Toyota’s strategy towards SME suppliers

By Mr. Yoshiaki Muramatsu

1. Toyota in Thailand

Over the past few years, several large car producers have built production
capacities for both the domestic market and exports in Thailand. Cost factors and excess
capacity in traditional home markets were major factors that influenced decisions to shift
production to Thailand. In addition to the arrival of global car producers in the country,
also global suppliers entered the Thai market. As a consequence, local car part suppliers,
who are mainly SMEs, had to restructure their businesses and to compete for new
opportunities.

Realising that the company’s success depends to a considerable extent on a strong

network of quality suppliers, Toyota Thailand has played an active role in this
restructuring process. As a result of these efforts, Toyota Thailand has successfully
developed long-term relationships with local suppliers that benefit both Toyota and the
local industries. Currently, Toyota Thailand undertakes commercial transactions with
some 134 suppliers which can be categorised into five different groups: (i) independently
operating Thai firms; (ii) Thai companies that receive technical assistance from overseas
countries; (iii) local joint ventures with Japan; (iv) joint ventures abroad; and (v)
independent overseas suppliers. The total value of supplies amounted to almost USD 400
million in 1999.

2. Purchase policy pursued by Toyota

The ultimate objective of Toyota is to produce vehicles that fully satisfy the
customer. To this end, Toyota has developed three basic principles that guide its
relationship with suppliers with a view to optimising its purchases in a global context.
These principles are the following:

i) Fair competition based on an open door policy

Toyota is open to any potential supplier, regardless of nationality, size or whether

this company is a first-time supplier or not. Toyota’s co-operation with SME suppliers is
solely based on business considerations, which include an assessment of the overall
economic and technological capacities of the potential supplier. Critical parameters of this
evaluation are quality, cost, technological capabilities and reliability regarding the on-time
delivery of the required quantities of inputs, as well as the entrepreneur’s ability to
implement a kaizen strategy, which means the continued improvement and enhancement
of products, services and management.

72
TNC-SME Linkages for Development

ii) Mutual benefit based on mutual trust

Toyota believes in developing mutually beneficial, long-term relationships with

suppliers based on trust and confidence. Close and wide-ranging communication with
them is considered a key factor in building and maintaining trust.

iii) Contribution to local economic development through localisation and good

corporate governance

As part of the on-going globalisation efforts, Toyota is relocating a larger part of

its production to other countries. It is its objective to contribute to the host country’s
economic development in line with Toyota’s market presence by purchasing parts and
other inputs from local suppliers.

3. The Global Optimum Purchasing Framework

The Global Optimum Purchasing Framework provides the basis for Toyota’s
worldwide contacts with suppliers. By helping to identify and to recruit the most
competitive suppliers, Toyota ensures that all its branch offices purchase inputs from the
most competitive source. The Framework has three main elements:

 the global cost comparison system

This system helps to evaluate the competitiveness of purchased inputs at a global scale.
 the new suppliers and technology recruitment programme
Under this programme, relationships with competitive suppliers are identified and
developed.
 the reinforcement programme for current suppliers.
This programme assists established suppliers to enhance their international
competitiveness. It will be explained below in more details.

The components of the Global Optimum Purchasing Framework promote

competition among current and potential suppliers, thus contributing to an on-going
improvement of both products and services, as well as enabling Toyota to secure inputs
from the most competitive suppliers in the world.

4. The Reinforcement Programme for Current Suppliers

The Reinforcement Programme for Current Suppliers is a framework for

supporting individual efforts by established suppliers to increase their international
competitiveness. It is part of Toyota’s policy to build steady, long-term relationships that
spawn mutual benefits amid a spirit of mutual trust. The enforcement programme for
current supplier comprises two parts: the Toyota Target Value System and the Suppliers
Support Programme.

5. The Toyota Target Value System

The Toyota Target Value System is a complex system that is continuously applied
in Toyota-supplier relationships (see graph 1). Under this system, Toyota and a supplier
agree on a number of long-term issues and objectives to strengthen the supplier’s
competitiveness. In the course of intense consultations, the long-range objectives are

68
 Toyota’s strategy towards SME suppliers

scaled down to annual targets, the so-called “target values”. On this basis, the supplier
undertakes appropriate steps and measures to reach these goals as agreed. Progress is
regularly evaluated in terms of organization, effort and achievement and the assessment is
communicated to the supplier. Suppliers that succeed in raising their levels of
competitiveness receive awards. In case suppliers experience difficulties in their efforts to
attain the agreed targets, Toyota provides expertise to analyse the problems and to design
measures to remedy the situation.

The continuing circle of improvement, attainment and further improvement

enables suppliers to improve their competitive edge, while laying the foundation for a
stable and long-term business relationship with Toyota, as well as for a broadened range of
business opportunities.

This long-term approach also helps to overcome problems emanating from

economic recession and turmoil. For example, during the recent economic crisis in
Thailand a number of local suppliers faced severe liquidity problems. At the same time,
Toyota Thailand was aware of the fact that without a stable network of local suppliers its
own existence was at risk. Hence, Toyota realised the gravity of the situation and initiated
various support measures. These measures included price adjustments to mitigate adverse
effects of exchange rate fluctuations, advanced purchase to increase turnover,
compensation of dead stock stemming from order declines, encouragement of job transfers
from local companies to local joint ventures to utilise excess capacity, and efforts to
increase the volume of local inputs at the expense of imports.

6. Required qualifications of suppliers

As a basic rule, Toyota expects its suppliers to excel in quality, cost, delivery,
engineering, including technology, and management (see graph 2). These are the five key
areas that shape competitive entrepreneurs and make them successful in a competitive
environment. Thus, Toyota requires suppliers to maintain consistently high quality levels
which can be measured in terms of the number of defect parts per million. In addition,
suppliers need to build and to maintain a strong position regarding unique designs or
special technologies, while being cost- competitive. They also need to follow and to
monitor trends in information technology and be able to harmoniously amalgamate state-
of-the-art technology with their business organization.

It is often necessary that potential suppliers undergo a preparatory process before

entering a business partnership with Toyota. During this period, the management should
attach particular emphasis on the following issues:

- encouragement of an enterprise culture of creativity, continuous learning and

improvement;
- particular attention on R & D, which should go beyond technological issues to
include an analysis of both customers’ needs and competitors’ competitive
potential;
- improvement of employees’ satisfaction in order to promote creativity and
strengthen organizational development;
- strengthening the management information system to help executives to take
informed and effective decisions.

69
 The Reinforcement Program for Current Suppliers

No.1 GlobalCosts
Global Costs
Toyota Target Value System Competitiveness Comparison
Comparison
Database
Database

Common Understanding
Kaizen Annual Target
Cycle
Higher
Supplier Support Program
targets

New Suppliers
Awards Evaluation

70
 Toyota’s strategy towards SME suppliers

The most critical factor in this process is the adaptation of the management itself. In
order to survive in the 21st century, the management of supplier firms should be aware of the
implications of globalisation in their domain of business, i.e. entrepreneurs should be able to
follow and to understand global business trends. They should accept change and be prepared
to change, and they should be able to respond quickly. Lastly, management should think and
act locally, i.e. use local resource to the best extent possible and pursue a policy of
localisation or, as it happens in Thailand of “Thainization”.

Purely technical or technological improvements without the management’s

willingness and capability to do a better job will not yield a lasting success in a business
relationship with Toyota.

7. Promotion of SME suppliers in Thailand

Toyota is willing to assist its suppliers, but it cannot shoulder the responsibility for
SME development alone. Targeted Government intervention is needed in terms of policies
and support measures for SMEs. In the case of the Thai automotive industry, the
Government should complete the establishment of the Thai automotive institution and extend
its role as an intermediator between SMEs and government departments to ensure more
coherent policies that are consistent with suppliers’ demands. Government departments
relevant to the automobile industry should cooperate and interact more closely in defining
national strategy and regulations. However, the Government’s focus should not be confined
to the automobile industry only. Appropriate policies and measures should also include the
promotion of upstream industries, such as the production of iron sheets or plastic polymers,
which are critical inputs for the car production sector. This also applies to the promotion and
strengthening of local capacities in the area of tool makers and die producers.

Lastly, Government policies are extremely important for the development of human
resources, both in the automotive industry, and in up- and downstream industries, as well as
for the promotion of R&D. In particular, the Government needs to provide resources to R&D
institutions and universities to become centres for skill improvement and technological
development.

Today, Toyota is growing from a local to a regional company to finally become a

global player. Communication, co-ordination and co-operation with SME suppliers and
government departments are critical factors for the success of these efforts.

71
72
Toyota’s Expectations from Suppliers
Excellence in critical areas

Cost
Quality Delivery
No.1
Management Engineering

To be successful with Global Competitiveness

72