How Did Toyota Communicate Material Needs with Suppliers?

Executive Summary

• Something little-discussed regarding the TPS is how Toyota communicated requirements.
• We cover what makes the TPS different from the conventional explanation.

Introduction

This article was created to answer a question in the article How to Understand DDMRP as Yet Another Repackaging of JIT and Lean.

Question: On Material Need Communication

I have no issues with Toyota’s quality, but its suppliers were under pressure to perform, and any little failure would result in suspension. In this day and age, creative accounting is a complicated system and inventory ownership can be juggled in that system. –

The question to be asked is, how did Toyota suppliers know how much stock was required and at what exact tine delivery was supposed to be made to the production line. – Antony Fernandez

Answer:

There are quite a few books on TPS. Real TPS adherents will tend to tell you to refer back to the earliest books, such as the book by Taiichi Ohno (TPS: Beyond Large-Scale Production), which I have in front of me.

Toyota Production System: Beyond Large-Scale Production

This book is heavier on philosophy than details. I don’t see any description of the communication method used to communicate the JIT order to the supplier (regarding the technology). However, for many years at least Toyota used a stable production schedule for a month. And they communicated this schedule. See this quote.

“First Toyota Motor Company has an annual plan. This means the rough number of cars — for instance, 2 million — to be produced and sold during the current year.

Next, there is a monthly production schedule. For example, the type and quantity of cars to be made in March are another type of quantities of cars to be made in March are announced early on, and in February, a more detailed schedule is “set.” Both schedules are sent to the outside cooperating firms as they are developed. Based on these plans, the daily production schedule is established in detail and included production leveling.”

Communicating the Stable Production Schedule to Suppliers

So the outside suppliers would have already known the needs and timing of material without the necessity for communication (probably except in a few circumstances where they ran low).

Of course, this approach won’t work for most JIT proponents as most support “flexible manufacturing,” which is opposed to a stable production schedule. JIT/Lean proponents say that you can have much lower inventories (even though the lead times are much longer than what Toyota faced). They say that you can change the production schedule very frequently and that this is a best practice — being flexible is good, and being stable is bad.

So the pitch is that you can have it all.

The world is your oyster. And that one can pick and choose the parts of the TPS that they like and leave out the other parts.

And that one can pick and choose (i.e., cherry-pick) the parts of the TPS that they like and leave out the other parts.

Toyota could keep very low inventories because they had a network of suppliers very close to their factories that essentially were offsite warehouses for them. This point was left out of many explanations of the TPS.

This is because, in our view, it would have meant this aspect of the TPS was not translatable for many manufacturing companies that were the target customers of JIT consultants.

JIT, Proximity of Sourcing Locations and Lead Times

Obviously, if your supplier is down the street, you can keep very little inventory in your four walls. But that is not “JIT” per se. It is more accurately described as the stock being held by outside entities. It is also not the type of JIT preached to companies in the US that tried to replicate what Toyota did by listening to consultants who had cherry-picked the TPS. That is a standard inventory formula that will calculate a meager inventory if your lead time is 1 hour. A 50% variability in a 60 minute lead time is still only 30 minutes minus (but of course most importantly) plus. So the distinction is the lead time.

This observation contradicts a quotation from Taiichi Ohno, which I have included below:

Just-in-time means that, in a flow process, the right parts needed in assembly reach the assembly line at the time they are needed and only in the amount needed. A company establishing this flow throughput can approach zero inventory.

This is only possible if lead times are concise or if the orders’ scheduling is extremely low in variability (or, of course, both). By publishing a stable monthly production schedule to suppliers that were in very close proximity, Toyota met both of these criteria. This is why the system worked for them. Yet, the problem with Ohno’s statement is that it is not supportable with cost information. Furthermore, most manufacturers do not have a stable monthly schedule and do not have their suppliers within a 5 or 10-mile radius of their plant.

Therefore, there is limited applicability of these aspects of the TPS. Secondly, if you build a cost model, you will find that the TPS really overvalues reducing materials. There is no overriding need to deliver only as much product as is immediately required. In fact, no one does this in their personal life.

One Apple At a Time?

Do Lean/JIT consultants go grocery shopping differently than the rest of us? Extending the TPS to grocery shopping would mean only obtaining the food necessary for that meal. This means multiple daily trips to the grocery store.

People do not go grocery shopping for the food they eat at that meal to have “zero inventory” in their refrigerators. If one did so, they would spend an hour per day just driving back and forth to the grocery. People shop for perishables normally weekly (canned goods, of course, far less frequently). This is because there are costs related to “ordering” or acquisition both in time and money that overwhelm the costs of holding the inventory (in this case, the inventory carrying cost on the groceries that are not consumed in the meal.

If JIT/Lean consultants have a refrigerator, one natural question will arise. Why? This means they are storing food for later consumption. This is a big no-no according to their philosophy and is introducing waste into their food supply chain.

But if there should be only as much inventory delivered “in the amount needed.” why would a refrigerator be necessary?

The Problem with JIT/Lean Consultants Who Hold Costco Cards

Perhaps an even more egregious inconsistency is any JIT/Lean consultant who preaches one thing to companies during the week, but then shops at Costco during the weekend!

Are there any JIT/Lean consultants who are also Costco shoppers? If so, this is a serious violation of the TPS. These consultants should turn over their Costco cards immediately! They also need to move to daily or even hourly resupply of meat and produce to their homes. The eventual goal is “zero inventory” of food in their homes. 

How the Toyota Production System Was Misrepresented to US Audiences

Toyota is often put forward as an exemplar of what to follow — and there is a cottage industry in consulting which often explains what Toyota did incorrectly.

Most of the books on Toyota and the Toyota Production System (TPS) were written by consultants, who have consulting services to sell. Therefore, they will often alter the actual history of what sets Toyota apart to appeal to executive audiences.

The Toyota Production System and the Flexible Manufacturing System

To continue to give US executives more of what they want to hear but less of what is true, the TPS has been commingled with concepts of flexible manufacturing systems.

Manufacturing flexibility could be a good thing, as it depends upon what is meant by the term. In practice, the term is often used by those that refuse to accept any of the actual limitations of manufacturing operations, such as:

1. Changeover Time
2. Quality Tuning During a New Production Run
3. Resource Constraints
4. Manufacturing Costs Increases with Small Production Runs

Whatever the real restriction, flexible manufacturing proponents are against it.

I am aware that the only real way to improve manufacturing flexibility is to have the highest quality and best fitting production scheduling system possible. This is something I cover in the previous article Grading Your Production Scheduling System. However, flexible manufacturing proponents tend not to be for this and are often unimpressed by system solutions to the problem. They will often point to previous production scheduling systems’ failures as evidence that this is not an answer. However, as I say, many production scheduling applications have been selected by feeble evidence, with executive decision-makers not including schedulers in the software selection process. And secondly, production scheduling implementations are a specialized trade. They require a lot of involvement from the software vendor’s consulting organization.

Is it true that Toyota performed great things with flexible manufacturing? Were variable production schedules a hallmark of the Toyota Production System, and is this something that the Toyota Production System was known to master? This is crucial to determine because flexible manufacturing proponents are aligned with both sales and marketing viewpoints that manufacturing should be flexible. After all, Marketing in particular and Sales to a somewhat lesser degree has reduced the ability to forecast items.

Let us take a look at the Toyota Production System and production schedule variability.

Best Practices?

This actually gets to the question of how well best practices can be migrated or transferred from one place to another.

In the literature, some spectacular examples of the identification and transfer of best practices can be found, lean production probably being the most famous one. A team of the Sloan Management School at MIT condensed the practices of Japanese producers of automobiles and recommended automobile producers in their countries to adopt these principles. The major automotive companies readily followed the plea. The MIT concept became the world standard for automobile production. The principles have also been transferred to t he other industries. However, it is not at all clear whether this case is an example of a successful transfer of a practice. Th MIT team has been accused of constructing a highly stylized model of the Japanese automotive production system there by downplaying the specific Japanese context of automobile production. There is no consensus whether and how learn production positively affect performance. Lean production and other “best practices” of he soft are rather raw sketches of good rather than actual practices. – Trading Best Practices a Good Practice?

Toyota’s Flexible Programs

Toyota had a Flexible Body Line back in 1985. They have modified this over time, declaring that they can change over between models more easily on its production lines which they now call the Global Body Line or GBL. Some of the articles do bring up some specifics related to Toyota’s GBL, which include:

• “Replacing three pallets with a single pallet.”
• “New robots that are single-task versus multi-jig robots.”
• “Vehicle designs with commonality for various hardpoints.”

“Even with the ability to produce either different models, there is a limit to GBL’s flexibility. Once pressed, engineers admit that not everything Toyota makes can be produced on a single GBL Line.” – Wards Auto.

Another publication called the Idea of Practice of Flexible Manufacturing Systems of Toyota states that.

“We should understand that FMS is an extensive system from product design through product distribution, but not as a system limited to a process in manufacturing.”

The Limitations of a Flexible Manufacturing System

However, there is a limit to how much the factory floor can be adjusted to speed changeover times.  And these adjustments for flexibility have a cost. As I quoted above, Toyota had to invest in new robots and redesign the factory floor. Another thing that is often used to promote flexibility is to create a manufacturing cell. A cell is a pre-designated grouping of resources, labor, etc.. that is coordinated when a new product is made.

All of this is nice, but there are simply limitations to how much of this can be done. Whatever is done, be it adding specialized robots or developing manufacturing cells, then those are the constraints when the factory is set up. Now production scheduling deals with the obstacles as they are presented to the system.

The problem is that when these restrictions are referred to, often a person from Sales or Marketing or a flexible manufacturing guru will say that all that needs to occur is that manufacturing needs to be made more flexible. Now the person from Sales or Marketing does not know to manufacture and has a strong bias as they see any limitation placed upon their ability to sell. They mainly want the manufacturing facility to act as a magic box, where pretty much any product can be pulled out of.

Flexible Manufacturing System and an Infinite Box

Far too many people from Sales and Marketing see the manufacturing plant in this way. Would this be nice? Of course, but reality says there are always constraints in manufacturing.

How easy it is. One can know nothing about manufacturing but declare that there should be a flexible manufacturing system in place so that none of the normal manufacturing tradeoffs apply. One need only use the phrase “flexible manufacturing system.” It is a bit like using the term “clean coal.” By using the terms, the person can propose that there are no limits.

So if you don’t study or understand manufacturing, then one should probably not be proposing that the factory is “more flexible,” because you don’t know what that means.

As for other flexibility proponents, it should be understood that the factory does not become more flexible, from whatever the layout/cells/, etc., at a particular time. That is, flexibility is an inherent product of how the factory is set up and prepared. And whatever that flexibility is, it is — if the master data has been set up to reflect this — what the production scheduling system is already working with as a model. I feel that distinction is lost on quite a lot of people.

The Benefits of Manufacturing Stability

People who frequently discuss the importance of the flexible manufacturing system present an unbiased viewpoint on the management and planning of manufacturing. While touting the flexible manufacturing system, they dismiss the benefits of manufacturing stability and a stable production schedule.

As much as flexibility is talked up as universally virtuous, it is stability from where production efficiency flows. A plant may be made more flexible, but flexibility always has a cost in the form of production output. Obviously, the longer you keep making the same thing, the higher your output. And in fact, while Toyota has flexible components to it, my research into Toyota’s early years is that they had a very stable production schedule. This tends not to be brought up because while it is considered trendy to talk about flexibility, it is considered awkward to bring up stability.

Stability, not flexibility, is the basis for manufacturing productivity.

Toyota and Stability

Toyota had strong input from manufacturing in the overall strategy. In the early years particularly, Toyota kept a very stable production schedule — often a firm horizon for a month or more — something curiously left out by many of the Toyota Production Systems’ proponents in the US. A firm horizon of a month is now unheard of, and along with it, manufacturing environments have become far more chaotic and difficult to plan.

Toyota could do this because their cars’ demand (in the early years in particular) exceeded the supply. They sold basically every car they made at that time. This is a recipe for manufacturing stability. Manufacturing stability, getting ready for it, translates directly to efficiency, lowering costs, and quality. Something else Toyota has been known for.

Therefore, Toyota should be pointed to as an example of promoting stability in the production schedule. However, why is this story of Toyota’s success not emphasized?

Vendor Managed Inventories Versus the Japanese Approach to Supplier Collaboration

Interestingly, for many years, Vendor Managed Inventory was roundly accepted in most conferences and in most supply chain publications as a valuable technique for improving the supply chain. Vendor Managed Inventory essentially allows the vendor to determine when their customer receives inventory.

“Tell me when you think I would want something, and order it for me, and bill me when you see fit”

This conflict was explained to use by Kyle Harnden and the inventory planner. According to Kyle:

“There have been times when suppliers have pushed inventory on us that was not required, that we did not need in order to meet their objectives.”

Successful Vendor Managed Inventory?

On the other hand, experienced experts such as Morris Cohen, the founder of MCA and longtime consultant to industry, favor Vendor Managed Inventory. He goes on to describe his recommendations to Saturn and GM…

“But others did learn from the Saturn experiment. “The concepts that are embodied in the Saturn strategy have been widely adopted,” says Cohen. The supply chain strategy, called Vendor Managed Inventory, includes features such as buyback incentives, which lower risks for dealers, and information sharing between all of the points on the supply chain. However, Cohen adds, learning from one of Saturn’s successes is not a guarantee of success.

“One company I worked with closely as they tried to emulate Saturn was Caterpillar,” Cohen recalls. Indeed, they called their strategy “Jointly Managed Inventory (JMI)” to highlight that it was to be a cooperative venture involving the company and their independent dealers. But “their success with it was not as dramatic as Saturn’s. One of the lessons I learned from that episode is that it matters how information and risk is shared when implementing a supply chain strategy based on coordination and cooperation. The Saturn strategy worked because it contained multiple elements that supported that notion. Caterpillar was less successful because at the end, they did not get the same level of trust or conformance out of their dealers.”

We found this quote from the paper on Vendor Managed Inventory.

“It should be noted here that ‘consignment stock’ is merchandise which is stored at the customer’s site, but which is owned by the supplier. The customer is not obliged to pay for the merchandise until they remove it from consignment stock. The customer can usually return 18 consignment stock, which is unused. Counter to common perception, this arrangement is also a Type 0 supply chain, and is not ‘simply another term for vendor-managed inventory’ (as many managers wanted to make us believe). The reason is the change in the ownership of the inventory does not change how the replenishment orders are generated: the same decisions are being made, based on the same information as in a traditional supply chain, and thus no dynamic benefit is derived. Undoubtedly there are benefits in centralizing decision-making in the supply chain. However, from a supply chain dynamics perspective, nothing fundamental has changed because the same amount and type of decisions are still being taken. When implementing vendor-managed replenishment, suppliers do not make the final step and incorporate the customer information into their own production and inventory control process. The supplier hence loses out on an important opportunity: in principle, the customer’s inventory and sales information is available for the supplier to use for controlling his own production and inventory control process, but we found that in practice the supplier does not use this information for his production and inventory control processes. Why is it that the demand information is not being used to improve the supplier’s ordering processes?”

“It should be noted here that ‘consignment stock’ is merchandise which is stored at the customer’s site, but which is owned by the supplier. The customer is not obliged to pay for the merchandise until they remove it from consignment stock. The customer can usually return 18 consignment stock, which is unused. Counter to common perception, this arrangement is also a Type 0 supply chain, and is not ‘simply another term for vendor-managed inventory’ (as many managers wanted to make us believe). The reason is the change in the ownership of the inventory does not change how the replenishment orders are generated: the same decisions are being made, based on the same information as in a traditional supply chain, and thus no dynamic benefit is derived. Undoubtedly there are benefits in centralizing decision-making in the supply chain. However, from a supply chain dynamics perspective, nothing fundamental has changed because the same amount and type of decisions are still being taken. When implementing vendor-managed replenishment, suppliers do not make the final step and incorporate the customer information into their own production and inventory control process. The supplier hence loses out on an important opportunity: in principle, the customer’s inventory and sales information is available for the supplier to use for controlling his own production and inventory control process, but we found that in practice the supplier does not use this information for his production and inventory control processes. Why is it that the demand information is not being used to improve the supplier’s ordering processes?” – Supply Chain Collaboration: – Making Sense of the Strategy Continuum – Matthias Holweg1, Stephen Disney, Jan Holmström3 and Johanna Småros

The Decline of Vendor Managed Inventory

Vendor Managed Inventory is far less popular than in the past decade. It is interesting to see how an idea declines in popularity without anyone observing the decline or taking responsibility for pushing the trend that was ultimately not sustainable. Much around Vendor Managed Inventory had to do with simply shifting who accounted for the inventory, so a sort of financial fraud. Interestingly, the fraudulent angle on Vendor Managed Inventory was always minimized if discussed at all.

What the Japanese did have something similar to VMI. They had a stable production schedule and then published this production schedule to their customers. However, US companies largely moved away from stable production schedules in favor of chaotic schedules, which essentially invalidated the ability to receive benefits from VMI and move off of orders to deliver based on the forecast.

Manufacturing Stability and Quality

This is now extremely unpopular to point out. Still, my research into manufacturing history as part of the book Process Industry Manufacturing Software demonstrated that high volume manufacturing is most correlated with manufacturing quality. Before mass production, product quality and uniformity were much lower as most manufacturing was “flexible,” a job shop and primarily made to order.

It was flexible, alright it just was not very good — and the costs for everyday items were high. In fact, the uniformity and quality of many manufactured items are due to high volume manufacturing. Furthermore, quality is highest later into the production run, with most of the scrap being at the beginning of a new production run as things are being tuned. As a general statement, it is true to say that the longer the production run, the better the quality of the average output.

Inexpensive High-Quality Light Bulbs

An excellent example of this is repetitive manufacturing. The process is so tuned and so automated that defects can be quite rare, manufacturing speed is amazingly high, and the costs are very low. The perfect example of this? The light bulb. Where would we have been without inexpensive and plentiful lightbulbs? I would say “in the dark,” but that is certainly corny.

Conclusion

Toyota used a combination of close supplier proximity and published and stable monthly production schedules to enable communication with their suppliers as to material needs. These are two features that few manufacturing operations have today. Once these conditions are not met, this aspect of the TPS will have difficulty in translating. Buy it is also not particularly important because keeping several weeks of inventory “within the four walls” of the factory is normally very low in cost. Even the highest inventory carrying cost estimates (which normally translate to 25%, but which most companies disagree with when you try to use that number — as they think it is far lower) does not amount to much when reduced to a monthly carrying cost.

• The cost drivers in factories are normally the facility, the machines, and the people.
• These last two cost drivers are optimized through the constant availability of materials. Material shortages, as well as changeovers, reduce manufacturing efficiency.
• The objective of any manufacturing concern is not “zero inventories.”

Toyota and the Toyota Production System are often cherry-picked by people who want to emphasize an attribute or way of doing something they favor. It is more accurate to say that Toyota has used both flexible and stable production management forms in its history. However, Toyota is not simply switching over willy nilly — it has set up some aspects of some of its factories to be more flexible. However, this does not mean that their factories are infinitely flexible. Secondly, Toyota accepts a loss in productivity with each change-over. This may be a good thing, but we can’t be sure because the costs to make the factory more flexible must be included in the analysis of the overall benefits of becoming flexible, and this type of analysis is never performed or performed internally by Toyota or another company and never released to the public.

So the next time you hear about how important it is to be flexible in manufacturing. When Toyota’s name is used to support flexible manufacturing as a virtue, you can send that person this article for some more perspective.

References

Toyota Production System: Beyond Large-Scale Production. Productivity Press, 1978 (Japanese Edition), English Translation 1988, Taiichi Ohno.