The International Trading and Supply Chain Management of Toyota - Case Study Example

Supply Chain Management of Toyota Table of Contents Introduction 3 Operation Management of Toyota 3 Overview of the Production System 4 The Supply Chain 6 The Logistics Flow 6 International Logistics and Financial status of Toyota 7 Conclusion 8 Reference List 10 Appendix 12 Introduction Supply chain management is defined by systematic planning and its implementation in order to achieve efficient logistics, outsourcing of operations and streamlined manufacturing process (Sanders, 2012). The fast growth of globalization has reduces international barriers, which once posed as big hurdles to the international trade. Further boosted by technological advancement, which led to efficient logistics, inventory management and instant communication, transnational firms have been stretch their supply chain longer than ever (Blanchard, 2012). This paper is focused on the international trading and supply chain management of Toyota Motor Corp. Toyota has been picked as the company of choice for this study because it operates its manufacturing operations in 27 countries and sells its products in more than 170 countries (Toyota-global, 2014). Due to its geographically diverse business operations Toyota is the right choice to study international supply chain management. This paper includes details of procurement of raw materials, components and services, manufacturing process with reference to Lean manufacturing. Operation Management of Toyota In order to adopt an efficient operations system, Toyota designed its own supply chain management system known as Toyota Production system (TPS) in 1940. The TPS is one of the most efficient production systems in the automobile manufacturing industry. The company successfully improved its production system which not only increased it revenue generation but it also improved its brand image (Liker, 2005). The TPS model aims to fulfill the following goals which are, a) to provide the best quality in the industry, and make it an inherent characteristic of the company, b) low production cost owing to the efficient production system, c) In time delivery of products by adhering to process standards, d) taking care of environmental issues by conforming to environmental standards, e) following necessary measure to provide safety to both customers and employees. The Toyota Production System has been structured in the diagram below (Sanders, 2012). Figure 1: Toyota Production System House Source: (Toyota-forklifts. 2014) Overview of the Production System The TPS is based on lean manufacturing system. The concept of lean manufacturing is to achieve waste reduction by improving the work flow and reducing the work overload. This process has been termed by Toyota as Muda Muri Mura (Ohno, 2004). The lean manufacturing process allows the managers to reduce wastage by comparing the input of raw materials with the out of finished goods. This comparison helps the company to assess the amount of raw materials wasted in the production process and also helps to make the necessary changes in the system (Fine, 2009). Based on the Toyota Production system house, it can be clearly stated that the TPS stands on two pillars, Just in Time and Jidoka meaning “Build in Quality”. The Just in Time inventory management system is aims to deliver the right products or parts in right amount of time in the necessary location using minimum amount of resources. This concept helps a company to avoid over and under production of goods (Geunes, J. 2009). Toyota keeps their amount of inventory low so that the problems in the production process surfaces out quickly. The fast identification of problems and abnormalities allows the company to spend enough time to solve the issues (Toyota-forklifts, 2014). The second pillar in the TPS house model is Jidoka or Build in quality. Toyota maintains it high quality by designing the production processes in such a way that it can be shut down as soon as any abnormalities are identified. Thus Toyota has refined the automation process by adding a “radical” element in the process. The TPS model has highlighted that the key element of efficient production is not continuous output, but avoiding defects and injury in the process (Toyota-forklifts, 2014). Toyota unlike traditional production system produces small batches in order to achieve maximum cost reduction. Jidoka has provided the needed flexibility in the production system so that the company can meet the changing market demand. The lean supply chain has allowed the company to achieve the following goals, a) Reducing waste by overproduction and excess inventory, b) Reducing waiting time, c) Avoiding over processing, and d) Efficient use of employees’ skills and abilities. The TPS uses value stream mapping (VSM) to measure the operational wastes and to identify the value added activities. The lean manufacturing system allows the company to identify different types of resource wastage, so that they can be eliminated. Toyota primarily focuses to avoid overproduction. This system separates all the operational activities in to value added and non value added activities. The value added activities are those which add value for the customers in the long run. The VSM also helps the company to measure the lead time, which accounts for the time required for incoming of production parts and delivery of finished goods (Wee and Wu, 2009). The first step of the VSM is to study the ongoing processes, which covers the aspects like man, machine, material, information, etc. It also draws a visual current state map from the identified VA and NVA activities. After this the process identifies the resource wastes and bottlenecking of activities, so that they can be removed from the system. The CSM acts as a tool for measuring and setting up targets for the company. The team members can further improve the CSM to create a Future state map (FSM). By studying the difference in the CSM and the FSM, the team can point out new problems and get to its solution quite easily (Wee and Wu, 2009). The Supply Chain The traditional supply chain management system is a non continuous one where the logistics is not connected to the production system (please refer appendix 1). However on the other hand, Toyota uses a “One Production System Flow” where the logistics is integrated in the production system. This integrated system virtually diminishes the warehouse time from the production process. The centralized control of the logistics system allows the company to influence the decision of the business partners and wholesalers. The “Heijunka” in the TPS model describes the smooth running of the production process by efficient use of Just in Time concept to produce in small delivery lots to meet the market demands. This allows the company to have a large and flexible distribution network. The logistics system followed in the North American network has its own dedicated milk run loops and direct trucking (Ludwig, 2013). Steve Brown, the vice president of the logistics division, mentioned that Toyota is able to respond to the suppliers and the changing market scenario more quickly by controlling the trucking routes and the distribution frequency. One of the disadvantages of a centralized controlling system is its complexity of management. Toyota has its own centralized departments for purchasing, production and logistics control, packaging design, etc. Despite of the centralized control the momentum of the logistics is always controlled by individual production plants (Wee and Wu, 2009). The Logistics Flow Toyota has designed its logistics solution in such a way that it reduces the logistics cost of the customers (wholesalers and dealers). The company’s technological advancement and expertise in the field of automated storage, materials handling and retrieval systems has allowed it to handle all the logistics needs of its customers. The overall logistics system is further improved by optimizing the flow of capital, goods and information between the firm and the customers. The company considers the logistics system as a continuous and ongoing process which does not end till the final product reaches the end user (Toyota-industries, 2014). The logistics routes are adjusted as much as ten times a year, more than any company in the industry. The frequent changes in the transportation route help the company to meet the fluctuating demand in the market. This strategy allows Toyota to make quick follow ups, allowing it to grab hold of new market opportunities quickly (Ludwig, 2013). The raw materials are delivered to the suppliers from the parts center which in turn is sent to the assembly plants. The assembly plants can be either local or overseas. Overseas assembly plants are used to leverage the comparative advantage of the host countries’ low labor and assembly costs. The assembled production parts are then delivered from the assembly plants to the manufacturing plant via a logistics center. On the other hand, the service parts are delivered to the manufacturing plant via parts center. In the manufacturing plant the raw materials are converted in to the finished product, which is then delivered to the dealers and wholesales. The wholesalers deliver the required number of units to the retailers; from where it is purchased by the end users (please refer to appendix 2). International Logistics and Financial status of Toyota The first overseas plants of Toyota were established in 1958 in Brazil. (Toyota, 2014)Within a span of around fifty years Toyota has expanded globally to 27 countries. In order to meet the growing demand in the automobile market Toyota has distributed its production centers in places where demand is high. Apart from the manufacturing plants the company also has different R&D units in nine overseas locations (please refer appendix 5). Toyota imports production parts from overseas assembly plants, for instance the parts delivered to North American region is mostly from Japan and in some cases from Brazil. The delivery amount varies across different plants, for example the plants in Georgetown only receive thirteen containers per day. The containers in transit in sea routes are not managed by Toyota, rather the contract is given to carrier companies for secured transportation (Toyota, 2014). Most of the Toyota’s production takes place in Japan, which accounts for 48.1 percent of the overall production. This is followed by North America and Europe, each accounting for 19.5 % and 5.6 % respectively of the total production (please refer appendix 3). USA holds the highest rank when it comes to sales of Toyota cars. USA accounts for 27.7 % of the global sales, followed by Japan holding 25.9 % (please refer appendix 4). Toyota’s made revenue increased from $22.06 billion in 2013 to $25.69 billion in 2014. The gross profit margin of the company also increased from 15.51 to 19.04 %. Moreover the operating margin of the company of the also increased from 6% to 8.9 %. Thus it can be stated that the multinational operation of Toyota has successfully led to higher profitability for the company (please refer to appendix 6). Operating in the global market brings certain challenges to the company. The exchange rate risk is one of them. The conversion of yen to other currencies affects the financial figures of the company. In North America, due to the free trade policy, Toyota can easily move their shipment between countries like Canada, USA, Mexico, etc. Toyota has assembly plants in Mexico in for Tacoma, in Canada for, Matrix, Corolla and RX33 and, Tacoma, Avalon, Corolla, Sienna, etc in USA. The company has also leveraged the opening of European Union to the Asia Market, and has expanded its operations in countries like Poland, Greece, Norway, Denmark, France, etc (Toyota-global, 2014b). Conclusion The supply chain management of Toyota can be stated as the most efficient and resource optimized management system in the world. Toyota has successfully designed it own product and supply chain management system, which allows the company to easily monitor its production system and quickly identify the issues and solve them. The company does not follow traditional production system which calls for keeping large inventory stocks. Rather it manufactures in small lots and keeps low inventory size. This allows the company to stay aligned with the rapidly changing market scenario. The company is thus able to avoid over production, which in turn allows it to keep resource wastage to a minimum. In order to increase the efficient use of resources, Toyota follows the lean management system. The lean management allows the company to indentify the problems and issues in the production system that causes resource wastage. Toyota has also designed its logistics operations in order to meet the customers’ interests. The multiple production plants and the frequently changing trucking routes help the company to quickly respond to their customers’ needs. Thus it can be stated that Toyota has successfully designed its international supply chain management to achieve low operating cost and customer preference, thereby gaining a competitive edge over its rivals. Reference List Blanchard, D. 2012. How to Manage a Global Supply Chain. [online] Available at: [Accessed 11 December 2014] CSCMP, 2006. Success through a Highly Integrated Supply Chain: Toyota North America. Supply Chain Premier Event. October, pp 15-18 Fine, C.H., 2009. Quality improvement and learning in productive systems. Management Science, 31(10), p.1301 Geunes, J. 2009. Applications of supply chain management and E-commerce research. 5th ed. , London: McGraw-Hill Education Krajewski, L, Ritzman, M and Malhotra, N. 2006. Operations Management: Processes and Value Chains. 8th ed. New Jersey: Prentice Hall. Liker, J. K., 2004, The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer. New York: The McGraw-Hill Companies. Liker, J. K., 2005, The Toyota Way and Supply Chain Management. Presentation for OESA Lean to Survive Program. Michigan: The University of Michigan Ludwig, C., 2013. Toyota’s total supply chain vision. [online] Available at: [Accessed 11 December 2014] Morningstar, 2014. Toyota Motor Corp. [online] Available at: < http://financials.morningstar.com/ratios/r.html?t=7203®ion=jpn&culture=en-US > [Accessed 11 December 2014] Ohno, T., 2004. Eliminate muda, mura, muri completely. [online] Available at: < http://www.toyota-global.com/company/toyota_traditions/quality/jul_aug_2004.html > [Accessed 11 December 2014] Sanders, N.R., 2012. Supply Chain Management: A Global Perspective. Hoboken: Wiley. Toyota. 2014. Global Expansion. [online] Available at: [Accessed 11 December 2014] Toyota. 2014a. Globalizing and Localizing Manufacturing. [online] Available at: [Accessed 11 December 2014] Toyota-forklifts, 2014. Toyota Production System and what it means for business. [online] Available at: < http://www.toyota-forklifts.eu/SiteCollectionDocuments/PDF%20files/Toyota%20Production%20System%20Brochure.pdf > [Accessed 11 December 2014] Toyota-global, 2014. Worldwide Operation. [online] Available at: [Accessed 11 December 2014] Toyota-global, 2014a. Logistics. [online] Available at: [Accessed 11 December 2014] Toyota-global, 2014b. Financial Highlights. [online] Available at: [Accessed 11 December 2014] Toyota-industries, 2014. Logistics Solutions. [online] Available at: [Accessed 11 December 2014] Wee, H.M and Wu, S., 2009. Lean supply chain: Learning from the Toyota Production System. Supply Chains Management: An International Journal. 14 (5). Appendix 1) Figure: Traditional Supply Chain management. Source: (Geunes, 2009) 2) Figure: Toyota logistics map Source: (Toyota-global, 2014a) 3) Figure: Toyota’s Production by Region Source: (Toyota-global. 2014b) 4) Figure: Toyota’s Sales by Region Source: (Toyota-global. 2014b) 5) Figure: Global Distribution of Production and R&D units. Source: (Toyota. 2014a) 6) Particulars ($) 2013 2014 Revenue JPY Mil 22,064,192 25,691,911 Gross Margin % 15.5 19 Operating Income JPY Mil 1,320,888 2,292,112 Operating Margin % 6 8.9 Net Income JPY Mil 962,163 1,823,119 Earnings Per Share JPY 303.78 574.92 Dividends JPY 80.91 138.09 Payout Ratio % 26.6 24 Shares Mil 3,167 3,171 Book Value Per Share JPY 3835.3 4564.74 Operating Cash Flow JPY Mil 2,451,316 3,646,035 Cap Spending JPY Mil -1,974,152 -2,678,691 Free Cash Flow JPY Mil 477,164 967,344 Free Cash Flow Per Share JPY 150.66 305.07 Working Capital JPY Mil 872,370 1,037,021 Margins (% of Sales) Key Ratios (Profitability) 2013 2014 Revenue 100 100 COGS 84.49 80.96 Gross Margin 15.51 19.04 SG&A 9.53 10.11 Cash Flow Ratios 2013 2014 Operating Cash Flow Growth % YOY 68.77 48.74 Free Cash Flow Growth % YOY 102.73 Cap Ex as a % of Sales 8.95 10.43 Free Cash Flow/Sales % 2.16 3.77 Free Cash Flow/Net Income 0.5 0.53 Figure: Financial Results of Toyota Source: (Morningstar, 2014) Read More