Supply Chain Industry

The need to expand and realize global strategic goals in many organizations has led to the competitive nature of supply chains in those organizations around the world. Through their supply chains, firms are living to their dreams of establishing presence in the global markets which are very aggressive in nature. Toyota being one of them it is working hard to reap as many benefits from its well established supply chain as it can. It is of fundamental importance that firms have a clear and concise understanding of the nature of supply chains as well as the dynamics of demand and supply contests in business operations.

In order to gain from its supply chain Toyota should work towards improving efficiency, be ready to manage and mitigate risks, be open to learn and adopt new environment of doing business, and also enhance their reputation. Effective supply chain management system helps firms to enter and compete in almost all world markets to increase its chances of surviving. The chosen firm for this paper is Toyota in Japan.

Supply chain management is the management of relations and integrated business processes across the supply chain that produces products, services and information that add value for the end customer (Müller, 2011). Müller noted that effective supply chain has become increasingly important, because it enables companies to respond faster to changes in the external environment than competitors (2011).

Toyota is a global auto company with many products and markets (Iyer, Seshadri & Vasher, 2009). Toyota Motor Co. was started in 1933 with the company being a division of Toyoda Automatic Loom Works. The company is composed of markets across the globe with different characteristics that demand different supply chain configurations. On top of that, differences among the Toyota, Lexus and Scion vehicles warrant different supply chain processes (Iyer, Seshadri & Vasher, 2009). It has been noted that although common processes underpin these supply chains, variations across these supply chains provide additional insights.

Streamlining the supply chain requires an understanding of the customer types and relative size and profitability of each segment. Iyer, Seshadri & Vasher (2009) says that 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. Iyer, Seshadri & Vasher (2009) argues that these order requirements are fixed and scheduled at least one month in advance for production. Toyota’s advantage is that its supply chain can allow its domestic dealers in Japan to change a greater percentage of orders closer to production because the export orders do not change. In this context, the export orders create a buffer to absorb the domestic changes in orders.  

The Toyota Production system is simply put, a method of shortening the time it takes to convert customer orders into vehicles deliveries (Taylor & Brunt, 2001). For a supply chain to achieve this, the whole sequence from order to delivery is arranged in a single, continuous flow with continuous efforts made in terms of shortening the sequence and making it flow more smoothly (Taylor & Brunt, 2001). The result of a well streamlined supply chain is a far higher level of productivity, better quality and a major reduction in wasted time, money and effort or better products made more cost effectively.

Toyota’s supply chain has a wide range of functions affecting the whole value chain of a business from the inbound raw materials through production and distribution of finished goods to the customers (Sehgal, 2011). The company’s supply chain is constantly juggling the conflicting goals of minimizing inventory while establishing the highest service levels, reducing labor while increasing throughput, and reducing supply costs while maintaining stable supplies. Sehgal (2011) indicated that “Toyota’s supply chain is integrated with the rest of the business functions that senses changes, adapts, optimizes, and works within the larger business context, without any conflicts would be great” (p. 24).

A supply chain designed in a vacuum will idealize theoretical capabilities that may not create any competitive advantages. Sehgal (2011) indicated that supply chains can also not be a result of reacting to organic growth. These supply chains are reactive by design and therefore do not create any competitive advantage; they simply bring a company up to its peers in that industry segment. Sehgal (2011) noted that “the supply chain must be competitively designed to create capabilities that will allow companies to achieve the goals of their business strategy by explicitly creating the desired competitive advantages” (p. 24).

Supply chains are essential to create capabilities that in turn create competitive advantages supporting the corporate strategy. Sehgal (2011) argues that if Toyota creates the right capabilities are created, then the corporation enhances its likelihood of having day to day operations that are aligned with its larger goals and therefore move the corporation towards its stated objectives. Misalignment between the corporate strategy and its supply chain strategy will definitely result in poor, inefficient operations and a low return on assets and also directly affect the corporation ability to realize its business strategy (Sehgal, 2011).

Moreover supply chain initiatives are expensive and require capital investments. Sehgal (2011) thus says that for Toyota’s supply chain to be successful contenders for the capital investments they must be aligned with the corporate strategy and support the strategic goals of the firm. The Toyota’s supply chain system does not operate in isolation. Instead it operates in larger system landscapes interacting with many other corporate systems, exchanging data and information, affecting other processes, accepting inputs, and providing outputs to support multifunctional processes that cut across departmental and organizational boundaries. Sehgal (2011) indicated that the company’s supply chain cannot be developed in isolation, but must be thought of and planned as an integral part of other corporate systems.

Sehgal (2011) mentioned that “a supply chain strategy must exist for it to become a competitive asset” (p. 1). This implies that supply chain capabilities must be explicitly designed and pursued for deployment in a proactive manner to create competitive advantages. The Toyota’s supply chain strategy directs the evolution of supply chain capabilities that the corporate strategy requires (Sehgal, 2011). A well designed supply chain strategy process should allow the corporation to assemble a larger picture of the required supply chain capabilities and to evaluate their dependencies among themselves and with other functions.

The functional footprints of supply chains have grown to include most of the original value-chain functions. Sehgal (2011) therefore says that the supply chain remains the key to realizing the business goals of Toyota. Sehgal (2011) argues that while supply chain capabilities include processes and the supply chain network, consisting of facilities for manufacturing, sourcing, stocking and selling, the warehouse, transport equipment, and labor, it is the process capabilities that tie these resources together and create the ability to leverage these resources in the most effective manner.       

A supply chain has both physical components and operational and planning processes. Iyer, Seshadri & Vasher (2009) noted that within the physical flows of the supply chain, 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 inspection. Iyer, Seshadri & Vasher (2009) outlined that once the vehicle is produced, it is transported to the dealerships via outbound logistics. On paper this process appears to very simple, however it is complex because a vehicle is very large and bulky. It is also assembled from thousands of parts that are produced by hundreds of suppliers and there are thousands of vehicle combinations that could be produced.

Suppliers provide thousands of parts and components that go into the vehicle. These parts and components are received through 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. Since suppliers also have suppliers, and those suppliers have suppliers, the supply chain contains several levels that are referred to as tier 1, 2, and tier 3. This implies that the supply chain of the inbound is complex for an automobile assembly plant. Because suppliers are located in various geographic areas, the time for parts to arrive from each supplier to the assembly plant can vary greatly.

Through the inbound logistics, once 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 known as inbound logistics. Iyer, Seshadri & Vasher (2009) says that at Toyota parts are delivered in two ways. They say that Toyota takes complete responsibility for pickup and transportation of parts from the suppliers to the plants (Iyer, Seshadri & Vasher, 2009). This is because Toyota’s just-in-time parts inventory practice requires extreme reliability of inbound logistics. To improve efficiency in its supply chain, Toyota organizes the suppliers into clusters based on geographic proximity.

Dealers play an important role in the supply chain because they are the face of Toyota to the customer. Iyer, Seshadri & Vasher (2009) says that they are responsible for selling the vehicles produced by the manufacturer to the retail customers. It is significant that a dealer invests sufficiently in a facility so that it can operate efficiently and at the same time meet or exceed its sales objectives.

Stadtler & Kilger (2005) mentioned that supply chains differ in many attributes from each other. A distinctive attribute often stressed in literature is the division into innovative product supply chains and functional product supply chains. Stadtler & Kilger (2005) argues that innovative product supply chains are characterized by short product life cycles, unstable demands, but relatively high profit margins. This leads to a strong market orientation to match supply and demand as well as a flexible supply chains to adapt quickly to market swings. Functional product supply chains face a rather stable demand with long product life cycles but rather low profit margins.

A supply chain analysis does not only have to capture the correct type of the supply chain, but should also reflect this is the performance measures to be evaluated (Stadtler & Kilger, 2005). Supply chains or strategic goals should also mirror these fundamental values. Sehgal (2011) noted that “while supply chains of today extend through most of the value chain activities of a business as originally described by porter they are fundamentally a set of capabilities that organizations build to operate, survive and grow” (p. 24). Sehgal (2011) says that Toyota’s supply chain is a tool in the hands of company’s leaders to not only support efficient operations but to wield as a competitive asset that can be leveraged to create competitive advantage.

The performance at Toyota is evaluated with equal weight given to both the processes used to derive performance and the results achieved. Iyer, Seshadri & Vasher (2009) indicated that this process focus aims to generate a v4L balance of key supply chain parameters which include a variety of products offered, velocity of product flow, variability of outcomes against forecast and visibility of processes. Toyota chooses variety with a focus on marketing benefits with scant attention to supply chain implications, velocity and variability.

Toyota’s supply chain management processes systematically focuses on the v4L balance. The first principle in this company’s supply chain is variety. Iyer, Seshadri & Vasher (2009) says that variety is carefully chosen to balance market demands and operational efficiency. Toyota’s 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. Variety represents an important supply chain design choice that has an impact across all supply chain participants (Iyer, Seshadri & Vasher, 2009).

Velocity of supply chain flows is the next main concept and it manifests itself in all processes across the supply chain. Iyer, Seshadri & Vasher (2009) says that “Toyota focuses on maintaining a steady flow throughout the system enables capacity planning to be synchronized across the supply chain” (p. 3).

In Toyota’s supply chain, variability of orders or deliveries across the supply chain is minimized by how the individual processes are executed. Iyer, Seshadri & Vasher (2009) indicated that reducing variability enables all the supply chain flows to operate with low levels of inventory. For Toyota variability enables quality improvement processes to operate without interruption, therefore enabling continuous cost reductions and quality improvements. It is important to note that variety, velocity and variability 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. In the Toyota’s supply chain, performance metrics have a 50% weight for results and a 50% weight for process compliance (Iyer, Seshadri & Vasher, 2009). The aim is to reward not only short-term success but also ensure that the correct processes are followed. Iyer, Seshadri & Vasher (2009) indicated that this approach ensures that bottlenecks are visible and responses immediate, changes are deliberate, velocity are maintained variety is synchronized to demand, and variability is minimized. Visibility enables continuous learning and feedback, thus guaranteeing that execution of process remains synchronized with market realities.

According to Taylor & Brunt (2001), supplier integration particularly focuses around the use of the supplier association which integrates each tier with the one above and below and allows for an external version of policy deployment, cross functional management and intercompany learning and development. Taylor & Brunt (2001) noted that the first-tier firms play a key role in Toyota’s supply chain. The most important part of supply chain system is quality buffer. Taylor & Brunt (2001) says that if a longitudinal cross-section of the supplier system is taken it can be clearly seen that not only are the first tier firms most adept at controlling their own defects but importantly act as a buffer for their customers by controlling the quality of their suppliers. With the presence of quality buffer in its supply chain, it implies that Toyota can produce excellent quality products even though its second, third and lower-tier suppliers are not always so excellent in their quality performance.

In its entire supply chain, the competitive gaps that exist in productivity give Toyota a keen advantage in all areas except their raw material. Taylor & Brunt (2001) indicated that the advantage is not uniform in the supplier network and is greater at first tier than at assembler level. When these gaps are indexed according to the value adding at each level it becomes clear that the advantage that Toyota gains is largely a result of their own productivity (18%), that of the first tier (40%) and that of the second tier (32%).

Toyota gains an upper hand from the 2^nd tier suppliers, many of whom they do not even know. Taylor & Brunt (2001) articulated that the 1^st tier firms are also instrumental in unlocking another 32% directly from their suppliers (and indirectly another 10% from 3^rd and 4^th tier firms). This implies that the 1^st tier firms have through their own and Toyota’s work developed a system which means that Toyota can lever their internal competitive advantage by at least a factor of 5 within their supplier network with the first tier acting as the key architects of this advantage through the use of methods such as the various kyoryoku kai (Taylor & Brunt, 2001). 

In the company’s supply chain, the first tier suppliers are also the focal point of raw materials purchasing (Taylor & Brunt, 2001).  Taylor & Brunt (2001) say that this is because they with the exception of the direct purchases by Toyota directly buy not only their own raw materials requirements but also the majority of raw materials on behalf of their direct and indirect suppliers. Taylor & Brunt (2001) indicated that “such materials are in general supported by a stockholding in subsidiary companies of the 1^st tier component manufacturers” (p. 73).

The figure below illustrates Toyota’s supply chain system.     

Retrieved from: Müller, C (2011). Case Study and Comparative Strategic Analysis of Toyota and Ryanair: The KeyDifferences in the Operations Strategy of Manufacturers and Service Firms

in Terms of Process Design, Supply Chain, Human Resources, Capacity, Innovation and

Quality Management. Munich, Germany: GRIN Verlag.

Toyota spends much time on evaluating potential suppliers in order to choose the right suppliers, agree on long term contracts and establish long term relationships based on mutual trust. Müller (2011) indicated that Toyota continuously assesses each suppliers performance with regard to quality, reliability, creative proposal costs. Research shows that in the years to come the company intends to reduce 30% of costs throughout the whole supply chain and share half of the profits with its suppliers.

So as to sell its cars to end customers, Toyota has established a network of dealers across the world. This implies that a service company’s supply chain is not totally different (Müller, 2011). Manufactures focus on the management and coordination of all activities in the supply chain, yet place emphasis on aspects such as service capacity, waiting time, distribution channels and quality of service.

Through its supply chain, Toyota has consistently reduced waste and work-in-process and has focused on effective material balance and zero inventories an approach known as lean manufacturing. Müller (2011) says that in order to ensure effective and efficient production on a high variety and high volume basis, the company’s supply chain combines various process design techniques including factory networks, cellular layout, and supplier network coordination. Müller (2011) says that these factors within the supply chain enhance production rates and ensure high utilization of resources.       

In conclusion,the automotive supply chain is very multifarious and consists of many processes that when pooled together, form a supply chain from the customer back to the different tiers of suppliers. The physical process of the Toyota’s supply chain consists of the production of parts at the suppliers, shipping of these parts to the assembly plant of the original equipment manufacturer, congregation of parts into a completed vehicle, delivery of completed vehicles to dealers, and finally delivery to a customer. Toyota, the company’s production system (TPS) practices and principles expand well beyond the plant walls to include the comprehensive supply chain and therefore it requires some vital preferences to ensure supply chain efficiency