Toyota Picks Supply Chain Over Layoffs to Cut Costs

In efforts to trim its costs and widen its margins on its vehicles, Akio Toyoda is initiating one of his largest strategic changes since he took the helm of Toyota (NYSE:TM) in 2009: the company will be significantly shortening its list of different components, and adopting an approach that favors a more common component-based production model.

As of right now, Toyota uses about 50 different types of airbags, all designed to protect the knees of the driver. The company needs so many different units because different models had differing profiles for their driver seats. Rather than ordering different parts for nearly every single vehicle it makes, Toyota will be moving to a more standardized component model, which it hopes will help bring down its driver knee-protection airbag count from 50 to about 10.

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The pursuit of a more standardized model has already gotten underway at the automaker. Last year, the company took its range of 100 or so different radiators, and slimmed it down to just 21 different types. The company also plans to take the axe to its cylinder sizes as well, reducing the collection of 18 different cylinder variations to just six.

“From now on, Toyota will seek the compatibility of certain parts it uses with standard parts used by many automakers globally,” the company said in a statement outlining its Toyota New Global Architecture, or TNGA, in March.

The shift to more common components will have numerous benefits for the company, as well as the consumer. Toyota’s own estimates indicate that the plan will cut both the time and cost for creating new models by as much as 30 percent, which could see the savings make its way to the showroom floor. The slimming of parts may also help lower maintenance costs for the vehicles, and help alleviate inventory headaches in dealerships and parts distributors.

Also hoping to cash in on Toyota’s new strategy are the large manufacturers and suppliers, which have the means to keep up with the huge demand that common parts will generate. Smaller companies have been able to land contracts with the manufacturer to make specialized parts (like 50 different variations of airbags), but with a standard approach, larger companies could move in to fulfill the colossal volume that Toyota would demand.

“This should mean more opportunities for global mega-suppliers” with worldwide capacity and design expertise, said Tokyo-based Credit Suisse analyst Masahiro Akita.

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Additionally, fewer different parts would help secure Toyota’s supply chain against disruptions, as it would use parts from the largest manufacturers that can be substituted globally.

Japanese carmakers’ shift toward the largest global suppliers will probably hurt smaller parts makers and subcontractors in the carmaker’s network, said Dean Enjo, auto parts analyst at CLSA Asia Pacific Markets. “You can’t expect a family-run supplier solely depending on a single automaker group to compete with mega-suppliers like Bosch or Denso under these new standardization programs,” Enjo said.

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