The Toyota Strategy - Case Study Example

Toyota has a leaner, assembly-based, outsourced and JIT, demand-pull paradigm for the automotive industry (Cox, 1999). Toyota develops long-term partnerships with suppliers who are given implicit guarantees on future business and in return the suppliers make relations-specific investments to enhance productivity in this relationship (Dyer, Cho & Chu, 1998). They treat suppliers as partners and not adversaries. Toyota’s approach is operationally as well as strategically innovative. Since they lacked the resources to take total control of the supply chain, they took a strategic decision to concentrate on the resources that were of critical importance to its participation in the supply chain. They outsourced the non-critical aspects of the supply chain thereby maximizing the value. Since the suppliers were totally dependent on Toyota, Toyota had a control on them. Secondly, since Toyota enjoyed power relationship with the suppliers, it could create an assembly-based, demand-pull and JIT system (Cox). Through this system it could also enforce innovation from the supplicants. Thirdly, they realized that through cost control and innovation they could pass on more value to the customers. Toyota functioned in a market where there were a number of horizontal competitors who could replicate so their lean production approach allowed them to provide highest quality to customers. They have to operate on low margins and delight the customer in order to achieve high value market share. This strategic approach has allowed them to have undisputed control over the supply chain. Toyota’s model is based on the transformation in the structure of power through the creation of hierarchies of structural dominance. Their policy allowed them to respond to changing customer demands and eliminated the cost of holding ‘just-in-case’ stocks (McAdam & McMormack, 2001). Thus Toyota demonstrates that they encourage continuous and are able to minimize demand response time. Their inventory carrying costs are low because of the JIT. Ford maintains non-exclusive (arm’s length) arrangements with suppliers (Dyer, Cho & Chu, 1998). They share their supplier with other auto manufacturers. This means Ford can have more than one supplier and hence they do not have any strategic segmentation of suppliers while Toyota has high level of strategic segmentation of suppliers. This approach encourages fierce competition among suppliers, one supplier can also play against others and rewards or punishments are used to derive performance standards. This is because the trading partners are interchangeable and whoever gets importance will take advantage. This is then based on the concept of “survival of the fittest”. They follow the vertically integrated supply push practices where they integrate the whole chain from raw materials to the end customer (Cox, 1999). They follow the conveyor system rather than the JIT system, which according to them is more disciplined and more suited their older plants (Donnelly & Morris, 2003). The conveyor system has led to a reduction of 20 to 30 percent investments. In this system, instead of paying upfront to their body work machinery makers, the suppliers are paid only when the line is actually working. Thus, they become totally dependent on their suppliers when they want a turnaround. They follow the POP or pay on production system and this does not cost the company any capital outlay. Ford’s policy allows them to take advantage of diversity in the international environment. They have a global attitude and all activities in the supply chain are considered as one entity. They are able to accommodate local culture and variations and understanding international issues. Ford’s ‘global car concept’ consists of a basic engineering design accompanied by regional variations to suit local tastes ((McAdam & McMormack, 2001). The key to success of the Toyota strategy is their highly effective supplier integration process. They have total control over the cost, quality and delivery. Their lean production method has led to low inventory and consequently low costs for the customer. While Toyota tries to extend maximum value to the customer, Ford’s approach is totally customer-focused. They are able to cater to global customers because of their ‘global concept’ but Toyota can guarantee the best value within whatever amount the customer is willing to pay. This is because they operate on low margins which Ford is unable to do. Ford relies heavily on performance measurements, and competition among the suppliers ensures that Ford gets the latest and the best technology. While Toyota’s strategy allows them a dominant role over the suppliers, Ford’s approach encourages competition among the suppliers which translates into creativity and innovation. Toyota has long-term relationships with suppliers which Ford in unable to have because they have multiple suppliers which are not dedicated. The Toyota model suggests high level of trust between the partners which may not be always available in the model that Ford follows since the suppliers cater to multiple companies. In the case of Toyota the suppliers growth is fully dependent on the growth of the company but the suppliers of Ford can have sizeable growth because they supply to several auto makers. Both however have been able to attain economies of scale – in the case of Ford the suppliers make the initial capital investment and Toyota follows the JIT which leads to low inventory. Toyota has a focused approach as they outsource the non-core activities thereby maximizing the value. Toyota has been successful because they maintain power relationships and power is essential for success. Toyota’s strategy is being duplicated globally not only in the automobile industry but even in the retail sector. Technology always carries risks with it. Firms could standardize on the wrong technology platform and may also be unable to keep pace with change (Bendor-Samuel, 2006)). Multiple players with diverse technological backgrounds and systems join hands to integrate supply chain activities (Lippert & Forman, 2006). Positive user attitudes towards technology in supply chains can reduce uncertainty and risks. Sharing information requires trust and as dependency on technology increases, trust on technology has to increase too. Deregulation, new technology, reduced transportation costs, debts and concentration of market power in the hands of a few buyers have resulted in a large number of competitive and relatively powerless suppliers face a few large buyers (Vorley, n.d.). References: Bendor-Samuel, P. (2006). Four Secrets to Supply Chain Success. Available from: http://www.bettermanagement.com/library/library.aspx?libraryid=754 [Accessed 30 May 2008] Cox, A. (1999). Power, value and supply chain management. Supply Chain Management: An International Journal. Volume 4 . Number 4 . 1999 . 167-175 Donnelly, T. & Morris, D. (2003). Restructuring Ford Europe. European Business Review. Vol. 15 No. 2 pp. 77-86 Dyer, J. H. Cho, D. S. & Chu, W. (1998). Strategic Supplier Segmentation: THE Next “BESTPRACTICE” IN SUPPLYCHAIN. Available from: http://dspace.mit.edu/bitstream/1721.1/1470/1/185a.pdf [Accessed 30 May 2008] Lippert, S. K. & Forman, H. (2006). A supply chain study of technology trust and antecedents to technology internalization consequences. International Journal of Physical Distribution & Logistics Management Vol. 36 No. 4, 2006 pp. 271-288 McAdam, R. & McMormack, D. (2001). Integrating business processes for global alignment and supply chain management. Business Process Management Journal, Vol. 7 No. 2, 2001 Vorley, B. (n.d.). Food Inc, Corporate concentration from farm to consumer, UK Food Group, Available from: http://www.ukfg.org.uk/docs/UKFG_Food_Inc_Summary.pdf [Accessed 30 May 2008] Read More