CASE STUDY ANALYSIS OF

TOYOTA MOTOR
PRATTAYADUTTA
T-23-A
PGDM2018043
SEAT NO- 46

1. What are the main features of Toyota procurement strategy and explain the benefits of
these features?

Ans.: Main features of Toyota procurement strategy:

The Procurement strategy is considered three years prior to a new model production.  New
technological advancements and the correct suppliers are identified and invited to bid. 
There is early engagement with local and Japanese engineering groups to evaluate existing
suppliers and related technology. At this point, Toyota Logistics also ensure they have a
suitable infrastructure in the supplier country.  A Product Specification is obtained from the
engineers and whilst exact specifications are difficult to obtain a good specification early on
means less risk of cost growth. Toyota also looks to fix unit cost elements with suppliers at
this stage.  It is essential for the buyer to understand the market. They must be able to look
for new potential suppliers and analyze the performance of all suppliers
Benefits of features of Toyota Procurement strategy: 
They focus on maintaining the relationships with customers and suppliers as
at Toyota the procurement activities are based on fair business practices in order to
realize amicable relationships and mutual benefit.
 Toyota Industries Corporation is involved in a wide range of business fields
and procures the parts, materials, and equipment for these many different businesses
from suppliers all over the world.
 Along with requiring suppliers to provide quality items at a low price and
in a timely manner, they cooperate with them to promote environmental preservation
and meet the other demands of society.
 In addition, Toyota take a long term view toward relationships with
suppliers with an aim to realize an amicable relationship of mutual benefit based on
fair business practices.

2. How do you measure the performance of Toyota suppliers?

Ans.:  Large numbers of design changes can occur between design and
manufacture. Change is managed via an ‘open book’ policy whereby Toyota
 understands the structure of the supplier’s costs. Toyota insists on visibility of the
supply chain through to second tier.
The supplier profit margin is ring fenced and any variances resulting from
design changes are accommodated within the overall economics so as to protect this
margin.
 Toyota’s procurement department utilize a graduate intake that receive
groundup training in Toyota methodology and gain knowledge of reasonable costs.
Inhouse comparator studies are also used; Toyota has a wide, international supplier
network which provides many opportunities for benchmarking.
 There is tremendous pressure in the car market to reduce costs. It is easy
for suppliers to hide their margin as they can allocate costs in many different ways.
 Toyota uses its trained buyers, with their detailed knowledge of cost
structures to confirm that quoted costs are reasonable. Tracking the performance of
suppliers is instrumental in evaluating whether or not they are showing improvement.
Each company must assess what measurements and metrics are important evaluation
tools for them. Most organizations track various performance criteria, and although
there is a myriad of measurements that could be used when developing suppliers, the
consensus among most experts is that the following measures are the most important:
 Delivery
 Quality
 Cost
 Benchmarking

3. How Toyota is using LD clause and why it is used?

Ans.: Toyota uses LD Clause by:

 Early engagement with suppliers is made in the case of any dispute resolution with
Toyota seeking commitments rather than guarantees. Toyota does use penalty clauses
in their contracts but only invoke them as a last resort; the Purchasing Manager has
not seen Liquidated Damages (LD) invoked in 14 years of working at Toyota. Toyota
wish to have the widest possible pool of potential bidders and seek to resolve disputes
constructively. The use of LD can end a workable relationship.
 Typically, where an LD claim is justified, the supplier management are brought in
and the situation is discussed. Toyota will state their costs incurred and come to an
agreement on cost which are allocated in line with who has incurred them.
 Toyota maintains contact with suppliers during pre-production work and monitors
their plans. Any problems that arise are discussed and resolved openly by the
Purchasing Manager. LD is used because:
 Liquidated damages (also referred to as liquidated and ascertained damages) are
damages whose amount the parties designate during the formation of a contract for
the injured party to collect as compensation upon a specific breach (e.g., late
performance).
 When damages are not predetermined/assessed in advance, then the amount
recoverable is said to be 'at large' (to be agreed or determined by a court or tribunal in
the event of breach).
  Liquidated Damages Clause: Allows the non-breaching party to recover damages in
the event that actual damages are difficult to calculate. However, the amount of
liquidated damages needs to be reasonable in light of the circumstances.

4. How Toyota is maintaining good relations with the suppliers?

Ans.:  Toyota maintains contact with suppliers during pre-production work and
monitors their plans.
 Any problems that arise are discussed and resolved openly by the Purchasing
Manager.
 Toyota’s relationships benefit from a more Japanese approach to growth than a
typical western view. A Japanese view emphasizes longer term development growth
with consistent, long term relationships, this improves business year on year and leads
to cost reduction. A western view is more short term and influenced by shareholder’s
quarterly returns.
 Toyota contracts do not have standard dispute resolution clauses but escalation
agreements are in place. It is difficult to independently arbitrate so Toyota do it
themselves. Toyota rarely revert to references to specific contract clauses. Instead,
responsibilities on each side are spelt out. For example, if Toyota makes design
changes, they agree reasonable price changes. If cost is in dispute, Toyota can access
suppliers’ factories/processes to confirm realistic costs

5. How supply chain is established with the suppliers. How Toyota ensures suppliers
capability for ensuring dependency on the supplier?
Ans.: Supply chain is a system of organizations, people, activities,
information, and resources involved in moving a product or service from supplier to
customer. Supply chain activities involve the transformation of natural resources, raw
materials, and components into a finished product that is delivered to the end
customer. In sophisticated supply chain systems, used products may re-enter the
supply chain at any point where residual value is recyclable. Supply chains link value
chains. Supply-chain management (SCM), the management of the flow of goods and
services, involves the movement and storage of raw materials, of work-in-process
inventory, and of finished goods from point of origin to point of consumption.
Interconnected or interlinked networks, channels and node businesses combine in the
provision of products and services required by end customers in a supply chain.
 All potential suppliers have the opportunity to bid for new business at
model changes, even if they are not a ‘preferred’ supplier due to past
performance.
 Toyota must be convinced that the supplier has given a realistic bid at
which it can produce sustainably. As Toyota will need to hold the
supplier to the contract for around five years, they are willing to walk
away from a potential supplier who has quoted unrealistically low
costs
 Toyota visits the plants of potential suppliers with a team consisting of
a Quality Engineer, Production Tooling Engineer and Logistics
Specialist. All systems are tracked from goods-in to final output and a
 quality evaluation is carried out. A final opinion is issued using a
traffic-light style system with three grades: Acceptable (invited to
bid), Some Concern (invited to bid but concerns are raised),
Unacceptable (not invited to bid).
 Toyota view selection of the right supplier as key to smooth relations. A
presourcing selection meeting is a useful tool. During such meetings, Toyota cover
scenarios which can provide a feel for the supplier’s company culture. If the
supplier’s commercial strategy is at odds with Toyota’s, there is little point
proceeding as the relationship is unlikely to work.
 Toyota considers it normal practice that unsuccessful bidders incur costs of
tendering. Supplier overhead costs are expected to contain an amount to cover the cost
of any contracts their company does not win. Potential suppliers should always be
capable of winning the business and are not invited just to make up a certain number
of bidders.
 Toyota’s profit philosophy is to set a target price for a vehicle and a target
profit. The profit target is the starting point and a cost structure is produced which
accommodates it. If the target cannot be hit, the specification must change; there is
mutual ownership of this process. To enable successful outcomes, the technical
department must work closely with Purchasing. In Western Europe, it is more usual to
start by building up costs and designating the remainder as percentage profit.

6. What do you understand by value engineering? How it is used by Toyota?

Ans.: Value engineering is a systematic and organized approach to providing the
necessary functions in a project at the lowest cost. Value engineering promotes the
substitution of materials and methods with less expensive alternatives, without
sacrificing functionality. It is focused solely on the functions of various components
and materials, rather than their physical attributes. Value engineering is also called
value analysis. Value engineering is the review of new or existing products during the
design phase to reduce costs and increase functionality in order to increase the value
of the product. The value of an item is defined as the most cost-effective way of
producing an item without taking away from its purpose. Therefore, reducing costs at
the expense of quality will simply be a cost-cutting strategy. With value engineering,
cost reduction should not affect the quality of the product being developed or
analyzed. The concept of value engineering evolved in the 1940s at General Electric,
in the midst of World War II. Due to the war, purchase engineer Lawrence Miles and
others sought substitutes for materials and components, since there was a chronic
shortage of them. These substitutes were often found to reduce costs and provided
equal or better performance.
Toyota uses it:
a) Toyota has dedicated tooling which is expensive to change once it is laid down in
the prep phase.
b) Value Engineering (VE) involves making changes before tooling occurs.
 c) VE is engineering in the most cost effective way. A simple example of VE is the
production of a component that does
2 jobs rather than producing 2 different components to do those 2 jobs.
d) Suppliers are asked to contribute to generating such VE ideas.
e) Value Analysis (VA) involves things that are less structural and easy to change eg
removing pieces of foam from the vehicle under construction.
f) For Toyota’s new Corolla, 1800 new VE ideas were received from Suppliers. VE
ideas are requested at bid, after the spec has been issued. It is requested that the bid is
based on the spec with accompanying details of VE ideas, and then Toyota deduct
valid VE reductions from the bid price. Below is an example of the approach to
inviting bids for a large civil construction project:
 Build up specification and perform pre-study.
 Invite all potential suppliers to a meeting and present the specification so they all
receive the same message. This is followed by a tour of relevant section of plant with
any necessary data supplied to potential suppliers (e.g. soil data for a civil
construction project). Following this, there is a period for questions to be asked and
answered.
 Proposals and Value Engineering (VE) ideas are then submitted by bidders. Toyota
may own VE ideas contained in an unsuccessful bid if they are common knowledge
ideas. (VEs relating to parts are not shared due to respect for IPR).

7. Please summarize the main points of this case study

Ans.:  Toyota has their UK vehicle manufacturing plant in Derby where
they build the Avensis and Corolla models. Engines are manufactured in Deeside,
North Wales.  The combined investment in these sites is over £1.7 billion, with
over 5,500 people employed. Toyota currently has 5% of the European car
market.  The capital commitment and investment required by Toyota suppliers
requires long – term relationships to be built between themselves and Toyota.
Toyota has built up a strong corporate reputation over time which facilitates the
building of good relationships. Although Toyota may rotate key staff on a 2 to3
year basis, there is an underlying consistency which allows relationships to last
over time. Individuality is respected but the overarching Toyota approach remains
consistent in the way they work with suppliers.  Toyota has empathy with
supplier problems as they are manufacturers themselves and if a supplier escalates
a problem; they know Toyota will deal with it consistently.  As good team
working is fundamental at every stage, Toyota explains their way of doing
business to potential suppliers.  Toyota have a ‘bad news first’ relationship with
their Supply Chain. Suppliers are encouraged to make immediate contact in the
event of problems and Toyota endeavor to assist.  Toyota feel there is rarely a
need to resort to legal action which could bankrupt a supplier. Toyota reserves the
right to charge suppliers for expenses such as needing to halt the production line.
However, they may only charge a portion. Suppliers are likely to receive more
favorable treatment if they provide early notice of a problem.  Toyota wants
their suppliers to be sustainable. They invest in educating their suppliers on
techniques and business knowledge over a long period, always maintaining open
dialogue.  Mutual trust is a key principle of good supplier relations. Guarantees
can be considered worthless if, for example, the Managing Director or ownership
of a supplier changes. Toyota expects consistency of policy and agreements
irrespective of management or ownership changes, within the context of a long
term relationship.  Unless severe quality issues occur, a supplier can expect to
retain business for the duration of a model lifespan (around 5 years). Toyota use
General Purchase Agreements which are more philosophical than legalistic.
Toyota prefers Terms & Conditions discussions to be retained within a
commercial framework.
 On a large project, Toyota incentivize by using stage payments linked to
clearly defined, tangible milestones.
 Fixed Price Lump Sum is Toyota’s preference on large construction
projects. Therefore, the specification provided to contractors must be accurate.
Toyota supplies a bill of quantities (as a guide) and if the supplier changes the
quantities it is at their risk.  Toyota would give Bills of Quantities rather than a
Target Price. Prices can be very flexible depending on the market at the time
required.