LSCM 315 Logistics and Supply Chain Management
Case Study Overview
Submit via Blackboard
Case Study 4 & 5 – Real Life Case Study Project
At this point, you are fully aware that all companies need a supply chain to gain a
competitive advantage. To add value to their organizational system, companies need to
develop their internal and external supply chain, logistics, and operations strategies.
Evansville Association of the Blind (EAB) Industries - a real-life company, is concerned about
two main things: how the company can 1) improve their external supply chain (SC) network
and partnerships and customer retention rates and 2) improve their current internal process
structure. Now that you have researched and studied Toyota’s Production System. For the
final case study assignments, you will analyze EAB industries in comparison to Toyota and
past case study findings.
It will help if you have visited the Evansville Association of the Blind (EAB) Industries facility
to analyze the company in comparison to Toyota’s tour. Students should consider visiting
the facility on more occasions to analyse the case better.
By the given deadlines, teams will provide EAB with a professional business proposal that
has three main deliverables: 1) a short description/business development plan (10-15 pages)
about the company‘s supply chain, logistics, and operations issues with recommendations
for improvement, 2) a current value stream map (VSM), and 3) a future VSM.
By the end of case study 4 & 5, teams will provide these deliverables by May 6, 2020. The
final paper is due May 6, 2020, at 11:59 pm. The final proposal will be broken into two parts
to describe the company’s current state and the proposed - recommended state of the
company. Students will also present their findings to EAB’s senior management if time
permits. Presentations will occur on April 20. Teams will present the visualized current and
proposed future state of the company to EAB.
For the case study 4 deadline, teams are expected to analyze a current process/problem at
EAB. To start analyzing the company, teams start working on the required questions and
submit answers to the questions listed below due March 23, 2020, via BB. It would be best if
you were as strategic as possible with your time and the information that you have now
acquired this semester. These questions will help the teams to analyze the company.
1. Discuss EAB’s industry supply chain (SC):
a. Do an external supply chain audit on the company by answering these questions
i. Provide a brief bio and history of the company.
ii. Who and what is EAB as a company? What will be EAB’s position in a basic
SC structure?
iii. Identify what type of company EAB is in the general business/supply chain
marketplace?
b.
c.
d.
e.
iv. What is the overall corporate/business mission of the company? Do their
supply chain, logistics, and operations management align with their
mission? How?
v. Identify (if possible, all) the organizations, people, information, resources,
and activities involved in their supply chain. Which company will your team
say is critical to the success of the company? Why select the company?
vi. Who are EAB’s competitors in the business marketplace?
vii. What strengths are most valuable to the business marketplace? What sets
EAB apart?
Perform an internal analysis of the company.
i. Who are EAB’s customers? How can they be developed and satisfied?
ii. Identify gaps in the market that EAB’s operations can fill or satisfy.
iii. What strategic part does EAB play to their suppliers and or customers’
supply chains?
iv. Perform market segmentation on their suppliers and customers? How can
these market segmentation help EAB to showcase their unique strength?
v. Describe EAB’s supply chain integration status.
Describe EAB’s LSCM and operations management functions
i. What are EAB’s main processes and nested processes?
ii. What logistics activities does EAB perform?
iii. What are their logistics value-added utility functions?
iv. Identify the key external and internal factors that influence EAB’s LSCM
functions
v. Do you think Kaizen is utilized at EAB? Refer to pg.161 of the Toyota text.
vi. Does EAB have a “right process”? Refer to pg.151 in the Toyota text
vii. Did you notice any Kanban system at EAB? Explain
viii. Do EAB’s methods manage visibility using visual controls? What are your
thoughts on this question? E.g. why ask this question?
ix. What lean consideration does EAB utilize?
x. How can the lean methodology support its business mission?
Supply chain Network and potential
i. What are the main strengths the company has that can be appealing to
future suppliers/customers
ii. What are the cost factors/centers for this company? That is the area you
think increases costs that can be unappealing to potential
suppliers/customers? Or, the cost factors of the company that can be
appealing to potential customers?
iii. What new supply chain partnerships can lead the company to greater
success?
To visualize the team’s analysis, your team will make a visual representation of the
problem identified. You should first identify what types of problems are closely
related to EAB’s two main concerns. Make sure that you demonstrate that your
team has researched the mentioned problem(s) in this case study. Don’t state
them to discuss why you mention them.
f. Use one of these areas to describe a main problem of the company as it relates to
their two main concerns:
i. Supplier relationship management
ii. Logistics process management
iii. Process/facility plan and layout structure
g. Formulate a thesis statement about the main problem observed at EAB. (Make
sure this is the problem is explained and included in the final report due May 6).
i. For the thesis statement, identify ONE key problem at EAB. Make sure the
main problem falls within the three areas in question (f).
1. Was this one main problem observed at EAB during the tour?
Where?
2. Is this one main problem similar to any of the previous case studies
1 & 2 selected company’s supply chain issue?
ii. What are other key problems attached/related to the main problem?
1. Highlight relevant facts about the problem(s) related to the main
problem you mentioned
2. What are its causes? Why do they exist?
3. Who causes the problem?
4. Whom are the parties involved in the problem or making it worse?
5. Who is affected by the problem?
iii. From this analysis, can you determine what are the types of Muda that EAB
experiences? Expand on two main types of waste.
iv. Are these types of waste related to any of the supply chain issues
mentioned in chapter 1? What are the related SC issues? Are these
problems similar to Muda and the SC issues?
v. How do you think EAB should utilize strategic sourcing to solve the
problem? Expand on their strategic sourcing potential.
2. To visualize the current state of the company, use a value stream map (VSM) to determine
the value and non-value-added processes that contribute to the problem analysis and or
overall company strength.
a. First, determine the need for the situation you are analyzing.
i. What value process did your team notice as key to satisfying the customer?
That is what process do you think is the most critical to meeting their
customers’ needs? Brainstorm to analyze if this process is part of their
problem/solution.
ii. Can the main process that is key to satisfying the customer be highlighted
in the current VSM, and can the process be expanded on the future VSM?
iii. For example, if you are looking at supplier relationship management, look
through the processes that EAB takes to meet the specific goal you are
analyzing, such as sourcing suppliers. Build on all the steps EAB uses to
accomplish this process.
b. Select the one need/process/problem and analyze the current state of this
process/problem using a VSM.
i. Visually identify what the nested processes of this selected need/process
are?
ii. Identify the critical or central need/problem and the problems that cause
it?
iii. In the diagram, consider showcasing the SCM view of the process by
breaking up the external and internal customers and suppliers to this
process/problem.
iv. Try to provide the takt time/cycle time for each of the nested processes
v. What do you think is EAB’s key value-added processes? What are the nonvalue-added processes in the company?
vi. Highlight what non-value added processes will be eliminated in the current
state map. Make sure it evident in the future VSM map?
vii. Explain why to use the value stream map to identify each process.
viii. Make sure you break down and analyze the one main problem you
identified in your answers above, and if possible, show how the main
problem identified relates to EAB’s two main concerns on the VSM?
For submission on BB, provide short answers to each question. Teams do not have to use the
written or APA template writing format for this case study. Only use the APA template/format
if to include citations. That is, only use the APA format to include answers from online sources.
Teams are expected to describe their first VSM maps in class on the Case Study 4 deadline
that is due, March 23. Teams should look out for case study 5, due April 20, 2020 – For Case
study 5, teams will provide the proposed future state of EABs and finalize the business
proposal for EAB. Note that students will need to use the APA template/format for case
study 5 to make the final paper look professional. Teams will then provide the final
deliverables for EAB’s management by May 6, 2020. Teams will provide this professional
proposal by April 20 for me to check for improvement before the final submission.
SUPPLY CHAIN
MANAGEMENT
A STRATEGIC APPROACH
TO THE PRINCIPLES OF
TOYOTA’S RENOWNED SYSTEM
ANANTH V. IYER
SRIDHAR SESHADRI
ROY VASHER
New York Chicago San Francisco Lisbon London Madrid Mexico City
Milan New Delhi San Juan Seoul Singapore Sydney Toronto
To my wife Vidhya and daughters Apsara and Rani,
and in memory of my parents
Thank you
Ananth
To my wife Shubha, daughters Padmavati and Sharada,
and all my family
Thank you
Sridhar
To my wife Audrey; daughters Jody and Neely; my mother Emma,
who at the time of this writing is 105; and all my family
All my love
Roy
This page intentionally left blank
Contents
Foreword by Hau L. Lee
Acknowledgments
Introduction
vii
ix
xi
Chapter 1. Toyota Learning Principles and the v4L Framework
1
Chapter 2. Comprehensive Overview of Supply Chain
5
Chapter 3. Mix Planning
25
Chapter 4. Sales and Operations Planning
37
Chapter 5. Production Scheduling and Operations
55
Chapter 6. Parts Ordering
73
Chapter 7. Managing Suppliers
85
Chapter 8. Logistics
103
Chapter 9. Dealer and Demand Fulfillment
121
Chapter 10. Crisis Management
133
Chapter 11. The Toyota Way of Managing Supply Chains
147
Chapter 12. How to Apply Toyota Way Principles to
Nonautomotive Supply Chains
173
Chapter 13. The Beer Game and the Toyota Supply Chain
185
Chapter 14. Reflections of Supply Chain Participants
201
Chapter 15. Reflections
215
Appendix
Index
219
221
v
This page intentionally left blank
Foreword
F
or decades, Toyota’s success in the marketplace has been admired by business practitioners and executives alike. The automaker is the envy of
others within the automobile industry, but the company is also considered to be the symbol of excellence in business in general. The firm has been the
focus of research in academia.
The power of Toyota has been attributed to its two distinct core values: the
Toyota Way and the Toyota Production System (TPS). The Toyota Way has created a culture of respect for individuals, promoting innovation and fostering
cooperation. TPS has been the engine under which lean manufacturing, kanbans, quality systems, just-in-time, and continuous improvement practices have
been developed. Together, they have been the pillars for the foundation upon
which Toyota has become so successful.
But the Toyota Way and TPS are just foundational pillars. There is another
concrete secret to the success of Toyota: the way the company runs its supply
chain. The Toyota Way and TPS of course have been part of how Toyota has
developed its supply chain principles and how the company has applied such
principles to work with its suppliers, dealers, and manufacturers. Based on these
principles, Toyota has coordinated the plans across the supply chain—and it
has executed them well. Supply chain management excellence is the ultimate
way in which Toyota has built its superior efficiency in operations.
I am delighted to see this book about Toyota’s supply chain management
written by two leading academics and an experienced Toyota executive. This
book reveals the powerful way that Toyota runs its supply chain, and it shows
vividly how the Toyota Way and TPS have been ingrained in the processes used
by Toyota to run its supply chain. I submit that reading about Toyota Way and
TPS is only a starting point for really learning the innovativeness and effectiveness of Toyota’s operations. The current book completes the picture.
vii
viii
Foreword
While TPS is the central theme of how Toyota runs its factories, the scope of
supply chain management is much greater. It spans suppliers to Toyota as well as
possibly the suppliers’ suppliers, the distribution channel, the dealers, and ultimately, the consumers. The coordination, planning, and control of this extensive
network are a daunting task. The current book well describes how Toyota has
been very smart in examining three dimensions of supply chain management:
geography, product, and time. This book gives us a treatment on how Toyota has
designed and operated supply chains to adapt to these three dimensions. For
example, the needs for the Japanese and U.S. markets, the Camry versus the
Lexus, and at different points in time of the product life cycle, are different, and
so different supply chain processes are needed.
I would urge the reader going through this book to keep two perspectives
in mind. First, it describes in great details how Toyota runs its supply chain. As
a result, there are many innovative ideas that Toyota uses, and many best practices described. So the reader can pick up a lot of useful tips and revelations.
Second, the structure of the book is extremely helpful to organize your thoughts
and evaluations of your own supply chain. The chapters that follow cover the
whole spectrum of what constitutes comprehensive supply chain management.
So, going through the chapters gives you a framework to follow. In that sense,
even if you extract the Toyota content out of the chapters, the book is a good
guideline to develop sound supply chain management practices.
One of the most useful conceptual frameworks in this book is the v4L construct. We see how Toyota manages its supply chain to ensure that the 4v’s—
variety, velocity, variability, and visibility—can be controlled. In every chapter,
for every supply chain operation, the authors describe how this can be done.
Again, seeing how Toyota has done it is valuable and informative. But I also
think that the reader can benefit from seeing how the authors developed the
thought process behind what Toyota did to accomplish the objectives of gaining
control of the 4v’s. That knowledge by itself is highly educational.
For anyone who wants to learn the true secret of Toyota’s operational excellence, this book is a must-read. In addition, while learning about Toyota’s supply
chain management, we also are given a journey of sound supply chain management in general.
In my personal research, I have come across Toyota’s supply chain management practices and have been very impressed by how thorough and innovative
the company has been since its inception in the 1930s. I must congratulate the
authors of this book, as they have done the most comprehensive, insightful, and
penetrating treatment of this subject.
Hau L. Lee
Thoma Professor of Operations, Information, and Technology
Graduate School of Business, Stanford University
Stanford, CA
Acknowledgments
T
he authors express their appreciation to the management of Toyota
Motor Engineering & Manufacturing North America, Inc., for providing access to their executives for interviews as well as for the tour of the
Georgetown manufacturing facility. Nancy Banks, manager external affairs, was
extremely helpful in coordinating the interviews and arranging for the plant
tour. Nancy also spent countless hours reviewing drafts of the book and providing excellent feedback.
The interviews with Toyota executives provided deep insights into Toyota’s
management of the supply chain. We would like to thank all of the interviewees
for taking precious time out of their busy schedules to speak with us. Gene
Tabor and Jamey Lykins, general managers in Toyota’s Purchasing Division, discussed how Toyota’s purchasing relationship with suppliers plays an important
role to ensure a strong partnership with suppliers at all levels. David Burbidge,
vice president of Production Control, provided an excellent overview of
Production Control’s role in managing the supply chain. Mike Botkin, general
manager of Logistics, shared with us his expertise of Toyota’s Logistics operation.
In addition, the interviews with executives from Toyota’s partners enlightened us on how the extended supply chain supports Toyota’s management philosophy. Jeffrey Smith, vice president and general manager for Toyota Business
Unit Johnson Controls, Inc., has several years of working with Toyota around
the world and was able to provide the supplier perspective. Gary Dodd, former
president of Tire & Wheel Assembly, also discussed the supplier’s role and
explained the process of becoming a new Toyota supplier. To round out the
supply chain we spoke with Steve Gates, dealer principal, Toyota South in
Richmond, Kentucky, to obtain an understanding of the dealer operations in
the Toyota environment. Steve is also a member of Toyota’s dealer council, so he
ix
x
Acknowledgments
was able to provide a comprehensive view not only of the dealer’s operation but
also the Toyota dealer network. Achim Paechtner, former senior manager of
Toyota of Europe, provided a framework of how Toyota and other automobile
companies operate in Europe. Achim’s understanding of the European markets
was extremely helpful.
We thank the Toyota Motor Corporation for endowing the Term
Professorship at the Stern School of Business without which Sridhar Seshadri,
the first Toyota Motor Term professor, would never have met Roy Vasher and
this joint project would never have been undertaken. Ananth Iyer acknowledges
the support of the Krannert School of Management at Purdue University whose
Fall DCMME Manufacturing Conference, where Roy was a speaker in 2007,
provided a forum for the authors to meet face-to-face for the first time.
We thank Mayank Agarwal, MBA student at the Stern School of Business
for his extensive research into the automobile business. The research was used in
this book to confirm the benefits of Toyota’s supply chain management. The
final manuscript would not be complete without the assistance of Leslie
Culpepper, who helped copyedit this manuscript.
Introduction
T
oyota uses unique processes to effectively manage and operate the
supply chain. These processes span the supply chain and have enabled
Toyota to deliver remarkably consistent performance over decades. The
authors, a retired Toyota senior executive with hands-on experience and two
senior academics, have pooled their combined experience to both describe existing processes as well as understand why they work. By combining the insights
of a practitioner with almost 20 years of Toyota’s execution and management
experience and two academics with decades of research experience, we hope to
provide a unique presentation of the topic that can influence supply chain practices at auto and nonmanufacturing companies.
The fundamental thesis of this book is that understanding process details,
as well as the logic associated with their success, will enable adoption of these
ideas in both manufacturing and service contexts. The material in the pages that
follow provides insights into how Toyota uses learning (L) processes to implement practices and principles, both within Toyota’s cross-functional organizations as well as with Toyota’s partners (including suppliers and dealers)—in
short, across the extended supply chain. We show how integrated and synchronized processes enable careful balancing of variety, velocity, variability, and visibility (4v’s) across the supply chain. Learning is linked to the 4v’s to form the v4L
framework. We will describe the v4L framework in more detail in Chapter 1.
In keeping with the “how-to” approach to these complex topics, most
chapters provide illustrative examples that both explain details as well as illuminate the logic behind the processes. The choice of topics is meant to focus on
essential tactical and operational differences in the way Toyota manages its supply
chain. Chapter 1 describes the v4L framework and the Toyota learning principles.
Chapter 2 provides a comprehensive overview of processes that are part of the
xi
xii
Introduction
overall supply chain. That, in turn, is followed by topics in the sequence of
activities in a supply chain. First, there’s “Mix Planning” (Chapter 3) to support
production stability and how this is translated into “Sales and Operations
Planning” (Chapter 4). We then cover how sales requests are supported by
“Production Scheduling and Operations” (Chapter 5), “Parts Ordering”
(Chapter 6), and “Managing Suppliers” (Chapter 7). The inbound and outbound
“Logistics” processes are described next (Chapter 8), followed by “Dealer and
Demand Fulfillment” (Chapter 9) and dealer-related processes, which will complete the supply chain coverage. Finally, Chapter 10 covers how Toyota handles
“Crisis Management.”
The detailed discussion of Toyota’s supply chain processes will be followed
by chapters on “The Toyota Way of Managing Supply Chains” (Chapter 11) and
how that has been used to design and improve each of these steps, and “How to
Apply Toyota Way Principles to Nonautomotive Supply Chains” (Chapter 12).
We have also included a chapter titled “The Beer Game and the Toyota Supply
Chain” (Chapter 13), which describes the well-known bullwhip effect in supply
chains and examines how following Toyota’s integration of processes across the
supply chain enables reduction of the bullwhip effect. Two “Reflections” chapters conclude the book: Chapter 14 examines the reflections of supply chain participants; Chapter 15 reflects on the Toyota experience in general and considers
potential future innovations in the automotive supply chain.
Although there are several excellent books that describe the Toyota production system, as well as a few that cover principles used in the Toyota supply
chain, we believe there is a benefit to understanding process details in order to
execute processes consistent with the principles. The sources of material for this
book include firsthand experience with applying these processes at Toyota, direct
interviews with Toyota-experienced managers and suppliers, existing books on
Toyota’s processes, academic research, surveys, and empirical case studies.
Chapter 1
Toyota Learning Principles
and the v4L Framework
T
oyota is well known for its approach to problem solving and continuous
improvement. Articles by practitioners, researchers, and participants
have made the tools and techniques of continuous improvement familiar
to every business executive. For example, phrases such as andon, heijunka, and
kanban have become part of the day-to-day vocabulary of managers. In an
insightful commentary on these tools and techniques, Jeffrey Liker writes that
Toyota’s success goes beyond these tools and techniques to what he calls “The
Toyota Way.”1
Liker presents the Toyota Way as an all-encompassing method for designing and managing processes. Every student of Toyota also knows that the Toyota
Way is unique, not only in its approach to problem solving but also in perpetuating its way of thinking across different types of operations, organizations
(including suppliers, logistics providers, and dealers), and worldwide locations.
Underlying the success of Toyota is the company’s approach to scientifically
examining problems, solving them, learning from the experience, and passing
on that knowledge to others.
Toyota is a global auto company with many products and markets. The
company encompasses markets across the globe with different characteristics
(e.g., the United States, Europe, and Japan) that warrant different supply chain
configurations. In addition, differences among the Toyota, Lexus, and Scion
vehicles warrant different supply chain processes. Although common processes
underpin these supply chains, variations across these supply chains provide additional insights. We believe that an understanding of how all these supply chains
coexist in one company provides an excellent learning opportunity for a practicing supply chain manager to apply the v4L framework to his or her work.
1
Toyota Supply Chain Management
2
v4L Framework
Performance at Toyota is evaluated with equal weight given to both the process
used to derive performance and the results achieved. This process focus aims to
generate a balance of key supply chain parameters—variety of products offered,
velocity of product flow, variability of outcomes against forecast, and visibility of
processes to enable learning. The learning follows a carefully documented process
that promotes continuous improvement. At the end of every chapter a reflection
section will be included that links the chapter to the v4L framework: balancing
variety, velocity, variability, and visibility across the supply chain. One way for
managers to understand Toyota’s concepts is to first ask how their company’s
supply chain achieves this balance. Often, variety is chosen with a focus on
marketing benefits with scant attention to supply chain implications, velocity,
variability, and the like. This off-optimal choice of variety can have severe repercussions across the supply chain, which is often difficult to untangle. A careful
choice of v4L parameters enables superior supply chain performance at Toyota.
Learning (L) Principles
Toyota has mastered the art of learning and believes that the principles to attain
mastery are universal. Moreover, Toyota has spread these ideas throughout its
supply chain in its leadership role. We shall review these ideas in later chapters
and provide a summary of methods that makes learning a practical and ongoing
process at every level and every task in Toyota. Toyota’s way of making learning happen not only conforms to the theory of learning (as we mention in
Chapter 11) but can be simply explained (as is often the case with things that
are very hard to accomplish!). The following are the main principles:
■
■
■
■
Create awareness. Unless problems are seen, they will not be solved.
Systems need to be in place to report ideas, problems, deviations, and
potential issues to a direct team leader with no delay.
Establish capability. Unless someone is capable of solving a problem that
might arise within the system boundaries set for him or her, that person
will be unable to contribute to the problem-solving process and will be
unable to recognize the need for specialized help.
Make action protocols. Actions have to be taken within a set of constraints, and they must conform to certain standards. Doing so will help
in the identification of the relation between action and results. It will aid
in the codification of the knowledge for future use, with the same language and format used as well as similar content.
Generate system-level awareness. As experience with solving problems
is obtained, greater awareness of other areas that might be affected
Toyota Learning Principles and the v4L Framework
■
3
by actions or that might impact one’s own performance needs to be
created.
Produce the ability to teach. As system-level awareness and experience
accumulate, the capability to teach others about these methods needs to
be in place.
v4L Principles
The v4L learning principles are combined across all Toyota supply chain management processes to systematically focus on the v4L balance:
■
■
■
■
Variety is carefully chosen to balance market demands and operational
efficiency. Awareness of the impact of variety on the market demand and
on manufacturing and supply chain costs enables all the entities across
the supply chain to be considered when decisions regarding variety are
being made. In one sense, variety represents a crucial supply chain design
choice that has an impact across all supply chain participants. A key issue
when variety is being chosen is the need to have feedback loops to ensure
that the selected variety represents the best response to current market
conditions. As we will discuss in each of the chapters, this is where the
learning features of Toyota’s process enable the constant loop of Plan,
Do, Check, and Act (PDCA).
Velocity of supply chain flows is the next key concept, and it manifests
itself in all processes across the supply chain. A focus on maintaining a
steady flow throughout the system enables capacity planning to be synchronized across the supply chain. The detailed process descriptions in
the following chapters will highlight how a rate-based approach serves as
a linchpin for the planning processes across the system.
Variability of orders or deliveries across the supply chain is minimized by
how the individual processes are executed. Reducing variability enables
all of the supply chain flows to operate with low levels of inventory. It
also enables quality improvement processes to operate without interruption, thus enabling continuous cost reductions and quality improvements. Notice that variety, velocity, and variability all interact to stabilize
supply chain performance.
Visibility of all processes is ensured with use of the right metrics and the
requirement that a consensus be reached before plans are changed. At
Toyota, performance metrics have a 50 percent weight for results and a
50 percent weight for process compliance. In other words, the goal is to
reward not only short-term successes but also ensure that the correct processes are followed. Such an approach ensures that bottlenecks are visible
and responses immediate, changes are deliberate, velocity is maintained,
Toyota Supply Chain Management
4
variety is synchronized to demand, and variability is minimized. Visibility
enables continuous learning and feedback, thus guaranteeing that execution
of processes remains synchronized with market realities.
We suggest that v4L highlight the intricate balance of all supply chain
processes. How each of them is balanced by vehicle type or geography is a business choice that reflects Toyota’s competitiveness in that market. The choice of
the v4L and the actions required to implement these choices are guided by the
learning principles. All companies should be asking themselves how their current choices reflect the impact of the v4L. A way to remember this concept is to
ask, is the supply chain’s v4L engine at my company appropriately tuned for
competitive performance?
Endnote
1. Jeffrey K. Liker, The Toyota Way. New York: McGraw-Hill, 2004.
Chapter 2
Comprehensive Overview
of Supply Chain
T
he Toyota Production System (TPS) is the benchmark used throughout
the world as the foundation for “lean” thinking. At Toyota, the TPS
practices and principles extend well beyond the factory walls to include
the extended supply chain and require some crucial choices to ensure supply
chain efficiency. This chapter explains how Toyota plans and operates its supply
chains globally. But first, a brief look at the extended global automobile supply
chain is in order, which will enable you to understand the processes described in
the following chapters.
The automotive supply chain is very complex and consists of many
processes that, when linked together, form a supply chain from the customer
back to the various tiers of suppliers. The physical processes consist of the production of parts at the suppliers, transportation of these parts to the assembly
plant of the original equipment manufacturer (OEM), assembly of parts into a
completed vehicle, distribution of completed vehicles to dealers, and finally
delivery to a customer. In addition to the physical processes, there are both preproduction and day-to-day operational support processes. To fully understand
these processes, some background on the auto industry is necessary. The following questions need to be answered:
■
■
■
What is the product?
Who are the customers?
What are the distribution models?
What Is the Product?
A car or a truck can be described with its specifications. Each OEM uses a
slightly different terminology to define a vehicle’s specifications. Toyota uses a
5
Toyota Supply Chain Management
6
Table 2-1. Vehicle Specifications Hierarchy
Make
Model
Body
Grade
Options
Accessories
Toyota
Camry
Sedan
Sedan
Crew cab
Double cab
Sedan
LE
XLE
Sunroof
Navigation
XM Radio
Sunroof
Navigation
Spoiler
Floor mats
Tow hitch
Bed liner
Floor mats
Tundra
Lexus
ES350
hierarchical method of vehicle specifications. The typical hierarchy of the vehicle specifications is shown in Table 2-1. The following are some examples of
vehicle specifications:
■
■
■
■
■
■
■
■
Make. Toyota, Lexus
Models. Camry, Avalon, Tundra, Sienna, etc.
Body style. Four-door sedan, two-door coupe, convertible, crew cab,
double cab, etc.
Grade. XLE, LE, SE, etc. When a grade is selected, it usually includes
several standard equipment items. Typically the higher-grade vehicles
include many standard items. Sometimes when the grade is selected, the
engine and transmission combination is included as standard equipment.
Engine. Six-cylinder, four-cylinder, etc.
Transmission. Automatic, five-speed, etc.
Factory options. Engine, transmission, sunroof, air-conditioning, navigation, radio, power windows, etc.
Accessories. These items are like options, but they can be installed in the
factory or added after the vehicle is built. Examples are spoiler, tow
hitch, roof rack, and pinstripes.
In addition to the above specifications, exterior and interior colors must be
included to complete the vehicle build specifications:
■
■
Exterior color. The outside color is usually one color; however, it could
be two-toned.
Interior trim/color. The interior colors (e.g., black leather and gray cloth)
are usually coordinated with exterior ones, but not all interior colors
always will be available with all exterior colors.
So each vehicle is built with a unique set of specifications called a “build
combination.” If all possible build combinations were produced, then the total
build combinations for a model would be in the millions. This variety would
make managing the supply chain an extremely complex and costly process;
therefore, many automotive companies limit the number of build combinations
Comprehensive Overview of Supply Chain
7
offered in each market area. Toyota has been extremely successful in balancing
the combinations that are made and sold by sales area. For example, one
approach used at Toyota to reduce the build combinations is to include many
standard equipment options based on the model and grade that is selected. The
methodology on how to choose profitable levels of variety to be offered across
market areas is explained in Chapter 3.
Who Are the Customers?
Automobile companies have several categories of customers that need to be considered. The following is a list of the types of customers and a brief description
of each:
■
Retail consumers. The retail segment is the largest segment of customers,
and it is also the one in which the automotive companies make the most
profits. Although not all retail customers are the same, as yet there are
not clear classifications for groups of customers. Figure 2-1 illustrates
how various customer types can be plotted along a continuum: at one
end is the serious buyer and at the other is the serious shopper.
The serious buyer is a person who needs a vehicle within a short time
frame. This type of buyer shops for price and value and will compromise on vehicle specifications. Some reasons that this type of buyer is
in the market for a vehicle are that a vehicle needs replacement
because of an accident, the current vehicle needs major repair, or the
lease is expiring. This type of customer wants to walk into a dealership and drive out with a new vehicle.
The serious shopper is a person who has done homework and knows
exactly what he or she wants. This type of shopper has researched
several vehicle models and options prior to visiting the dealership and
then proceeds to the dealer with the complete vehicle specification in
Just
wrecked car
“Green”
buyer
First-time
buyer
Serious
Buyer
Serious
Shopper
Starting
family
Figure 2-1. Customer continuum
Retiree
Toyota Supply Chain Management
8
■
■
hand. Because the serious shopper is very particular about the vehicle
he or she wants, this customer will shop around or perhaps wait until
a vehicle can be ordered “fresh from the factory.” Examples of the serious shopper are a consumer who is young, a first-time buyer, and a
car enthusiast.
The area on the continuum from the serious buyer to the serious
shopper is by far where most customers can be found. Indeed, most
customers who walk into a dealership have not made up their minds
on the exact vehicle specification or even if they are ready to buy a
vehicle.
Employees/suppliers:
Employees. Automotive companies allow employees, relatives, and (in
some cases) friends to purchase a limited number of vehicles per year
at a substantial discount. The employees must receive prior approval
before proceeding to a dealer to make a purchase or place an order.
The purchase price is calculated automatically based on the discount
allowed. The dealer may also receive some rebate to ensure that the
dealer margin is maintained.
Suppliers. Automotive companies may offer selected employees of
suppliers a vehicle purchase program. This arrangement is similar to
the employee purchase program in that the purchaser must get prior
approval before proceeding to a dealer to purchase a vehicle. The purchase price is calculated automatically based on the discount allowed.
The dealer may also receive some rebate to guarantee that the dealer
margin is maintained.
Fleet:
Rental companies. The rental companies (Hertz, Avis, Enterprise,
etc.) negotiate a contract with each automobile company for annual
volume of each model. The detailed specifications of each monthly
vehicle order are submitted in advance, and the vehicles are scheduled
for production based on the delivery schedule requested by the rental
companies. Because space at most rental facilities is limited, the rental
companies need to minimize the overlap of new vehicles arriving and
the used vehicles being shipped out for auction or resale.
Commercial fleet. These are private companies that provide a company car for selected employees who require a vehicle to perform their
job or for certain executives as a perk. Examples are senior management, sales representatives, taxi drivers, and delivery persons. These
smaller fleet customers may negotiate a deal with the automotive
company or a dealer. In some cases there may be a long-term contract
with multiple automotive companies to provide specific models for a
Comprehensive Overview of Supply Chain
9
company vehicle program. The company may offer employees an
option to select from a list of vehicles with specified options from
multiple automotive companies. Then, either based on a lease period
or on mileage, the employee will order a replacement vehicle.
Government entities. All levels of government—federal, state, and
local—purchase vehicles from the automotive companies. Contracts
are usually negotiated with the automotive companies to provide
vehicles over a period of time. In many cases, special orders may need
to be placed for vehicles with unique equipment such as police cars
and fire trucks.
Clearly, streamlining the supply chain requires an understanding of the customer types and relative size and profitability of each segment. The following are
some examples that show how the customer types affect the supply chain:
■
■
■
At Toyota plants in Japan, a large percentage of the production orders are
exported to countries all around the world. So these order requirements
are fixed and scheduled at least one month in advance for production.
Toyota’s advantage is that it can allow its domestic dealers in Japan to
change a greater percentage of orders closer to production because the
export orders do not change. The export orders create a buffer to absorb
the domestic changes in orders.
At Dell, about 85 percent of the orders are for corporate customers.
Corporate orders are forecast in advance and can be scheduled based on
the lead time for each corporate customer. The retail orders coming
through the Internet can be fulfilled quickly even if demand is highly
volatile, because the corporate orders can be shifted slightly to absorb the
variability in retail customer demand.
At Ford, when Hertz was a wholly owned subsidiary, at least 40 percent
of some models were sold to Hertz. This arrangement enabled Ford to
use the Hertz volume to fill in the valleys in demand during the year
when retail sales were slow.
Thus, customer types and order characteristics can be used to build a more
flexible supply chain.
What Are the Distribution Models?
The term “distribution model” defines the method used to distribute vehicles
from the assembly plant to the dealers. There are many variations in the distribution model within the automotive industry. At Toyota, the distribution model
is different for various regions around the world. For example, the United States,
Europe, and Japan all have different models, and in some cases the models vary
Toyota Supply Chain Management
10
within a regional area. Lee, Peleg, and Whang explain that just as Toyota has a
set of central core values but allows individual divisions to customize to local
conditions, when it comes to supplying to different geographies, different products, or at different times in the product life cycle, “the company adapts the
design and control of its demand chain so that it has the right demand chain for
the right product, in the right place, and at the right time.”1 In the United
States, there are three distribution models:
■
■
North American production. In this model, vehicles are produced at the
North American assembly plants and shipped to North American dealers. Once vehicles are released from the plant, they are moved to a marshaling yard. The function of the marshaling yard is to prepare the
vehicles for shipment. Vehicles are shipped via train and truck to the
dealerships. If vehicles are shipped by train, then they must be transferred to trucks at a railhead near the dealership. If vehicles are shipped
by truck, then they will be delivered directly to the dealership. While the
vehicles are in the marshaling yard, some accessories can be added, a final
quality assurance check performed, prep performed on selected vehicles,
and the price label affixed to the side window. “Prep” is a term that
describes the tasks that are normally performed at the dealer just prior to
customer delivery. The total time it takes to distribute a vehicle once it
leaves the assembly plant can range from two days to three weeks,
depending on how far the dealer is located from the factory. In this distribution model, vehicles are typically allocated and assigned to dealers
two to four weeks prior to production. The vehicle inventory is stored at
the dealerships.
Overseas production distributed in North America. With this distribution
model, vehicles produced in Japan are shipped via large vessels to ports
in North America and then transported to dealerships. The port provides
functions similar to the marshaling yards’; however, typically there are
several accessories that are installed at the port to enable the dealers to
customize the vehicles closer to delivery. It takes three to five weeks to
ship the vehicles from Japan to North American ports. It can take
another two days to one week to transport to dealers via truck. The
reason why this delivery time is shorter than the time it takes to transport vehicles from the North American factories is that vehicles arriving
from Japan are shipped to a port that is located geographically close to
dealers. The ports are located in cities such as Portland, Oregon; Long
Beach, California; Houston, Texas; Jacksonville, Florida; and Newark,
New Jersey. The vehicles are normally allocated and assigned to dealers
while they are in transit from Japan to the port; however, they must be
allocated to a regional area prior to being loaded onto the ships. That
Comprehensive Overview of Supply Chain
■
■
■
11
step is necessary because vehicles destined for the East Coast will be
loaded onto different ships than ones destined for the West Coast. As
with the North American model, vehicle inventory in this production
model is stored at the dealerships.
Scion model. Scion cars are produced in Japan and distributed in North
America in a manner similar to the distribution model described previously; however, there are some significant differences that provide the
dealers with much greater flexibility to customize the Scion cars for customers. The first difference is that Scion cars are shipped to the ports
with only basic equipment installed at the factory and in limited colors.
The second difference is that Scions are allocated but not shipped to the
dealers until the dealer makes a request. That arrangement allows the
dealer to select a base model and color, and then add accessories to customize it to meet the customer requirements. Most vehicle inventory is
held at the port, which allows flexibility for customization. That adaptability is consistent with the key strategy behind Toyota’s introduction of
the Scion, namely, to keep a customer for life.2 As stated previously, the
vehicle inventory is stored at the port with the exception of a limited
number of vehicles located at dealers for display.
European distribution model. In Europe, the distribution model is very
different from North America, because most dealers are located in urban
areas and do not have room for vehicle stock. Therefore, once vehicles
are released from the plant, they move to a marshaling yard. The function of the marshaling yard is only to stage the vehicles for shipment.
Vehicles are shipped primarily by truck to a consolidation point called a
“hub.” Generally there is at least one hub for each country; however,
smaller countries may share a hub, and large countries may have multiple hubs. The hub serves to hold the vehicle inventory until a dealer signs
a contract with a customer. At that time, an order is sent to the hub for
a specific vehicle. Also, the dealer can request additional accessories to be
installed at the hub prior to shipment. The transit time from a hub to
the dealer averages one week. In Europe, most vehicle inventory is stored
at the hub, not at the dealerships.
Japanese distribution model. In Japan, the distribution model is similar to
that for Europe because most dealer retail outlets have very small storage
lots. The difference is that in Japan each dealer has a consolidation center
where the vehicle inventory is stored until one of the dealer retail outlets
sells a vehicle. At that time an order is sent to the consolidation center
and the vehicle is shipped to the dealer retail outlet. Again, as in Europe,
most vehicle inventory is kept at the consolidation center, not at the
dealerships.
Toyota Supply Chain Management
12
Supply Chain Overview
The supply chain has both physical components as well as operational and planning processes.
Physical Flows
The physical flow of the supply chain is shown in Figure 2-2. Parts are produced
by suppliers and transported by inbound logistics to the assembly plant. At the
assembly plant, the vehicle begins in the body shop, moves to the paint shop,
then to assembly, and finally to inspection. Once the vehicle is produced, it is
transported to the dealerships via outbound logistics. On paper this process
looks very simple; however, it is complex because a vehicle is very large and
bulky, it is assembled from thousands of parts that are produced by hundreds
of suppliers, and there are thousands of vehicle combinations that could be
produced.
Suppliers Suppliers provide thousands of parts and components that go into
the vehicle. These parts and components are received via the inbound logistics
network from hundreds of tier 1 suppliers. Tier 1 consists of the first-level suppliers that make parts and ship directly to the assembly plants. Because suppliers also have suppliers, and those suppliers have suppliers, the supply chain
contains several levels that are referred to as tier 1, tier 2, tier 3, and so on. So
you can imagine how complex the inbound supply chain is for an automobile
assembly plant. In addition, because suppliers are located in various geographic
areas, the time for parts to arrive from each supplier to the assembly plant can
vary greatly. Local suppliers may be only one or two days away from the assembly plant, whereas suppliers located overseas may require several weeks of transportation time.
Inbound Logistics After parts are produced by the suppliers, they are shipped to
the assembly plants. The process to ship these parts from the many suppliers to
each assembly plant is referred to as “inbound logistics.” At Toyota, parts are
delivered in two ways. Overseas parts coming from Japan are shipped via vessel
Suppliers
Inbound
Logistics
Body
Figure 2-2. Physical flow
Factory
Paint
Assembly Inspection
Outbound
Logistics
Dealers
Comprehensive Overview of Supply Chain
13
and then by railcar to the assembly plant. Once the railcar arrives at the assembly plant rail yard, the container is offloaded onto a truck and driven to the
assembly dock.
Local parts produced in North America are shipped by truck using a dedicated logistics partner. Toyota takes complete responsibility for pickup and
transportation of parts from the suppliers to the plants, because Toyota’s just-intime parts inventory practice requires extreme reliability of inbound logistics.
Toyota organizes the suppliers into clusters based on geographic proximity. The
truck routes are designed for parts to be picked up from multiple suppliers and
delivered to a regional cross-dock. To improve efficiency, the same truck will
pick up parts not only from multiple suppliers but also from each supplier destined for different Toyota plants.
Once trucks arrive at the cross-dock, the parts are unloaded and staged for
each assembly plant. They are then loaded onto trucks that take parts directly to
each plant. Trucks are unloaded at the plant based on the progress of production. If the plant is operating on schedule, the trucks will wait only a few hours
in the plant yard. After the parts are unloaded, the truck is reloaded with the
corresponding empty returnable containers. These returnable containers flow in
reverse through the cross-dock and back to the supplier to be reused for a future
shipment.
Production Vehicles are produced at the final assembly plant from the parts
provided by hundreds of suppliers. A typical assembly plant will have one or
more separate lines on which vehicles are assembled. The plant is subdivided
into shops. The vehicle is born in the body shop where the frame and body are
formed. The body parts are stamped in the stamping shop by presses. The body
shop is where numerous robots are used to weld the body parts together. Once
the body is assembled, then the vehicle moves to the paint shop and its exterior
is painted.
After the vehicle is painted, it moves down the line into final assembly. At
that point most of the supplier-provided parts are installed to make a finished
vehicle. Each part is assigned a line location so that parts can be delivered from
the dock to a line address based on a bar code label affixed to the parts container
by the supplier. After the vehicle is assembled, fuel is added and the vehicle is
driven off the assembly line. But at that point the process is not yet complete
because the vehicle still needs to go through several quality control steps along
with final inspection. Once the vehicle completes the final inspection, it is
released from the factory for shipment to the dealer.
Outbound Logistics Vehicles that are produced at an assembly plant must be
transported to each dealer. This process is commonly referred to as “outbound
14
Toyota Supply Chain Management
logistics.” In the United States, vehicles are transported by two modes: railcar
and truck. Because of the long distances that vehicles must travel, about 75
percent of the vehicles travel via railcar and are then loaded onto trucks for delivery to the dealers. The remaining 25 percent are delivered by truck to dealers
that are located within two to three days’ drive from the factory. In Europe, most
vehicles are shipped by truck; however, sometimes ships must be used when
there is a large waterway that must be crossed.
Just outside the assembly plant, there is a large yard that is used to stage the
vehicles prior to shipment. At Toyota, these yards are referred to as “marshaling
yards.” In the United States, these yards perform three functions. Team members
install accessories, perform final quality assurance, and stage vehicles for shipment.
Once the vehicle is ready for shipment, it is driven to either the railcar staging area
or the truck staging area.
For railcar shipments, there are two types of railcars: bi-level and tri-level.
“Bi-level” means vehicles are loaded onto two levels within the railcar, and “trilevel” means vehicles are loaded onto three levels. The capacity of a bi-level railcar is 9 to 10 vehicles; a tri-level, 14 to 15 vehicles. Therefore, vehicles are staged
in lanes according to the capacity of the railcar and the destination.
Vehicles shipped by truck are identified by the dealer and parked in a truck
staging area. The trucking company is responsible for selecting the vehicles to be
loaded onto each truck based on the route plan for that truck. The trucking
companies have a delivery performance objective to deliver all vehicles within
two days. To ensure that both the trucking and rail companies have adequate
capacity to ship vehicles, the assembly plant needs to provide a day-to-day forecast of volume by destination.
Dealers Dealers play a key role in the supply chain because they are the face
of Toyota to the customer. They are responsible for selling the vehicles produced by the manufacturer to the retail customers. In addition to selling
vehicles, dealers have an extremely important influence on customer satisfaction. Independent customer surveys such as the “J.D. Power survey”3 measure
customer satisfaction in various categories. The two prime categories are (1)
initial vehicle quality and (2) customer satisfaction regarding the selling
process. Customers that score the selling process low also tend to give lower
scores on the initial quality survey. A high J.D. Power score can be a valuable
marketing tool for an automobile manufacturer. Therefore, it is critical not
only that the vehicle quality itself be high but also that the customer buying
experience be positive—or at least not negative. Two reasons that the Lexus
vehicles always score high in the J.D. Power survey are that the vehicles are
assembled with extreme attention to detail and that the customer is also
pampered by the dealer.
Comprehensive Overview of Supply Chain
15
It is imperative that a dealer invest sufficiently in a facility so that it can
operate efficiently and at the same time meet or exceed its sales objectives. A key
factor in a lean supply chain is the optimum level of dealer stock. It is also critical that a dealer have an adequate mix of stock so that most of the customers
can be persuaded to buy from stock and the dealer does not end up with too
many aged stock units. (Mix planning is discussed in Chapter 3.)
Vehicles are shipped to dealers from the assembly plants or from the port of
entry. They are delivered by truck. The delivery time window will vary by dealer
depending on dealer location and operating hours. Most dealers will accept
vehicles only during business hours; however, a dealer may not want to be interrupted during very busy times. Therefore, the trucking company must understand the dealer’s delivery time windows and schedule its deliveries accordingly.
Most trucks will deliver a load of vehicles to multiple dealers, so the loading
sequence must be planned based on the delivery route.
One of the key responsibilities of the salesperson is to guide customer
demand. Toyota’s sales model is designed so that a high percentage of vehicles is
sold from a relatively low level of dealer stock. The objective is to stock 20 percent of build combinations that represent 80 percent of the sales for each market
area. Some of the techniques that a dealer uses to achieve this end are to advertise and promote only the popular models and display these models in the showroom or in an area that is easy for the customer to see.
Once a vehicle is sold, the dealer must “prep” the vehicle for customer delivery. That usually means the dealer has to install wheel covers, wash and clean the
vehicle, fill the tank with fuel, and inspect the vehicle to ensure that there are no
defects. In addition, the dealer needs to prepare appropriate documents. At the
time of delivery, the dealer will instruct the customer on how to operate various
features of the vehicle, complete the paperwork, accept payment or arrange
financing, and in some cases take possession of the trade-in vehicle.
After the vehicle is delivered, the dealer submits a sales transaction to the
manufacturer, which will relieve the stock, provide the dealer with credit for the
sale, and start the customer warranty date.
Various operational processes are necessary to operate the supply chain;
Figure 2-3 provides another view of the transformation process that takes place
from parts produced by suppliers to vehicles ready for sale at dealers.
What is the difference between the supply chain of most car manufacturers
and of Toyota? Visualize the Toyota supply chain operation as a giant Swiss
clock. The plant is the main mechanism of the clock. When a clock is opened
to expose all of its working mechanisms, there are various-sized movements that
are all moving at different speeds but are integrated precisely to ensure that the
correct date and time are displayed on the face. This continuous motion repeats
itself at numerous intervals: seconds, minutes, hours, days, months, and so on.
16
Toyota Supply Chain Management
Figure 2-3. Transformation from parts to vehicles
Similarly, inside the Toyota plants, vehicles move down the main assembly
line at a constant speed—or “takt time.” Feeder lines are also moving key subassemblies to various stations along the main line, where the correct engine or
other subassembly arrives just-in-time to be installed in the exact vehicle that
requires that subassembly. In another area of the plant, for example, seats are
arriving by truck from a sequenced supplier to be installed in the vehicles, again
based on the exact match. In the staging yard just outside the plant, trucks
loaded with parts produced by hundreds of suppliers are arriving and are
unloaded based on the vehicle sequence and progress of the vehicles moving
down the main line. Looking back through the supply chain, the cross-docks
and truck milk routes are all operating on repeatable cycles to support the main
line’s need for parts. Also, all tier 1 suppliers and their suppliers are operating on
a schedule to produce parts based on the scheduled pick-up time.
Thus, Toyota’s supply chain functions like a finely tuned Swiss clock. It is
synchronized and integrated to perform as a lean supply chain. Nevertheless,
it produces sufficient variety and at a sufficient velocity to satisfy demanding
customers.
Comprehensive Overview of Supply Chain
17
Operational Processes
Several operational processes must be performed on a periodic basis to guarantee that the physical supply chain is operating efficiently and effectively. These
processes integrate and synchronize the operational processes with the physical
processes to ensure a lean supply chain. The key processes are as follows:
■
■
■
■
■
■
Mix planning
Sales ordering/forecasting
Production scheduling
Dealer allocation
Parts ordering/forecasting
Inbound logistics planning
For some perspective of what these processes entail, a thorough explanation
of Toyota’s practices and principles follows. The detailed processes and the logic
used to execute these processes will be described in Chapters 3 through 9.
Mix Planning Mix planning is the process of limiting the number of build combinations that are ordered for stock in each market area. As mentioned earlier,
“build combination” is a term that defines the unique set of specifications for a
vehicle. For mix planning purposes, vehicle specifications are divided into three
categories: factory-installed options, color, and accessories that can be installed
after a vehicle is built. Mix planning is initially performed on an annual basis
prior to new model launch and can be adjusted monthly to reflect changes in
demand and/or seasonal trends. For the United States market, the mix planning
is done at the region level to ensure that the vehicles ordered for stock closely
meet the needs of the geographic area. For example, sport utility vehicles (SUVs)
ordered for dealers located in the northern states would almost always be
equipped with four-wheel drive, whereas SUVs ordered for southern states would
be ordered with two-wheel drive. Another example is vehicles ordered for Arizona
being painted with light colors (certainly not black!) because of the heat.
In Europe, the mix planning is done country by country because many of
the countries have unique requirements. For example, the United Kingdom
requires right-hand-drive vehicles whereas the countries on the Continent
require left-hand-drive. Also, there are various regulations in different countries,
significant climate differences from Norway to Spain, and substantial economic
differences between Western and Eastern Europe.
Sales Ordering/Forecasting One of the functions of the sales division is to provide a monthly production order and forecast. That is in the form of a rolling
three-month plan with the first production month categorized as a firm order
and the next two months as a forecast. The firm order requires the sales division
18
Toyota Supply Chain Management
to commit to the total volume of units for the month, whereas for the forecast
months the volume can change. The content of the order month, however, can
change in terms of number of vehicles up to one to two weeks prior to production. The process starts with the sales and production divisions first agreeing to a
planned volume of units or vehicles that are going to be produced each month.
Sales divisions determine their request by analyzing recent sales and stock levels.
Sales divisions will also consider marketing promotions and seasonality changes.
Both sales and production divisions collaborate to agree on the total planned
vehicle volume for each of the next three months. The total vehicle volume is further broken down by vehicle model and by plant. Next, sales divisions allocate
the total volume by model to each region based on sales performance. Then each
region uses the mix plan along with the recent sales trends to create the quantity
of each build combination for each month for each vehicle model. The mix plan
or target is compared to the actual mix of sales and the actual mix of stock to determine which build combinations need to be ordered to maintain the target level of
mix for stock. In addition, the regions may need to make adjustments for any special dealer requests and also need to consider any special promotions or seasonal
trends; for example, sunroofs and convertibles sell better in spring and summer.
Once the forecast is made and the order is completed by each regional office,
it is sent to the sales divisional headquarters. There it is checked before it is forwarded to the production divisional headquarters to create a production schedule.
Production Scheduling Production scheduling is the process of taking the
monthly order and forecast from sales and assigning a production date and
sequence to each vehicle. The objective is to create a production schedule that is
leveled across each day of each production month using the heijunka principle.
Heijunka is a Japanese term that is defined as “smoothing.” The concept is
to assign each vehicle option a smoothing weight based on its importance to
manufacturing. For example, engines will get a higher weight than color, because
if they were not evenly scheduled over the month and there were a change in production of engines, that would have a greater negative impact on manufacturing.
The term “production month” is different from “calendar month.” For each
calendar year, a production calendar is created. There will always be 52 or 53
production weeks in a year. A week is assigned to a month, based on Monday’s
date. For example, if January 31 falls on Monday, then that complete week is
considered January production. February production would start with the
February 7 week and end with the February 28 week. The only exception to this
rule is the week that includes January 1. The week that contains the January 1
production day will always be week 1, even if January 1 does not begin on a
Monday, which means it may contain some December days. Each production
month will contain an even four or five weeks.
Comprehensive Overview of Supply Chain
19
After the production plan is complete, it is sent back to sales with a scheduled build date for each vehicle. A copy is also sent to the parts ordering group
at each assembly plant.
Dealer Allocation Dealer allocation is the responsibility of the sales regions. The
dealer allocation process is usually performed twice each month for two weeks
of production at a time. That occurs four to five weeks prior to the scheduled
build dates for the vehicles that are being allocated.
Prior to the allocation process, dealers can update their profile with specific
guidelines on the type of vehicles they either want—or in some cases do not
want—to be allocated. For example, dealers in northern cities may want a cold
weather kit, and dealers in Arizona may not want dark-colored cars. This dealer
profile is important because each region covers a large geographic area of several
states that may have different climates and demographics.
The allocation process is executed by each region for its dealers. The allocation quantity for each vehicle model is based on a “fair-share method” (sometimes referred to as “turn and earn”) to guarantee that each dealer is treated
fairly. The concept involves basing the allocation on how well each dealer is selling its previous allocation compared to all other dealers. Another benefit of this
method is that it ensures that the inventory is rebalanced across all dealers.
After the vehicles are allocated, they are assigned to the dealer and will be
visible to the dealer as pipeline orders. A pipeline order is a vehicle that is in the
scheduled pipeline and will be built during the week identified with each vehicle. Each vehicle has a full set of specifications, including color. Therefore, the
vehicle will be built as is unless the dealer submits a change request.
Parts Ordering/Forecasting The parts ordering process is actually two different
processes: one for local parts and another for overseas parts. The local process
requires that the vehicles scheduled for each day be placed in the exact sequence
that they would be built on the assembly line. The next step, after each vehicle
is scheduled by day, is to sequence the vehicles into the ideal sequence in which
they would be assembled. The concept used is to consider the impact of the
schedule on the factory team members and equipment. It is important to
sequence the vehicles so that vehicles that contain high workload or process
complexity are not scheduled back to back.
Once the vehicles are aligned in sequence for each day, parts calculation is
performed for each vehicle. Then the parts installation time stamp is applied to
each part for each vehicle. One time stamp calculation follows:
■
Vehicle number 500 of the day is scheduled to line-off the end of the
assembly line at 1 p.m.
Toyota Supply Chain Management
20
■
■
■
■
Part A is installed at a workstation 2 hours prior to line-off.
Part B is installed 2 hours and 30 minutes prior to line-off.
Part A would have a time stamp of 11 a.m. (1 p.m.–2 hours).
Part B would have a time stamp of 10:30 a.m. (1 p.m.–2:30 hours).
Next each part’s lead time from the supplier to the lineside is determined.
That will determine at what day and time the supplier will need to ship the part
to arrive at the lineside just-in-time. Other factors, such as lot size, shipping
frequency, and adjustments, need to be considered as well when the parts order
is calculated.
Adjustments are made in two ways. One way is for a vehicle specification to
be changed by a dealer after parts have already been ordered from some suppliers. This occurs when a supplier’s lead time is longer than the freeze point for
the assembly plant. A freeze point is the last day prior to production on which
changes can be made to vehicle specifications. The plant’s freeze point is based
on the 80 percent rule (i.e., the point is selected so that 80 percent of the suppliers have a lead time shorter than the freeze point). In other words, if the freeze
point specification is five days, then 80 percent of the suppliers’ deliveries should
take less than five days. The freeze point will vary by plant but will range from
5 to 10 days. This still leaves 20 percent of the suppliers that are outside the
freeze; thus, there is a need to make adjustments based on the dealer’s changes.
That is done by comparing the parts calculated each day to the previous day’s
calculation, and if there is a difference and the part has already been ordered, an
adjustment is made on the next order. A second adjustment is made by comparing the actual usage for each production day and the planned usage. The purpose of this adjustment is to catch any scrap or misused parts.
The order is transmitted to the suppliers daily. In addition to the daily
order, a weekly forecast is sent to the supplier as a prenotice for the next 12
weeks. It is extremely important for the suppliers to wait for the daily order to
prepare the shipments. (The supplier’s role is discussed in Chapter 7.)
Logistics Planning Once the parts forecast is completed for the next production
month, a determination needs to be made about the most efficient routes for the
logistics partner to pick up the parts from all suppliers. A sophisticated software
program is needed to simulate the various route options. Some of the inputs
needed and constraints are locations of each supplier, quantity of parts by
supplier by pick-up time, location of cross-docks, location of assembly plants,
and cost per mile. Assurances need to be made that all delivery times for parts
will be met and the cost of operating the fleet of trucks optimized. This process
may take numerous simulations before a route plan can be finalized.
Comprehensive Overview of Supply Chain
21
Relationship of Processes to Physical Flow
Figure 2-4 illustrates how these operational processes are integrated and synchronized to support the transformation flow of the physical parts and vehicles.
Planning Processes
The final processes necessary to complete the picture of the comprehensive
supply chain are performed one to three years prior to actual production. These
processes are as follows:
1.
2.
3.
4.
5.
Product planning and design
Plant design for capacity and flexibility
Package design for logistics
Purchasing
Annual sales and operations planning
Figure 2-4. Transformation processes
Toyota Supply Chain Management
22
Product Planning and Design Vehicle design starts about 36 months prior to
production and is completed about 18 months prior to production. During the
design phase the physical design and functional design are completed, in addition to all parts and components. The designers and engineers must collaborate
with product planning, sales and marketing, purchasing, and manufacturing on
the new vehicle design. In addition, many of the suppliers collaborate with the
engineers on selected components.
One of the factors to be considered during the vehicle design is the impact on
the supply chain. For example, the more parts that can be shared by multiple vehicles, the greater the efficiency, as there will be fewer part numbers and a higher
volume of parts produced per part number. The result will be improved economies
of scale and the ability to source high-volume parts to multiple suppliers.
Another example is to reduce the number of parts that is directly associated
with an option or color. That arrangement will increase the dealer’s flexibility to
change options or colors, because fewer parts will be impacted.
Plant Design for Capacity and Flexibility At Toyota, most final assembly plants
are designed to produce multiple vehicle models on multiple assembly lines.
That design provides flexibility to shift production volume from a slow-selling
model to a faster-selling model to ensure that each plant maintains a stable
production volume. In the event that the total volume needs to be adjusted
either up or down, then the average time allowed between vehicles that come off
assembly (the “takt” time), can be adjusted to increase or slow down the line
speed. Line speed adjustment can be planned and implemented with one to two
months lead time. In effect, this type of flexibility allows Toyota to change production capacity to meet market demand quickly.
Package Design for Logistics Inbound logistics must also be lean to support
Toyota’s supply chain. Therefore, when parts packaging is designed, careful consideration must be taken to make sure that parts can be moved efficiently
through the logistics network. In addition, Toyota has a strong “green” policy, so
almost all packaging uses returnable containers. The following are some of the
major packaging considerations:
■
■
■
■
Don’t “ship air.” Ensure that parts can be arranged in the container so
that cubic space utilization is optimized. For example, a part shaped like
a hockey stick cannot be packaged efficiently.
Stackable. Design containers so that they can be stacked with many
other parts containers and can be interlocked so containers will not shift
during transit.
Lot size. Order parts in small lots with frequent shipments.
Quality. Guarantee that parts will not be damaged because of movement
during shipment.
Comprehensive Overview of Supply Chain
23
Purchasing Purchasing is responsible for parts and component sourcing and
must work closely with engineering and quality. Purchasing considers many
factors when selecting suppliers such as supplier capability and capacity, current
supplier base, price, location, local content targets, and minority supplier
objectives.
In addition to these more obvious criteria, purchasing should also consider
the impact on the supply chain. Again, the focus should be on understanding
the relationships of options and colors to parts. One way to enable flexibility to
change options closer to production is to purchase these option-related parts
from suppliers located close to the assembly plant. Managing suppliers requires
Toyota to choose how to operate the assembly plant to stabilize supplier orders.
That role requires implementation of all of the processes described earlier. But
it also requires leveraging the benefit of order stability to provide a competitive
product to the customer.
Annual Sales and Operations Planning Sales and manufacturing must collaborate on the annual plan for all vehicles sold and produced within a market (e.g.,
North America or Europe). That process can be a very contentious one because
manufacturing and sales goals naturally conflict. The manufacturing objective is
to operate all plants at full capacity with stable volume and to minimize interruption during model changeover. The sales objective is to maintain flexibility
in order to change production volume as market demand shifts and to avoid
producing too many vehicles of old models when a new model is scheduled to
be introduced. One common objective is to maximize profits; however, that is
easier said than done. (This topic will be discussed in detail in Chapter 4.)
Reflection Points
Toyota has effectively implemented the Toyota Production System across the
extended supply chain and has demonstrated its capability to be a learning
organization by the following:
■
■
■
Viewing the supply chain as a very broad and comprehensive set of
processes that must be designed to function cohesively
Promoting cross-functional teamwork to ensure that all internal and
external parties are collaborating to kaizen both processes and operations
Streamlining the supply chain to be synchronized and integrated so that
it functions like a fine-quality Swiss clock
Although there are many examples of the v4L principles in this chapter, we
will wait and highlight them at the end of each of the chapters that discuss them
in detail.
24
Toyota Supply Chain Management
Endnotes
1. Hau Lee, Barchi Peleg, and Seungjin Whang, “Toyota: Demand Chain
Management,” Case GS-42, Stanford Graduate School of Business,
Stanford University, Stanford, CA, 2005, p. 18.
2. The thinking goes something like this: A twenty-something person starts
out purchasing a Scion, then gets married and moves up to a Camry, then
starts a family and adds a sports utility vehicle or van, and then as an
empty nester moves up to a Lexus.
3. J.D. Power and Associates Ratings, www.jpower.com/autos/car-ratings/,
October 11, 2008.
Chapter 3
Mix Planning
M
ix planning is an important process for companies that manufacture
and distribute products to retailers in multiple market areas. For
vehicle manufacturers, this decision is extremely important because
of the complexity of a vehicle. This complexity creates millions of possible vehicle build combinations or variants. The objective of mix planning is to reduce
the variants of each vehicle manufactured by several orders of magnitude, from
millions to hundreds.
Mix planning is a process that is undertaken during major model change
preparation. It can also be adjusted annually during minor model change and to
a lesser degree during the model year. The model change mix planning is completed about 12 months prior to new model introduction, to enable the following to happen:
■
■
■
Marketing strategies for each region to be synchronized with product
offerings
Manufacturing to fill the supply chain pipeline with parts
Sales regions to order vehicles to have in stock in time for new model
introduction
Mix planning at Toyota deals with choosing the specific mix of vehicles that
will be offered at sales regions across the country. The goal of mix planning is to
carefully manage dealer-level product demand so as to enable stable production
at the manufacturing plant. That also translates into stable orders to suppliers.
In other words, the aim of mix planning is “to nip some of the demand variability in the bud” through careful planning. The associated upstream stability
because of mix planning permits a focus on improved quality, cost reduction
using kaizen, and ultimately higher value to customers that enables higher
customer satisfaction and retention.
Studies suggest that Toyota cars offer approximately $2,500 in additional
value to the customer compared with competing midpriced, high-volume cars.
25
Toyota Supply Chain Management
26
That additional value translates directly into a higher resale value that customers
receive for their Toyota cars compared to most manufacturers in the auto industry. We attribute this higher value to variety reduction, variability control,
improved visibility across the chain, and higher velocity. Thus, in order for the
v4L strategy to be viable it must generate significant value enhancement to all
players. We will cover this topic in later chapters, but first we focus on how
Toyota does mix planning.
Mix Planning Objective
Mix planning at Toyota means that the planned variety offered in a sales area is
chosen carefully to be primarily the 20 percent of product range that represents
around 80 percent of the demand in that region. Thus, planned offerings in a
region are frequently a small subset of all available product types or even of all
product types offered in the national market. That simple decision enables synchronization of all activities in a region, from TV advertisements focusing on the
specific colors and options available in a region to newspaper and periodical pictures and dealer brochures, all suggesting offerings that synchronize with the
product available at the dealer. In addition, the smaller range means that most
dealers carry similar products, thus both enabling customers to decide where to
buy the car and keeping dealer margins competitive. Availability of the same set
of products among dealers increases retail availability without the need for high
levels of dealer stocks. Similarly, a focus on offerings with high-demand velocity
also decreases dealer inventories and thus increases inventory turns. That is one
of the reasons that Toyota’s average incentive cost per vehicle is typically about
$1,000 compared to the $3,000 average for the industry as shown in Table 3-1.
A key risk to be managed in the selection of a subset of items is that that
supply has to remain synchronized with current demand trends. Also, there is a
Table 3-1. Incentives Offered by Six Automakers
Automaker
June 2007
June 2006
Chrysler Group
Ford
General Motors
Honda
Nissan
Toyota
$3,962
$3,187
$2,830
$1,397
$2,218
$1,308
$4,045
$3,648
$3,135
$770
$2,677
$961
Source: Edmunds.com. Reference www.autoobserver.com/2007/07/june-sales-gmhits-all-time-low-market-share.html (downloaded on 7/10/08).
Mix Planning
27
natural tendency for the sales organization to attempt to justify why more is
better. In other words, it is tempted to keep adding variants because doing so
will help create incremental sales. That effort requires the need for thorough
analysis of selling trends by product type and features, as well as monitoring of
competitor offerings, in order to determine the optimum mix of variants. The
key is that it is easier to add complexity or variants after the vehicle is introduced
than it is to remove them. Therefore, it is important to start out by erring on the
lean side and if necessary adjusting variants on a periodic basis after several
months of sales history and trends can be evaluated. This method of adjusting
mix during the monthly ordering process will be discussed in Chapter 4.
Complexity Reduction
Before mix planning can be undertaken, the product complexity needs to be
reduced. That effort requires collaboration among design, sales and marketing,
and manufacturing groups. The following is a summary of some methods that
are used to achieve complexity reduction.
Product Planning, Design, Sourcing
■
■
■
Look for opportunities to use common parts across products (i.e., share
radios). This step focuses on studies that suggest that over 80 percent of
manufacturing costs are fixed at the design stage.1 So, preventing designers
from adding variety when none is warranted is the first step. In addition,
part commonality permits higher inventory turns for original parts as well
as spare parts, production flexibility for suppliers and the assembly plant,
and economies of scale in purchasing, design, and production.
Consider making high-volume options standard (e.g., if air-conditioning
is sold in 95 percent of all vehicles, it should be made a standard feature).
Such a step focuses on trading off the forecasting difficulties when
choices are left to consumers against the enhanced value perceived when
customers are offered standard features. For example, antilock brakes and
other standard safety features may not be valued by customers if offered
as separate choices but may well enhance the product preference if
offered as standard. In addition, the forecasting of individual variants is
often more difficult than forecasting the total demand for a product.
This gain in forecasting accuracy as well as improvement in perceived
value may well offset the lower margins because some features are
discounted to customers who may not want them.
Eliminate options that do not sell well (e.g., if ashtrays are only ordered
in 5 percent of vehicles, eliminate them as an option). This approach
Toyota Supply Chain Management
28
■
■
■
focuses on simplifying designs even at the cost of losing some customers
in order to make demand more predictable.
Minimize parts that vary by option and color—for example, does the
window washer nozzle on the hood have to match the color, or can it be
black? In our example, supplier-part orders for the window washer
nozzle will be kept standard even if customer vehicles vary by color.
Because the same supplier component may be used in many car types, it
is a great example of assembly postponement applied to stabilize supply
while providing variety.
Attempt to source optional parts to local suppliers to shorten lead time.
Such an approach focuses on decreasing safety stock by lowering lead
time for difficult-to-forecast parts. In addition, because the forecast error
for some options may be higher than for standard equipment, the lead
time impact on safety stock inventory for optional parts is higher than
for standard equipment parts. Thus, a more responsive supplier for
option parts may well generate lower overall costs compared to an efficient long lead time supplier.
Design accessories that can be installed after the vehicle leaves the factory
at a hub or at a dealer to minimize impact on the factory and supply
chain. Such a practice moves some accessorizing tasks to the point of sale
or close to the point of sale and permits last-minute customization for
the customer. It is particularly relevant for cars like the Scion. The Scion
is produced in Japan with almost no options or accessories. The vehicles
are then kept in stock at the ports until the dealers submit an order, at
which time the accessories are installed and the vehicle is shipped to
the dealer.
Marketing
■
■
Limit product offering for a market area. Vehicles sold in Europe and the
United States should each offer a subset of products that best reflects
local demand (e.g., manual transmission may be offered in Europe as an
option but not in the United States). Such synchronization of products
offered to local preferences makes demand levels more predictable and
thus improves supply chain performance. In addition, such an approach
increases the chance that demand can be satisfied directly from dealer
stock, thus decreasing retail customer lead time.
Combine related options into packages (e.g., the safety package may
include side airbag, stability control, and auto window wiper). Bundling
of features permits the market segment as a whole to be targeted rather
than individual feature choice. This process balances “up-selling”
Mix Planning
■
29
whereby customers end up choosing more than they actually need, with
stability on the supply side. In addition, by converting products into,
perhaps, three offerings (economy, deluxe, and luxury), with associated
option bundles, customer choice is simplified and the number of variants sold at retail reduced.
Consider making high-volume options standard, not offering low-selling
options, or both.
Mix Planning by Sales Region
After the complexity reduction activities outlined previously have been completed, the next step is for each sales division to work closely with its sales region
to determine which subset of the vehicle mix will be the high-volume sellers in
each region. This step is necessary because each sales region may have different
demand characteristics. The following are some of the guidelines that are to be
considered:
■
■
■
■
■
■
Limit stockkeeping units (SKUs). Determine which build combinations
will be stocked by a sales region. A sales region within a sales company’s
territory could be the southern region of the United States or Italy within
Europe.
Analyze past sales, competition offerings, and local regulations to predict
demand for future sales.
Use the 80/20 rule. The 80/20 rule identifies the SKUs that account for
80 percent of the sales. This should be about 20 percent of the possible
SKUs.
Stock high-volume SKUs. Dealer stock should include only the 20
percent of the SKUs that represent 80 percent of the volume.
Target marketing campaigns to support mix planning by region.
Synchronizing offerings with marketing plans permits customer preferences to be “guided” whenever feasible. For example, featuring the
same subset of colors and features in print ads, TV ads, dealer showrooms, and dealer inventory increases the chances that customers will
choose from the available colors and features and thus reduces the customers lost because of unavailability of special colors featured but not
offered.
Manage demand. Provide guidance to dealers on ways to respond to
demand for vehicles that are not in stock:
The salesperson can gently persuade the customer to change his
mind and take one of the vehicles in stock. This is called “guided
selling.” However, this technique could result in negative customer
Toyota Supply Chain Management
30
satisfaction. (Note: it is not necessary to sell a vehicle to every
customer; sometimes it is better to lose a sale than to have an unhappy
customer.)
Locate a trade with another dealer.
Request an order change from the factory. (This process will be
explained in Chapter 9.)
Mix Planning Details
This example shows how the mix planning process is performed by the Toyota
sales company:
1. Determine the volume of vehicles that is expected to be sold by region. For
this example, assume that 10,000 cars—specifically, Camrys—are to be distributed across four different regions. The percentage sold in each region
reflects the share of the national volume; this is shown in Table 3-2. With
this market share, the volume by region is also calculated to ensure that the
aggregate mix will be weighted accurately.
2. Next break the planned volume into the volume of sales by vehicle model.
This planned mix reflects marketing plans, production volumes, supplier
commitments, expected competition and price points, demographics, and
so on. Table 3-3 shows such an example.
Table 3-2. Allocation Total Volume of All Camrys by Region
Regions
Camry Allocation
West
East
South
North
Total
Market Share
Monthly Volume
25.0%
2,500
30.0%
3,000
25.0%
2,500
20.0%
2,000
100.0%
10,000
Table 3-3. Sales and Production Model Mix of Camrys
Model
Volume
Percent
CE
LE
SE
XLE
Hybrid
Total
1,000
5,000
1,500
1,500
1,000
10,000
10%
50%
15%
15%
10%
100%
Mix Planning
31
Table 3-4. Distribution of Model Mix by Region
Model
West
East
North
South
Total
CE
LE
SE
XLE
Hybrid
Total
200
1,400
250
350
300
2,500
250
1,600
500
450
200
3,000
250
1,150
350
500
250
2,500
300
850
400
200
250
2,000
1,000
5,000
1,500
1,500
1,000
10,000
Table 3-5. Model Variants Offered
Model
B/C No.*
VSC
CE
CE
LE
LE
LE
SE
SE
XLE
XLE
Hybrid
Hybrid
CE-01
CE-02
LE-01
LE-02
LE-03
SE-01
SE-02
XLE-01
XLE-02
HB-01
HB-02
X
X
X
X
X
Sunroof
Spoiler
X
X
X
X
X
X
X
X
Nav
X
X
X
X
*B/C No. = build combination number.
3. Use data from each region to break up the total vehicle volume for a
region into a composition by model. That data should be derived through
collaboration between the sales headquarters and each regional manager.
Table 3-4 shows this breakdown by model by region.
4. Take each car model and decide on the number of different variants that will
be offered and the specific features of each variant. An example is shown in
Table 3-5. This is the most difficult part of the process, because it is
extremely challenging for the marketing staff to limit the number of
variants. Note that this example is an oversimplification. In normal cases,
there will be hundreds of build combinations that must be considered. That
is where the 80/20 rule will be applied. The result will be to select about 20
percent of the variants that will represent 80 percent of the volume.
32
Toyota Supply Chain Management
Table 3-6. Mix of Model Variants by Region
Mix of Each Model by Region
Model
B/C No.*
West
East
South
North
CE
CE
LE
LE
LE
SE
SE
XLE
XLE
Hybrid
Hybrid
CE-01
CE-02
LE-01
LE-02
LE-03
SE-01
SE-02
XLE-01
XLE-02
HB-01
HB-02
0%
100%
50%
50%
0%
100%
0%
100%
0%
0%
100%
70%
30%
50%
0%
50%
50%
50%
20%
80%
20%
80%
20%
80%
0%
70%
30%
30%
70%
30%
70%
30%
70%
100%
80%
20%
100%
0%
100%
40%
60%
*B/C No. = build combination number.
5. Decide on which of these variants will be sold in each region, and determine
the mix of variants by region (Table 3-6). The mix by region will then be
used to calculate the volume of each variant by region during the monthly
ordering process. (This process will be discussed in detail in Chapter 4.)
Note that in this example not all regions will decide to order stock for all
variants that were preselected by the sales division for the entire national
market. However, they will still be able to make daily order changes or
submit special orders for variants that appear on the national list.
6. Finally, take each of these quantities and decide the colors that will be
offered in each region and thus the specific quantities by color of each of
these variants that is expected to be shipped to each region.
Toyota processes reduce complexity and limit the mix sold within sales regions.
The metrics for mix planning are the number of build combinations by region
or country by model. Next we will examine how a mathematical model can be
used to evaluate various mix planning strategies.
A Simulation Model
Although Toyota’s success may be proof that the 80/20 rule is valid, another
issue that deserves focus is the empirical observation that SKUs that have lower
sales volume have higher demand variability. In addition, the identity of these
SKUs might not be the same from region to region. Thus, staying with the top
80 percent limits the variability seen by the plant; it also reduces inventories at
the dealer. That reduces cost, improves forecasting, and further contributes to
Mix Planning
33
reducing variability. Moreover, it focuses selling effort on a small set of models
and thus can drive demand in the right direction.
Given these different possible reasons for mix planning, we will focus on
one such reason to understand details. The Appendix will provide a specific
example; here we refer to the learning points from that example. Increasing
product variety potentially attracts new customer segments to purchase the
product and may thus increase the mean demand for the product. This increase
in customer segments, however, may make the specific composition of demand
for products in a period less predictable. Such a decrease in predictability may
be understood (intuitively) as arising from the inability to predict the demand
process for each customer segment. So the benefit associated with attracting
more customers to the product has to be balanced with the increased forecast
error for individual products offered. In such a context, it may be better to offer
a narrower range with more predictability. A more limited, more predictable
demand stream may then enable a stable supply chain to be created, which offers
the opportunity to increase customer value associated with a product.
A key question is, how much of the demand can be retained when variety
is decreased? If, instead of 50 percent of the potential being captured, the
demand drops to 30 percent, then it is worth considering how profitable this
lowered variety is relative to increased variety.
What is the fundamental message of this model? Increasing product variety
may increase demand forecast error because of difficulties in forecasting
demand. It is the difficulty in understanding the composition of customer
demand that creates significant forecast error—that is, it is easier to forecast
aggregate demand but quite difficult to forecast the variety. Thus, careful targeting of customers and choice of product offerings can stabilize the system if the
demand is not affected significantly. The trade-off between stability and sales
volume has to be made prior to determination of the mix planning strategy.
Non-Toyota Examples of Mix Planning
A paper by Chan and Mauborgne on the “Blue Ocean Strategy”2 describes the
process of pursuing differentiation and low cost. They describe a company that
“generates cost savings by reducing factors that an industry traditionally competes on. Buyer value is lifted by raising or creating elements the industry never
offered. Over time, costs are reduced further as scale economies kick in, as sales
volumes increase due to superior value provided.” An example that is provided
focuses on the choices by Casella Wines, an Australian wine company that
entered the U.S. wine industry in 2001, when the industry had over 1,600 wine
choices in the market.
Unlike existing strategies, Casella decided to focus on simplicity and on
attracting new customers who were not traditional wine drinkers in the United
34
Toyota Supply Chain Management
States. The company thus decided to use one bottle type for red and one for
white wines and offer only two types of each wine, simplify packaging, eliminate
promotions, and go after nonwine drinkers with a fruity flavor. It eliminated
all technical jargon from wine bottles and used simple, bright colors. Retail
employees were encouraged by its ease of description to recommend it to
customers. By eliminating a lot of the wine reputation–building costs faced by
traditional wine companies, Casella focused on new tastes that made it easy to
purchase, while simultaneously lowering production costs. At the same time,
Casella managed to charge more than budget wines while growing the market
significantly. The narrowing of choices and simultaneous raising of satisfaction
permitted a significant increase in the volume sold and enabled the company to
emerge as the fastest-growing brand in U.S. wine history, surpassing the wines of
France and Italy. In 2004, the company sold more than 11.2...
Purchase answer to see full
attachment