27-01-2011 The Toyota way - CPO Agenda

The Toyota way

The car giant's European purchasing boss talks about its 'tough but fair' approach to supplier
relationships, and the challenges of applying this model outside Japan

Spring 2007

by Geraint John

Illustration: Ben Kirchner

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The latest annual survey of US
automotive suppliers shows that
Toyota remains in pole position for
good working relations, but General
Motors is no longer in last place
Toyota may not yet be the world's biggest automotive
firm (although that is widely tipped to happen by 2008),
but it is certainly the most profitable. In 2005-06 the
Japanese producer of best-selling models such as the
Corolla and Camry made more money than General
Motors, DaimlerChrysler, Ford, Volkswagen, Honda,
Nissan, Peugeot-Citröen, BMW and Fiat combined.
(Admittedly, GM's $10.5 billion loss in that year makes
the statistic look rosier than it ought to be; nevertheless,
it's an impressive achievement.)
Aside from its engineering rigour, focus on quality
control and continuous improvement (or kaizen) and its
just-in-time production system, Toyota is famed for its
tightly knit group of domestic suppliers (keiretsu) and

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its long-term, collaborative approach to supplier
relations. Annual studies such as the one conducted in
the US by Planning Perspectives Inc consistently show Toyota well ahead of its rivals in terms
of how suppliers rate it as a customer to do business with.

For an insight into how the company manages its supplier relationships, and the challenges
associated with transplanting Japanese methods to the West, CPO Agenda sat down with
Mark Adams, senior general manager of purchasing at Toyota Motor Europe, at its technical
centre in Zaventem, on the outskirts of the Belgian capital, Brussels.

What is Toyota's philosophy on working with suppliers?

We try to share what we call "the Toyota way" values, which is the philosophy of how we work
both internally and externally. The key pillars are continuous improvement and respect for
people. At a practical level, in terms of supplier relations, we are demanding but we are also
logical; we probably would be rated as the most logical of customers if you spoke to our
supply base. By logical, I mean that when we come to negotiate with our suppliers it will be an
open negotiation with the facts before us on the table; there will be no hiding behind pieces of
paper with numbers on, or old-fashioned horse trading. It's very open, very frank and it's about
finding the optimum solution for both parties based on the facts before us. That requires
openness on both sides, of course.

Some people would describe that as "open-book" negotiation. Is that how you see
it?

Yes, we would. We can't force suppliers to open their books completely. I would say that
within our supply base we've got everything from complete visibility to some suppliers who
feel they've got a dominant niche in a particular product who are completely closed in terms
of their costs. We try to move as far as possible towards totally open book on the basis that
the only way we can help the supplier to improve its cost - and therefore improve its
competitiveness and potentially increase its business - is if we have visibility of which portion
of the cost needs to be improved.

How do you look at cost with a supplier?

There's a basic equation that underpins our business. Suppliers often misunderstand what
we mean when we talk about cost-based purchasing; they think it's cost plus profit equals the
price we pay. That's not correct. The price is set by two things: what the marketplace will
sustain and, linked to that, what the supplier quotes. So price, as set by quotation, minus cost
equals profit is the equation we use. That key element of "minus cost" is what we have to

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work on to create space within the price structure that's been fixed in order to generate profit
for both parties.

The way we can work to improve cost is through the purchasing interaction on the supplier's
shopfloor. So there's two sides to our purchasing organisation: there's the buyers - the
people who solicit the quotations, negotiate the price and analyse the costs within that - and
then we've got almost an equivalent number of purchasing engineers who spend most of their
time out on the road at suppliers' factories working on improvement activities.

What language do you use to describe the way you work with suppliers?

We are tough, but we are fair; we are professional but we're also human; and we deal
logically with open facts rather than smoke and mirrors. Those three things simply describe
our behavioural purchasing.

Do you use terms such as collaboration or supplier relationship management?

We use the term partnership. A relationship can be aggressive or submissive, but

somewhere in between is professional. It can be engaging or distant - we seek to be
engaging. It can be price focused or cost focused - we try to be cost focused. It can be warm
or cold, in terms of the human approach - we try to be warm. All those things added together, I
think, describe whether you are going to be adversarial or a partner, and we seek to be a
partner.

Are you trying to be a partner with all your suppliers, or do you segment your supply
base into strategic and non-strategic, as many other companies do?

We try to be a partner with all suppliers. In terms of whether we segment our suppliers into
strategic and non-strategic, I would say we don't. All suppliers should be strategic in some
way. For example, they could be strategic because we see them as a development partner
able to offer something in terms of our R&D; alternatively they may be strategic in a
manufacturing sense, because of a certain location or a certain cost advantage that they
have in their process. We're reviewing our supply base at the moment to identify which
category of supplier is best served by the various approaches that we have to supplier
improvement.

Do you not get more value by concentrating on a smaller number of suppliers?

The problem with that is that there may be very little cost control exerted on the mass of
suppliers. Toyota's approach is about applying some focus to all our suppliers, and trying to

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keep a contained, manageable number. We do have a degree of differentiation in the
amount of time we spend on suppliers' premises, according to the type of product they are
supplying and the degree of risk that we assess them to be facing. For example, a supplier of
a simple set of plastic mouldings might need less attention on the shopfloor than a supplier of
a complex braking system. So we do differentiate in that way, but there is a standard set of
tools that can be applied selectively to the whole of the supply base.

What number of suppliers are you dealing with in Europe?

If we are talking number of plants it's less than 500; if we're talking number of different
companies it's something in the order of half of that.

To what extent is Japanese practice on supplier relations mirrored in Europe? Are

there any major differences?

We have something called "Toyota business practice", which is essentially a formalised

approach to problem-solving and one of the key elements of our improvement activity with
suppliers. That's a standardised process worldwide, linked to a never-ending quest for
kaizen, so we do mirror Japanese practice. But inevitably cultures, ideas and values differ
between countries and from those that existed in Japan when Toyota was in its infancy. So
regional variations in practice do exist; however, underneath it all the fundamental DNA of
Toyota methodology can be identified and experienced wherever we operate.
Do you find European and American suppliers are willing to reciprocate the
partnership approach, as they do in Japan?

I think European and North American suppliers are very keen to learn from Toyota. In order to
do that, they need to engage with us in the way that we seek to engage with them, which is
that collaborative approach. However, in most cases the scale of business we have with
European suppliers is in small single-digit percentages of their overall revenue. Most of their
business is with other customers, who perhaps behave in a different way. It's very difficult to
expect a supplier to behave in one way for one set of customers and then to completely
change character for the way it deals with Toyota. I think that's a potential contradiction in
identity that suppliers are facing at the moment.

Do you teach your buyers to work in a collaborative way?

In our recruitment process we test for teamwork, because that's a strong element of the way
we work collaboratively with suppliers. Formal training in the collaborative style is quite
difficult, but we do share the Toyota way as applied to supplier relationships with new
recruits, and it's constantly reinforced through on-the-job training. It's also important that

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management behave consistently in this collaborative style. We have a number of Japanese
nationals, who we call co-ordinators, who are there primarily to teach the Toyota way of
working within the European business.
So we try to develop a collaborative approach, but you can't put a thermometer into the
organisation, look at the reading and tell how collaborative you are. Our decision-making
process, though, is all about consensus, and that means people have to collaborate with their
peer group, they have to collaborate with engineers; they are used to making decisions on a
collective basis. So I think it's instilled in our people through their day-to-day experience.

How do you strike the right balance between competition and collaboration?

For our suppliers, long-term business is not a given; it's something that's earned. There is a
cost model that we make suppliers aware of, and the expectation is that year by year they
find genuine cost-reduction means to offset inflation and move the market price of their
product in a downward direction. Providing they do that, they should remain competitive for
the lifecycle of a car model, which may be five or six years. When it comes to the next-
generation model, our priority would be to give incumbent suppliers every opportunity to
quote, but we expect at that model change a quantum leap in cost improvement, driven by
technology, by manufacturing process, by supply chain and perhaps by manufacturing
footprint as well. If a supplier has been working with us collaboratively, has been engaging
with our engineers, and if its quality performance on the previous model has been good, then
it has an advantage. That should lead to a long-term perpetuation of business. But no
supplier is guaranteed that.

What qualities do you look for in existing and potential suppliers?

Everything starts with having good product; if we're looking for new suppliers it's invariably
because we've got a new technology requirement and we're looking for that capability.
Linked to that, we look for a manufacturing capability to make that product with good quality
control, cost competitiveness, and top management commitment to Toyota. We are a
demanding customer, and without that top management commitment it's difficult to steer the
relationship in the right direction.

Tell me about the challenges you face in Europe when it comes to supplier
relationships and working practices.

Our challenge to emulate the collaborative supplier relationship approach that originated in
Japan is great. If you look at the history of close collaboration between Toyota Motor
Corporation (TMC) and its tightly knit supply base in Toyota City in Japan, what you find there
is homogeneous language and culture - Japanese language, Toyota culture. In Europe, our

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purchasing office has 18 nationalities of buyers and engineers with around 13 first
languages, so there's a lot of potential for confusion. We have traditional Japanese suppliers
vying with western companies for our business. Those Japanese suppliers are very tightly
fused to Toyota; they understand completely how to engage us based on their experiences in
Japan. However, as we grow in Europe, the enthusiasm of western suppliers to work with us
grows. I think we are viewed as a difficult - certainly different - sort of customer with globally
benchmarked targets against unfamiliar technical standards. That's really the challenge for
European suppliers, in that it takes time to learn how to work with Toyota.

Are you trying to replicate the Japanese model in Europe?

I think to replicate the Japanese model would exclude some potential advantages of working
with European suppliers. I am sure there is some innovation out there in the European supply
base that has a different product approach and a different technology approach to that that
Toyota is accustomed to in Japan. We need to watch and listen for that, because it might be
that someone knows something that we don't, or has a better way of doing something. The
spirit of kaizen is one of constant organic learning, and we have to pick up learning from
whatever source it comes.

What share of the parts for your European production is sourced locally?

Our definition of local purchasing extends to eastern Europe and Turkey. It's true that more
than 90 per cent of our locally produced cars are built with components and raw materials
from within that region. The parts that come from Japan or the Far East today include those
that are low volume in Europe but either very high volume or standard in Japan - things such
as manual transmissions and fasteners - where we get scale benefits.

What about your approach to low-cost country sourcing, in terms of seeking or

developing suppliers?

That's not so much on our radar. We are seeking to develop the relationships with European
suppliers. It is the case that many of our first-tier suppliers are procuring second or third-tier
parts from territories further afield, including China and south-east Asia, but we are not
actively seeking first-tier sources in those locations. Our policy is not to insist that suppliers
should manufacture in low-cost countries. I understand that some of my opposite numbers in
other car companies might say the reverse.
What we have seen is a gradual but clear shift eastwards, but that's been driven by our
suppliers seeking to find the way to fit the price minus cost equals profit equation that I
mentioned earlier. It is natural that some commodities, some bulky parts, need to be
manufactured close to our car-making plants, because of the high cost of logistics. That

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means that we have seen suppliers locating close to our plant in Turkey, and therefore Turkey
has emerged as one of our major preferred locations for lower-cost manufacturing. We are
increasingly able to utilise Turkish sources for our other manufacturing locations in the UK
and France.

To what extent do you look to your supply base generally - and Europe specifically -
for innovations?

Big innovations and advanced technology, such as our leading-edge hybrid power plant, are
still the domain of TMC, our parent company in Japan. There is a degree of true partnership
and dependency upon the Toyota group of Japanese suppliers to contribute to those
innovations. But we're expanding the technical content of our business here in Europe, and
we now have a small group of suppliers that we view as being development partners with
whom we want to engage in upfront engineering programmes in order to develop technology
that can be applied to projects in the future, specifically to satisfy European market style and
taste and European regulations, such as on CO2 emissions.
What do you see as the key benefits of that approach?

To provide an alternative to the styles and technologies coming out of Japan. It's not
necessarily the case that what's best for Japan is best for Europe. It's not even necessarily
the case that cost-effective designs in Japan will be cost-effective designs in Europe. I
already mentioned that we represent quite a small percentage of many suppliers' business,
and therefore if our designs are so different that they are not compatible with their existing
experience and manufacturing process, that puts us at a commercial disadvantage. And if
we're not providing product that's to European tastes, that also puts us at a potential
disadvantage. Our contention is that in some areas our European suppliers may have
something to offer that Toyota does not instinctively understand at the moment.

How do your purchasing and R&D teams work together, and how does that feed
through into the way you interact with your supply base?

The major step forward we've made over the past few years has been co-locating purchasing
and R&D in the same European offices. That fosters teamwork between purchasing and
engineering staff. We would not make a purchasing decision to select a supplier and a
particular technology without a consensus with our engineering colleagues, so it's a joint
decision. It is facilitated by purchasing, but made in conjunction with many other parties,
including R&D, production engineering and quality. And increasingly we are inviting resident
engineers from suppliers to join our co-development activities, both here and in Japan.

How do you measure the performance of your suppliers?

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In terms of the quality of their supplied product, we have many measures. The most common
are parts per million defects and the number of quality problem reports that have been issued
from our manufacturing companies in respect of what we would call A-rank defects in
supplied parts - something that is serious enough to cause the customer to complain to a
dealership. In terms of cost, we are constantly benchmarking the costs of equivalent parts in
other regions around the world through the Toyota global network of purchasing organisations
and suppliers. That calculation is always based on an exchange rate, and our aim is for
European suppliers to be globally competitive, irrespective of the vagaries of the currency
markets.

What about the quality of your relationships with suppliers?

We don't have any concrete measures for that. The sense of positive management attitude
from the supplier towards Toyota is an attribute that we superficially rank when we are
considering our purchase strategy for a particular commodity or category. But it's not
measured numerically.

Annual surveys in Europe and the US consistently show Toyota ahead of other car
makers in terms of how suppliers rate the quality of their business relationships. Are
those something you watch closely?

I'm aware of those tables. I'm also aware of some of the differences between Toyota's
practices and other companies' practices. But we concentrate on what we believe is the right
way to do business and the way to optimise the performance of our suppliers. I think we try to
behave consistently in line with declared principles. We try to be professional, we try to listen,
we try to do what we say we will do when we say we will do it. We certainly help suppliers to
improve at a practical level and we try to take a long-term and realistic view. Are we doing it
because we want to be seen as a customer of choice? Only indirectly. We're doing what we
think is right to achieve high quality at optimum cost. That generally means working with
suppliers over a long period of time in the style I've described. If the suppliers appreciate that
and it makes them want to do more business with us, that's great. But we're doing it because
we believe that it's the best approach to achieve the aims of both parties.

How far do you attribute Toyota's growth and profitability over the past decade to its
supplier relationships?
My personal view is that a good product has to be at the core of any business success. Our
product is motor cars, therefore having good cars in the marketplace - described by quality,
reliability, durability, and of course desirability - has to be top of the list of reasons for our
growing profitability. At the same time, we have a local manufacturing policy and seek to

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make our cars in the markets where we sell them. That gives some visibility to Toyota's
workings, which may also include some feeling of what we stand for and the motivations that
lead to a collaborative style. So it probably does contribute in some way, but quality of the
product is more influential.

What advice would you offer to other senior procurement executives looking to
build long-term supplier relationships?

Take a genuine interest in the manufacturing side of the supplier's business. Take a long-
term view in your discussions with suppliers. And treat the supplier as you would like them to
treat you back. We should seek to earn the respect of suppliers and the reciprocated support
that brings, rather than demanding it as a right of position.

FACT FILE: Toyota at a glance

Founded: 1937
Head office: Toyota City, Japan
Number of employees: 286,000 (55,000 in Europe)
Japan's and Asia's biggest company; the world's eighth largest
Vehicle sales in 2006: 8.8 million (1 million in Europe)
Revenues in 2005-06: ¥21 trillion ($185 billion in Europe)
Revenues in 2005-06: ¥1.4 trillion ($12.1 billion in Europe)
Manufacturing plants in 28 countries (8 in Europe)
Major markets: US, Japan, Thailand, Australiam China
Brands: Toyota, Lexus, Daihatsu, Hino
Best-sellers: Corolla, Camry, Hilux.4 Runner, Land Cruiser, RAV4, Yaris, Prius

Geraint John (geraint.john@cpoagenda.com) is the editor-in-chief of CPO Agenda

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