Toyota Supplier Partnering Characteristics

What follows are the seven characteristics of Toyota’s supplier partnering, as described in Table 12-1. We’ll look at them from bottom to top and discuss the steps you would need to follow to bring each element of the partnering relationship to fruition.

Mutual Understanding

The basis for the relationship starts with understanding, and it does not come easy. What does it mean for a company to understand its supplier partner? For Toyota, it’s genchi genbutsu (actual part, actual place), reflecting its core philosophy of going and seeing directly, to deeply understand the situation. The question is whether you are willing to hit the road, get your hands dirty, and put in the effort.

When Toyota first started to work with Metalsa, a frame and body components manufacturer headquartered in Monterrey, Mexico, they spent time with senior management and wanted to understand the company’s philosophy. They appreciated the fact that Metalsa was originally a family-owned company, one that still has significant family influence. More important, they appreciated Metalsa’s emphasis on creating a positive work culture with only the best people. Hiring is a core activity for Metalsa and includes intense screening, including visiting the homes of prospective employees to see them in their family environment. Metalsa invests heavily in training its people and considers their quality its principal competitive advantage.

Table 12-1. Key Elements in Supplier Partnering

A team of supplier engineers from Toyota visiting the Metalsa plant were given their usual preview of frames and other products in the lobby showcase. What made it unusual was that its executives could not get the Toyota engineers out of the lobby. They pored over each and every weld, intently discussing the quality of the welds and the design of the chassis. It was apparent that there was something different about Toyota as a customer. Metalsa got major business during the engineering phase to source the entire chassis for the Tundra truck to be built in a Toyota plant that had not yet been built in San Antonio, Texas. To support the launch, Toyota asked that a large team of engineers be dedicated to the project and that they spend significant time in Japan. They asked for a full-time engineer to be stationed in Michigan near the Toyota Technical Center (TTC), and for one and later two more engineers to be stationed full-time in Japan to work alongside Toyota engineers.

It was extremely unusual for Toyota to give this much business to a brand new supplier. But Toyota had told the Mexican government they would source more product and build vehicles in Mexico in exchange for favorable tariff treatment. Once this decision was made, Toyota set out to find suppliers with compatible cultures. They then started the long and resource-intensive process of developing mutual understanding between Toyota and the supplier. This was an investment that would span decades.

Given the significant investment by Metalsa in assigning many engineers to work with Toyota, building prototypes, and investing in learning to work with Toyota before ever getting paid, one might expect a degree of apprehension. But on the contrary, Metalsa senior executives made an increase in Toyota business one of the company’s top strategic objectives. They even offered to build a special plant dedicated to Toyota parts near the border (which Toyota refused). Why? They knew Toyota would be an honorable and reliable customer, their visibility in the industry would go up considerably because they supplied Toyota, and that they would learn a ton and get much better as a company.

Toyota suppliers speak in glowing terms about Toyota as reliable, capable, and that the relationship causes them to get better at supplying Toyota products and their own total business. A Toyota supplier put it this way:

Toyota has helped us dramatically improve our production system by coming in and working with us side by side. On the commercial side, Toyota is very hands on also. They come in and measure and work to get cost out of the system. We started with Toyota when they opened the Canadian plant with one component, and as we improved performance we were rewarded, so we now have almost the entire cockpit. Relative to all car companies we deal with, Toyota is the best customer.

Many companies have certain suppliers that have been with them for many years. And the customer and supplier get to know each other. But by “mutual understanding,” we mean more than familiarity. Do you and your suppliers truly understand each other at a working level? Do you understand their processes in detail, enough to help them improve their processes? Do your suppliers or customers respect your ability to understand their processes and make useful suggestions? Is there trust in the relationship—trust that each party is out to help the other be successful?

Interlocking Structures

Putting out a product to bid conveys an image of a bunch of commodity suppliers who can all equally well make the product the customer wants. As homeowners, we aren’t going to develop an intimate relationship with the producer of lightbulbs we buy for our house. The best the lightbulb manufacturer can do is become part of a large purchasing and retailing organization like Costco. But we might want to get to know the carpenter who will build our new addition or house. The dynamics involved in purchasing custom parts for a complex product like an automobile include an array of products, from a lightbulb to the complexity of a customized assembly like a chassis or seat.

When Toyota first decided to make cars in Georgetown, Kentucky, they needed a nearby source for seats. Seats in automobiles are big and very complex; there are a huge number of variations. So building an inventory of all possible seat combinations is not cost effective and would leave auto assemblers walking up and down the line picking the right seat. Instead, Toyota wanted seats to arrive from the supplier in the sequence needed as cars come down the assembly line. One possible way to do that is to push a ton of inventory onto the seat supplier, but if that approach were adopted, the Toyota seat supplier would not be able to meet its cost objectives. And quality problems would be hidden in mountains of inventory. Therefore, Toyota asked its supplier to actually build the seats in the sequence needed on the assembly line based on seat-by-seat orders from Toyota.

Toyota wanted to source this expensive component to an American company.After extensive discussions with many companies, they picked Johnson Controls (JCI), whose plant later became an extensively studied model for Toyota-style just-in-time production. But it is important to remember that this did not just happen without effort. It required a lot of hard work.

When Toyota first started working with the Johnson Control plant in Georgetown, JCI not only agreed to work with Toyota, but also was prepared to expand the plant to accommodate Toyota’s demand. Much to JCI’s surprise, Toyota said they would give them the business only if they did not expand the plant. They challenged JCI to reduce inventory and fit the additional volume into the existing building, which seemed impossible within JCI’s mass production paradigm at the time. But with Toyota’s help they accomplished it and began to understand the Toyota philosophy. From Toyota’s perspective, it was not enough for Johnson Controls to deliver seats in sequence, just-in-time. JCI needed a compatible system to Toyota’s—the ability to build and deliver justin-time and continually improve their system to drive out waste over time. Only then could Toyota and the plant mutually prosper.

This became even more evident when Toyota brought on a second source of seats for Georgetown. Toyota had worked very hard to develop the JohnsonControls plant. But Toyota’s policy is to never sole source. They always want at least two to three potential sources for every component. They do not want 10, but do want intense competition between suppliers to help motivate improvement. The suppliers each get the business for a product, and they keep that business over the life of that model until a new version is introduced. At that point the next model is bid again. The incumbent may have a big advantage, unless other conditions warrant switching products around. It is possible for a poor performer to lose some share of Toyota’s business and for an excellent supplier to increase its share over time.

Toyota had invested heavily in teaching the Toyota Production System to Johnson Controls and would not add a supplier of a critical component like a seat without a similar level of capability to build and deliver almost perfect quality, just-in-time, and in sequence. So they asked JCI to enter into a joint venture with Araco, Toyota’s premier seat supplier in Japan, 70 percent of which is owned by Toyota. The joint venture, called Trim Masters, Inc. (TMI), was formed in 1994. Johnson Controls is the single largest shareholder, with 40 percent, but Toyota and Araco together have controlling interest.

This example and many more tell a story of interlocking structures with supplier partners. It is more like a marriage than casual dating. Technical systems, social systems, and cultural systems are all tightly intertwined. It goes beyond manufacturing to product development systems. It is not enough to be a good supplier. The supplier must act as a seamless extension of the refined lean systems of Toyota. The interlocking structure was reinforced in the case of TMI by Toyota’s ownership and control. For Johnson Controls, a condition of getting the business was that they had to invest in a separate Toyota business unit with strong firewalls between it and the rest of JCI. The structure reinforces the interdependent processes with Toyota.

Investing in interdependent processes means more than a customer issuing a set of requirements to a supplier. It means the way they work fits together. If the customer is asking for just-in-time delivery of material, the supplier should have the capability to build just-in-time, not ship from inventory. If the customer has the flexibility to quickly change to a different product mix, the supplier must have that capability. If the customer picks up product in tight time windows, the supplier must have the structure in place to get the product reliably on the dock, preinspected within those time windows. In other words, the processes used to design, make, test, and deliver a product should be seamless, as if each partner is an extension of the other.

Control Systems

Partnering gives the impression of a relationship among equals. “Trust” suggests that Toyota lets suppliers do their own thing. Nothing could be further from the truth. The role suppliers play is too vital for Toyota to take a hands-off approach— they do not want to leave parts reliability and product quality to chance. To Toyota, the flip side of the same coin called trust is an effective control system. Toyota has elaborate systems of measurement, target setting, and monitoring of performance.

Toyota’s command central for supplied parts is a bit like the control tower at a well-run airport. They know the status in real time of all parts suppliers. Ask for any key delivery performance indicator for any supplier, and it is at the fingertips of production control. Ask purchasing for charts and graphs of performance over time on quality, cost, and delivery, and it is there.

If there is a near missed shipment, a quality problem, incorrect labeling, or any glitch, it will surface immediately. Then Toyota is on the phone and demands the supplier come to see them and explain the cause of the problem and their planned countermeasures. They expect immediate responses to any concerns about quality, cost, or delivery, when indicators are off target, and before there are any serious performance threats to production. But these cannot be just entry-level engineers talking. They expect the highest executive levels of the supplier to get personally involved. These instances of problems are taken as an opportunity to educate the supplier.

For example, a Toyota vice president of product development relayed an example of a supplier that had a quality problem that was design related. The vice president of the supplier was asked to come to the Toyota Technical Center to discuss his countermeasures. When the VP showed up for the meeting, it was obvious that he did not have a detailed understanding of the problem, its cause, and the countermeasures. With a wink and a nod he assured the Toyota executives that he would take care of the problem immediately. The Toyota vice president was stunned that this VP would come to the meeting so poorly prepared, without seeing for himself what the real problem was. He asked him to go back and find out what the real problem was and return for another meeting.

What the Toyota vice president was doing was educating. He was not interested in this particular case. He could have had a lower-level engineer talk to a lower-level engineer at the supplier. He took the opportunity to create an object lesson in the appropriate role of an executive of a Toyota’s supplier. They must take responsibility and lead by example.

Control also extends to aggressive cost reduction initiatives. Toyota not only gives the supplier a target, but carefully monitors progress in reducing costs to achieve the targets. As an example, Toyota’s supplier, Trim Master, Inc., bids on every new model (about every four or five years) and is expected to decrease prices about 3 to 4 percent every year after the initial model introduction year. The cost-cutting initiative by Toyota around 2000 was so aggressive it seemed scary. The goal was to bring suppliers in America to the levels of global sources overseas. Toyota suppliers felt they should be following TPS or a similar philosophy and excel at cost reduction more than the average overseas supplier, which should make up for differences in wage levels and material costs. The program was called CCC21, and the focus was on becoming the cost leader in the world for the twenty-first century. This was not a target for existing products, but for new products being developed for the next new model launch. For TMI it meant approximately a 30 percent price reduction for the next new model launch (in about three years).

How could TMI cut prices so aggressively when they already were exceptionally lean by most standards? They had to start by accepting the fact that this was their target and it was critical that they work as hard as possible to achieve it. Next they needed a plan. The approach used was hoshin kanri, also called policy deployment, in which top management sets high-level objectives and the next level down comes up with objectives to support these and draws a chart showing the relationships between their objectives and the higher level. And this cascades down ultimately to the shop floor. Charts for each of the different departments with their plans and progress toward the plans are prominently displayed in a “war room.”

The severe price cutting Toyota requested became the focus of this plan, and everyone knew what they had to do to support that price reduction. The group of 12 managers who were champions for their functions met weekly in the war room to review progress and the implementation of specific measures and countermeasures to achieve the plan. Since there had already been so much cost taken out of plant operations, the biggest opportunities were in the engineering of the new product, working with Toyota product development. In this workmanlike fashion TMI steadily and systematically achieved the goal. They realized that if Toyota saw a serious effort and they fell somewhat short of the target cost reduction, Toyota would not punish them. And since Toyota was closely monitoring the process, they knew that Toyota knew what kind of effort they were expending.

Target pricing is a severe form of control. It is well known that Japanese companies work backward in setting costs for the product. Instead of the typical American practice of building up costs, adding a profit margin, and setting the price, they start with the market price and figure out what costs they can bear to make the profit they want. This leads to target prices for suppliers—the piece price they can afford to pay to suppliers within the vehicle budget. American auto companies have all picked up on this practice, setting target prices, but they lack the sophistication of Toyota and Honda in setting prices within which suppliers can make a profit, and they lack sophistication in helping suppliers achieve the target costs required to meet that price. As a brake system supplier put it:

For the Big Three, target pricing equals “squeeze the supplier until we are dead.” I have asked how they have developed the target price. The answer is the following— silence. It is based on nothing. It is based on the finance guy who has divvied up money. They have no idea how we will get the cost reductions, they just want them.

Because Toyota has a rational system to set targets for suppliers, work with suppliers to reach the targets, and is reasonable with suppliers when their best efforts do not achieve the targets, they are perceived as fair customers. They are not out to simply control the suppliers or run them out of business. They are out to work with them for mutual benefit.

We will see in the case of Delphi at the end of this chapter that the backbone of this target setting system are cost management models. Toyota does not want to just manage price, they want to manage cost. They want the reality of costs to be reflected in the target price. If Toyota cuts price by 10 percent, they want the reality of the supplier to reflect an actual cost reduction of 10 percent. Toward this end, Toyota has developed realistic cost models that reflect the costs of raw materials, space, inventory, part processing, and overhead. For example, they know that processing costs for stamping are proportional to the number of strokes of the dies in the presses. They have established a relationship between these and built that into the model. The parameters of the model come from suppliers, Toyota plants, and public sources. These models allow them to estimate what the cost of the part should be. It also allows product engineers to redesign the product and estimate the cost impact. And it allows supplier development engineers to make suggestions and estimate the cost reductions of those suggestions.

Perhaps the most important source of Toyota’s control is the old-fashioned free market mechanism of competition. But how can Toyota have long-term dedicated suppliers and get competition at the same time? The answer is sometimes called “parallel sourcing.” Source not from one but not from many. Toyota looks for three or four top-notch suppliers for a component and keeps the business within this family. For any given car model, one of the suppliers will get this business for the life of that model. But getting it for the next version of that model is not guaranteed. If they do not perform, or their competitor, like a sibling, does a lot better, they can lose this business.

How are your control systems seen by your suppliers? Are they enabling the suppliers to get better and reach aggressive targets? Do you have enough detailed understanding of your supplier’s costs to set realistic targets and understand if they are achievable?

Compatible Capabilities

These days it is popular to source in low-wage countries like China or India. We know of auto companies and their suppliers that have set multibillion-dollar targets for sourcing in China, as if that is an accomplishment in and of itself. In the near–term, at least, this is not an option for Toyota. Toyota is well known for excellence in engineering and manufacturing, and views suppliers as extensions of its technical capabilities. It is not enough to be able to make parts to specs. Suppliers must be able to innovate in the product design and process and work closely with Toyota through the product development process. While there are different roles in product development, ranging from being given general (black box) specifications to being asked to design the part to being given a blueprint and asked to make it, in all cases suppliers must be capable of working seamlessly with Toyota engineers.

For Toyota in Japan, close partners like Denso and Aisin can work independently on the component design, generally anticipating Toyota’s needs before even receiving specifications. However, in the United States this type of approach would be considered unusual, largely because the U.S. suppliers may not have the intimate knowledge of their customers that Denso and Aisin have of Toyota, and also because they lack the specific technical capabilities. The U.S. suppliers often find that working with Toyota engineers is novel and very different from working with the Big Three. As an executive at the Toyota Technical Center in Ann Arbor, Michigan, put it:

Some people in Japan have grown through the parent company and then moved to jobs at various suppliers, so they already know the culture. Toyota in Japan and their suppliers know each other’s capability. Delphi and other large companies are going to top management in Japan and saying, “Here is what we would like to do in the U.S. with TTC,” and salesmen from the suppliers will go over to Japan and tell Japanese management of Toyota what they want to hear. But the American suppliers often cannot deliver on the salesmen’s promise. There is a problem of capability among American suppliers compared to what Toyota has come to expect in Japan.

It’s not a matter of the American suppliers being weak technically or incapable in general, but that they do not understand the Toyota Way of product development and preparing a product for production. For example, Toyota suppliers say that Toyota often, makes things vague on specifications, especially at the beginning of a new model development. They might not spell out the exact level of drag/resistance/looseness of a hinge as it closes and opens but say something like, “This has to do with the ‘feel,’ and thus is hard to quantify”—it will get adjusted as they go along. Toyota in Japan is also used to giving vague specifications to suppliers. In fact, this is expected in the “guest engineer” system. First-tier suppliers typically have a significant number of design engineers who spend about three years living in Toyota’s engineering offices full-time. They work alongside the parent-company engineers, learning the product development process in detail. At some point they understand the process and language intimately. They know when all of the new car programs will begin and the basic goals of those programs. They come up with ideas for the design before even being asked.

Today, Toyota has stepped up its simultaneous engineering initiative, getting input from suppliers on their manufacturing capabilities when it is still a concept and before the body is even styled. American suppliers, lacking that history and intimate knowledge, are unable to work with the vague specifications in the early stages of simultaneous engineering. A new group was set up in Toyota purchasing to help American suppliers participate in simultaneous engineering. According to an executive from Toyota’s North American purchasing department:

The degree of simultaneous engineering in Japan is so high, our engineers have to give vague specifications early in the program. Experienced suppliers know how to feed their design and manufacturing requirements to Toyota even with this uncertainty, and those less experienced do not understand the timing of that and how to do it. Our role [in North American headquarters] is to help suppliers by reviewing Toyota’s technical information jointly with the supplier and trying to help the supplier fully meet the early and vague Toyota requirements. The suppliers have the technical capability if they have the information, and we help them get it and interpret it.

Not all suppliers have the capability. Their American customers do not have the same requirements for information as Toyota, and therefore do not always keep the detailed manufacturing data Toyota needs to set its design specifications—a frustrating situation for Toyota and its suppliers. As a young American auto body engineer working at the Toyota Technical Center explained:

New suppliers are hard to work for, particularly when it comes to getting tolerance data. For fitting their parts into our body design, we want the tolerance between two points of fit. Our suppliers may come to us and say we cannot hold the level of tolerances you are requesting. We know other suppliers can hold tighter tolerances. So we ask why. They simply don’t have the data. In one case recently it was clear the supplier fudged the data. They gave us data on hundreds of parts and they averaged out to exactly .5 for all the parts—we knew that was completely improbable and they fudged it. “Go and see” is the biggest thing—we live that. In the process, we teach them what our data requirements are and how we collect and analyze the data.

Toyota continues to invest heavily in teaching Americans their way, and the capabilities are gradually building in America. Toyota has made major investments in its technical center in Michigan, which is continuing to expand rapidly, and its suppliers are making comparable investments in Michigan R&D facilities. The 2005, Toyota Avalon was the first entire vehicle to be principally engineered in the United States. There was still a lot of involvement from Toyota engineers in Japan, but the development was directed out of Michigan. Developing engineering capability for North America has been an ongoing process for over 15 years and will continue for the next 15 years.

Now the question: Can Toyota simply pick up shop and transfer parts supply to a low-wage country and leave behind this investment? It is not the sunk cost that is the issue. It is that Toyota’s product development process is so “leaned out” and fast that it needs suppliers who can work in lockstep and provide the critical contributions it needs every day. Losing that would mean losing a core part of Toyota’s competitive advantage.

Now your turn: Is your company actively working on reducing product development lead time? Are you working to use simultaneous engineering to get the design right up front? Are you interested in the highest quality parts that work together seamlessly? If the answers to these questions are yes, it’s worth taking your supplier’s technical capabilities seriously. And it is the fit between your “culture of engineering” and your suppliers that is at stake. Parts are not parts, and engineering is not engineering.

Information Sharing

In the early stages of American companies learning to partner with suppliers, the approach seemed to be more information sharing with suppliers is better: “If we inundate suppliers with information, they will be informed enough to be equal partners.” Toyota also believes strongly in information sharing, but of a more targeted variety. There is a high degree of structure with a specific time and place for meetings, very clear agendas, and clear formats for information and data sharing. At the TTC in Michigan there is a “design-in” room, where competing suppliers work in the same room on the same project for Toyota. Design-in requires the most intensive level of supplier involvement. The idea is that suppliers design their components into Toyota’s vehicle. It has separate rooms for the suppliers to keep themselves secure as well. However, separable body functional parts like sunroofs, mirrors, and locks are designed fundamentally by the suppliers in their own buildings. They are referred to as RDDP (Request for Design and Development Process) parts. Headliners and floor consoles might also be considered RDDP. For instance, since the Toyota management deems that suppliers garner expert knowledge of the mechanism of the locks, they ask them to work on the design and give them only basic specs. These RDDP parts can stand alone and be plugged in. Yet Toyota engineers are still deeply involved with the interface and have to work with body sheet-metal area and trim to define the boundaries of those parts. For design-in parts, suppliers must be present at TTC. But for RDDP parts, it’s more hands off, and the suppliers don’t have to be present. Design-in is always done on Toyota’s CAD system and communication is intense, whereas RDDP can be done on the supplier’s system with less intense communication.

Clearly when the supplier is involved in the “design-in” process and has engineers on site, they are in close communication with Toyota engineers. But the nature of the communication is very different from the “inundation model.” Most of the communication is between the specific Toyota engineer in charge of that component system and the supplier engineer for that system. And it is highly focused on technical issues. There is much less non-value added communication than we see at other companies. Toyota expects the supplier engineer to learn Toyota’s CAD system. Toyota engineers can do their own CAD work—they do not delegate the core engineering work to specialist CAD users—and they expect the same of the supplier engineers. So a lot of the time the supplier engineer is doing engineering work—something all too rare in many companies.

A great deal of information sharing is necessary in order to optimize the development and manufacturing of the vehicle. Achieving the cost reductions Toyota expects cannot be achieved through manufacturing improvements alone. For instance, Toyota estimates that 70 percent of its purchasing manpower is spent during the product development and launch phases. Particularly during the early phases of product development, the most sensitive proprietary information each company possesses is being disclosed and discussed. It can only be openly shared in an atmosphere of trust.

Has your company developed this kind of trust to openly share technical information with key suppliers? What percentage of the communication between your company and suppliers is value-added technical communication? By this we mean focused on technical issues that get immediately translated into engineering design and decisions. Is there a clear technical contact in your company working with each supplier? Are your technical contacts highly knowledgeable and authorized to make decisions about the product? Do your engineers and suppliers share a common language so communication is efficient, timely, and accurate?

Joint Improvement Activities

Many American suppliers we know celebrated when they first received business from Toyota, even if it is a small and not very profitable start-up contract. In addition to new sales, they knew as a parts supplier that they would have opportunities to learn and get better . . . and enhance their reputation with other customers. Toyota does not just purchase parts from suppliers. Toyota develops supplier’s capabilities. A contract from Toyota is like getting admitted to a top university—the best in the business. Toyota’s goal in teaching its suppliers lean methods is not to teach specific tools or methodologies, but to teach a way of thinking about approaching problems and about improving processes.

The approach Toyota uses is learning by doing and experiencing. Toyota has some training courses, for example on TPS. But these tend to be short overview sessions. The preferred approach to teaching TPS is to do a project at the supplier’s plant. In the 1990s, for instance, Toyota established the Toyota’s Supplier Support Center (TSSC), which was set up as a separate, wholly owned corporation to teach TPS. The approach was to work with the supplier to set up TPS on one product line, create a model by working with a few supplier engineers and managers, and let them discover TPS firsthand by doing it and experiencing it. After the model was implemented, it was up to the supplier to keep it going, with occasional coaching. It’s interesting that Toyota separated TSSC from the purchasing relationship, even making it a separate corporation owned as a subsidiary of Toyota. TSSC’s goal was to teach through doing and demonstration, and Toyota did not want the suppliers looking over their shoulder, fearing they would be asked for extra price reductions. The process took six to nine months of intense tutelage, focusing on one product family. Typical results were a spectacular doubling of productivity, increases in quality, and dramatic reductions in inventory and lead time.

More recently, TSSC has shifted its focus from free consulting to fee-based consulting, focusing exclusively outside of auto. Also, part of the old TSSC was shifted to an internal Operations Management Development Division that focuses on internal training of American Toyota employees in TPS. Interestingly, one way OMDD trains internal Toyota associates in TPS is to send them to suppliers to work on a project. They say if they do the project at Toyota and their mentor criticizes them, it will embarrass them in front of peers, so they would rather do the training at a supplier where they are not among peers. Obviously, suppliers also benefit from this training.

Toyota purchasing is now responsible for supplier development, but has still separated TPS teaching from the business relationships. There are no 50-50 splits of cost savings. A Toyota purchasing executive explained:

We separate the cost challenge that all suppliers have anyway to reduce price from some improvement or support activity. We are likely to send a TPS expert to work with the suppliers two days a month on long-term development, and we do not ask the supplier to share savings based on specific improvements. Instead, that is part of our annual cost reduction targets for the suppliers. My engineers do not understand how that improvement relates to a purchasing commercial arrangement, and it is not a productive use of their time.

An example of a strategic supplier relationship comes from Delphi, the largest automotive parts supplier. They have the size to support Toyota technically and globally, so Toyota decided to invest in training them. Delphi, set up its own supplier development program for secondand third-tier suppliers modeled after Honda and Toyota and asked for a Toyota TPS expert to be assigned full-time to them for three years. Toyota would not agree to three years but did agree to assign one of their most senior experts full-time for two years. Delphi wanted this expert housed at corporate headquarters, but Toyota insisted he be assigned to one division so he could get more deeply involved in supplier development activities on the floor. The Toyota executive in charge explained:

We dispatched our TPS expert to Delphi to help their supplier support engineers have more of a Toyota Way of thinking and method, but we needed him back in two years. They requested to extend that assignment, and we suggested they send a senior engineer or someone from that group to our OMDD to be developed just like a Toyota engineer is developed—here is the project company, project, observe and make improvements. It is a very traditional student-sensei approach.

Complementing the supplier development activities, value engineering typically takes place in the early product development phase. Before the product is in production there are many opportunities to cut cost through common parts, simplification of the product—such as reducing the number of parts—and designing it to reduce the amount of labor required for assembly. After the product is in production, value analysis is the analogous process to redesign it to take cost out. Toyota was able to take literally billions of dollars in cost out of the Camry over time through product redesign. They do this through their product development function, and in this case share savings with suppliers.

Clearly, Toyota’s approach to supplier development is distinctive. For one thing Toyota itself is a lean model, arguably the lean model. So they have something to teach. But perhaps more important, the context is one of cooperation and learning, and they make suppliers better in a holistic sense. It is not just about the individual project and the savings they can extract from the project—Toyota gets its annual price reductions anyway. The teaching they do is to enable the supplier to give this price reduction to Toyota while still making money on the business.

Is your company in a position to mentor suppliers? Have you developed the internal capability so you have something to offer to your suppliers? Are you willing to make the investment in making your suppliers better so they will give you better cost, quality, and delivery performance?

Continuous Improvement and Learning

The result of working on the six base levels of the supplier partnering hierarchy is the foundation for kaizen (continuous improvement) and learning. Typically, learning is thought to occur at the individual level, and if these individuals leave the organization or move to another assignment, their learning is lost. Preserving what is learned at the organizational level is far more challenging, and learning at the enterprise level seems near impossible. But Toyota has developed this core competency.

With a solid foundation, the key to enterprise learning is the development of standardized processes that get refined and improved. Without standards there can be no learning. Standards go beyond documented procedures to shared tacit knowledge of the right way to do things.

Toyota views suppliers as extensions of its capabilities, but also as independent agents. At first glance this claim may appear paradoxical, but it actually is not. On the one hand, Toyota will not impose its own way or production system on its suppliers. If a supplier can use a different production system effectively to achieve the objectives required for cost, quality, and delivery, that’s fine. On the other hand, the suppliers share a common philosophy of product development and manufacturing, and many specific practices. In the codevelopment of products, it’s necessary to be completely synchronized on timing, testing methods, metrics to specify product performance, and even technical vocabulary. The result has been the evolution of common philosophies, language, and approaches between Toyota and its suppliers.

In the United States, suppliers quickly realize that to achieve Toyota’s demanding performance requirements they must learn lean manufacturing methods. Through various supplier development activities, they end up learning from their customers, and thus a standard emerges. Many of the actions of Toyota that appear to be short-term cost-cutting initiatives are also investments in learning. Toyota thinks of CCC21 as not just a price reduction program, but a way to create a challenging environment so its suppliers will grow:

If we go to supplier and say we want you to reduce your price by 5 percent, they will say okay and will lower the price and take a hit on profit. However, there is no way to reduce price by 30 percent and stay in business. He has to go in and revolutionize every part of the business. We will work with the supplier to make the 30 percent. We will not leave them high and dry. In some cases you cannot get 30 percent out. If it is a simple part and very little labor, you cannot get 30 percent out. Did you make a strong effort? Did you look at every step from raw material to shipping out the door? Can you get a penny here and there? Maybe we only get 20 percent out, so we are both winners. Purchasing understands the cost for every step of manufacturing from raw material on out.

Developing all of the individual suppliers to fill the North American needs for Toyota was the first step in the puzzle of creating an extended lean enterprise. Once the individual parts are in place comes the tough job of connecting these independent suppliers into a true supplier network. We call this a “lean learning enterprise.” Long ago in Japan Toyota developed jishuken4, or study group, as a means of learning with its suppliers. Now they organize top suppliers into study groups. In Toyota style, these are all “learning by doing” processes. Toyota believes in keeping classroom training to a minimum. The important learning happens through real

projects on the shop floor, and suppliers must take ownership of their learning.

They have set up similar jishuken activities with American suppliers (called Plant Development Activities) trying various configurations. They found they had to group suppliers by skill level with TPS since there was such a wide range. These Plant Development Activities afford a chance for suppliers to get

4Translated as: Ji (myself), shu (autonomous), ken (study). In other words, suppliers are responsible for taking the opportunity to learn for themselves, with mentoring from Toyota.

hands-on activity with TPS in different supplier environments. They also begin to create a bond across Toyota suppliers, almost like a club.

These activities are conducted within the context of BAMA (Bluegrass Automotive Manufacturing Association), Toyota’s supplier association. It started in Kentucky when Toyota opened its first assembly plant there, but is now throughout North America. These are core Toyota suppliers who meet during the year, sharing practices, information, and concerns. There are committees that work on specific things, including joint projects. The meetings are important and allow Toyota to provide key information to suppliers. But the networking is even more important.

In sum, to be successful, a lean extended enterprise must have strong leadership from the final assembler, partnering between the final assembler and its suppliers, an established culture of continuous improvement, and joint learning among the partners. At the very least this requires a stable set of suppliers who have learned a common philosophy of operations and are part of a broader supplier network.