This is the fifth installment of a Ward’s 7-part series stemming from interviews with the purchasing departments of GM, Ford, Chrysler, Toyota, Honda and Nissan.

The process of kaizen, or continuous improvement, permeates every aspect of Toyota Motor Corp.’s corporate philosophy.

But even the No.1 Japanese auto maker, going on nearly a year of declining or flat sales in its most profitable market and battling rising raw-material prices as crude oil hovers above $130 per barrel, is sounding the alarms.

In a speech coinciding with Toyota’s year-end earnings release, President Katsuaki Watanabe announced “emergency value analysis activities” were under way, vowing Toyota would “aim to eliminate waste and review the process and structure of every aspect of our operations.”

Toyota Motor Engineering and Mfg. North America Inc. was set to kick off those activities in mid-June, following a meeting with its suppliers.

Toyota is not asking “suppliers to reduce pricing and reduce profitability, but rather to find a way to reduce cost without having any negative impact on customer value,” Chris Nielsen, vice president-purchasing, vehicle parts and materials for TEMA, tells Ward’s just before the meeting.

“It’s not about reducing the content of our vehicles or appeal or features of our vehicles,” Nielsen says. “It’s about taking out things that don’t have any negative impact on appearance or the performance of the vehicle.”

He calls it a “win-win” situation for Toyota and suppliers, saying both sides are collaborating on cost-reduction ideas and sharing the savings realized.

Nielsen emphasizes Toyota will not remove costs from parts or components that are readily visible to consumers.

Although reviews of newer models have criticized Toyota for sub-par interior quality, Nielsen says there is no plan to take costs out of interiors. What a customer might think looks cheap or is of lesser quality actually can be more expensive, he says.

“I know (in) one example, we introduced a vehicle and got some feedback from customers (that) they didn’t like how a certain part of the interior looked,” Nielsen recalls, unable to remember the model.

“It was actually something that was quite expensive for us to have a supplier make, and when we changed the design the cost actually went down and the customer appeal went up.”

Nielsen acknowledges the current economic environment has been hard on Toyota and its parts makers.

The skyrocketing price of crude oil, “has a very significant impact on our supply chain overall, both for the logistics services that we buy directly as well as throughout our supply chain,” Nielsen says.

While Toyota hasn’t quantified how much the price of crude has impacted its logistics costs or those of its supply base, Nielsen notes the price of diesel is of particular concern in regard to the transportation of materials.

Also, as crude oil is a “feedstock” for many different commodities, such as resins, “it has that ripple effect through the supply chain as well,” he says.

With such a harsh business environment, might Toyota, which purchased approximately $30 billion from North American suppliers last year and expects to spend the same amount this year, consider sourcing more parts from suppliers in low-cost countries (LCC)?

Yes, and no, Nielsen says.

“Our vehicles have to be competitive with other auto makers. We’re in no way immune from needing to be competitive,” he says when asked if Toyota, long considered to have a strong relationship with its suppliers, is pursuing more LCC sourcing.

“But our focus has been on how to work with our supply base in North America and how to improve their competitiveness here, as opposed to jumping right away to import” from an LCC, Nielsen says, adding the auto maker already has seen good results from such collaboration.

North American suppliers will be preferable because of their ability to develop new technologies and automate processes, he predicts.

“It’s not realistic to think a company in the U.S. pays wages the same as China,” Nielsen says. “We wouldn’t want to have that, (but) at the same point in time we can take advantage of our strengths here in North America.”

He doubts Toyota, or the auto industry as a whole, will embrace deals such as the one Chrysler LLC recently inked to source seats from a supplier in India for Jeeps built in Toledo, OH.

Instead, Nielsen says he wants to make Toyota’s North American suppliers more competitive, citing transportation costs and exchange-rate fluctuations “that can make (the allure of overseas sourcing) change drastically from a risk standpoint.”

Meanwhile, Toyota’s newest North American plant will come online later this year in Woodstock, ON, Canada.

Many suppliers to Woodstock, which will build the RAV4 midsize cross/utility vehicle, will be the same as those supplying the nearby Cambridge plant, home of the Toyota Corolla, Matrix and Lexus RX models.

But there are some new North American suppliers that have been added to the mix, or some that have expanded or located closer.

“One of the reasons we elected to establish this Woodstock plant was that we feel really good about the supply base we have in Canada now,” Nielsen says.

Likewise, Nielsen says Toyota is “constantly studying” sourcing components for its Kentucky-built Camry Hybrid sedan from local suppliers, rather than from Japan.

Much of what is unique to the Camry Hybrid is Toyota-made, including the car’s nickel-metal hydride batteries, co-developed with Matsushita Group. Still, opportunities exist for local suppliers as production volumes expand.

“As it stands today, our volume for local production of hybrid (electric) vehicles is actually small,” Nielsen says. “But if this grows, it’s certainly going to be an important localization focus for us.”

Toyota won’t disclose its projected volumes for 2008 but says it built 52,000 Camry Hybrids at its Georgetown, KY, plant last year.

Through May, sales of U.S.-built Camry Hybrids are up 104.2% to 24,500 units, Ward’s data shows, and Toyota has acknowledged lean days’ supply of its hybrid models.

cschweinsberg@wardsauto.com