Toyota Supply Chain

SUPPLY CHAIN MANAGEMENT A STRATEGIC APPROACH TO THE PRINCIPLES OF TOYOTA’S RENOWNED SYSTEM ANANTH V. IYER SRIDHAR SESHADRI ROY VASHER New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto Copyright © 2009 by Ananth V. Iyer, Sridhar Seshadri, and Roy Vasher. All rights reserved. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

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Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages.

This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. To my wife Vidhya and daughters Apsara and Rani, and in memory of my parents Thank you Ananth To my wife Shubha, daughters Padmavati and Sharada, and all my family Thank you Sridhar To my wife Audrey; daughters Jody and Neely; my mother Emma, who at the time of this writing is 105; and all my family All my love Roy This page intentionally left blank Contents Foreword by Hau L. Lee Acknowledgments Introduction Chapter 1. Toyota Learning Principles and the v4L Framework Chapter 2.

Comprehensive Overview of Supply Chain Chapter 3. Mix Planning Chapter 4. Sales and Operations Planning Chapter 5. Production Scheduling and Operations Chapter 6. Parts Ordering Chapter 7. Managing Suppliers Chapter 8. Logistics Chapter 9. Dealer and Demand Fulfillment Chapter 10. Crisis Management Chapter 11. The Toyota Way of Managing Supply Chains Chapter 12. How to Apply Toyota Way Principles to Nonautomotive Supply Chains Chapter 13. The Beer Game and the Toyota Supply Chain Chapter 14. Reflections of Supply Chain Participants Chapter 15. Reflections vii ix xi 1 5 25 37 55 73 85 103 121 133 147 173 185 201 215 219 221 v

Appendix Index This page intentionally left blank Foreword F or decades, Toyota’s success in the marketplace has been admired by business practitioners and executives alike. The automaker is the envy of others within the automobile industry, but the company is also considered to be the symbol of excellence in business in general. The firm has been the focus of research in academia. The power of Toyota has been attributed to its two distinct core values: the Toyota Way and the Toyota Production System (TPS). The Toyota Way has created a culture of respect for individuals, promoting innovation and fostering cooperation.

TPS has been the engine under which lean manufacturing, kanbans, quality systems, just-in-time, and continuous improvement practices have been developed. Together, they have been the pillars for the foundation upon which Toyota has become so successful. But the Toyota Way and TPS are just foundational pillars. There is another concrete secret to the success of Toyota: the way the company runs its supply chain. The Toyota Way and TPS of course have been part of how Toyota has developed its supply chain principles and how the company has applied such principles to work with its suppliers, dealers, and manufacturers.

Based on these principles, Toyota has coordinated the plans across the supply chain—and it has executed them well. Supply chain management excellence is the ultimate way in which Toyota has built its superior efficiency in operations. I am delighted to see this book about Toyota’s supply chain management written by two leading academics and an experienced Toyota executive. This book reveals the powerful way that Toyota runs its supply chain, and it shows vividly how the Toyota Way and TPS have been ingrained in the processes used by Toyota to run its supply chain.

I submit that reading about Toyota Way and TPS is only a starting point for really learning the innovativeness and effectiveness of Toyota’s operations. The current book completes the picture. vii viii Foreword While TPS is the central theme of how Toyota runs its factories, the scope of supply chain management is much greater. It spans suppliers to Toyota as well as possibly the suppliers’ suppliers, the distribution channel, the dealers, and ultimately, the consumers. The coordination, planning, and control of this extensive network are a daunting task.

The current book well describes how Toyota has been very smart in examining three dimensions of supply chain management: geography, product, and time. This book gives us a treatment on how Toyota has designed and operated supply chains to adapt to these three dimensions. For example, the needs for the Japanese and U. S. markets, the Camry versus the Lexus, and at different points in time of the product life cycle, are different, and so different supply chain processes are needed. I would urge the reader going through this book to keep two perspectives in mind. First, it describes in great details how Toyota runs its supply chain.

As a result, there are many innovative ideas that Toyota uses, and many best practices described. So the reader can pick up a lot of useful tips and revelations. Second, the structure of the book is extremely helpful to organize your thoughts and evaluations of your own supply chain. The chapters that follow cover the whole spectrum of what constitutes comprehensive supply chain management. So, going through the chapters gives you a framework to follow. In that sense, even if you extract the Toyota content out of the chapters, the book is a good guideline to develop sound supply chain management practices.

One of the most useful conceptual frameworks in this book is the v4L construct. We see how Toyota manages its supply chain to ensure that the 4v’s— variety, velocity, variability, and visibility—can be controlled. In every chapter, for every supply chain operation, the authors describe how this can be done. Again, seeing how Toyota has done it is valuable and informative. But I also think that the reader can benefit from seeing how the authors developed the thought process behind what Toyota did to accomplish the objectives of gaining control of the 4v’s. That knowledge by itself is highly educational.

For anyone who wants to learn the true secret of Toyota’s operational excellence, this book is a must-read. In addition, while learning about Toyota’s supply chain management, we also are given a journey of sound supply chain management in general. In my personal research, I have come across Toyota’s supply chain management practices and have been very impressed by how thorough and innovative the company has been since its inception in the 1930s. I must congratulate the authors of this book, as they have done the most comprehensive, insightful, and penetrating treatment of this subject. Hau L.

Lee Thoma Professor of Operations, Information, and Technology Graduate School of Business, Stanford University Stanford, CA Acknowledgments T he authors express their appreciation to the management of Toyota Motor Engineering & Manufacturing North America, Inc. , for providing access to their executives for interviews as well as for the tour of the Georgetown manufacturing facility. Nancy Banks, manager external affairs, was extremely helpful in coordinating the interviews and arranging for the plant tour. Nancy also spent countless hours reviewing drafts of the book and providing excellent feedback.

The interviews with Toyota executives provided deep insights into Toyota’s management of the supply chain. We would like to thank all of the interviewees for taking precious time out of their busy schedules to speak with us. Gene Tabor and Jamey Lykins, general managers in Toyota’s Purchasing Division, discussed how Toyota’s purchasing relationship with suppliers plays an important role to ensure a strong partnership with suppliers at all levels. David Burbidge, vice president of Production Control, provided an excellent overview of Production Control’s role in managing the supply chain.

Mike Botkin, general manager of Logistics, shared with us his expertise of Toyota’s Logistics operation. In addition, the interviews with executives from Toyota’s partners enlightened us on how the extended supply chain supports Toyota’s management philosophy. Jeffrey Smith, vice president and general manager for Toyota Business Unit Johnson Controls, Inc. , has several years of working with Toyota around the world and was able to provide the supplier perspective. Gary Dodd, former president of Tire & Wheel Assembly, also discussed the supplier’s role and explained the process of becoming a new Toyota supplier.

To round out the supply chain we spoke with Steve Gates, dealer principal, Toyota South in Richmond, Kentucky, to obtain an understanding of the dealer operations in the Toyota environment. Steve is also a member of Toyota’s dealer council, so he ix x Acknowledgments was able to provide a comprehensive view not only of the dealer’s operation but also the Toyota dealer network. Achim Paechtner, former senior manager of Toyota of Europe, provided a framework of how Toyota and other automobile companies operate in Europe. Achim’s understanding of the European markets was extremely helpful.

We thank the Toyota Motor Corporation for endowing the Term Professorship at the Stern School of Business without which Sridhar Seshadri, the first Toyota Motor Term professor, would never have met Roy Vasher and this joint project would never have been undertaken. Ananth Iyer acknowledges the support of the Krannert School of Management at Purdue University whose Fall DCMME Manufacturing Conference, where Roy was a speaker in 2007, provided a forum for the authors to meet face-to-face for the first time. We thank Mayank Agarwal, MBA student at the Stern School of Business for his extensive research into the automobile business.

The research was used in this book to confirm the benefits of Toyota’s supply chain management. The final manuscript would not be complete without the assistance of Leslie Culpepper, who helped copyedit this manuscript. Introduction T oyota uses unique processes to effectively manage and operate the supply chain. These processes span the supply chain and have enabled Toyota to deliver remarkably consistent performance over decades. The authors, a retired Toyota senior executive with hands-on experience and two senior academics, have pooled their combined experience to both describe existing processes as well as understand why they work.

By combining the insights of a practitioner with almost 20 years of Toyota’s execution and management experience and two academics with decades of research experience, we hope to provide a unique presentation of the topic that can influence supply chain practices at auto and nonmanufacturing companies. The fundamental thesis of this book is that understanding process details, as well as the logic associated with their success, will enable adoption of these ideas in both manufacturing and service contexts.

The material in the pages that follow provides insights into how Toyota uses learning (L) processes to implement practices and principles, both within Toyota’s cross-functional organizations as well as with Toyota’s partners (including suppliers and dealers)—in short, across the extended supply chain. We show how integrated and synchronized processes enable careful balancing of variety, velocity, variability, and visibility (4v’s) across the supply chain. Learning is linked to the 4v’s to form the v4L framework. We will describe the v4L framework in more detail in Chapter 1.

In keeping with the “how-to” approach to these complex topics, most chapters provide illustrative examples that both explain details as well as illuminate the logic behind the processes. The choice of topics is meant to focus on essential tactical and operational differences in the way Toyota manages its supply chain. Chapter 1 describes the v4L framework and the Toyota learning principles. Chapter 2 provides a comprehensive overview of processes that are part of the xi xii Introduction overall supply chain. That, in turn, is followed by topics in the sequence of activities in a supply chain.

First, there’s “Mix Planning” (Chapter 3) to support production stability and how this is translated into “Sales and Operations Planning” (Chapter 4). We then cover how sales requests are supported by “Production Scheduling and Operations” (Chapter 5), “Parts Ordering” (Chapter 6), and “Managing Suppliers” (Chapter 7). The inbound and outbound “Logistics” processes are described next (Chapter 8), followed by “Dealer and Demand Fulfillment” (Chapter 9) and dealer-related processes, which will complete the supply chain coverage. Finally, Chapter 10 covers how Toyota handles “Crisis Management. The detailed discussion of Toyota’s supply chain processes will be followed by chapters on “The Toyota Way of Managing Supply Chains” (Chapter 11) and how that has been used to design and improve each of these steps, and “How to Apply Toyota Way Principles to Nonautomotive Supply Chains” (Chapter 12). We have also included a chapter titled “The Beer Game and the Toyota Supply Chain” (Chapter 13), which describes the well-known bullwhip effect in supply chains and examines how following Toyota’s integration of processes across the supply chain enables reduction of the bullwhip effect.

Two “Reflections” chapters conclude the book: Chapter 14 examines the reflections of supply chain participants; Chapter 15 reflects on the Toyota experience in general and considers potential future innovations in the automotive supply chain. Although there are several excellent books that describe the Toyota production system, as well as a few that cover principles used in the Toyota supply chain, we believe there is a benefit to understanding process details in order to execute processes consistent with the principles. The sources of material for this book include firsthand experience with applying these processes at

Toyota, direct interviews with Toyota-experienced managers and suppliers, existing books on Toyota’s processes, academic research, surveys, and empirical case studies. Chapter 1 Toyota Learning Principles and the v4L Framework T oyota is well known for its approach to problem solving and continuous improvement. Articles by practitioners, researchers, and participants have made the tools and techniques of continuous improvement familiar to every business executive. For example, phrases such as andon, heijunka, and kanban have become part of the day-to-day vocabulary of managers.

In an insightful commentary on these tools and techniques, Jeffrey Liker writes that Toyota’s success goes beyond these tools and techniques to what he calls “The Toyota Way. ”1 Liker presents the Toyota Way as an all-encompassing method for designing and managing processes. Every student of Toyota also knows that the Toyota Way is unique, not only in its approach to problem solving but also in perpetuating its way of thinking across different types of operations, organizations (including suppliers, logistics providers, and dealers), and worldwide locations.

Underlying the success of Toyota is the company’s approach to scientifically examining problems, solving them, learning from the experience, and passing on that knowledge to others. Toyota is a global auto company with many products and markets. The company encompasses markets across the globe with different characteristics (e. g. , the United States, Europe, and Japan) that warrant different supply chain configurations. In addition, differences among the Toyota, Lexus, and Scion vehicles warrant different supply chain processes.

Although common processes underpin these supply chains, variations across these supply chains provide additional insights. We believe that an understanding of how all these supply chains coexist in one company provides an excellent learning opportunity for a practicing supply chain manager to apply the v4L framework to his or her work. 1 2 Toyota Supply Chain Management v4L Framework Performance at Toyota is evaluated with equal weight given to both the process used to derive performance and the results achieved.

This process focus aims to generate a balance of key supply chain parameters—variety of products offered, velocity of product flow, variability of outcomes against forecast, and visibility of processes to enable learning. The learning follows a carefully documented process that promotes continuous improvement. At the end of every chapter a reflection section will be included that links the chapter to the v4L framework: balancing variety, velocity, variability, and visibility across the supply chain. One way for managers to understand Toyota’s concepts is to first ask how their company’s supply chain achieves this balance.

Often, variety is chosen with a focus on marketing benefits with scant attention to supply chain implications, velocity, variability, and the like. This off-optimal choice of variety can have severe repercussions across the supply chain, which is often difficult to untangle. A careful choice of v4L parameters enables superior supply chain performance at Toyota. Learning (L) Principles Toyota has mastered the art of learning and believes that the principles to attain mastery are universal. Moreover, Toyota has spread these ideas throughout its supply chain in its leadership role.

We shall review these ideas in later chapters and provide a summary of methods that makes learning a practical and ongoing process at every level and every task in Toyota. Toyota’s way of making learning happen not only conforms to the theory of learning (as we mention in Chapter 11) but can be simply explained (as is often the case with things that are very hard to accomplish! ). The following are the main principles: ¦ ¦ ¦ ¦ Create awareness. Unless problems are seen, they will not be 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 of the relation between action and results. It will aid in the codification of the knowledge for future use, with the same language and format used as well as similar content.

Generate system-level awareness. As experience with solving problems is obtained, greater awareness of other areas that might be affected Toyota Learning Principles and the v4L Framework 3 ¦ 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. v4L Principles The v4L learning principles are combined across all Toyota supply chain management processes to systematically focus on the v4L balance: ¦ ¦ ¦ ¦

Variety is carefully chosen to balance market demands and operational efficiency. Awareness of the impact of variety on the market demand and on manufacturing and supply chain costs enables all the entities across the supply chain to be considered when decisions regarding variety are being made. In one sense, variety represents a crucial supply chain design choice that has an impact across all supply chain participants. A key issue when variety is being chosen is the need to have feedback loops to ensure that the selected variety represents the best response to current market conditions.

As we will discuss in each of the chapters, this is where the learning features of Toyota’s process enable the constant loop of Plan, Do, Check, and Act (PDCA). Velocity of supply chain flows is the next key concept, and it manifests itself in all processes across the supply chain. A focus on maintaining a steady flow throughout the system enables capacity planning to be synchronized across the supply chain. The detailed process descriptions in the following chapters will highlight how a rate-based approach serves as a linchpin for the planning processes across the system.

Variability of orders or deliveries across the supply chain is minimized by how the individual processes are executed. Reducing variability enables all of the supply chain flows to operate with low levels of inventory. It also enables quality improvement processes to operate without interruption, thus enabling continuous cost reductions and quality improvements. Notice that variety, velocity, and variability all interact to stabilize supply chain performance. Visibility of all processes is ensured with use of the right metrics and the requirement that a consensus be reached before plans are changed.

At Toyota, performance metrics have a 50 percent weight for results and a 50 percent weight for process compliance. In other words, the goal is to reward not only short-term successes but also ensure that the correct processes are followed. Such an approach ensures that bottlenecks are visible and responses immediate, changes are deliberate, velocity is maintained, 4 Toyota Supply Chain Management variety is synchronized to demand, and variability is minimized. Visibility enables continuous learning and feedback, thus guaranteeing that execution of processes remains synchronized with market realities.

We suggest that v4L highlight the intricate balance of all supply chain processes. How each of them is balanced by vehicle type or geography is a business choice that reflects Toyota’s competitiveness in that market. The choice of the v4L and the actions required to implement these choices are guided by the learning principles. All companies should be asking themselves how their current choices reflect the impact of the v4L. A way to remember this concept is to ask, is the supply chain’s v4L engine at my company appropriately tuned for competitive performance? Endnote 1. Jeffrey K. Liker, The Toyota Way.

New York: McGraw-Hill, 2004. Chapter 2 Comprehensive Overview of Supply Chain T he Toyota Production System (TPS) is the benchmark used throughout the world as the foundation for “lean” thinking. At Toyota, the TPS practices and principles extend well beyond the factory walls to include the extended supply chain and require some crucial choices to ensure supply chain efficiency. This chapter explains how Toyota plans and operates its supply chains globally. But first, a brief look at the extended global automobile supply chain is in order, which will enable you to understand the processes escribed in the following chapters. The automotive supply chain is very complex and consists of many processes that, when linked together, form a supply chain from the customer back to the various tiers of suppliers. The physical processes consist of the production of parts at the suppliers, transportation of these parts to the assembly plant of the original equipment manufacturer (OEM), assembly of parts into a completed vehicle, distribution of completed vehicles to dealers, and finally delivery to a customer.

In addition to the physical processes, there are both preproduction and day-to-day operational support processes. To fully understand these processes, some background on the auto industry is necessary. The following questions need to be answered: ¦ ¦ ¦ What is the product? Who are the customers? What are the distribution models? What Is the Product? A car or a truck can be described with its specifications. Each OEM uses a slightly different terminology to define a vehicle’s specifications. Toyota uses a 5 6 Toyota Supply Chain Management Table 2-1. Vehicle Specifications Hierarchy Make

Toyota Model Camry Tundra Body Sedan Sedan Crew cab Double cab Sedan Grade LE XLE Options Sunroof Navigation XM Radio Sunroof Navigation Accessories Spoiler Floor mats Tow hitch Bed liner Floor mats Lexus ES350 hierarchical method of vehicle specifications. The typical hierarchy of the vehicle specifications is shown in Table 2-1. The following are some examples of vehicle specifications: ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ Make. Toyota, Lexus Models. Camry, Avalon, Tundra, Sienna, etc. Body style. Four-door sedan, two-door coupe, convertible, crew cab, double cab, etc. Grade. XLE, LE, SE, etc.

When a grade is selected, it usually includes several standard equipment items. Typically the higher-grade vehicles include many standard items. Sometimes when the grade is selected, the engine and transmission combination is included as standard equipment. Engine. Six-cylinder, four-cylinder, etc. Transmission. Automatic, five-speed, etc. Factory options. Engine, transmission, sunroof, air-conditioning, navigation, radio, power windows, etc. Accessories. These items are like options, but they can be installed in the factory or added after the vehicle is built.

Examples are spoiler, tow hitch, roof rack, and pinstripes. In addition to the above specifications, exterior and interior colors must be included to complete the vehicle build specifications: ¦ ¦ Exterior color. The outside color is usually one color; however, it could be two-toned. Interior trim/color. The interior colors (e. g. , black leather and gray cloth) are usually coordinated with exterior ones, but not all interior colors always will be available with all exterior colors. So each vehicle is built with a unique set of specifications called a “build combination. If all possible build combinations were produced, then the total build combinations for a model would be in the millions. This variety would make managing the supply chain an extremely complex and costly process; therefore, many automotive companies limit the number of build combinations Comprehensive Overview of Supply Chain 7 offered in each market area. Toyota has been extremely successful in balancing the combinations that are made and sold by sales area. For example, one approach used at Toyota to reduce the build combinations is to include many standard equipment options based on the model and grade that is selected.

The methodology on how to choose profitable levels of variety to be offered across market areas is explained in Chapter 3. Who Are the Customers? Automobile companies have several categories of customers that need to be considered. The following is a list of the types of customers and a brief description of each: ¦ Retail consumers. The retail segment is the largest segment of customers, and it is also the one in which the automotive companies make the most profits. Although not all retail customers are the same, as yet there are not clear classifications for groups of customers.

Figure 2-1 illustrates how various customer types can be plotted along a continuum: at one end is the serious buyer and at the other is the serious shopper. The serious buyer is a person who needs a vehicle within a short time frame. This type of buyer shops for price and value and will compromise on vehicle specifications. Some reasons that this type of buyer is in the market for a vehicle are that a vehicle needs replacement because of an accident, the current vehicle needs major repair, or the lease is expiring. This type of customer wants to walk into a dealership and drive out with a new vehicle.

The serious shopper is a person who has done homework and knows exactly what he or she wants. This type of shopper has researched several vehicle models and options prior to visiting the dealership and then proceeds to the dealer with the complete vehicle specification in Just wrecked car “Green” buyer First-time buyer Serious Buyer Starting family Retiree Serious Shopper Figure 2-1. Customer continuum 8 Toyota Supply Chain Management hand. Because the serious shopper is very particular about the vehicle he or she wants, this customer will shop around or perhaps wait until a vehicle can be ordered “fresh from the factory. Examples of the serious shopper are a consumer who is young, a first-time buyer, and a car enthusiast. The area on the continuum from the serious buyer to the serious shopper is by far where most customers can be found. Indeed, most customers who walk into a dealership have not made up their minds on the exact vehicle specification or even if they are ready to buy a vehicle. Employees/suppliers: Employees. Automotive companies allow employees, relatives, and (in some cases) friends to purchase a limited number of vehicles per year at a substantial discount.

The employees must receive prior approval before proceeding to a dealer to make a purchase or place an order. The purchase price is calculated automatically based on the discount allowed. The dealer may also receive some rebate to ensure that the dealer margin is maintained. Suppliers. Automotive companies may offer selected employees of suppliers a vehicle purchase program. This arrangement is similar to the employee purchase program in that the purchaser must get prior approval before proceeding to a dealer to purchase a vehicle. The purchase price is calculated automatically based on the discount allowed.

The dealer may also receive some rebate to guarantee that the dealer margin is maintained. Fleet: Rental companies. The rental companies (Hertz, Avis, Enterprise, etc. ) negotiate a contract with each automobile company for annual volume of each model. The detailed specifications of each monthly vehicle order are submitted in advance, and the vehicles are scheduled for production based on the delivery schedule requested by the rental companies. Because space at most rental facilities is limited, the rental companies need to minimize the overlap of new vehicles arriving and the used vehicles being shipped out for auction or resale.

Commercial fleet. These are private companies that provide a company car for selected employees who require a vehicle to perform their job or for certain executives as a perk. Examples are senior management, sales representatives, taxi drivers, and delivery persons. These smaller fleet customers may negotiate a deal with the automotive company or a dealer. In some cases there may be a long-term contract with multiple automotive companies to provide specific models for a ¦ ¦ Comprehensive Overview of Supply Chain 9 company vehicle program.

The company may offer employees an option to select from a list of vehicles with specified options from multiple automotive companies. Then, either based on a lease period or on mileage, the employee will order a replacement vehicle. Government entities. All levels of government—federal, state, and local—purchase vehicles from the automotive companies. Contracts are usually negotiated with the automotive companies to provide vehicles over a period of time. In many cases, special orders may need to be placed for vehicles with unique equipment such as police cars and fire trucks.

Clearly, streamlining the supply chain requires an understanding of the customer types and relative size and profitability of each segment. The following are some examples that show how the customer types affect the supply chain: ¦ ¦ ¦ At Toyota plants in Japan, a large percentage of the production orders are exported to countries all around the world. So these order requirements are fixed and scheduled at least one month in advance for production. Toyota’s advantage is that it can allow its domestic dealers in Japan to change a greater percentage of orders closer to production because the export orders do not change.

The export orders create a buffer to absorb the domestic changes in orders. At Dell, about 85 percent of the orders are for corporate customers. Corporate orders are forecast in advance and can be scheduled based on the lead time for each corporate customer. The retail orders coming through the Internet can be fulfilled quickly even if demand is highly volatile, because the corporate orders can be shifted slightly to absorb the variability in retail customer demand. At Ford, when Hertz was a wholly owned subsidiary, at least 40 percent of some models were sold to Hertz.

This arrangement enabled Ford to use the Hertz volume to fill in the valleys in demand during the year when retail sales were slow. Thus, customer types and order characteristics can be used to build a more flexible supply chain. What Are the Distribution Models? The term “distribution model” defines the method used to distribute vehicles from the assembly plant to the dealers. There are many variations in the distribution model within the automotive industry. At Toyota, the distribution model is different for various regions around the world.

For example, the United States, Europe, and Japan all have different models, and in some cases the models vary 10 Toyota Supply Chain Management within a regional area. Lee, Peleg, and Whang explain that just as Toyota has a set of central core values but allows individual divisions to customize to local conditions, when it comes to supplying to different geographies, different products, or at different times in the product life cycle, “the company adapts the design and control of its demand chain so that it has the right demand chain for the right product, in the right place, and at the right time. 1 In the United States, there are three distribution models: ¦ ¦ North American production. In this model, vehicles are produced at the North American assembly plants and shipped to North American dealers. Once vehicles are released from the plant, they are moved to a marshaling yard. The function of the marshaling yard is to prepare the vehicles for shipment. Vehicles are shipped via train and truck to the dealerships. If vehicles are shipped by train, then they must be transferred to trucks at a railhead near the dealership. If vehicles are shipped by truck, then they will be delivered directly to the dealership.

While the vehicles are in the marshaling yard, some accessories can be added, a final quality assurance check performed, prep performed on selected vehicles, and the price label affixed to the side window. “Prep” is a term that describes the tasks that are normally performed at the dealer just prior to customer delivery. The total time it takes to distribute a vehicle once it leaves the assembly plant can range from two days to three weeks, depending on how far the dealer is located from the factory. In this distribution model, vehicles are typically allocated and assigned to dealers two to four weeks prior to production.

The vehicle inventory is stored at the dealerships. Overseas production distributed in North America. With this distribution model, vehicles produced in Japan are shipped via large vessels to ports in North America and then transported to dealerships. The port provides functions similar to the marshaling yards’; however, typically there are several accessories that are installed at the port to enable the dealers to customize the vehicles closer to delivery. It takes three to five weeks to ship the vehicles from Japan to North American ports. It can take another two days to one week to transport to dealers via truck.

The reason why this delivery time is shorter than the time it takes to transport vehicles from the North American factories is that vehicles arriving from Japan are shipped to a port that is located geographically close to dealers. The ports are located in cities such as Portland, Oregon; Long Beach, California; Houston, Texas; Jacksonville, Florida; and Newark, New Jersey. The vehicles are normally allocated and assigned to dealers while they are in transit from Japan to the port; however, they must be allocated to a regional area prior to being loaded onto the ships. That

Comprehensive Overview of Supply Chain 11 ¦ ¦ ¦ step is necessary because vehicles destined for the East Coast will be loaded onto different ships than ones destined for the West Coast. As with the North American model, vehicle inventory in this production model is stored at the dealerships. Scion model. Scion cars are produced in Japan and distributed in North America in a manner similar to the distribution model described previously; however, there are some significant differences that provide the dealers with much greater flexibility to customize the Scion cars for customers.

The first difference is that Scion cars are shipped to the ports with only basic equipment installed at the factory and in limited colors. The second difference is that Scions are allocated but not shipped to the dealers until the dealer makes a request. That arrangement allows the dealer to select a base model and color, and then add accessories to customize it to meet the customer requirements. Most vehicle inventory is held at the port, which allows flexibility for customization. That adaptability is consistent with the key strategy behind Toyota’s introduction of the Scion, namely, to keep a customer for life. As stated previously, the vehicle inventory is stored at the port with the exception of a limited number of vehicles located at dealers for display. European distribution model. In Europe, the distribution model is very different from North America, because most dealers are located in urban areas and do not have room for vehicle stock. Therefore, once vehicles are released from the plant, they move to a marshaling yard. The function of the marshaling yard is only to stage the vehicles for shipment. Vehicles are shipped primarily by truck to a consolidation point called a “hub. Generally there is at least one hub for each country; however, smaller countries may share a hub, and large countries may have multiple hubs. The hub serves to hold the vehicle inventory until a dealer signs a contract with a customer. At that time, an order is sent to the hub for a specific vehicle. Also, the dealer can request additional accessories to be installed at the hub prior to shipment. The transit time from a hub to the dealer averages one week. In Europe, most vehicle inventory is stored at the hub, not at the dealerships.

Japanese distribution model. In Japan, the distribution model is similar to that for Europe because most dealer retail outlets have very small storage lots. The difference is that in Japan each dealer has a consolidation center where the vehicle inventory is stored until one of the dealer retail outlets sells a vehicle. At that time an order is sent to the consolidation center and the vehicle is shipped to the dealer retail outlet. Again, as in Europe, most vehicle inventory is kept at the consolidation center, not at the dealerships. 2 Toyota Supply Chain Management Supply Chain Overview The supply chain has both physical components as well as operational and planning processes. Physical Flows The physical flow of the supply chain is shown in Figure 2-2. Parts are produced by suppliers and transported by inbound logistics to the assembly plant. At the assembly plant, the vehicle begins in the body shop, moves to the paint shop, then to assembly, and finally to inspection. Once the vehicle is produced, it is transported to the dealerships via outbound logistics.

On paper this process looks very simple; however, it is complex because a vehicle is very large and bulky, it is assembled from thousands of parts that are produced by hundreds of suppliers, and there are thousands of vehicle combinations that could be produced. Suppliers Suppliers provide thousands of parts and components that go into the vehicle. These parts and components are received via the inbound logistics network from hundreds of tier 1 suppliers. Tier 1 consists of the first-level suppliers that make parts and ship directly to the assembly plants.

Because suppliers also have suppliers, and those suppliers have suppliers, the supply chain contains several levels that are referred to as tier 1, tier 2, tier 3, and so on. So you can imagine how complex the inbound supply chain is for an automobile assembly plant. In addition, because suppliers are located in various geographic areas, the time for parts to arrive from each supplier to the assembly plant can vary greatly. Local suppliers may be only one or two days away from the assembly plant, whereas suppliers located overseas may require several weeks of transportation time.

Inbound Logistics After parts are produced by the suppliers, they are shipped to the assembly plants. The process to ship these parts from the many suppliers to each assembly plant is referred to as “inbound logistics. ” At Toyota, parts are delivered in two ways. Overseas parts coming from Japan are shipped via vessel Suppliers Inbound Logistics Body Factory Paint Assembly Inspection Outbound Logistics Dealers Figure 2-2. Physical flow Comprehensive Overview of Supply Chain 13 and then by railcar to the assembly plant.

Once the railcar arrives at the assembly plant rail yard, the container is offloaded onto a truck and driven to the assembly dock. Local parts produced in North America are shipped by truck using a dedicated logistics partner. Toyota takes complete responsibility for pickup and transportation of parts from the suppliers to the plants, because Toyota’s just-intime parts inventory practice requires extreme reliability of inbound logistics. Toyota organizes the suppliers into clusters based on geographic proximity. The truck routes are designed for parts to be picked up from multiple suppliers and delivered to a regional cross-dock.

To improve efficiency, the same truck will pick up parts not only from multiple suppliers but also from each supplier destined for different Toyota plants. Once trucks arrive at the cross-dock, the parts are unloaded and staged for each assembly plant. They are then loaded onto trucks that take parts directly to each plant. Trucks are unloaded at the plant based on the progress of production. If the plant is operating on schedule, the trucks will wait only a few hours in the plant yard. After the parts are unloaded, the truck is reloaded with the corresponding empty returnable containers.

These returnable containers flow in reverse through the cross-dock and back to the supplier to be reused for a future shipment. Production Vehicles are produced at the final assembly plant from the parts provided by hundreds of suppliers. A typical assembly plant will have one or more separate lines on which vehicles are assembled. The plant is subdivided into shops. The vehicle is born in the body shop where the frame and body are formed. The body parts are stamped in the stamping shop by presses. The body shop is where numerous robots are used to weld the body parts together.

Once the body is assembled, then the vehicle moves to the paint shop and its exterior is painted. After the vehicle is painted, it moves down the line into final assembly. At that point most of the supplier-provided parts are installed to make a finished vehicle. Each part is assigned a line location so that parts can be delivered from the dock to a line address based on a bar code label affixed to the parts container by the supplier. After the vehicle is assembled, fuel is added and the vehicle is driven off the assembly line.

But at that point the process is not yet complete because the vehicle still needs to go through several quality control steps along with final inspection. Once the vehicle completes the final inspection, it is released from the factory for shipment to the dealer. Outbound Logistics Vehicles that are produced at an assembly plant must be transported to each dealer. This process is commonly referred to as “outbound 14 Toyota Supply Chain Management logistics. ” In the United States, vehicles are transported by two modes: railcar and truck.

Because of the long distances that vehicles must travel, about 75 percent of the vehicles travel via railcar and are then loaded onto trucks for delivery to the dealers. The remaining 25 percent are delivered by truck to dealers that are located within two to three days’ drive from the factory. In Europe, most vehicles are shipped by truck; however, sometimes ships must be used when there is a large waterway that must be crossed. Just outside the assembly plant, there is a large yard that is used to stage the vehicles prior to shipment. At Toyota, these yards are referred to as “marshaling yards. In the United States, these yards perform three functions. Team members install accessories, perform final quality assurance, and stage vehicles for shipment. Once the vehicle is ready for shipment, it is driven to either the railcar staging area or the truck staging area. For railcar shipments, there are two types of railcars: bi-level and tri-level. “Bi-level” means vehicles are loaded onto two levels within the railcar, and “trilevel” means vehicles are loaded onto three levels. The capacity of a bi-level railcar is 9 to 10 vehicles; a tri-level, 14 to 15 vehicles.

Therefore, vehicles are staged in lanes according to the capacity of the railcar and the destination. Vehicles shipped by truck are identified by the dealer and parked in a truck staging area. The trucking company is responsible for selecting the vehicles to be loaded onto each truck based on the route plan for that truck. The trucking companies have a delivery performance objective to deliver all vehicles within two days. 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 the face of Toyota to the customer. They are responsible for selling the vehicles produced by the manufacturer to the retail customers. In addition to selling vehicles, dealers have an extremely important influence on customer satisfaction. Independent customer surveys such as the “J. D. Power survey”3 measure customer satisfaction in various categories. The two prime categories are (1) initial vehicle quality and (2) customer satisfaction regarding the selling process.

Customers that score the selling process low also tend to give lower scores on the initial quality survey. A high J. D. Power score can be a valuable marketing tool for an automobile manufacturer. Therefore, it is critical not only that the vehicle quality itself be high but also that the customer buying experience be positive—or at least not negative. Two reasons that the Lexus vehicles always score high in the J. D. Power survey are that the vehicles are assembled with extreme attention to detail and that the customer is also pampered by the dealer.

Comprehensive Overview of Supply Chain 15 It is imperative that a dealer invest sufficiently in a facility so that it can operate efficiently and at the same time meet or exceed its sales objectives. A key factor in a lean supply chain is the optimum level of dealer stock. It is also critical that a dealer have an adequate mix of stock so that most of the customers can be persuaded to buy from stock and the dealer does not end up with too many aged stock units. (Mix planning is discussed in Chapter 3. ) Vehicles are shipped to dealers from the assembly plants or from the port of entry.

They are delivered by truck. The delivery time window will vary by dealer depending on dealer location and operating hours. Most dealers will accept vehicles only during business hours; however, a dealer may not want to be interrupted during very busy times. Therefore, the trucking company must understand the dealer’s delivery time windows and schedule its deliveries accordingly. Most trucks will deliver a load of vehicles to multiple dealers, so the loading sequence must be planned based on the delivery route.

One of the key responsibilities of the salesperson is to guide customer demand. Toyota’s sales model is designed so that a high percentage of vehicles is 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 are to advertise and promote only the popular models and display these models in the showroom or in an area that is easy for the customer to see.

Once a vehicle is sold, the dealer must “prep” the vehicle for customer delivery. That usually means the dealer has to install wheel covers, wash and clean the vehicle, fill the tank with fuel, and inspect the vehicle to ensure that there are no defects. In addition, the dealer needs to prepare appropriate documents. At the time of delivery, the dealer will instruct the customer on how to operate various features of the vehicle, complete the paperwork, accept payment or arrange financing, and in some cases take possession of the trade-in vehicle.

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. Various operational processes are necessary to operate the supply chain; Figure 2-3 provides another view of the transformation process that takes place from parts produced by suppliers to vehicles ready for sale at dealers. What is the difference between the supply chain of most car manufacturers and of Toyota? Visualize the Toyota supply chain operation as a giant Swiss clock.

The plant is the main mechanism of the clock. When a clock is opened to expose all of its working mechanisms, there are various-sized movements that are all moving at different speeds but are integrated precisely to ensure that the correct date and time are displayed on the face. This continuous motion repeats itself at numerous intervals: seconds, minutes, hours, days, months, and so on. 16 Toyota Supply Chain Management Figure 2-3. Transformation from parts to vehicles Similarly, inside the Toyota plants, vehicles move down the main assembly line at a constant speed—or “takt time. Feeder lines are also moving key subassemblies to various stations along the main line, where the correct engine or other subassembly arrives just-in-time to be installed in the exact vehicle that requires that subassembly. In another area of the plant, for example, seats are arriving by truck from a sequenced supplier to be installed in the vehicles, again based on the exact match. In the staging yard just outside the plant, trucks loaded with parts produced by hundreds of suppliers are arriving and are unloaded based on the vehicle sequence and progress of the vehicles moving down the main line.

Looking back through the supply chain, the cross-docks and truck milk routes are all operating on repeatable cycles to support the main line’s need for parts. Also, all tier 1 suppliers and their suppliers are operating on a schedule to produce parts based on the scheduled pick-up time. Thus, Toyota’s supply chain functions like a finely tuned Swiss clock. It is synchronized and integrated to perform as a lean supply chain. Nevertheless, it produces sufficient variety and at a sufficient velocity to satisfy demanding customers. Comprehensive Overview of Supply Chain 17 Operational Processes

Several operational processes must be performed on a periodic basis to guarantee that the physical supply chain is operating efficiently and effectively. These processes integrate and synchronize the operational processes with the physical processes to ensure a lean supply chain. The key processes are as follows: ¦ ¦ ¦ ¦ ¦ ¦ Mix planning Sales ordering/forecasting Production scheduling Dealer allocation Parts ordering/forecasting Inbound logistics planning For some perspective of what these processes entail, a thorough explanation of Toyota’s practices and principles follows.

The detailed processes and the logic used to execute these processes will be described in Chapters 3 through 9. Mix Planning Mix planning is the process of limiting the number of build combinations that are ordered for stock in each market area. As mentioned earlier, “build combination” is a term that defines the unique set of specifications for a vehicle. For mix planning purposes, vehicle specifications are divided into three categories: factory-installed options, color, and accessories that can be installed after a vehicle is built.

Mix planning is initially performed on an annual basis prior to new model launch and can be adjusted monthly to reflect changes in demand and/or seasonal trends. For the United States market, the mix planning is done at the region level to ensure that the vehicles ordered for stock closely meet the needs of the geographic area. For example, sport utility vehicles (SUVs) ordered for dealers located in the northern states would almost always be equipped with four-wheel drive, whereas SUVs ordered for southern states would be ordered with two-wheel drive.

Another example is vehicles ordered for Arizona being painted with light colors (certainly not black! ) because of the heat. In Europe, the mix planning is done country by country because many of the countries have unique requirements. For example, the United Kingdom requires right-hand-drive vehicles whereas the countries on the Continent require left-hand-drive. Also, there are various regulations in different countries, significant climate differences from Norway to Spain, and substantial economic differences between Western and Eastern Europe.

Sales Ordering/Forecasting One of the functions of the sales division is to provide a monthly production order and forecast. That is in the form of a rolling three-month plan with the first production month categorized as a firm order and the next two months as a forecast. The firm order requires the sales division 18 Toyota Supply Chain Management to commit to the total volume of units for the month, whereas for the forecast months the volume can change. The content of the order month, however, can change in terms of number of vehicles up to one to two weeks prior to production.

The process starts with the sales and production divisions first agreeing to a planned volume of units or vehicles that are going to be produced each month. Sales divisions determine their request by analyzing recent sales and stock levels. Sales divisions will also consider marketing promotions and seasonality changes. Both sales and production divisions collaborate to agree on the total planned vehicle volume for each of the next three months. The total vehicle volume is further broken down by vehicle model and by plant. Next, sales divisions allocate the total volume by model to each region based on sales performance.

Then each region uses the mix plan along with the recent sales trends to create the quantity of each build combination for each month for each vehicle model. The mix plan or target is compared to the actual mix of sales and the actual mix of stock to determine which build combinations need to be ordered to maintain the target level of mix for stock. In addition, the regions may need to make adjustments for any special dealer requests and also need to consider any special promotions or seasonal trends; for example, sunroofs and convertibles sell better in spring and summer.

Once the forecast is made and the order is completed by each regional office, it is sent to the sales divisional headquarters. There it is checked before it is forwarded to the production divisional headquarters to create a production schedule. Production Scheduling Production scheduling is the process of taking the monthly order and forecast from sales and assigning a production date and sequence to each vehicle. The objective is to create a production schedule that is leveled across each day of each production month using the heijunka principle. Heijunka is a Japanese term that is defined as “smoothing. The concept is to assign each vehicle option a smoothing weight based on its importance to manufacturing. For example, engines will get a higher weight than color, because if they were not evenly scheduled over the month and there were a change in production of engines, that would have a greater negative impact on manufacturing. The term “production month” is different from “calendar month. ” For each calendar year, a production calendar is created. There will always be 52 or 53 production weeks in a year. A week is assigned to a month, based on Monday’s date.

For example, if January 31 falls on Monday, then that complete week is considered January production. February production would start with the February 7 week and end with the February 28 week. The only exception to this rule is the week that includes January 1. The week that contains the January 1 production day will always be week 1, even if January 1 does not begin on a Monday, which means it may contain some December days. Each production month will contain an even four or five weeks. Comprehensive Overview of Supply Chain 19 After the production plan is complete, it is sent back to sales with a scheduled build date for each vehicle.

A copy is also sent to the parts ordering group at each assembly plant. Dealer Allocation Dealer allocation is the responsibility of the sales regions. The dealer allocation process is usually performed twice each month for two weeks of production at a time. That occurs four to five weeks prior to the scheduled build dates for the vehicles that are being allocated. Prior to the allocation process, dealers can update their profile with specific guidelines on the type of vehicles they either want—or in some cases do not want—to be allocated.

For example, dealers in northern cities may want a cold weather kit, and dealers in Arizona may not want dark-colored cars. This dealer profile is important because each region covers a large geographic area of several states that may have different climates and demographics. The allocation process is executed by each region for its dealers. The allocation quantity for each vehicle model is based on a “fair-share method” (sometimes referred to as “turn and earn”) to guarantee that each dealer is treated fairly.

The concept involves basing the allocation on how well each dealer is selling its previous allocation compared to all other dealers. Another benefit of this method is that it ensures that the inventory is rebalanced across all dealers. After the vehicles are allocated, they are assigned to the dealer and will be visible to the dealer as pipeline orders. A pipeline order is a vehicle that is in the scheduled pipeline and will be built during the week identified with each vehicle. Each vehicle has a full set of specifications, including color.

Therefore, the vehicle will be built as is unless the dealer submits a change request. Parts Ordering/Forecasting The parts ordering process is actually two different processes: one for local parts and another for overseas parts. The local process requires that the vehicles scheduled for each day be placed in the exact sequence that they would be built on the assembly line. The next step, after each vehicle is scheduled by day, is to sequence the vehicles into the ideal sequence in which they would be assembled. The concept used is to consider the impact of the schedule on the factory team members and equipment.

It is important to sequence the vehicles so that vehicles that contain high workload or process complexity are not scheduled back to back. Once the vehicles are aligned in sequence for each day, parts calculation is performed for each vehicle. Then the parts installation time stamp is applied to each part for each vehicle. One time stamp calculation follows: ¦ Vehicle number 500 of the day is scheduled to line-off the end of the assembly line at 1 p. m. 20 ¦ ¦ ¦ ¦ Toyota Supply Chain Management Part A is installed at a workstation 2 hours prior to line-off.

Part B is installed 2 hours and 30 minutes prior to line-off. Part A would have a time stamp of 11 a. m. (1 p. m. –2 hours). Part B would have a time stamp of 10:30 a. m. (1 p. m. –2:30 hours). Next each part’s lead time from the supplier to the lineside is determined. That will determine at what day and time the supplier will need to ship the part to arrive at the lineside just-in-time. Other factors, such as lot size, shipping frequency, and adjustments, need to be considered as well when the parts order is calculated. Adjustments are made in two ways.

One way is for a vehicle specification to be changed by a dealer after parts have already been ordered from some suppliers. This occurs when a supplier’s lead time is longer than the freeze point for the assembly plant. A freeze point is the last day prior to production on which changes can be made to vehicle specifications. The plant’s freeze point is based on the 80 percent rule (i. e. , the point is selected so that 80 percent of the suppliers have a lead time shorter than the freeze point). In other words, if the freeze point specification is five days, then 80 percent of the suppliers’ deliveries should take less than five days.

The freeze point will vary by plant but will range from 5 to 10 days. This still leaves 20 percent of the suppliers that are outside the freeze; thus, there is a need to make ad

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