Shorter is better

We've seen big car manufacturers face market uncertainties over the past weeks. Leading Japanese car maker Toyota Motor Corp. has cut production at several North American plants to halve its inventory of vehicles. Let's evaluate how stock can be managed effectively, how to save costs and try to maintain a high level of customer service.

When Toyota first began selling cars 50 years ago in the US, it imported completed vehicles from Japan, made entirely from Japanese parts. While many other US manufacturers look overseas for low-cost manufacturing and supply, Toyotas sold in the US are manufactured at North American plants and the majority of the $30 billion in parts bought to make those vehicles are sourced by North American suppliers.

Toyota has adopted a philosophy whereby it wants to produce its vehicles where customers are. This philosophy has become more entrenched as the company increases production in North America, with new plants coming online in Canada last year and in Mississippi by 2010. In both cases the company is localising vehicle production, so most of the parts and materials used can be provided by local suppliers.

Toyota is not a big proponent of supplier-hopping, primarily due to the lifecycle of its product. Toyota buyers may be required to source parts for up to three years prior to production for a vehicle that could stay in production for up to seven years. It's very difficult to forecast supplier-facing issues in advance, so the company has found a simpler supplier evaluation model that focuses on things it can control, such as supplier productivity.

The company looks at a variety of metrics to measure a supplier's productivity, including labour rates, manpower allocation, production time and scrap rates. It is important to point out that the philosophy does not imply that Toyota ignores lower cost suppliers in overseas markets, but on completion of a total cost analysis, most often local suppliers prove most cost-effective.

The company isn't swayed by short-term changes because it can get too wrapped up by which country has the lowest wage rate or provides the best exchange rate. That can cause 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 is usually much lower than in the West, but productivity rates may be vastly different - likely better in the US and Europe, which adds to competitiveness. And when transportation costs, productivity and the level of technology used to make the parts are factored in, US suppliers are usually more productive.

But the strategy doesn't work unless western suppliers are constantly challenged to find new ways of increasing value vs overseas competitors. A deep analysis of a supplier's manufacturing processes and costs allows Toyota's purchasing staffers to identify where a local supplier is able to improve cost-competitiveness.

Toyota recently kicked off a value analysis campaign with its US suppliers to further reduce costs. While value analysis is an ongoing priority for the company, the latest emphasis focuses on finding ways to reduce costs in supplier products/processes, which can then be shared with manufacturing locations worldwide.

To better facilitate the cross-functional meetings required for true value analysis, Toyota employs a Japanese concept 'Obeya' - the literal translation being 'big room' - the true meaning focuses on bringing members of various organisations 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, it has become so institutionalised that there is an Obeya phase for every project after concept design. There are also Obeya teams between sales and production and within organisations.

Shorter is better than longer in your supply chain. This is a simplified way of looking at it, but simple philosophies bring direction and guidance to an organisation in the long term.

Supply chains around the world might imply that logistics rates, energy costs, labour issues and lead times are unpredictable at best. And where there's unpredictability, there is risk. Ocean freight rates have fluctuated a lot recently and these are hard to forecast. Exchange rates can also change quickly, and this adds to the extra unknown in the suppliers' overall costs.

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 organisation. The team had two primary goals: to monitor the financial health of Toyota's supply base and to build tools to streamline the supplier risk assessment process.

Last year, the team rolled out its proprietary supplier assessment tool, which uses a variety of metrics to assign public and private suppliers, a risk score. Toyota recently pushed the tool out to its Tier One suppliers so these 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, the idea was received well internally at Toyota.

Mr Borg, a trainer and chartered consultant in logistics and supply chain management, is director of Support and Supply Management (SSM) Group Ltd (www.ssmgroup.org). The group has joint branches in the UK, and the UAE and represents the Chartered Institute of Logistics and Transport.