Much will be written in the months and, most probably, years to come about Toyota’s fall from grace in the first few months of 2010. Insights into why the Japanese car maker did what it did and why it didn’t do what it should have done will abound. The verdicts of those who have the luxury of reflecting on the situation without the pressures of public criticism and confrontation with government officials will invariably be replete with wisdom.
Nonetheless, the reality is that, even at this early date, there are lessons to be learned from the actions and omissions that have led Toyota into its current situation. This article offers a brief discussion, based on some of the 14 principles of The Toyota Way, of some of the more obvious lessons for the procurement function (all of the principles are cited in The Toyota Way by Jeffrey K Liker).
Principle 1
“Base your management decisions on a long-term philosophy, even at the risk of short-term financial gains”
Balance cost with risk. The increasing focus by numerous firms in a wide variety of industries on standardising parts for their products to bring unit costs down is a necessary and appropriate action in today’s competitive environment.
As the Toyota situation so aptly demonstrates, however, the lower costs of standardisation are offset by the risk of huge expenses when large numbers of a standardised part are found to be deficient. This risk suggests procurement should be more cautious when making sourcing decisions involving standardised parts.
Because the procurement function carries the ultimate responsibility for supplier selection, it is essential that when a standardised part is being sourced, procurement pays particular attention to balancing the cost of the part against the potential risk of something going wrong with the component, whatever the cause may be, and the ability of the supplier to respond to a potentially catastrophic situation involving
their component.
It may be prudent to pay a higher piece price to obtain the part from an experienced supplier that has proven personnel, engineering skills and manufacturing capabilities that will prove useful in the event of unforeseen circumstances that require a rapid response, such as Toyota has experienced. Such prudence suggests that procurement should work closely with the engineering and manufacturing functions to ensure the supplier can meet these requirements.
Even though the costs and time associated with making such decisions may seem disproportionate to the probability of something going wrong, the payback is astronomical when set against doing less, if something does go wrong.
Principle 5
“Build a culture of stopping to fix problems, to get quality right the first time”
Once a supplier has been selected, the procurement function can help to minimise the occurrence of a Toyota-like situation. First, it can ensure that the sourced parts being delivered to the firm’s manufacturing facilities are what is expected.
Second, once the parts are in the end product in the field, procurement should make certain that a process exists whereby procurement, working with other functions in the organisation, ensures that supplier parts are performing as expected.
How should Toyota approach supplier performance measurement?
Engineering is responsible for the design and specifications of the goods that are to be purchased, activities that are beyond the responsibilities of procurement. However, once the design is decided and a supplier is selected, it is procurement’s responsibility to ensure that the supplier continually provides the sourced goods as specified.
To achieve this end, it is essential that procurement has in place a supplier performance system that provides the supplier with accurate and adequate performance information in a timely manner. This is easier said than done. Our research has found that few manufacturers meet these three characteristics to the satisfaction of suppliers. As a result, suppliers have told us they are not able to quickly correct quality deficiencies or other unexpected part performance issues, which increases the probability of defective parts or systems unnecessarily making it into in the firm’s end product.
It, therefore, behoves the procurement function to continually monitor each supplier’s performance so that problems are identified quickly. In the event of a problem occurring, procurement should provide the accurate and detailed information that would enable the supplier to put it right quickly.
There is also the question of field quality monitoring. Procurement supplier performance measures help to ensure the supplier remains diligent in ensuring that its goods meet the purchaser’s specifications. When the end product goes wrong in the field, as Toyota experienced with the sudden acceleration and Prius braking problems, the engineering function has the responsibility of finding the cause.
However, in fulfilling its responsibilities towards supplier development, procurement can support its engineering colleagues by helping to ensure that the parts in the company’s end products are performing as expected.
Toyota, by its own admission, failed to maintain a vigilant monitoring of field part performance when it reduced its monthly meetings to assess where things went wrong with its vehicles in the market. With geographically dispersed end products, it can be difficult to identify potential part-related problems in a timely manner without a comprehensive monitoring system that gathers information on reported faults, warranty data, customer complaints and so on, and analyses the pattern of the problems.
Although this activity falls outside procurement’s remit, its intimate relationship with and knowledge of suppliers, coupled with its supplier development responsibilities, means that procurement can provide useful support to this cross-
functional activity.
Principle 11
“Respect your extended network of partners and suppliers by challenging them and helping them improve”
Dirty laundry should stay inside. One aspect of the Toyota crisis that was entirely out of character was its public announcement of the supplier – CTS – that provided the accelerator assembly that was presumed, at the time, to be the cause of the sudden accelerator malfunction.
Neither I nor anyone I spoke to, who is familiar with Toyota, could recall the company ever doing something like this. Such action would be typical of a company that has adversarial supplier relations and is trying to deflect public criticism from itself, which is not the reputation that Toyota has. After several days of the press questioning the supplier’s competence, CTS had no choice but to defend itself by indicating that it made the part according to Toyota’s design specifications.
Until this incident, Toyota always showed respect for its suppliers. This included treating suppliers as an extension of Toyota, implying that, by virtue of having selected the supplier and making the firm part of its business, Toyota was responsible for its suppliers’ actions.
If a supplier does not perform to expectations, it must be realised that by selecting the supplier procurement has the ultimate responsibility for getting the supplier back to its expected performance. If the supplier is no longer able to meet expectations, it is procurement’s role to find a suitable replacement.
Regardless of what action procurement takes, if the function has the slightest desire to build strong supplier working relations, it must realise that public humiliation of a supplier reflects poorly on itself and its abilities. Most importantly, negative public declarations about a supplier’s capabilities signal to the firm’s wider supply base that suppliers are neither respected nor can they expect support from their customer when times become difficult. Such adversarial actions are contrary to building strong supplier working relations, which is an essential element of respecting your suppliers.
Principle 14
“Become a learning organization through relentless reflection and continuous improvement”
Maintain the appropriate culture. The public scuffle between Toyota and its accelerator parts supplier not only reflected badly on Toyota, it was further indication that the company had lost its way. This is not surprising. In each of the past two years, our annual study of supplier working relations among North America’s six major automotive manufacturers (Toyota, Chrysler, Ford, General Motors, Honda and Nissan), Toyota’s supplier working relations, although they still scored highly, had fallen dramatically to the point it no longer has the strongest relations in its industry. More importantly, our consultancy and research work on supplier relations in other industries showed that Toyota was no longer the undisputed leader in supplier relations.
Over the past two years, Toyota’s rapid growth unknowingly weakened the foundation on which its excellent supplier relations are based. Toyota had forgotten its basic principles. The Toyota Way was no longer an invisible hand driving its actions. As Akio Toyoda, president of the company, stated in his testimony to the US House of Representatives Committee on Oversight and Government Reform on 24 February: “Toyota has, for the past few years, been expanding its business rapidly... the pace at which we have grown may have been too quick… Toyota’s priority has traditionally been the following: first, safety; second, quality; and third, volume. These priorities became confused… We pursued growth over the speed at which we were able to develop our people and our organisation.”
No doubt, Toyota will apply what it has learned from this experience to become a stronger company and more responsive to its customers’ need for safe, high-quality vehicles, while improving its supplier working relations to again be the best.
For a company to have strong relations with its suppliers, procurement must take the lead in developing and maintaining them. In doing so, the procurement function must recognise that building and maintaining strong relations is a difficult, consuming activity. It is essential that consistent actions that reinforce adherence to the principles of strong supplier working relations are maintained through a range of avenues: training, personnel performance metrics, visible top management support, and discipline of purpose.
Only by maintaining a culture that is committed to strong supplier working relations can a procurement organisation maintain the consistency in its day-to-day operations that will ensure strong relations develop with suppliers and the concomitant benefits are realised.
The Toyota Way offers direction to the procurement organisation that strives to add to the wider business’s competitive advantages, but only if it follows the principles all of the time. To help ensure this occurs, perhaps it is time to add one more principle to The Toyota Way.
Principle 15
“Don’t forget the other Principles”
John Henke (henke@ppi1.com) is president of consultancy Planning Perspectives in Birmingham, Michigan, and professor of marketing at Oakland University in Rochester, Michigan
