Japanese Automakers, U.S. Suppliers and Supply-Chain Superiority

Many manufacturers today are concerned with the inefficient manufacturing and delivery practices of their company’s suppliers. Before pointing a finger accusingly at their suppliers, however, perhaps they should examine their own policies and procedures. Any manufacturer can learn this lesson from U.S. automakers, their Japanese rivals that have set up operations in the United States and the automotive suppliers that provide parts to both groups.

In the 1980s and 1990s, Japanese auto-makers built significant production capacity in the United States, and their world-class manufacturing practices quickly became the new quality standard for the U.S. automotive industry. These practices went well beyond the just-in-time (JIT) delivery of parts to a plant and included all aspects of lean manufacturing. (See “Lean Manufacturing and Just-In-Time Delivery.”) The transplanted Japanese automakers, with their lean focus, realized that their success depended on developing a local supply base, which meant sharing with U.S. suppliers the innovative manufacturing-management practices and technologies that made similar plants so competitive in Japan.1 Some skeptics claimed that lean manufacturing would never work in North America, considering the continent’s size and transportation systems that might not be able to deliver materials reliably just in time. But Japanese companies in the United States seemed to prove otherwise. U.S. automobile manufacturers began following the lead of their Japanese counterparts, transforming themselves in the lean direction and demanding JIT logistics from their suppliers. See sidebar.

For automakers to effectively practice a lean approach, it would seem critical that suppliers make the transition from traditional mass production systems to lean systems internally and in their logistics practices.2 In fact, this is only partly true. The logistics practices and internal management policies of the automakers — in other words, of the customers themselves — may have a more profound impact on the supplier’s ability to respond with lean systems and thereby get the right parts to the right place at the right time.

The performance of U.S. suppliers to the automotive industry in North America demonstrates the impact of customer policies on supply-chain management: U.S. suppliers perform at much higher levels when they are supplying Japanese automakers than when working with U.S. automakers. To compare the policies and practices of the Big Three automakers and Japanese transplants, we surveyed supplier plants that made comparable products for U.S. and Japanese customers. (See “Methodology,”) Production or logistics managers in supplier plants filled out questionnaires about their manufacturing and logistics practices with respect to their largest U.S. auto customer and their largest Japanese transplant customer. Because a supplier may operate several plants with markedly different internal and external logistics, we focused on the individual plant and treated multiple plants from the same supplier as separate cases. We examined not only how U.S. and Japanese customers differed, as a whole, but also how specific customers differed: Ford, GM and Chrysler for the U.S. automakers; Honda, Nissan, Toyota and other transplants for the Japanese.

A total of 91 suppliers described their relationship with a Japanese customer and a U.S. customer. We found that Japanese automakers have effectively brought the goals of lean manufacturing to their supply base in the United States and are much more successful in these practices than their U.S. competitors. What follows is an examination of both the secrets of the Japanese transplants’ success and the ways in which U.S. automakers, despite attempts to emulate lean manufacturing practices and supply-chain logistics, are not performing up to the Japanese standard.

Achieving Lean Manufacturing

Japanese automakers, when compared with their U.S. counterparts, tend to emphasize long-term business relationships.3 When Toyota, Honda and Nissan set up engine and assembly plants in the United States, they brought many of their Japanese suppliers with them — suppliers that had already mastered lean manufacturing and supply-chain logistics. But under pressures from the U.S. government, the automakers set out to find local supply sources that could meet their stringent cost, quality and delivery standards. This was not easy. The Japanese automakers faced a choice: accept poor performance or invest in their relationships with the U.S. suppliers and teach them lean manufacturing. They decided to invest in supplier development initiatives.

Consider the case of Toyota and one of its suppliers, Johnson Controls, a company famous for its ability to build and deliver seats for Toyota just hours before the seats are to be installed on the assembly line.4 Before working for Toyota, the supplier would hold a huge inventory of seats. After working for Toyota and transforming its plant in Georgetown, Kentucky, to lean manufacturing in 1992, inventory levels dropped from 32 days of inventory to 4.1 days. This required many internal changes such as reducing die setup times from 6 hours to 17 minutes. (See “An Overview of Toyota and Honda Supplier-Development Initiatives.”)

Indeed, customer/supplier relations are a key determinant of successfully adopting and diffusing innovative manufacturing and purchasing practices among Japanese transplants.5 Japanese transplants typically develop close relationships with a small number of suppliers and integrate those suppliers with plant production systems and JIT delivery systems through extensive information exchanges.6 Our data show that the investments of Japanese automakers in developing their suppliers have been worthwhile. In the same supplier plants, production lines for their parts are leaner compared with production lines for their U.S. competitors. With their U.S. suppliers, Japanese automakers focus on holding low inventory levels, maintaining level production and building in quality.

Keeping Inventory Levels Low

One key to successful lean manufacturing is maintaining low inventory levels. (See “Comparing Performance Indicators for Suppliers.”) Ideally, the time between when a customer needs a part and when the supplier builds it should be short. In traditional large-batch manufacturing, suppliers build products according to a schedule that does not take into account whether a customer actually needs those products. Suppliers are left with many weeks of inventory, and they may not have the specific product a customer wants. In small-batch production, by contrast, products move rapidly through the suppliers’ plant and to their customers. A small-batch capability obviously means lower inventory carrying costs, but there are other important benefits as well. Suppliers can respond quickly to changes in customer demand. They can identify any defects in products quickly and fewer potentially defective parts that need to be sorted through and reworked.7 With fewer people needed to perform wasteful activities, such as moving large batches of inventory from place to place in the plant, productivity rises.

The same supplier plants that make and ship a comparable product to both Japanese and U.S. customers maintain lower levels of inventory for the Japanese transplants than they do for U.S. automakers. Suppliers serving Japanese transplants achieve an inventory turnover of 38.3 (the ratio of annual sales to average inventory) as compared with 25.4 for their U.S customers. They also maintain much less work-in-process (WIP) inventory, finished goods and on-the-wheel (on-truck) inventory for their Japanese customers.

Important differences also emerge among Japanese and U.S. customers. Among the transplanted Japanese automakers, Toyota has the least inventory and is widely regarded as the premier lean manufacturer with its Toyota Production System. Chrysler leads its U.S. peers, having invested earlier in JIT systems for getting parts to its assembly plants. Ford has the highest on-the-wheel inventory.

Although they continue to lag their Japanese counterparts, U.S. automakers are improving. Whereas in the past weekly deliveries were common, there has been a significant shift toward daily deliveries and thus toward reducing inventory. Ford, for example, despite its high on-the-wheel inventory, has been moving aggressively toward more frequent, small-lot deliveries as part of its Ford Production System.

One might expect that reducing inventory would increase the risk of missing deliveries to customers and shutting down the assembly line, which in turn would result in more expensive shipments by expedited trucks or even helicopters. Despite operating with far less inventory, however, Japanese transplants are not paying more for emergency shipping. In fact, Japanese transplants paid less in emergency shipping ($371 per million sales dollars) than U.S. automakers ($714 per million sales dollars). Toyota’s suppliers are the best performers at $204 and Chrysler’s are by far the worst at $1,235.

Consider the myriad benefits of reducing inventory at one of Toyota’s U.S. suppliers. When Toyota began purchasing leather seats for its Lexus vehicles from Garden State Tanning, the automaker found that GST could not keep up with demand.8 The supplier often missed shipments and had to switch from scheduled ocean shipments to expedited air shipments of leather to Toyota’s plant in Japan. Even though GST was paying for the emergency shipments, Toyota was not pleased with the supplier’s performance. The automaker sent a team of Toyota Production System specialists to GST. Working with everyone from the CEO to employees on the shop floor, the team moved equipment on the shop floor into one-piece flow cells, implemented kanban systems, developed standardized procedures for cutting leather and slashed inventories of cowhide.

The CEO of GST was convinced that the reduced inventory would ensure an increased number of missed shipments. To his surprise, as inventory fell from 112,000 hides to fewer than 40,000, emergency air shipments plummeted to nearly zero. At the same time, quality defects were almost eliminated, productivity more than doubled and lost-time accidents dropped from 242 per year to two. And the supplier achieved this in a two-year period without expending any capital.

Maintaining Level Production

The success of lean manufacturing also depends on a level production schedule; that is, the production of different items must be distributed evenly to minimize uncertainty for upstream operations and suppliers. (See “Scheduling and Shipping.”) Toyota defines level production as evenly “distributing volume and specifications over the span of production” during the assembly process so that suppliers have a smooth, stable demand stream.9 A nonlevel schedule (e.g., making a large batch of two-door cars and then switching to a large batch of four-doors cars) presents suppliers with spikes in demand. To deal with the spikes, suppliers are forced to maintain high inventory levels to ensure they are prepared for unexpected customer demand. Donnelly Mirrors calls the finished-goods inventory maintained for its non-level customers the customer’s “wall of shame.”

Providing suppliers with a predictable schedule —stable orders and regular demand — is particularly important in a lean logistics system with little inventory to cover unexpected fluctuations in demand. Japanese transplants outperform their U.S. counterparts on this dimension. Their order demand is stable, reflecting leveler schedules in their assembly plants. Honda, Nissan and Toyota stand out among their Japanese peers. Toyota is particularly sensitive to the importance of level production, a core principle of the Toyota Production System. The automaker states that customers unable to level their schedule do not have the “right” to use a J.I.T. pull system.10 Nonlevel customers are simply imposing their chaotic systems onto their suppliers, and the suppliers will pay the price in higher inventory, with all its related maladies and higher transportation costs for expedited shipments. The Big Three, however, are slower to learn this lesson. In fact, Chrysler alone is making improvements. Chrysler’s suppliers can plan their production schedules much more easily than Ford’s or GM’s. They can hold less inventory and still consistently meet customer demand. The ability of Chrysler to level its schedule may help explain its lower inventory levels.

Much has been written about the “bull whip” effect in which a small change in the schedule of the customer plant leads to a much larger disruption in the supplier plant and an even greater disruption for those companies that supply the supplier.11 In short, maintaining a level production schedule has significant second- and third-order effects. The scheduling practices of the Japanese transplants and U.S. automakers affect the ability of suppliers to maintain level production: the same suppliers maintain a higher degree of level production for Japanese transplants than they do for U.S. automakers. And when first-tier suppliers have level production schedules, their second-tier suppliers are better able to cut their inventories and ship on a JIT basis.

Japanese customers place much less pressure on suppliers to fill a truckload than U.S. customers. In addition, only 8% of suppliers for Japanese customers, compared with 33% for U.S. customers, are penalized if they do not fill a truck. Ford’s suppliers are under particular pressure to fully load a truck, a finding that starkly contrasts with Toyota’s suppliers. Examining the pressure on Ford’s suppliers shows the ripple effects. Ford’s low ranking on lean inventories, and particularly its high level of on-the-wheel inventory, can be partly explained by its truckload shipping policy. Ford wants to use all the space in its trucks to lower its transportation costs and therefore requires its suppliers to fill trucks on the basis of minimum weight requirements. Ford usually pays the shipping costs, but suppliers who fail to meet minimum targets must pay for the shipment themselves. Ford’s policy encourages suppliers to fill trucks whether or not Ford needs the parts — a practice that refutes the core lean manufacturing principle of delivering the right part at the right place at the right time.

Incorporating Quality

A focus on building in quality is another requirement for effective lean manufacturing. Instead of relying on a formal inspection process to uncover defects after they occur (which leads to costly repairs and wasted floor space in the repair areas), workers can stop the production flow immediately whenever they detect abnormalities.12 (See “Lean Manufacturing Practices on Supplier Production Lines.”)

Although U.S. and Japanese customers do not differ significantly in terms of the quality received from their suppliers, suppliers for the Japanese transplants reported significantly less scrap and rework than suppliers for the Big Three. In other words, suppliers delivered the same quality to their customers — but at a significantly higher cost in internal scrap and rework for their U.S. customers. It seems clear that suppliers are more likely to build in quality when serving Japanese transplants and “inspect in” quality when supplying U.S. customers.

Insisting on quality from suppliers and penalizing them for not delivering are insufficient to prevent wasteful practices in supplier plants. For example, one U.S. automaker set up a special warranty reduction department to identify parts that break down in the field causing high warranty costs and to help suppliers of those parts reduce the breakdowns. The automaker measured quality defects and threatened to stop dealing with suppliers that did not aggressively improve. The result was a significant reduction in defective parts delivered to the assembly plant. But there was little actual transfer of knowledge to the suppliers, and our data suggest that the suppliers were solving the problem through increasingly costly inspections of parts. Japanese automakers have elicited more effective performance on quality from their suppliers — without incurring the higher costs of extra inspection — by combining high-quality expectations with hands-on teaching of lean manufacturing methods.

Achieving Just-In-Time Transportation and Delivery

Lean manufacturing minimizes inventory and prevents waste, but critically depends on transporting and delivering parts — typically, small and frequent shipments by truck — in an orderly, timely manner and at low cost. (See “Lean Transportation Practices.”) Just as the Japanese transplants excel at lean management, so too they stand out in regard to JIT logistics. Overall, suppliers for Japanese transplants achieve higher scores than those for the Big Three on all aspects of logistics performance except for the load factor (a measure of how often trucks are fully loaded). Suppliers to U.S. plants ship 68% of trucks full to capacity, whereas the same suppliers fully load only 47% of trucks to Japanese suppliers. Differing customer policies are the reason: U.S. customers penalize suppliers for partially filled trucks, whereas Japanese customers expect suppliers to ship what is needed when it is needed.

When it comes to their delivery and transportation systems, what are Japanese transplants doing right? They develop close working relationships with core carriers, set stringent delivery requirements, compensate for the longer distances in the United States by using innovative delivery methods and adopt efficient loading practices such as mixed-product loading.

Developing Close Relationships with Transportation Carriers

As important as it is to develop close relationships with a relatively small group of parts suppliers, developing close ties with transportation carriers is equally critical for the efficient functioning of an automakers’ lean transportation and delivery system.13 By focusing on a small group of select carriers, known as “core carriers,” lean manufacturers receive proven, reliable service in such areas as consolidation, tightly scheduled deliveries, shipment tracing and effective communication.

For both the Japanese transplants and the Big Three U.S. automakers, a few core carriers move a majority of the freight. But Japanese transplants use core carriers to a much greater degree than U.S. automakers: the Japanese use 1.4 trucking firms compared to 4.3 firms for U.S. automakers. Moreover, the highest percentage of freight carried by a single company working for a Japanese transplant is 92, whereas among the U.S. automakers the highest percentage is 75.

Stark differences emerge when examining individual automakers. The contrast between Toyota and GM, for example, is startling: Toyota uses only one carrier, whereas GM uses seven. It is not surprising, then, that GM scores much higher on late deliveries and lower on on-time pickups than Toyota. With so many core carriers, how can GM develop its transportation suppliers to fit into its scheduling systems and make perfect delivery to GM a top priority? The lesson is clear: If an automaker outsources a transportation job to the lowest bidder, the result will be low price but not necessarily high-quality service. Within a lean enterprise, without the protection of large inventory reserves, reliable transportation service is critical. Developing relationships with carriers and demanding consistent, on-time shipping is a top priority.

Setting Stringent Delivery Requirements

When customers establish stringent delivery requirements — regarding frequency, delivery within specific time periods and efficient loading and unloading —they motivate suppliers to meet those requirements by improve their operations and shipment activities.

Requiring frequent shipments from their suppliers is one key to the Japanese transplants’ success. Infrequent shipments suggests that customers are receiving and holding large batches of inventory, which increases inventory holding costs, occupies valuable space and masks quality problems. Suppliers that serve Japanese transplants also make more frequent daily shipments than for U.S. automakers —3.6 shipments per day for the Japanese compared to 2.4 shipments for the Big Three. Chrysler’s suppliers make an average of 4.0 shipments each day in contrast to only 1.1 shipments for Ford’s suppliers. Toyota’s suppliers lead all automakers, with 5.0 shipments per day. (See “Scheduling and Shipping.”)

To avoid chaos and congestion at their delivery docks, lean customers also require suppliers to unload their shipments within specific time periods. One lean company that makes aluminum gutters implemented a system of tightly scheduled windows of opportunity (i.e., time windows) for the pickup of finished goods. They also developed a highly disciplined system of organizing finished-goods inventory according to delivery times with standardized times and methods for loading and unloading finished goods. The company spaced deliveries throughout the day to ensure there was an even flow of work throughout the shift. The result: Of 12 shipping docks that had always been congested, 10 docks were closed. The two remaining docks are used evenly throughout the day, and rarely are there any delays on the docks.

In regard to the unloading and timing of deliveries, we again see evidence that although U.S. automakers have been embracing a lean philosophy on paper, they are missing key elements of the discipline needed to make it work. Only 34% of suppliers report that their Japanese customers allow truck drivers to unload freight before the scheduled delivery time. By contrast, a full 63% of suppliers say that U.S. automakers permit early unloading. There are no significant differences in the use of pickup time windows at the suppliers of U.S. and Japanese customers. However, trucking firms often fail to live up to suppliers’ expectations — particularly those delivering to U.S. customers. Trucking firms for Japanese transplants arrive at the suppliers’ plants within the pickup windows 89% of the time compared with 79% of the time for U.S. customers. Note that trucking firms for GM achieve only 72% on-time pickups even though GM “requires” 100%.

Compensating for Geographical Distance

The sheer size of North America poses daunting geographical challenges for lean auto manufacturers. Toyota made the JIT approach famous in Toyota City, a rural area outside Nagoya, amidst a different geography. Land was plentiful, and suppliers dedicated to Toyota built plants around the assembly plant. Suppliers would receive a signal just a few hours before parts were needed on the assembly line and could ship exactly what Toyota needed many times throughout the day, building the parts just before they were shipped.

This approach clearly does not work when supplier plants are hundreds of miles away from assembly plants and it takes hours to make a delivery. Our results show a similar average shipping distance from suppliers to both groups of customers: 376 miles to Japanese customers compared with 356 miles to U.S customers. But Japanese transplants have found a way to compensate for the geographical distances they encounter in the United States. “Milk runs,” or compound deliveries, are the key. Traditional point-to-point delivery works well in lean manufacturing if a single plant provides enough products for an assembly plant to fill the truck many times every day. But if that is not the case, milk runs — that involve stopping at several suppliers or assembly plants —are preferable.

U.S. customers tend to rely on single-product loads more than their Japanese counterparts: 33% of U.S customers used single-product loads compared with 16% of Japanese customers. In addition, 57% of freight haulers for U.S. customers, compared with 37% for Japanese transplants, use point-to-point delivery. And 18% of freight for Japanese transplants is delivered via compound deliveries compared with only 8% for the U.S. automakers.

Only 13% of the deliveries to Toyota plants from our sample of suppliers consists of single-product, point-to-point loads. Toyota has become the master of cross-docking in the North American auto industry. Cross-docks accept truckloads of product at one side of the warehouse and reconfigure them into different mixes of product on trucks leaving the other side. The auto-maker established a joint venture, called Transfreight, and taught the company how to use the Toyota Production System to manage its cross-dock.14 Full-truckload shipments come into the cross-dock from individual suppliers or milk runs. Transfreight then reconfigures the inventory into mixed loads and ships about 1.5 hours’ worth of exactly the material Toyota needs in its assembly plants. Material flows through the facility, rarely spending more than a few hours in temporary storage. A similar approach is being adopted by Ford in its Nirvana project.

Adopting Effective Loading Methods

In traditional manufacturing, taking extra time to load and unload a truck may incur additional labor costs, but those extra costs tend to be insignificant. In lean manufacturing, by contrast, loading and unloading time is critical, because there are no inventory buffers on the assembly line. Inventory sitting on a truck being unloaded for an extra half hour can mean that the assembly line will be starved for parts.

Loading time for Japanese transplants is significantly less than for the U.S. automakers. Suppliers for Japanese customers spend only 38 minutes loading a shipment, whereas suppliers for U.S customers spend 58 minutes. More specifically, Ford and Chrysler suppliers take almost twice as long loading as the suppliers of Nissan and Toyota.

Studies have shown that it can take less time to unload from a side-loaded truck, yet only trucking firms for Toyota use trucks equipped for side loading. In rear-loaded trucks, there is only a small space for removing parts, and workers first must remove parts at the rear of the truck before getting to parts closer to the cab. Side-loaded trucks provide broad access to parts stored throughout the truck. In addition, workers can be selective about the order in which they unload parts, unloading at the same time the parts going to similar storage locations in the assembly plant. Side loading, however, requires significant capital investment and cooperation from the supplier. It will not work if suppliers have raised shipping docks already set up for rear-loading trucks.

Use of sequenced loads also increases efficiency. Large products that are customized for different vehicles are brought to an assembly plant in the exact sequence needed for the cars being built on the assembly line. Instead of walking up and down the line to select the right seat for the next car coming down the line, assembly line workers need only to walk to one place and pick up the next item in sequence. This allows workers to focus on assembling the car rather than finding a part, but it also reduces the chances of selecting the wrong part for a particular car. Japanese automakers are more likely to use sequenced loads than their U.S. peers. A total of 19% of freight for Japanese transplants is loaded in sequence compared with 3% for U.S. automakers. Toyota’s suppliers obtain the highest score at 34%.

An efficient truck transfer system that separates the roles of truck drivers and loaders can increase loading efficiency. This system involves leaving additional trucks or trailers at the supplier’s plant so that the supplier can load products before drivers arrive at the dock. A truck driver can depart immediately with the loaded vehicle instead of waiting for it to be loaded. Suppliers to Japanese transplants are more likely to use additional trucks or trailers, particularly Honda for which 66% of its suppliers do this.

Conclusion

Our comparison of supplier plants with product lines serving both U.S. automakers and Japanese transplants revealed that the actions of supplier’s customers significantly affected the ability of suppliers to be lean. In regard to supply-chain management, the Big Three U.S. automakers have publicly adopted some version of lean manufacturing and JIT logistics. The data showed, however, that they still could benefit from improvement. The same suppliers had much leaner operations within their plants and in their logistics when serving Japanese customers. By most measures, the suppliers that served Toyota were the leanest of all. This is not to say that U.S. automakers were weak on all measures. There was variation across companies and, on many measures, the Big Three were equal with their Japanese competitors —most likely because the Big Three have been aggressively focusing on making improvements.

What did the Japanese transplants do to develop superior lean supply chains in North America?

1. They worked with their suppliers to help them develop lean capabilities — at least for the particular production line that served the Japanese assembly plants.
2. They leveled their own production schedules to avoid big spikes in demand, which enabled suppliers to hold less inventory.
3. They created a disciplined system of delivery time periods within which specific parts shipments must be received.
4. They developed lean transportation systems to handle mixed-load, small-lot deliveries. In some cases, this required building a cross-dock to accept large loads for redistribution into smaller loads.
5. They encouraged suppliers to ship only what was needed at the assembly plant at a particular time —for example, by not penalizing suppliers for shipments that did not completely fill a truck.

Is this phenomenon unique to the automobile industry? Clearly, the answer is no. Companies “going lean” in aerospace, shipbuilding, computers, furniture, paint, telecommunications, aluminum products — to name only a few — face similar issues. Consider Miller SQA, a division of Herman Miller, that chose to make a lean furniture line that is “Simple, Quick and Affordable.” To deliver quickly, as promised, the company needed to dramatically reduce lead time since their competitors were taking two to four months from receipt of a customer order to shipment to the customer. By systematically examining every step in the value chain and eliminating waste, Miller SQA was able to cut lead time to a few weeks and, in some cases, to just a few days. The company created a lean assembly plant for assembling the furniture and installed a metering center (a cross-dock) near the assembly plant. Pull signals are sent to the metering center, and parts are brought to the plant just a couple of hours before they are needed. Suppliers, who have developed highly reliable lean systems with the help of Miller SQA, are electronically connected to the metering center and receive pull signals telling them when to replenish the parts.

Miller SQA cannot level its schedule because it builds furniture to order, but by developing lean suppliers, highly flexible assembly cells and information technology support, the company was able to assemble and deliver in record time more than 400,000 end items of almost perfect quality.

The power of creating a lean value chain is gradually being understood, and even Toyota is constantly improving its system. As the pace of e-commerce accelerates and customers expect deliveries to be as fast as computers, performance pressures will become more stringent. The central lesson of lean manufacturing is that speed does not necessarily mean increased cost and lower quality. Shrinking the time line can actually improve quality and reduce costs. But customers cannot achieve these benefits by simply expecting their suppliers to perform to a lean standard. Creating a lean supply chain requires a give-and-take partnership across all the links in the chain of value to the customer.