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1 Chapter 9 The Lean, The Just-in, and The Toyota Way 2011 2007 2005 2004 2011 1990 2003.

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1 1 Chapter 9 The Lean, The Just-in, and The Toyota Way

2 What happened to Toyota recently? Toyota was no ordinary company. It was in a class by itself, long known, ever revered, for its sterling quality. MIT Sloan Management Review, 52(4), 2011Robert E. Cole, Professor, UC Berkeley But in October 2009 consumers were surprised by the first of a series of highly publicized recalls of Toyota vehicles in the United States. Exaggerated by media and politicized by politicians, Toyota’s quality image among consumers suffered significantly with the recalls. So what really happened and why? Floor mats, sticky gas pedals, software glitches that affected braking, electronic control, driver errors, or to help “Government Motors”?

3 3 Why has Toyota been struggling with quality issues? MIT Sloan Management Review, 52(4), 2011Robert E. Cole, Professor, UC Berkeley Management’s recent focus on growth weakened the emphasis on quality. The increasing technical complexity of the company’s products. Underestimated the great influence of media reports.

4 4 Strategic Focus on Growth In 1995, top management called for rapidly increasing its global market share from 7.3% (1995) to 10% over the next decade. Toyota achieved 9.7% in 1998, and then set a new target of 15% by 2010, surpassing GM as the global leader. Its overseas manufacturing facilities increased from 37 to 53, and global sales rose an average of 9% per year between 2002 and Hired significant number of new employees, contracting with new non-Japanese suppliers and hiring large number of of contract engineers. The expansion gave management little opportunity for adjusting its systems and practices to accommodate such strong growth. Key decisions affecting product development, supplier management and production became biased in favor of meeting sales, cost cutting and profit targets.

5 5 Product Complexity A typical car today has more than 60 electronic control units and more than 10 million lines of computer code — a 400% increase over what was a decade ago. Toyota’s North America sales increased from 1.7 to 2.9 million units (71%) between 2000 and 2007, and product offerings grew from 18 to 30 models. Lead time between exterior design approval and start of sales was compressed to less than 20 months.

6 6 Did Washington Punish Toyota to Help U.S. Automakers? Ray Lahood, the Secretary of Transportation made his ill- advised offhand remark (2/3/10) that Toyota owners should stop driving their cars and take them into dealerships. Despite his almost immediate clarification, damage (or help for “Government Motors”) was done. Succumbing to political pressure, NHTSA commissioned NASA to study the problem. After 11 months, NASA found absolutely no evidence that Toyota's electronic throttle control systems were at fault for unintended acceleration(1/11). NHTSA knew all along that the only problems were floor mats and sticky pedals, but they had to go ahead with the NASA study to convince members of Congress who believed electronics were the cause of sudden acceleration despite a total lack of evidence to support that belief.

7 7 Did Washington Punish Toyota to Help U.S. Automakers? Moreover, NHTSA confirmed only two deadly crashes, the Saylor crash and one more, as a result of pedal entrapment and none for the sticky gas pedal problem. According to NASA, reported cases of unintended acceleration are exceedingly rare events. The probability of these events is about 1/100,000 vehicles a year or 1 in 1.4 billion miles driven. There has been only one documented accident caused by the floor mats — the one involving the loaner Lexus, where the dealer had used the wrong floor mat and failed to attach it properly with the provided restraining clips. There have been no documented cases of accidents caused by the very small number of sticky pedals. Most accidents have been attributed to driver error.

8 8 Media Reports "I was itching for the world to have a crisis,” Roone Arledge, the legendary chief of ABC News (1977). CBS Evening News (Jan. 2010) anchor Katie Couric opened her broadcast with the story of Jim Sikes, a California real estate agent who claimed to have lost control of his Toyota Prius, shooting up to 94 miles an hour. Jim's contentions were later discovered to be fraudulent—he was facing serious financial difficulties and had told his story to obtain a large settlement. The Los Angeles Times, criticized NHTSA for not pursuing alleged electronic causes of the problem. Lawyers for plaintiffs charging faults in Toyota electronic controls fueled the speculation. Media reports ignored the low probability of unintended acceleration. Negative events drive the news, not careful analyses of their likelihood.

9 9 Implications for Supplier Management 70% of the value added in Toyota’s vehicles comes from parts and subassemblies produced by its suppliers. In response to the growth, Toyota had to delegate more design work to outside contract engineers and take on new suppliers because the internal engineering resources and existing supplier base couldn’t keep up with the demands. It came to use outside engineers for as much as 30% of its development work globally. In the wake of rapid growth, Toyota increasingly failed to properly evaluate and approve components designed and produced by outside, especially overseas, suppliers. Suppliers attributed their growing problems to less experienced staff in Toyota’s purchasing group who had not internalized the “Toyota Way.”

10 10 Toyota’s Actions Slow down the product development. Establish a new team of 1,000 quality engineers. Expand its rapid quality response teams around the globe. Reduce its percentage of outside engineers to 10%. Although driver error appears to have been the primary cause of the acceleration problems, user error can be reduced by better design. Toyota decided to reconfigure the shape of the acceleration pedal in response to the floor mat problem. In contrast to centralized management, delegate more power to overseas (e.g., U.S.) executives to make decisions affecting recalls.

11 11 Lessons Learned MIT Sloan Management Review, 52(4), 2011Robert E. Cole, Professor, UC Berkeley Identify risks early and eliminate them while they are still minor problems (risk management) Despite the growing availability of real data, consumers form perceptions of product quality on what is often limited information and personal experiences (“My brother loves his XYZ”). Consumers may hold on to their beliefs even in the face of objective information on the contrary. Negative quality perception can linger long after the objective quality problems have been corrected. Toyota’s problems were not caused by a faulty production system but by poor management decisions. There is no such thing as corporate DNA, and that superior production systems, important as they are, cannot be taken for granted.

12 12 Concluding Remarks The Toyota production system still represents state of the art in manufacturing and continue to provide an important model to companies in a wide range of industries. MIT Sloan Management Review, 52(4), 2011Robert E. Cole, Professor, UC Berkeley It would be difficult to overstate Toyota’s role in shaping the modern approach to quality improvement. Toyota pioneered numerous quality improvement methodologies in the 1960s, providing the operational basis for Japanese total quality control (TQC). TQC, in turn, provided the basic building blocks for the Six Sigma approach, actively embraced by leading U.S. companies such as GE and Boeing. While Toyota's quality has recently declined, it still score in the top ranks of quality performers.

13 13 Further Readings “Toyota's Recall Crisis: What Have We Learned?” by Jeffrey Liker, Harvard Business Review, Feb. 11, "Toyota, The Media Owe You an Apology,“ by Ed Wallace, BusinessWeek, Feb. 10, “What Really Happened to Toyota?” by Robert E. Cole, MIT Sloan Management Review, 52(4), 2011

14 14 JIT: Some buzzwords “Pursuing the last grain of rice in the corner of the lunchbox” “Continuous commitment to the pursuit of excellence in all phases of manufacturing system design and operation” “Produce the required items, at the required quality and in the required quantities, at the precise time they are required” Relentless Pursuit of Perfection Passionate Pursuit of Perfection

15 15 Japan: Limited Resources LandPopulation (000 Sq. Miles)(Millions) Japan California15636 U.S.3, Any scrape is not acceptable Large inventory is evil. Save more, waste none! Culture to Survive

16 16 The Recent Toyota marks the 70 th anniversary of Toyota’s funding, 50 years since it started exporting cars to the U.S. Overtakes GM as the world’s largest automaker. Has been top ranked in terms of reliability, initial quality, and long-term durability for the past 15 years. Lexus goes from 0 to 25% market share in 10 years; the #1 luxury brand in the U.S. In 2006, Toyota made a profit of $13.7 billion, whereas GM lost $1.97 billion and Ford lost $12.61 billion. Most profitable automaker on earth. Market capitalization (May 2007) of $186 billion is more than 1.5 times GM’s ($16 B), Ford’s ($15.7), and DaimlerCrysler’s ($81.7 B) combined.

17 17 The Humble Past Toyota in the past ≈ Poor quality and cheap products (1950s~1970s) US market share: Toyota: 2%(1970), 3%(1980), 8%(1990), 9%(2000), 13%(2006), 16%(2009) GM: 40%(1970), 26%(2006), 19%(2009)

18 18 The Future What’s the secret? Toyota is proud of the fact that its management principles are different from those taught in Business schools. Other companies find it very difficult, if not impossible, to emulate Toyota, because its management tools matter less than its mind-set. “Toyota is as much a state of mind as it is a car company.” (--USA Today--)

19 19 The Future Why competitors have not yet been able to imitate or learn from Toyota? “We are not so concerned that our knowledge will spillover to competitors. Some of it will. But by the time it does, we will be somewhere else.” –Toyota executive-- “We are a moving target.” “Toyota’s advantage is sustainable because Toyota and its suppliers have a ‘dynamic learning capability’ and learn at a faster rate than competitors.”

20 20 The Toyota Traditions “Five Main Principles of Toyoda” (1935) 1.Always be faithful to your duties, thereby contributing to the Company and to the overall good. 2.Always be studious and creative, striving to stay ahead of the times. 3.Always be practical and avoid frivolousness. 4.Always strive to build a homelike atmosphere at work that is warm and friendly. 5.Always have respect for God, and remember to be grateful at all times. Father of Kiichiro Toyoda, the founder of Toyota Motor.

21 21 The Toyota Production System (TPS) Pioneer of the Toyota Production System (TPS) in the 1950s Taiichi Ohno visited Ford’s Rough plant in Detroit several times, but soon concluded that mass production as running at Ford could never work in Japan, as there was too much muda (waste) everywhere. Muda: any activity that does not add value. Example: Muda of manpower, overproduction, inventories and excess processing, defects, waiting, transport, idle time, etc. Japan and Toyota were too poor to have these kinds of waste.

22 22 The Toyota Production System (TPS) Pioneer of the Toyota Production System (TPS) in the 1950s Inspired by the modern supermarket system in the USA, Ohno invented the so-called just-in-time or kanban system to reduce muda (waste). e.g., parts would be produced as they are needed and arrive just in time when they are needed. The concept was later extended through the entire supply chain. The concept of muda (waste) became one of the most important concepts in quality improvement activities originated by Taiichi Ohno’s famous production philosophy from Toyota in the early 1950s. The philosophy was widely called Toyota production system (TPS) in Japan, and later labeled as lean production and lean thinking. Muda (waste) is anything (that increase cost, time, etc.) without adding value for customers.

23 23 The Lean Production Published in 1990, The Machine that Changed the World is the result of a 5-year, $5-million study of the auto industry in the world by Womack et al. at MIT. The term “lean” was coined because the best plants in Japan used less of everything: half the human efforts in the factory, half the manufacturing space, half the investment in tools, half the engineering hours to develop a new product in half the time, far less than half the needed inventory, etc. These impressive results are due to the quality evolution in Japan from 1950 to 1980, during which most Western companies did not bother very much on quality issues.

24 24 The Lean Production The 5 principles of Lean Production 1.Specify what creates value from the customer’s perspective 2.Identify the value stream for each product 3.Make the value flow without interruptions 4.Make only what is pulled by the customer 5. Strive for perfection by continually removing wastes

25 25 Total Quality Management The new management philosophy “TQM” was born in the late 1980s because West woke up and began to study “what happened in Japan.” The roots of TQM can be traced back to the Japanese quality evolution, where Toyota was one of the pioneering companies. Toyota practiced the philosophy and principles of TQC as early as late 1950s. The Japanese version of TQC became the main reference when the term TQM was born in late 1980s. TQM is a company culture characterized by the participation of everyone to enhance customer satisfaction through continuous improvement. T=?, Q=?, M=?

26 26 Total Quality Management It is interesting to note that TQM was not mentioned at all in The Machine that Changed the World (published in 1990) as TQM was not a well-known management philosophy at that time. Quality control (QC) is regarded as a narrow engineering discipline focusing on defects in production. In 1988, quality control has developed into a holistic management philosophy called TQM, which deals with not only production but also all other processes in the company in all types of industries including services.

27 27 The 6 Sigma Motorola pioneered the concept of a six sigma program in late 1980s. Since then, many other companies have developed their own 6-sigma programs, including GE, TI, Eastman Kodak. 1.Identify physical and functional requirements of the customers 2.Determine the critical characteristics of product 3.Determine for each characteristic, whether controlled by part, process or both 4.Determine maximum range of each characteristics 5.Determine process variation for each characteristics 6.If process capability (Cp) is less than 2, then redesign materials, product, process as required Motorola’s “six steps to 6 sigma”

28 28 The 6 Sigma In 1996, Jack Welch, then Chairman and CEO of GE, declared the 6 sigma process to be GE’s strategy for improving quality and competitiveness. 1.Measuring every process and transaction 2.Analyzing each of them 3.Painstakingly improving them 4.Rigorously controlling them for consistency once they have been improved. GE’s 4 simple but rigorous steps to 6 sigma:

29 29 The 6-Sigma 6-sigma improvement process usually follow the so-called DMAIC process. Define: Identification of the process or product that needs improvement. Measure: Identify those characteristics of the product or process that are critical to the customer’s requirements for quality performance and which contribute to customer satisfaction. Analyze: Evaluate the current operation of the process to determine the potential sources of variation for critical performance parameters. Improve: Select those products or process characteristics which must be improved to achieve the goal. Implement improvements. Control: Ensure that the new process conditions are documented and monitored via statistical process control methods (SPC). Depending on the outcome it may become necessary to revisit one or more of the preceding phases.

30 30 The 6 Sigma The DMAIC process may be regarded as a short version of PDCA cycle, also referred to as either the Shewhart Cycle or the Deming Wheel, which became an important quality improvement standard.

31 31 The Lean and 6-Sigma The 5 principles and the aim of lean production as well as the principles and tools behind the 6-sigma process are embedded in principles, concepts and tools of the holistic management philosophy called TQM, or Japan’s quality evolution. Both lean and 6 sigma recommend simple and clear roadmaps to follow for companies that have decided to embark on a quality journey to TQM or world class quality. On the surface, 6-sigma and DMAIC appears to be easier to understand and hence to implement compared to the five lean production principles. 6-sigma and DMAIC does not explicitly require the “pull” and flow principles from lean production. This may make it easier to apply to non-manufacturing operations.

32 32 The Toyota Way: 4 P Model 1P: Philosophy: Long-term Philosophy 2P: Process: The right process will produce the right results 3P: People and Partners: Add value to the organization by developing your people and partners 4P: Problem Solving: Continuously solving root problems drives organizational learning Jeffery K. Liker, 2004

33 33 The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer 1.Base your management decisions on a long-term philosophy, even at the expense of short-term financial goals. 2.Create continuous process flow to bring problems to the surface. 3.Use “pull” systems to avoid overproduction. 4.Level out the workload. 5.Build a culture of stopping to fix problems, to get quality right the first time. 6.Standardized tasks are the foundation for continuous improvement and employee empowerment. 7.Use visual control so no problems are hidden. Jeffery K. Liker, 2004

34 34 The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer 8.Use only reliable, thoroughly tested technology that serves your people and processes. 9.Grow leaders who thoroughly understand the work, live the philosophy, and teach it to others. 10.Develop exceptional people and teams who follow your company’s philosophy. 11.Respect your extended network of partners and suppliers by challenging them and helping them improve. 12.Go and see for yourself to thoroughly understand the situation. 13.Make decisions slowly by consensus, thoroughly considering all options ; implement decisions rapidly. 14.Becomes a learning organization through relentless reflection and continuous improvement. Jeffery K. Liker, 2004

35 35 The Toyota Way: 4P & 14 Principles

36 36 The Toyota Way—Two Pillars (2001) I. Continuous Improvement Challenge: We form a long-term vision, meeting challenges with courage and creativity to realize our dreams. Kaizen: ( 改善 ; Change for the better; improvement) We improve our business operations continuously, always driving for innovation and evolution. Genchi Genbutsu: ( 現地現物 ; Go and see for yourself) We got to the source to find the facts to make correct decisions, build consensus, and achieve our goals. Toyota’s internal document

37 37 The Toyota Way—Two Pillars (2001) II. Respect for People Respect: We respect others, make every effort to understand each other, take responsibility, and do our best to build mutual trust. Teamwork: We stimulate personal and professional growth, share the opportunities of development, and maximize individual and team performance. Toyota’s internal document

38 38 The Toyota Way—Two Pillars (2001) II. Respect for People I. Continuous Improvement “Respect is necessary to work with people. By “people” we mean employees, supply chain partners, and customers. “Customer first” is one the company’s core tenets. We don’t mean just the end customer; on the assembly line the person at the next workstation is also your customer. That leads to teamwork.” -- Katsuaki Watanabe, HBR, Katsuaki Watanabe, President (05-09) Toyota Motor Corporation.

39 39 The Toyota Way—Two Pillars (2001) “If you adopt this principle, you’ll also keep analyzing what you do in order to see if you are doing things perfectly, so you’re not troubling your customer. That nurtures your ability to identify problems, and if you closely observe things, it will lead to kaizen: continuous improvement.” -- Katsuaki Watanabe, HBR, “The root of the Toyota Way is to be dissatisfied with the status quo; you have to ask constantly, “Why are we doing this?” -- Katsuaki Watanabe, HBR, II. Respect for People Katsuaki Watanabe, President (05-09) Toyota Motor Corporation.

40 40 The Toyota Way—Two Pillars (2001) Katsuaki Watanabe, President (05-09) Toyota Motor Corporation. “There is no end to the process of learning about the Toyota Way. I don’t think I have a complete understanding even today, and I have worked for the company for 43 years.” -- Katsuaki Watanabe, HBR, “It takes time to develop Toyota people, who are trained on the job rather than in a classroom. Toyota develops T-type people. The vertical stroke of the T stands for the fact that employees must intensify or deepen what they do, and the horizontal stroke indicates that they must learn other jobs.” -- Katsuaki Watanabe, HBR,

41 41 The Toyota Way—Two Pillars (2001) II. Respect for People “Year after year, Toyota has been able to get more out of its people than its competitors have been able to get out of theirs,” according to Gary Hamel [1]. “It took Detroit more than 20 years to ferret out the radical management principle at the heart of Toyota's capacity for relentless improvement....Only after American carmakers had exhausted every other explanation for Toyota's success — an undervalued yen, a docile workforce, Japanese culture, superior automation—were they finally able to admit that Toyota's real advantage was its ability to harness the intellect of ‘ordinary’ employees." [1] "Management Innovation," by Gary Hamel, Harvard Business Review, February, 2006, p. 74.

42 42 The Toyota Way—Two Pillars (2001) II. Respect for People Lean is a management system that creates engaged, thinking people at every level of the organization and most particularly at the front line. If you implement all of the lean principles save one -respect for people- you will reap only a shadow of the potential advantages that lean can bring. If you implement only one principle -respect for people- you will position the people in your organization to discover and implement the remaining lean principles.


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