Toyota’s Supply Chain and Currency and Global Risk Impact

An article in the New York Times (Dec 9, 2011) describes Toyota’s announcement of a 54 % profit drop due to the appreciation of the yen and the floods in Thailand. The strong yen affects Toyota more than other automakers since the company has more than 50 % of its capacity in Japan.  In response to the strong yen, the automaker had moved part production to Thailand, but the floods in Thailand, that followed the earthquale and tsunami in Japan disrupted supply. How should Toyota adjust it production to decrease risk while maintaining its commitment to Japanese employees ? Given the related risk in thailand, does it suggest a more globally diverse component supply base or a higher inventory level as the appropriate approach going forward ? Would changes to its global supply chain impact the quality that the company is renowned for ?

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9 Responses to Toyota’s Supply Chain and Currency and Global Risk Impact

  1. deepakregu says:

    By going for standardization of components and modularization of aggregates across models, the part count that should be sourced can be greatly reduced, which allows a greater level of substitution if supplies from one region/part fails and hence the disruption can be contained. This also allows shared inventory and capacity at a global scale.

  2. Debjit Mukherjee says:

    A major portion of the Japanese makers are moving abroad, however as the Thai surges illustrated, this doesn’t essentially solve the issues, it just makes them different.
    Labour intensive procedures were moved to low-wage nations. That is the reason why Thailand had been for quite a while been a get together base for Japanese supply chains at a point when these were abruptly intruded on it had thump impacts in Japan, United States of America and Europe.
    Thailand’s surges turned into a noteworthy impetus for organizations to reassess their supply chains.
    In any case, it could have been more regrettable for car organizations who were protected to some degree by having numerous worldwide generation centers.
    Embracing a similar approach in the procurement field means keeping on picking up the advantages of an economy of scale by directing parts requesting that straddles locales, models and dispatch periods. From the viewpoints of quality and enhancing global competitiveness must be directed together with suppliers. Standardization of additionally helps increase in the generation volume of every part, making it conceivable to differentiate suppliers and creation destinations without losing productivity. Therefore, the global supply chain would not be affected maintaining the same quality

  3. Rajarshi Mukherjee says:

    The article addresses a few points which are indeed quite tricky to answer in the global scenario:
    1. Commitment to quality: Irrespective of cost or supplier location, there can not be any compromise in product quality. I don’t feel changing the supplier base will affect quality to a great extent, since a thorough supplier audit (purchasing, supply chain, quality) is a given for any multi-national organization.
    2. Currency appreciation/depreciation: This is a factor which puts various countries in a competitive position. India for example has been and will going to be a favored destination of global sourcing, if we only look from USD/INR exchange rate perspective. However, due to the Euro zone crisis, Euro/INR exchange rate has been slashed from 83+ down to 70+. Export businesses dealing with Euro as a payment currency, might think of switching to USD since it is more profitable at the moment. Exchange rate however ‘used to’ form a small part of the long term business strategy for the organizations, since production/manufacturing decisions were largely based on cheaper labor cost, favorable tax structure or ease of doing business. But in the recent 5-7 years, there has been a global shift in the currency structure and companies have become more agile in transacting through currencies which minimizes cost and maximizes profit. Toyota having most of its business in Japan, it will be difficult to shift the lion’s share of its business to other countries (finding a new vendor, qualification, tool development/transfer – all these take a lot of time) – however, Toyota should consider developing multiple sources for its critical components – especially those which might suffer from localized bottlenecks. A transfer of 20-30% business volume to a more stable country (politics, economy, natural disaster) is a more likely approach to hedge against the bottlenecks.
    3. Having a diversified global supplier base is a smart approach. It helps to protect against the previously mentioned localized bottlenecks, while at the same time, having multiple competent sources in different countries provide us with a lot of analytical metrics which are crucial for continuous improvement and value engineering processes. For example, India’s Jamnagar is world-renowned for brass machining manufacturing. Their cost of manufacturing is at least 20-30% cheaper than components produced in any other country. For a manufacturer sitting in Europe, the horizon is much narrower when they deal with only European vendors, but when we include suppliers from other competitive countries, we gain access to more productive manufacturing, with an understanding to probable value engineering opportunities.

  4. Nikhil Sharma says:

    Completely agree with Rajarshi’s point pertaining to standardization of product quality being maintained in all locations, especially in the automotive industry. But of course, there is the classic trade off between advantages of mitigating risks by global production and increased costs owing to loss in economies of scale that can achieved, which is at play here.

  5. Vivek Kaimal says:

    Standardization, local manufacturing, having assembly setup in different countries etc. are strategies that have arleady been developed by auto companies worldwide to tackle these problems. Toyota are a major global player and it makes sense for them to have production facilities closer to markets and at the growth rate that Toyota is at, this seems possible without really compromising the commitment to Japanese employees. It is a tricky trade-off between commitment to employees and hedging risk.

  6. Aayush Goyal says:

    Re-engineering the parts chain- reducing the number of bottleneck parts, Modifying it for standardization so that in case of emergency it may be outsourced very easily. Developing a vendor base in some other political environment like India and South Korea who are more than eager to jump on the train. These countries have been proven to be cost effective as well as good quality producer. reduce the number of parts bottlenecks, using a wide array of tools. Suppliers to be given engineering and disaster recovering assistance to help solve problems at the plant.

  7. Rohit Singh says:

    Be it Toyota or any other company, product quality is of prime importance and it cannot be degraded. For currency fluctuations, global sourcing is a good idea and these fluctuations are not really of long term nature.Toyota can have the production facilities in their major markets and can still remain devoted to their existing Japanese employees while hedging the risk.

  8. Mehul Raina says:

    While Toyota can definitely not control the events happening outside its sphere of control, there are actions that it can take within its sphere of control that will help minimize the losses against risk.
    One of the steps can be to have certain level of flexibility in their product portfolio. I will give an example of Maruti Suzuki, leading car manufacturer of India. When floods happened in Thailand, MSIL could not procure alloy wheels from its sole supplier of alloy wheels in Thailand. These were to be fitted in the top variant of Ertiga, an MUV introduced by MSIL at that time. As a result, MSIL created another variant of Ertiga which had all the features of the top variant minus the alloy wheels. Customers were given the option of later upgrading to alloy wheel version if they wanted to.

  9. Dhruv Vashistha says:

    Disruption in supply chain exposes the negative side of Just in time scheduling and TPS approach of having fewer but dependent supplier. Having said this Toyota’s ability to adopt to such disruption is superb. The case of fire at one of their major and sole supplier and then using this approach as an opportunity is one such example. In this case spreading out the supplier base in alternative location seems to be a logical approach rather than having higher inventory.

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