Executive Briefings

Blaming Toyota's Supply Chain

We're just at the beginning of what promises to be a long-running drama of finger-pointing, recriminations and possible lawsuits over the safety problems afflicting Toyota's best-selling cars. But it's not too early to ask the basic question: For a company that seems to have done everything right in its supply chain, how did it get things so spectacularly wrong?

I'm not privy to Toyota's inner workings, so I'll have nothing to say on Who Knew What and When. What seems likely, though, is that a portion of the blame rests with the automaker's supplier relations. While Toyota appears to have perfected its assembly operation through the use of Lean and continuous improvement techniques - it's called the Toyota Production System, for goodness sake - it looks to have dropped the ball on ensuring quality beyond its own plants.

We've previously heard this view from IHS Global Insight, which suggested that rapid expansion and a shift away from traditional Japanese suppliers was to blame (http://www.supplychainbrain.com/content/headline-news/single-article/article/supply-chain-managements-role-in-the-crisis-at-toyota/). Maybe so, but are either of those things automatically bad? Nearly every major manufacturer has engaged in some form of outsourcing and offshoring in the past decade or two. In many cases the strategy was seen as a necessity for competing in fast-growing international markets. So let's not go slamming Toyota merely for having ventured beyond the cozy enclave of the Japanese supply base. A wealth of new systems and business processes is supposed to make up for longer, globalized supply chains by ensuring tight relationships with suppliers, no matter how distant.

Emphasis on "supposed to." Because few companies have managed to keep close tabs on a multi-tier supplier base located thousands of miles from their end markets - and clearly Toyota isn't one of them. There's "no question" that the automaker's current woes are an outgrowth of inadequate supplier management, says Jim Lawton, senior vice president and general manager for supply management solutions with Dun & Bradstreet (http://www.dnb.com/us/). "If there's anybody left in the world that does not believe that a supplier can have an impact on how you perform," he says, "this is absolutely a wake-up call."

The problem is more complicated than a single design flaw or failed part. It began with two separate issues - floor mats that interfere with the accelerator, and "sticking" accelerator pedals, causing the car to speed up or the pedal to return too slowly to the idle position. The discovery has caused Toyota to issue a recall on more than 7 million cars, including models of the popular RAV4, Corolla, Camry, Highlander and Sequoia. (Toyota didn't move fast enough on the recalls for public taste, however. It has been suggested that the company was forced into initiating the action by the U.S. government. So much for the fundamentals of crisis management.)

More recently, we've witnessed the recall of nearly 500,000 Prius and Lexus models worldwide for a braking problem which stems from the software that runs the control system. Assuming Toyota isn't sitting on more bad news, the combined effect of those flaws could be devastating enough to the world's number-one automaker. IHS says Toyota is likely to lose sales of some 10,000 units for both January and February. D&B's Lawton quotes an estimate by investment banker UBS that the event will cost the company $155m a week to fix. And that doesn't even allow for the long-term effects from this blow to Toyota's carefully burnished image.

There's an extra twist to this story. Industry experts are always telling companies about the importance of focusing on major suppliers. Yet the smaller ones can cause the biggest headaches. Elkhart, Ind.-based CTS Corp. is the maker of the pedal assemblies that prompted the Jan. 21 recall. But automotive business reportedly accounts for less than a third of the company's sales. And Toyota contributes about 3 percent of that. (CTS calls Toyota "a small, but important" customer.)

Was it CTS's fault? In a rather chilly statement on Jan. 27, the company stated that its products "have been manufactured to Toyota's design specifications." It went on to say that the two are "actively working" to develop a new pedal that meets tougher specifications. And that's about it. In fact, the boilerplate "Safe Harbor" language tacked on to the end of the CTS press release is longer than the statement itself.

Regardless of where the blame ultimately falls, there appears to have been too little communication between Toyota and CTS. The lapse is hardly rare. Lawton says there are numerous "natural barriers" in any corporate environment that prevent businesses from discovering and coming clean about product defects. Maybe the screwup can be fixed before the public finds out, top executives might reason. Or perhaps we'd better run it by Legal first. But the failure to act quickly and decisively often does more damage than the original flaw. Do the words "Ford" and "Firestone" ring a bell?

Lawton says it's vital that companies review their suppliers on a regular basis, to flush out problems related to financial condition or product quality. Are your vendors working with liens against them? Have they been charged with violations of environmental or worker-safety laws? Are there issues related to their financial stability? Buyers and suppliers "need to create an environment from a technology perspective where it's easy and cost-effective to share information," Lawton says. The issue becomes even more critical in tough economic times, when partners in the chain pare back resources to an absolute minimum.

The price of failure is high. According to a report by the CFO Executive Board (https://cfo.executiveboard.com/Public/Default.aspx), the number of supply disruptions has been on the rise. Typical results include an 11-percent increase in costs, 7-percent decline in sales growth and 35-percent plunge in shareholder returns.

So we're left with a major automaker that must accelerate from a slow start in reassuring consumers and regulators of its commitment to safety. Company president Akio Toyoda finally got around to apologizing to customers at a Feb. 5 news conference (although observers have been debating the depth of his bow), but "sorry" by itself doesn't cut it. Real results will come from a commitment to better supplier relationships within the Toyota organization. Meanwhile, costs continue to mount. Says Lawton: "The clock is ticking."

- Robert J. Bowman, SupplyChainBrain

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We're just at the beginning of what promises to be a long-running drama of finger-pointing, recriminations and possible lawsuits over the safety problems afflicting Toyota's best-selling cars. But it's not too early to ask the basic question: For a company that seems to have done everything right in its supply chain, how did it get things so spectacularly wrong?

I'm not privy to Toyota's inner workings, so I'll have nothing to say on Who Knew What and When. What seems likely, though, is that a portion of the blame rests with the automaker's supplier relations. While Toyota appears to have perfected its assembly operation through the use of Lean and continuous improvement techniques - it's called the Toyota Production System, for goodness sake - it looks to have dropped the ball on ensuring quality beyond its own plants.

We've previously heard this view from IHS Global Insight, which suggested that rapid expansion and a shift away from traditional Japanese suppliers was to blame (http://www.supplychainbrain.com/content/headline-news/single-article/article/supply-chain-managements-role-in-the-crisis-at-toyota/). Maybe so, but are either of those things automatically bad? Nearly every major manufacturer has engaged in some form of outsourcing and offshoring in the past decade or two. In many cases the strategy was seen as a necessity for competing in fast-growing international markets. So let's not go slamming Toyota merely for having ventured beyond the cozy enclave of the Japanese supply base. A wealth of new systems and business processes is supposed to make up for longer, globalized supply chains by ensuring tight relationships with suppliers, no matter how distant.

Emphasis on "supposed to." Because few companies have managed to keep close tabs on a multi-tier supplier base located thousands of miles from their end markets - and clearly Toyota isn't one of them. There's "no question" that the automaker's current woes are an outgrowth of inadequate supplier management, says Jim Lawton, senior vice president and general manager for supply management solutions with Dun & Bradstreet (http://www.dnb.com/us/). "If there's anybody left in the world that does not believe that a supplier can have an impact on how you perform," he says, "this is absolutely a wake-up call."

The problem is more complicated than a single design flaw or failed part. It began with two separate issues - floor mats that interfere with the accelerator, and "sticking" accelerator pedals, causing the car to speed up or the pedal to return too slowly to the idle position. The discovery has caused Toyota to issue a recall on more than 7 million cars, including models of the popular RAV4, Corolla, Camry, Highlander and Sequoia. (Toyota didn't move fast enough on the recalls for public taste, however. It has been suggested that the company was forced into initiating the action by the U.S. government. So much for the fundamentals of crisis management.)

More recently, we've witnessed the recall of nearly 500,000 Prius and Lexus models worldwide for a braking problem which stems from the software that runs the control system. Assuming Toyota isn't sitting on more bad news, the combined effect of those flaws could be devastating enough to the world's number-one automaker. IHS says Toyota is likely to lose sales of some 10,000 units for both January and February. D&B's Lawton quotes an estimate by investment banker UBS that the event will cost the company $155m a week to fix. And that doesn't even allow for the long-term effects from this blow to Toyota's carefully burnished image.

There's an extra twist to this story. Industry experts are always telling companies about the importance of focusing on major suppliers. Yet the smaller ones can cause the biggest headaches. Elkhart, Ind.-based CTS Corp. is the maker of the pedal assemblies that prompted the Jan. 21 recall. But automotive business reportedly accounts for less than a third of the company's sales. And Toyota contributes about 3 percent of that. (CTS calls Toyota "a small, but important" customer.)

Was it CTS's fault? In a rather chilly statement on Jan. 27, the company stated that its products "have been manufactured to Toyota's design specifications." It went on to say that the two are "actively working" to develop a new pedal that meets tougher specifications. And that's about it. In fact, the boilerplate "Safe Harbor" language tacked on to the end of the CTS press release is longer than the statement itself.

Regardless of where the blame ultimately falls, there appears to have been too little communication between Toyota and CTS. The lapse is hardly rare. Lawton says there are numerous "natural barriers" in any corporate environment that prevent businesses from discovering and coming clean about product defects. Maybe the screwup can be fixed before the public finds out, top executives might reason. Or perhaps we'd better run it by Legal first. But the failure to act quickly and decisively often does more damage than the original flaw. Do the words "Ford" and "Firestone" ring a bell?

Lawton says it's vital that companies review their suppliers on a regular basis, to flush out problems related to financial condition or product quality. Are your vendors working with liens against them? Have they been charged with violations of environmental or worker-safety laws? Are there issues related to their financial stability? Buyers and suppliers "need to create an environment from a technology perspective where it's easy and cost-effective to share information," Lawton says. The issue becomes even more critical in tough economic times, when partners in the chain pare back resources to an absolute minimum.

The price of failure is high. According to a report by the CFO Executive Board (https://cfo.executiveboard.com/Public/Default.aspx), the number of supply disruptions has been on the rise. Typical results include an 11-percent increase in costs, 7-percent decline in sales growth and 35-percent plunge in shareholder returns.

So we're left with a major automaker that must accelerate from a slow start in reassuring consumers and regulators of its commitment to safety. Company president Akio Toyoda finally got around to apologizing to customers at a Feb. 5 news conference (although observers have been debating the depth of his bow), but "sorry" by itself doesn't cut it. Real results will come from a commitment to better supplier relationships within the Toyota organization. Meanwhile, costs continue to mount. Says Lawton: "The clock is ticking."

- Robert J. Bowman, SupplyChainBrain

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