11-January PDM - Dr. Iyer (1)

8/6/2019 '11-January PDM - Dr. Iyer (1)

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Supply Chain Ideas based on

Toyota¶s Approach

Based on a book on Toyota Supply Chain Management

Ananth IyerSusan Bulkeley Butler Chair in Operations Management

Krannert School of Management, Purdue University

[email protected]

Sridhar Seshadri

University of Texas, Austin, Texas

Roy Vasher

Retired Senior Executive, Toyota Motor Manufacturing, NA



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Now Available in

� Japanese

� Traditional Chinese

� Portuguese� Spanish

� Korean

� India Version ± Tata McGraw Hill

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KEY IDEAS

� Velocity

� Variability

� Visibility� Variety

� Leadership

� v4L

� v4L is a framework to understand Toyota¶sSupply Chain Managment

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Toyota SCM 5

v4L Principles

� Variety: Variety of productsoffered = Careful selection

y Velocity: Velocity of ProductFlow = Steady Flow

y Variability: Variability of outcomes against forecast =

minimize variability

y

Visibility: Visibility of processesto enable learning = increase

visibility across the SC

y KEY POINT ± Balance variety, velocity, variability & visibility

across the supply chain and apply the learning principles foreach 4v's

y THINK ± How does your Company¶s supply chain achieve thisbalance?

y How does Choosing or focusing only on Variety affect Velocity,Variability, Visibility and Total Cost down the supply chain ?



For different industries let¶s

identify the v4 metricsIndustries/Products

� Consumer Products(toothpaste, paper towels,

detergents)� Apparel

� Grocery

� Consumer Durables

� Restaurants

V4 impact

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Toyota SCM 7

Toyota Learning Principles and the v4L framework

� Learning (L) Principles at Toyota

Establish Capability ± Unless someone is capable of solving a problem

that might arise within the system boundaries set for him or her, thatperson will be unable to contribute to the problem-solving process andwill 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 willhelp in the identification betn action and results. Aid in the codificationof knowledge for future use.

Generate System-level awareness ± As experience with solving

problems is obtained, greater awareness of other areas that might beaffected by actions or that might impact one's own performance needsto be created

Produce the ability to teach ± As system-level awareness andexperience accumulate, the capability to teach others about thesemethods needs to be in place

Create Awareness ± Unless problems are seen, they will not besolved. Systems need to be in place to report ideas, problems,deviations and potential issues to a direct team leader with no delay



For your company ± think about

the following questions� How would you measure velocity ?

� Does this rate of sales vary over time ? Is the variationpredictable ? How is it accomodated ?

� How much visibility do you have over the supply chain ?What is the impact of this visibility on the variability ?

� What is the level of product variety ? How does varietyimpact visibility and variability ? Does it impact variety ?

� What is the level of ³L´ in your company ± what changeswould improve supply chain performance for your firm ?

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Why Study the Toyota Supply Chain ?

� It has a large fraction of outsourced suppliers

� It is global in scope

� Product quality and reputation

� Continuous Improvement

� Technology

� Supply base knowledge management

� Is there a Toyota DNA ?

� Repeated successful performance ± see next page



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Outline

� Examples of Excellence of the Toyota SupplyChain ± Data regardingWRI, Aisin Seiki, Prius,

CCC21

� Supply Chain Insights� Links to ideas for other contexts



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Some examples of Successful

performance� Toyota Supplier Working Relations Index

� Mix Planning

� Supplier Coordination� Aisin Seiki Fire response

� CCC21 Initiative

� Prius Introduction



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Supplier WRIJohn Henke from Planning Perspectives created Supplier Working Relations Index

based on analysis of ``supplier trust of the OEM, open and honest communication,timely information, degree of help to decrease costs, extent of late engineeringchanges, early involvement in the product development process, flexibility torecover from canceled or delayed engineering programs etc (Max value = 500)

OEM\YEAR 2002 2003 2004 2005 2006

Toyota 314 334 399 415 407

Honda 292 307 384 375 368

Nissan 225 262 294 298 300

Chrysler 176 180 186 196 218

Ford 166 161 163 157 174

GM 164 157 150 114 131





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Why do suppliers matter ?

� An OESA/McKinsey study suggests that «� Interface costs can be estimated as 5.2 % of program

cost.

� The interface costs include all of the issues included in

theWRI above.� The study also estimates that 80 % of the waste was

due to poor supplier management

OESA ± Original Equipment Suppliers Association

US Industry sales around $ 400 billion



Reasons and Impact

� Reasons ± poor product specifications, partcomplexity and ineffective coordination of capacity and demand.

� The estimated cost due to this waste to the USauto industry was estimated to be $ 10 billion.

� What is the opportunity in your company ?

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Toyota Manages Suppliers differently..

� Published reports suggest that Japanese autosuppliers won renewal of their contracts 90 % of the time vs 71 % for suppliers to US auto

OEMs.� The typical Toyota plant had only 125 suppliers

compared to 800 for the typical General Motors plant.

� At the firm level, Toyota had 224 supplierscompared to 5500 suppliers for General Motors.



And more..

� Japanese OEMs make about 27 % of their components in-house vs 54 % for US autoOEMs.

� While Japanese automakers accounted for 33% of world output in 2002, Japanese suppliersaccounted for less than 19 of the world's top100 auto suppliers.

� This suggests that Japanese suppliers aresmaller than their US counterparts.

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Toyota SCM 18

Managing Suppliers

� Imagine, You are a supplier to Toyota ± What is your role in the Toyota Supply Chain?

± What is your expected productivity improvements over time?

± How would your experience as a part of Toyota¶s supply chaindiffer from your experience supplying to other auto OEMs?

± How would your processes have to operate to synchronize withToyota¶s system?

± How would you have to adjust organizationally to collaborate

with other suppliers to Toyota? ± How can the v4L framework enable an understanding of

Toyota¶s supplier management system and its impact across thesupply chain?



Toyota SCM 19

Managing Suppliers

� Toyota Supplier Selection ± A Supplier must meet extreme tough conditions to qualify

± Main Evaluation factors are

� Assessment of Management Attitudes

� Production Facilities (Control & Engineering)

� Quality Levels

� R&D capabilities

� Manufacturing (Capacity, Operation Efficiency)

� Excessive Amount of Information Sharing

� Value Engineering Capability etc ± Toyota chooses suppliers across multiple tiers so as to

guarantee availability of innovative solutions across the supplychain (Tiered Supplier Organization)



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Supplier Tiering Nishiguchi source



Toyota SCM 21

Managing Suppliers� Assisting Suppliers

± Two Types of Assistance are provided� Individual

± Individual Assistance is to get some quick results

± Focus is to deal with an immediate supplier problem such asshare drop in profits or difficulty in keeping up with a modellaunch

± Toyota Experts go to supplier, observe and suggestimprovements

� Group

± The Jishuken Group develops supplier personnel and also

assists Toyota. It is a closely knit gathering of middle-levelproduction technologists from a stable group of companies who jointly develop better capabilities for applying the TPS throughmutual criticism and concrete application

± This approach enhances Toyota¶s Capability to do targetcosting ± a technique to manage and reduce costs over a

product¶s life cycle



Toyota SCM 22

Managing Suppliers� Assisting Suppliers ± Examples

� Toyota Supplier Support Center (TSSC)

± Suppliers are encourage to share their best practices amongthe supply chain

± Ability to see a working solution increases the chance thatsuppliers can replicate that knowledge.

� Toyota Consultants visited XYZ company every day for 4 months toprovide ongoing support for the next five years

� TSSC suppliers have seen productivity (output per worker) increaseby 123%, and inventory reduced by 74%.

� A supplier of metal Stampings, found only 4 value-added steps outof 30, but with TSSC and Company jointly reconfigured the

production system and through process changes, eliminated 19 steps. Setups were reduced from 2hours to 12minutes

� Suppliers also go to keep all their benefits

� Ultimately, Toyota does reap benefits during the annual pricereviews through a target pricing in which customer price is definedand used to work backward to a supplier cost target.



Toyota SCM 23

Managing Suppliers� Assisting Suppliers

± CCC21 System ± 30% Cost Reduction Target ($10BillionSavings in five year from 2000)

± Supplier Guest Engineers & Quality Resident Engineers

± Supplier Location Decision

� Planning Rule: 50-mile-per-hour travel time

� In Japan, 85% of Suppliers are located within 50 mile radiusof a plant with one-hour drive

� In NA & EU, 80% of the parts are delivered within 3-4dayslead time

� Supplier Location Closer to Toyota results in lower inventories for the supplier and assembly plant

� So, Toyota Expectation from New Supplier is to consider building factories near Toyota Plants.



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What would you expect ?

� More Levels

� Less central ownership

� Suggests more variability (bullwhip) and morecontractual complexity

� BUTWHAT IF YOU HAVE«..

� Standardized processes, frequentcommunication, fragile system, commongoals, long term contracts«..??



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The Aisin Seiki Fire and the Supply Chain¶s

Response

� At 4:18 am on Saturday, February 1, 1997 a fire erupted in theAisin Seiki Kariya plant # 1.

� By 8:52 am the lines devoted to P-valves and two other brake parts were completely destroyed.

� The P-valve is a small rectangular object that controls pressureon real wheels, preventing skidding of the car.

� The P-valve was sole sourced to Aisin Seiki.

� The plant was responsible for delivering 32,500 P-valves toToyota and to other companies such as Mitsubishi, Isuzu and

Suzuki.� Because of JIT delivery of parts to Toyota, only 2 to 3 days of inventory existed in the system.

� The fire on February 1 caused Toyota to start idling plantswithin two days i.e., by February 3.



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What Happened then «� At 5:30am Aisin Seiki created an emergency response team that later

contacted all suppliers to ask for assistance in producing P-valves

� About 62 firms responded, including 22 of Aisin¶s suppliers, Toyota itself, 36of Toyota¶s regular suppliers and 4 nonregular suppliers including a sewingmachine manufacturer

� Because there were 100 different types of P-valves, Aisin had to decide whowould supply which valve type.

� Each of the suppliers used different supply chain processes to produce the P-valve.

� Denso decided to outsource its existing production to free up capacity to produce P-valves on over 40 machines.

� Taiho met with its suppliers and chose 11 suppliers to assist, providingmachining centers at its plants.

� Toyota pulled employees from its experimental prototype division and set up

a temporary production facility.� Kayaba outsourced the P-valves to three of its suppliers and produced no

valves itself.



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Quick response

� One supplier started delivering prototypes three days after thefire.

� Denso delivered their prototype on February 5, followed by twoother large suppliers the same day.

� Kayaba delivered prototypes on February 6 from one supplier

and February 7 and 8 from the other two suppliers.� Volume production began within a day or the same day as prototype approval.

� 80% of supplies restored within one week

� Aisin back by mid March with full supplies

How did all this happen so quickly ?Who paid the bills ?

How did this happen with so little central coordination ?

Was this the Toyota Supply Chain¶s capability ?



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Collaboration Rules

� Compare the Toyota Supply Chain with

� Open Source Linux programmers

� Quick response to crisis

� Organic response with no central control

� Standardized protocols

� Inherent resilience due to agility and flexible capacity

How do you develop such a supply chain capability thatis competitive ?



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The CCC21 program

� In 2000, Toyota announced a plan to cut costs by 30 % across the board for parts it buys to guarantee that it retains its competitive edge.

� 30 % was regarded as the China price by US automakers� By 2005, the program had already saved $ 10 billion over five years but had

done so while improving quality

� The Japanese term for this is ³kawaita zokin wo shiboru´ (wringing drops froma dry towel).

� In one case, the team disassembled the horns made by a Japanese supplier and

found ways to eliminate 28 components, thus decreasing costs by 40 %.� Interior grips above the door had 35 variants ± these have been decreased to

three across all the 90 model lines.

� To counter the rise in steel prices, the team is focused on decreasing the number of steel parts in a car from 610 to about 500 by turning to substitutes such asaluminum and plastic.

� CCC21 ± Construction of Cost Competitiveness for the 21st Century

� How do you set achievable goals for the supply chain ? Grandmaster

� How do you get everyone to follow process while attaining these goals ?



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Designing the Prius

� Original Goals ± 50 % greater fuel economy than basic Corolla,increased to 100 % later

� Focus on ³natural resources´ and environment

� Start discussions in 1993, clay model in July 1996, launch inOctober 1997 (15 month product development)

� Hybrid permitted use of the best of battery and enginecapability

� Parallel model development, late stage finalization of design

� Suppliers co-opted for technology development

� Toyota has an 80 % market share for hybrids

� Significant push exactly when Toyota was most profitable ± considered by top management to be most vulnerable

Are these processes consistent with Toyota¶s supply chain processes ?



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Lean Supply Chain

� Low to zero inventories

� Frequent deliveries

� Milk runs

� Planned 50 mph speed for suppliers� Prescribed routes for supplier trucks, adjusted for

weather

� Plan detailed vehicle build sequence includingspecific options for a two week period (or a month)

� Release orders per lead time



Mix Planning

� Mix Planning at Toyota deals with choosing

the specific mix of vehicles that will be offered

at sales regions across the country.

� The goal is to manage dealer-level product

demand so as to enable stable production at the

manufacturing plant.

� This also translates into stable orders to

suppliers.

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Mix Planning

� Choose a subset of colors/options to offer in each region� Coordinate marketing, brochures, sales effort to synchronize

with major offerings

� Longer lead time for special requests

� Dealer deliveries ± push system.

� 80 % of the deliveries stable ± remaining adjusted by dealer swaps or by build sequence adjustment (last resort)

� Centralized control of shipments to stabilize assembly plant production and supplier orders

� Periodic adjustments to synchronize demand and supply

Effect: Toyota spends about $500 per car vs $ 2000 per car in promotions, Toyota car inventories about 15 days vs 30-45 for others, fewer dealers for Toyota, customer pull of products, cars

pushed to dealers





Toyota SCM 35

Mix Planning

� Mix Planning by Sales Region

± Sales Division works with each sales region tochoose the subset of vehicle mix that will be thehigh-volume sellers in each region

� Guidelines

± Limit SKUs (stock keeping units) : Determine which variantswill be stocked by a sales region

± Analyze Past Sales, competition offerings, and localregulations to predict demand for future sales

± 80/20 Rule: 20% of SKUs accounts to 80% of sales

± Target Marketing Plans or Campaigns to support mixplanning by region

± Manage unpredicted demand: It is better to lose a sale thanto have an unhappy customer through ³Guided SellingSales Technique´



Toyota SCM 36

Mix Planning

� Reflection Points ± So How does Variety hurt a company?

± V ariety: Selected by Region (Local to Global) representing the popular mix demanded.

± V elocity: Is maintained by Limiting Variety by choosing variants

accounting to 80% of the demanded Offerings. Faster Response toCustomer with decreased rate of Inventory Turns at dealer

± V ariability: Is reduced by synchronizing Sales and Operations Planningto focus on a FEW VARIANTS (~20%) by REGION. These choices areadjusted in response to observed sales.

± V isibility: Of this Planning Process across Sales & Operations enables ACCURATE DEMAND FORECASTING, LIMITING THE IMPACT OF UNPREDICTABILITY OF LOW VOLUME VARIANTS, & STABILISINGTHE OPERATIONS & SUPPLY CHAIN



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The examples consist of

� Approaches to deal with disaster

� Approaches to deal with projects such as new

products� Approaches to deal with cost reduction

� Approaches to manage repetitive operations



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Executing Strategy

� Careful consideration of the operational aspects of

strategy choice

� Choose achievable but stretch goals

� Play the role of a ³Guiding Hand´ for the supply

chain

� Provide supplier assistance but use logical target

costing approach to get cost reductions� Training/Assistance to suppliers at no cost

� Guarantee stability, assist to achieve results



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Is this applicable to your company ?

� How significant a role do suppliers play ?

� How are suppliers managed ?

� How are projects managed ?� How much value is released by the supply

chain ?

� Can v4L release value in your supply chain?



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THANK YOU

Ananth V Iyer

[email protected](765)-494-4514

Documents

11-January PDM - Dr. Iyer (1)