Making cars and car parts in the same factory is supposed to be an outdated business plan.
So why is Toyota Motor Corp. - an industry leader in efficiency and innovation for many years - hanging on to in-house parts making at its North American assembly plants?
General Motors, Ford Motor Co. and the Chrysler group have been struggling for years to make assembly plants more efficient by unloading parts manufacturing to outside suppliers.
Toyota's North American factories, which range in age from 10 to 20 years, also perform the sort of large-scale in-house parts making that more modern auto factories no longer do.
But Toyota's factories are the most efficient in North America - parts and all - and Toyota isn't so sure it wants to change.
On one hand, the company sees parts making as a critical piece of its overall quality-control program. Toyota argues that keeping some parts in-house actually makes it more efficient. 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.
On the other hand, there is evidence of change. Okamoto's Princeton plant used to make its own fuel tanks out of steel. Now it purchases them from a supplier that makes them out of plastic. The same plant, which builds the Tundra pickup, Sequoia SUV and Sienna minivan, also now is using an outside supplier to sort and sequence parts before they arrive at the assembly line.
Okamoto also is overseeing the 2006 launch of a Toyota factory in San Antonio. That plant will rely on a cluster of small supplier operations on Toyota's plant site, adjacent to its assembly shop.
Norm Bafunno, vice president of manufacturing at Princeton, says 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.
The wage model between Toyota and its supply chain is not markedly different from the Big 3's own supplier model. Toyota's own hourly wages are roughly the same as the wages paid to Big 3 assembly workers.
And Toyota's suppliers - even those in which it owns partial control - pay their workers the usual industry rates for wages, says economist Steven Szakaly of the Center for Automotive Research in Ann Arbor, Mich.
Those supplier wages are in the range of $9 to $11 an hour at small plants in the South and $15 to $18 an hour at plants in higher-cost areas around the Great Lakes, Szakaly estimates.
For now, Toyota remains content to build parts in-house that its competitors have been trying to outsource for decades.
"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."
Toyota emerged as the industry's most efficient automaker in this summer's Harbour Report, a closely read annual analysis of automaker operations across the continent. According to the study, Toyota spent 27.90 hours of labor to stamp and assemble its vehicles and powertrains in North America, compared with 29.43 hours at No. 2 Nissan North America Inc., and 34.33 hours for GM, the most efficient of the Big 3.
And those numbers include parts work that its competitors are not performing.
At its Camry-Avalon-Solara plant in Georgetown, Ky., Toyota workers produce the cars' bumpers, instrument panels and plastic trim parts for the instrument panel and the vehicle interiors. A metal fabricating operation welds the company's steel fuel tanks, while the plant produces its own stamping dies, knocks out suspension parts and other small stampings, assembles the suspension systems and paints its own bumpers, oil pans and suspension systems.
At Toyota's assembly plant in Cambridge, Ontario, in addition to building the Corolla, Matrix and Lexus RX 330, workers produce cockpits, instrument panels, headliner systems and bumper fascias. Instead of using an electronics supplier, Cambridge even produces its own andon boards - the electronic overhead displays that track production activity throughout Toyota plants.
Some automakers still do some of those jobs in-house. Several of Ford's plants assemble their own headliners and fuel tanks. But no automaker does them all, according to Harbour.
Toyota's engine plants in Georgetown; Huntsville, Ala.; and Buffalo, W.Va., are the only three engine plants in the industry that produce their own piston pins, according to Harbour's data. The camshafts, another engine piece that is being outsourced increasingly to third parties, also is made in-house at Toyota.
Despite the added work, Toyota Buffalo is the industry's most efficient engine plant, building one engine every 1.88 hours in 2004, according to Harbour. The most efficient Big 3 engine plant is GM's Tonawanda, N.Y., plant, which spent 2.33 hours per engine in 2004. The industry average was 3.97 hours per engine.
In Georgetown, Ky., Toyota workers assemble Camrys and Avalons - and make a wide variety of components, too.
A different beat
GM, Ford, Chrysler, Renault SA, Nissan and the European operations of DaimlerChrysler AG are marching to a different beat. They have spent years - and in some cases, decades - eliminating in-house parts production.
Two years ago, Chrysler sold its big Huntsville electronic components plant to Germany's Siemens VDO Automotive. The sale took about 2,300 Chrysler jobs that were paying about $30 an hour and turned them into supplier jobs that - while still supplying Chrysler - pay about half that.
Chrysler is building a plant in Toledo, Ohio, that will use three outside suppliers to construct and operate portions of the Jeep Wrangler assembly process. Nissan's assembly plant in Canton, Miss., has conveyer systems delivering cockpits, front-end modules and other complete vehicle sections from supplier operations on the other side of Nissan's factory wall.
Why is Toyota resisting the industry shift toward outsourcing?
Jeffrey Liker, a University of Michigan engineering professor who has studied Toyota for two decades, says vertical integration makes Toyota more efficient in two ways.
By building a part in-house, Toyota can focus on eliminating waste from its production - something that is central to Toyota's operating system, says Liker, whose book The Toyota Way was published last year. And by not relying on a supplier, Toyota has immediate control over quality issues, avoids problems with delivery and logistics, saves transportation costs and maintains total flexibility on scheduling and engineering changes.
But what about Toyota's obvious cost disadvantage? Suppliers almost universally pay their workers lower wages than auto assembly plant wages.
"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's Georgetown assembly plant is completing a three-year cost-cutting drive that will reduce its powertrain manufacturing costs by 40 percent, according to Liker.
Says Dan Sieger, a spokesman for Toyota's North American manufacturing office: "We view this as a competitive issue. We have a team that carefully analyzes each issue of whether we should make something or have it made by a supplier, based on different factors.
"But our basic philosophy is that the fundamental elements of the vehicle should be manufactured by Toyota. We do consider it something that's desirable."
But there are dangers to trying to do so much internally, says Craig Cather, CEO of CSM Worldwide in Farmington Hills, Mich. As Toyota expands in North America, Europe and China, it must hire new people. New managers and workers are not necessarily as adept at Toyota's various businesses as seasoned outside suppliers would be.
"They are getting bigger on a global basis every year," Cather told Automotive News. "They need to be very careful that they have the management and manpower to continue doing this work in-house, or else that their family-owned suppliers can keep up with them as they grow.
"The rest of the industry is relying more and more on outside expertise for that sort of support. Toyota is relying on itself."
Although GM now is backing away from using suppliers such as Lear Corp. and Intier Automotive to design and integrate entire interiors, it still is relying on outside companies for critical expertise on brakes, stability control, safety and electronics.
The Chrysler group is building a Jeep Wrangler factory in Toledo that will entrust the design and tooling of large parts of the plant to three outside companies. Chrysler then will rely on the suppliers to perform portions of the actual vehicle production.
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."
You may e-mail Lindsay Chappell at [email protected]