DEMAND CHAIN MANAGEMENT

Prepared For:
Professor Joseph Geunes

Models for Supply Chain Management

OEM 2015 / Summer 2014
ESI 6323

Prepared By:

INTRODUCTION
Company Profile
Toyota Motor Corp. engages in the manufacture and sale of motor vehicles and parts.
It operates through the following segments: Automotive, Financial Services, and

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Others. The Automotive segment designs, manufactures, and distributes sedans,
minivans, compact cars, sport-utility vehicles, trucks, vehicle parts, and accessories. The
Financial Services segment consists of vehicle financing and equipment leasing
operations. The Others segment includes residential design, construction, and sales; and
information and telecommunications services. (Forbes.com 2014)

Company Background
The Toyota Motor Co Ltd. Was first established in 1937 by Kiichiro Toyoda. Kiichros
father, Sackichi Toyoda, was the founder of Toyoda Automatic Loom Works. In 1924,
Kiichro sold the patent rights to a ground-breaking automatic loom for 1 million Yen
(1924 equivalent to 18.98 million US Dollars); this was the seed money used to fund the
start-up.
In 1957, Toyota Motor Sales USA Inc. was
established with their first dealership in
Hollywood California. Only two vehicle
model types were available for purchase and
the first US registered Toyota was sold in
1958. A total of 287 Toyota vehicles were
purchased in the states that year.
Toyota cars were slow to catch on in the
United Statesit took until the mid-1960s for the company to gain a respectable chunk
of the American marketbut when they did, they did so with a bang. In 1972, thanks in
large part to its success in the United States, Toyota sold its 1 millionth car, and three
years later Toyota became the best-selling import brand in the United States.
(History.com 1957)
Originally all cars were imported from Japan. However in 1959, Toyota began their
overseas production operation in Brazil by establishing Toyota do Brazil S.A. (Toyota
Motor, Toyota-Global 2012). Since then the corporation has primarily experienced
exponential organic growth. At of the end of Dec. 2013, Toyota conducts its business
worldwide with 52 overseas manufacturing companies in 27 countries and regions.

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Toyota's vehicles are sold in more than 160 countries and regions. (Toyota Motor, ToyotaGlobal 2014)

Toyota Motors led global auto sales

ahead of GM and Volkswagon in both
2012 and 2013. For 2014, they have set
an unprecedented goal of 10 million unit
sales. As of March 31st, 2014 Toyota has
almost 339,000 global employees.
According to Forbes Global 2000 list, they are ranked #8 in sales, #20 in profit, #81
assets, #22 in market value, #14 in worlds most valuable brands, and #12 overall.
(Forbes.com 2014)

Main Company Principles (5), Est 1935 (Toyota Motor, Toyota Global 2014)
1. Alwaysbefaithfultoyourduties,therebycontributingtotheCompanyandtothe
2.
3.
4.
5.

overallgood.
Alwaysbestudiousandcreative,strivingtostayaheadofthetimes.
Alwaysbepracticalandavoidfrivolousness.
Alwaysstrivetobuildahomelikeatmosphereatworkthatiswarmandfriendly.
Alwayshaverespectforspiritualmatters,andremembertobegratefulatalltimes.

Company Guiding Principles (7), Est 1992 (Toyota Motor, Toyota Global 2014)
1. Honorthelanguageandspiritofthelawofeverynationandundertakeopenandfair
businessactivitiestobeagoodcorporatecitizenoftheworld.
2. Respectthecultureandcustomsofeverynationandcontributetoeconomicand
socialdevelopmentthroughcorporateactivitiesintheirrespectivecommunities.
3. Dedicateourbusinesstoprovidingcleanandsafeproductsandtoenhancingthe
qualityoflifeeverywherethroughallofouractivities.

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4. Createanddevelopadvancedtechnologiesandprovideoutstandingproductsand
servicesthatfulfilltheneedsofcustomersworldwide.
5. Fosteracorporateculturethatenhancesbothindividualcreativityandthevalueof
teamwork,whilehonoringmutualtrustandrespectbetweenlaborandmanagement.
6. Pursuegrowththroughharmonywiththeglobalcommunityviainnovative
management.
7. Workwithbusinesspartnersinresearchandmanufacturetoachievestable,longterm
growthandmutualbenefits,whilekeepingourselvesopentonewpartnerships.

As previously discussed, the Toyota Production System (TPS), a landmark in lean

manufacturing, whose staple is the Kanban supply and scheduling system for just-in-time
manufacturing, is shown to not only work as an inventory control system, but also as a supply
strategy when Toyota introduced the splinter-division Scion.
The kanban system has also been called the "Supermarket method" because the idea behind it was
borrowed from supermarkets. Such mass merchandizing stores use product control cards upon
which product-related information, such as a product's name, code and storage location, are
entered. Because Toyota employed kanban signs for use in their production processes, the method
came to be called the "kanban system." At Toyota, when a process refers to a preceding process to
retrieve parts, it uses a kanban to communicate which parts have been used. This system in
which the 3rd principle of The Toyota Way was founded; Use pull-systems to avoid
overproduction.
In the past, Toyota was successful in targeting the baby boomers generation, whose average
consumer was the age of 47 in 2004. Their immediate response was the creation of the Genesis
group in 1999, marketing the Celica, Echo, and MR2 Spyder.

The models were moderately successful, however the median ages for the buyers were 37, 41,
and 36, respectively. It is not known if the supply chain strategy changed in any way, however,
the case study eludes to the fact that targeted marketing was not sufficient, but an end-to-end
product-to-consumer change in experience was required to appeal to those belonging to
Generation Y.
The Genesis groups first thought was that of product differentiation, and explored the full range
of products offered by the Toyota line, and selected the model bB of the Japan market, which

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became the better known Scion model xB. At the end of 2000, they also selected the xA based on
value and lifestyle study.

The case study lacks information as to why the xA was also chosen, as the xB was wildly
successful, whereas the xA would later be discontinued (replaced by the xD in 2009). Sales in the
xA peaked at 28,000 in 2005 while the xB peaked at 61,000 in 2006, and ran all the way until
2013.
The Scion product line would have three key distinctive features that would differ from the
mature product line offered by Toyota:
Product: a customized product that would stand out for a relatively low price.
Market: rather than mass-marketing, they would rely on word-of-mouth and the world wide web.
Dealership Experience: the target goal was to shorten the purchasing process, rather than the
typical 4-5 hour ordeal, assume customers have little time and arrive with information obtained
from the internet and friends.
When Scion launched the xA and xB in California in June 2003, each model had roughly 40
accessories the customer could choose from, versus 15 offered in the typical Toyota. Customers
would build a car online or at the dealer to their exact specifications. Once that order was placed
and the demand secured, the vehicle would be ready for pickup within 5 to 7 business days. They
also had the option of choosing a car in the local inventory and could have it ready overnight.
The price was also set and non-negotiable eliminating that time spent at the dealer. Roughly half
the customers completed the configuration ahead of time online and walked into the dealership
with the printout, or emailed it to the dealer in advance.
Scion offered many more options with shorter lead times than others; on the contrast, a custom
made BMW from Germany came with the 3 month lead time.

Production took place in Japan. All features at the factory level with the exception of color and
transmission were standardized to produce a running customizable blank. So even though each
car had many options, the assembly process remained simple. Normally, after the manufacturing
plan is set 3 months in advance of production, there was a very limited chance in changing that
plan (roughly 5 %). With Scion, they were initially allowed to change quantities by 20 to 30
percent. To gain more flexibility, they had to horse-trade with other models that shared common
components or on the same assembly line.
From the factory, the cars were delivered to a port pool in Japan with a delivery time of 3 days,
and then shipped to Long Beach, California. Shipping time between ports was 10 to 12 days, and
the total lead time from factory to US port about 3 weeks. When they arrive at the Long Beach
port, they are typically allocated to dealers, and each dealer is allotted a 20 to 30 day supply, of
which half is kept at the dealership while the rest remained at port. Final customization took
place either at the US port or at the dealership, depending on the orders for that month. No
customization would occur from the time the car leaves the factory until a firm order has been
placed.
Once an order was placed, the dealer would check stock for the appropriate color and
transmission. If the car was stock at the port, the customization center at the port would install
the ordered accessories based on the individual order, then delivered to the dealer. In the event
that the specific combination was not in stock, they were able to exchange inventory
electronically with other dealers allotments, based on the inventory at the port. When
accessorized at the port, the car would be available for pickup within 5 to 7 business days. If the
car was accessorized at the dealership, the entire process could be completed overnight. The
majority of the accessories were designed and manufactured in the U.S. To aide in a leaner
process, Toyota put a priority processing for parts going to Scion vehicles at port, cutting down
the delivery time to the customization center from two to one day.
Toyota also worked very closely with the accessory manufacturers through SEMA (Specialyty
Equipment Marketing Association) to ensure the dimensions of the accessories would better fit
the cars. Toyota had predicted the demand for accessories would be high due to the experience
with the bB model in Japan. To improve local customization, Toyota would later design future
Scions to be pre-wired and have snap-on and off accessories. This would simplify installation to
be more efficient, with higher quality and lower cost to the end user.
In understock situations, such as the xB, the cars moved through the system as fast as possible,
with priority shipping and processing at the ports. Additionally, the xBs were allocated to dealer
at the port in Japan so dealers got an earlier visibility to their available stock. On the contrary, the
demand for the xA was overestimated by 50 percent, shutting down production for four months.
Excess inventory was stored in Long Beach.
This multi-tier inventory network was designed to address demand uncertainties. Two ports with
an inventory pool, a flexible plant, and a separate discretionary pool that could be allocated to
different regions based on the demands.
Toyota aimed to set up an early radar system for customer satisfaction; they were the first car
company to offer online chat. 97% of Toyota customers contacted by phone, whereas 75% Scion
customers were through email or chat. They also monitored postings at external sites and forums

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to find out negative experiences. While this strategy improved customer satisfaction, it required a
large investment in resources.
In the end, Toyota met its goal of targeting a younger consumer; the average age of Scion buyers
was 35. By end of year 2003, Scion sales totaled almost 11,000 vehicles, 500 of which were
registered outside of California. Since, Scion had also introduced the wildly popular tC model,
and participated in a joint venture with Subaru producing the FRS.

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PROBLEM CONTEXT DISCUSSION / IMPORTANT FEATURES
1. What makes this problem interesting and complex?
2. What factors make it more complicated than the modeling approaches we have
discussed?
3. Are there any human/organizational elements that might make a quantitative
approach difficult?

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DIAGNOSIS, ANALYSIS, AND RECOMMENDATIONS
1. What systematic and/or modeling approach would you use to approach the problem
discussed in the case?
2. What data (if any) is missing?
3. What operational changes (if any) would you recommend as a result of your analysis?
4. What strategic changes (if any) would you recommend as a result of your analysis?
5. What organizational changes (if any) would you recommend?

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CONCLUSION / DISCUSSION OF CURRENT SITUATION
1. Summarize case and your analysis and recommendations
2. Is there a way to find out what actually happened with respect to the issues discussed
in the case?
3. How is the company currently doing (possibly as a result of the actions they took)?

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Bibliography
Forbes.com. Global 2000 Leading Companies. Jan 1, 2014.
http://www.forbes.com/companies/toyota-motor/ (accessed Aug 3, 2014).
History.com. This Day in History (Oct 31). History Channel. Oct 31, 1957.
http://www.history.com/this-day-in-history/toyota-motor-sales-usa-opens-in-hollywood
(accessed Aug 3, 2014).
Toyota Motor, Corporation. Toyota Global. Jan 1, 2014. http://www.toyotaglobal.com/company/vision_philosophy/guiding_principles.html (accessed Aug 3, 2014).
Toyota Motor, Corporation. Toyota-Global. Jan 1, 2014. http://www.toyotaglobal.com/company/profile/facilities/worldwide_operations.html (accessed Aug 3,
2014).
Toyota Motor, Corporation. Toyota-Global. Jan 1, 2012. http://www.toyotaglobal.com/company/history_of_toyota/75years/text/taking_on_the_automotive_business
/chapter2/section9/item3_a.html (accessed Aug 3, 2014).