The Importance of Supply Base Localization for Toyota

Not only is Toyota about to become the world's largest automaker, it is doing so largely from its success in the global marketplace -- not just growth in its home country. Given Toyota's rise to eminence in North America, Europe, and other parts of the world, it has been critical for the vendor to invest in developing local suppliers to keep its total supply chain costs down. But this international expansion is about to enter an entirely new era as the growing automotive giant will soon "produce more cars overseas than in Japan for the first time ever in 2007" according to MSNBC. Because of this international expansion boom, it will be even more critical for Toyota to continue to develop its regional supply bases.

Earlier in the year, I wrote a short blog entry on how Japanese OEMs prefer supply base localization strategies to low cost country sourcing ones. In the post, I commented that "Toyota now spends $20 billion annually with North American parts suppliers, a number up nearly 400% from a decade ago. As an outsider looking in, I find it fascinating that as GM and Ford look to cut costs in their supply chain by focusing on getting piece part prices down from global sourcing, Toyota and Honda are following the same "partnering" strategy with local, strategic suppliers that they pioneered in their home market. Indeed, according to the article, Toyota is even taking equity stakes in a handful of key suppliers in the US market."

Especially given the prospects of a global economic manufacturing downturn -- or at least a slowdown -- in the coming years, the importance of developing local suppliers for regional products and markets cannot be overemphasized. By continuing to work with regional suppliers for local production, Toyota will greatly reduce its supply risk relative to the Big 3 who face not only the wrath of scores of near bankrupt domestic suppliers -- courtesy of the constant "hammering" they've received over the years -- but also the risks of moving parts around the world prior to final assembly merely to trade on regional labor arbitrage (which is inherently a short-term strategy in any case).

Whether GM and Ford pull out of their current turnaround situations in the form they are in today remains to be seen. But reading the Japanese OEM tea leaves is much easier. Indeed, I'd even wager that global marketshare domination and market leadership -- thanks in large part to sustainable global procurement and operations strategies -- is even closer for them than many think.

- Jason Busch