehicles are prepared for shipping. In North America, shipping is mostly done by train. The supply chain approach tries to minimize the amount of time that the vehicles are in the marshalling yard to ensure that they are delivered to dealers ‘Just in Time(Webb, 2016).’ Storage is done by the dealers and the delivery time after a dealer makes an order is between 2-4 weeks. In the automotive industry, this is one of the fastest production times considering the complexity of the process.

The second distribution of products produced overseas. Not all models are manufactured in North America. There are some that are still manufactured in Japan. These vehicles are shipped to North America on large vessels. In this supply chain, the ports serve the same purpose as the marshalling yard. Quality assurance and the addition of accessories is done in the ports before the vehicles leave for North America(Takeuchi, Osono, & Shimizu, 2008). They are mostly delivered to Portland, Long, beach, Jacksonville, Houston, Newark and Florida. Immediately they arrive they are placed on transit trucks and sent to respective dealers.

The Scion model is predominantly produced in Japan. It is mainly sold in Asia because the vehicle is designed for Asian markets. However, some models are sold in America and Europe. The supply chain for the Scion is different from other vehicles in the production line because they are designed to provide customers unique customization. Therefore, Scion vehicles are produced with only basic equipment. They are delivered to ports where dealers make orders based on customer requests. The cars are fitted with the accessories the customer wants and then it is shipped(Monden, 2011). The fourth is the European distribution model. There are numerous plants in different European countries that produce different cars. Left-hand vehicles are produced in a specific country while right-hand vehicles are produced in a different factory. The vehicles that are produced are placed in a marshalling yard before being shipped by train or no transit lorries. Each country has a hub where vehicles are first shipped to after production. There, dealers can order vehicles with certain specification and minimal adjustments are made before they are shipped(Monden, 2011). Europe is the only region where vehicles are stored in hubs instead of in dealerships. The transit time from the hub to the dealer takes roughly a week, depending on how far the dealer is from the hub.

The final production plant is the Japanese plant. The plant is the largest and it can produce almost all the vehicles Toyota currently makes in other regions. The Japanese production plant mainly produces vehicles for distribution in countries without production units. As a result, there are many vehicles that are produced and sent to ports where international dealers can requisition the vehicles(Iyer, Seshadri, & Vasher, 2009). Those that are sold in Japanese are sent to consolidation centres because the dealers in Japan do not have adequate space to store the vehicles.

Overview of the Supply Chain

Apart from the production and distribution channels, there are other components. The physical flow can be explained based on the following structure.

Figure 1: Toyota Supply Chain (Iyer, Sheshadri and Vasher)

The first stakeholders are the suppliers who produce the parts that are required to make the cars. Toyota assigns them to tiers depending on how crucial the components. Those that produce the aluminium for the chassis are considered tier 1 suppliers. Others produce the glass, bearings, rims and other components that are required. These suppliers sell their parts to Toyota. Toyota tries to use local suppliers in the different regions except for some crucial components that are too expensive or that must be produced centrally in the Japan plant(Iyer, Seshadri, & Vasher, 2009). The next stage is the inbound logistics where the Toyota liaises with the suppliers to ensure that the raw materials are sent to the different production plants. Those that are supplied locally arrive through trains and railcars while those that are shipped from overseas are stored in containers and then offloaded to trains and trucks for the final delivery.

Once the raw materials arrive at the production plant, the actual manufacturing process can begin. The vehicles are essentially made using different chassis and then the superficial differences are added afterwards. The bodies are made from aluminium or steel depending on the model. Toyota tries to ensure that the variability in the manufacture of the body is minimized to increase the speed of production. Since there are millions of units of the same chassis created, Toyota can use automation to minimize the errors. By the time the assembly unit is done with a vehicle, the body is complete, it has windows and doors(Lai & Cheng, 2016). Once this is done the vehicle is painted and the final components like the dash, winders and the electrical systems are added to the vehicle. Tires are added and the vehicle is driven off out of the factory after a comprehensive inspection is done.

The final part is the outbound logistics. Once the vehicles leave the factory, they are held in marshalling yards or ports where they are either shipped by train or by sea. In some cases, the vehicles are loaded onto a bi-level and tri-level trucks that can carry 9 or 14 vehicles respectively. Trucks are only used when the dealer is nearby. Before the vehicles are shipped to the dealers, some minor accessories are added depending on the specifications given by the dealer(Munson, 2013). The central supply chain command centre in each of the different regions ensure that the orders are received and the vehicle are dispatched as fast as possible. The dealers also play a role in some of the regions. They provide storage of the vehicles because Toyota does not have any warehouses. The lack of warehouses reduces the costs while ensuring that inventory does not lie idle in Toyota’s supply chain.

Concepts in the TPS

In the 1980s, Japanese companies relied on the keiretsu system when forming relationships along the supply chain. During the reformation in Toyota’s supply chain, the firm opted to adapt and innovate some of the components of these systems. The firm deviated from the predominantly western ideas and opted for a more traditional relationship with suppliers that yielded certain benefits. The firm opted to create lasting relationships instead of exclusively purchasing from one supplier. As a result, the cost of raw materials went down as suppliers competed to offer them the best process. Toyota also opted to purchase parts from suppliers who offered them integrated parts instead of purchasing parts from multiple suppliers for the same component. The approach encouraged suppliers to improve the integrated services that they offered giving them the incentive to go the extra mile for the end customers(Aoki & Lennerfors, 2013). As a result, Toyota was able to reduce costs considerably. When Toyota entered into a contract with a supplier, it included the expectations of price decreases.

Another concept in Toyota’s supply chain is the just-in-time approach. Just-in-time is a lean approach to supply chain management. The firm uses just-in-time by creating a detailed production plan that relies on real-time information from the dealers. When multiple dealers start making orders for vehicles, Toyota informs the suppliers to supply the required raw materials. The raw materials are then manufactured into cars and once the cars assembled they are sent to the dealers. Most of the time, inventory does not stay for more than a week in the ports and marshalling yards. It is important to note that this system heavily relies on accurate information from the dealers to allow a detailed production plan to be created(Canis, 2011). The Just-in-time system is one of the best SCM approaches around the world. Toyota can hold less inventory than most other car manufacturers, leading to better liquidity. Ultimately, this saves costs.

The third concept used in the TPS is the use of the Kanban system. The system is borrowed from supermarkets. In supermarkets, all the items are tagged when they are delivered to the store. As a result, whenever items are sold, they are recorded in the database providing an accurate snapshot of what inventory there is in the supermarket(New York Times, 2012). Toyota used this approach and used Kanban signs to name the production processes. At any point, the supply chain managers can know what parts have been used in a specific process and how many parts are remaining from the raw materials inventory. This gives an exact detail of what is being used. It also gives the firm a realistic estimation of when assembled cars will be available to the dealers.

The third concept used in Toyota’s supply chain is Jidoka. Jidoka refers to advanced automation to save on costs. An effective way of reducing costs in the manufacturing industry is by adopting automation. This reduces operations costs despite the high capital demands. The concept was borrowed from the creation of the automatic loom. The loom was able to change the shuttles without the operations stopping. Many believed that the loom was able to make decisions and the Japanese term ‘Jido’ was created to explain the automation. Jidoka simply refers to automation while retaining some human touch. The automation process in the production plans allows one operator to monitor the different machines working on a specific task in the assembly line. The operators can visually see any machines that have problems and quickly request the engineers to ascertain the cause if the problem. Machines with problems can be seen on the ‘Andon’ display system(Toyota, 2017).

The final way that Toyota improves the global supply chain is by localizing production. Some automobile companies only have one production plant in the home country. The problem is that while they can control the production process, the supply chain suffers difficulties due to problems with shipping of vehicles and raw materials. Toyota tries to minimize these added costs by ensuring that the raw materials are sourced from the local area where the production plant is situated. North American production relies on North American suppliers for most concepts(Lohr, 2011). Even though the cost of setting up assembly plans is expensive, it allows the supply chain to remain lean. As a result, Toyota does not rely a lot on warehouses. Opting for global distribution would mean cars take weeks or months before they arrive at dealerships. Additionally, the cost of inventory would reduce liquidity, making it more difficult for the firm to invest in research.

The main modern technology that Toyota hopes to add to the supply chain is artificial intelligence and big data analytics. As highlighted, Toyota’s supply chain requires accurate information to ensure that the production plan is detailed. However, the current data collected does not paint a clear picture. As a result, there are sometimes when the supply chain is unable to cope with increased demand for specific models(Bunkley, 2011). Big Data analysis can allow Toyota to accurately collect information from dealers and customers to determine the trends in purchases.

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