Executive Summary

The purpose of this report is to identify on how Toyota Motor Corporation (TMC) has

approached the planning and implementation of its logistics activities. Toyota has

established Toyota Production System (TPS) to organize its manufacturing and logistics

activities as well as suppliers and customer’s interaction. One of the TPS concepts is Just-in-

time (JIT) which is well known worldwide and provide significant competitive advantages to

Toyota. As a result, Toyota has become to be the world’s largest automobile manufacturers

by sales and production. To achieve JIT goals, Toyota has used “kanban system” to control

its production which can reduce lead time and response to any changing requirements.

Another system that Toyota has implemented and it is important on expediting JIT delivery

in lean system which is cross docking. In order to accomplish this, Toyota has integrated

kanban and milk run logistics into the operational design of cross docking facility. Milk run

is one of the most common used in the automobile industry nowadays. It combines inbound

and outbound logistics in a single vehicle on a JIT basis.

Although JIT and cross docking are beneficial and support Toyota production system but

there’re some limitations that has found in this report. Toyota has to traded-off the additional

cost against inventory and transportation cost savings form this implementation. For future

trend, Toyota has continuously improved its system such as implementing e-kanban and

material requirement planning which capable to support its JIT concept.

 Introduction

“Logistic Management is the process of planning, implementing, and controlling the

efficient, effective flow and storage of goods, services, and related information from point of

origin to point of consumption for the purpose of conforming to customer requirements”

(Council of Logistics Management, 1998). In the competitive business world today, logistics

has been increasing their importance to the business achievements to create time and place

value in the products to maximize consumers’ satisfaction. Moreover, the effective logistic

management helps reduce cost of inventory carrying, material handling, transportation and

other distribution activities. This report will investigate on how Toyota Motor Corporation

(TMC) has planned and implemented of their logistic activities to become to be the world’s

largest automobile manufacturer by sales (Marr, 2009) and production (The Truth about

Cars, 2011).
 Company Background

Toyota Motor Corporation is a multinational automaker company, was found by Mr. Kichiro

Toyoda since Y1937 and has its head quarter in Aichi Prefecture, Japan. Toyota owns and

operates Lexus and Scion brands as well as holding shares in Daihatsu, Hino Motors, Fuji

Heavy industries, Isuzu Motors, Yamaha Motors and Mitsubishi Aircraft Corporation.

There’re totally 522 subsidiaries worldwide under Toyota Group and about 320,590

employees. The current business is not only automotive but also in robotics and financial

services.

Toyota has developed the Toyota Production System (TPS) to organize its manufacturing and

logistics activities, as well as suppliers and customer’s interaction. The company philosophy

has reflected in the terms of Lean Manufacturing and Just-in-Time Production which are

known as “Toyota Way”, recognized as a world’s automobile industry leader in manufacture

and production with the large economic of scales in production of 51 manufacturing plants in

26 countries worldwide (Toyota, 2011).

Toyota has passed GM as a world’s largest automaker in Y 2008 with selling of 8,972

million. In Y 2009, Toyota gained a highest market share in automotive industries with

9.40%, followed by General Motors Corporation 6.60% and Daimler AG 6.0%.

(Datamonitor, 2009b).

Figure 1: Business Results (Consolidated basis (U.S. GAAP))

Source: Toyota
 Just-in-Time, an Inventory Strategy

“The more inventories a company has, the less likely they will have what they need” (Liker

2004, p104). Toyota is a pioneer using of just-in-time production. The Company has spent

many years to revamp its ordering, producing and distribution to make it easier for dealers

and customers to make changes before production (Fahey, 2004). At that time, the goal is to

reduce the average delivery time since the dealer order until receive vehicles from 70 days

to 14 days (Fahey, 2004). This goal accomplishment would not only satisfy customers need

but also reduce dealer inventory costs and the need for Toyota to spend on rebates for slow-

selling vehicles (Fahey, 2004).

“Just-in-Time” (JIT) production is one of the concepts of Toyota Production System (TPS).

“It means producing the necessary items in necessary quantities at the necessary time”

(Kotelnikov, 2001). It is a continuous improvement philosophy in increasing value-added

and eliminating waste. The results once it achieved, cost is reduced and quality of the

product is improved which will give the sustainable competitive advantage to the company.

JIT is most likely been used in Automobile industries. Inventory has seen as waste

associated with keeping stocks. Parts are provided only when they are needed in production.

With JIT production system, Toyota could produce a vehicle within shortest time and

deliver to the customer as fast as possible by adhering to the following:

1. Once received a vehicle order, a production instruction must be given to the vehicle

production line since the beginning as fast as possible.

2. To be able to assembled any types of vehicle ordered, the require number of all types

of needed parts have to be stocked at the assembly line.

3. The parts must be replaced by retrieving the same number of parts from the preceding

process.
 4. Only small numbers of all types of parts will be stocked in the preceding process and

produce only the numbers of parts that were retrieved by an operator from the next

process.

In order to meet JIT goals, Toyota uses “kanban system” to control its production to

determine what to produce, when to produce and how much to produce. Kanban is a

Japanese word, means card. It is an information system that controls the production of the

necessary products in the quantity that is required at the right time in every process of a

manufacturing company (Henderson, 1986). It is a pull inventory system which means that

parts are pulled when it needed and sent to the needed location. The pull system starts from

the customers and then it works all the way backwards to the original resources.

Figure 2: Kanban System at Toyota

Source: Toyota

The figure 2 shows the sample of the process of Kanban System at Toyota supplying

carburetors. The washing process will give an order cards to a preceding process, machining

when its products stock level lower than demand needed from the subsequent assembling

process. The machining process will start processing immediately once receives an order

card to replenish the inventory.

The benefits of Kanban are to reduce lead time and having fast response to any changes of

production schedule by changing the final assembly process and then the work will

automatically produce in their way back up the production line. However, there’re limitations

of this system that is not suitable for manufacturing with high demand fluctuation, short

production run and having multi types of products. Moreover, if the Kanban is breakdown,

the entire production line will be shutting down.

Benefits of Just-in-Time (JIT) production system

The main benefits that Toyota received from implementing Just-in-Time production are cost

reduction, increase production efficiency and quick customer response by shorten lead time.

1. Cost Reduction: JIT enables to reduce cost of ordering and inventory because it

allows to purchase and receive parts just before needed in the assembly line.

Moreover, when overproduction occurs, products are produced more than demand

and leads to excess inventory, JIT helps to eliminate this waste and Toyota can save

storage costs as car no longer sit idle in warehouses waiting for customers (Atkinson,

2005). Last, JIT itself doesn’t cost a lot of investments in assets or systems. It’s

simply use the simple technique like Kanban to use card as a signal of parts

movement and utilize machine and people at the optimum.

2. Increasing of production efficiency: Ohno (1984) found that it was easy to triple or

quadruple productivity by assigning one person per machine, as pre-war some critical

machines typically had 3 or 4 operators assigned per machine to increase efficiency

of production. The efficiency increased when productivity increase and cost reduce.

Moreover, increasing its efficiency in managing shop floor production can improve

quality of the product.

3. Quick customer response by shorten lead time: JIT helps to reduce lead time both in

production and delivery. The examples to reduce lead time in production are moving

work stations closer together, reducing the number of jobs that waiting in process,
 and improving cooperation between processes. To reduce lead time in delivery,

Toyota has good relationship with suppliers and encourages them to locate close to

the factory. Toyota supplier’s goal is Open-Door Policy, giving them training,

encourage innovations and partnering for growth with their suppliers.

Limitation of Just-in-Time (JIT) production

There’re some limitations in JIT system as following.

1. In JIT, small batch production is preferred. Parts of automobiles come from many

different suppliers which will result in high level of supply network coordination.

However, this may effect to logistic costs especially transportation cost because of

high frequency of parts delivery and costly bulk transportation charges.

2. With the concept of zero inventories, no stocks or minimal reserve, a small disruption

from suppliers is possible to cease the production with a very short notice.

International Herald Tribune (1997) reported about one of Toyota’s supplier plants

got fired and couldn’t deliver all break parts. Toyota decided to stop and close down

all the assembly lines. This cause Toyota lost about $15 billions in sales before

supply break parts could be restored.

 Just-in-Time Cross dock

In a past decade, Toyota has designed and implemented cross dock to support their lean

principle, aim to reduce costs and improve customer satisfaction. Cross docking is a

warehouse management concept, in which products are delivered to a warehouse by inbound

trucks and been sorted out immediately, reorganized based on customer demands, routed and

loaded into outbound trucks for delivery to customers without holding the products as

inventory at the warehouse (Yu and Egbelu, 2008). In lean system, a cross dock is focus on

expediting JIT delivery to the production sites. To be able to achieve this, Toyota has

integrated kanban and milk run logistic into the operational design of cross docking facility.

A JIT cross dock is able to sort, repack and delivery of large number of Kanbans while parts

order-cycle time can be reduced. The ferret (2011) website stated that in one week of

operation, a 7,525.15 square-meter-cross dock could process over 8,000 orders representing

shipments from 100 suppliers to 34 production sites.

JIT cross dock is also supports JIT production by using “milk run” to pick up and deliver

parts just-in-time and in a consolidated manner. Milk run is a logistic procurement method

that uses in scheduled pick up of parts from multiple suppliers designed to support a given

production level (Baudin, 2004). Milk-run has been implemented to utilize Toyota logistic

concepts by consolidated fully-loaded distribution through small-lot and pickup frequently

from each supplier. The truck is scheduled at specific time to pick up several parts from

suppliers along the way and return to cross dock. At cross dock, parts are unloaded and

prepared for each assembly plant. After that, truck is reloaded with the empty returnable

containers and return to supplier to be reused for the next shipments. To be able to deliver

parts frequently with the required amount and specific time from suppliers, the suppliers

must located near the assembly base such as Toyota in Japan and the scale of each supplier’s

production has to be large enough.

Figure 3: Cross dock operation for Milk run system
Source: Toyota Kirloskar Motors (TKM)

Implementation of milk run system into cross dock makes transportation consolidation more

efficiency and help to increase inbound-material visibility and control.

The example of milk-run logistic for Toyota Motor Thailand (TMT) was started by Toyota

Tsusho Thailand in 2001, and succeeded by TTK Logistics (Thailand) in 2003 and became

full-scale with the beginning of multi-purpose vehicles production (Nemoto, Hayash &

Hashimoto 2010 ). The number of trucks used for the milk-run logistics expanded to 565

trucks in May 2007 while the number of drivers expanded to 1.081. There’re about 150

delivery routes established in 3 plants at TMT with six-wheel trucks (4.3 tons loading

capacity) are usually utilized. TMT has received benefits from milk-run logistic in term of

loading rate has been improved and number of trucks and travel distance have been reduced,

which is result in reducing transportation cost.

There’re 4 steps to track the operations of JIT cross docking that can help to indicate

problems immediately.

1. The route number and time for unloading/loading must be labeled on dock doors to

verify that what truck is being serviced and to assure that the service are correct

within the specific time limits.

 2. A cross-dock floor is marked by Kanban square, and in overhead signs must show the

destination and time for delivery as well as the height of truck. This is to ensure that

the shipments are placed in the right lane and the right time.

3. All containers come to cross dock will receive the ticket which will be indicated all

contents, departure time, supplier’s name and destination in order to be tracked

internally.

4. The employees at the dock use a box with indicated slots for each shipment. This will

help to verify that each shipment has been loaded on truck correctly.

To ensure a JIT cross-dock operational stability, it needs to utilize TPS principles which are

work standardization, preventive maintenance and supplier involvement. Work

standardization is the key factor of JIT cross-dock operational stability. Toyota has set the

work standardization such as exact format, process and procedures, and then published to all

employees so everyone knows what to do and how to do it in the same way in each process

and can identify the errors or variability in the operation immediately. For preventive

maintenance, vehicles, material and equipments need preventive measures to decrease

process breakdowns. Last, involvement from suppliers to join pick-up route planning and

sharing related information can also decrease operational variability.

Benefits of JIT Cross Docking

1. Toyota transportation cost has reduced. With JIT cross docking, parts are shipped

more frequency and lower quantity by consolidating smaller part supplies into

consolidated loads. Moreover, the trucks are almost fully utilized with full truckload

in both direction, not same as before the trucks only partially full.

2. Using a minimum number of containers, Toyota can save money from returnable

containers because the vehicle parts that go to assembly plants are balance to the

empty containers that return everyday.

 3. Toyota is able to deliver more frequency and in some cases even double delivery

cycles because of reducing in product cycle time and improve customer satisfaction.

4. Cross-docking is lower holding inventory cost since there’s no required inventory in

stocks.

One example, Transfreight, a joint venture company between TNT Logistics and Mitsui

Trading Company is one of the Toyota companies which is successful to implement cross

docking and achieved JIT delivery goal in North America.

Limitation of JIT Cross Docking

Although there’re many benefits from JIT cross dock implementation but there’re still some

limitations as follow,

1. Cross docking is suitable for company with large distribution system because with the

full truckload from suppliers to factory need sufficient volume to reduce

transportation cost.

2. Cross docking need a lot of start-up investment and it is difficult to manage.

3. Cross docking needs good cooperation with supply chain partners to plan, forecast

and share information among the chain. Tetsuo Agata, president of Toyota Motor

Engineering & Manufacturing North America, Inc, said that as Toyota redoubles its

efforts to improve quality, our suppliers’ commitment to flexibility and continuous

improvement is crucial to Toyota now more than ever (pressroom.toyota, 2010).

 Future Trends

With high competition in manufacturing industry and significant of Just-in-time production,

Toyota has been aware and developed new technologies to support the production system

such as implementation of e-Kanban instead of card-Kanban. The electronic kanban (e-

kanban) system can minimize human mistakes and facilitate tacking, monitoring and

performance measurement (Wan and Chen, 2007). E-kanban is more efficiency in term of

fast response, data availability, all information passes through electronic data information

system and material number doesn’t need to write into SAP. Moreover, the history data can

be analyzed in e-kanban.

To improve JIT cross-docking activities, Toyota has continue complemented current

enterprise resource planning (ERP) applications such as Material Requirement Planning

(MRP) with integrated capabilities to make it more visible, traceable and compliance. The

visibility can be seen in term of real-time shipment status to its suppliers and 3PL providers,

traceability in term of historical records of shipment activities and compliance to the

procedures to make sure the accuracy of shipment and timeliness.

 Conclusion

The success of implementing of Just-in-time as an inventory strategy has made Toyota

become to be a world’s leader automotive manufacturer. It has brought many benefits to the

company such as reducing cost, increasing speed of production with high product quality,

avoid risk of remaining vehicles unsold and improve customer satisfaction. This concept is

very well known and mostly used in automotive industries nowadays. One of the tools that

support JIT production is kanban system. It uses to schedule production, determine what

need to be produced, when and how much to produce by using pull concepts, produce

according to customers’ actual demand.

In term of reducing transportation cost, Toyota has implemented JIT cross docking as a

strategy. JIT cross docking uses milk run logistic concept to pick-up and deliver parts just-in-

time. By this means, Toyota is able to pick-up parts more frequency with small-lot size

delivery and having better truck utilization. The major benefits from cross docking

implementation are reducing transportation cost and inventory handling cost. However,

there’re limitations such as high setting cost, and only suitable for the company with large

distribution size. Moreover, it needs a high level of supplier’s coordination.

In the future, Toyota has continuous improved its system by using new technologies to

support its operation such as material requirement planning to make more competitive

advantages to the Company.