The Toyota Case study by Professor Hill includes several very interesting items for consideration. Among the most notable is the difference between Toyota’s manufacturing processes and those in use by the majority of the automotive industry, including the large automobile manufacturers in the United States. There are several important items that are integral to Toyota’s manufacturing system, just-in-time inventory, long-term partnership agreements with major suppliers, team-based production, and a focus on identifying issues/defects at as early a point in the process as possible. Each of these components provides an advantage to Toyota over its rivals. When these elements are combined the advantage becomes strategic.
At a conventional assembly facility the inventory on-hand is equal to several days production needs. Having this much inventory requires a large capital investment in both the inventory and in warehouse capacity to hold the inventory. The investment of that capital in inventory also prevents rapid changes in vehicle features without also having the different components on-hand – yet more inventory. An issue with holding such a large inventory is the introduction of defects. With a small inventory defects are identified very quickly and can be corrected. Identifying defects quickly ensures that minimal capital is wasted through defective components.
Having large amounts of inventory complicates the identification of the source of a defect and at what point the defect was first introduced along with the task of isolating assemblies that may have used the defective part. This can cause a very large amount of waste or worse, allow defective products (automobiles) to leave the factory. By developing a team –based approach Toyota eliminated the need for several levels of intermediate management that did not actually provide any real production capacity.
Another Toyota development, systems that allowed the production teams to change out necessary equipment, eliminated the need for groups of specialists and large amounts of production down-time while the machines were being changed. These two items significantly reduced the staff time required to assemble a vehicle (from 31 hrs/car at GM to 16 hrs/car at Toyota)1 and costs per vehicle while ensuring production capacity was not adversely affected by the absence of any one worker. Having the work teams cross-trained also helped in the identification of defects earlier in the process.
The combined effects of smaller parts inventories and cross-trained teams enabled Toyota to achieve a defect rate of 45 defects per 100 cars, one-third that of GM in 19871. Having a production system that produced vehicles in half the time with a defect ratio one-third that of its competitors and production equipment setup times in minutes instead of hours enabled Toyota to provide a wider variety of vehicle models with far fewer defects with a much smaller company. Continuing this Toyota outsourced a large percentage of its production work, keeping only a few key components and the final assembly.
This change from traditional automobile production allowed Toyota to focus on those items that truly were key to its success and to take advantage of the lower labor costs at smaller production facilities, further reducing costs. Another change from conventional automotive production, Toyota developed partnerships with their suppliers instead of continuous competitive bidding. The reasoning was that while competitive bidding was more cost effective in the short-term it did not allow the long-term advantages in quality and process that could be gained in a more stable business relationship.
Furthering the partnership, Toyota expanded the lean production techniques to its partners, enabling them to take advantage of just-in-time inventories and the team-based production techniques that Toyota had developed. As part of the business relationship Toyota agreed to share the savings of any improvements developed jointly with a partner and that the partner would keep the savings of any improvements they developed independently for the life of the contract. This change in supplier model enabled Toyota to develop a more productive, quality-focused supply chain than its larger competitors. It also enabled Toyota to leverage the advances made by its suppliers, improving productivity, profit, and quality.
By improving quality and increasing product variety Toyota is able to increase sales; reduced costs yield higher profits on those sales. The improved relationship with suppliers brings them into a partnership in which all parties benefit, further improving the overall product and reducing costs. The improvements made by Toyota were developed due to a combination of external influences and internal ideas. In fact, this is one area where Toyota has differentiated significantly from its main competitors – they have embraced new ideas from their customers and partners.
These new ideas, some from Toyoda Kiichiro and many from Ohno Taiichi, led to the major changes in Toyota’s production systems including the development of the ability to change stamping dies very quickly, which led directly to small production runs and just-in-time inventory, team-based production, and the “kanban” system. After studying the mass production systems in use at American automobile manufacturing facitlites Ohno Taiichi determined that there were five major flaws in American mass-production.
He also realized that the Japanese market was small enough that it would not support the production model being used by US automobile manufacturers. He then began to address these issues. The answers he developed addressed the issue of large inventories, early identification and correction of defects, the team concept and cross-training of team members, and the ability to meet the consumer’s desire for variety in the products.
Ohno’s drive to continue improving the quality and processes at Toyota ultimately became the lean production methodologies of today. Another issue that came up was Toyota’s ability to export these processes outside of Japan – could Toyota implement this methodology elsewhere with the same level of success? Based on the case study by Professor Hill, the answer is an unqualified “yes.” In the early 1980s Toyota entered a joint venture with General Motors (GM) as New United Motors Manufacturing, Inc (NUMMI), building a facility in Fremont, CA with the capacity to build 250,000 cars per year.
“By the fall of 1986 the NUMMI plant was running at full capacity and the early indications were that the NUMMI plant was achieving productivity levels close to those achieved at Toyota’s major Takaoka plant in Japan.”2 Specifically the NUMMI plant took nineteen hours to build a car, sixteen hours were required at Takaoka and thirty-one hours at GM’s Framingham plant. Further, the cars produced at NUMMI averaged forty five defects per one hundred vehicles, the same as Takaoka, compared with one hundred thirty five defects per one hundred cars at Framingham.
Toyota’s largest problem was building a global supplier network comparable to their network of tier-one and tier-two suppliers in Japan. One of the most significant problems encountered was in the quality of parts provided by Toyota’s foreign suppliers. An example of this was the defect ratio of Toyota’s North American suppliers. In 1990 Toyota identified a defect ratio for the parts from their North American and European suppliers that was one hundred times greater than for their Japanese suppliers, one thousand defects per million parts, vice ten defects per million parts from their Japanese suppliers.
Additionally, the parts produced in Europe and North America were significantly more expensive. This combination of defects and cost led Toyota to import many of the parts from Japan. Ultimately Toyota was able to work with the US and European suppliers, partly through the establishment of a training program, to improve the quality of the parts supplied. Interestingly, many of the suppliers have reported “double- and triple-digit productivity gains as a result”2 of implementing the lessons they learned through the Toyota training program. Toyota’s competitive advantage is based on their ability to produce a wide variety of vehicles in a smaller facility, using fewer staff-hours, and with fewer defects than their rivals.
These capabilities enable Toyota to better meet the needs of the end consumers and to be far more profitable than their competitors (as evidenced by the 2007 profit statistics which reported that Toyota had a pretax profit of $922 per vehicle while GM and a $729 loss per vehicle and Ford lost $1467 per vehicle3). “According to J.D. Power, Toyota has the three most efficient assembly plants in the world, all of which are located in Japan.”2,3 While it is possible to replicate or imitate those things that provide Toyota’s competitive advantage none of the large automotive manufacturers has been able to do it successfully.
Although the other automobile manufacturers have significantly reduced the time, and consequently the cost, required to build a vehicle and have also improved the overall quality of their vehicles they still lag behind Toyota.
Bibliography: 1: The Machines that Changed the World J.P. Womack, D.T. Jones, and D. Roos New York, Macmillan, 1990 Fig 4.2, p.83
2: Toyota in 2009: The Origin and Evolution of the World’s Leading Automobile Manufacturer by: Professor Charles Hill, Foster School of Business, University of Washington, May 2009 p15-16
3: Oliver Wyman’s Harbour Report, Oliver Wyman, June 2008