The Open Secret of Toyota's Change

Table of Contents

1 Introduction
1.1 Background
1.2 Problem definition
1.3 Objective
1.4 Methodology
1.5 Determination leads to longlasting success
1.6 Preliminary results
1.7 Directed backing information
1.8 Utility analysis

2 Results and Conclusion

3 Outlook

List of abbreviations

illustration not visible in this excerpt

List of figures and tables

(This list is not complete; sources that hint at companies that have been examined in this work have been removed)

Figure 1: Comparison of results before and after the introduction of TPS

Figure 2: Dealer Satisfaction Index (DSI) 2003 - 2005, FAW Bamberg 2005

Figure 3: 2005 vehicle dependability study - J. D. Power & Associates, 2005

Figure 4: Imageprofile 2006 ranking list of automotive companies

Figure 5: Imageprofile 2006, ranking of criteria since 1990

Figure 6: Production Systems

Table 1: Utility Analysis

Table 2: Performance – Objectives and Scale

Acknowledgements

Special thanks to all experts who readily filled in the questionnaire and answered my questions, my tutor at the FOM Dr. Cetin Nazikkol, Peter Siemens for his MS excel support (during his own master thesis), my friends who checked the questionnaire and made recommendations, all people who gave me valuable references and all who helped me otherwise.

1 Introduction

1.1 Background

This Master thesis explores the organisational change, as performed by Toyota after World War II which, within decades, made this company the most successful automobile producer in the world and a model of corporate governance.

Forced by historic circumstances, Toyota, which started as a company producing automated looms, underwent a dramatic and sweeping revolution, which finally made it number two of the most successful car manufacturers in the world regarding sales volume.

Following World War II, Japan could not afford mass production as was commonly in place elsewhere. A tiny domestic market that demanded for a wide range of vehicles, new labour laws introduced by the Americans that strenghthened the workers’ negotiation position, a post-war economy that was starved for capital and foreign exchange (and thus offered no way of acquiring expensive machinery for mass production), and pressure from huge foreign motor vehicle producers who wanted to defend their markets against Japanese exports made a new way to satisfy the Japanese domestic market inevitable.

Productivity indices of that time claimed that one American worker was as productive as nine Japanese workers. At Toyota, one was amazed about this relation and it was understood that a lot of energy was wasted by Japanese workers. Soon the Toyota Production System (TPS) was born and continuously developed. It gave such a boost of productivity to the Japanese automobile industry that soon it was copied all over the world. The details of this system, which is to a huge amount based on practical experience and which requires a huge amount of preparatory work, are sufficiently known within the industry. Nevertheless, other Japanese companies and, in particular, international companies fail to catch up with Toyota. The question is, why?

Studies have shown that the German industry as a whole does not only produce costly because of high wages. Additionally, potential for improvement is far from being exhausted. If it were used, costs for processes could be lowered substantially. But obviously this is only one side of the story. Quite a number of car manufacturers already produce according to lean principles, as the TPS instruments are sometimes called, quite successfully, as it seems, and nevertheless they lag behind the performance of Toyota.

A highly saturated North American and European automobile market requires thorough change, since companies, due to an increasing global competition, need to undergo some kind of change to survive in the market. Experts assume further consolidation among Original Equipment Manufacturers (OEM) until 2010.

1.2 Problem definition

Although everything seems to be known about TPS, there is obviously a remainder, because otherwise there would be more “Toyotas” than just one.

There must be something in TPS that has not been identified or has been left out so far by the majority of OEMs all over the world. (Judging from the current competition in the automotive industry, it is more likely that this ‘something’ has been unintentionally ignored). This is the case although the whole system, without any restrictions, is made accessible to competitors and anyone interested in TPS. Obviously, the knowledge of this mostly missing aspect or link in TPS is restricted, because in the current situation in the automotive industry no company can afford giving away any chances.

1.3 Objective

This master thesis aims at identifying and preparing the above mentioned, apparently hidden or unintentionally ignored, aspects of the Toyota Production System (TPS) which make Toyota more successful than other car makers.

The main objective consists of the collection of data and information from literature that hint at Toyota’s ‘open secret’; subordinate targets will be the backing of the gained information by a suitable analysis.

1.4 Methodology

A deductive approach has been selected. Due to the enormous amount of information it was not possible to evaluate all sources that are available on the subject.

This work provides hypotheses on why Toyota has such a lead over its competition. Four hypotheses were selected after an initial literature research aiming to identify well known German automobile manufacturers who produce according to lean principles (that are derived from the TPS).

The TPS is superior to other production systems ...

1. ...because it aims for 100 % value added for the customer.
2.because it is characterised by uncompromising and longlasting determination.
3. ...because it guarantees full transparency and is comprehensible.
4. …because it involves all stakeholders and shareholders of the company regardless of hierarchy.

These hypotheses were derived by the author following an initial literature research on the topic including books and internet resources. These sources will be verified as far as possible.

At the same time a questionnaire was developed to illuminate production and overall processes within the respective companies. This questionnaire was sent to as much employees of the companies in focus as possible to support literature findings and to catch a glimpse of internal organisation and overall orientation of the four German car manufacturers.

Characteristic of the TPS is the huge amount of preparatory work. To successfully install the TPS it is inevitable to become aware of various aspects in advance, e.g. the true value added for the customer. Only by this a company can put up itself adequately to be able to fully satisfy its customers’ needs. An example taken from Womack and Jones illustrates this. Four companies, all members of the combine of Pratt and Whitney, a leading producer of turbine engines^[1], participate in a value chain. Each of them operates rather isolated, preoccupied with its own concerns. No one of the four parties has ever analysed the whole value chain to optimise the cooperation between the four companies for actions in one company have an influence on processes in the downstream one.^[2] Thus each company will merely optimise its own processes, but never the whole value chain. Furthermore, redundant processes are likely, as is the case in this example. Womack and Jones talk of “desintegrated creation of value”, which creates a huge amount of muda (unnecessary effort).

Studies have shown that the German industry as a whole does not only produce costly because of high labour cost. Additionally, potential for improvement is just given away. If it were used, costs for processes could be lowered drastically.^[3] Other sources, too, come to similar conclusions: pressure on carmakers in a global market increases and hence creates the need for rationalisation, e. g. by lean development, as it is called in this source.^[4]

The Management Engineers study sees further potential for optimisation in a redesign of production processes or build-up of new plants with modern structures. This could save as much costs as the improvement of existing structures. Overall 30% to 50% of production costs in German automobile plants could be saved in such a way, according to the study. The result also applies to companies with a high degree of automation and creation of high value added with the help of innovations. Lowering of wages is also needed, though, to achieve the calculated level of savings.

Potential for further savings is seen especially in the administration where one third of the company’s work is done, but which is a department which does not contribute to value added. Furthermore nested structures as well as redundant work create high costs.

Womack and Jones^[5] describe the difficulties of implementing TPS. Most managers they have met tried to implement single instruments without an understanding of the whole concept. They drowned in work due to a missing overview. According to the authors “shows of strength” are necessary to turn a mass production system into a lean one^[6]. Yet, Ford recognized the tendency of people to stick to a method while it is long overdue to change it.^[7] Womack and Jones recommend rather to compete against perfection than against rival firms.^[8] This, of course, requires uncompromising determination.

A survey of Management Engineers^[9] comes to the conclusion that in Germany, companies give away huge potential for optimisation with regard to processes and costs: in most factories, around 20% of costs could be saved just by process optimisation, that is mainly a more efficient assignment of the workforce. A reason for problems in implementing the TPS mentioned in a number of sources is the existence of mass production structures that in a way ‘block’ innovation.

Steffen Lehndorff^[10] who deals with problems of supply chains due to inadequate change towards lean production examines the consequences for supplier companies if the philosophy of JIT is not fully understood. Production processes have been adapted to the pull principle but on the other hand very often the cost-intensive machinery is to be used as long as possible and preferably without interruptions. Further inconsistencies and relocations of problems lead to a constant disorientation within the system, and it becomes evident that mostly the supply chain is not optimised at all. Lehndorff attributes this problem to the fact that only a limited understanding of “JIT” exists which reduces JIT to precise supply of companies without recourse to larger inventory, in other words: a logic of supply. Lehndorff explains the true meaning of JIT: it is used as a lever because without inventory all processes have to run optimally so that there is no need for parts from an inventory.

The aspect of transparency is important within the company itself but also outside, e.g. when an analysis of the value chain outside the company is required. Closely related to full transparency are information hiding aspects. Womack and Jones give a vivid example on how muda could survive over decades because in a value chain every company worked on its own, for reasons of distrust:

Keines der vier Unternehmen (...) hatte jemals seine Aktivitäten den anderen drei Parteien vollständig transparent gemacht. Zum Teil war dies eine Frage des Vertrauens – jedes Unternehmen hatte Angst, dass die vor- und nachgelagerten Firmen jede geeignete Information für härtere Verhandlungen benutzen würden.^[11]

Transparency, which is essential for the TPS to work, is only possible if hierarchical thinking and rivalry among companies are given up for the benefit of true partnerships from a company to its suppliers and partner companies who, together, create the value added.

In this context, Lehndorff speaks of “department egoism” which impedes effective and crossfunctional work along the value chain^[12]:

Es existiert eine althergebrachte Unternehmenskultur die durch Mißtrauen, Schubladendenken und Abteilungsegoismen gekennzeichnet ist. Aus Fehlern wird nicht gelernt - Fehler werden geahndet und müssen daher tunlichst vertuscht werden. Gesichtswahrung gilt als oberste Prämisse.

The Toyota way of coping with mistakes is completely contrary: every mistake is appreciated as an opportunity to improve the actual state. The person who makes a mistake will not be punished but will be supported. On the other hand, the Toyota corporation expects everyone to do his very best to prevent mistakes and, at the same time, to help eliminate a mistake immediately if one has occurred.

Toyota aims at reducing complexity and helping everyone to understand what he or she has to do. Toyota lets its employees partake in the whole production process by providing an undisguised 360-degree glance at the company. The idea behind that is: everyone can easily understand the individual requirements, everyone can see his or her own work within the context of the whole company. Thus, everyone gains an increased awareness of the intertwinement of one’s own work and the work of one’s neighbours. By this, employees get the chance to see their company as one big “machine” and their place in the whole process. In all likelihood, this, in combination with other TPS concepts, contributes to a feeling of togetherness.

The TPS certainly contains strong aspects of employee participation, too. Konosuke Matsushita, founder of the electronic consumer goods company Matsushita, is often cited with the insight that Western companies and even managers’ heads are designed according to the Ford principles. Only those companies will survive that can take full advantage of the combined intelligence of their whole workforce, which makes serious qualification and care for the staff necessary. In this, Matsushita and other companies are ahead of Western companies.^[13]

The andon trigger line serves as a suitable example to illustrate a noticeable difference between Japan and the West: in most Western companies (and especially in Germany - due to its strong hierarchical orientation^[14] ) it is not allowed to exceed one’s competence. Usually, this competence is very restricted: this leads to people working as specialists in a well-defined domain without being allowed to interfere with other areas or to do something without permission of their superior. TPS works differently: every employee is seen as thinking individual who is expected to act for the company’s good - in his or her team, however. If a defective component or part arrives at the production line it is the duty of every worker to pull the andon trigger line immediately because JIT does not allow any components to arrive in minor quality. No excess capacity of parts exists to replace a defective one. The company trusts in the competence of production line workers to identify the required level of quality and to act accordingly. One relies on the awareness of workers that any mistake might lead to a stop of the whole production process. A number of sources, some of which will be discussed below, argue that this possibly represents a strong pressure on the lean production worker.

[...]

^[1] For further information see the company’s homepage on http://www.pratt-whitney.com/

^[2] Womack and Jones, 2005, p. 25

^[3] Results of a study conducted by „Management Engineers“, a strategy consultancy headquartered in Düsseldorf, according to this source belonging to the top 15 of management consultancies in Germany. (The study was published in the paper “Handelsblatt”), on: http://www.wiwo.de/pswiwo/fn/ww2/sfn/buildww/elemid/10/searchno/0/id/1301/SH/8a2301067106a9ee1ec20179469208/depot/0/index.html (copied 11/2005)

^[4] Automobil Industrie 05/2005, on http://www.ai-forum.com/images/Lean_Development.pdf (copied 11/2005)

^[5] Womack and Jones, 2005, p. 8

^[6] Womack and Jones, 2005, p. 10

^[7] Henry Ford cited in Weber, 2004: „Geschäftsleute versagen in ihrem Geschäft, weil ihnen die alten Methoden so gut gefallen, dass sie sich nicht dazu aufraffen können, sie zu ändern.“

^[8] Womack and Jones, 2005, p. 70

^[9] “Management Engineers” is a consulting company with headquarter in Düsseldorf, and, according to the source, belongs to the top 15 of management consultancies in Germany: http://www.wiwo.de/pswiwo/fn/ww2/sfn/buildww/elemid/10/searchno/0/id/1301/SH/8a2301067106a9ee1ec20179469208/depot/0/index.html (copied 05/11/05)

^[10] Steffen Lehndorff: „Menschen als Problemlöser - oder nur Puffer?“, in: Institut Arbeit und Technik (IAT): Jahrbuch 1995. Gelsenkirchen, p. 114-125; “Wissenschaftszentrum NRW, Institut für Arbeit und Technik” online on http://www.iatge.de/aktuell/veroeff/am/lehndorff95a.html (copied 19/12/05)

^[11] Womack and Jones, 2005, p. 25

^[12] Dorit Jäger: “Die strategische Bedeutung der Meister für das lernende Unternehmen“; in: Institut Arbeit und Technik: Jahrbuch 1996/97. Gelsenkirchen, S. 150-165, on http://www.iatge.de/aktuell/veroeff/ps/jaeger97a.html

^[13] See “Futurverlag” on http://www.futur.futurverlag.de/zitate.htm (copied 27/11/05); reference to Matsushita taken from Hajo Weber, 1994. The source “Futurverlag” seems critical but it was the only one available to display most of the matsushita text, and identical passages of the text can be found in the discussion paper of Hajo Weber, however.

^[14] Cp. “Communicaid - global communication”, on http://www.communicaid.com/germany-business-culture.asp or “Executive Planet”, two of the very few sources with explicit notes on the subject, on http://www.executiveplanet.com/business-culture-in/132163004477.html (both copied 12/01/06)