Fundamentals of Supply Chain Operations by Toyota - Case Study Example

Fundamentals of Supply Chain Name and Number Module and Number Programme Title Name of Lecturer Executive summary Toyota has been a market leader in the automobile industry with its main source of competitive advantage stemming from its lean approach in the supply chain. However, in light of the disruptions to its supply chain and the consequential halting of production due to insufficient parts, should the company rethink its supply chain approach? Taking into account that Toyota is the pioneer of the lean supply management, and the immense success it has achieved over the years placing it ahead of its competitors, there is need to pursue a critical analysis of the suggested fool proof approach and its impact on the overall competitiveness of Toyota in the automobile industry (Canis 2011). This need is further compounded by the fact that, the timing of this decision is when global competition is fierce with competitors, such as the Korean automobile industry and the US industry, threatening to close in on the gap between themselves and Toyota. Similarly, the market is completely volatile and extremely uncertain, and driven by a huge demand by the customers. It is therefore important that Toyota management realises the impact of its approach to averting or mitigating the extent of severity should disruptions occur in the supply chain. It should do so bearing in mind that the likelihood of occurrence of natural disruptions cannot be calculated but the intense competition is an everyday concern. The fool proof approach should therefore in no way reduce the company’s competitiveness or result in inefficiencies (Beamon 1998). This paper assesses the suitability of the lean supply approach in the automobile industry, and identifies the inherent shortcomings that are as a result of this approach and the various ways that they can be addressed without having to completely override lean management principles. It also evaluates Toyota’s fool proof approach and the likely impact it will have on Toyota and all the stakeholders involved in this decision. Introduction Lean supply management is an approach that is in complete disapproval of mass production. It instead advocates for pull system of the supply chain where the demand from the end consumers is the main triggering factor that prompts production. Demand driven production always ensures that there is a ready and guaranteed market thereby eliminating problems, such as dead stock, which normally arise out of forecast driven production. This approach aims at reducing wastes, which are as result of errors through a principle that advocates for getting it right on the first attempt, reducing costs of production in the form of tied up stocks due to excess inventory, and lead time and complete elimination of any non-value adding operations in the production process. Lean approach is based on some core pillars and has various advantages (Prakash & Kumar 2011). Lean philosophy The core principal of lean philosophy is the just in time system (JIT). One of the key principles of lean approach is a small supplier base compromising of several suppliers who are ranked in a tired structure. The first tire supplier is regarded to as the supplier base. This kind of structure involves outsourcing but the difference is that other approaches are usually characterised by a large supplier base, which usually lacks cohesion. Small supplier base results in close knit relationships and ultimate partnership that foster trusts and mutual benefits. The shared vision and mission allows the need for joint designs in production, which allows the supplier and the company to utilise each other’s expertise thereby resulting in quality deigns (Sanchez & Perez 2005). A small supplier base will also allow effective coordination of the just in time mechanism and capacity synchronisation. The level of inventory and whether the company can keep sufficient inventory at levels to avoid issues, such as lead time due to insufficient inventory, draws a distinct line between an effective system and an ineffective system. A close relationship with the supplier will allow flexibility in the inventory systems as the suppliers have a clear understanding of the buyer’s production operations and strategies (Sanchez & Perez 2005). The kind of understanding that can only arise out of smooth flow of information between the suppler and the buyer. Single sourcing or dual sourcing is another major hallmark of the lean supply approach. The lean supply chain approach normally avoids multiple supplier sources. It will instead involve only one or at most two suppliers in outsourcing of a particular product (Sanchez & Perez 2005). This helps in building a relationship based on trust .It also results in efficiency and cost optimisation as the supplier will produce the required parts in a large scale therefore benefiting from economics of scale, which translates into a lower cost per unit. Single sourcing is also important during designing of products as it allows the collaboration of both the buyer and the supply. This kind of collaboration would be very difficult to achieve in the case of multiple suppliers (Choi, Yeung and Cheng, 2013). Another salient feature of the lean approach is synchronised flexible capacity, which eliminates the problem that results from rigid inventory systems during demand or supply shock. The scheduled capacities from the suppliers and the buyers should not be fixed. Instead, it should be able to easily and conveniently adjust to inherent changes, which causes a change in the demand in order to avoid over or under capacity (Sanchez & Perez 2005). The most significant characteristic of the lean approach is the just in time (JIT) principle. This approach entails synchronised delivery; the materials and parts are ordered and delivered only when they are required for the production process, which helps in avoiding delays and the need for holding unnecessary inventory, which in turn increases the holding costs (Sanchez & Perez 2005). It also reduces lead time to the most practical levels through scheduling that ensures the supplies are supplied to meet the immediate production requirements. The JIT approach is demand driven and therefore accurate forecasting is essential. The lean approach is highly beneficial. Firstly, it results to the elimination of waste; the lean approach advocates for low inventory levels therefore eliminating the need for safety stock, work in progress and the material and labour resources that are often as a result of excess stock. It also roots out non value adding processes, which are mostly reworking and debarring (Sanchez & Perez 2005). In doing so, it results to functional synergies, which translate into reduced costs of production and uncertainty. Further, the lean approach promotes utmost supplier integration, therefore resulting in improved flow and sharing of information. It also creates conducive environment that allows joint collaboration in improving and guaranteeing quality products (Sanchez & Perez 2005). Issues facing the automobile industry There are many challenges facing the automobile industry. In this context, the discussed challenges are those that arise primarily in the supply chain operations and more specifically the use of lean supply chain operations. One of the challenges faced is the risk of supply chain failure. This is the probability that a disruption in the supply chain operations will occur and the extent of severity that the disruption will have on the production process. This is a risk that is faced by every supply chain operation as any system is vulnerable to disruptions, which are either manmade or natural, such as earthquakes (Leckcivilize 2012). However, the main concern is whether the supply chain approach used by the automobile company is effective and robust enough to effectively and swiftly respond to the disruptions without any significant losses. Most automobile companies fail to recognise the need for risk management in their approach as they fail to recognise any correlation between risk mitigation and a supply chain’s resiliency and responsiveness (Balakrishnan, Bowen & Eckstein 2008 & Wu 2008). Similarly, another major challenge is limited stock inventory to cushion the production process from severe effects. A lean approach advocates for small stock levels and single sourcing (Sanchez & Perez 2005). Despite the fact that this approach is highly advantageous to the automobile companies, it also presents a major weak link in the supply chain. This is mainly because should any disruption occur, the immediate and only response would be halting the production till the supplier source is up and running again. This challenge is not limited to the automobile companies that embrace the lean approach; low inventory and single sourcing, which allows for supplier integration, is becoming the norm regardless of the approach used by any automobile company. This challenge is further compounded by the fact the limited number of suppliers would amplify the impact of any upstream supply chain failure therefore making the situation more severe. Supply chain visibility is also another major challenge facing the automobile industry. Supply chain visibility can be defined as the ability to identify and capture important information throughout the supply chain operations (Business information through Technology 2007). Poor supply chain visibility impedes a rapid response to any major occurrence in the supply chain. Poor supply chain visibility in the automobile industry is as a result of a number of factors including organisational silos, which hamper effective communication and drawing boundaries on the presumed intellectual property thereby resulting to ineffective collaboration. Real time Information on demand and inventory is crucial in determining stock levels, sourcing and placement thresholds. This kind of information is only available through supply chain visibility (Business information through Technology 2007). Cost containment is a challenge that continuously threatens the automobile industry especially in the wake of globalisation and increasing customer demands. Companies in the automobile industry have adopted various ways of reducing the costs of production including supplier integration. However, these strategies have not been able to successfully contain costs to the desired levels (Balakrishnan, Bowen & Eckstein 2008). One of the reasons why automobiles are failing to reap the benefits that are associated with strategies, such as the supplier integration, is the visibility of the suppliers’ costs and the transparency of the total costs (Business information through Technology 2007). Toyota’s fool proof plan The severe consequences as a result of the disruption of Toyota’s supply chain serve as a clear indicator why any automobile company should incorporate the aspect of risk management in its supply chain operations. However, the company needs to take into account that the likelihood of the occurrence of a disaster is a distant possibility that cannot be estimated nor calculated. Stiff competition, on the other hand, is an everyday occurrence. The implication is that regardless of the approach that the company resorts to use in order to mitigate the effects of risk occurrence, it must not interfere with its main source of competitive advantage in the market as stiff competition poses a real threat to the sustenance of the company than the effects of a threat. Toyota’s fool proof plan seeks to address the recognised weak links in its supply chain operations. These weak links include the extreme dependence on a single supplier and limited alternatives in case of disruptions in its supply chain. It is important to assess the effects that this plan will have on Toyota’s overall performance before determining whether it is a pragmatic and prudent solution. In this case, the main source of Toyota’s competitive advantage is its supply chain approach; the recommended solutions should therefore be in line with this approach Toyota’s fool proof plan recommends standardisation of auto parts and also increasing the various locations where these points are made. It also recommends increase in inventory and stock levels of highly specialised parts or those parts that are sourced from a single supplier. It will also reduce extreme dependence on one supplier through the creation of various sources of such parts. The company also seeks to reduce its global interdependence so that disruptions in one geographical area do not affect the production process of another geographical location. Lean supply management is characterised by inventory levels that are just enough to meet the production process based on customer demand. However, this approach does not entail complete elimination of inventory; it allows room for buffer stock up to a certain threshold. Increasing the various locations where auto parts are produced inherently results in the significant increase in the levels of stock levels. Increased inventory levels normally result in increased holding costs and other costs. This move is to a larger extent in contrast of the JIT approach. However, it may be the only practical solution that can address the risks that are associated with limited stock levels. The company may therefore be compelled to reduce stock at other areas in order to contain the increased costs. Regardless of this, the biggest question lies in deciding whether it is prudent to increase inventory levels because of fear of a disaster whose probability of happening is very vague. The company’s move to reduce extreme independence on single or limited suppliers is not in line with the lean philosophy, which advocates for a small supplier base. This move may pose a huge risk to the company’s competitiveness in that supplier integration is very difficult when many suppliers are involved. However, many suppliers may create a competitive spirit a much needed requirement in eliminating the risk of complacency, which is mainly as a result of overreliance on a single supplier. This creates room for quality and low costs suppliers. The biggest shortcoming however lies in the fact that increase in production due to an increase in the supply chain is only feasible when the market capacity is also growing in order to absorb the extra supply of vehicles. Reducing global interdependence of supply chain may have little effect on the move to mitigate risks mainly because risks are universal and no place in the world is immune to risk or supply chain disruptions. Toyota’s fool proof plan also has an impact on the company’s relations. In fact, the fool plan approach has the most impact on its relations with its parts suppliers. Prior to the earthquake and disruptions on its supply chain, Toyota had a highly integrated supply chain due to its small supplier base. This kind of approach is highly advantaged as seen earlier in the form of functional synergies and collaborative approach (Leckcivilize 2012). Toyota’s fool proof plan incorporates the aspect of multiple suppliers. This creates a competitive approach. This kind of approach normally erodes quality relationship between the supplier and the buyer. Given that Toyota has a large purchasing power and multiple sourcing creates little room for joint improvements and mutual awards, such as cost reduction. The suppliers may therefore have little bargaining power and in turn not work towards improving quality but instead focus on meeting the threshold mark. Recommendations Given a critical analysis of the challenges facing the automobile industry especially its main lifeline, which is the supply chain, there are four core areas that need to be addressed. They include the dependence on the supply chain, visibility of the supply chain, substitutability and portability of the product design information. By addressing these four areas, the automobile industry will be increasing the robustness of its supply chain operation without having to sacrifice the competitiveness of its supply chain operations. In reducing the dependence on one supplier, the company should resort to virtual dual sourcing and virtual dual tooling as opposed to dual suppliers and duplication of production equipment in several areas. This is based on the open manufacturing theory, which terms manufacturing as building design information into a product. This creates the need to eliminate processes that entail non design information portability, which are crucial weak links in the supply chain during disruptions. This is however highly dependent on whether the design is product specific and in turn whether it is design portable. The reason why portability of design information is so important is mainly because during disasters, there is no need to halt production as the main focus is in ensuring continuous flow of information even if it is on backup equipment. It also eliminates the need for multiple suppliers (Humphrey 2003). The company can also increase the sub stability of its parts without having to create common standards parts, because today’s customers are very particular regarding the product architecture. Substitutability in this case refers to either customer product specific or supplier process specific. Highly non substitutable parts are difficult to purchase or substitute. The company should instead opt to produce highly customized parts. More general strategies include conducting simulations in order to assess risks in the supply chain operations created by either natural or manmade disruption. The company must also determine the time it requires to recover from supply chain disruptions. Bibliography Balakrishnan, J, Bowen, F, and Eckstein, A 2008, ‘A Strategic Framework for Managing Failure in JIT Supply Chains, International journal of information systems and supply chain management, vol. 1, no. 4, pp. 328-330. Beamon, B 1998, ‘Supply Chain Design and Analysis: Models and Methods’ International Journal of Production Economics, vol. 55, no. 3, pp. 281-294. Business information through Technology 2007, ‘Supply Chain Management. New trends and strategies’ SETLABS Briefings, vol. 5, no. 2. 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Accessed May 23, 2013 from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CC0QFjAA&url=http%3A%2F%2Febiz.uoregon.edu%2Fpoms2008%2FFullPapers%2F008-0679.pdf&ei=jg6jUY6IOoeXO_vLgIgN&usg=AFQjCNER8KFhn4TeFeWE_hfBrZ8Qq0pFMg&sig2=UbGLktUSo-ISH0EyM6-PTg&bvm=bv.47008514,d.ZWU Read More