By October 26, 2005 3 Comments Read More →

Toyota "Bucks Trend" by NOT Outsourcing

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This article eventually reaches the conclusion I jumped to early on. Of course Toyota doesn’t outsource as much as the other automakers. Toyota’s own internal production can be cheaper and with better quality, I assume, than their suppliers.

Think back to Ford, they were completely vertically integrated under Henry Ford. From a Value Stream perspective, this makes sense for many reasons, including:

  • Avoiding paying an extra layer of profit to an outside supplier
  • Internal production can be located closer, typically, reducing supply chain inventory needs
  • Being in the same company can improve information sharing, problem solving, muda/waste elimination, and coordination

The article takes the mainstream mindset of “of course it MUST be cheaper to outsource” since all these other companies outsource to “save” money. But are companies really saving money? Many outsourcing decisions fail to consider the total supply chain cost. Just because Supplier X has cheaper labor, it doesn’t mean you will automatically reduce your total cost and long-term cost by outsourcing.

Some great quotes here, they speak for themselves.

Outsourcing parts simply to meet the changing industry norm is viewed warily by Toyota executives.”I don’t believe we can outsource our responsibility to the customer,” Seizo Okamoto, president of Toyota’s truckmaking operations in Princeton, Ind., told Automotive News.

…..

Norm Bafunno, vice president of manufacturing at Princeton, say Toyota may outsource other components as vehicles are redesigned and, like the Tundra’s fuel tank, “where it makes sense.” But that will mean that potential suppliers will have to compete against a very efficient competitor: Toyota itself.

…..

“Toyota is as vertically integrated today as GM was 30 years ago,” efficiency expert Ron Harbour, president of Harbour Consulting Inc. in Troy, Mich., told Automotive News. “But the difference is, Toyota can make all of its integrated parts operate efficiently together. For Toyota, it works.”

…..

“Sure, a supplier could make a given part with lower wages,” Liker told Automotive News. “But labor costs are only part of the equation. Let’s assume that a supplier’s workers earn 25 percent less than Toyota’s. Toyota could easily find ways through its practice of continuous improvement to eliminate 25 percent of its own labor cost. And once that’s out of the way, what real advantage does the supplier have to offer?”

…..

Toyota is simply following a different model, says Dave Cole, chairman of the Center for Automotive Research in Ann Arbor.”There isn’t one magical business formula in the auto industry,” Cole says. “Vertical integration works for Toyota. It doesn’t work so well for the others.”

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Mark Graban's passion is creating a better, safer, more cost effective healthcare system for patients and better workplaces for all. Mark is a consultant, author, and speaker in the "Lean healthcare" methodology. He is author of the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, as well as The Executive Guide to Healthcare Kaizen. His most recent project is an eBook titled Practicing Lean that benefits the Louise H. Batz Patient Safety Foundation, where Mark is a board member. Mark is also the VP of Improvement & Innovation Services for the technology company KaiNexus.

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3 Comments on "Toyota "Bucks Trend" by NOT Outsourcing"

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  1. "Favorite Posts" Q4 2005 — Lean Blog | July 27, 2011
  1. Steve says:

    It is obvious that the methods that Deming taught the Japanese still ring true.

    You don’t outsource because it is a fad. You outsource only if you can save money.

    If someone is going to offer a better product and/or price that what Toyota makes internally, they have to be more productive. In the manufacturing world, elimination of scrap and rework accomplishes this. In the IT sector, the same concepts apply.

    Lost cost per hour doesn’t necessarily equate to lowest cost of production.

    Steve Larrison
    http://www.surviveoutsourcing.com

  2. Anonymous says:

    1) Vertical integration failed in GM because the unions were able to use the vertical integration to their advantage. By strategically striking a component line, multiple assemly lines go down, followed by more component lines. In this environment, mangement stops considering the vertical integration an asset and begins to neglect it in favor of simpler outsouring arrangements.
    2) Outsourcing masks ineffective management. By outsourcing, an immediate cost savings can generally be had without hassles. Any problems can be blamed on the suppliers.

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