General Motors' virtual command center has been running 24 hours nearly every day since the first of this year.
There, supply-chain managers act like air traffic controllers. They talk to every level of supplier, down to the smallest to direct scarce parts with semiconductor chips to factories that build GM's bestselling and biggest profit-making vehicles.
GM says it has mitigated the ongoing worldwide chip crisis because of improved supplier relations, played out daily in its virtual command center.
But it wasn’t always that way for GM. It certainly is not that way for Ford Motor Co. and Stellantis. The latter two companies have lost points on Plante Moran's 2021 North American Automotive Manufacturer - Supplier Working Relations Index. But GM gained 20 points in this year's index to lock down third place behind Honda and No. 1 Toyota.
Toyota's had consistently strong supplier relations. It's partly for that reason that some industry experts say Toyota has fared the best so far in the chips crisis.
Plus, Toyota's dealers are used to operating with low inventory. And Toyota has perfected building only the fastest-turning combination of vehicles, creating efficiencies in pushing sales volume, even amid the crisis.
Proof is in the fact that Toyota outsold GM in the U.S. last quarter. It was the first time GM has not been the top-seller in this country since 1998, though Toyota's sales boss on Wednesday said it is likely unsustainable.
Still, the Japanese automaker could provide some lessons to the Detroit Three, some industry experts say.
"The auto industry is getting better at managing their first-tier suppliers, but they figure, 'If I do a good job at managing my first tier, everyone else will fall into place,' " said Steve Melnyk, professor of supply chain management at Michigan State University. "What Toyota learned in the 2011 tsunami is that you have to cover the critical elements of your supply chain and that’s the second and third, the lower tiers of the supply chain."
A shared suffering
Toyota's practices are long-ingrained, but its ability to prepare for the unknown chips crisis came from lessons learned a decade ago amid tragedy.
In March 2011, the Tohoku earthquake caused a tsunami that hit Japan’s northeastern coastline, killing more than 15,000 people.
Toyota Motor Corp. would need six months to recover from it with many of its key suppliers, including Renesas' chip-making plant, hit hard too. But in the aftermath, the Japanese automaker would learn valuable lessons from its strong supplier relations that allowed it to monitor even its smallest suppliers and identify the valuable car parts that Toyota had to either stockpile or find alternatives, Melnyk said.
Toyota even developed a way to monitor its wide sweeping supplier network to foresee potential parts shortages ahead of time and address them. It did that by building trust with its top tier suppliers and then working down.
“To get to your lower tier suppliers, you have to have masterful relationships with your top tier," Melnyk said. "Toyota has done a masterful job at that.”
Part of that strategy is shrewd business, but it's also cultural.
"Japan is a resilient country and people help each other out in terms of sharing resources. The suppliers and Toyota are like a conglomerate and will even send engineers to help each other," said Christopher Tang, a business professor who specializes in supply-chain management at the University of California, Los Angeles. "Toyota knows, 'I am suffering now, but if I cancel, you’ll suffer, so we’ll share the suffering.' It’s about commitment. So the suppliers, as a result, give Toyota a high priority.”
Melnyk recalled a conversation he had with a first-tier supplier in the 1980s. The supplier told him that a Detroit automaker would send in a team of six engineers to the supplier's facility.
“They beat you up for a day wanting a 5% price reduction," Melnyk said. "But Toyota sends a 70-year-old guy in and he observes your operations and he comes back three days later and he will say: ‘There are many things I like about what you’re doing, but here are some opportunities.’ Then he says, ‘These will allow you to reduce costs?’ You say, ‘Yes.’ He says, ‘Would you be willing to share some of those cost reductions with Toyota?’ ”
“He told me, ‘I both adored and hated that guy.’ He showed you your problems," Melnyk said. “But he wasn't demanding."
Toyota gets an edge
The term in supply-chain management when a company gets priority is, “Earned Preferential Treatment," Melnyk said. Toyota has it.
"If one customer works with you, commits to you and keeps a good stream of communication with you and involves you in decision making, How would you treat that customer?" Melnyk said. "Versus a customer that only comes to you when they want something and the only thing that matters is price and if you don’t provide it, they’ll find someone else?”
Toyota's ability to manage its supply chain, Melnyk and Tang said, gave it an edge earlier this year when the chip crisis was proliferating.
Last year during COVID, the auto industry shut down and people were not buying cars. A lot of automakers canceled their chips orders.
"Toyota did not. Toyota had reduced orders, but did not cancel 100%,” Tang said. “So Toyota was doing pretty good until June — everyone else was in trouble in February and March.”
Toyota Motor North America declined to provide any executives for interviews on this article. But the company is not immune to the chips shortage as it drags on. Toyota said the shortage will affect production at some of its North American plants, just like with other automakers.
But Toyota's manufacturing and supply chain teams have "worked diligently to develop countermeasures" to mitigate the production impact, said Keith Robertson, Toyota's group vice president of Supply Chain Management, in an email to the Free Press.
Robertson did not offer specific examples, but he said Toyota has an operational process that is a checklist of sorts the includes scenarios and alternate plans.
"We learned a lot during the aftermath of the 2011 tsunami, including the ability to grasp our suppliers’ situation, communicate frequently with them, and identify countermeasures so we can quickly and effectively navigate through any issue," Robertson said.
Toyota dominance unsustainable
Earlier this month, Toyota reported sales of 688,813 vehicles in the U.S. from April through June compared with GM's 688,236 vehicles during the second quarter.
Those extra 577 vehicles sold bumped GM from the top spot. According to Edmunds, the last time GM wasn’t the top-selling automaker in the U.S. for a quarter was in 1998 when Ford outsold GM during the third quarter.
Melnyk said part of Toyota's success comes from having chip parts, at least until June, and with more parts comes more inventory, leading to more sales.
In a call Wednesday with media and analysts, Toyota's head of sales, Bob Carter, said beating GM is not sustainable nor is it Toyota’s goal.
"He credited Toyota’s Ann Arbor center where R&D and purchasing are located as doing a masterful job of managing the supply chain — and not just chips," said Michelle Krebs, executive analyst for Autotrader, who was on the call. "He said there have been a number of supply chain hiccups for the industry."
Krebs provided a direct quote from Carter: “This was a moment in time. As the supply chain stabilizes for everyone, we’ll go back to historical (market) share.”
There are some other factors that have helped position Toyota to succeed even in tough times, such as a dealer body that is used to operating with a smaller inventory of vehicles.
"They are accustomed to the competitive nature of a 'turn-and-earn system' where dealers are essentially competing against one another for inventory," said Brian Finkelmeyer, senior director of business operations at Cox Automotive. "The faster a dealer sells cars, the faster they can earn new ones."
Toyota is also "laser-focused on only producing the fastest turning combinations" and Toyota makes the final decision on all production plans, Finkelmeyer said.
'Most incredible partnership'
Then there is Toyota's relationship with its dealer body.
While dealers give input to Toyota on product, it's ultimately at Toyota's headquarters that the call on what gets built and what gets shipped to which dealers is made, Finkelmeyer said.
Many of Toyota's competitors offer more autonomy to their dealers in terms of production ordering, with the dealers submitting orders directly, he said.
"Toyota handles this differently, with few combinations and trim packages, and total control over what gets ordered and built, which helps them simplify their inventory and keeps it all moving efficiently," Finkelmeyer said.
Also, Toyota dealers, more than any other dealer group, trust the factory, he said.
"It’s the most incredible partnership," Finkelmeyer said. "You will NEVER hear a Toyota dealer say a bad word about Toyota. Ever.”
GM's learnings
During GM's first-quarter earnings call in May, CEO Mary Barra said GM expects chip supplies to return to normal in the second half of the year.
"We’re looking at solutions," Barra said at that time. "The team is being super creative. We do think the second quarter will be the weakest and we’ll start to see recovery in the third quarter and strength in the fourth quarter.”
GM has learned lessons from the chip crisis that reflect some of Toyota's practices. Earlier this year, Barra said that GM will not return to big levels of inventory overflowing dealers' parking lots once the crisis ends. Instead, GM will keep inventory lean, but better than it is today. That's because GM has developed tools and technology that have helped dealers efficiently track a vehicle's production cycle and make pre-sales to keep volume flowing.
GM also continues to inch up the rankings in the North American Manufacturer-Supplier Working Relations Index and annual study by Plante Moran. The study ranks the top six automakers and is a quantification of suppliers’ experiences working with a company.
In 2021, GM ranked third with a 20-point increase year-over-year, and it improved in several key areas, including communication and relationships. Ford is in fourth place, having dropped 15 points. In last place is Stellantis, formerly called Fiat Chrysler Automobiles, which lost 28 points.
GM's improvement played out in its ability to produce lifesaving ventilators within 30 days during the height of the pandemic.
"This year, we are yet again proving what being collaborative partners looks like by working together to find solutions, mitigate impacts, and keeping production running despite a global semiconductor shortage and numerous other crises," said Shilpan Amin, GM's vice president of global purchasing and supply chain.
Amin said GM is committed to "building trust, transparency and communication" with its suppliers. That would yield stronger business results for both GM and the supply base, put customers first, lower business risks, eliminate waste, deliver defect-free vehicles and even address human rights issues.
It will also increase suppliers' willingness to invest in new technology such as electric vehicles and self-driving cars. GM has said it aspires for its entire light-vehicle lineup to be zero-emissions by 2035.
“What Toyota has recognized is the importance of being a good customer and that’s more than simply just paying on time," Melnyk said.
GM realizes it too.
