Optimizing a supply chain

Restructuring Toyota Motor's parts supply chain reduces inventories in North American distribution and at dealerships.

By -- Modern Materials Handling, 11/1/2000

Managing the supply chain was far easier-even if it was a very, very long chain all the way back to Japan-nearly half a century ago for Toyota. That's when the automaker's first Toyopet Crown auto reached U.S. shores in 1957.

But fast forward from the late 1950s to the year 2000 and management of supply becomes far, far more important. Consider the numbers now for Toyota in the U.S. and the reasons become clear:

• Projected sales of 1.6 million vehicles in the U.S. in the year 2000.

• U.S. parts and accessories sales reaching $2.2 billion annually.

When Toyota set up its U.S. headquarters in 1957, the logistics for both vehicles and their service parts were one-way from the parent firm in Japan. From that year until 1980, Toyota was in its pre-globalization period, as Rose Bauss, manager, national logistics operations, Toyota Motor Sales, USA, explains.

Much has changed since that time, and for the better, as Bauss pointed out recently in a presentation. She and Fletcher Davidson, Toyota Motor Sales' corporate manager, U.S. distribution operations, outlined how the parts supply chain has been restructured and improved at the Council of Logistics Management annual conference in New Orleans, La.

Toyota has cut back inventories at its 8 parts distribution centers in the U.S. by 53% from the stocking levels of the 1980s, as Davidson points out. That's equivalent to an increase in inventory turns from 2.4 to 5.2. And Toyota has sliced out 22 days, for a 31% reduction in days of supply of parts at its average dealership just since 1994. In inventory turns, that's a gain from 3.7 to 5.7

A combination of strategies and changes over the years has led to greater optimization of the automaker's supply chain, Bauss says. Toyota, for example, in the 1980s moved its auto assembly to North America as well as more of its procurement of accessories and service parts to this continent as sales grew. Just-in-time techniques successful in assembly plants were increasingly applied to this developing, more localized aftermarket parts supply, moreover.

Even so, as late as 1985, Toyota Motor Sales still was placing a monthly order for parts with Japan. This practice meant Japan had to support 4 months or more of supply. And there were other difficulties and costs: "Expediting activity was excessive," says Bauss. "Air freight expenses were high." Toyota's U.S. parts distribution centers "were running out of room," moreover, as Davidson observes.

Several steps had to be taken to improve parts distribution at that time. "We had to reinvent our procurement process, and incorporate North American production and the new supply base that went with it," says Bauss. "We also had to reinvent the warehouse operations to conserve space and improve efficiency as volumes grew."

During the 1990s, "we changed direction," Bauss continues. "With expanding, global production, we had to rationalize our parts supply operation."

Toyota took one major step: It began a system of daily ordering of parts. With daily orders, the company also focused on small batch processing of parts orders rather than handling large batches of orders.

JIT and lean thinking on orders have impacted Toyota dealerships. They have been able to achieve 20% to 40% savings in floor space utilization. And they have made productivity gains of 20% to 30% in parts management.

Toyota also increased its materials handling efficiencies by opening a 770,000 sq. ft. North American parts distribution center in Ontario, Calif. in 1996. Next year, a second North American DC opening in Hebron, Ky. will further foster productivity.

Suppliers in North America that provide parts to this supply chain have to adhere to a standardized process. Included are electronic ordering of parts, bar code labeling of shipments to Toyota, and ASNs-advance shipping notices.

Together with daily ordering, this process is working well, as Davidson notes. Supplier on-time delivery compliance has risen from 76% in 1997 to 93% in 2000. And 66% of suppliers on daily order status now deliver within 5 days or less.

Toyota also is working hard on a strategy of reducing the "purchase order unit," or POU, for the different parts it requires to 1 as often as it can. With more POUs of 1, Toyota can smooth out lumpy demand, as Davidson says, and avoid building up excess inventory and create a leaner supply chain.

When Toyota, however, has to order a particular part in multiples of 10 (POU = 10), for example, "the result is procuring inventory that we don't need and sending orders to suppliers that do not reflect true market demand," as Davidson says. Thus far, Toyota has reduced the POU unit number on more than 1,000 different parts.

POUs of 1, in turn, mean that suppliers have to provide proper unit packaging so parts have an easy and damage free journey through the supply chain. Suppliers also are strongly encouraged to use standardized pallets and masterpacks for good cube utilization in transit. Accurate case identification to support receiving/shipping is similarly requested.

Many of Toyota's largest suppliers have EDI links to the company for ordering. But in the future Toyota will be moving more toward use of the Internet and an e-Toyota system for these links, says Davidson.

All of these and other supply chain optimization strategies have to produce results. Toyota has an aggressive goal it wants to hit by the year 2010: Selling 2 million vehicles in the U.S., up almost 50% over its 1998 sales.