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III. Toyota: Sparking a Network

The primary hypothesis flowing from such a perspective is that a core assembler should either bring or attract a network of suppliers around the assembly plant. Furthermore, given the necessity of JIT practices to modern competitiveness, clustering of the most critical part suppliers should occur most quickly and most closely around this core plant as well. The supplier network of the Toyota Motor Corporation assembly factory in Georgetown, Kentucky provides a useful example of this phenomenon. The assembly plant has attracted a significant number of new suppliers to the area, particularly from Japan, thereby contributing to the base of regional suppliers. The assembly plant also has utilized a number of existing suppliers, in part present in the region to supply previously established regional assembly plants. These assembly plants include the Ford Motors facility in Louisville, Kentucky; the General Motors Corvette facility in Bowling Green, Kentucky, and the Nissan Motors facility in Smyna, Tennessee.


Analytical framework

The empirical analysis will examine the development of the supplier network for this Toyota plant both geographically and over time. In particular, the analysis will assess whether critical suppliers for Toyota: 1) tend to be located closer to the assembly plant; and 2) be more likely to be new investments. This projected relationship is schematically illustrated in Figure 1. Criticalness, which represents the asset-specificity of CPA for Toyota, is measured on the vertical access, and distance of suppliers from the core plant is measured on the horizontal access. A negative relationship between criticalness and distance is hypothesized; more critical and asset-specific part suppliers are expected to be located closer to the Toyota assembly plant. In addition, those critical suppliers locating near the core plant are likely to be more recently established to satisfy just-in-time delivery needs.


  Criticalness of CPA
FIGURE 1
Distance of CPA supplier
from assembly plant

Nearby suppliers ............................................ Distant suppliers
Just-in-time delivery ....................................... Just-in-case

More recently established inventory ................

Previously existing suppliers
Competition ................................................... Cooperation

In-house production........................................

Supplier sharing through out-sourcing

FIGURE 1: Criticalness of CPAs as a Locational Determinant of Suppliers


Data and methodology

A measure of criticalness will be developed for the parts produced at each Toyota supplier plant. Distance from the plant in miles will then be measured, as will the age of the plant, to determine whether the plant was opened before the Toyota assembly plant, or afterwards.

A data set was assembled of regional parts suppliers for the Toyota sedan assembly plant in Georgetown, Kentucky. The region was composed of the states adjacent to Kentucky: Illinois, Indiana, Missouri, Ohio, Tennessee, Virginia, and West Virginia. Data was gathered on the location, age, and part of each of 118 parts suppliers located in the Commonwealth of Kentucky and adjacent states. Of the 118 regional suppliers, 38 were located in Kentucky, 26 were located in Ohio, 17 in Indiana, 15 in Illinois, and 12 in Tennessee.

The supplier list was for production in 1992. Thus, the supplier list developed reflects what existed in Kentucky and adjacent states five years after assembly began at the Toyota facility in 1987, and seven years after the site was chosen in 1985. The list of suppliers was not acquired directly from Toyota, which naturally limits its release of information about its suppliers. The list was based on Haywood (1992). Haywood published information about the city of location and type of part supplied by each supplier. Further study was used to identify the beginning year of operation, and where possible, more specific information about the type of part produced.

One advantage of this 1992 list relative to a current list is that the 1992 list only represents suppliers to production at the Georgetown assembly plant. A more current list could include suppliers to plants in either Georgetown, or Buffalo, WV, where engines are now built. Further, the list from 1992 reflects substantial development in Toyota's supplier network. As of 1998, the number of Kentucky suppliers had only risen from 38 in 1992 to 56, indicating that at least for the Kentucky supplier network, the network was already well developed by 1992 (Haywood, 1998).

Each regional Toyota parts supplier also was assigned a rank for "criticalness." This term reflects the extent to which the part supplied is custom designed for Toyota sedans assembled at Georgetown. Criticalness was ranked at a value of 0 through 2. A value of 0 was assigned to purchases of basic products, which are products of use in a number of industries besides auto assembly such as raw steel, solder, chemical coatings, and paints. Purchases that are specifically auto parts but tend to be standard across many makes and models such as tires, wheels, window glass, and engine belts were assigned a ranking of 1. Auto parts likely to be specialized for a particular make and model such as stampings, trim, seat assemblies, engine tubing, throttles, and break and suspension components received a ranking of 2. The average value for criticalness among all 118 regional parts suppliers was 1.1.


Results

The network of regional parts suppliers to the Toyota Motor Corporation's Georgetown plant follows the expected geographic and temporal pattern. Plants producing parts more critical to Toyota sedan production tend to be located closer to the Georgetown plant. These plants also are much more likely to be newer facilities that opened the same year that production at the Georgetown plant began (1987), or opened a few years afterward.

Table 2 contains some basic statistics about the regional suppliers listed by Haywood (1992). The table shows the percentage of regional suppliers that are new facilities built during or after 1987, both overall and by criticalness rank. Suppliers with a high criticalness rank are much more likely to have been built after 1987. Of suppliers with the highest criticalness rank, 40 percent were built during or after 1987, compared to just 15 percent for Toyota suppliers with a rank of 1, and 5 percent for suppliers with a rank of 0. Plants that began operation in 1987 or later were much more likely to be among the most critical Toyota suppliers.


TABLE 2: Summary Statistics on Location and Age of Regional Parts Suppliers to Toyota Motor Corporation By Criticalness Ranking

 Criticalness Ranking
0 1 2 Overall
Number of Suppliers 37 34 47 118
Share of Suppliers that Began Operations During or After 1987 5.4% 14.7% 40.0%* 21.2%
Average Distance of Suppliers From the Georgetown, KY Assembly Plants (in miles) 224 245 157 204


Table 2 also shows the average distance of regional suppliers from the Toyota Georgetown assembly facility. The distance is illustrated for regional suppliers overall and for the three different criticalness ranks. The regional suppliers that are ranked most critical are located nearer to Georgetown, Kentucky. In particular, parts suppliers producing the most critical ranked parts were on average located from 70 to 90 miles closer to the Georgetown plant than parts suppliers producing less critical parts. Looked at another way, supplier plants located closer to an assembly plant are much more likely to be suppliers of critical parts.


TABLE 3: Results of an Ordered Logit Regression of Criticalness and Distance of Supplier from the Georgetown, Kentucky Assembly Plant

Variable Coefficient Standard Error Z-statistic Probability
Distance from Assembly Plant -.003202* .001307 -2.45 .0143
*Statistically different from ranks 0 and 1 at the 5 percent significance level.

LR Index = .02397
* Statistically significant at the 5 percent level


To test this proposition, an ordered logit regression was run relating criticalness rank with distance from the Georgetown assembly plant. Results of this regression are illustrated in Table 3. Regression results indicate that the likelihood of a supplier producing the most critical parts falls with distance. The negative and statistically significant coefficient indicates that, as suppliers move further from an assembly plant, the suppliers are less likely to supply the plant with the most critical types of parts. Figure 2 illustrates the likelihood that a supplier making a most critical part falls from 55 percent for a supplier plant located within 1 mile of an assembly plant to a probability of 32 percent for a supplier plant located 300 miles from an assembly plant.


FIGURE 2

FIGURE 2: Probability of a Supplier Making the Most Critical Part (Rank=2) Given Distance of Supplier from the Georgetown, Kentucky Assembly Plant


In sum, the results discussed above indicate that Toyota tended to procure more critical parts from plants that are located closer to the Georgetown assembly plant, and from newer parts suppliers opened concurrently with or after the Toyota assembly plant began operations. Toyota has organized a supplier network where the most critical parts are made nearby, and by new suppliers attracted to the region. Toyota brought critical suppliers to Kentucky and adjacent states to build its supplier network, but also utilized the existing network of regional suppliers. This behavior is consistent with just-in-time manufacturing and co-design between supplier and assembler for customized parts.


Additional effects on the parts supplier network

The location of the Toyota assembly plant appears to have had an additional impact on the establishment of a supplier network in the region, beyond the regional location of parts suppliers to Toyota. In particular, since the opening of the Toyota assembly plant, Kentucky has become the chosen location for numerous new auto parts companies that do not supply Toyota. This is especially true in the case of foreign direct investment.

We obtained a list of new auto parts companies locating in Kentucky from 1987 through 1998 from the Kentucky Cabinet for Economic Development. That list contained 75 companies, about one-third of which were the result of foreign direct investments. Of these 75, 38 supplier plants located in Kentucky from 1987 to 1992, while 37 located in Kentucky from 1993 to 1998. Many of the 38 new parts plants locating in the state from 1987 to 1992 were not identified as Toyota suppliers. Further, given that the total number of Toyota parts suppliers rose by only 18 from 1992 to 1998 (Haywood, 1992; 1998), it is likely that many of 37 new auto parts plants established since 1993 were also not Toyota suppliers.

This suggests that assembly plants contribute even more to the formation of foreign supplier networks than expected. Apparently, the location of the assembly plants and parts suppliers in an area makes the area an attractive location for other auto parts makers, perhaps through agglomeration effects such as skilled labor supply; and for foreign direct investment because there is an existing community of foreign managers and professionals. Smith & Florida's (1994) results suggest that such factors are indeed important in determining the viability of particular locations for automotive-related manufacturers in the United States.

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