dimarts, 20 de gener del 2009

Shorter is better for Toyota's supply chain

When Japanese carmaker Toyota first began selling cars in the U.S. 50 years ago, it was importing completed vehicles from Japan, which were made entirely from Japanese parts. Today, while many other U.S. manufacturers look overseas for low-cost manufacturing and supply, the Toyotas sold in the U.S. are manufactured at North American plants and the majority of the $30 billion in parts bought to make those vehicles are sourced from North American suppliers.
"We've had an overriding philosophy in place that we want to produce our vehicles where the customers are and we want to buy the parts near where we produce the vehicles," says Chris Nielsen, vice president of purchasing at Toyota Motor Engineering & Manufacturing North America (left) in a recent interview.
And that philosophy is becoming more entrenched as Toyota increases its production in North America, with new plants coming online in Canada later this year and in Mississippi in 2010. "In both those cases we'll be localizing vehicle production so most of the parts and materials used in those vehicles will come from local suppliers," Nielsen tells Purchasing. "As we continue to localize our production, our supply base will continue to localize as well."

As an example of that strategy at work, Nielsen says the new version of Toyota's Tundra truck launched last year went from 60% locally sourced parts to 90% local parts. (The majority of the remaining 10% comes from Japan).
Toyota is not a big proponent of supplier-hopping due primarily to the lifecycle of its product. Toyota buyers may be required to source parts up to three years prior to production for a vehicle that could stay in production up to seven years. "It's very difficult to forecast supplier-facing issues that far in advance," Nielsen says. "So we find a simpler model of supplier evaluation that focuses on the things we can control such as supplier productivity makes good sense."
The company looks at a variety of metrics to measure a supplier's productivity including: labor rates, manpower allocation, production time and scrap rates. Nielsen is quick to point out that the philosophy does not mean Toyota ignores lower cost suppliers in overseas markets, but says that when a total cost analysis is completed, most often the local suppliers prove to be the most cost-effective.
"We don't get swayed by short-term changes—you can get too wrapped up in what country has the lowest wage rate this year or which country provides the best exchange rate today. That can cause a lot of disruption and impact quality."
Toyota's total cost analysis typically includes a deep-dive on the supplier's manufacturing costs. "For example, the wage rate in China will usually be much lower than in the U.S., but productivity rates may be vastly different—likely better in the U.S. which adds to their competitiveness. And when you factor in transportation costs, productivity and the level of technology that's used to make the parts, North American suppliers are usually more productive."
But the strategy doesn't work unless those North American suppliers are constantly challenged to find new ways of increasing their value vs. their overseas competitors. That deep analysis of a supplier's manufacturing processes and costs allows Toyota's purchasing staffers to identify exactly where a local supplier may be able to improve its cost-competitiveness.
Toyota recently kicked off a value analysis campaign with its North American suppliers in an effort to further reduce costs. While value analysis is an ongoing priority at Toyota, according to Nielsen, the latest emphasis focuses on finding ways to reduce costs in both supplier products and processes, which can then be shared at its various manufacturing locations around the world.

To better facilitate the cross-functional meetings required for true value analysis work, Toyota employs a Japanese concept called obeya: while the literal translation is "big room" the true meaning focuses on bringing members of various organizations together to discuss ideas and projects.
While the obeya concept started at Toyota with purchasing and engineering coming together to discuss supplier-facing value analysis projects, today obeya has been so institutionalized at Toyota that there is an obeya phase of every project after the concept design is completed but before the final design.
"There are also obeya teams between sales and production and within organizations," says Nielsen. "We're using it to break down functional silos that often exist."

To put it simply, Nielsen says: "Shorter is better than longer in your supply chain. That is a simplified way of looking at it, but those simple philosophies provide direction and guidance to our organization in the long-term."
Nielsen says extending supply chains around the world can mean logistics rates, energy costs, labor issues and leadtimes are unpredictable at best. And where there's unpredictability, there is risk. "Ocean freight rates have fluctuated a lot recently and those are hard to forecast," he says. "Exchange rates can also change quickly, so those things add a little bit of extra unknown in the suppliers' overall costs. That's why we like our basic model of buying locally as much as possible. It reduces risks."
Toyota is so focused on reducing risk in its supply base that two years ago it created a six-person risk management team within its purchasing organization. That team had two primary goals: First monitor the financial health of Toyota's supply base and secondly, build tools to streamline that supplier risk assessment process. Last year, the team rolled out its proprietary supplier assessment tool that uses a variety of metrics to assign all suppliers—public or private—a risk score. This year, Toyota pushed the tool out to its tier one suppliers so they could, in turn, use it to assess the status of their own supply base. While it's still too early to get any real feedback from the tier ones, Nielsen says the idea has a lot of support internally at Toyota.
"While our risk management team has a pretty good handle on the tier one supply base, the tier two and beyond supply base is more of an unknown for us," Nielsen says. "That's where we're focusing this year. Some of the tier ones had good assessment practices already, but this will drive a common standard across the entire supply base."

By David Hannon -- Purchasing, 8/14/2008

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