Over the last 30 years, Toyota Motor Corporation has become one of the top three global car companies, alongside General Motors (US) and Ford (US). Its rise centres on twin strategies related to operations and marketing. This case study concentrates mainly on its operations successes but also touches briefly on marketing, since the two areas are interlinked. The Toyota operations strategies have been copied around the world, though rarely with the same success. Background
In the year to end-June 2004, Toyota produced and sold over 6.5 million vehicles around the world. The company had only started car production in the 1930s. Even in the early 1950s, it was still only averaging 18,000 vehicles per annum. The increase in production and sales between 1950 and 2004 was, by any standards, remarkable – Figure 9.4 shows the recent data for 2004.
Toyota’s strategic problem was that it was a tiny company competing against large competitors. The only way that it could survive was by finding new, flexible production methods that could be used by smaller companies. ‘The Toyota Production System originated as a means of achieving mass production efficiencies with small production volumes’ (Toyota Annual Report and Accounts 1998). Importantly, even in 2004, the major Toyota production location was Japan – from a strategy perspective, this raises important questions about how long its Japanese factories can remain low-cost centres of production.
Many of the production successes between 1950 and 1980 have been accredited to the Toyota Production System and its chief engineer during that time, Taiichi Ohno. He started experimenting to improve production in the late 1940s, but it took many years to develop the systems described below, such as kaizen and kanban, and to have them widely adopted across the company.
Even in the 1990s, experimentation and change were still taking place to improve production. Indeed, such change was by definition an integral part of the process of achieving production improvements: it was called ‘continual improvement’ or kaizen in Japanese. During the same period of time, Toyota operated a separate marketing company that essentially sold Toyota production. It was headed by Shotaro Kimaya, who had trained in US marketing methods after the Second World War.
He is credited with many marketing innovations in the company during the 1960s and 1970s. They slowly propelled Toyota to market leadership in Japan, with over 40 per cent of the market. Among other initiatives, he set up dealer networks, cheap car finance for customers and a strong, dedicated sales-force. He also developed Toyota exports so that by the 1970s around 40 per cent of all production was being sold outside Japan, especially in the US. Toyota’s Camry model is today the biggest single-selling car in the US.
Operations initiatives at Toyota between 1950 and 1980During this period, Toyota introduced a whole series of operations initiatives that assisted car and truck production – essentially a repetitive, mass-manufacturing process. The new procedures were designed to achieve three main objectives:
1 to reduce costs;2 to increase quality;3 to control the production process more tightly, thus reducing the inputs needed and making the company more responsive to market demand.
The first two objectives had an immediate impact on added value in the plant; the last had an indirect influence on added value. To achieve these objectives, Toyota had a number of key operations strategies: ● Design. More costs can be taken out at the design phase of operations than at any other stage. For example, Toyota has consistently used research and development to undertake such tasks as combining components so that they can be produced by one process rather than two. ● Kaizen. This means ‘continuous improvement’ across every aspect of production. Toyota’s engineers invented this approach to operations strategy. It is reflected in Toyota’s attention to detail,which is legendary. The result of one stage in kaizen is shown in Figure 9.5.
● Kanban system. This was originally a system of coloured cards on the factory floor that were associated with the amount of stock available for production. These were used to signal when stock needed to be replenished and provided a simple but extremely effective visual system, both to tell operatives when to reorder and to keep stocks controlled and low up to that time. ● Layout.
Instead of long, linear layouts for production lines, cellular layout arrangements of plant machinery were designed. They allowed workers to operate a number of machines and allowed them to work in teams to provide support and back-up more effectively.
The teams had to be flexible in their willingness to operate any machinery in the layout and needed to be highly trained to complete the varied range of tasks. Some other Japanese companies, such as Nissan, have had difficulty in achieving the same results, probably because of the sophistication needed to operate this system. ● Supplier relationships. Close co-operation was obtained and maintained with a small group of leading suppliers to Toyota.
It was used to work jointly on cost reduction schemes and seek higher quality from bought-in components. This was particularly important in the value-added process at Toyota because the company had a higher proportion of bought-in items from suppliers than its main international rivals. This arrangement applied to other companies in Japan but was extended when Toyota opened its plants overseas – for example, in 1993 at Burnasten in the UK. ●Just-in-time systems.
Toyota pioneered the arrival of stock from suppliers using methods which involve close contacts with suppliers. When stocks in the factory run low, they are replaced by stocks from suppliers very rapidly, using computer linkages and daily or even more frequent deliveries – just in time for production. The clear advantage to companies such as Toyota is that their capital investment in stock is permanently kept lower than otherwise.
The company is not unique in the use of such systems. Each of these developments was equally important at Toyota. All contributed to the general improvement in the production efficiency of the company. By the early 1980s, the Toyota Production System was being described and recommended for introduction into Western companies. Japanese rivals such as Nissan and Honda also attempted to introduce the same or similar schemes. During the 1990s, the Toyota plant at Takaoda was compared as a model of production with the worst North American plant. Toyota was used as a pointer to the changes required in the US.
However, there are cultural and industry structure problems that make complete adoption of the Toyota system difficult: for example, team working and flexibility may be closer to the Japanese model of society than to Western cultures. Toyota itself saw the techniques it had developed as being a set of evolving production strategies with no single ideal solution: kaizen meant what it said.
Production at Toyota into the new millenniumOver the last ten years, Toyota experienced real problems in the macroeconomic environment. They were:
● Downturn in worldwide demand for cars, including for the first time ever a drop in demand in its key Japanese home market;
● Significant rise in the value of the Japanese yen, making exports from Japan more expensive.
These developments prompted a major reappraisal of its production methods at the company and a redoubling of efforts to achieve new, lower costs. All Japanese car manufacturers, including Toyota, were forced to shift in a major way the focus of their operations strategy from rapid model changes to cost reductions. Toyota responded to the pressures by setting up a major cost reduction program. By 1994, the company was claiming that it had found savings at an annual rate of US$1.5 billion. But it was still not satisfied. By 2004, this had risen to US$ 2.1 billion.
Two recent examples of Toyota’s production strategy:
● In 2001, Toyota announced a totally new program called ‘Construction of Cost Competitiveness for the 21st Century’ or CCC21, for short. The relentless drive for improvement would be renewed. The company was looking again at every aspect of design, manufacturing, procurement and fixed costs.
This was expected to lead to better utilisation rates for manufacturing equipment and less ‘expenditure on human resources’. But this will not necessarily mean sacking workers, which is against the Toyota tradition. It may mean that some of the workers on temporary contracts will not have their contracts renewed, but the company was keen to avoid even this, if possible.
● In 2004, Toyota began its new UMR (Unit & Material Manufacturing Reform) Strategy. ‘This project sets and innovates toward production engineering targets on a different order of magnitude from anything tried before,’ claimed Toyota.
The company gave the example of the simplification of the moulds used in manufacturing car parts. All car production is centred on moulding – diecasting moulds, forging moulds, plastic injection moulds, etc. If it is possible to simplify moulding techniques, then it is possible to simply the entire production process. Toyota was able to re-engineer its moulding techniques so that moulds were reduced to between one-third and onetenth their former sizes. UMR was also used to shorten the machining and assembly lines for some of the Toyota engines. UMR also had benefits for overseas plants.
‘Through UMR, we are creating a production system for overseas plants that overcomes differences in experience, location and language and enables highly efficient production of in-house components of the same quality the world over. By implementing the UMR initiative, we aim to strengthen our global competitiveness.’ Some would question how Toyota could have been so efficient during the 1990s if it was still able to generate such massive savings in recent years.
Toyota has always had problems transferring its production system beyond its factories to other areas of the value chain. It had some success with its immediate suppliers but struggled both with raw material suppliers and with the marketing/selling end of the value chain.
These difficulties were then compounded as the Toyota Production System was subjected to the pressures of worldwide demand, the implications for production at its factories and a slump in Japanese domestic demand in the late 1990s. Nevertheless, personal and team motivation remain an important part of the Toyota system.
Toyota’s global vision on production and vehicle development According to the 2010 Global Vision Toyota document released in April 2002, the company aimed to increase its production by 50 per cent over the next nine years. It was also seeking to increase its market share by the same percentage. If it was successful, it would increase its market share from 10 to 15 per cent and would challenge General Motors for the title of the largest car company in the world. The company would seek to grow its share, particularly in North America, while retaining its dominance in Japan. It was also seeking major growth in India and China, possibly through joint ventures.
It had already entered into technical co-operation alliances with rival companies such as PSA Peugeot Citroën to produce a new small car in the Czech Republic. It had also made a similar agreement with two local car companies in China, FAW Group Corporation on cars and Guangzhou Automobiles on car engines.
In 2005, Toyota’s president became concerned that ‘the real meaning of Global Vision 2010 is often not fully understood. I originally put the 15% target forward as a common ambition that would unite employees worldwide as they pursued it and give them the impetus to win out in fiercely competitive markets. In my view, companies that lose their appetite for growth stagnate.’
One production and marketing strategy that Toyota has embraced is the development of more environmentally friendly vehicles. Its Hybrid-Vehicle Strategy over the last ten years has led to the Prius, one of the first cars to have an engine that switches between petrol and electric power depending on the road situation. In its first year 1998, the Prius sold 50,000 units. By 2004, this had risen to 300,000 units per year and sales were still growing fast.
To encourage wider use of the technology (and arguably to establish it as the industry standard), Toyota was offering its patented hybrid systems to rival car manufacturers. It claimed to be a world leader in environmental engine technology: ‘We are convinced that hybrid technology will become the core technology in the creation of the ultimate eco car.’ The one strategy that Toyota remained totally against was acquisition of a rival car company. The reason was simple: it would be impossible to introduce and gain the benefits of the Toyota Production System that was the main competitive advantage of the company.
© Copyright Richard Lynch 2006. All rights reserved. This case was written by Richard Lynch from published sources only.