Toyota supply chain provides millions of people with jobs. This paper explains the role of supplier relationships, information technology, and procurement practices in supply chain. Discover strategies and solutions to improve Toyota supply chain management.
Supply Chain Management and Business Objectives
Importance of Effective Supply Chain Management
Supply chain management (SCM) forms the central part of any business organization. As such, an organization needs to strive toward attaining an effective supply chain depending on its organizational goals. SCM involves the supply of goods to the end-user, as well as following up to ensure that such customer is satisfied. Consequently, customer satisfaction reflects directly an organization’s bottom line. In other words, the more satisfied the customers are, the more the likelihood that the organization will realize high profits. Therefore, any business-oriented organization will be keen to develop a thorough supply chain that encompasses the organization’s strategy. SCM involves the following important processes:
- Product development: This concept involves a range of strategic decisions by the management officials regarding the products to sell to their customers. Besides, the management has to evaluate the existing products to gauge customers’ interests in them and/or whether they require improvement.
- Customers: An organization must establish a suitable target market for its products. Once identified, the supply chain assists the organization in distributing the products to the target market.
- Manufacturing: An organization must deliberate manufacturing decisions, including the product to manufacture, the technology to use, and the ways of maintaining low costs of production.
- Suppliers: This category of people forms an important part of the supply chain.
Supply Chain and Other Business Functions
SCM is interconnected with most business functions within an organization because it spans the entire process from the time of obtaining raw materials to the point where they are delivered as finished products to the customer. Complex supply chains may involve numerous companies linked by the common objective of ensuring that the product reaches the consumer and that customer contentment is attained. Some of the functions that are directly linked to the SCM include the procurement process, control systems, and the development of skills (Stadtler 2015). As such, supply chain cuts across the entire scope of an organization. It can be used as the focal of organizational development. Particularly, the procurement process can be instrumental in building important relationships with external partners, for instance, suppliers and purchasers. In turn, such formidable relations will propel the organization toward attaining market success.
Key Drivers for Supply Chain Strategy
Companies strive to gain a greater market share by improving their supply chains. This effort may call for high spending in technology and the upgrading of processes. Also, some organizations may opt to outsource if they feel that their current supply chain is inadequate to meet the current market standards. Above everything, building an integrated supply chain calls for everyone in the organization to appreciate the central role played by the supply chain. Specifically, the management should design the organization’s strategy around the capacity of the supply chain. Other key drivers that will help formulate an integrated supply chain if well addressed are discussed below:
Customer relationship management is one of the key drivers. An effective supply chain is appreciative of the need to keep a satisfied clientele at all times. This goal will be achieved by building strong customer relationships while at the same time keeping them optimistic about the business in general. Additionally, providing customers with relevant information, for instance, product availability and delivery timelines, will boost transparency and hence customer satisfaction (Stadtler 2015). Cultivating good relationships with suppliers is another key driver. Suppliers assist the organization to monitor market trends in real-time. As such, an organization has the obligation of keeping its suppliers satisfied since this plan makes them indispensable partners in building a formidable supply chain.
Supplier Relationships Optimization
Supplier Relationships Maintenance Strategies
As observed earlier, the effective management of an organization’s suppliers can mean the difference between making profits and incurring losses. Many aspects are involved in supplier management. However, sourcing strategies and the management of relationships are the most important factors. With the integration of technology, supplier management can be simplified as opposed to the traditional setup where information flow is not smooth. Traditional relationships with suppliers are often built around the aspect of pricing. According to Sawik (2014), manufacturers are better off adopting a single-sourcing approach, as opposed to multi-sourcing. This study examines the relationship of Toyota with its suppliers where it has been established that the company recently underwent a drastic change in the way it related to its suppliers. Relationships between the company and its suppliers are currently characterized by closeness.
Toyota depends on its service providers to minimize expenses, raise the superiority of its commodities, and/or establish fresh items and processes in shorter lead times compared to its contenders. The culture of building close networks between suppliers and manufacturers has long existed in Japan. It is referred to as keiretsu (Aoki & Lennerfors 2013). Consequently, Toyota has transferred this culture to the North American market (one of Toyota’s largest markets). As Aoki and Lennerfors (2013) explain, about 80% of Toyota’s cost of production in North America is sourced from suppliers from the region. The good relationship with suppliers has enabled Toyota to build profitable relationships with suppliers, as compared to companies such as Ford and Chrysler.
Information Technologies in Supply Relationships Maintenance
The adoption of information technology into Toyota’s supply chain has led to the reduction of costs. According to Sawik (2014), a reduction in costs should open up an opportunity to increase the number of suppliers. Notwithstanding, Toyota has not increased the number of suppliers. This situation implies that the company may rely on other approaches to attain maximum benefit from its supplier relationships. The strategies include:
- Seeking up-to-date information regarding market trends and customer demands
- Demonstrating the capability of responding rapidly to any shift in demand
- Promoting efficiency in the way feedback from the market is plowed into the supply chain
- Using IT and the benefit of the available information to forecast future market trends is a strategy that may assist in inventory planning
- Using analytical tools to process and analyze different market forecasts as presented by different suppliers
- Using IT to monitor and process orders from suppliers
- Additionally, the company’s order and purchasing system can be linked with those of its suppliers in a bid to hasten the order placing and tracking process.
Systems of Supply Maintenance
Toyota values its relationships with suppliers. For this reason, the company has succeeded in recording short lead times in the manufacture of new cars (12 to 18 months). At the same time, competitors with noticeably poorer relations with suppliers such as Ford and Chrysler take between two and three years to produce new cars. Besides, Toyota may improve its supplier relationships by applying all or some of the following approaches:
- Seeking to understand the suppliers, how they work, their attitudes, and the existing partnerships
- Building the capacity of suppliers through technical training
- Sharing information intensively with some selected key suppliers
- Real-time interaction with the company’s suppliers by use of IT (e.g. exchange of emails)
- Carrying out joint improvement missions
Information Technology in Supply Chain Management
Integration of Different Parts of the Supply Chain
Large supply chains involve many companies working together each engaged in a different process. According to Stadtler (2015), SCM emphasizes efficient control of supply chains to maximize profits. IT is considered the latest entrant among the ways of managing supply chains. Some of them are discussed in this section.
Allocation network strategies are critical to the success of a supply chain. For this reason, IT can be used to maintain a smooth flow of information between the organization and suppliers (wholesalers and retailers). In turn, this plan will help in the placement and tracking of orders to prevent a scenario where customer orders may be delayed. The opposite scenario would be where orders stay too long in the warehouse due to oversupply. Oversupply is a major challenge for supply chains, particularly those that do not have efficient communication and inventory tracking software.
Designing efficient manufacturing strategies is also vital in assisting the integration of different parts of the supply chain of an organization. IT enables an organization to integrate logistics and the cost of production while designing an efficient manufacturing strategy. Different production strategies present varying cost implications. Precisely, the production of large volumes leads to low fixed costs, although it increases the cost of transportation, as well as logistic costs (Chopra & Meindl 2012). Conversely, the production of low volumes will lead to high fixed costs while transportation/logistic expenses drop. Given the above dilemmatic scenario, there is a need to create a balance. As such, IT assists organizations to devise and maintain strategies that can guarantee this balance in production.
Information Technology Contribution
According to Aoki and Lennerfors (2013), Toyota’s Information Strategy (IS) is the driving force behind the company’s success. When Barbra Cooper joined Toyota in 1996 as the head to the North American Branch, it identified the need to integrate IT into the company’s operations. From 2002, the North American branch adopted a robust IS strategy that would see the company revolutionize its supply chain. Over 200 areas were identified where IT could be used to improve the supply chain. One of the key areas that were addressed was demand management. This outcome was made possible by creating a demanding roadmap to monitor projects and/or link them together where possible. Presently, Toyota’s IT has abandoned its previous role as an “order taker” to adopt the more robust capacity described as ‘next-generation demand management’ (Aoki & Lennerfors 2013, p. 73). Hence, the IT department is currently structured to meet all the company’s demands, as opposed to the project-by-project approach of yesteryears.
Effectiveness of Supply Chain Management
Toyota has gained numerous benefits from adopting a robust IS, hence abandoning the previous paper-based system. An obvious challenge with the paper-based system was that it made communication across the supply chain much slower. At the same time, information was not seen as a valuable resource by Toyota’s SCM. However, with Barbra Cooper’s input, the Northern American branch (consequently the new IS was adopted across the entire Toyota) was able to appreciate the need to revolutionize communication. Today, Toyota enjoys a competitive position in the automobile industry because it integrates IT within its supply chain. Benefits enjoyed include cycle time reduction and restyled cross-functional operations. Additionally, the integration of IT in Toyota has resulted in the elimination of redundancy, particularly in demand management, because the processing of customer orders has become easier with the adoption of E-business solutions (Chaffey 2009).
Short lead times have resulted in improved customer satisfaction, which boosts the company’s competitive advantage. With proper information channels in place, as well as cooperative suppliers and buyers, Toyota’s SCM can monitor how customers in the market receive products. Customer satisfaction at Toyota is measured on a four-criterion approach, namely:
- Product quality
- Product innovativeness and creativity
- Product prices
- Toyota’s customer service
Presently, Toyota scores highly on the four categories, thanks to an IT system that enables the collection of feedback from customers. The feedback is then plowed into the supply chain in areas such as manufacturing and product development.
Logistics and Procurement in Supply Chain Management
Role of Logistics in Supply Chain Management
Logistics in the context of SCM refers to how goods flow across the supply chain from the point of production to where they are delivered to the user. Tomino, Hong, and Park (2011) reveal how logistics is a major concern for an organization with huge supply chains because of the costs involved. Additionally, concerns such as delayed deliveries and damaged goods are constantly bugging the SCM of these organizations. At Toyota, the overriding objective regarding logistics management involves minimizing resources and time utilized. Toyota’s logistics are grouped into two major categories, namely, inbound logistics and outbound logistics.
Inbound logistics is concerned with two related operations based on where the suppliers are located geographically. The two operations include the transport of vehicle components from local suppliers and the shipment of the same from global suppliers. Because Toyota operates a lean supply chain, third-party logistics providers (3PLs) manufacture most of the materials required for production. Most of Toyota’s 3LPs are located across Japan, North America, and Europe. The location of the 3PLs is important since it determines the size of transport costs involved in moving these parts from the supplier plants to Toyota’s factories. Making transportation easier requires Toyota to group its suppliers into clusters (according to geographic location) to build a “milk route” (Wang et al. 2011). A milk route is a circuit followed by Toyota’s trucks when picking up vehicle components from the suppliers within a geographic location. On the other hand, outbound logistics involves the distribution of finished goods across the supply chain. Unlike Toyota’s inbound 3PLs, the company does not maintain close ties with its distributors. One reason is that many outbound 3LPs are involved from when products leave the company up to when they arrive at the user. As such, Toyota even contracts common couriers to transport the finished goods to dealers who can then distribute them to the users.
Procurement Practices at Toyota
Purchasing forms an important part of the supply chain. It has a direct influence on the production costs. Thus, it is important to maintain a procurement strategy that is both dynamic and flexible to reflect frequent changes in the market. The competitiveness that is characteristic of today’s market requires greater participation by the purchasing department relative to the situation several decades ago. In full appreciation of this fact, Toyota maintains an effective procurement strategy complete with reliable suppliers. Suppliers are invited to bid three years before a new model is to be produced. This plan allows the company enough time to vet the bidders and hence select the best suppliers to work with to ensure that the proposed model becomes successful. At Toyota, it is believed that choosing the right suppliers is instrumental in driving product success. According to Wang et al. (2011), it is common for the company to ignore suppliers whose bidding prices are unrealistically low since they can barely be trusted to deliver quality. Besides, new technologies are identified and considered for incorporation in the production of the new model. Adopting the right technology will enable the reduction of production costs, thus promoting high-profit margins.
Factors Affecting Logistics and Procurement Practices
As observed, the logistics and procurement practices of an organization can mean the difference between a successful and an ineffective supply chain. For this reason, certain conditions must be met as a way of ensuring successful logistics and procurement practices in an organization. The conditions include:
- Effective order processing: Delayed orders, undersupply, and oversupply is some of the practical challenges involved in running a successful supply chain. Both challenges can be arrested and contained if effective order processing is integrated into the supply chain.
- Transportation costs: The goal here is to maintain low transport costs by adopting the right logistic strategies.
- Inventory management: This process is also a useful way of avoiding the challenges of undersupply and oversupply. Other considerations include warehousing, material handling, and proper packaging.
Strategy to Improve a Supply Chain
Toyota’s Supply Chain Improvement
Although Toyota has one of the best supply chains in the automobile industry globally, certain aspects can benefit from innovativeness. This section recommends a strategy that Toyota could adopt to enjoy even more benefits from its supply chain. First, cost reduction should be given more consideration, particularly regarding the procurement processes. In this light, Toyota should consider single sourcing (whenever possible), as opposed to multi-sourcing. According to Tomino, Hong, and Park (2011), single sourcing enables organizations to build formidable relationships with suppliers. In turn, effective relationships will result in smooth operations and hence the reduced cost of operations. Additionally, adopting competitive technologies can help the company to maintain a low cost of production.
Another major concern should be time reduction. While the “milk routes” are useful in reducing the time spent transporting materials, the company can benefit from effective coordination inside the factory. This goal can be achieved by cultivating proper communication channels to ensure that the processes are synchronized. Thirdly, innovativeness should be encouraged with the key aim of boosting product quality. One way this goal can be attained is by encouraging competitiveness among employees through rewarding creativity.
Supply Chain Strategy Assessment
Overall, the following benefits can be realized by improving the company’s supply chain:
- Better inventory management techniques
- Reduced cost of operation
- Enhanced information sharing between the company and suppliers
- improved customer satisfaction
- Efficiency in manufacturing because of improved coordination between processes
- Improved trustworthiness among suppliers
Problems and Solutions
Certain challenges will be encountered in the process of adopting the new strategy. However, with proper planning, these challenges can be overcome. One of the likely challenges is that while software solutions deliver a level of efficiency, they cannot guarantee data visibility, manageability, and accessibility. This problem can be addressed using the IBM Cognos SCPM, a platform for identifying inconsistencies in software. Companies such as DELL have used Cognos SCPM successfully to minor anomalies in the supply chain. Cognos SCPM works by allowing companies to connect all independent units of the organization, hence forging a common operating platform. Besides, the software can be used to gain access to external data. Building stronger relationships with customers will help to navigate the common challenge of disgruntled customers. One way of achieving this goal would be to increase the company’s online presence. Launching a social media platform where customers can post their complaints will ensure that customer’s grievances are received and addressed within a reasonable time.
Aoki, K & Lennerfors, T 2013, ‘Whither Japanese keiretsu? The transformation of vertical keiretsu in Toyota, Nissan and Honda 1991–2011’, Asia Pacific Business Review, vol. 19, no. 1, pp. 70-84.
Chaffey, D 2009, E-Business and e-Commerce management: Strategy, implementation and practice, Prentice-Hall, Upper Saddle River, NJ.
Chopra, S & Meindl, P 2012, Supply chain management, Pearson, New York, NY.
Sawik, T 2014, ‘Optimization of cost and service level in the presence of supply chain disruption risks: Single vs. multiple sourcing’, Computers & Operations Research, vol. 51, no. 1, pp. 11-20.
Stadtler, H 2015, Supply chain management: An overview, Springer Berlin Heidelberg, Heidelberg, Germany.
Tomino, T, Hong, P & Park, Y 2011, ‘An effective integration of manufacturing and marketing system for long production cycle: A case study of Toyota Motor Company’, International Journal of Logistics Systems and Management, vol. 9, no. 2, pp. 204-217.
Wang, L, Kong, F, Cao, J & Wang, Y 2011, Research on the application and optimization countermeasures of auto parts milk-run logistics mode, IEEE, New York, NY.