through clever uses of information technology, but Toyota has built a much deeper foundation of relationships to allow continuous improvement to thrive. We view Toyota’s supply chain as a pyramid 3 that we call a “supplier part- nering hierarchy.” We use the term “hierarchy” because some of the features in the seven levels form a foundation for others (Figure 12-1). As an example, many companies have attempted to develop supplier metrics in order to improve supplier performance. The famous balanced scorecard was THE TOYOTA WAY FIELDBOOK274 3 The Toyota Way presented a similar model called the “supply chain need hierarchy.” This was developed to describe the needs of suppliers in order to make them good partners. The perspective of building deep supplier partnerships that are effective for both parties, a model that applies equally well to Toyota and Honda, was first introduced in an article in the Harvard Business Review, December, 2004, by Jeffrey Liker and Thomas Choi, “Building Deep Supplier Partnerships,” pp 104-113. Mutual Understanding & Trust Interlocking Structures Information Sharing Kaizen & Learning Compatible Capabilities Control Systems Joint Improvement Activities Figure 12-1. Supplier partnering hierarchy touted as a supply chain solution that would significantly improve quality, cost, and delivery. Yet in implementing the balanced scorecards, companies often did it in the context of conflicted, adversarial relations with suppliers. These condi- tions made the balanced scorecard a punitive measurement system to identify underperformance. Suppliers would placate the customer through short-term actions, not to solve the root cause problem, but to make the numbers look good. In contrast, though Toyota also uses rigorous measurement systems to help control supplier performance, they do it in an environment of open communi- cation and trust. In short, jumping up to particular control systems without a foundation of mutual understanding and a structure that supports cooperative behavior leads to game playing and short-term responses. Of course, supplier partnering is not all fun and games. Being a partner to Toyota is not about Toyota being soft or forgiving. As pointed out in The Toyota Way, fairness, high expectations, and challenge characterize how Toyota treats suppliers. This is business, and the goal is to make money, but not at the expense of suppliers. As Taiichi Ohno, father of the Toyota Production System (TPS), stated: Achievement of business performance by the parent company through bullying suppliers is totally alien to the spirit of the Toyota Production System. The key word is “parent.” It implies leadership and long-term relationship. It connotes trust, caring, and mutual well-being, yet also signifies discipline, being challenged, and improvement. Seven Characteristics of Supplier Partnering What follows are the seven characteristics of Toyota’s supplier partnering, as described in Table 12-1. We’ll look at them from bottom to top and discuss the steps you would need to follow to bring each element of the partnering rela- tionship to fruition. Mutual Understanding The basis for the relationship starts with understanding, and it does not come easy. What does it mean for a company to understand its supplier partner? For Toyota, it’s genchi genbutsu (actual part, actual place), reflecting its core philos- ophy of going and seeing directly, to deeply understand the situation. The ques- tion is whether you are willing to hit the road, get your hands dirty, and put in the effort. When Toyota first started to work with Metalsa, a frame and body compo- nents manufacturer headquartered in Monterrey, Mexico, they spent time with senior management and wanted to understand the company’s philosophy. They appreciated the fact that Metalsa was originally a family-owned company, one Chapter 12. Develop Suppliers and Partners 275 that still has significant family influence. More important, they appreciated Metalsa’s emphasis on creating a positive work culture with only the best people. Hiring is a core activity for Metalsa and includes intense screening, including visiting the homes of prospective employees to see them in their family environ- ment. Metalsa invests heavily in training its people and considers their quality its principal competitive advantage. A team of supplier engineers from Toyota visiting the Metalsa plant were given their usual preview of frames and other products in the lobby showcase. What made it unusual was that its executives could not get the Toyota engineers out of the lobby. They pored over each and every weld, intently discussing the quality of the welds and the design of the chassis. It was apparent that there was something different about Toyota as a customer. Metalsa got major business THE TOYOTA WAY FIELDBOOK276 Table 12-1. Key Elements in Supplier Partnering Partnering Characteristic Key Elements Kaizen & learning Shared lessons PDCA Annual cost reduction Joint improvement activities VA/VE Supplier development Study groups Information sharing Accurate data collection and dissemination Common language Timely communications Compatible capabilities Engineering excellence Operational excellence Problem-solving skills Control systems Measurement systems Feedback Target pricing Cost management models Interlocking structures Alliance structure Interdependent processes Parallel sourcing Mutual understanding Trust Commitment to coprosperity Respect for each other’s capability Genchi genbutsu (actual part, actual place) during the engineering phase to source the entire chassis for the Tundra truck to be built in a Toyota plant that had not yet been built in San Antonio, Texas. To support the launch, Toyota asked that a large team of engineers be dedicated to the project and that they spend significant time in Japan. They asked for a full-time engineer to be stationed in Michigan near the Toyota Technical Center (TTC), and for one and later two more engineers to be stationed full-time in Japan to work alongside Toyota engineers. It was extremely unusual for Toyota to give this much business to a brand new supplier. But Toyota had told the Mexican government they would source more product and build vehicles in Mexico in exchange for favorable tariff treat- ment. Once this decision was made, Toyota set out to find suppliers with com- patible cultures. They then started the long and resource-intensive process of developing mutual understanding between Toyota and the supplier. This was an investment that would span decades. Given the significant investment by Metalsa in assigning many engineers to work with Toyota, building prototypes, and investing in learning to work with Toyota before ever getting paid, one might expect a degree of apprehension. But on the contrary, Metalsa senior executives made an increase in Toyota business one of the company’s top strategic objectives. They even offered to build a special plant dedicated to Toyota parts near the border (which Toyota refused). Why? They knew Toyota would be an honorable and reliable customer, their visibility in the industry would go up considerably because they supplied Toyota, and that they would learn a ton and get much better as a company. Toyota suppliers speak in glowing terms about Toyota as reliable, capable, and that the relationship causes them to get better at supplying Toyota products and their own total business. A Toyota supplier put it this way: Toyota has helped us dramatically improve our production system by coming in and working with us side by side. On the commercial side, Toyota is very hands on also. They come in and measure and work to get cost out of the system. . . . We started with Toyota when they opened the Canadian plant with one component, and as we improved performance we were rewarded, so we now have almost the entire cockpit. Relative to all car companies we deal with, Toyota is the best cus- tomer. Many companies have certain suppliers that have been with them for many years. And the customer and supplier get to know each other. But by “mutual understanding,” we mean more than familiarity. Do you and your suppliers truly understand each other at a working level? Do you understand their processes in detail, enough to help them improve their processes? Do your suppliers or customers respect your ability to understand their processes and make useful suggestions? Is there trust in the relationship—trust that each party is out to help the other be successful? Chapter 12. Develop Suppliers and Partners 277 Interlocking Structures Putting out a product to bid conveys an image of a bunch of commodity sup- pliers who can all equally well make the product the customer wants. As home- owners, we aren’t going to develop an intimate relationship with the producer of lightbulbs we buy for our house. The best the lightbulb manufacturer can do is become part of a large purchasing and retailing organization like Costco. But we might want to get to know the carpenter who will build our new addition or house. The dynamics involved in purchasing custom parts for a complex product like an automobile include an array of products, from a lightbulb to the complexity of a customized assembly like a chassis or seat. When Toyota first decided to make cars in Georgetown, Kentucky, they needed a nearby source for seats. Seats in automobiles are big and very com- plex; there are a huge number of variations. So building an inventory of all pos- sible seat combinations is not cost effective and would leave auto assemblers walk- ing up and down the line picking the right seat. Instead, Toyota wanted seats to arrive from the supplier in the sequence needed as cars come down the assembly line. One possible way to do that is to push a ton of inventory onto the seat sup- plier, but if that approach were adopted, the Toyota seat supplier would not be able to meet its cost objectives. And quality problems would be hidden in moun- tains of inventory. Therefore, Toyota asked its supplier to actually build the seats in the sequence needed on the assembly line based on seat-by-seat orders from Toyota. Toyota wanted to source this expensive component to an American company. After extensive discussions with many companies, they picked Johnson Controls (JCI), whose plant later became an extensively studied model for Toyota-style just-in-time production. But it is important to remember that this did not just happen without effort. It required a lot of hard work. When Toyota first started working with the Johnson Control plant in Georgetown, JCI not only agreed to work with Toyota, but also was prepared to expand the plant to accommodate Toyota’s demand. Much to JCI’s surprise, Toyota said they would give them the business only if they did not expand the plant. They challenged JCI to reduce inventory and fit the additional volume into the existing building, which seemed impossible within JCI’s mass produc- tion paradigm at the time. But with Toyota’s help they accomplished it and began to understand the Toyota philosophy. From Toyota’s perspective, it was not enough for Johnson Controls to deliver seats in sequence, just-in-time. JCI needed a compatible system to Toyota’s—the ability to build and deliver just- in-time and continually improve their system to drive out waste over time. Only then could Toyota and the plant mutually prosper. This became even more evident when Toyota brought on a second source of seats for Georgetown. Toyota had worked very hard to develop the Johnson THE TOYOTA WAY FIELDBOOK278 Controls plant. But Toyota’s policy is to never sole source. They always want at least two to three potential sources for every component. They do not want 10, but do want intense competition between suppliers to help motivate improve- ment. The suppliers each get the business for a product, and they keep that business over the life of that model until a new version is introduced. At that point the next model is bid again. The incumbent may have a big advantage, unless other conditions warrant switching products around. It is possible for a poor performer to lose some share of Toyota’s business and for an excellent sup- plier to increase its share over time. Toyota had invested heavily in teaching the Toyota Production System to Johnson Controls and would not add a supplier of a critical component like a seat without a similar level of capability to build and deliver almost perfect quality, just-in-time, and in sequence. So they asked JCI to enter into a joint ven- ture with Araco, Toyota’s premier seat supplier in Japan, 70 percent of which is owned by Toyota. The joint venture, called Trim Masters, Inc. (TMI), was formed in 1994. Johnson Controls is the single largest shareholder, with 40 percent, but Toyota and Araco together have controlling interest. This example and many more tell a story of interlocking structures with supplier partners. It is more like a marriage than casual dating. Technical sys- tems, social systems, and cultural systems are all tightly intertwined. It goes beyond manufacturing to product development systems. It is not enough to be a good supplier. The supplier must act as a seamless extension of the refined lean systems of Toyota. The interlocking structure was reinforced in the case of TMI by Toyota’s ownership and control. For Johnson Controls, a condition of get- ting the business was that they had to invest in a separate Toyota business unit with strong firewalls between it and the rest of JCI. The structure reinforces the interdependent processes with Toyota. Investing in interdependent processes means more than a customer issuing a set of requirements to a supplier. It means the way they work fits together. If the customer is asking for just-in-time delivery of material, the supplier should have the capability to build just-in-time, not ship from inventory. If the customer has the flexibility to quickly change to a different product mix, the supplier must have that capability. If the customer picks up product in tight time windows, the supplier must have the structure in place to get the product reliably on the dock, preinspected within those time windows. In other words, the processes used to design, make, test, and deliver a product should be seamless, as if each partner is an extension of the other. Control Systems Partnering gives the impression of a relationship among equals. “Trust” suggests that Toyota lets suppliers do their own thing. Nothing could be further from the Chapter 12. Develop Suppliers and Partners 279 truth. The role suppliers play is too vital for Toyota to take a hands-off approach— they do not want to leave parts reliability and product quality to chance. To Toyota, the flip side of the same coin called trust is an effective control system. Toyota has elaborate systems of measurement, target setting, and monitoring of performance. Toyota’s command central for supplied parts is a bit like the control tower at a well-run airport. They know the status in real time of all parts suppliers. Ask for any key delivery performance indicator for any supplier, and it is at the fingertips of production control. Ask purchasing for charts and graphs of per- formance over time on quality, cost, and delivery, and it is there. If there is a near missed shipment, a quality problem, incorrect labeling, or any glitch, it will surface immediately. Then Toyota is on the phone and demands the supplier come to see them and explain the cause of the problem and their planned countermeasures. They expect immediate responses to any con- cerns about quality, cost, or delivery, when indicators are off target, and before there are any serious performance threats to production. But these cannot be just entry-level engineers talking. They expect the highest executive levels of the supplier to get personally involved. These instances of problems are taken as an opportunity to educate the supplier. For example, a Toyota vice president of product development relayed an example of a supplier that had a quality problem that was design related. The vice president of the supplier was asked to come to the Toyota Technical Center to discuss his countermeasures. When the VP showed up for the meeting, it was obvious that he did not have a detailed understanding of the problem, its cause, and the countermeasures. With a wink and a nod he assured the Toyota execu- tives that he would take care of the problem immediately. The Toyota vice pres- ident was stunned that this VP would come to the meeting so poorly prepared, without seeing for himself what the real problem was. He asked him to go back and find out what the real problem was and return for another meeting. What the Toyota vice president was doing was educating. He was not inter- ested in this particular case. He could have had a lower-level engineer talk to a lower-level engineer at the supplier. He took the opportunity to create an object lesson in the appropriate role of an executive of a Toyota’s supplier. They must take responsibility and lead by example. Control also extends to aggressive cost reduction initiatives. Toyota not only gives the supplier a target, but carefully monitors progress in reducing costs to achieve the targets. As an example, Toyota’s supplier, Trim Master, Inc., bids on every new model (about every four or five years) and is expected to decrease prices about 3 to 4 percent every year after the initial model introduction year. The cost-cutting initiative by Toyota around 2000 was so aggressive it seemed scary. The goal was to bring suppliers in America to the levels of global sources THE TOYOTA WAY FIELDBOOK280 overseas. Toyota suppliers felt they should be following TPS or a similar phi- losophy and excel at cost reduction more than the average overseas supplier, which should make up for differences in wage levels and material costs. The program was called CCC21, and the focus was on becoming the cost leader in the world for the twenty-first century. This was not a target for existing prod- ucts, but for new products being developed for the next new model launch. For TMI it meant approximately a 30 percent price reduction for the next new model launch (in about three years). How could TMI cut prices so aggressively when they already were excep- tionally lean by most standards? They had to start by accepting the fact that this was their target and it was critical that they work as hard as possible to achieve it. Next they needed a plan. The approach used was hoshin kanri, also called policy deployment, in which top management sets high-level objectives and the next level down comes up with objectives to support these and draws a chart show- ing the relationships between their objectives and the higher level. And this cascades down ultimately to the shop floor. Charts for each of the different departments with their plans and progress toward the plans are prominently displayed in a “war room.” The severe price cutting Toyota requested became the focus of this plan, and everyone knew what they had to do to support that price reduction. The group of 12 managers who were champions for their functions met weekly in the war room to review progress and the implementation of specific measures and countermeasures to achieve the plan. Since there had already been so much cost taken out of plant operations, the biggest opportunities were in the engineering of the new product, working with Toyota product development. In this work- manlike fashion TMI steadily and systematically achieved the goal. They realized that if Toyota saw a serious effort and they fell somewhat short of the target cost reduction, Toyota would not punish them. And since Toyota was closely moni- toring the process, they knew that Toyota knew what kind of effort they were expending. Target pricing is a severe form of control. It is well known that Japanese companies work backward in setting costs for the product. Instead of the typi- cal American practice of building up costs, adding a profit margin, and setting the price, they start with the market price and figure out what costs they can bear to make the profit they want. This leads to target prices for suppliers—the piece price they can afford to pay to suppliers within the vehicle budget. American auto companies have all picked up on this practice, setting target prices, but they lack the sophistication of Toyota and Honda in setting prices within which suppliers can make a profit, and they lack sophistication in helping suppliers achieve the target costs required to meet that price. As a brake system supplier put it: Chapter 12. Develop Suppliers and Partners 281 For the Big Three, target pricing equals “squeeze the supplier until we are dead.” I have asked how they have developed the target price. The answer is the following— silence. It is based on nothing. It is based on the finance guy who has divvied up money. They have no idea how we will get the cost reductions, they just want them. Because Toyota has a rational system to set targets for suppliers, work with suppliers to reach the targets, and is reasonable with suppliers when their best efforts do not achieve the targets, they are perceived as fair customers. They are not out to simply control the suppliers or run them out of business. They are out to work with them for mutual benefit. We will see in the case of Delphi at the end of this chapter that the backbone of this target setting system are cost management models. Toyota does not want to just manage price, they want to manage cost. They want the reality of costs to be reflected in the target price. If Toyota cuts price by 10 percent, they want the reality of the supplier to reflect an actual cost reduction of 10 percent. Toward this end, Toyota has developed realistic cost models that reflect the costs of raw materials, space, inventory, part processing, and overhead. For example, they know that processing costs for stamping are proportional to the number of strokes of the dies in the presses. They have established a relationship between these and built that into the model. The parameters of the model come from suppliers, Toyota plants, and public sources. These models allow them to estimate what the cost of the part should be. It also allows product engineers to redesign the product and estimate the cost impact. And it allows supplier devel- opment engineers to make suggestions and estimate the cost reductions of those suggestions. Perhaps the most important source of Toyota’s control is the old-fashioned free market mechanism of competition. But how can Toyota have long-term dedicated suppliers and get competition at the same time? The answer is some- times called “parallel sourcing.” Source not from one but not from many. Toyota looks for three or four top-notch suppliers for a component and keeps the busi- ness within this family. For any given car model, one of the suppliers will get this business for the life of that model. But getting it for the next version of that model is not guaranteed. If they do not perform, or their competitor, like a sib- ling, does a lot better, they can lose this business. How are your control systems seen by your suppliers? Are they enabling the suppliers to get better and reach aggressive targets? Do you have enough detailed understanding of your supplier’s costs to set realistic targets and understand if they are achievable? Compatible Capabilities These days it is popular to source in low-wage countries like China or India. We know of auto companies and their suppliers that have set multibillion-dollar THE TOYOTA WAY FIELDBOOK282 targets for sourcing in China, as if that is an accomplishment in and of itself. In the near–term, at least, this is not an option for Toyota. Toyota is well known for excellence in engineering and manufacturing, and views suppliers as exten- sions of its technical capabilities. It is not enough to be able to make parts to specs. Suppliers must be able to innovate in the product design and process and work closely with Toyota through the product development process. While there are different roles in product development, ranging from being given general (black box) specifications to being asked to design the part to being given a blue- print and asked to make it, in all cases suppliers must be capable of working seamlessly with Toyota engineers. For Toyota in Japan, close partners like Denso and Aisin can work independ- ently on the component design, generally anticipating Toyota’s needs before even receiving specifications. However, in the United States this type of approach would be considered unusual, largely because the U.S. suppliers may not have the intimate knowledge of their customers that Denso and Aisin have of Toyota, and also because they lack the specific technical capabilities. The U.S. suppliers often find that working with Toyota engineers is novel and very different from working with the Big Three. As an executive at the Toyota Technical Center in Ann Arbor, Michigan, put it: Some people in Japan have grown through the parent company and then moved to jobs at various suppliers, so they already know the culture. Toyota in Japan and their suppliers know each other’s capability. Delphi and other large companies are going to top management in Japan and saying, “Here is what we would like to do in the U.S. with TTC,” and salesmen from the suppliers will go over to Japan and tell Japanese management of Toyota what they want to hear. But the American suppliers often cannot deliver on the salesmen’s promise. There is a problem of capability among American suppliers compared to what Toyota has come to expect in Japan. It’s not a matter of the American suppliers being weak technically or inca- pable in general, but that they do not understand the Toyota Way of product development and preparing a product for production. For example, Toyota sup- pliers say that Toyota often, makes things vague on specifications, especially at the beginning of a new model development. They might not spell out the exact level of drag/resistance/looseness of a hinge as it closes and opens but say something like, “This has to do with the ‘feel,’ and thus is hard to quantify”—it will get adjusted as they go along. Toyota in Japan is also used to giving vague specifications to suppliers. In fact, this is expected in the “guest engineer” system. First-tier suppliers typically have a significant number of design engineers who spend about three years living in Toyota’s engineering offices full-time. They work alongside the parent-company engineers, learning the product develop- ment process in detail. At some point they understand the process and language Chapter 12. Develop Suppliers and Partners 283 [...]... intense communication 286 THE TOYOTA WAY FIELDBOOK Clearly when the supplier is involved in the “design-in” process and has engineers on site, they are in close communication with Toyota engineers But the nature of the communication is very different from the “inundation model.” Most of the communication is between the specific Toyota engineer in charge of that component system and the supplier engineer... improvement, you do not want to contaminate the network with inferior suppliers When you introduce a new supplier, you can start to train them in the lean way from the start, beginning with a small order Test them on a less critical component and let them earn their way into the network At the Toyota Technical Center they gave the example of headlamps for vehicles They would not source an entire headlight... highly focused on technical issues There is much less non-value added communication than we see at other companies Toyota expects the supplier engineer to learn Toyota s CAD system Toyota engineers can do their own CAD work—they do not delegate the core engineering work to specialist CAD users—and they expect the same of the supplier engineers So a lot of the time the supplier engineer is doing engineering... practices, and then continually squeezing the process in order to expose the obstacles (seen as system weakness) Human beings tend to seek comfort and avoid discomfort The Toyota Way is not a natural behavior The Toyota philosophy relies on the “system,” and adhering to its concepts will force people supporting the system into uncomfortable situations The choices presented then are to either remove the obstacles... part of the old TSSC was shifted to an internal Operations Management Development Division that focuses on internal training of American Toyota employees in TPS Interestingly, one way OMDD trains internal Toyota associates in TPS is to send them to suppliers to work on a project They say if they do the project at Toyota and their mentor criticizes them, it will embarrass them in front of peers, so they... to make Toyota parts Once they got manufacturing in place, they experienced off -the- chart scrap rates for the parts The Toyota engineers who had recommended a different supplier based on engineering and manufacturing capability were furious Even though Toyota was not paying for the repair costs, and the supplier still wanted the business and was willing to continue at the low price point, Toyota decided... 2006 by The McGraw-Hill Companies, Inc Click here for terms of use This page intentionally left blank Chapter 13 Problem Solving the Toyota Way More Than Solving Problems The Toyota Way seeks to identify and remove obstacles on the path to perfection This philosophy is rooted in the Japanese cultural desire to seek perfection in every activity As we discussed earlier in the book, the Toyota Way is... of the Prius development project Toyota saw hybrid vehicles as the next step into the future They wanted “self-reliance” in making that step Once they had that internal expertise, they could selectively outsource the manufacturing Simply speaking, if a company does not have the internal competency to control the technology, they are at the whim of their suppliers Since their suppliers are free agents... understanding of the significance of the issue, to clearly outline the necessity and benefit of resolving the issue, and, with a high degree of accuracy, to predict the actual result Copyright © 2006 by The McGraw-Hill Companies, Inc Click here for terms of use 308 THE TOYOTA WAY FIELDBOOK The problem-solving methodology is a skill that runs deep and strong at all levels of the organization within Toyota and... designed fundamentally by the suppliers in their own buildings They are referred to as RDDP (Request for Design and Development Process) parts Headliners and floor consoles might also be considered RDDP For instance, since the Toyota management deems that suppliers garner expert knowledge of the mechanism of the locks, they ask them to work on the design and give them only basic specs These RDDP parts can . performance. The famous balanced scorecard was THE TOYOTA WAY FIELDBOOK2 74 3 The Toyota Way presented a similar model called the “supply chain need hierarchy.” This was developed to describe the needs. JCI’s surprise, Toyota said they would give them the business only if they did not expand the plant. They challenged JCI to reduce inventory and fit the additional volume into the existing building,. more evident when Toyota brought on a second source of seats for Georgetown. Toyota had worked very hard to develop the Johnson THE TOYOTA WAY FIELDBOOK2 78 Controls plant. But Toyota s policy is