The machine that ran too hot

The woes of Toyota, the worlds biggest carmaker, are a warning for rivals

Toyota was founded in 1933 and is headquartered in Toyota City, Japan. Toyota has more than 300,000 employees and a global network of production plants. The company has a market capitalization of $126 billion with an enterprise value of $238 billion. In 2008, it was the largest automobile manufacturer in the world, a title previously held for over 70 years by General Motors Co. But since 2008, Toyota has been plagued by a series of events that have caused it to repeatedly halt production. These endless work stoppage issues are starting to affect the long-term viability of the internal structural management of the company's supply chain. Toyota's supply chain is known for embracing " just-in-time" (JIT) warehousing infrastructure in its assembly lines. The JIT process helped the company save billions of dollars in capital by not having any inventory sitting around in factories or warehouses. This allowed Toyota to leverage its balance sheet by deploying its capital in production, not in warehouse inventory. JIT manufacturing shaped Toyota's assembly plants' design, its inventory structure, and its reliance on specific subcontractors. This worked until March 11, 2011, when Japan's great quake hit. Toyota is currently in the dock after a crushing series of safety-related recalls across the world, competitors are only too aware that it could be their turn next. After all, there is not a single big carmaker that has not modeled its manufacturing and supply-chain management on Toyotas lean production system. That said, there is a widespread belief within the car industry that Toyota is the author of most of its own misfortunes and that its mistakes hold lessons for others. In testimony delivered to the House oversight committee on Wednesday February 24th, Mr Toyoda, the carmakers boss,

acknowledged that in its pursuit of growth Toyota stretched its lean philosophy close to breaking point and in so doing had become confused about some of the principles that first made it great: its focus on putting the customers satisfaction above all else and its ability to stop, think and make improvements. James Womack, one of the authors of The Machine that Changed the World, a book about Toyotas innovations in manufacturing, dates the origin of its present woes to 2002, when it set itself the goal of raising its global market share from 11% to 15%. Mr Womack says that the 15% target was totally irrelevant to any customer and was just driven by ego. According to Mr Womack, the requirement to expand its supply chain rapidly meant working with a lot of unfamiliar suppliers who didnt have a deep understanding of Toyota culture. By the middle of the decade, recalls of Toyota vehicles were increasing at a sufficiently alarming rate for Mr Toyodas predecessor, Katsuaki Watanabe, to demand a renewed emphasis on quality control. But nothing was allowed to get in the way of another (albeit undeclared) goal: overtaking General Motors to become the biggest carmaker in the world. Even as Toyota swept past GM in 2008, the quality problems and recalls were mounting. The majority of those problems almost certainly originated not in Toyotas own factories but in those of its suppliers. The automotive industry operates as a complex web. The carmakers (known as original equipment manufacturer or OEMs) sit at its centre. Next come the tier-one suppliers, such as Bosch, Delphi, Denso, Continental, Valeo and Tenneco, who deliver big integrated systems directly to the OEMs. Fanning out from these are the tier-two suppliers who provide individual parts or assembled components either directly to the OEM or to a tier-one supplier. CTS Corp, the maker of the throttle-pedal assemblies that Toyota has identified as one of the causes of unintended acceleration in some of its vehicles, is a tier-two supplier whose automotive business accounts for about a third of its sales. On the outer ring of the web are the tier-three suppliers who often make just a single component for several tier-two suppliers. Although there are thousands of tier-two and tier-three suppliers around the world, their numbers have been culled over the past decade as the OEMs and the tierones have worked to consolidate their supply chains by concentrating business with a smaller number of stronger companies. Toyota revolutionized automotive supply-chain management by appointing certain suppliers as the sole source of particular components, leading to intimate collaboration with long-term partners and a sense of mutual benefit. By contrast, Western carmakers tended either to source in-house or award short contracts to the lowest bidders. The quality Toyota and its suppliers achieved made possible the just in time approach to delivering components to the assembly plant. Most big car firms now operate in a similar way. By and large, the relationships between the OEMs and the tier-one suppliers run smoothly. When problems crop up, it is usually with the other suppliers. Consolidation, the need to trim capacity and the shock to demand that began in mid-2008 have put the weaker parts of the supply chain under great strain:

A consequence of Toyotas breakneck expansion was that it became increasingly dependent on suppliers outside Japan with whom it did not have decades of working experience. Nor did Toyota have enough senior engineers to keep an eye on how new suppliers were shaping up. Yet Toyota not only continued to trust in its sole-sourcing approach, it went even further, gaining unprecedented economies of scale by using single suppliers for entire ranges of its cars across multiple markets. Although Toyotas single-supplier philosophy served it well in the past it had taken it to potentially risky extremes, especially when combined with highly centralised decision-making in Japan. In the aftermath of Toyotas crash, the question the industry is now asking itself is whether sole-sourcing has gone too far. Until very recently, Toyota was the peerless exemplar. For now, at least, it is seen as an awful warning. The ongoing product recall and quality perception crisis regarding Toyota Motor Corp. took on some positive movement with Toyota appointing chief quality officer executive within each major geography. These executives at Toyota will come up with plans to boost quality assurance and customer research and also focus on specific quality needs in the respective region. The special corporate-wide committee on quality consisting of 70 members held its first meeting to authorize the forming of dedicated technology offices within each major region. Technology offices will be increased from current one to seven within North America itself. New technology offices will also be established in Europe, China and other regions. Toyota noted that the quality committee will meet regularly to exchange insight and tackle safety issues. Under this new quality management structure, each regions chief quality officer will coparticipate with Toyota headquarters in Japan on consensus-driven action plans to address quality issues, including the need for recalls. Toyota also plans to have third party experts evaluate measures to improve quality and review steps adopted by the special committee. On Jan 26, 2010 Toyota Motor Company suspended dealer sales of eight different Toyota models that were involved in the ongoing product recall involving sudden acceleration of vehicles. Because of this suspension, Toyota had to suspend production of vehicles. The models involved in the recall include the Avalon, Camry, Corolla, Highlander, Matrix, RAV4, Sequoia and Tundra. Toyota had previously issued a recall of 2.3 million vehicles, along with other recalls in the past. Needless to say, this development was unprecedented, and had potentially far reaching impacts related to automotive supply chain disruption, if the suspension continued for a lengthy period. While details remain sketchy, Toyota has either reached a point of serious concern related to the safety of its vehicles, or is taking extreme measures to insure that the problem is root-cause identified and corrected. The problem is far more than a sticky accelerator and probably more to do with engine control electronics. In either case, this is a significant development.

Toyota Tsusho Corp., a key supplier and 21.8% owned by Toyota Motor Corp., moved to secure a long-term source of lithium in Argentina, billed as one of the first global naturalresource plays of the electric-car age. The investment, valued at $100-$120 million, is being inexpensively financed through a government of Japan state-owned public agency, Japan Oils, Gas and Metals National Corporation. High quality lithium is a core raw material in the production of rechargeable batteries. Quality supplies of this very light metal are limited to certain global areas of the world, specifically Bolivia, which is noted as having over one-half of the world reserves, followed by Chile, Argentina, China and Australia. Global automotive manufacturers must all tap into a finite number or raw material suppliers of high quality lithium originating from these regions. This latest investment by Toyota, through its supplier, is characterized as providing a more reliable supply of lithium, rather than being reliant on a few producers who could tighten the overall flow of supplies over the coming years. The investment time horizon is characterized as a window of ten years, a window where the demand for hybrid and electric autos and other vehicles could substantially grow. It assures that Toyota and the remainder of Japanese car makers and battery producers have a long-term reliable and consistent supply of high quality lithium. This was the best demonstration of strategically positioning a value-chain for long term competitiveness, and its not the first or last time a Japan or Asian-based industry will initiate such strategic or tactical moves.

Toyota Makes a Risky Move- Accelerates Cost Cutting Efforts

The worlds leading auto producer by volume has requested the help of its key suppliers to meet a goal of reducing the cost of component parts by 30% in the next three years. Toyota has been garnering considerable negative perceptions in the market of late. First, a multitude of major product recall incidents has tarnished the companys previous stellar reputation as a producer of reliable vehicles. Second, the effects of near two years of global recession coupled with some business missteps has had a severe impact on Toyotas sales growth and lack of profitability. The company expects to suffer its second straight year of loses, and has lost some market share. This latest initiative, despite the need for the company to repair its balance sheet, is rather untimely and fraught with more risk. Toyota owners already have building concerns about the companys building lapses in vehicle quality and reliability It seems that ever since the bulk of vehicle production was shifted outside of Japan, quality seems to have slipped over time.

Pushing suppliers even harder to achieve significant further component part cost reductions without a context to the root-causes of eroding quality and reliability is risking even more damage to the Toyota brand. A look back in history when major U.S. OEMs such as Chrysler and GM embarked on similar initiatives with their suppliers would indicate a disastrous impact on the reliability of vehicles. Toyota should know better than to embark on an accelerated road toward destroying its brand and owner loyalty.

Toyotas Evolving Challenges- A Sure Global Survivor

Unprecedented declines in our current global economy have provided endless stories as to how manufacturers have had to initiate drastic cutbacks in people and resources, and individuals and companies tend to just want to stop reading much of this endless negative news. However, when a world class provider such as Toyota is affected, we all have to take notice. The latest news regarding Toyota reflects that the drastic downturn being experienced in the automotive industry is deteriorating at a rapid clip. Toyota is on-track to post an operating loss of nearly $5 billion for the year ending March 31. Sales have dropped 24 percent overall, including 31 percent in North America, 14 percent in Europe, and 8 percent in Asia. The latest estimates of operating losses reflect a magnitude to be three times as much than the company forecasted. Since its founding in 1937, Toyota had never reported a full-year operational loss, until the downturn of 2008-2009. More challenges lie ahead for Toyota, particularly in the areas involving supply chain management. Toyota had implemented aggressive global capacity expansion in the midst of insatiable demand for its products, but now finds itself with a glut in overall production capacity. Inventory remains a problem since Toyota was not immune to the steep drop in consumer confidence and financing options. Whats important to note is that Toyota will attack the problem from multiple perspectives:
Cost reduction, Supplier and dealer collaboration, and As a revenue enhancing opportunity.

The global product line-up is under review to tag products that will be beneficial, as well as attractive, to consumers within the current economy. Investments in hybrid technology will reportedly continue, perhaps at a declined rate. Toyota plans to implement drives including cutting salaried employee bonuses, slashing executive pay as much as 30 percent, and cutting back on factory hours.

It may be painful, and there may be more bumps along the road, but Toyota will prevail and be a predominant global player when recovery finally comes. Just like every other problem or opportunity in the past, Toyota has the where-with-all to analyze root cause, attack with speed, and seize opportunity. Perhaps along the way we will all learn some new lessons in supplier collaboration, lean methods and adaptive supply chain management. Toyota Motor Corp. one of the largest manufacturing companies in the world, has offered strong periods of growth from which investors have profited. However, today it is a "Sell" - and is likely headed toward a long-term redevelopment of its core company structure.

Profit-Crushing Domino Effect The global supply chain for auto manufacturing relied on critical parts built in factories in Japan. While the majority of these factories were not affected by the quake or tsunami directly, they have been affected by rolling black outs, or a lack of parts from vendors who provide them with sub-assemblies that are sent to the factory. Toyota isn't the only the poster child for the supply chain issue. Other competitors in the automobile industry are experiencing supply issues as well, like Nissan Motor Co. Ltd.) and its primary engine plant. In the case of Ford Motor Co., it is the color of the paint sourced from Japan that's the issue. "It's hard enough to sell a $60,000 Navigator in this economy," said Fortunes O'Neal, general manager at Park Cities Ford in Dallas. "We don't want to have to tell customers, 'You've got to pick another color.'" Still, Toyota will feel the burden to a higher degree than its competitors will. This is because Toyota built its company around the "just-in-time" process in all aspects, leaving the company massively exposed to a major supply disruption. It not only embraced the strategy of only having the necessary parts available at the assembly line itself, it back sourced its warehouse reserve parts in the same way. Toyota is left needing everything to arrive at the right time. The implications of this will become more noticeable in the weeks and months ahead. Toyota has to build new parts factories from scratch, while changing the basic designs of some of its cars mid-year. In hindsight, JIT manufacturing will become known for its weakness in basic risk management. The lack of spare capacity across the production supply chain will have long-term ramifications on rebuilding the auto industry. In the United States, where Toyota should be shifting its manufacturing focus, it is canceling all overtime and is cutting back to single shifts.

"Everyone is putting on the brakes a little bit and taking a look to see where they are affected," said Paul Newton, an analyst with IHS Automotive. The company's stock price shows its pain.

The stock price hit a low of $67.56 on September 2, 2010, and a high of $93.68 on Feb. 16, 2011. The company stock is currently trading in the $80 per share range. If you look at the stock's recent activity in the accompanying chart, it appears to be forming a head and shoulders pattern. It is time to sell Toyota and move that capital to the sidelines. The great period of growth for the company is over. The reality is that Toyota has grown too quickly, without the necessary spare capacity in its supply chain to weather a major event like Japan's March 11 great quake. Toyota is a liquid stock, with enough trading to allow you to leave on your terms. Toyota has a long road ahead of it, as it changes its supply chain enough to adapt to the effects of this crisis.

ANALYSIS: Supply chain management and the crisis at Toyota

Is Toyota's much vaunted supply chain management system on the verge of meltdown in the midst of the unfolding quality crisis centred on faulty accelerator pedals? The global quality crisis now hammering Toyota has launched a debate about whether the blame should be placed squarely on the companys renowned system of supplier relations. At the very least, supplier

executives say Toyota may be ready to reevaluate its method of early involvement and close, long-term partnerships with individual suppliers, as well as single-sourcing, in the wake of plans to modify or replace millions of faulty accelerator pedals around the world. Is The Toyota Way still the right way for a company that has grown so much in the past decade? Several schools of thought emerged in the days following the recent disastrous turn of events. Among them:

Toyota's deeply integrated ties with its parts makers actually permitted the problems with the pedal modules to occur. How? The automaker has remained lean while its volume has increased dramatically since the days when the company's principles and methods were established. Thus, Toyota can no longer maintain sufficient support and quality control, especially as it adds new suppliers around the world. Yet it still governs the design of key components. Toyota's streamlined supply base is at fault. By relying so heavily on sole suppliers and using parts across multiple platforms and vehicles, the automaker increases its risks. Toyota's methods have minimised the damage - enabling a relatively quick fix to the sticky pedal problem because of the automaker's inherent ability to work closely with suppliers on engineering solutions. But the consensus among analysts is that Toyota's rapid expansion is at the core of the problem. They say the company can no longer maintain the same level of quality control and engineering rigor. And they say Toyota has rushed into relationships with suppliers it has not adequately vetted, shifting away from trusted Japanese-based companies in favor of new parts makers located around the world. The automaker has also been forced to slash costs as part of its growing orientation towards stock market performance that followed its listing on the New York exchange in the late 1990s. Also, Toyota's recalls have involved fantastically large numbers of vehicles, which some critics say is the result of reliance on single suppliers that provide common components for many platforms and vehicles. The lack of a second supplier means it cant easily switch sources.

Suggestive Corrections for Toyota

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 Multiple tiers so as to guarantee availability of innovative solutions across the supply chain (Tiered Supplier Organization)

Questions1. Prepare a synopsis of the Supply Chain practices followed at Toyota and how it became a successful model till 2005-2008 2. What were the supply chain causes that led to the downfall of Toyota and the reason behind huge vehicle recalls due to quality and customer satisfaction issues 3. If you were to prepare a strategic re-structuring of Toyotas Supply Chain Model what were the steps you would take and what would be your time frames for desired outcomes

You may wish to read an article in The Economist on 24 February 2010 on this. You may also wish to read Texas Magazine, Fall/Winter2009, p14-14, McKenzieManifie, Martha. Supply Management, 3/19/2009, Chappell, Lindsay; Sedgwick, David. Automotive News, 4/27/2009, Vol. 83 Issue 6357, p1-23, and LAMB, JOHN. Logistics Manager, Apr2010, p32-32. There is no book on this issue thus far.