Toyota part 1: Cornerstone of a strong supply chain20 March 2015 | Christopher Ludwig
The view outside the Toyota parts centre in Ontario, 50 miles east of Los Angeles, is pure California. Palm trees line the road in either direction and on clear days the snow-capped peaks of Mount San Antonio are the only interruption to the endless blue above. An out-of-town visitor, whose typical encounters with warehouses and plants happen in the concrete grey of northern European industrial estates, might be forgiven for lingering a few minutes in the light of a 30°C afternoon in mid-February.
If the mix of sun and nearby ski slopes offers a glimpse of the California dream, the warehouse is a vision of another well-ordered ecosystem, but this one is pure Toyota. Inside are rows of high-rack storage and sophisticated forklifts safely separated from the main picking areas, where teams of workers walk on ergonomic flooring to retrieve or store parts at stations designed for minimal bending or reaching; in the middle of the warehouse, a crossdock transfers fast-moving items like bumper covers from sea containers directly for outbound shipments. Trailers move constantly through the warehouse’s 10 receiving and 11 shipping doors, a traffic flow that stands in relief to the quiet mountains facing opposite.
For nearly 20 years, the North American Parts Center California (NAPCC, or PCC for short) has been a cornerstone of Toyota’s aftermarket supply chain. Built in 1996, it was one of the most important projects in the evolution of North American Parts Operations (NAPO), the division of Toyota Motor Sales USA (TMS) responsible for service parts and accessories distribution in the US, as well as export across North America and beyond.
The PCC, tucked within the sprawling Inland Empire region, ships more than 280,000 pieces and 35,000 order lines everyday (an order line is a collection of parts in a single order). It currently carries 36 days of supply (DOS) across more than 260,000 unique part numbers. The operation is vital to NAPO’s network, and will not move from its current location even as TMS gives up the sea, sun and mountains of southern California and moves its headquarters to Plano, Texas, north of Dallas, by 2017.
The shock absorbers
Of late, however, operations at the PCC have been somewhat impaired. A little more than an hour’s drive away, at the port of Long Beach, a lingering labour dispute between dockworkers and waterfront employers has led to a severe slowdown in container unloading, creating an armada of container ships moored outside the harbour. Even after a recent agreement, the ports will likely require months to clear backlogs. The blockage prevented the supply, among much else, of around 30 containers per day that arrive at the PCC from Toyota Motor Corporation (TMC) in Japan. Emergency air freight has partly made up the difference, while the PCC uses safety stock, and NAPO explores creative ways to get Toyota containers out of the port.
However, while the disruption led to production slowdowns at Toyota and other Japanese-brand assembly plants, there has been virtually no impact in service parts and accessory deliveries to Toyota’s 1,400 US dealers or private distributors across the continent. According to Neil Swartz, vice-president and general manager of NAPO, that is because the California parts centre, together with its counterpart in Hebron, Kentucky (the NAPCK, or PCK), act as “shock absorbers” in smoothing supply between parts suppliers and Toyota’s dealer-facing parts distribution centres (PDCs).
“The two parts centres use safety stock or emergency freight to absorb interruptions in supply so that we can provide a smooth, consistent service to our dealers and distributors,” says Swartz.
Ontario and Hebron form the front line in what Swartz refers to as Toyota’s “two-tier supply chain”. On the inbound side, the centres receive and store a combined 260,000 unique parts and accessories from Toyota plants and suppliers, which they then ship to 13 regional PDCs, plus private distributors, vehicle distribution centres (VDCs) at ports and plants, and export locations.
“We move parts to Canada, Mexico, the Pacific Islands and almost 30 export distributors, so we are not only a US supplier, but a truly North American and global supplier,” says Mamie Warrick, corporate manager responsible for strategy at NAPO.
Except for accessories, each centre carries separate inventory, with the PCC sourcing from suppliers in Japan, the western US and Mexico, and PCK receiving parts from Toyota’s principal supply base in the Midwest and eastern states. That means the outbound chains from these parts centres are often long, complex and use multimodal transport. Parts from the PCC, for example, move by truck to distribution centres in Los Angeles, San Francisco and Portland, but by intermodal trains to New York, Boston and Baltimore, with eight- or nine-day delivery times. Flights from LA/Ontario International airport, a major cargo hub for FedEx and UPS just a few miles from the centre, also move urgent orders across the network.
Engineering these routes from the parts centres to distribution centres allows for smoother, faster delivery to local dealers at the ‘second tier’ of the supply chain. This level is made up principally of the PDCs across the US, from which NAPO is also responsible for managing dealer distribution – in most cases via overnight, unattended delivery. NAPO also delivers to other PDCs and depots, including Toyota Canada and private distributors Gulf States Toyota (GST) in Texas and Southeast Toyota (SET) in Florida, which arrange their own dealer deliveries (often by similar processes to those that NAPO uses).
This two-pronged approach might, on the surface, appear to add more transport and handling in the supply chain. Parts built at, or near, Toyota’s manufacturing plant in San Antonio, Texas, for example, are shipped first to the PCC in Ontario, even though many parts will return to GST in Houston for onward distribution. However, the centralisation of inventory helps to better control availability across the network, while the parts centres enable economies of scale in consolidating transport, re-sorting, picking and packing material, including the use of returnable packaging modules that reduce damage.
“In the past our primary decision point was heavily weighted on cost, and then service after that. That has flipped to meeting and exceeding customer expectations, and then taking costs out later. That’s the Toyota Way” – Neil Swartz, Toyota
The network is on the one hand aligned to Toyota Production System (TPS) principles of ‘continuous flow’. However, as this is a customer-oriented operation, Toyota is willing to carry a higher level of inventory to maintain customer service. At the PCC, for example, the 36 days of supply across part numbers could be considered high, compared even to the 20 days’ supply stored at the PCK. The reason, according to Gordon Fogg, national manager for inventory planning and accessory supply, is because the Kentucky parts centre stores parts for more new models built in North America, which may be faster moving but also have a shorter inbound lead time compared to parts imported from Japan. “Part of the explanation is also a willingness to carry more DOS as buffer stock for the customer,” he says.
These are among the reasons why most dealers only know about port strikes or supplier capacity issues if they read about them in the news, rather than as they wait longer for alternators or air filters. “While the port situation is certainly stressful, we can absorb most of that strain in the parts centres and still not have it visible to dealers,” says Fogg.
Ed Huante, corporate manager overseeing inventory and supply management, recalls other notable disruptions during which the two-tier supply chain protected dealers, including an earlier port lockout in 2002, the Japanese tsunami in 2011, and the closure of Toyota’s joint-venture NUMMI factory in California. “These were tough on NAPCC, but we shipped to our dealers and kept our Toyota, Lexus and Scion customers immune from the major disruptions,” he says. “In each case, our dealers openly thanked us for our work.”
Serving customers before warehouses
Beyond dealing with disruptions, the measure of NAPO’s effectiveness is in its remarkably high order fulfilment rates. According to Swartz, the ‘facing fill rate’, which measures the availability of parts for dealer orders in the regional distribution centre closest to them, is running close to 96% (from a 95% target). That means the great majority of orders placed before evening cut-off times – around 90% of parts volume, says Swartz – arrive at dealers before 7am the next day.
Meanwhile, the ‘system fill rate’, which includes the availability of parts at facing PDCs, plus parts that can be referred and expedited from other locations in the network, is at, or above, 98% (the 2% of orders that cannot be filled this way go on backorder at suppliers).
Those fulfilment rates and quick delivery times are critical targets for NAPO, and the two-tier network is an important way of supporting them. However, Swartz notes a cultural and strategic shift taking place, with more emphasis on reducing order lead times for dealers, including those in less dense markets, than on cutting cost. “In the past our primary decision point was heavily weighted on cost, and then service after that,” he says. “That has flipped to meeting and exceeding customer expectations, and then taking costs out later. That’s the Toyota Way.”
Following TPS principles, dealers are encouraged to order parts every day, with NAPO delivering parts five times a week across the majority of its network. Over the last two to three years, Swartz and his team have increased this ‘continuous flow’ by a number of methods, including extending order cut-off times, introducing a same-day delivery service through a drop-off point, and offering more ‘will call’ at parts distribution centres (where dealers can pick up their orders directly). Overall, that has meant a rise in the percentage of next day deliveries (82% of which now come from orders made after 4pm), and the ability for some dealers to have multiple deliveries or collections per day.
“We are not in the warehousing and transportation business, but we are truly in the customer service business, and that means the priority should be on shortening order-to-arrival times, and giving dealers more opportunities through ‘will call’ and same day delivery service” – Mike Schober, Toyota
“We believe that a Camry customer in San Francisco should get the same level of service as one in San Antonio or San Juan,” says Swartz, “and we have to build our supply chain in the North American region to assure that it happens. We owe that at a minimum to our customers.”
This strategy shift is partly down to economic recovery. Toyota’s service parts sales are healthy and growing thanks to rising sales, as well as increases in local vehicle production and parts sourcing in North America. The latter is also driving growth in exports, as North America is one of Toyota’s four global poles for parts (along with Japan, South-East Asia and Europe). However, these service changes are also a response to wider shifts in customer expectations; the e-commerce revolution has demanded more convenient service, higher product reliability and faster turnaround times for all products. Although NAPO’s direct customers are still dealers and distributors, its supply chain needs to be as flexible and reactive as those of any retail segment.
“If there was ever a time to say it was exciting to be in the supply chain field, this is it,” says Mike Schober, corporate manager responsible for PDCs and dealer distribution. “We have to realise that we are not in the warehousing and transportation business, but we are truly in the customer service business, and that means the priority should be on shortening order-to-arrival times, and giving dealers more opportunities through ‘will call’ and same-day delivery service.”
According to Schober, the traditional thinking for things like PDC pickups for dealers in proximity to these parts centres, had been to avoid anything that would disrupt the efficiency of order picking and packing in the warehouse. However, NAPO is changing that way of thinking. “We don’t want to second-guess our customers in terms of how fast they want and need a part,” he says.
Such initiatives require investment and add costs, whether in labour, transport or inventory. Today, all of the PDCs are working on two shifts to allow for later order processing, except for one in Dallas that has later opening hours. The Kentucky parts centre is on two shifts, while the California centre has also extended its hours to get material on the last flights out of LA/Ontario to the east coast. Five years ago, says Swartz, only 75% of centres had extended hours of any kind.
Another investment is that, early next year, NAPO will add its first new PDCs in a decade with the introduction of Lexus-dedicated warehouses in Atlanta, Georgia and Orlando, Florida. Swartz says that by adding more storage points for Lexus in the region, as well as bringing the brand under NAPO in the south-east (SET, which sells the Toyota brand, has also distributed Lexus parts on contract), many Lexus dealers will have later cut-off times and an opportunity for same-day delivery.
According to Swartz, Toyota and Lexus dealers have reported faster service bay turnover as a result of these enhancements. He is also “comfortable” with NAPO’s cost base, which was restructured in the early 2000s and has been relatively stable in relation to rises in transport and labour costs. However, Swartz is willing to take on a certain amount of higher logistics costs if it means shorter lead times and making parts more consistently available to customers.
Ultimately, he sees the service parts supply chain as a means to compete with independent distributors and other brands. In the future, he says, that could mean supporting dealers in areas like e-commerce, including expedited shipments to dealers or even direct deliveries to final customers, which Swartz says NAPO has the capacity to do.
“Our role in NAPO is to connect the supply chain to Toyota’s broader objectives,” says Swartz. “Strategically, that is not only to serve the immediate needs of our customers, but also to be a competitive advantage for Toyota.”
All photos by Jon Didier