My last two posts in this three-post series on leveling talked about fluctuations and leveling in general, and the challenges and costs associated with leveling. In this last post I will go into greater detail on how Toyota does its leveling. Because Toyota does this actually quite well.
How Does Toyota Do Leveling?
If you are wondering, yes, Toyota successfully does this type of leveling. Let me explain how: First of all, as an OEM Toyota is at the end of the automotive value stream. After a Toyota final assembly line, there are only sales and then the end customer. Hence, they are in an excellent spot toward the end of the value stream to do leveling.
As I mentioned before, leveling needs to decouple fluctuations, and this is not free. Usually this is done through more inventory, but many companies that try to do leveling balk at the idea of more inventory and try to level without adequate decoupling of the incoming fluctuations. As a result, many of the fluctuations break through the (weak) leveling and negate the benefit of leveling.
Here, Toyota sort of has a cheat code. As I mentioned before, there are three ways to decouple fluctuations: inventory (buffer goes up or down), capacity (production ramps up or down), and time (customer waits). The whole point of leveling is not to play around with capacity, hence this one is out (albeit they do adjust on a month-to-month basis). Here, Toyota (and most other automotive OEMs) are in the position that the customer is willing to wait for their products. If you order a Toyota model with your desired options and colors, they will tell you when they will get around to making it. And, they make it when it fits their pattern. You (the customer) just have to wait.
If you can make your customer fit your leveling pattern, it already takes a lot of effort out of the leveling itself. Of course, Toyota also uses some inventory buffers to help with the leveling, but they can be much smaller. Overall, Toyota manages very well to create a leveled signal at their point of leveling.
But that is where the easy part ends, even for Toyota. In most other companies, internal fluctuations destroy the leveling pattern again quickly (assuming there was a good pattern to begin with). Toyota puts a lot of effort into reducing these fluctuations, and their processes seem to run more stably than other car makers’. Breakdowns and problems do happen, but they are resolved quickly. Overall, Toyota manages to follow their leveling pattern quite well.
The Toyota leveling pattern is on a monthly basis. They decide how many cars of what type they need for the current month, and then they distribute the production volume evenly across all the days in the month. The change from one month to the next with one month prior notice is no more than 10% of the volume, albeit larger changes are possible with longer notices for the plants and the suppliers.
Even more so, Toyota manages to keep this stable signal throughout most of their supply chain. I have visited Toyota tier 3 suppliers (i.e., the supplier of the supplier of the supplier of Toyota) and seen their production plan for Toyota parts. It was THE VERY SAME QUANTITY EVERY DAY for an entire month! The entire production plan was like “make 673 parts every workday for June.”
This is mind boggling. While not all suppliers of Toyota have this strict leveled pattern, many do. I have talked with a German supplier of Toyota (and other OEMs), and the orders for their other customers were all over the place, and they were at the whim of their customers. Toyota, however, had a very stable order pattern with few changes. This particular supplier also tried leveling, and failed everywhere except for the Toyota production lines. The group leader told me that the leveling only works since they get an already leveled pattern from Toyota to begin with. Of course, leveling an already-leveled pattern is quite pointless, but it made management happy to level anyway. Overall, planning and managing production for Toyota was much easier than for other OEMs (unless you had quality problems, as Toyota has VERY high expectations on quality).
However, one day this supplier noticed a quirk where the orders by Toyota were less than expected for one day and more than expected for the next day. Pretty much what happens all the time with their other customers. They mentioned this to Toyota in a side-note comment as part of their small talk. However, Toyota took this seriously, apologized, and promised an investigation. They indeed followed up, found the cause of this fluctuation, and implemented actions so it does not happen again.
Overall, the stability of Toyota’s purchasing is legendary in industry. They create a good leveled pattern and put in an insane amount of effort to keep this pattern. Most of their suppliers are within a two-hour drive from the main plant. The daily production quantity has a very high priority, and they can adjust with overtime on short notice (this one may not work in all countries due to legal restrictions).
As a result, Toyota gets away with very little inventory in their supply chain. Their inbound warehouses in their final assembly plants have only around two hours’ worth of inventory (I counted it myself), whereas a good Western plant has two days’ worth of inventory, an average Western plant two weeks’ worth, and a bad Western plant may have two months’ worth.
Frequent deliveries in small quantities help with leveling, which is hard to do overseas. Some customers in Western countries push the problem to their suppliers, ordering all over the place but expecting prompt delivery anyway. This forces the supplier to have high inventory to cover the fluctuations. Here, too, Toyota does much better. For example, Denso has around half a day’s worth of inventory for their Toyota customers, but a couple of days’ worth inventory to deal with the order fluctuations for their Western OEM customers. Naturally, even though the inventory is at Denso, the cost of the inventory has to go into the final price of the parts.
This concludes my three-post series on leveling. Now, go out, reduce the fluctuations in your factory, and organize your industry!
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This is an amazing post. As an intern working with a mixed-model production line, I encountered a similar problem. I tried to propose leveling the production, as we are the primary supplier for an automotive company. However, I was unsuccessful. With only two days of inventory, we cannot afford to wait for our customer, so increasing capacity seemed like the only option. Unfortunately, due to regulations in Europe, this was not feasible.
Another post on “just-in-sequence” helped me a lot, as our main issue is at the end of the line. Here, we condition the product but use the same material in the next station (to reduce costs) to add new products in the same sequence and reintroduce them to the line. This creates a challenge because our products have different takt times and rework requirements, disrupting the FIFO system. As a result, we face shortages of certain products.
Speaking of Toyota, what’s your take on the twin turbo V6 issues they are having? The talk about the new Tacoma 8 speed transmission failures is also something concerning.
After reading this series, issues like the above sounds like something that would throw a big wrench into the works.
In my opinion, inventory and overproduction are much more complex topics and there are way too many industry and plant specific factors to take into account before you can decide where excess inventory or excess production is waste or a reasonable buffer to deal with fluctuations and circumstances that are not feasible to “just fix”
Great post and nice insight into Toyota’s operations! As I heard and you confirmed it, Toyota also uses capacity in order to buffer fluctuations, i.e. overtime if necessary. Since the Japanse carmakers work with decoupled shifts they always have an opportunity to do overtime at the end of one shift and therefore the possibility, to recalibrate the whole system and get back to their planned leveling pattern.