Toyota 2010/Crisis at the World’s Largest Automaker

Toyota 2010/Crisis at the World’s Largest Automaker Order Description Read the Toyota case. Provide answers to the following questions. 1 page maximum (single space), A4 size, 12-point font size, 1-inch margin around. 1. What do you think were the main and most important causes of the Toyota crisis? Don’t just repeat phrases or paragraphs from the case, but think more deeply about the Question. You would need to go more deeply than just listing bullet points. 2. What should Toyota do to restore its reputation and competitive advantage? In addition to the attached file, about the Toyota case, you may find this article useful. It is a report from harmstad university or you can use any other supporting document. You don’t have to write it APA, just a question and answer. www.diva-portal.org/smash/get/diva2:349746/fulltext02 yale case 09-040 february 3, 2010 Toyota 2010 Crisis at the World’s Largest Automaker Arthur Swersey1 Andrea Nagy Smith2 Catherine Forman3 Jaan Elias4 In winter 2010, the Toyota Motor Corporation faced a crisis. Following a number of highly publicized accidents involving Toyota vehicles, the company was forced to recall millions of cars with potentially deadly defects. Toyota shut down production at several of its North American plants, halted sales of some of its most popular models, and issued a public apology. Customers fled the showrooms, and Toyota sales in the U.S. dropped 16 percent in January 2010. Additionally, the U.S. government promised to get involved as both the Obama administration and Congress threatened investigations. Observers were astonished. Toyota had built a reputation for the reliability of its automobiles. Over a period of decades, the company had pioneered lean manufacturing and a stringent quality control system that had become the envy of the world. Building on this success, in the late 1990s, Toyota’s leadership had set a goal of capturing a 15 percent share of the world auto market. From 2000 to 2005, Toyota had steadily expanded its global manufacturing capacity and had also worked to reduce costs by benchmarking to Chinese manufacturers. The strategy seemed to work. By 2005, Toyota was worth more than the Big Three American car companies put together, and The Economist called it “The Car Company in Front.”5 By 2007, Toyota achieved its goal of becoming the largest car manufacturer in the world. However, at the end of the decade, significant problems appeared. In the mid-2000s, the number of recalls on Toyota vehicles began to increase. The company’s quality rankings slipped, and in 2007 its vehicles were downgraded by Consumer Reports. By 2009, Toyota recalls affected over four million vehicles in the United States alone. In December of 2009, The Economist, the same magazine that had lauded the company just five years earlier, now declared on its cover “Toyota Slips Up.”6 Other publications followed suit with equally prominent stories about slipping quality at Toyota. The New York Times published a front page story under the headline “Toyota’s Slow Awakening to a Deadly Problem,”7 and The Wal Street Journal pronounced, “Toyota Is Unable to Hit the Brakes on Crisis.”8 During January 2010, broadcast news outlets featured nearly daily updates on Toyota’s woes. l Auto industry analysts suggested that the company’s rapid expansion had strained Toyota’s ability to control its quality. In winter 2010, the company that had become one of the great success stories of the automobile industry faced a crisis that could cost it billions of dollars and threaten its survival. Observers wondered what, if anything, the company could do to restore the quality of its products and its reputation for reliability. A Brief History of the Toyota Production System Toyota’s unique production system evolved because of the competitive disadvantages that the company faced after World War II. The Toyota Motor Corporation was founded in 1937 for the purpose of building trucks for the Japanese army. After the war, as it made the transition to commercial car production, the company faced a number of challenges. In particular, it needed to produce a wide range of vehicles in small numbers at low cost in a war-ravaged economy. But the efficiencies that drove the big American carmakers were not suitable for car production in Japan, which was a fraction of that in the United States. American methods emphasized large batches made on highly specialized machinery, but this system was not cost-effective for low-volume demand, especially in a country that had little capital for investment following the war. In the 1950s, Toyota executives, led by executive Taiichi Ohno, visited the United States and toured a Ford plant with its assembly line production. The Toyota delegation noticed that Ford produced only a few automobile models, and they also observed the large amounts of inventory in the factory and the resulting inefficiencies. While the Toyota executives were in the United States, they also visited a Piggly Wiggly grocery store, where they observed that shelves were stocked with many kinds of food and that goods were restocked only after they were sold. Inspired by the American supermarket, the president of Toyota, Kiichiro Toyoda, put in place the first Just-in-Time system, which also came to be known as the Toyota Production System (TPS). The central goal of the system was to eliminate waste by delivering materials to the point of production only when they were needed. The particular methods of the TPS practiced today are attributed largely to Taiichi Ohno. During the 1950s and 60s, Ohno developed a series of production techniques that emphasized flexible resources, with regards to both machinery and employees, and an increase in productivity through the elimination of waste. Ohno embodied the culture of change and improvement that came to distinguish the Toyota Motor Corporation. He personally mentored many of the executive leaders of Toyota, as well as hundreds of production managers and supervisors. The system developed by Ohno made Toyota viable in postwar Japan, enabling the company to produce a variety of automobile models in low volume at low cost. Eventually Ohno’s system also gave the company a way to compete with the high-volume, more mechanized systems of the US automakers. The Toyota Production System resulted in reduced lead times, lower costs, and higher quality, which over time enabled Toyota to become as profitable as all other car companies in the world combined. As Toyota gained strength, its production system became the topic of hundreds of books and articles on ways to increase efficiency in production. Most notably, in 1990 MIT professor James Womack conducted an extensive study of auto manufacturers in which he concluded that the Toyota Production System was destined to “change the world.”9 Womack coined the term “lean manufacturing” to describe the theory of the Toyota Production System, and he claimed that Toyota principles could be applied to any production process—administrative, retail, or service, as well as manufacturing. 2 toyota Pillars of the Toyota Production System The Toyota Production System is a method of organizing mass production that differs in important respects from the assembly line and the associated scientific management principles developed in the 1920s. Toyota describes its production system as a “philosophy” that aims at “the complete elimination of all waste.”10 Specifically, Toyota identifies seven types of waste, or “muda,” that creep in at all stages of the production process: 1. Over-production ahead of demand; 2. Excess motion of people or equipment more than is required for production; 3. Unnecessary waiting of people or equipment for the next production step; 4. Excess movement of products beyond what is required to perform the processing; 5. Over-processing or incorrect processing as a result of poor tool or product design; 6. Excess inventory of raw materials, work in progress, and finished products; 7. Excess rework required by the manufacture of defective products. The Toyota system attempts to expose the hidden causes of inventory-keeping and then to create a production process that minimizes waste. Every person, machine, and building should be adding value to the final product, the automobile. Two methods are recognized by the company as the “pillars” of the Toyota Production System: the Just- In-Time method of controlling the quantity and timing of production, and the Jidoka method of assuring quality. (See Exhibit 1 for a glossary of Toyota Production System vocabulary.) Just-In-Time Production Control The "Just-in-Time" manufacturing system means that Toyota makes only “what is needed, when it is needed, and in the amount needed.”11 Push versus Pull In manufacturing systems prior to TPS, production was controlled by work orders back-scheduled from a final production schedule. The amount of goods produced was based on the bill of material, the lead time required to make the components, and the cost of setting up the machinery or ordering the part. Because setup costs and scrap rates were high, managers scheduled long production runs to offset these expenses. In order to accommodate these production runs, work orders were scheduled far in advance of needs. Work was “pushed” onto the shop floor from an overall manufacturing plan. The layouts of plants were of two types: a final assembly line where the product moved at a steady rate down a conveyor with carefully timed work at each station, and back shops where the component parts were made in large batches and stored in cribs for use on the assembly line. In the back shops, parts traveled back and forth across the plant between operations and often waited in front of each operation. Large batch sizes meant that a work order took a long time to complete at each operation. Assigning work to machines and employees was handled by a supervisor and directed by production control expediters. 3 toyota Taiichi Ohno reasoned that much of the waste in such a system could be addressed by pulling material through production instead of pushing it. Production would be initiated by a signal from the following operation, not by a work order generated in advance from a production plan. By producing only what was needed, the excess work-in-process inventory of parts would be greatly reduced. In traditional “push” systems, the manufacturer produces goods and then tries to find buyers, but in the Toyota system all production is linked to demand. Kanban During the 1950s Ohno devised a technique called “kanban” to implement the just-in-time system. In the kanban method, parts for many models are available at each station. When a part is used to build a subassembly, the preceding station (the station that produced that part) is signaled to make another. Each operation produces only to replenish what is used up by the following operation. There are many ways to signal the need for replenishment, the most common being kanban cards. In Japanese, “kanban” means “sign-board.” These cards are marked with codes indicating the type of part, the location where it is used, and the supplier that provided it. When a part is used, a card is sent to an internal or external supplier requesting a re-supply. A withdrawal kanban card is used to get material from a storage area, and a production kanban card is then sent to the work station to produce more material. Other methods for signaling the need for replacement are lighted boards or empty shelf space. Kanbans enable a steady flow of material through the system, by sending a signal at the precise moment when more materials are needed. Kanbans also can signal a change in the mix of parts needed depending on final demand. As the model mix on the final assembly line changes, the replenishment kanbans change. What to produce and in what quantity is signaled by the following operation all the way from final assembly through the back shops to suppliers. Production is pulled from final assembly. One-Piece Flow The ideal pull-based system would consist of a one-piece flow of materials through the production line, with no excess inventory. The technique of kanban does not in itself eliminate excess inventory. The quantity on the kanban card tells the station how many to produce, but this quantity may be fairly high. In addition, there may be several kanban containers of parts at an operation. In order to reduce inventory, the number of containers and the quantity on a kanban card must be reduced to as close to one as possible. Interconnected Techniques In order to make the number of kanbans small, Toyota developed a set of interconnected techniques. When material is pulled through the production system, and when the batch size is close to one, there is no room for error in quality, quantity, or timing. Supporting operations must be closely synchronized. It is said that inventory is like water that “hides the rocks.” As Ohno reduced the quantity on kanbans and reduced the number of kanbans, “rocks,” or other sources of waste in the system, were revealed. As a result, other methods for reducing waste had to be put into place. These elements are interconnected and cannot be implemented effectively without putting all of them into place. Reduced Setup Time In order to decrease the quantity on a kanban card, which makes small lot production economically feasible and allows flexibility in manufacturing different variations of the final part, machine setup costs must be reduced. All machined parts require specific tooling: a drill bit size, a stamping mold, a grinding wheel, and a computer program. Every time a different part is created, the tooling must be changed, and 4 toyota this requires machine changeover time or setup time. The longer this process takes, the more expensive small batch sizes become. One of Ohno’s colleagues, Shigeo Shingo, developed what is called Single-Minute Exchange of Die, or SMED, in which changeovers are targeted to be done in less than ten minutes. In order to reach this goal, the operator prepares for the changeover while the machine is running; these are known as external setup tasks. Then the worker uses various devices to minimize the time needed to switch tools while the machine is stopped; these are known as internal tasks. Setups are practiced and analyzed many times to refine the changeover tasks and improve the process. Takt Time If material is being pulled to support the final assembly schedule, it must be produced at the same rate as that schedule. Each station must manufacture the requisite number of parts in the requisite amount of time. This is accomplished by determining the required cycle time for the final product from final demand, and then calculating the cycle time for each supporting activity from final assembly cycle time. This cycle time is called takt time, the German word for beat. It is the beat of the plant. Takt time varies, depending on demand. Every 10 days Toyota dealers provide the factory with details about orders, and based on that information, the factory makes a production plan. The plan can be adjusted up to three days before the car is manufactured. Takt time for a production facility is calculated by dividing the number of minutes in a day by the production requirements for a day at each operation. The beat of the final assembly drives the beat of all supporting activities. For example, if one car is produced every minute, then four tires, one steering wheel, two front seats, one transmission, four pistons, etc., must be produced every minute. This means that tires must be produced one every 15 seconds. Adhering to takt time results in an even flow of production. As The Economist described the process, “Everything is minutely synchronized; the work goes at the same steady cadence of one car a minute rolling off the final assembly line. Each operation along the way takes that time. No one rushes….”12 Mixed-Model Assembly Schedule In order to maintain steady production in the stations that support final assembly, the model sequence must be mixed. If all cars with sunroofs were produced only one day out of the week, the supplier that fabricates sunroofs would either have to produce inventory in advance of the schedule or be idle most of the week. A mixed-model final assembly schedule smoothes production in the back shops and allows kanban to remain small. This practice of evening out the production flow is known as “heijunka.” A beneficial byproduct of heijunka is that the manufacturer can quickly respond to changing demand. It is not necessary to wait for “sunroof day” to make a car with a sunroof; instead, the mix of cars can be adjusted each day. Multi-Skilled Employees In order to produce multiple models with the same resources, machines must be generic and flexible, and employees must be multi-skilled. Toyota does not use specialized machines or groups of machines that can make only one kind of part. Instead they use flexible equipment that can produce multiple parts, and they train employees to operate multiple types of machines. This means that employees are seldom idle: if there is a decline in demand for one type of task, they turn their attention to another task. 5 toyota Cells and U-Shaped Layout The Toyota system attempts to avoid the waste of traditional manufacturing that operates in a process or department layout. In this system, workers perform an operation on a product in large batches, before sending the product on to the next department. The result is large inventories and long throughput times. In this system, all machines of the same type are grouped together in one department. In the Toyota system, consecutive operations on a part (both workers and machines) are located as close to each other as possible in a manufacturing cell. As soon as one operation is completed, the product is passed on to the next operation. Toyota found that the best way to do this was to place machines in a U shape so that the cross-trained workers can move from one machine to another to reduce idle time. This cell layout is referred to as a product layout, because a particular cell would produce parts in one product family. In contrast to a department layout, a cell would have different types of machines placed side by side. In a process layout (separate departments) producing in large batches, there is a great deal of indirect labor that comes from material handling to move parts from one department to the next. A batch of (say) 100 parts does not move to the next process until all 100 parts are completed; in other words, all of the parts in the batch wait until the last one is finished. In contrast, with a product layout and small lot production, parts move from operation to operation quickly, thus reducing throughput time and work-inprocess inventory. In addition, quality improves because a worker can inspect a part coming from the previous operation, and there is more of a sense of teamwork. Standard Work In order to make sure every activity meets takt, work methods must be standardized. Employees list the tasks required to make each part, measure the minimum time required for production, agree on the best methods, and post standard work sheets that describe and sequence the tasks. When demand changes, takt changes, and so do the standard work sheets. Workplace Organization The workplace must be organized so that everything needed is accessible. This enables the factory to reduce setup time and meet takt time. Toyota developed a system called 5S—sort, straighten, shine, standardize, sustain–that organizes the workplace and reduces wasted movement. First, everything in the area—tools, material, instructions, reports, personal items—is sorted, and only those items needed for production are stored in the work area. Then items are placed where they can be accessed easily during work, and the locations are labeled. When not in use, items are put back in storage. Everything has a place, and everything is in its place. The work area is kept clean at all times. As a result, it is easier for employees to notice problems, such as oil on the floor by a machine. Usually employees are given time at the end of the day to clean up. Finally, the rules and procedures are agreed upon by all employees in the area (“standardize”), and all employees participate in finding ways to improve the area (“sustain”). Total Productive Maintenance Because each stage of the production system is linked together with little inventory between stages, machines cannot break down during production hours. Operators do preventive maintenance on their machines at regular intervals during the work week. Tasks are posted and checked off when accomplished. Periodic overhauls by maintenance personnel are done on off shifts according to a lifetime maintenance plan for the machine. This is called total productive maintenance. 6 toyota Jidoka The second pillar of the Toyota Production System is jidoka, which involves the automatic detection of defects. The concept originated with a loom invented by Sakichi Toyoda. The loom stopped automatically whenever it detected a broken thread. By employing machines that automatically detect defects and stop operating, jidoka frees operators from watching machines, enabling them to do more productive work. Over the years, Toyota developed a number of techniques for putting this quality system into practice. Andon Boards Employees are given the power to stop the assembly line in order to call attention to a defect. They pull a cord or touch a switch, and a signal is given to the team leader, usually a light on a board called an “andon.” The team leader comes immediately and tries to fix the problem before the end of the workstation’s takt time. If the problem cannot be fixed in time, the line stops until the problem is resolved. Employees are expected to call for help if they have not completed the required tasks by the middle of their takt time, even if there is no defect. The team leader prevents future incidents by either training the employee in the proper standard work, or changing the tasks to make it possible to complete them within takt time. Improvement Cycle When a defect is discovered, Toyota employees engage in a process called “the five whys,” asking why the defect occurred, and then why the problem that caused the defect occurred, all the way back to the source of the problem. This method of discovering and fixing defects is called the daily improvement cycle. Poka-Yoke Poka-yoke devices are devised to foolproof a process, thereby preventing defects from occurring. Pokayoke devices prevent employees from incorrectly assembling a part, packing a part, painting a part, etc. Often these inexpensive devices involve a change in the design of the part. For example, one manufacturing plant found that a car radio circuit board could easily be mounted upside-down, because the circuit board was symmetrical. The solution was to make the circuit board asymmetrical by cutting a notch on one side. After the improvement, the circuit board could not be mounted upside-down, because it would fit into the frame in only one configuration. As a result of this small mechanical adjustment, the quality defect was eliminated. Kaizen Toyota’s system of quality control and production control depends on active employee involvement. Integral to TPS is the principle of “kaizen,” or continuous improvement, in which workers continually think of small ways in which to improve the quality and efficiency of their tasks. Toyota asks all employees to participate in the “daily improvements” of poka-yoke, work area quality circles, and project teamwork. Employee suggestions are taken seriously and a high percentage of them are implemented. For example, during the 2009 financial crisis at Toyota, an executive vice president said that the company received 30,000 cost-saving proposals from employees, suppliers, and other partners. 13 Toyota has a policy of “stable employment that avoids simple layoffs and terminations,” because it is committed to encouraging the development of employee skills and creativity.14 Layoffs disrupt labor- 7 toyota management relations and hinder that development. In the company’s current code of conduct, employees are expressly asked to participate in improving the company in return for stable employment. This philosophy of employee involvement and continuous improvement began with the first presidents of the company. In 1935, Toyota executives published the teachings of Toyota founder Sakichi Toyoda as the Toyoda Precepts, one of which urged each employee to pursue continuous improvement. Supplier Networks An essential part of Toyota’s quality control was to integrate its operations with those of its suppliers. Toyota found that in order for the just-in-time pull system to function, its suppliers had to follow all of the requirements of the Toyota Production System. Not only the machines but also the parts had to be defect-free, because in a just-in-time system, a defective part will stop the flow of production. During the time that Toyota was developing the elements of its own production system, it was also developing a new method of relating to its supply base. The company selected the best suppliers and developed close, long-term relations with them. In exchange, it exacted a high standard of quality. The supplier was required to operate with defect-free quality, mixed-model production, on-time delivery with the right part in the right quantity, and short lead times. As a visitor to Toyota’s Kyusha plant in Japan explained, Toyota produces only what is ordered. Dealers have to make a unit commitment 30 days in advance of the production month, then lock in their specific orders five days in advance. At that time, specific requirements are transmitted to Toyota's suppliers, and they then have a three-day lead time to sequence the parts required for each vehicle, which are then delivered in hourly increments straight to the production floor.15 Toyota’s supply system requires reciprocal obligations: Toyota commits to long-term contracts with a supplier and provides training and resources for improvement. The supplier is then expected to adopt the Toyota Production System, including a commitment to continuous improvement in quality and reductions in cost. Toyota shares production data with the supplier for planning purposes, and in return the supplier opens its books to Toyota. The automaker collaborates with suppliers in the design of parts and provides resources for them to design improvements in their own parts. In order to support the just-in-time delivery of product and the mixing of models on a daily basis, suppliers must be in close proximity to assembly plants. These relationships are not built easily, since the most important characteristic of a supplier is that it is able to provide consistent on-time delivery and defect-free quality. This requires training and many times an overhaul of the company’s production systems. Toyota’s training institute was created as much to train suppliers as Toyota employees. Success, Then Growth, Then Crisis Over time, as Toyota implemented its production system, it gained a reputation for producing high quality cars at low cost. As a result, during the 1970s and 1980s, it was able to expand its overseas sales and production. In 1980 Toyota had 11 factories in nine countries, but the bulk of its production was domestic. By 1990 it had 20 factories in 14 countries. (See Exhibits 2 and 3 for a chart of production facilities by country.) 8 toyota Global Vision 2010 In 2000, Toyota reached a ten percent market share in global auto sales, placing it fourth among the world’s car companies. The company decided to commit to a set of goals, among which was a target of 15 percent market share by 2010. Observers noted that by setting this goal, the company was committing itself to a far higher rate of growth than it was accustomed to sustaining. One analyst figured that Toyota needed to grow at a compound annual growth rate of seven percent per year for 10 years, in contrast to its four percent CAGR over the previous decade.16 From 2000 to 2005, Toyota opened 11 new plants in seven countries: the United States, Mexico, the Czech Republic, Poland, France, Russia, and China. By 2005 Toyota had 46 factories in 26 countries, and more than half of its production was outside Japan. By 2007 two-thirds of its workers were employed outside Japan. Along with opening new manufacturing plants, Toyota increased its proportion of outsourcing until in the mid-2000s it was sourcing between 70 and 80 percent of the cost of the automobile from suppliers.17 Toyota built networks of suppliers around plants in all 26 of the countries where assembly plants were located. As Toyota president Fujio Cho explained in 2008, “At Toyota, 'global' means localizing production in principal markets.”18 In addition to increasing sales, Toyota global vision strategy committed the company to a cost-cutting campaign called “construction of cost competitiveness for the 21st century” or CCC21. The company aimed to cut supplier costs by 30 percent and to benchmark those costs to Chinese parts-makers.19 Toyota hoped to realize these savings by working closely with suppliers. By 2004, auto analysts were reporting that the company appeared to be reaching many of its goals. The company’s growth in production capacity led to an equally impressive growth in sales. In April 2007, Toyota announced that its first-quarter sales had surpassed those of General Motors, a development that The New York Times saw as inevitable: “Toyota’s ascendancy, which many in the industry have predicted for some time, is another milestone in America’s long decline from unchallenged industrial preeminence.”20 Indeed, in 2008 Toyota’s yearly sales topped those of GM, and Toyota became the largest automobile maker in the world. Market share by 2008 was just below the 15 percent goal. Quality Problems However, at the same time as it was reaching its Global Vision 2010 goals, the quality of Toyota’s major models unexpectedly began to slip. Before 2006, the three top-selling Toyota models—the Camry, the Corolla, and the Rav4—were regular winners of overall quality and dependability awards. But from 2006 through 2009, those models, which comprised over 40 percent of unit sales, did not win any quality awards from J. D. Powers in North America or in Germany. The Lexus division luxury models won multiple awards in those years, but they comprised only 13 percent of unit sales. Toyota’s recalls began to rise, exceeding those of its competitors Honda and Nissan. (See Exhibit 4 for details.) In October 2007, as a result of the decline of quality on three models, Consumer Reports stopped its practice of automatically recommending all Toyotas. Even worse, an increasing number of recalls put Toyota quality further in the spotlight. Some of the vehicle problems resulted in driver deaths: most notably, in August 2009, a state trooper and his family were killed in an accident in San Diego when the accelerator stuck on their Lexus. The National Highway Traffic Safety Administration said that it had received reports of over 100 incidents in which accelerators had been stuck, and the Los Angeles Times claimed that 1000 complaints about the same problem could be documented. In 2009 Toyota was forced to recall four million cars with accelerator problems in the United States. 9 toyota Toyota vehicles manifested other safety problems, as well, including tire corrosion, engine stalling, exhaust system defects, and faulty steering rods, all of which caused the recall of several million vehicles in the United States from 2004 to 2009. In 2007 the company settled one lawsuit from customers complaining about oil sludge in car engines, and it was the subject of another lawsuit alleging that it had covered up defects at its Nummi California plant. Overall in the United States, the number of Toyota vehicles affected by recalls began to skyrocket. In 2000 there were about 8,000 Toyota vehicles recalled; in 2003 there were 200,000 recalled; and in 2005 there were 2.3 million vehicles recalled. In Japan, as well, the company began to struggle, with its share of recalls rising from 1.4 percent in 2001 to 34 percent in 2005.21 Financial Difficulties At the same time as it was struggling with quality problems, the company began to suffer financially. In 2008, for the first time since 1939, Toyota reported an operating loss. The worldwide recession was an obvious source of declining sales figures. A related problem was a strong yen, which reduced earnings on exports. Early in 2009, Wharton professor John Paul MacDuffie said, “The yen is a big headache for the Japanese right now. Added to everything else, it's a tremendous burden. It's one thing to deal with a dramatic shift in exchange rates that made products more expensive for consumers in good times; now it means you have to persuade people to pay more when they are still not buying cars. If you take drastic declines in demand and add on the strong yen, which makes their cars much more expensive, it's a very tough challenge."22 Global Vision 2010 Abandoned Reluctant to shut down facilities, Toyota instituted other cost cutting measures. In mid-2009, the company announced that it would close its joint venture with GM in California. Toyota also said that it would postpone the opening of a plant in Mississippi, and would shut down other manufacturing lines in North America. Most significantly, it announced that it would no longer pursue its goal of 15 percent global market share by 2010. Quality and the Workforce The overarching problem, as many saw it, was that in its drive to expand, Toyota had neglected its commitment to quality. As one analyst put it, “At some point, Toyota became a victim of its own success. The company’s double quick expansion, from perennial underdog to voracious overlord, has compromised their unique selling point: product quality.”23 Toyota CEO Fujio Cho had acknowledged in 2005 that such fast growth would bring challenges. According to The Economist , He sees his greatest challenge as maintaining Toyota’s high standards in such areas as quality while it grows so fast across the globe. For Toyota has only recently started to transform the way it is run to make itself a truly global company rather than a big exporter with a string of overseas plants. 24 Many believed that the transformation to a “truly global company” had not come soon enough. 10 toyota Challenges in Translating the Toyota Way One particularly difficult problem that Toyota faced in its global expansion was training managers in the Toyota Production System. From its inception, Toyota had taught both factory workers and managers its Just-in-Time and Jidoka techniques through apprenticeship. There was no manual; rather, training took place on the shop floor through practical experience in making improvements. Ohno mentored hundreds of Toyota managers, and they in turn mentored others. As Ohno envisaged the system, it was not a set of techniques that could be enumerated in a book and then applied in any setting. In 1983 he wrote, Since the Toyota production system has been created from actual practices in the factories of Toyota, it has a strong feature of emphasizing practical effects, and actual practice and implementation over theoretical analysis.25 When Toyota first began to open manufacturing plants outside Japan, skeptics wondered whether the company’s unique production system could be taught to foreigners. Some observers suggested that the system was so interconnected with Japanese culture that it could not be applied in other settings, especially in western countries. However, during the 1980s, Toyota had successfully translated its principles to far flung plants outside Japan. For example, beginning in 1988 Toyota had opened an assembly plant in Georgetown, Kentucky, and had painstakingly trained American workers, managers, and suppliers in the Toyota system. In the late 1990s, as Toyota was formulating its Global Vision 2010, it seemed as though the company had proved that its principles that could be applied anywhere in the world. However, the rapid expansion of the early 2000s strained the company’s ability to transmit its production methods through mentoring alone. In 2001, in an attempt to explain its system to new managers, the company began to produce documentation and training courses. The company codified its philosophy as the “Toyota Way,” and it established the Toyota Institute to train foreign managers in the essentials. But even with formal courses, the Toyota system did not come naturally to new managers. According to one analyst, Like a religion, converting to TPS takes time (about two years or more), an organizational commitment to cultural change, and the acceptance of new values by everyone--especially management. In return the process optimization that TPS makes possible can lead to huge paybacks in inventory reduction, increased product quality, and a relentless elimination of any waste that hinders efficiency. If not a religion, TPS is at the very least a rigorous philosophical approach to organized activity….26 As one American manager new to the company put it, the Toyota Way was “a shock to the system.”27 Workforce In addition to the difficulty of training foreign managers and workers, observers also pointed to a lack of sufficient manpower at all levels of the company. One source of this problem was the retirement of experienced people. According to an industry analyst, In a number of facilities, older workers with extensive knowledge of their plants and processes are retiring, leaving their jobs to workers who are not as yet in step with their work. As a result, Toyota, which built market share on a reputation for top-quality products, has experienced recalls and quality problems ….28 11 toyota As experienced employees retired, Toyota did not necessarily replace them. Instead, the company had hired temporary and part-time workers and had pushed its existing staff to work ever longer hours. According to a 2006 article in the Japanese magazine Weekly Toyo Kezai, Toyota’s productivity in Japan had increased significantly between 1998 and 2005, from 47.8 cars per employee to 58.7. (See Exhibit 5 for details.) The results were not necessarily good, said the authors: “the consequence is extreme fatigue, with engineers working in the field inevitably having quality problems.”29 Others wondered if quality problems could be traced to a generational shift in the workforce. Observers noted that in Japan a workforce that had proudly dressed in Toyota uniforms and joyously engaged in performances of the company song was being replaced by younger workers with individualistic attitudes who wore t-shirts and baseball caps. One visiting production expert referred to it as the “Americanization” of the Toyota workplace. Suppliers Putting together supplier networks at the same time the company was trying to force down costs was also creating problems. Because of a shortage of engineers experienced in CAD (computer-aided design), Toyota had outsourced some design and engineering work to its suppliers. However, it was becoming clear that these suppliers were not being given proper oversight: The shortage of in-house talent has forced Toyota to outsource, relying on its parts suppliers to design key components. At the same time, the automaker has increased the amount of parts sharing among different models. The practice has dramatically increased the scope of a "single" failure, as witnessed by last October's recall of 1.27m Japanese vehicles. Goldman Sachs estimates that design faults (e.g. rubber parts not thick enough to withstand engine heat and joints too weak to hold together) account for 68% of Toyota’s 2004 recalls.30 Suppliers were also being called on to train shop floor workers in Toyota’s new plants. According to The Wall Street Journal, As it races to add new factories in North America and around the world while trying to maintain quality, Toyota Motor Corp. is bringing in outside help to run its much-studied and much-copied “lean manufacturing” system. For as long as Toyota has existed, the company has relied mainly on its own highly-trained workers for manufacturing expertise to ensure that all Toyota plants conform to the rigorous Toyota Production System…. But now, the world’s second-biggest producer of automobiles after General Motors Corp. is scrambling to find enough in-house Toyota Production System experts. In a significant shift, Toyota is turning to affiliated assemblyspecialist companies to cope with the challenges of its ambitious plan to grab 15 percent of the world auto market—about as much as GM has today—by 2010. Chief among those challenges: a shortage of quality gurus. There are signs the company’s torrid growth agenda is straining Toyota’s human and technical resources and allowing competitors to catch up with it on quality, one of Toyota’s most critical strategic selling points.31 Cost Cutting One of the largest problems, according to observers, was that Toyota’s ambitions to save money were taking a toll. According to one analyst, Toyota’s “constant focus on cost cutting has created devastating production glitches” 32 As a result of this change, it appeared that some key principles of the Toyota Production System were being ignored. In 2007 Koki Konishi, the head of the Toyota Institute, told The New York Times that he was concerned that some managers were not allowing workers to stop the assembly line when they spotted a defect.33 The focus was shifting to speed and immediate cost savings. 12 toyota The Crisis Deepens On October 2, 2009, Toyota president Akio Toyoda made a public apology for Toyota vehicle defects that had led to a fatal crash in San Diego.34 Besides apologizing, Toyoda outlined a strategy for the company: In his first press conference since taking the job, Mr. Toyoda painted the company as having overextended itself in an effort to make big cars and big profits in the American market. He promised to take a 30-per-cent pay cut himself, and offered a back-to-basics strategy that would see the company develop new and separate strategies for each of the regions it is targeting: North America, Europe and Japan, as well as emerging markets like China and India.35 However, in the succeeding months, the crisis only deepened. The recalls multiplied, involving more and vehicles across an increasing number of models. The U.S. Congress promised an investigation, and the U.S. Transportation Secretary requested a direct meeting with Toyota’s CEO. In early 2010, recalls began to affect cars Japan and Europe, as well. By late 2009 Toyota had suffered greater financial losses than its competitors Honda and Nissan, and the worst was yet to come. The Wall Street Journal reported, The immediate impact of Toyota Motor Corp.'s recalls and sales stoppages is estimated to cost the company around $1 billion, but the longer-term damage to the auto maker's hitherto impeccable brand is set to be much larger….36 Toyoda and other executives faced a crisis that the company had not seen since it first entered the consumer automobile business after World War II. The company had built a production system that was proved superior to American manufacturing methods and was said to have transformed industry throughout the world. But somehow, in the process of that transformation, the company had forgotten the basics. As The New York Times reported, Toyota had neglected a key Jidoka technique: In Toyota lore, the ultimate symbol of the company’s attention to detail is the “andon cord,” a rope that workers on the assembly line can pull if something is wrong, immediately shutting down the entire line. The point is to fix a small problem before it becomes a larger one. But in the broadest sense, Toyota itself failed to pull the andon cord on this issue….37 As Toyota’s managers coped with the immediate crisis, others wonder how the company could restore the quality of its products and its reputation for reliability. The assistance of Saburo Yoshida with Japanese translations is gratefully acknowledged. This case has been developed from published sources for pedagogical purposes. The case is not intended to furnish primary data, serve as an endorsement of the organization in question, or illustrate either effective or ineffective management techniques or strategies. Copyright © 2010 Yale University. All rights reserved. To order copies of this material or to receive permission to reprint any or all of this document, please contact Case Study Research and Development Yale School of Management, 135 Prospect Street, New Haven, CT 06520, or email at [email protected]. 13 toyota Endnotes i 1 Professor of Operations Research, Yale School of Management. 2 Project Editor, Case Study Research and Development, Yale School of Management. 3 Adjunct Professor of Management, Southern Connecticut State University. 4 Director, Case Study Research and Development, Yale School of Management. 5 “The Car Company in Front,” The Economist (Jan. 27, 2005). 6 “Toyota Slips Up: What the World’s Biggest Car Maker Can Learn from Other Corporate Turnarounds,” The Economist (Dec. 10, 2009). 7 The New York Times, Feb. 1, 2010. 8 The Wall Street Journal, Jan. 29, 2010. 9 James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine that Changed the World (1990; New York: Free Press, 2007). 10 Toyota company website, http://www2.toyota.co.jp/en/vision/production_system/origin.html 11 Toyota company website, http://www2.toyota.co.jp/en/vision/production_system/just.html 12 “The Car Company in Front,” The Economist (Jan. 27, 2005). 13 Automotive News, Nov 9, 2009. 14 Toyota company website, http://www.toyota.co.jp/en/environmental_rep/03/jyugyoin.html 15 Kevin Meyer , “Toyota’s Kyusha – Manufacturing Ballet,” www.superfactory.com 16 Bob Emiliani, “Toyota’s Denouement,” Superfactory: Resources for Lean Manufacturing, www.superfactory.com, September 2009. 17 J.K. and T.Y. Choi, “Building Deep Supplier Relationships,” Harvard Bus ness Review 83 (December 2004), pp. 104-113. 18 “The Toyota Sequoia,” Toyoland, http://www.toyoland.com/trucks/sequoia.html. 19 “A China Price for Toyota,” Business Week (Feb. 21, 2005). http://www.businessweek.com/magazine/content/05_08/b3921062.htm 20 Keith Bradsher, “Toyota Tops G.M. in Sales for First Time,” The New York Times (April 24, 2007). http://www.nytimes.com/2007/04/24/business/24cnd-auto.html?_r=3 21 Jan Miller, “When Did Toyota Get to Be a Company Like This?” Panta Rei blog, August 2, 2006. 22 “Biggest by Default: Toyota May Be Number One, but It Still Faces Challenges,” Knowledge @ Wharton (Feb. 24, 2009). http://knowledge.wharton.upenn.edu/article.cfm?articleid=2155 23 Frank Williams, “Toyota: [Falling] Quality Is Job One,” The Truth about Cars (Aug. 18, 2006). http://www.thetruthaboutcars.com/toyota-falling-quality-is-job-one/ 24 “The Car Company in Front,” The Economist (Jan. 27, 2005). 25 Taichi Ohno, Foreword to Yasuhiro Monden, Toyota Production System (Georgia: Industrial Engineering and Management Press, 1983), p. i. 26 John Teresko, “Toyota’s New Challenge,” Industry Week (Jan. 15, 2001), p. 71. 27 Martin Fackler, “The ‘Toyota Way’ Is Translated for a New Generation of Foreign Managers,” The New York Times (Feb. 15, 2007). 14 toyota 28 “Biggest by Default: Toyota May Be Number One, but It Still Faces Challenges,” Knowledge @ Wharton (Feb. 24, 2009). http://knowledge.wharton.upenn.edu/article.cfm?articleid=2155 29 Takahiro Hasegawa, Akihiro Nomura, and Keiji Umesaki, “Toyota,” Weekly Toyo Keizai (July 29, 2006), pp. 28- 37. Translation by Saburo Yoshida. 30 Frank Williams, “Toyota: [Falling] Quality Is Job One,” The Truth about Cars (Aug. 18, 2006). http://www.thetruthaboutcars.com/toyota-falling-quality-is-job-one/ 31 Norhiko Shirouzu, “Mean but Lean, Toyota Seeks Outside Help --- With In-House Quality Gurus in Short Supply, Auto Maker Turns to Its Assembler Affiliates,” The Wall Street Journal (July 14, 2005), p. B4. 32 Frank Williams, “Toyota: [Falling] Quality Is Job One,” The Truth about Cars (Aug. 18, 2006). http://www.thetruthaboutcars.com/toyota-falling-quality-is-job-one/ 33 Martin Fackler, “The ‘Toyota Way’ Is Translated for a New Generation of Foreign Managers,” The New York Times (Feb. 15, 2007). 34 Hiroko Tabuchi and Micheline Maynard, “President of Toyota Apologizes,” The New York Times (October 3, 2009), p. 1. 35 Mark MacKinnon, “How It Became Japan’s Detroit: Nowhere Is Japan’s Manufacturing Slump More visible and Visceral than in Toyota City,” The Globe and Mail (July 18, 2009), p. B1. 36 Daisuke Wakabayashi, Mariko Sanchanta, and Yoshio Takahashi, “Toyota Faces Fallout over Recall,” The Wall Street Journal (Feb. 1, 2010). http://online.wsj.com/article/SB10001424052748704107204575038750582835286.html 37 Bill Vlasic, “Toyota’s Slow Awakening to a Deadly Problem,” The New York Times (Jan. 31, 2010). http://www.nytimes.com/2010/02/01/business/01toyota.html?scp=2&sq=toyota&st=cse 15 toyota 16 toyota Exhibit 1: Glossary of Toyota Production System Vocabulary Andon: Toyota’s system for calling attention to a defect at the point of production. Typically the worker pulls an andon cord, which lights up a signal on an andon board. 5S: sort, straighten, shine, standardize, sustain; Toyota’s techniques for organizing the workplace and reducing wasted movement. Five whys: the process of asking why a defect has occurred, and then why the problem that caused the defect occurred, through five iterations, in an attempt to solve the problem at its source. Heijunka: the process of evening out the production flow so that model variations are spread out rather than clustered together, the result being a mixed-model final assembly schedule. Jidoka: Toyota’s system of quality control; the devices and practices that keep defective parts from getting to the next operation. Kaizen: Japanese word for “improvement”; incremental ways in which every employee improves the quality and efficiency of their work. Kanban: a system, involving cards, lighted boards, or empty shelf space, for sending a signal at the precise moment when more materials are needed at a particular point in the production line. Muda: waste that occurs in the manufacturing process, chiefly as the result of excess inventory. Poka-yoke: mechanical devices, such as a checking tool or a holding tool, that prevent defects. Takt: the “beat” of the plant; the time in which each operation of the production system must happen in order to maintain an even production flow and meet each day’s production requirements. Takt time is calculated by dividing the number of minutes in a day by the production requirements for a day at each operation. 17 toyota Exhibit 2: Toyota Plants outside Japan As of the end of March 2008, Toyota conducts its business worldwide with 53 overseas manufacturing companies in 27 countries and regions. Toyota's vehicles are sold in more than 170 countries and regions. Location Start of Operations Number of Employees Vehicle Production* North America Canada British Columbia Feb. 1985 302 - Ontario Nov. 1988 5,091 303 California Nov. 1971 606 - Kentucky May 1988 7,632 515 Missouri Jan. 1993 1,129 - West Virginia Nov. 1998 1,389 - Indiana Feb. 1999 4,279 284 Alabama Apr. 2003 1,012 - U.S.A. Texas Nov. 2006 2,205 139 Latin America Argentina Mar. 1997 2,949 69 Brazil May 1959 3,090 63 Colombia Mar. 1992 1,860 - Mexico Sept. 2004 834 34 Venezuela Nov. 1981 2,327 17 Europe Czech Republic Feb. 2005 3,320 105 France Jan. 2001 3,959 262 Poland Walbrzych Apr. 2002 2,074 - L g Jelcz-Laskowice Mar. 2005 1,069 - Portugal Aug. 1968 690 - Turkey Sept. 1994 3,963 161 U.K. Sept. 1992 4,926 278 Russia Dec. 2007 600 - Africa Kenya Aug. 1977 311 South Africa June 1962 9,557 146 Oceania Australia Apr. 1963 4,903 149 Middle East Bangladesh June 1982 66 - * Vehicle production reported in 1,000s. Only final assembly plants report vehicle production – other plants manufacture parts. 18 toyota Location Start of Operations Number of Employees Vehicle Production* Asia Tianjin Oct. 1997 413 - Tianjin May 1998 793 - Tianjin July 1998 1,821 - Tianjin Jan. 1999 233 - Tianjin Oct. 2002 12,281 271 Changchun Dec. 2004 767 - Tianjin Dec. 2004 231 - Guangzhou Jan. 2005 1,241 - Chengdu Dec. 2000 2,057 5 China Guangzhou May 2006 4,614 170 Taiwan Jan. 1986 2,793 99 India Bangalore Dec. 1999 3,614 52 Bangalore July 2002 836 - Indonesia Jakarta May 1970 5,332 66 Jakarta 2004 - 86 Malaysia Shah Alam Feb. 1968 3,270 45 Sungai Choh 2005 - 22 Pakistan Mar. 1993 2,079 36 Philippines Makati City Feb. 1989 1,929 19 Laguna Sept. 1992 1,045 - SamutPrakan Dec. 1964 12,722 436 SamutPrakan May 1979 - - SamutPrakan May 1988 1,100 63 Thailand Bangkok July 1989 2,260 - Vietnam Aug. 1996 854 18 * Vehicle production reported in 1,000s. Only final assembly plants report vehicle production – other plants manufacture parts. Source: Toyota company website, http://www2.toyota.co.jp/en/facilities/manufacturing/worldwide.html 19 toyota Exhibit 3: Toyota Plants, Japan Locations of Toyota manufacturing facilities 20 toyota Toyota Plants Name Main products Start of operations Number of employees Honsha Plant Forged parts, hybrid system motors, Land Cruiser chassis Nov. 1938 2,506 Motomachi Plant Crown, Mark X, Estima Aug. 1959 4,582 Kamigo Plant Engines Nov. 1965 4,128 Takaoka Plant Corolla, Vitz, ist, Ractis, Auris, Scion xD Sept. 1966 4,984 Miyoshi Plant Transmission-related parts, cold-forged and sintered parts July 1968 1,745 Tsutsumi Plant Prius, Camry, Premio, Allion, Wish, Scion tC Dec. 1970 6,340 Myochi Plant Suspension cast parts, suspension machine parts June 1973 1,641 Shimoyama Plant Engines, turbochargers, VVT, catalytic converters Mar. 1975 1,997 Kinu-ura Plant Transmission-related parts Aug. 1978 4,081 Tahara Plant LS, GS, IS, GX, RAV4, 4Runner, Land Cruiser, Vanguard, engines Jan. 1979 10,370 Teiho Plant Mechanical equipment, moldings for forging and casting and resin-molding dies Feb. 1986 1,872 Hirose Plant Research and development and production of electronic control devices, ICs Mar. 1989 1,290 Toyota Motor Kyushu, Inc. IS, ES, RX, Harrier, Highlander, engines, hybrid system motors Dec. 1992 4,762 Toyota Motor Hokkaido, Inc. Automobile parts including automatic transmissions, transfers, aluminum wheels Oct. 1992 1,691 Toyota Motor Tohoku Co., Ltd. Production of mechanical and electronic parts Oct. 1998 277 Notes 1: As of March 2007 (automotive operation or products and number of vehicles produced are as of December 2007). Figures for numbers of employees are as of the end of the fiscal year. 2: Production figure for the Honsha Plant indicates Land Cruiser chassis production. 3: Toyota Motor Kyushu, Inc., Toyota Motor Hokkaido, Inc. and Toyota Motor Tohoku, Inc. are 100%-owned subsidiaries of Toyota Motor Corporation. Source: Toyota website, http://www2.toyota.co.jp/en/facilities/manufacturing/ 21 toyota Exhibit 4: Toyota Recalls Compared to Honda and Nissan, Japan, 2000 to 2005 Total number of cars recalled during the selected years. Note: this chart does not take into account the differences in sales volume. Source: Weekly Toyo Kezai, July 29, 2006 Number of Recalled Cars in Japanese Market (in thousands) 0 500 1000 1500 2000 2500 2000 2001 2002 2003 2004 2005 HONDA TOYOTA NISSAN 22 toyota Exhibit 5: Toyota Car Production per Employee, Japan, 1996 to 2005 Annual Production (in thousands) Employees 1996 3,500 65,224 1997 3,421 64,806 1998 3,086 64,998 1999 8,212 65,290 2000 3,422 65,005 2001 3,364 66,820 2002 3,513 65,551 2003 3,558 65,346 2004 3,749 64,237 2005 3,863 65,798 Source: Weekly Toyo Kezai, July 29, 2006 Toyota Per-Worker Car Production in Japanese Market 40 50 60 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 (number of cars)