Toyota buyers mitigate risk to avoid managing supply chain crises – by James Carbone

For Toyota, two-way communication with suppliers is imperative in order to identify and mitigate supply chain risk

Managing risk in the supply chain is a tough task for purchasers in all industries, but it is especially challenging for buyers at automakers because the auto industry has multiple tiers of suppliers.

Purchasers at carmakers such as Ford, General Motors, Honda and Toyota often purchase electronics systems or assemblies from tier 1 suppliers such as Denso, Continental, ZF/TRW, Harman, Panasonic, Pioneer and Bosch among others.

Tier 1 suppliers build systems such as car computers, anti-lock braking, airbags, infotainment, radios, climate control, advanced driver assistance systems (ADAS), rear backup cameras, Wi-Fi and other systems.

Buyers at automakers don’t purchase semiconductors, passives and other components used in those systems. Rather they depend on their tier 1 suppliers to buy the chips, capacitors, resistors and electronic components needed for production and to manage the relationships with those electronic parts suppliers.

However, when it comes to managing supply chain
risk that could impact components used in automotive systems, vehicle manufacturer buyers are more involved and have developed risk management strategies that affect not only their tier 1 suppliers, but tier 2 and tier 3 suppliers as well.

Automaker buyers need to be involved with supply chain risk management to make sure their supply chains maintain continuity of supply if a natural disaster disrupts production of components or other materials, or market conditions result in shortages of needed parts.

Most vehicle manufacturers, as well as OEMs in other industries, beefed up supply chain risk management efforts following the devastating earthquake and tsunami in Japan in March 2011 and the flooding in Thailand later that year. Besides killing thousands of people, those disasters shut down production of many electronic components and other products used by many industries, including automotive.

“Basically, the tsunami in and of itself really kicked us into this activity of risk management,” said Blaine Lewis, senior manager of electronics purchasing for Toyota Motor North America, based in Plano, Texas. “At that point time we did not have an established countermeasure system for those types of events,” said Lewis, who is based at Toyota’s Research and Development Center in Saline, Mich.  With a lot of effort, “we did fare well” through the disaster, he said. “We did have some impact and had to do some adjustments to make sure we made it through without completely stalling production,” said Lewis.

Bridge the gap

After the earthquake and tsunami in Japan, Toyota challenged its first-tier suppliers to look at their supply base and determine if there was another catastrophic event that disrupted production, how long it would take them to recover. The automaker also wanted to know how suppliers could bridge the gap between recovery and the immediate needs of Toyota as an automotive maker buying parts.

“Once they determined that, they also told us what their countermeasures would or should be,” said Lewis. When Toyota received those countermeasure ideas from all of its suppliers, the company evaluated them and identified “some fantastic countermeasures” that could help mitigate risk and keep supply of parts flowing, said Lewis. Other supplier ideas “needed some improvements” and Toyota made suggestions on how the ideas could be enhanced.

To reduce risk, it is important to have two-way communication with suppliers, said Lewis. Suppliers need to inform Toyota if they see a potential risk problem occurring and communicate the information as quickly as possible,
he said.

“The earlier we know about a potential problem, the more opportunity we have for risk mitigation,” said Lewis. Toyota can query other suppliers if they are seeing the same problem in the supply chain. “This will help us determine if it is an issue with one supplier or is it an issue that spans across our supply base,” said Lewis.

Jim Holloway, general manager purchasing responsible for electronics, electrical and powertrain procurement for Toyota, said prior to the tsunami “we had strong collaboration with our suppliers for information sharing. But it was more crisis management” than risk management. “The real change for us was shifting from managing crises to mitigating risk,” he said.

A resilient supply base

After the disaster, the car maker identified some key characteristics of its supply base. Toyota recognised the “resilience of our supply base to be able to recover through a crisis collaboratively with us,” said Holloway. Toyota also learned that it did not have good information about its first-tier suppliers’ supply chain.

“A lot of tier 1 suppliers view that information as propriety. Their supply chain is confidential to them,” said Holloway. But since the tsunami, Toyota has worked with its suppliers to understand their supply base and where some “pinch points might be” if there is another disaster.

“Now we see those pinch points and we can proactively work with our suppliers to mitigate risk rather than manage crisis,” said Holloway.

Holloway said Toyota expects its tier 1 suppliers to manage their supply chains and provide “continuous supply to us despite multiple avenues of potential interruption.”

One way of reducing risk and providing continuous supply is have more than one supplier for a needed part or have multiple manufacturing locations for the components. Lewis says Toyota has discussions with its tier 1 suppliers about this issue.

If a component supplier to tier 1 manufacturer has a single manufacturing site for a needed part used in a system that Toyota buys, the automaker wants to know how the tier 1 is going to protect Toyota if something happens to disrupt manufacturing of the part.

“It’s a big burden for them if they have a single-source manufacturing facility v
ersus a dual source and
they recognise that,” said Lewis. He said that automotive suppliers including tier 1, 2 and 3 suppliers are doing a much better job “making sure there are multiple manufacturing sites or some manufacturing flexibility.”

Secondary source needed

Holloway said there are “different scenarios” on how tier 1 suppliers protect the supply-chain and supply flow and collaborate with them to understand what their approach is to guarantee supply. “For example, if their approach is to approve a secondary source, then they need our approval of that,” he said.  “We will collaborate and cooperate with them on that, but the ownership (of the relationship with the secondary source) is theirs.”

Collaboration and cooperation with suppliers are not just needed to manage risk. Rather it permeates the entire relationship Toyota has with its suppliers including new product development. “We work very closely with suppliers in the very early stages of new product development,” said Lewis.

Toyota generates new ideas for future  vehicles, but its suppliers also do research and development and make suggestions for new features as well. “In the end it is a combination” of ideas that result in new features in Toyota models, he said.

Because Toyota’s supply base is stable and partners with
key tier 1 suppliers, the automaker rarely changes suppliers. It may add a supplier if it has a new technology or for competitive reasons.

Toyota has an open-door policy with potential new suppliers because the automaker recognises that there are companies that are developing new and advanced technologies that Toyota needs to know about, said Holloway. “We have an open-door policy to make sure that we understand what the competitive environment in the marketplace is,” he said. He added if Toyota’s current supply base “can’t keep pace with that, in some cases we may have to make a change.”

However, Toyota rarely changes suppliers because of performance issues. “Once you are supplier partner, we have long-term relationships and we work diligently with suppliers to make sure that suppliers are successful,” said Lewis.

He said Toyota has key performance indicators and “we constantly evaluate our suppliers on safety, quality, and cost,” said Lewis. “If we see a supplier  is struggling in an area then purchasing may form a new cross functional team that includes various areas of our company such as quality or logistics” or other functions depending what the issue is to support the supplier, he said.

Holloway said Toyota provides clear expectations to suppliers. “If suppliers are struggling with our expectations, we partner with them on identifying ways to meet them. One of our core philosophies is continuous improvement,” he said.

Is strong component demand from automotive causing shortages?

It is no secret that automakers are building more models of vehicles equipped with sophisticated electronics systems to enhance safety, vehicle performance and overall driver and passenger experience.

Features such as lane change warning, collision avoidance, rear-view cameras, automatic braking, self-driving, as well as infotainment used to be confined to higher end, luxury vehicles, but now are being designed into lesser expensive models.

Those systems are loaded with semiconductors and other components and some buyers in non-automotive industries and some distributors say demand by automotive is causing, or at least contributing to, component shortages of MOSFETs and other discrete semiconductors, multilayer ceramic capacitors, resistor chips and other parts.

In fact, demand for chips, passives and other components by the auto industry is rising as a result of the growth of sophisticated, high-tech electronics systems. Global revenue of automotive electronics systems increased from $87.3 billion in 2011 to $126.9 billion in 2017, according to researcher IHS Markit. By 2022 sales of automotive electronics systems will rise to $169.2 billion, the researcher said. Automotive electronics systems include advanced driver assistance systems (ADAS), chassis, safety, infotainment, powertrain, automotive body and convenience features.

Strong demand for automotive electronic systems is boosting sales of components used in those systems. For instance, the automotive integrated circuit market will have a compound annual growth rate of 12.5 per cent, according to IC Insights. Automotive accounted for 7.4 per cent of total IC sales in 2017 and is forecast to account for 7.5 per cent in 2018 and 9.3 per cent in 2021, the researcher said.

While demand for automotive chips and other components is growing, not all buyers agree that the auto industry is responsible for causing shortages parts for other industries.

Blaine Lewis, electronics purchasing manager for Toyota, says while electronics use in vehicles is increasing, the demand for semiconductors and other components in other industries is growing as well.

“Yes, we are increasing electronics content in cars, adding more advanced driver assistance systems and more complex communication systems to vehicles,” he said. However, he disputes that automotive is responsible for component shortages.

“The thought that automotive electronics is making an impact on overall electronics industry [supply] is false in my opinion,” said Lewis. He said there is an “exponential explosion” of demand for consumer electronics products.

“Smart watches, Alexa, all the new gadgets that are available in the home that are electronic in nature are in competition for capacity in the electronics market,” he said. In fact, demand for such devices, which tend to use components based on new technologies, is causing some issues with the auto industry.

Lewis said because of that “draw on the capacity for consumer electronics products, manufacturers are trending towards newer style of electronic components, or next-generation.” Such products have short life cycles.

“You get a new smart phone every two years, or new smart watch every three years or something like that,” said Lewis. However, automotive systems have longer lifecycles.

“We may build a particular electronic product for up to five years maybe seven so the componentry that’s in some of our electronics can be five to seven years old.

He said electronics manufacturers often obsolete other components in favour of parts based on newer technology.

“That makes it more difficult for automotive get our share,” said Lewis.