Why Toyota Outsource
Founded by Kichiro Toyoda in 1937, Toyota Motor Corporation is a multinational company headquartered in Japan and is currently the world’s largest automaker. Toyota is a public company with revenue of 3.26 billion as of 2009 and 316, 121 employees. The mission of Toyota is to attract customers for life. Their ambition – to become the most admired sales finance company for all stakeholders. The vision of the company is not to be no. 1 instead to become the most successful and respected car company in the world. Externally, Toyota belonged to the transportation equipment industry and its market is the public companies trading.
Japanese companies such as Toyota, unlike American companies, outsource over 70% of their vehicle content. To begin with, “outsourcing on a continuum is the new corporate reality” (2002). maintained that “companies will be more likely to outsource a function if there are multiple reasons for doing so” (2006). Such multiple reasons are as follows: a) acquire new skills and better management, b) enhance controls, c) focus on strategy and core functions, d) avoid major investments, e) assist a fast-growth situation, f) handle overflow situations and g) improve flexibility and ratio. Toyota though understands that customers are expecting reliable quality regardless of who makes the engine, radio, seat, etc of their cars. Nevertheless, outsourcing does not absolve Toyota or responsibility. Toyota is known to have outsourced engines as well as software and hardware.
The primary reason why Toyota outsources is that Toyota is a master of cost reduction internally and expects its suppliers to master this discipline as well. Toyota makes use of functional outsourcing which is thrusting of certain services towards partners or providers. The advantages of functional outsourcing for Toyota are superior leveraging of market, redundancy-capable and maintenance of outsourcer’s control over processes though this process can result to a non-existence of end-to-end management.
Partnering with Toyota, Toyota demands of timeliness, innovation, quality and cost reduction. What Toyota offers its suppliers is to innovate the product design through value engineering. Because Toyota responds to supplier concerns with integrity and capability, it has established a great level of professional trust with its suppliers and also through developing a sophisticated system that encompasses people, processes, tools and technology and extends to all partners in lean enterprise. Although reducing costs is critical for Toyota, quality must not be sacrificed.
The second reason why Toyota outsources is to further improve quality management. A viable option to eliminate poor management in exchange of quality management is through outsourcing of functional areas into suppliers. Through this process, a relative degree of pressure will also be alleviated. The result would be sufficient control over the operation.
The third reason is to focus on strategy and core functions while also avoiding heavy investments. The tactical part of function-distribution would enable the management to focus on strategy-related issues like market positioning and product development in return. Moreover, acquiring increased market share requires a support mechanism for function overloads. Converting fixed costs into variable costs as well as driving the performance ratios improved the profitability per person and the business as a whole.
One of the disadvantages of outsourcing is supplier failure. Failures of the suppliers, in effect, are equated to failure of the company are serious risks, not to mention, confidential information sent by the businesses adds up to the constraints since suppliers are given the right and control over crucial informations. The future changes in supplier circumstances also disadvantaged the position of Toyota. Changes in the operations of suppliers (e.g. financial difficulties, technology requirements of services) might alter the outsourcing relationship. Nonetheless, the risk can be diminished through inclusion of termination clause in contracts. Third are perceived risks which could be either higher or lower in actual. The bandwagon effects of outsourcing are inclined to success to stories whereas, in reality, outsourcing is problematic and conflict-laden.
In sum, the motivation of Toyota is always inclined at lowering costs while strengthening the competitive advantage through quality enhancement. Though they possess the power to decide whether to outsourced or not and what specific functions are needed to be outsourced, they might as well as think of better ways to outsource while not jeopardizing the reputation of the company. Nonetheless, the last statement is well-understood by Toyota, as a pioneer outsourcing company through its lean manufacturing business model.
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