1. Homework 1- Toyota

2. SWOT analysis of Toyota Motor Corp TM
Strengths
Weaknesses
Global leader in vehicle production; market share –11.8% (Dec-13); sales – $252bn;
Global capacity of 10 mn units – 52 plants in 27 countries & 16 plants in Japan;
Operating margin at 10.8% (Q1FY15) higher than competition
Product recalls – image has taken a beating; costly exercise; $1.2 bn penalty to US govt;
Asia is the fastest growing market – market share in AxJ is 6%, not making enough headway in China and rest of Asia;
No immediate plan for investment – as company is focussing on internal measures – “Always Better Cars”.
Opportunities
Threats
On-going efforts at reducing COGS & SG&A expenses – expected to boost margins;
Roll-out of Toyota New Global Architecture (TNGA) will standardize platforms;
Growing sales of Lexus (luxury) in US;
Introducing contemporary models and focus on green cars.
Smart alliances with Intel, Google, BMW.
Nearest competitor is Volkswagen; playing a fast catch-up (its MQB platform almost ready);
Yen expected to appreciate – will adversely affect profits and exports
Increase in wages and sales tax (from 5% to 8%) in Japan from Apr 14; wage bill and cost of components & parts will rise in Japan and thus lead to lower margins (note: Japanese operations have highest margins in the co)
Source: company website, public domain information and data

3. Current manufacturing & distribution strategy
Exports from Japan have bridged the gap in USA, Europe & other countries
100%=9.03mn units
100%=9.12mn units
Source: company website
Export strategy becoming untenable on long-term basis due to expected appreciation of yen and rising operating expenses in Japan
Key factors for deciding location and capacity of plants:
Being close to where the market is
Examining trends & market forecasts for sales
Cost and resource considerations
Examining cost trends & supply chain strategies to maintain supply chain margins
Presence / possibility of developing vendor network and logistics support
Business climate (incl currency neutrality, political stability and regulation)
Tariffs and free trade agreements for that country
Tax considerations (including tax benefits, if any offered by the government)

4. Region-wise distribution of Toyota’s global capacity
Global coverage of demand, with global presence
Uneven distribution of production capacity with respect to forecasted demand
China appears to be the biggest potential market, but very limited available production capacity
Source: company website & KPMG report

5. Future growth markets- global auto industry
Source: KPMG report on global automotive retail market (Sep 2013)
Key takeaways for 2020:
Global demand will grow from 83 mn (end 2013) to 118 mn (2020);
2. China, will be the major automotive market;
3. India and ASEAN will have the highest CAGR at 11%;
4. Negative growth in Japan and South Korea;
Demand in mature markets of North America & Western Europe more for premium
cars, while growing markets will have demand for economy cars

6. Questions
Where should the plants be located and what degree of flexibility should be built into each? What capacity should each plant have?
Should plants be able to produce for all markets or only specific contingency market?
How should markets be allocated to plants and how frequently should this allocation be revised?
What kind of flexibility should be built into the distribution system?
How should this flexible investment be valued?
What actions may be taken during product design to facilitate this flexibility?

7. 1. Where should the plants be located and what degree of flexibility should be built into each? What capacity should each plant have?
Toyota encountered issues after the earthquake in 2011 disrupted its supply chain. This prompted Toyota to have redundant capacity in case of disasters. To reach this goal, plants need to be in separate geographic areas to be able to produce different parts.
This approach also enhances flexibility.
Given the uneven rates of growth in certain areas, it is recommended that the company follows a strategy that tries to match local supply with local demand, and therefore expand local capacity to match local demand.
Generally, the company should develop its capacity planning by applying a “think global – act local” approach, which will provide global complementation, while adjusting for local / regional characteristics and needs.

8. 2. Should plants be able to produce for all markets or only specific contingency markets?
Generally, these plants should be able to produce for all markets; however, plants will be basically satisfying the needs of the market that has been assigned to them.
Plants should be operating to create products and parts that are needed primarily at the local level, to avoid transportation costs, but should also be ready to export to markets when the local market weakens.

9. 3. How should markets be allocated to plants and how frequently should this allocation be revised?
The recommended strategy is primarily a co-location strategy, which de-risks the business by having customer & plant in same geography:
High growth markets (pull factor) – Increase capacity in China, India, Brazil, Indonesia & Mexico to meet domestic demand
Mature markets - Build high-end models in USA (e.g. Lexus)
Close plants in regions with economies of low scale (e.g. Australia – announced for 2017)
Set up plants in regions (i) having free trade agreements (FTA) with key markets (nil export duty), (ii) with low cost structure, (iii) political & currency stability & (iv) countries offering incentives for green cars (e.g. Indonesia) – these plants would serve both domestic & global demand. Examples: Mexico ( e.g. - FTA with America), Indonesia (e.g. - FTA with ASEAN, Australia, New Zealand, China, South Korea, etc), USA (e.g. - FTA with South Korea)

10. 4. What kind of flexibility should be built into the distribution system?
Flexibility (and redundancy) in the production and distribution systems should be built into the system to allow for parts to be manufactured anywhere and shipped anywhere, even in the case of failures in parts of the supply chain. This will allow Toyota to avoid extra costs and maintain service level in terms of cars delivered.
Lower Supply chain cost and higher customer value can be achieved by planning for an flexible distribution system providing a high level of customer responsiveness at a reasonable cost.
The distribution systems should first be optimized globally, with standardization of products and skills, and a certain degree of redundancy, and then flexibility should be developed regionally, in order to achieve a cost-effective distribution

11. 5. How should this flexibility investment be valued?
The value of this flexibility investment could be phrased as a cost reduction in terms of an emergency
For example
When the existing supply is disrupted because a plant goes down, how much do the costs rise in fulfilling demand?
When the demand rises in a certain region / country, what is the opportunity cost of lost sales?
Using financial models to calculate NPV of cash flow under different flexible supply chain scenarios (e.g. option pricing).

12. 6. What actions may be taken during product design to facilitate this flexibility
To increase flexibility, parts should be interchangeable between markets and car models. This can be designed into cars by reusing parts between designs and using basic frames of cars (sedan, light truck, heavy truck, etc.) with different models reusing the frame.
The recently adopted Toyota New Global Architecture (TNGA) goes a long way towards establishing Commonality of spare parts. Additional actions include:
Combining specialized facilities for stable demand of components (e.g. automotive electronics) and flexible manufacturing facilities for a widely varying volume/variety of components (e.g. car accessories).
Incorporating production level flexibility (e.g. multi-purpose machines, multi-level skilling of workers, etc.)
Infusion of the concepts of a) New product flexibility (ability to change with new technology and new demands); b) Mix flexibility (ability to produce a variety of products within a short time); c) Volume flexibility (ability to operate profitably at different levels of production)