Toyota mulling overhaul of strategic sourcing as yen appreciates against U.S. dollar

As it works to increase manufacturing capacity, Toyota is struggling to increase profits as Japanese yen gains in value.

Japan-based Toyota has faced myriad hurdles on its rocky road to recovery. In March, the 9.0-magnitude earthquake and subsequent tsunami that battered Japan caused significant damage to the automaker's domestic manufacturing facilities. In the wake of the natural disasters, the world's biggest carmaker struggled to restore domestic production to pre-crisis levels.

However, Toyota weathered that crisis, overhauling its strategic sourcing as it endeavored to achieve procurement cost reductions amid such a backdrop. Now, Toyota – along with other carmakers based in Japan – is mulling how to contend with a rapidly appreciating yen.

The Wall Street Journal reports Toyota president Akio Toyoda affirmed this week the company is considering whether to move some of its compact car manufacturing offshore. Toyoda said the automaker is also deciding whether to seek alternative suppliers, which could help drive business cost reductions.

The yen, which is trading at record high values against the greenback, is hurting Toyota's ability to increase its profit margin in Japan. Toyoda conceded it "doesn't make sense" for the car company to continue to export compact cars to other nations because they are already less profitable than the firm's other vehicle offerings.

Precarious market conditions are spurring Toyota to make some difficult decisions, Toyoda asserted.

"That is why we might take various steps such as shifting [production] overseas, using different suppliers and increasing local procurement," he said.

As a result of the ever-evolving global market, Toyota could also renege on its pledge to produce at least 3 million vehicles per year in Japan. Toyoda said the figure is not a definite number, but that officials are rather endeavoring to ascertain whether offsetting domestic manufacturing could improve efficiency and augment profits.

Toyota is also developing plans to use its factories in foreign countries as a means of improving manufacturing efficiency, according to Toyoda. For example, Toyota could use some its plants in the U.S. – including a newly opened facility in Mississippi – to produce Corollas. The carmaker would then ship them to nations with which the U.S. has favorable trade agreements.

Toyota's willingness to shift production and overhaul its strategic sourcing illustrates how the carmaker is struggling to retain its market dominance amid mounting competition and unforeseen economic phenomena.