MMRCDISCUSSION PAPER SERIES

No. 456

Demand Fluctuation and Supply Chain Integration:
Case Studies of Japanese Firms
Mizuki Kobayashi
Graduate School of Economics, University of Tokyo
Takahiro Tomino
School of Commerce, Meiji University
Junjiro Shintaku
Graduate School of Economics, University of Tokyo
Youngwon Park
Manufacturing Management Research Center, University of Tokyo
April 2014

東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
Discussion papers are in draft form distributed for purposes of comment and discussion. Contact the author for
permission when reproducing or citing any part of this paper. Copyright is held by the author.
http://merc.e.u-tokyo.ac.jp/mmrc/dp/index.html

Demand Fluctuation and Supply Chain Integration:
Case Studies of Japanese Firms

Mizuki KOBAYASHI
Takahiro TOMINO
Junjiro SHINTAKU
Youngwon PARK

Abstract
Current Japanese OEMs utilize both Make-to-stock (MTS) and Make-to-order(MTO) to cope with demand fluctuation. In this paper, we study how leading manufacturingfirms utilize MTS and MTO by observing two case studies, Toyota and Omron’s operations in
China. We showed both companies strategies to mix MTS and MTO along with integratinginternal and external parties.

Keywords
Demand Fluctuation, Supply Chain Integration, Make-to-stock (MTS) and Make-to-order(MTO), Toyota, Omron Healthcare

Demand Fluctuation and Supply Chain
Integration:
Case studies of Japanese Firms
Mizuki KOBAYASHI1*,Takahiro TOMINO 2, Junjiro
SHINTAKU 1, Youngwon PARK 3,
Graduate School of Economics, the University of Tokyo,
Japan1
School of Commerce, Meiji University, Japan 2
Manufacturing Managemment Research Center, Faculty of
Economics, the University of Tokyo, Japan 3

Abstract
Current Japanese OEMs utilize both Make-to-stock (MTS) and Make-to-order (MTO)
to cope with demand fluctuation. In this paper, we study how leading manufacturingfirms utilize MTS and MTO by observing two case studies, Toyota and Omron’s
operations in China. We showed both companies strategies to mix MTS and MTO
along with integrating internal and external parties.

Keywords
Demand Fluctuation, Supply Chain Integration, Make-to-stock (MTS) and Make-toorder (MTO), Toyota, Omron Healthcare

11. Introduction
In today's turbulent business environment, it is quite important for organizations to be
responsive to customers' demands, and an important tool in doing this is an effective demandand supply chain. Significant challenges in managing supply chain stem from demand
fluctuation, longer lead time and higher uncertainty in the extended supply chains byglobalization. As a result, the globalization has weighed more on the demand-to-supply side ofthe economies than on the supply-to-demand side. However, factors that lead to demand
fluctuation include not only global business range but also seasonality, taxation, productavailability and pricing. Hence, the organizational interest for a product that shows variations
over time focuses on supply chain management activities to increase supply stability anddecrease demand fluctuation. Most of international companies have employed Supply Chain
Management (SCM) based on demand forecast in recent years. In the global SCM, however, it
is not easy to manage supply chain effectively, due to the various processes and procedures incoordination of supply chain. Demand fluctuations in the supply chain lead to uncertainty ininventory policy and hence the inventory costs increase. Variability in order sizes grows as
demand signals propagate upstream in the supply chain. For example, the bullwhip effect is amajor cause of higher costs and inefficiencies in supply chains. It describes how small
fluctuations in demand at the customer level are amplified as orders pass up the supply chain
through distributors, manufacturers and a variety of suppliers. In this paper, we discuss how
the focal companies control the fluctuation by utilizing MTS and MTO. For this, we observe
their internal and external integration activities of supply chains in China.

2. Literature Review
2.1. Demand Fluctuation and Supply Chain Integration
Now more than ever, firms try to improve the efficiency of their supply chains in order tomaintain a competitive advantage (Ambe, 2011). In recent, as market environment is more
fiercely competitive than ever before, the very nature of competition has changed. Increasing
global competition, advances in technology and increasing customer expectations promise toeradicate traces of mediocrity. As business contexts had become globalized, a variety ofsupply chain risks have been raised. Significant challenges in managing supply chain stem2

from demand fluctuation, longer lead time and higher uncertainty in the extended supply
chains by globalization. In particular, one of the most significant problems lies in the demand
management area in the supply chain (Naude and Badenhorst-Weiss, 2011). Demand
fluctuation and forecast inaccuracy risk result from a mismatch between a company’s businessplan projections and actual demand. If forecast are too low, products might not be available tosell. However, forecasts that are too high result in excess inventories and, inevitably, pricemark-downs. Forecast inaccuracies can also result from information distortion within the
supply chains (Chopra and Sodhi, 2004; Trkman and McCormack, 2009).
The bullwhip effect is the uncertainty caused from this information distortion flowing up
and down the supply chain. In other words, information distortion by higher demand
fluctuation is apt to cause the bullwhip effect in long supply chain. When the demand orderfluctuations in the supply chain are amplified as they moved up the supply chain, the bullwhip
effect occurs (Lee at al., 1997; Chopra and Sodhi, 2004). Distorted information from one endof a supply chain to the other can lead to tremendous inefficiencies in managing total supply
chains. We think demand fluctuation cannot be controlled but can be effectively managed if
supply chain management has included responsive and collaborative relationships between afocal company and related players. Today, to solve these fluctuation problems, most ofcompanies in same supply chains are trying to cooperate. By these collaborations it is also
possible to fulfill multiple customer requirements including cost, quality, delivery speed,
delivery dependability, innovativeness and flexibility (Boyer and Lewis, 2002; Flynn and
Flynn, 2004; Zhao et al., 2008). Hence, SCM needs to satisfy both the current and future
customers, and integrate customer needs into supply chains efficiently (Park et al., 2009; Parket al., 2012).
However, configuration, collaboration, and coordination complexities of supply chain havebeen important variables (Tomino et al., 2009; Abdelkafi et al., 2011). In particular, Supply
chain Integration (SCI) is one of the most important competitive strategies used by modern
enterprises (Narasimhan and Kim, 2002). The major partners of the supply chain are the focalorganization and the customers, the suppliers, and any other partners involved in the business
transactions. For this reasons, supply chain integration is exceedingly difficult. It requires hard
work and focus on both internal processes of firms and integration endeavor with external
players. Thus, we think that the main aim of supply chain management is to integrate various
external players as well as internal and external supply chain processes to satisfy market
3demand. In this sense, inter-organizational capabilities to integrate internal processes of supply
chains are the essence of supply chain integration (Comes-Casseres, 1996; Hagedoorn andDuysters, 2002; Chiang and Trappey, 2007). Furthermore, in terms of external suppliers
management, supplier selection and evaluation plays an important role in establishing aneffective supply chain (Lee and Kimz, 2008; Lin, et al., 2009; Chen, 2011). A stream ofliterature concerning integration with suppliers in Japanese and USA contexts focuses on (1)information and physical flow coordination; (2) coordinative mechanisms for individual
suppliers in a supply chain; (3) coordination incentives within supply chain for performance
improvement; (4) supplier selection and evaluation, (5) inter-organizational collaboration
through contracts, information, and mutual trust (Sahin and Robinson, 2002; Narayanan and
Raman, 2004; Araz and Ozkarahan, 2007; Li and Wang, 2007; Tomino et al., 2009). Diverse
forms of coordination with suppliers and their collaborative endeavors impact on supply chain
performance. In view of supply chain integration in mobile industry, Park et al. (2009) show
how the key players in the mobile phone industry utilize their strategic alliances andcollaboration arrangements. Through case study, they examined NOKIA (as mobile phone
manufacturer) and Texas Instruments (as component supplier) have maintained collaborative
strategic alliances for their mutual competitive advantages.
Collaborative network capabilities in supply chains satisfy complex customer requirementsthat either manufacturer or suppliers alone may not satisfy (Bowersox et al., 1999; Squire et al.,2005). As a result, an important strategic priority for many firms is to enhance supply chain
integration and achieve competitive advantages through supply chain integration (Ahmad andSchroeder, 2001; Stank et al., 2001; Peppard and Rylander, 2006; Di-Domenico et al., 2007;
Zhao et al., 2008; Rajagopal and Rajagopal, 2008).
Most of supply chain integration studies have mainly centered on manufacturer-suppliers
relationships. Besides, many of these studies have focused on the success of Japanesemanufacturing including Toyota (Miyazaki, 1996; Lincoln et al., 1998; Manabe, 2002;
Amasaka, 2002; Liker and Choi, 2004; Tomino et al., 2009). There has been a lack of studies
which consider integration of internal and external supply chain players alike. In particular,
recent studies have little done studies of supply chain integration practices of various
industries together. This paper contributes to the body of the literature by conducting casestudies of supply chain integration of automotive and medical companies. Furthermore, thispaper mainly focuses on supply chain management corresponding to demand fluctuation and4analyzes the integrative processes between assemblers, their suppliers, and external dealers(marketing agencies).

2.2. Research Focus
Generally, production system as research object is classified as make-to-stock (MTS),
assemble-to-stock (ATS), make-to-order (MTO), configure-to-order (CTO) and engineer-toorder (ETO) in the manufacturing continuum. In this study, we regard BTO and MTO as same
concepts. However, we consider different cost structures by production methods of MTS andMTO (Bowersox et al., 2002, Chinen, 2006; Tomino et al., 2009). For make-to-stock (MTS)
method, as production increases, manufacturing and transportation cost decreases inproportion to economies of scale but the cost of keeping stock increases. In contrast, make-toorder (MTO) method takes the cost of keeping small stock but yet takes high cost for
production and transportation costs.
In case of Japanese automotive industry, it is known that Make-to-order (MTO) makes
production lead time longer because it has to accommodate additional customer orderspecifications. One alternative is to use Make-to-stock (MTS) by anticipating the level ofcustomer demand while assuming additional inventory risks for the various components offinished cars. A challenge of today’s operations management is to resolve the conflicts
between lead time and inventory risks by using MTS and MTO. Consequently, current
Japanese OEMs utilize both MTS and MTO (Tomino, 2003, 2004, 2006; Tomino et al., 2009).
Production and delivery of component suppliers are based on the advance notification fromtheir manufacturers. Thus, the accuracy of production forecasting is critical in controllinginventory risk. In the month of actual production, their production system runs much like
MTO. Furthermore, most of automotive firms integrate marketing channels internally.
However, unlike automotive firms, most of electronic and healthcare firms do not integrate
marketing channels internally. Consequently, it is difficult to forecast and control demand
accurately like automotive firms. Therefore, for electronic and healthcare firms, it is atremendous challenge to respond to demand fluctuation through integration with externalmarketing agencies.
In this paper we discover how case study firms utilize MTS and MTO while observing their
supply chain integration. In next section, we will analyze comparative case studies of Toyota
and Omron in China.
5

We thought briefly two reasons to analyze firms’ operation in overseas. First, it is not easy
to establish the same operation in foreign countries, even though the operation in Japan isstable (Abo, et. al, 1991). In Toyota case, we focus on the effort between production site andmarketing site in China. In Omron Healthcare case, we shed light on the efforts among its
factory in China, sales site in Japan and external parties in Japan. Second, it is necessary to
regard different natures of marketing channels in different industries as mentioned above. In
Toyota, the dealers in China are under its control, however, not every firm has the marketing
channel as same as Toyota. Therefore, we choose a firm, such as Omron Healthcare, withexternal distributor and retailer. For these two reasons, these case studies are appropriate forthe analysis (Fig. 1).

Figure. 1 Observation focus of two case studies

3. Case Studies
3.1. Methodology
We have adopted a multiple case study method to explore our research question (Yin, 1981,
2003; Voss et al., 2002; Krajewski et al., 2005). We interviewed several executives fromToyota and Omron and several executives from their suppliers and dealers (or sales agencies).
The interviews were conducted from 2003 to 2012. The information was gathered frommanagers that possesses expert knowledge about the subject of inquiry through interviews.
As shown in Appendix 1, we have conducted interviews for Toyota (5 interviews), Omron(3 interviews) 1 dealer, and 1 supplier (first tier) interviews. In view of our prior extensive
knowledge base on Toyota and Omron in Japan, our interviews focused on Toyota and Omron
in China this time. With their permission we have carefully documented the details of eachinterview. All interviews were tape-recorded and detailed documentations were made. For
6

consistency we have used formal semi-structured interview questions. As needed we also
asked additional proving questions. Post-interview analyses included comparison of ourmultiple interview results with previous literature findings.

3.2. Japanese vehicle company: Toyota
3.2.1.

GTMC (GAC Toyota Motor Co., Ltd.)We interviewed Toyota Japan (Toyota Motor Corporation), GTMC (GAC Toyota Motor Co.,
Ltd.), Japanese and Chinese car dealers, and part suppliers. The interviews were conductedfrom 2001 to 2008.
Firstly, we analyze a case of GTMC which is one of the Chinese local corporations of
Toyota. It is a good example which started production and sales function at the same time in2004 (establishment in 2006) and reflected the manufacturing philosophy of Toyota into thesystem.
First of all, we show the process of production planning at GTMC. The production
planning of the vehicle production for the Nth month begins in the N-2th month, two months
before which receives order (allocation of cars demand) from dealers of GTMC control. How
to sell cars in China is basically a stock sale at the dealer store and a customer watches adisplay vehicle and purchases one.
Each dealer performs the forecast order of the vehicle at the final specifications levelconsidering the situation of the stock vehicles and future sales. At this point, GTMC finalizes
the total complete volume requirements for the Nth month production plans of each model(Camry, Highlander, Yaris, Camry hybrid) and fixes the allocation of cars of Nth month toeach dealer, namely monthly production planning. In principle, GTMC does not holdinventory cars.
After that, a dealer can demand a change about the specifications (a model and color) of thevehicle which it ordered every day as needed. This is close to the system of the daily change inJapan.
GTMC collects and reflects the order change information that received from a dealer into
production planning two times a month. Change of specifications depends on the procurement
situation (in particular, transportation parts that has a long procurement lead time from Japan).
Most of changes are about the color. Specifically, GTMC establishes production planning forprevious two weeks of Nth month in N-1th month and for later two weeks of Nth month at the7beginning of Nth month (Fig.2).

Figure 2. GTMC production planning

3.2.2 Coordination mechanism between production and marketing of Toyota
As the establishment of GTMC may be relatively new among the production bases ofToyota of the world in 2004 (the start of production in 2006), GTMC makes coordination
process of production and marketing of Toyota explicit knowledge while using IT effectively.
Here, we clarify the contents of coordination process of production and marketing of the
Toyota style by two examples of the IT system called SLIM (Sales Logistics Integrated
Management) and TOSS (Total Order Support System).

3.2.2.1. SLIM
SLIM is a system to always grasp the situations such as sales plans, production progress,
logistics, and the finished vehicle stock of the dealer possession. One of the most distinctive
features in a series of systems constituting SLIM is a liquid crystal display (LCD) located in
the wall surface of one head office of GTMC. Various kinds of information are updated anddisplayed for every 45 minutes in a huge liquid crystal display. Specifically, sales branches(272 sales branches as of March, 2011) of GTMC in the whole land of China are displayed ina vertical axis and the latest situations of each process of the supply chain are also displayed ina horizontal axis such as the sales plan (the sale accomplishment situation) of each dealer, thefund preparations situation of the dealer, production progress of GTMC, the number of car
volumes in the factory yard, the situation of the out-bound logistics, the situation of the store
inventory car, and the delivery of waiting situation to customers.
An icon separated by color is displayed in the screen, and one icon expresses a vehicle.
8

Each vehicle is managed by an IC chip, and the information is sent to the server and updated
whenever it passes each process. It can display various kinds of detailed information(specifications such as a color or the model) of each vehicle icon when an operator operates aterminal connected to the management board. Furthermore, the color of the icon of the vehicle
changes automatically whenever store standard inventory is exceeded and a vehicle beyond
the planned production lead time appears. For example, as GTMC, by this system, can grasp
the information of the dealer on a screen for which target of the sales plan went unachieved, it
can cope with confirmation and the measures to the dealer. The president, a production
manager, and members of each sales district charge gather before SLIM board once a week,share information, and perform detailed cross-functional adjustment of production andmarketing. This artificial adjustment becomes the key.

3.2.2.2. TOSSGTMC has TOSS which is an ordering support system introduced from 2009. This system
is important in planning supply-demand balance of production and marketing.
GTMC, utilizing SLIM, comprehends inventory of the whole supply chain and the situation
concerning lead time information, and the sales trend of the vehicles as just mentioned. TOSS
is the system to request appropriate vehicle ordering to dealers based on gathered information
through SLIM. When a dealer places an order for the vehicle to GTMC, TOSS is the system tohelp a judgment of the dealer about what kind of specifications and which car model should beordered to maintain appropriate standard stock.
When we see an example of Camry produced at GTMC, seven specifications occupy
approximately 80-90% of all unit sales, even though the number of the main specifications isabout 80. Therefore GTMC classifies the “hot (best-selling)” products according to
specifications by 4 ranks of A (large amount of products), B (middle amount of products), C(small amount of products), D (rarity) depending on the past sales results and sets eachstandard inventory quantity for every store. GTMC does not put the store inventory as a
general rule for the minor specifications of the D rank that just over 10 cars per dealer are soldin a month and maintains the system which is close to make-to-order production. GTMC
shows recommended order, increases accuracy of order and keeps the appropriate inventory,
while adding the stock situation of each dealer, the order situation, and the sales results tothese “hot(best-selling)” products analysis data (Fig.3).
9

Before 2009 when TOSS was introduced, the order from the dealer was often based on
perception and the experience of the person in charge, and massive fluctuation occurred
between the sales results and the stock quantities at the last specifications level about the salesof the car in inexperienced China. To promote an appropriate order, TOSS was introduced.

Figure 3. TOSS (Total Order Support System)

For example, it incorporated the system to call attention to the dealer and confirm it, when
the specifications that hardly had orders in the past are ordered. But TOSS is not the system toforce order to dealers, but to show recommended order. The dealer finally places an order byan original judgment in reference to information shown in TOSS. This point is important. In
this way, Toyota’s case illustrates that the positive functions of marketing dealers are notmerely to pass onto customer order to the manufacturers but to actively achieve the advanced
production planning (Asanuma, 1997). Marketing supports the stabilization function of the
expected production plans of Toyota. GTMC introduced TOSS to support Chinese dealerswith very little sales experience, but TOSS has just a supporting role to recommend order andthe dealers have an authority to determine orders and the responsibility for taking a inventory.
This operation at GTMC is similar to that of Japan. In turn, this role definition motivates
dealers to enhance their demand prediction accuracy and at the same time aggressively engage
in their marketing efforts. As a result, sales increase. In addition, 3-4 days before the actual
production dealers may request changes in color and model types at Toyota Japan and 2 weeks
before the actual production dealers may request at GTMC so that the production side helps
inventory stock risk reduction of the marketing side.
10

Furthermore, needless to say, it is not IT tools themselves such as SLIM or TOSS that areimportant here. Rather, we should pay attention to coordination mechanisms between
production and marketing and production planning capabilities of the Toyota style,simultaneously achieving both production and marketing efficiencies while securing the
maximum of customer satisfaction.

3.2.3. Coordination between make-to-stock (MTS) and make-to-order (MTO)
Japanese vehicle-manufacturers involve information flows from customer order placement
to final order fulfillment including production and purchasing plans. Production plans (annualand daily production details) require timely and reliable information of customer demandthrough nation-wide dealership network (Tomino et al., 2009). In general, Japanese production
schedule and plan (annual, monthly, weekly, and daily) and part purchasing plans areimportant components of supply chain processes. Supply network is consisted of multiple tiersof suppliers and demand network is connected through national sales offices, retail distributors
and final customers. For our research purpose, we did not involve 2nd or 3rd tier suppliers
because in Japanese context first tier suppliers are responsible of the performance outcomes of
2nd and 3rd tier suppliers as well. This study focused on examining the comprehensive
relationships between suppliers, manufacturers and dealers in the Chinese context.
In terms of production planning processes total production volumes by each product line isbased on previous month’s records and therefore each month’s production plans change very
little. In this way, Toyota operates in monthly cycle which is fairly long planning time span. As
Toyota fixes its production plans in the monthly intervals, it controls the fluctuations of
production plans. But since such production plans are based on long production cycles, theadjustability to demand change falls. Therefore, for specifications, Toyota also uses shortproduction cycles (which are usually fewer than three days at Toyota Japan and two weeks at
GTMC) to enhance market responsiveness. At the same time, Toyota utilizes both short andlong production cycles for the modified cycle of specifications. Although the final production
volume of product specifications may be up to tens of thousands, in general there are “hot(best-selling)” products that customer prefers so that mostly the items for major production
adjustments by dealers are except “hot (best-selling)” products. Since such production plans
are based on long production cycles, dealers adopt their marketing efforts in ways not todamage customer satisfaction but to stabilize their overall order patterns.
11Through utilizing TOSS depending on “hot (best-selling)” products, GTMC maintains
stabilization of the production. At the same time, Toyota maintains short time cycles (dailychange system) as much as possible, for other small special order cars and specifications(items) which may require some changes in their order plans. The customers who insist
particular feature orders tend to tolerate longer adjustment periods. Therefore, with the uses ofshort and long production cycles Toyota effectively fulfills both production and marketing
goals.
In this way, Toyota’s monozukuri (product manufacturing) combines short and long termchange cycles in different levels and achieve both production and marketing efficiencies andrealizes coordination between MTS and MTO.
As we analyzed Toyota, Japanese OEMs generally utilize both MTS and MTO. This is due
to particular aspects of their component suppliers (Tomino et al., 2009). A car has in general
20,000 to 30,000 component parts. Japanese OEMs receive nearly 70% of components fromtheir suppliers. Thus, any changes in production schedule affect component purchase plans
which in turn impact production schedules of component suppliers. Many suppliers produce
component parts according to advance notification from manufacturers and start making thesecomponents prior to receiving final change specifications. Unusual levels of inventory may
arise with slight discrepancies between advance notification and actual orders. In the long run,this is what both OEMs and their suppliers should avoid. As OEMs use MTO, it is challenging
for supplier to procure all the components in timely manner. This situation demands OEMs todevise structures that provide flexible production plans while stabilizing component
procurement schedules. OEMs’ production schedule determines the heart of the inventory risk
and delivery time issues involving large numbers of suppliers.

3.3 Medical equipment Company : Omron Healthcare1
3.3.1. Omron Healthcare Dalian, China

Omron Healthcare Co., Ltd is one of the major healthcare equipment and machine firms in
the world, that customers are familiar with its blood pressure monitors, digital thermometers
and other products. Here we focus on Omron Healthcare Dalian in China (Kobayashi et al.,forthcoming). As production activities in Dalian factory (China) were increasingly important
1

The case of Omron Healthcare is based on the description from Kobayashi et al.
(forthcoming)12

to Omron Healthcare, it brought the production systems in home country which called ONPS2
to Dalian and renamed the system DNPS (Dalian New Production System) in 2005. In 2010,
the inventory level temporarily fell down, but it went up soon without noticed. Some products
were even short of inventory although the factory worked very hard on manufacturing them.
One of the main causes of the problem was that the irregular bulk orders disturbed regular
production plan. DNPS actually performed remarkably on inventory reduction andproductivity improvement. But regardless of how precisely DNPS could shorten the frequency
of demand forecast from monthly demand forecasting to the weekly, production site had no
idea or means of access to the actual market situation, and what it did is just “manufacturing
products”. The production site also knew nothing about sales site’s policy and plans, except
basic order information such as product numbers and purpose of use.

Besides, production

site and sales site did not dare to try to share detailed information together.

It means

production site’s effort only contributed the local optimization (good impact only inside of
production site), but the firm needed all parties involved to work together in order to solve theinventory problem.
To solve the problem, Omron Healthcare started working on organizing order types andinitiated a new system called Make to Availability (MTA) in 2010 for the regular order supply.
MTA is based on Theory of Constraints (TOC), which is to focus on removing the bottleneck
and improving the companywide product information flow in order to link the activities toprofit. On this occasion, each department/party shall not focus on optimizing its own
department/party but instead shall consider how to generate a smooth flow of information for
the entire firm. In briefly, the production history can be described into two phases. In the firstof two phases for production, Omron Healthcare paid much attention to the production
capability building and the cooperation with the supplier, and DNPS was a key system. In thesecond phase, Omron Healthcare made much work on a wider range of cooperation, which
involved more departments and parties to make information flow traveling through them, andboth DNPS and MTA played a big role.

3.3.2. Coordination mechanism between production and marketing of Omron
3.3.2.1. Supply chain integration
Omron Healthcare recognized the importance of involving all departments and external
2

Omron New Production System(ONPS) utilizes Kanban based on TPS, in which parts andproducts supply comes from customer demand.
13

players in order to make the new system (MTA) work. First of all, it started internal
department integration. In March, 2010, six-day workshop was held for sharing the common
goal by all members. All managers from production, logistics, product development and sales
departments were gathered. They were required full commitment to the workshop during thesix days. Before this workshop, DNPS was perceived as the system not for total inventory
control but for the inventory control at production site. Sales department did not utilize DNPS
for the control of their distribution inventory. Other than learning the new system, managers
also did in-depth discussion on what would be the problems after system implementation.
Additionally, managers shared their own situation and subjects, and truly deepened mutual
understanding for the first time. At the workshop, increasing the sales team’s comprehension
was especially important because all customer information and order information came fromthe sales person. If sales manager could not fully understand the whole concept, the way themembers of the firm pass information would not be any different from the past. Sales sitetended to pass the orders to production side with more amount than the one of actual demandbecause it did not want to have inventory shortage and fail to response to its customer (i.e.
distributor). Moreover their fluctuation of production volume was amplified since sales site
has passed the order information that mixed up with regular order and bulk order for special
campaign. That fluctuation brought the inventory shortage problem at production side.
Therefore, sales site could not completely trust production site and kept to order more than theactual demand to prevent opportunity loss until this workshop. At the end of the workshop,
Omron Healthcare decided to give MTA a shot and started the implementation around August,
2010, a trial on five kinds of products and aimed to integrate management between production
department and sales department. Now it implements the MTA with 170 items.
According to Omron Healthcare, MTA is a production system that links finished goods
inventory and market demand. It replenishes stock according to downstream demand
information (source from the market or distributor or sales site).

MTA means that they

manufacture in order to guarantee availability of their products for distributors.

Basement for

production planning was changed from the order from sales department to the sales shipping
inventory.

Sales persons basically do not need to order to production department based on

their sales forecast. Here DBM is the main methods to support MTA. Dynamic Buffer
Management (DBM) is an important inventory management method to support MTA. It
visualizes which item should be given the priority of production and how volume should be
14

manufactured. First, it calculates the maximum amount of inventory for each item as a buffer
to cope with demand fluctuation. The initial maximum amount of inventory is defined as the
maximum demand during supply lead time. Supply lead time is the sum of order lead time,
production lead time and delivery lead time. The maximum demand is basically the past
maximum sales at the time when the product was the best seller in the item. Then, item’s
inventory is divided to three zones: green, yellow and red. The supply priority is dynamicallyadjusted by an easy rule. Red zone means the inventory is ready to short. Those products in
red zone should be manufactured as first priority. Yellow zone is the ideal level of inventory
and those products should be manufactures as second priority. Green zone means quite
sufficient inventory, and the supply is not in a hurry at that time. Present inventory is the sumof the inventory amount in shipping warehouse in Japan, the amount on transportation, theamount in warehouse in Dalian and the amount in manufacturing process in Dalian factory.
The amount of supply to be manufactured is subtraction of the present inventory from the
maximum inventory.
For the regular order, sales person do not need to make an order, and people on production
side do not need to work hard on controlling the inventory level anymore. Information system
help two departments share information of inventory amount, products/parts location andfactories’ circumstances at any time. All actual information is visualized on the information
system and shared between production and sales departments.

Figure 4. Supply Chain Integration of Omron

Source: Kobayashi et al. (forthcoming)
Second of all, Omron Healthcare also worked on integration with external parties, such as
15

the suppliers and dealers.

It held a meeting with people from the suppliers, explained the

MTA system, and implemented DBM to the supplier who agreed with.

With dealers, as atrial, Omron Healthcare implemented MTA to one of its distributors with a few kinds ofproducts (Fig.4). Its ideal thought is to place the MTA to more downstream players (moredistributors and retail stores), then the demand of the end customer will be more visible thanever before.

3.3.3. Coordination between make-to-stock (MTS) and make-to-order (MTO)
Production site treats the bulk order from sales site as a special order, and makes anotherproduction plans (MTO and MTS) separately from the MTA which deals with the regularorder (Fig. 5). People in charge of production attend the formal meeting in sales department
and information sharing becomes denser than before. Production site adopts MTO to respondto the bulk order. The bulk orders can be operated in MTA if the amount of orders is allowedby the MTA standard. Additionally, production site adopts MTS as for the new products. It isnecessary to prepare enough inventories before the introduction of new product to the market.
The amounts of those advance inventories are set according to the sales and promotion plansby sales department. Production people understand actual sales are often below those plans orforecasts since no one knows whether it is going to be a blockbuster or not.

Figure. 5 Coordination of MTA, MTO and MTS

In 2012 summer, the inventory in the warehouse located in Osaka is reduced about 30% to
40% compared to it before the implementation of MTA. The inventory in Dalian factory is
16

reduced about 40%. The inventory problem has not completely disappeared after MTA
implementation, yet monthly meetings and other communications between two departments
enable actual demand information of regular order and sales policy (bulk order for campaign
and the new product debut) to be visible for each department.

3.4. Comparison of cases
A challenge of today’s operations management is to resolve the conflicts between lead timeand inventory risks by using MTS and MTO. Current Japanese OEMs utilize both MTS andMTO (Tomino et al., 2009).
Toyota operates in monthly cycle which is fairly long planning time span. As Toyota fixes
its production plans in the monthly intervals it controls the fluctuations of production plans.
But since such production plans are based on long production cycles, the adjustability to
demand change falls. Therefore, for specifications, Toyota also uses short production cycles(which are usually fewer than three days at Toyota Japan and two weeks at GTMC) to enhancemarket responsiveness. At the same time, Toyota utilizes both short and long production cycles
for the modified cycle of specifications. Although the final production volume of productspecifications may be up to tens of thousands, in general there are “hot (best-selling)” productsthat customer prefers so that mostly the items for major production adjustments by dealers are
except “hot (best-selling)” products. Since such production plans are based on long production
cycles, dealers adopt their marketing efforts in ways not to damage customer satisfaction but
to stabilize their overall order patterns.
Through utilizing TOSS depending on “hot (best-selling)” products, GTMC maintains
stabilization of the production. At the same time, Toyota maintains short time cycles (dailychange system) as much as possible, for other small special order cars and specifications(items) which may require some changes in their order plans. The customers who insist
particular feature orders tend to tolerate longer adjustment periods. Therefore, with the uses ofshort and long production cycles, Toyota effectively fulfills both production and marketing
goals. In this way, Toyota combines short and long term change cycles in different levels andachieves both production and marketing efficiencies and realizes coordination between MTS
and MTO (Fig. 6).
On the other hand, Omron had problems to cope with tremendous demand fluctuation. For
this, production site of Omron treats the bulk order from sales site as a special order, and17makes another production plans (MTO and MTS) separately from the MTA which deals withthe regular order. People in charge of production attend the formal meeting in sales department
and gradually incorporated their statements and thoughts into sales plan. With such effort,
production site is able to know information about big changes in production volume in earlytime, which never happened before. With sales site’s cooperation, production site adopts MTO
to respond to the bulk order (National Day or New Year campaign).
The number in Fig.6 represents easiness and difficulty of demand forecast. The smaller thenumber is, the more pull-like by the market demand, the bigger the number is, the more pushlike by the demand forecast.

Figure 6. Case analysis results

In this study, we mainly focus on both companies’ general operation as red dotted circled.
For Toyota, we observed how it copes with regular order when specifications changes areneeded.

For Omron Healthcare, we studied how it copes with three types of orders.

4. Conclusion
Japanese vehicle manufacturers in terms of production and purchasing plans, inventory risk
management, use MTS and MTO. It is noted that in two ways Toyota has made extra efforts toimprove the stability of the manufacturing plan as general operation(Tomino, 2003, 2004;
Tomino et al., 2009). First, Toyota’s dealers take responsibility of inventory risks for all thesales order of cars. Second, Toyota carefully considers challenges of component suppliers.
Daily specification change system sets the acceptable range. Toyota limits the rate of18

specification change of each component within ±10% of production plan. This policy aims at
reducing big discrepancy between components and actual orders in its Kanban system. Toyota
considers the impact of schedule change on the production plan of its component suppliers.
Toyota emphasizes precise advance notifications and consciously attempts to enhance them.
It establishes monthly production planning carefully after having examined the capabilities ofToyota marketing and the sales dealers and a demand trend. Therefore all the sale dealers are
responsible for the decided amount of production as a general rule. As a result, the inventoryrisk occurs to the dealers, but it helps improvement of the demand prediction of the dealers,
the order accuracy and aggressive sales effort, and finally strengthens Toyota.
Different from automotive companies, however, healthcare companies internally have nodistributors. Thus, it is difficult to integrate external supply chain such as sales agencies anddistributors. As a result, healthcare company like Omron suffered from demand fluctuationsuch as bulk orders. To respond to these problems, these companies more try to integrate
external supply chain players as well as internal supply chain department.
When we consider the adaptation to a demand fluctuation, previous studies’ attention is apt
to go only on the side of the adaptability of production to demand, but it is more important
how to keep stability of the production side. In other words, it is also important how to control
demand according to production. Also, we should notice that mixture of MTS and MTO
sounds a smart solution to control demand fluctuation, instead of choosing either one.
Unintentional flattery to demand may force the production side to increase cost more thanrequired and, as a result, may reduce profitability. Firms should competitively position as thewinners of global supply chain that integrate both dynamic and rapidly changing demandrequirements (market-in) with stable and efficient supply responses (product-out).

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24

Appendix 1: Interview Details
Date
9/15/2003
2/6/2008
5/29/2010
2/3/2011

2/3/2011

2/3/2011
8/21/2012
9/21/2012

9/28/2012

9-11/2012

8/21/2012

Company
Toyota Japan

Department
Position
Production
Engineering
GeneralProject
Planning Division
Manager
Toyota Japan
Production Control Division
General Manager
GAC
ToyotaFirst Dealer Shop
General Manager
Dealer A
GAC Toyota
Vice President
e-CRB Promotion Division
General Manager
e-CRB Promotion Division
General Manager
Vehicle Sales Department
SeniorProduction
Management Coordinator
Division
DeputyGeneralAdministration Division
Manager
GAC
ToyotaCorporate
Planning
Specialist
Motor
China Department
Business
Investment
Planning&Research
GAC
ToyotaFirst Dealer Shop
General Manager
Dealer A
Omron
Production Control Division
Chairman of theboard, Vice President
Healthcare Dalian
Omron
Production
Strategy
General Manager
Healthcare
HQ Department:
Senior Engineer
Japan
R&D
Management
Senior Staff
Department
Production
Information
System Department
Omron
Sales Department
General Manager
Healthcare
Tokyo OfficeConsulting
HQ OfficeChief Executive
company B
OffierProject Director
Project Director
Omron
President
Healthcare
Production Department
General Manager
Supplier A
Production Department
Deputy Manager
Production Department
Manager
Quality
Management
Manager
Department

25

Hour
4.0
3.0
2.0
4.0

1.0
3.0
4.5
2.0

2.0
5.0

1.0