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.

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.

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.

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)?

“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.

Toyota N.A. Purchasing — By the Numbers

  • $30 billion budget for parts procurement in 2008

  • Approximately 500 suppliers in North America

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