The tricky part of making U.S. cars: Lining up U.S. parts

Brash new approach reshaped supply chain

For perspective on how far Toyota Motor Corp. has come as a customer for North America-made auto parts and production materials, Chris Nielsen recalls one of his first days on the job.

It was the summer of 1987, and Nielsen had graduated recently from GMI Engineering & Management Institute in Flint, Mich., and taken one of five jobs in Toyota's new U.S. purchasing office. Toyota had opened the office in a Detroit suburb to begin setting the stage to supply the automaker's plant in Georgetown, Ky., which would start building cars the next year.

Days after accepting his job with Toyota, Nielsen and his small band of colleagues were relocated to Lexington, Ky., to begin their work.

"We knew we needed to begin buying things," says Nielsen, 44, who recently became Toyota's first American vice president for North American purchasing. "So I sat at a table with a sheet of paper and a ruler and drew what looked like a purchase order. When the other people in the office approved it, I drove down the street to a copy place and ran off a stack of them to be Toyota's purchase orders.

"I had to use my personal credit card to pay for the print job."

This year, Toyota's Kentucky-based manufacturing and purchasing operations will buy $30 billion worth of parts and materials from nearly 500 North American suppliers. Ohio-made steel, air conditioners made in Tennessee, wheels made in British Columbia and engine valves made in Illinois will come together in seven assembly plants to turn out 1.5 million cars and trucks.

The 20-year evolution illustrates how much Toyota has come to rely on North American component sourcing. The real drama of the history is that, prior to 1988, Toyota was a company with scarcely any experience outside of Japan, with virtually no global reach in its supply chain, dependent on suppliers that, for the most part, had never ventured out of Japan.

"This was all new to us," Nielsen says. "Toyota didn't know these suppliers, and these suppliers didn't know us.

"Some of our younger associates here today look at me in disbelief when I tell them that, back in the beginning, American parts suppliers weren't so sure they wanted to do business with Toyota. I spent a lot of my time in those early years — and I mean a lot of it — trying to convince U.S. companies that it would be OK to sell us parts."

NOT LAUGHING

It may be amusing to the industry's young managers today, but in the politically charged late 1980s and early 1990s, the heat on Toyota and the rest of the Japanese auto industry to build U.S. business relationships was anything but funny.

U.S. parts trade groups were seeing their traditional Big 3 market customer base erode as Japanese market share climbed. Japanese auto parts poured in to support a growing fleet of Japanese-badged vehicles on the roads of the country. Many U.S. firms viewed the arrival of Japanese-owned auto assembly plants suspiciously, labeling them "screwdriver plants," as though their new assembly workers were merely snapping together parts that arrived from Japan.

And in the beginning, the new U.S. production began that way. Auto plant startups such as Toyota's in Georgetown were tenuous and delicate. Japanese managers sought to limit risk by changing as few factors as possible from production lines in Japan. That typically meant using experienced Japanese managers and trainers to launch a proven vehicle model with existing Japanese suppliers.

But from the beginning, Toyota and the other transplant automakers knew such tenuousness was temporary. The drama was whether purchasing managers like Nielsen and his Kentucky colleagues could localize parts production fast enough to appease their trade critics in Washington and Detroit.

The problem for Toyota was that it wanted more from its suppliers than to merely be able to deliver a part, says Gene Tabor, who joined the Toyota purchasing team soon before Nielsen. Toyota wanted to look into the supplier's business. It wanted to see how the supplier controlled its costs, how it measured and improved quality from day to day, and how it planned to serve its customer on a long-term basis, says Tabor, now 53.

"That was a different approach to business for many of them," Tabor says.

NO INCREASES?

To some traditional U.S. companies, it seemed like Toyota expected the moon and stars from suppliers. In the familiar world of American automaking, suppliers were accustomed to passing along price increases on an annual basis. Toyota warned up front that that would not be acceptable.

Sheller-Globe Corp., a Toledo, Ohio, supplier, initially balked at Toyota's approaches but won several contracts to supply interior Camry parts anyway. After a year, it informed Toyota that higher-than-envisioned costs would require it to raise its prices.

Instead, Toyota sent a contingent through Sheller-Globe's factory looking for wasteful practices. By the time the exercise was over, Sheller-Globe withdrew its request and satisfied itself with the improved operating margin that resulted from following Toyota's suggestions.

U.S. suppliers also tended to be mistrustful of customers. A purchasing manager who wanted to go over a supplier's financial books was considered out of line and probably only looking for hidden profit that the automaker could translate into a price rollback. Many U.S. firms simply assumed Toyota was lying, Nielsen recalls.

"We spent so much time with suppliers trying to get them to trust us," he says. "We showed them the general agreement that we began with, and still do, which is really a philosophy statement. It calls for mutual trust. It required that we always tackle the bad news first. It opened up the financial data. It described the long-term relationship.

"Some of them looked it over and said, 'There's no way. Over my dead body will we do this.' Others tip-toed in. Some really jumped in with both feet."

FLAWS

Trust aside, quality remained the more serious problem. Toyota executives at the time were reluctant to say so out loud for fear of frightening away U.S. consumers. But the numbers showed that American parts makers were not yet at the quality levels Toyota enjoyed in Japan.

In some cases, U.S. suppliers' defect rate for parts was twice that of their Japanese competitors. While Toyota worked on a just-in-time inventory basis, the automaker also used warehouse space in Georgetown to create a just-in-case buffer inventory to protect itself from quality-related interruptions.

Equally distressing to Toyota was the amount of waste and scrap it found in U.S. parts plants. A core component of the Toyota Production System was eliminating waste. To do so required a manufacturer first to identify the inefficiency, then to conceive of a remedy for it. Both actions invariably resulted in a higher quality product, according to the production system. And making better quality parts with less waste also spelled lower operating cost.

"It was really hard convincing some people that improving quality would literally reduce their costs," Nielsen says. "I remember experienced manufacturing guys looking at me and saying, 'You can't tell me that this will work. I know better.' "

IT CAN BE DONE

By the early 1990s, the slow pace of the courtship between Toyota and potential American suppliers was becoming a problem in Washington. With the U.S. economy in a recession in 1991 and Japan's automotive trade imbalance with the United States soaring, the first Bush administration was putting heavy pressure on the Japanese government to take more aggressive action. In response, officials in Japan asked automakers there to lay open their business plans in greater detail to American manufacturers in the hope that it would stimulate more business.

Enter Hajime Ohba.

Ohba, a manager in Toyota's Overseas Management Consultants Department in Japan in 1992, had been assigned to help an obscure construction trailer division improve its Japanese supply chain. It was a little-known fact that, just like Americans, many Japanese manufacturers still were having a hard time grasping the nuances of the Toyota Production System.

They understood simple kaizen, the practice of continuously improving the factory process. More complex issues, such as logistics issues and kanban — the practice of waiting until products are needed before moving them down the line — were proving harder to master. Ohba was patiently guiding the companies through the Toyota Production System.

But under the new political heat, Toyota dispatched Ohba to the United States to establish the Toyota Supplier Support Center in Lexington, Ky. The center would work with U.S. companies — free of charge — to explain the Toyota Production System and help interested companies adopt it.

The problem on the U.S.-Japanese trade front was that Toyota wasn't going to sign up U.S. suppliers simply to appease politicians when the suppliers couldn't meet quality and cost targets. In documents distributed to U.S. suppliers in the 1990s, Toyota showed that while Japanese electronic suppliers experienced defect rates of 100 or fewer per million parts, their American competitors sometimes saw closer to 1,000 per million. A Japanese radiator supplier experienced approximately 50 defects per million; an American radiator supplier, closer to 4,000 per million.

Toyota believed many more U.S. firms would become eligible for its parts business if they would clean house, using the Toyota Production System to reduce scrap and waste, improve quality and develop ways to discover the causes of problems before they materialized.

SUBTERFUGE

"In Japan, we had suppliers we could point to as examples of what we were talking about," Ohba says. "We realized we had better do that in North America. So we helped five or six plants do that here. That way other U.S. companies could come see them."

To the ears of old U.S. manufacturers, whose products seemed to suit the Big 3 just fine, Toyota's concerns sounded like mere political subterfuge. Some U.S. suppliers dismissed the Toyota Production System as "Japanese practices."

"People here said to me, 'Of course you can make that system work in Japan. In Japan, you don't have a union like we do,'" Ohba, now 62, recalls of his North American critics. "Or, 'In Japan, you have different rules about how work is done, or different transportation issues.' "

Not all efforts were successful. At one Michigan company that requested Ohba's assistance, a smog of dust and oil in the factory air hovered over the plant's production lines. Ohba informed the management that he must be able to see the production line to know how to improve it. He asked the supplier to find the source of the factory smog and eliminate it, and then he promised to return and begin working in earnest.

He never heard from the supplier again.

Now, 15 years later, non-Toyota consultants across the industry are advising manufacturers on "lean manufacturing," U.S. shorthand for the Toyota Production System. Plants all over North America, as well as Europe and Asia, have adopted some, if not all, of Toyota's systematic approach to problem-solving and muda (waste) elimination. The Detroit 3 now use Toyota Production System buzzwords, such as andon and kaizen.

You can reach Lindsay Chappell at lchappell@crain.com.