Purchasing and supply chain management: Toyota

KEY TERMS

AUTOMOTIVE COMPONENT MANUFACTURERS (ACMS) AUTOMOTIVE (MOTOR) INDUSTRY

BOTTOM LINE CONTINUOUS IMPROVEMENT (CI) EARLY SUPPLER INVOLVEMENT (ESI) FIRST-
TIER SUPPLIERS GROSS DOMESTIC PRODUCT (GDP) INTEGRATED SUPPLY CHAIN INVENTORY
MANAGEMENT JUST-IN-TIME KEY PERFORMANCE INDICATORS LEAN PRODUCTION LONG-
TERM RELATIONSHIPS ORIGINAL EQUIPMENT MANUFACTURERS (OEMS) OUTSOURCE
PURCHASING FUNCTION SUBASSEMBLIES SUB-TIER SUPPLIERS SUPPLIERS SUPPLY CHAIN
MANAGEMENT SUSTAINABILITY TOYOTA PRODUCTION SYSTEM VEHICLE ASSEMBLERS
VENDOR MANAGED INVENTORY SYSTEM (VMI)

Introduction

Toyota’s net income per employee is five times greater than that of Ford and Chrysler.
Toyota also shines in receivables turnover, inventory turnover, and asset turnover. Ford and
General Motors have worked hard at implementing the inventory management philosophy
that was pioneered by Toyota Japan. True efficiency goes beyond inventory management
and requires an integrated product development, sales, manufacturing, and supply system.
Toyota is very mature in its approach to these activities, and this clearly shows in its bottom
line.1 Toyota is admired for their systems and their operational performance by competitors
and other business institutions worldwide. They are also appreciated by millions of satisfied
Toyota vehicle owners. However, even though admired for their efficiency and quality
products, the worldwide vehicle recalls from 2010 to 2014 indicate that no organisation’s
systems and networks are perfect. In modern organisations like Toyota the purchasing
function forms an inherent and integrative part of an integrated supply chain. A supply chain
consists of purchasing (inputs or sourcing), the operational process (assembling or
transformation) and distribution of half-finished or finished consumer goods. Today’s market
place is more fiercely competitive than ever before due to globalisation, technological
change, and demanding customers. The nature of competition has changed. Companies no
longer compete against companies. Supply chains compete against other supply chains for
supremacy. ‘… Toyota and its suppliers will clash with Ford and its suppliers for global
competitive advantage’.2 The purchasing function, which has the important task of finding,
keeping and managing relationships with suppliers, and managing incoming goods, is an
important part of supply chain management. Toyota is regarded as the benchmark for best
practices in South Africa and throughout the world. This case study will focus on purchasing-
related issues, such as systems, inventory, suppliers and quality in Toyota. The case study
also briefly refers to Toyota’s recall of certain models to demonstrate that no organisational
strategy, system and supply chain is perfect, even with the greatest care and efforts of
.management

The automotive industry

The global automotive (motor) industry is the largest manufacturing sector in the world,
with industry output equivalent to the world’s sixth largest economy.3 The industry is
characterised by global mergers and relocation of centres to emerging economies.4 It draws
on a wide range of supplier industries, from raw materials (such as steel, aluminium, plastics
and chemicals) through to sophisticated component assemblies, tooling, design and
engineering services. The industry is one of the largest investors in research and
development (R&D), playing a key role in society-wide technological development.5 With its
skill base and innovative practices, the automotive sector is often seen as providing an
effective national training ground for

many manufacturing and engineering employees in very diverse industries.6 The global
automotive industry is currently led by the main manufacturers or original equipment
manufacturers (OEMs), that is, Toyota, General Motors, Volkswagen, Ford, Honda, PSA,
Nissan, BMW and Chrysler, which function in a competitive international market.7 The
automotive industry supply chain integrates four groups of players: original equipment
manufacturers (OEMs), automotive component manufacturers (ACMs) (first-tier suppliers),
sub-tier suppliers, and infrastructure suppliers in the supply side of auto manufacturing. The
supply chain stretches from the producers of raw materials through to the assembly of the
most sophisticated electronic and computing technologies.8 The major components of the
supply chain include parts and raw material suppliers (tier 2–3), ACMs, OEMs, distribution
centres, dealers and customers. OEMs create 30 to 35 per cent of value internally and
delegate the rest to their suppliers (ACMs).9 OEMs purchase entire subassemblies, such as
doors, power trains, and electronics from suppliers. The desire to work with partners to
outsource subassemblies is leading to a radically new infrastructure to support the design,
purchasing (also known as procurement), and logistics processes of the manufacturers.10

The automotive industry in South Africa

Importance The automotive industry is an important industry for the South African
economy. The South African vehicle manufacturing and associated industries have grown to
become the major contributor to manufacturing output in South Africa and accounts for
about one third of all manufacturing activities in the country. An overview of economic
activities of the automotive industry and the subsequent contribution to the country’s
economy is clear in Table 13.1. From Table 13.1 it is clear that the retail part of the
automotive industry provides the most employment opportunities and the automotive-parts
(ACMs) part of the supply chain the second most employment opportunities. (ACMs are
direct suppliers to OEMs such as Toyota Motor Company). The motor retail part (dealers)
forms the customer or distribution part of Toyota’s supply chain and is responsible for sales
and servicing the final customer. (Refer to Figure 13.2 where the different parts of the motor
vehicle (automotive) supply chain is shown.) Figure 13.1 shows the contribution of the
.automotive industry to the South African gross domestic product (GDP)

Source: NAAMSA. 201412 Figure 13.1 The contribution of the automotive industry’s
contribution to the South African GDP 1999–2013

Revised to include BLNS country data ** Including BLNS country data but excluding R39
.billion of aftermarket parts not linked to value addition under APDP Source: NAAMSA. 2015

From Figure 13.1 it is clear that the automotive industry plays an important role in the
economy. It is also clear that the global economic conditions influence the automotive
industry’s output which is clearly visible in 2007, 2009 and 2010 – since the beginning of the
.global financial and economic crisis, leading to conditions of a recession world-wide

Structure The main role players in the automotive industry are identified below and
indicated in Figure 13.2. From the figure it is clear that the supply chain in the motor
industry involves many parties, nodes, links and logistical processes to deliver the final
.product to the final customer
 .1
.2
.3

Source: Naude & Badenhorst-Weiss, 2011, Southern African Business Review13 Figure 13.2
Role players in a typical supply chain in the South African motor industry

Automotive component manufacturers (ACMs). The ACMs supply components to OEMs,

OESs and the independent aftermarket. The ACMs can be seen as the firsttier supplier in the
automotive supply chain. Original equipment manufacturers (OEMs) or automotive
assemblers. This category comprises both passenger and commercial vehicle assemblers, for
example Toyota and Ford. There are 8 main light vehicle assemblers and 11 producers of
medium and heavy commercial vehicles. Toyota is the major producer (in terms of market
share) of both cars and light commercial vehicles. Automotive retail and aftermarket, which
consists of automotive parts and accessory

.sales, through independent retailers and repair shops

Toyota Motor Company – the history14

In 1933, in Japan, Toyoda Automatic Loom Works created a new division devoted to the
production of motor cars under the direction of Japanese industrialist, Kiichiro Toyoda, the
founder’s son. In 1936 Toyoda Automatic Loom Works created its first passenger motor car
and Toyota’s logo was established. Toyota Motor Company was established in 1937.
Although the founding name is Toyoda, the company name was changed in order to signify
the separation of the founders’ work life from home life, to simplify the pronunciation and
to give the company a new beginning.15 In 1938 Toyota launched ‘just-in-time’ on a full-
scale basis. Just-in-time is a system that ensures suppliers have intimate knowledge of the
production scheduling of Toyota and that they are able to deliver the materials when
needed in the production-line. Hence, no stock of the required items, parts and modules
need to be kept at Toyota. During the sixties, Toyota established a global presence and in
1965 the Deming prize (highest award on Total Quality Management in the world) was
awarded for the first time. In the 1970s, Toyota was awarded the first Japanese Quality
Award. Due to the 1973 oil crisis, the US market started to change their demand to small
fuel-efficient cars. As a result, Toyota established a strong presence in the USA.16 Toyota
listed itself on the New York and London Stock Exchange in 1999. Toyota Corporation is a
Japanese multinational enterprise. In 2012 Toyota became the world’s largest automaker
and the eighth largest company in the world. Toyota’s headquarters are in Toyota City,
Japan. The company has assembly plants all over the world where vehicles are assembled
for both domestic and international markets. Assembly plants are in Japan, Australia,
Canada, Indonesia, Poland, South Africa, Turkey, the United Kingdom, the United States,
France, Brazil, Pakistan, India, Argentina, Czech Republic, Mexico, Malaysia, Thailand, China,
Vietnam, Venezuela, the Philippines and Russia. Toyota Motor Corporation has 52
manufacturing companies in 26 countries and regions, employs approximately 333 000
people worldwide, markets vehicles in more than 170 countries and averages a global
production figure of 10 million vehicles per annum.17 As this case study focuses on Toyota
.South Africa, it is appropriate to give some background information on the company
 Toyota South Africa Motors (Pty) Ltd (TSAM) Toyota South Africa Motors (Pty) Ltd (TSAM)
holds the rights for the importation, assembly, manufacture and distribution of Toyota,
Lexus and Hino vehicles and components in the southern Africa region. TSAM is owned by
holding company, Toyota South Africa (TSA), who in turn is 100% owned by Toyota Motor
Company.18

TSAM has been a market leader in South Africa for the past 34 years, and of the 148 203
vehicles produced in 2013, 52 percent was for the export market to 58 countries in Europe
and Africa. TSMA employs about 8 000 people who contribute to the manufacturing and
marketing of the Corolla, Hilux, Fortuner and Dyna models, which are marketed and sold
through 192 dealerships in southern Africa. In 2014 a R1 billion investment to expand the
Durban production plant was announced. This will enable TSAM to assemble the new
generation Corolla for domestic and export markets.19 TSAM ranks among the top ten
international distributors of TMC, and is firmly established as the largest vehicle
manufacturer in the African continent, and the largest vehicle exporter in South Africa. Over
the past few years TSAM has received national and international awards and accolades for
their products, brand, responsible business conduct, community projects, environmental
stewardship, customer service, sales and marketing.20

Supply chain management – integration of functions and parties

In large organisations, particularly in manufacturing and assembly type organisations such as

Toyota, the organisational functions (purchasing, production, marketing, finances, logistics
and human resources) are performed in an integrated manner in a supply chain. The
functions of purchasing, operations and logistics are particularly integrated in a supply chain
and cannot be separated. Not only are the internal business functions performed in an
integrated manner, but the suppliers of the organisation are also integrated by means of
planning, systems and long-term relationships. In the same way, the customers are linked to
the supply chain. Information, money and materials flow through the whole supply chain as
a unit – as if it is one organisation. In this case study some purchasing related issues will be
highlighted within the integrated supply chain of Toyota. In this approach to managing
(supply chain management) organisations, the purchasing function plays an increasingly
important role with regards to the selection of and relationship with suppliers. With over 25
000 possible combinations of parts that can be assembled into one Toyota vehicle it
becomes clear how complicated the supply chains and particularly the production system,
selection of suppliers, inventory control and quality control are. This case study will cover
.Toyota’s production system, inventory, suppliers and quality

Toyota production system Toyota is one of the most written about companies in the world,
attracting the attention of journalists, researchers and business executives seeking to
benchmark its

famous production system.21 This is because Toyota has repeatedly outperformed its
competitors in terms of quality, reliability, production and cost reduction, number of sales,
market share growth and market capitalisation. In fact, opinions were expressed that Toyota
taught the modern car industry how to make cars properly using the Toyota Production
System (TPS).22 The Toyota Production System (TPS) has become known as the world’s
premier production system, and the manufacturing process as ‘lean manufacturing’. Lean
production is one of the names given to the manufacturing strategy developed by Taijichi
Ohno and Eiji Toyoda of the Toyota Motor Company. Lean production has its roots in the
Toyota Automobile Company of Japan where waste was to be avoided at all cost. This means
‘getting more done with less’. The process entails the identification and removal of
nonvalue-added activities right through the whole supply chain in order to realise quicker
customer response, reduced inventories, better quality and improved human resources.
‘Lean’ means an integrated set of activities designed to obtain the same output from half the
resources used by older production methods – in other words, half the resources in terms
of: half the number of workers who are multiskilled and work in teams, half the number of
design engineers and half the level of inventory. At the same time, this involves the use of
half the resources achieving higher levels of quality, more frequent new model launches and
more varied product variations.23 The TPS was developed to improve quality and
productivity and has its foundation in the Japanese culture – (1) elimination of waste; and (2)
respect for people. The just-in-time (JIT) philosophy is also incorporated in the TPS. In a
system incorporating JIT, items move only when they are needed by a downstream
processing step. In other words, supplies and assemblies are ‘pulled’ through the system
when and where they are needed. When problems are encountered, the process is stopped
until the problem is sorted out. Since reductions in throughput time allow materials to get
where they need to be on time, JIT activities are all connected to this objective. Managers
work on this objective by: reducing lot sizes; processing times; safety stocks; waste worker
and material movements; inconsistencies; and defects. These are all considered waste in the
JIT philosophy.24 Continuous improvement (CI), also called Kaizen, was developed by Taichi
Ohno, the pioneer of the Kanban system at Toyota. Kanban is the information system
perfected by Toyota in Japan to operate the JIT-system. Ohno developed continuous
improvement into a viable, tangible management approach. CI seeks for continual
improvement of machinery, materials, labour utilisation and production methods through
applications of suggestions and ideas of company teams, which might also include
suppliers.25

Information systems Toyota uses the Global Toyota System and SAP information systems.
SAP is used for commercial applications such as the control of finance and human resources.
Data is

shared with suppliers through a domestic website portal and global information such as
forecasts and prices are available to the relevant suppliers. Suppliers who supply
requirements to Toyota have to subscribe to Toyota’s website portal.26

Inventory Toyota aims to keep their inventory to the minimum by using the JIT system. This
means nothing is produced until the customer requests a vehicle, and subsequently, nothing
is purchased until the production process begins and materials are requested from the
supplier. Materials are therefore ‘pulled’ from their source and never ‘pushed’ into the
process. A pull system works on feedback from the user before materials and components
are introduced into the process. Obviously all elements of the supply chain system must be
ready and in perfect synchronisation in order to make the ‘pull’ supply chain work. The
objectives of a pull system are to create a flexible system capable of delaying final assembly
until a customer places an order. The benefits of such a system are quicker delivery times,
reduced inventory levels and improved quality. The JIT system at Toyota SA is complicated
by the fact that their suppliers are dispersed throughout South Africa and some of the
suppliers are even overseas. Inventories should be kept to provide for risks involved in
purchasing from far away suppliers. Toyota is trying to get their suppliers to move towards a
supplier (vendor) managed inventory system (VMI). VMI is a JIT technique in which inventory
replacement decisions are centralised with upstream suppliers. In VMI, customers no longer
pull inventory from suppliers, but inventory is automatically pushed to customers as
suppliers check the customers’ inventory levels and replenish inventory as and when
required. The supplier is therefore responsible for keeping and administering the inventory
.levels of its manufactured goods at the customer’s facility

Suppliers Suppliers are referred to as business partners. Toyota prefers long-term

relationships with suppliers in order to realise mutual growth based on mutual trust. A long-
term mutually beneficial mindset is an important criterion for the selection of suppliers.
Toyota suppliers are also assessed using the standard key performance indicators (KPIs).
These are cost, quality, delivery and environmental issues. Of those, cost is the most
important to Toyota.27 Environmental issues are becoming increasingly important.
Therefore, Toyota expects their suppliers to be ISO14001 compliant. That means that
suppliers must apply certain standards to manage their impact on the environment with the
materials they use, production processes, waste, scrap, packaging, disposal of the end
product and anything that might have an impact on the environment. The sustainability of
suppliers is important for Toyota. Sustainability means

firstly, that the supplier must be a viable business and the business must be able to adapt
and survive into the future. Therefore, Toyota does not only purchase parts from suppliers,
Toyota also develops suppliers’ capabilities. They train suppliers in the Toyota Production
System (TPS). They use retired employees who have knowledge in production and logistics
to work with the supplier. As part of their long-term mindset Toyota start to involve
suppliers early on in the design process. Early supplier involvement (ESI) occurs when a
strategic supplier provides product and process technology and knowledge to support the
buyer’s operation.28 Key strategic suppliers are able to make vital contributions in the areas
of quality, cost and timely market availability of new products. For example, the core
competency of designing Toyota seats now lies with Toyota Boshoku. Toyota will indicate to
Toyota Boshoku how they expect car seats to function and what they want them to look and
feel like. Toyota Boshoku will then be responsible for the development, design, procurement
of parts and production. Toyota aims to develop a few suppliers (two or three), who can
supply a certain part in order to maintain competition within the supplier base.29 Supplier
innovation within Toyota is critical and the company gives an annual award to the top
supplier for innovation. The playing field for local suppliers (ACMs) has changed over the last
few years. OEMs such as Toyota are now sourcing components on a global basis at the
lowest possible cost.30 In order to survive the South African ACMs need to compete with
the best in the world from a cost and quality perspective. Toyota Motor Corporation and
Toyota South Africa thus employ world best practices in the management of their supply
chain. This includes the Toyota Production System, aimed at waste reduction, lean
principles, quality, just-in-time and continuous improvement. Likewise, inventory and
suppliers are managed according to best practice. The result is quite clear: in South Africa,
Toyota South Africa ranks among the top ten international distributors – they have a good
reputation and have received numerous awards over the past decades for product quality
.and performance in many areas

Vehicle recalls of 2010 and 2014

When Toyota recalled vehicles worldwide and in South Africa in 2010, despite Toyota’s good
reputation and the best practices employed, it became clear that perfection or ‘zero defects’
 (a popular concept for the past number of decades) is a goal to strive for and not always a
certainty. The Corolla, Auro and Verso (52 546 vehicles) were recalled in South Africa to
correct a potentially faulty accelerator pedal mechanism. In other parts of the world cases
were reported where the mechanism had deteriorated and become harder to depress, slow
to return to idle or was stuck in a partially depressed position. Toyota also recalled 216 Prius
models for a software upgrade to the electronic brake system. The brake upgrade will fix
problems when

braking on a slippery surface.31 In 2014 Toyota Motor Corporation announced two

international recalls that also affected locally sold vehicles. The recalls involve the seat
fastener spring on previous generation Yaris models and a spiral cable connection to the
driver’s airbag module in the RAV4, Hilux, Fortuner and Inova models. The seat spring of the
Yaris was inspected and replaced if necessary, ensuring that the seat remains firmly locked
into place. For the other models mentioned the spiral cable was replaced to prevent any
possible wear that could lead to the airbag warning light illuminating.32

Discussion The recall of Toyota vehicles was not good news for Toyota because it hurt their
reputation for quality and reliability. Xiaoyuan33 (a researcher in the USA) is of the opinion
that the recalls are the result of Toyota’s business strategy ‘that sacrifices its customer-first
focus in favour of driving shareholder value. Toyota gradually shifted away from the tenet of
lean manufacturing. Seeking cost leadership and market leadership has gone too far, and
differentiation through quality, reliability and fuel efficiency becomes blurred.’ The
researcher added that ‘the execution of such business strategy the past few years has lured
Toyota to rush into relationships with suppliers it has not adequately vetted and to apply
questionable security measures as it sourced parts from all around the world. In doing so
Toyota has been constantly adding stress to the security of its supply chain. In the end, its
risk mitigation capability does not improve and quality standards have lapsed.’ The
researcher also feels that the recalls are the result of Toyota’s focus that has shifted from
the customer and customer satisfaction to market share and lowest cost. Toyota sources
parts from suppliers worldwide, based on the cost competitiveness of suppliers – not on a
long-term view of good relationships where there is security for the suppliers so that they
can focus on quality. This is almost a contradiction of what was stated earlier in terms of
Toyota’s philosophy about suppliers – Suppliers are referred to as business partners. Toyota
prefers long-term relationships with suppliers in order to realise mutual growth based on
mutual trust. A long-term mutually beneficial mindset is an important criterion for selection
of suppliers. However, Toyota admits that cost is the most important key performance
indicator – Toyota suppliers are [also] assessed using the standard key performance
indicators (KPIs). These are cost, quality, delivery and environmental issues. Of those cost is
the most important to Toyota. The question could be asked: Has quality being sacrificed by
?focusing on lowest cost

Conclusion In the above case study certain purchasing-related supply chain practices
implemented by Toyota were outlined. Toyota is known as an efficient organisation
.worldwide, with systems admired and emulated by many other organisations

Toyota’s reputation with its final customers (Toyota vehicle owners) is equally admirable. No
wonder the vehicle recalls as explained in the last part of the case study caused hype in the
media. The case study clearly indicates that no matter how good and admirable systems or
business operations are, there are still shortcomings. Toyota is known for quality and it is
 ironic that in this case the quality of one small part could cause a problem of such
magnitude. There was no public explanation of where things went wrong. Due to the fact
that recalls were done both internationally and in South Africa one can only guess that
either one of the international supplier’s quality was not up to standard, or the wrong
specifications were communicated, or it was a design flaw. It must have caused losses of
millions of rands for Toyota. Due to Toyota’s long established reputation and the way they
handled the recalls it is doubtful whether it has tarnished the Toyota brand reputation.
‘Although the Toyota recall caused the brand to lose 16% of its brand value, its long-standing
reputation for reliability, efficiency and innovation helped it weather the crises better than
expected’.34 The last statement is clearly illustrated by Table 13.2, reflecting the findings of
.research conducted amongst TSAM customers in comparison with industry wide findings

.It is clear that TSAM still performs well in terms of customer satisfaction

.1

.a. b

.2

.a. b

.3

.a. b

.4

.a. b

.5

.a. b

.1

.a. b. c. d

.2

.a. b. c. d

.3

.a

Self-assessment questions

Easy questions The purchasing function’s role has diminished in the supply chain
management approach. True False

The automotive industry is characterised by innovative practices. True False

Original equipment manufacturers such as Toyota mainly purchase raw materials. True False

The final consumer of Toyota’s vehicles is part of the automotive supply chain. True False
 Suppliers are regarded as partners in a supply chain management approach at Toyota. True
False

Challenging questions Which one of the following is not part of the Toyota Production
System? Waste elimination Just-in-time Continuous improvement Automation

The pull supply chain can only work if ___________________. There is continuous
improvement of efforts. Large inventories are held at various places in the supply chain.
.There is perfect synchronisation in the supply chain. Suppliers are ISO140001 compliant

The just-in-time system is complicated by ___________________. The use of integrated

.information systems

.b. c. d

.4

.a

.b

.c

.d

.5

.a. b. c. d

.1
.2
.3

Suppliers situated far from the assembly line. More demanding customers. Continuous
.improvement efforts

Which one of the following statements is correct? Sustainability of Toyota’s suppliers means
only that they have to survive to ensure future supply. Early supplier involvement is a
practise to be used for all purchased products at Toyota. With lean manufacturing workers
become only a gear in the Toyota Production System. Long-term relationships means that
.suppliers are always assured of orders

Which one of the following KPIs for supplier selection is most important to Toyota? Cost
Innovation Quality Sustainability

.Essay questions Illustrate and explain a typical supply chain in an assembly-type industry

Key points to discuss: The parties involved in the supply chain are second-tier suppliers; first-
tier suppliers, also known as ACMs; OEMs (such as Toyota); retail market. The parties are
linked through processes, systems and planning. Materials, funds and information flow
.through the supply chain

What is meant by the statement ‘The automotive industry is sensitive to economic

?’conditions
 Key points to discuss: In difficult economic times (e.g. high interest rates or recession)
consumers tend to postpone their decision to buy new motor cars. The sales drop and
sometimes necessitate the limitation of production of motor cars and can lead to
.retrenchments

.Identify and explain the most important principles of the Toyota production system

.4
.5
.1
.2
.4 .3
.5
.6

Key points to discuss: Lean production Waste avoidance – ‘getting more done with less’ Just-
.in-time Continuous improvement

.Explain how inventory is managed in the Toyota supply chain

Key points to discuss: Just-in-time Materials ‘pulled’ from their source Benefits Supplier
.(vendor) managed inventory system

.Discuss how Toyota manage their suppliers

Key points to discuss: Business partners – long-term relationships Assessment criteria cost,
quality, delivery and environmental issues Sustainability of suppliers – develops suppliers’
capabilities Early supplier involvement (ESI) Supplier innovation Sourcing globally – best cost
.and quality

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