Analysis: Can Toyota still be held up as an SRM benchmark?

Toyota's recent woes are well documented and while its brand continues to take a pounding it has perhaps only been hit so hard because of its excellent reputation for manufacturing reliability and effective supply chain management. 

The car manufacturer's recall of millions of vehicles and the cessation of production in several US plants is a severe blow to a company that has seen its renowned Toyota Production System - 'The Toyota Way' - held up as a manufacturing benchmark.

Trivialising these failures would be a mistake - the impact is evident and Toyota will be feeling the effect for some time to come. But look a little deeper and it's clear that some of the potential problems that led to this calamity are separate issues to the effectiveness of supplier relationships that have spawned a great deal of the innovation that was a feature of the company's previous growth.

Plenty of blame has been apportioned to Toyota's inability to manage its supply base as effectively after its recent growth spurt, particularly in the US. This is perhaps key to starting to understand why its current problems are separate from its history of getting it right with SRM.

Nicolas Reinecke, expert principal at McKinsey & Company, is one of many who believes Toyota is still a strong example of a company that has had sustained success at working with its suppliers to generate innovation.

He believes that in SRM there are two problems at stake. "One is the difference of getting it right vs not getting it right, the other is identifying which types of markets facilitate which types of relationships," he says. "Toyota is known as one of the most efficient production lines in the world and that is an asset that they can apply to their suppliers and help make them leaner."

Ariba's senior solutions marketing manager Sundar Kamakshisundaram agrees, "Toyota is a good example. It relies on its suppliers for innovations in design and material and they have built a relationship where they are in a perfect position to do that. It's all about trust."

By establishing long-term partnerships with individual suppliers, Toyota has been able to build this trust - even going so far as to take ownership of several. Given the recent supply chain failure it might seem a little odd to be underscoring the trust here, but the value it has built over the years has seen the company consistently in the top ten of AMR Research's Supply Chain 25 since its inception.

Often, when the flaws in a supply chain are exposed there's a reasonable case for suggesting this undermines the whole philosophy. However, due care needs to be applied in understanding why the original Japanese model has been so effective and why it is this growth, which adopted a different approach to SRM, which is widely viewed as the deeper source of today's trouble.

Reinecke points to one of the more obvious advantages of Toyota's original approach. "The trick is that they not only help its suppliers become more lean and share the saving for that, it also transfers the interfaces; so these processes are run through a Toyota interface. This means they won't work if they offer them to a competitor."

In the context of these markets in general, this kind of behaviour is unusual and difficult to engineer. Possibly then, in a period of rapid growth, new relationships enter more unfamiliar models.

Naturally, most relationships are either buyer-centric or supplier-centric and the dynamic there tends to heavily influence where the innovation and risk stems from. If buyers are able to use their muscle to extract innovation from suppliers, or the competition between suppliers is fierce enough that innovative solutions make for a strong competitive edge, innovation and ability to mitigate risk can be as much of a selling point as cost.

On the other hand, CPOs are often in a position where they are competing for innovative suppliers and won't have the kind of relationships that Toyota was already in possession of. For procurement, this is the business end of SRM.

Kris Timmermans says that, "SRM is often underestimated - it's very important for suppliers who work closely with CPOs. They tend to take the view in tough times that 'the partners who stick with us now are our partners for the future'."

He believes that buyer behaviour is at the heart of the quest for innovation. "Many will be tough but fair," he says. "But for those that are hungry for power and keep their suppliers at arm's length they have to be in the right position, otherwise there's a distinct disadvantage.

"These types of organisations have more volatility, others will have more consistent performance across cycles. Price-wise there's more to gain by being able to be tighter with their supply management, but even so just about every company has categories where the relationship is only strategic and because of regulations, for example, and here there is huge incentive to look to extract innovation over cost."

Still, Toyota has an inevitable degree of complexity in its supply chain and it's 'keep them close' approach isn't always applicable. Returning to the comment by Timmermans, Toyota's efforts to expand made it, seemingly, prudent to keep a distance from many of its suppliers.

Another key challenge was taking a set of SRM procedures and philosophies that had been designed and enacted in one environment (think Toyota City) and then applying those to a broadening supply chain while growing and diversifying the company.

So where did it go wrong? Analysts have several theories, but one of the more prominent ones centres around the idea that the systems put in place to manage its suppliers, particularly in terms of quality control, were not of a high enough standard and the growth of the company put that under pressure.

The philosophy could only stretch so far.

The key point to be made about the recent disruptions is that CTS, the supplier of some of the faulty parts in question, is, as mentioned in a recent post on the Procurement Leaders blog, most likely not in the top-500 of Toyota's list of largest suppliers.

Again, the twin maelstroms of a severe economic downturn and a difficult push in to the heart of the US market had a large effect on the way Toyota chose to deal with a certain section of its supply base.

"Making sure you are the customer of choice means making sure your suppliers are not going out of business - maybe there are short-term savings on offer, but these won't help the relationship with suppliers that are crucial, but maybe not in a position of strength," points out Kamakshisundaram.

Aggressive tactics following its first year of loss in 59 years in 2008, saw the auto giant push suppliers' profits down to negligible levels, slash production and even hire private detectives to hunt for bankruptcies.

Bloomberg quoted Kazushi Kawabata, president of Toyota supplier Comco Holdings, as saying: "The suppliers are totally in Toyota's grip."

Although often these types of cases are driven more by necessity than by design, the supplier relationship still suffers. Just to prove it, in 2009 Toyota's ranking as a favourite customer plummeted.

Toyota would have been aware as well as anyone on what it was sacrificing in its relationship management. Timmermans notes that "the closer the relationship with a supplier, the more you are able to know whether they are in trouble or whether they are able to offer innovation. There's no real financial indicators, beyond those that often emerge by the time it's too late - being close to a team and learning from them about their business is a far better source of information."

Reinecke highlights the importance of identifying the different approaches needed to identify where parties can have the most to gain. "Segmentation is very important," he says. "Yet it's one of the areas where some of the larger corporations still struggle. Some large companies have the impression that the world should come to it with open arms and that simply doesn't work. Whereas if you look at GE, for example, they're much more segmented in their focus and interested in looking at how each area should behave differently."

Whether Toyota has been having trouble getting its segmentation right is another matter, but certainly the disparity between its success in cultivating and managing its Japanese supply base and its efforts elsewhere have an impact.

Timmermans suggests that, "Several different structures are possible, but likely what you will see being effective in general terms is upfront segmentation of the supplier base so that employees are designated as key account managers. And not just one-on-one for the procurement teams, but across the board so CEOs, operations, finance - all of them connect and all the key relationships are tagged from top to bottom."

Looking from a risk management perspective, not understanding which suppliers to engage with risk management processes and, for example, focusing on strategic suppliers only, can be costly.

As Kris Colby, director of spend management services at Ariba, says, "this episode underscores the importance of deploying a more holistic and systematic approach to tiering and managing suppliers."

Crucially, now is a time where its use of supplier relationship management (SRM) could have an extensive impact on its competitiveness.

But Toyota's treatment of CTS, at least from an external perspective during and after the recall, has been monitored closely. Not only has the company refused to point the finger of blame at its supplier, it has looked to leverage its existing relationship in order to complete its recall, redesign and reimplementation.

At heart, poor SRM isn't likely to be the sole cause of Toyota's recent problems. However, it is key to it being able to manoeuvre out of them. And furthermore, anyone looking to draw lessons from the case would do well not to ignore Toyota's SRM - what it did well and what it didn't.

Think Toyota is finished? It would be surprising if the company that was so original and open-minded in its SRM programme early on wasn't able to weather the storm.

Procurement Tag - Supplier Relationship Management