appear hypocritical to suppliers. The customer should start by getting its own
house in order.
- Identify Your Core Competencies
Outsourcing entails more than simple make-buy decisions.
Outsourcing can lead to lower cost and higher flexibility. But it’s also impor-
tant to carefully consider what competency you should retain in-house. By
focusing on core competencies, Toyota can outsource a great deal of the vehicle
development and manufacturing. However, its definition of core competency
is much broader than that of many auto companies. Toyota sells, engineers,
and makes transportation vehicles. The key question: When Toyota outsources
up to 80 percent of the vehicle to suppliers who controlled technology for
them and all its competitors, how can they excel or distinguish themselves?
If a new technology is core to the vehicle, Toyota wants to be an expert and
best in the world at mastering it. They want to learn with suppliers, but they
never transfer all the core knowledge and responsibility in any key area to
suppliers.
For example, Toyota’s most aggressive development project in recent times
was that of the Prius hybrid vehicle. A core part of the computer system is called
the Insulated Gate Bipolar Transistor (IGBT), a switching device that boosts the
voltage from the battery and converts it to AC power for driving the electric
motor. Toyota engineers were not experts at designing or building semiconduc-
tors, but rather than outsource this critical component, they developed it and
built a brand new plant to make it—all within the tight lead time of the Prius
development project. Toyota saw hybrid vehicles as the next step into the
future. They wanted “self-reliance” in making that step. Once they had that
internal expertise, they could selectively outsource the manufacturing.
Simply speaking, if a company does not have the internal competency to
control the technology, they are at the whim of their suppliers. Since their sup-
pliers are free agents and can supply that technology to anyone, the parent com-
pany cannot use that technology as its competitive advantage. Also, it is difficult
to understand the cost structure for a particular part unless you have the capa-
bility to develop and make that part.
- Develop Your Core Suppliers
Make sure their systems and philosophies are compatible with yours and
they’re at a comparable level of operational excellence
A chain is as strong as its weakest link. If your suppliers are not as capable as
your own internal operations, you must develop them to that level. Obviously
you can’t develop hundreds of suppliers for everything from major modules to
nuts and bolts. Toyota has developed a tiered structure. The top tier supplies major
subassemblies or even modules that are sent to their engine and assembly
Chapter 12. Develop Suppliers and Partners 291