Supplier Performance Improvement at Toyota
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Last month I met up with a bunch of former Toyota UK colleagues, some of whom I hadn’t seen for 20 years and many of whom are now grey-haired like me, and perhaps we didn’t have the chiselled abs as we once did (ok, I made that last one up) but their spirit was completely undimmed. Just as I remembered.
Among the fond memories and experiences that we shared, one stood out, so much so that I thought I’d share it with you because I think it’s brilliant.**
For those unfamiliar with the principles that Toyota Motor Manufacturing follows with its suppliers, the one I’m going to cite here is that of long-term mutual success.
This isn’t a bold, flashy slogan plastered on the office and factory walls to which everyone becomes blind and ignores, but it sits deeply in their philosophy.
From a practical point of view, it translates into long-term business commitments with its suppliers, typically of around 5-6 years, the production life of the vehicle.
This is a bold commitment, isn’t it? Some of you might be thinking that with such a long-term commitment, it can make the suppliers feel lazy, entitled and can take the pressure off them to deliver continuous improvement. It’s the very opposite of “keeping them keen by treating them mean” and re-tendering at every opportunity (sometimes for marginal theoretical benefits).
The reality was the contrary. Toyota managed to secure year-on-year benefits from its supplier base across all the parameters that mattered.
The name of the vehicle (pardon the pun) that delivered these benefits was called “Supplier Expectations”.
Each year, suppliers were given an explicit improvement target based on their competitiveness and the needs of the business. For quality there was a PPM reduction target, for delivery a DPM target and for cost, a % reduction target.
It wasn’t just a “spray and pray” admin exercise to issue the targets then hope that the suppliers met them. No.
Suppliers were held to account to deliver on them. And where suppliers needed support to make the necessary improvements, Toyota provided resources and guidance. After all, we’re talking about mutual success. Progress was followed closely at the regular business review meetings. Achieving them was in the interest of both parties and the success rate was enormous.
Why did it work?
Here’s what I think.
1. Certainty - A long term commitment to a supplier meant the supplier had business certainty: they wouldn’t have the business pulled from them on the whim of a Procurement exec. This enabled them to invest in equipment, people and processes to drive continuous improvement (the benefits of which were given to Toyota, with the supplier choosing whether to share the same with their other customers or keep the gains for themselves)
2. Future business award - Achievement of the supplier expectations targets was hard-wired into the supplier selection decision-making process in the most transparent example of merit-based strategic sourcing I’ve come across. If suppliers achieved their targets they’d get more business.
3. Prestige – an annual awards ceremony recognised the top-performers, with supplier CEO’s keen to seize the limelight on stage ahead of their competitors when collecting their gleaming awards.
Could you get something similar to work in YOUR company? It’s not something I think you can tactically “switch on” for quick gains, but even if you chose to test this approach with a few of your key suppliers, imagine the value you could unlock.
** Could it be that I’m looking through rose-tinted glasses?