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The Toyota Way14 Management Principles from the World's Greatest Manufacturer
By Jeffrey K. Liker
McGraw-HillCopyright © 2004 McGraw-Hill
All right reserved.
Chapter OneThe Toyota Way: Using Operational Excellence as a Strategic Weapon
We place the highest value on actual implementation and taking action. There are many things one doesn't understand and therefore, we ask them why don't you just go ahead and take action; try to do something? You realize how little you know and you face your own failures and you simply can correct those failures and redo it again and at the second trial you realize another mistake or another thing you didn't like so you can redo it once again. So by constant improvement, or, should I say, the improvement based upon action, one can rise to the higher level of practice and knowledge. —Fujio Cho, President, Toyota Motor Corporation, 2002
Toyota first caught the world's attention in the 1980s, when it became clear that there was something special about Japanese quality and efficiency. Japanese cars were lasting longer than American cars and required much less repair. And by the 1990s it became apparent that there was something even more special about Toyota compared to other automakers in Japan (Womack, Jones, and Roos, 1991). It was not eye-popping car designs or performance—though the ride was smooth and the designs often very refined. It was the way Toyota engineered and manufactured the autos that led to unbelievable consistency in the process and product. Toyota designed autos faster, with more reliability, yet at a competitive cost, even when paying the relatively high wages of Japanese workers. Equally impressive was that every time Toyota showed an apparent weakness and seemed vulnerable to the competition, Toyota miraculously fixed the problem and came back even stronger. Today Toyota is the third-largest auto manufacturer in the world, behind General Motors and Ford, with global vehicle sales of over six million per year in 170 countries. However, Toyota is far more profitable than any other auto manufacturer. Auto industry analysts estimate that Toyota will pass Ford in global vehicles sold in 2005, and if current trends continue, it will eventually pass GM to become the largest automaker in the world.
Every automotive industry insider and many consumers are familiar with Toyota's dramatic business success and world-leading quality:
* Toyota's annual profit at the end of its fiscal year in March 2003, was $8.13 billion—larger than the combined earnings of GM, Chrysler, and Ford, and the biggest annual profit for any auto maker in at least a decade. Its net profit margin is 8.3 times higher than the industry average.
* While stock prices of the Big 3 were falling in 2003, Toyota's shares had increased 24% over 2002. Toyota's market capitalization (the total value of the company's stock) was $105 billion as of 2003—higher than the combined market capitalization of Ford, General Motors, and Chrysler. This is an amazing statistic. Its return on assets is 8 times higher than the industry average. The company has made a profit every year over the last 25 years and has $20-$30 billion in its cash war chest on a consistent basis.
* Toyota has for decades been the number one automaker in Japan and a distant fourth behind the "Big 3" automakers in North America. But in August of 2003, for the first time, Toyota sold more vehicles in North America than one of the "Big 3" automakers (Chrysler). It seems that Toyota could eventually become a permanent member of the "Big 3" U.S. automakers. (Of 1.8 million Toyota/Lexus vehicles sold in North America in 2002, 1.2 million were made in North America. Toyota is rapidly building new production capacity in the U.S., at a time when U.S. manufacturers are looking for opportunities to close plants, reduce capacity and move production abroad.)
* In 2003 the Toyota nameplate was on track to sell more vehicles in the U.S. than either of the two brandnames that have led U.S. sales for the past 100 years—Ford and Chevrolet. Camry was the top-selling U.S. passenger car in 2003 and five of the years prior. Corolla was the top selling small car in the world.
* Toyota not long ago was known for making small, basic transportation vehicles, yet in ten years leaped out to become the leader in luxury vehicles. Lexus was introduced in 1989 and in 2002 outsold BMW, Cadillac, and Mercedes-Benz in the U.S. for the third year in a row.
* Toyota invented "lean production" (also known as "the Toyota Production System" or "TPS"), which has triggered a global transformation in virtually every industry to Toyota's manufacturing and supply chain philosophy and methods over the last decade. The Toyota Production System is the foundation of dozens of books on "lean" including two bestsellers: The Machine That Changed the World: The Story of Lean Production (Womack, Jones, Roos, 1991) and Lean Thinking (Womack, Jones, 1996). Toyota employees are sought out by companies in almost every industry throughout the world for their expertise.
* Toyota has the fastest product development process in the world. New cars and trucks take 12 months or less to design, while competitors typically require two to three years.
* Toyota is benchmarked as the best in class by all of its peers and competitors throughout the world for high quality, high productivity, manufacturing speed, and flexibility. Toyota automobiles have consistently been at the top of quality rankings by J.D. Powers and Associates, Consumer Reports, and others for many years.
Much of Toyota's success comes from its astounding quality reputation. Consumers know that they can count on their Toyota vehicle to work right the first time and keep on working, while most U.S. and European automotive companies produce vehicles that may work when new but almost certainly will spend time in the shop in a year or so. In 2003 Toyota recalled 79% fewer vehicles in the U.S. than Ford and 92% fewer than Chrysler. According to a 2003 study in Consumer Reports, one of the most widely read magazines for auto-buying customers, 15 of the top 38 most reliable models from any manufacturer over the last seven years were made by Toyota/Lexus. No other manufacturer comes close. GM, Mercedes, and BMW have no cars on this list. Not a single Toyota is on the dreaded "vehicles to avoid" list, while a handful of Fords, almost 50 percent of the GMs, and more than 50 percent of the Chryslers are to be avoided, according to Consumer Reports.
Here are some other statistics from Consumer Reports' 2003 annual auto issue: * In the small car category (Toyota Corolla, Ford Focus/Escort, GM Cavalier, and Chrysler Neon), Toyota won each of the last three years for overall reliability, as well as the prior three years, and predicted reliability for the 2003 model year.
* For family sedans, the Toyota Camry beat out the Ford Taurus, the GM Malibu, and Dodge Intrepid, winning in the last three years, the three prior years, and predicted reliability for the 2003 model year.
* More than half of all Toyota used cars are singled out as "recommended for purchase," compared with less than 10 percent of the Fords, 5 percent of the GMs, and none of the Chryslers.
* Toyota/Lexus has also dominated the J.D. Powers "initial quality" and long- term durability rankings for years. Toyota's Lexus was again the #1 most reliable car, according to the J.D. Powers 2003 quality survey, followed by Porsche, BMW, and Honda.
What is the secret of Toyota's success? The incredible consistency of Toyota's performance is a direct result of operational excellence. Toyota has turned operational excellence into a strategic weapon. This operational excellence is based in part on tools and quality improvement methods made famous by Toyota in the manufacturing world, such as just-in-time, kaizen, one-piece flow, jidoka, and heijunka. These techniques helped spawn the "lean manufacturing" revolution. But tools and techniques are no secret weapon for transforming a business. Toyota's continued success at implementing these tools stems from a deeper business philosophy based on its understanding of people and human motivation. Its success is ultimately based on its ability to cultivate leadership, teams, and culture, to devise strategy, to build supplier relationships, and to maintain a learning organization.
This book describes 14 principles which, based on my 20 years of studying the company, constitute the "Toyota Way." These 14 principles are also the foundation of the Toyota Production System (TPS) practiced at Toyota manufacturing plants around the world. For ease of understanding, I have divided the principles into four categories, all starting with "P"—Philosophy, Process, People/Partners, and Problem Solving (see Figure 1-1). (For an executive summary of the 14 principles of the Toyota Way, see chapter 4.)
About the same time that I started writing this book, Toyota was unveiling its own internal "Toyota Way" document for training purposes. This document greatly influenced my thinking about the 14 principles and consequently I have incorporated the four high-level principles from that document (Genchi Genbutsu, Kaizen, Respect and Teamwork, and Challenge) and correlated them to my four principle categories of Philosophy, Process, People/Partners, and Problem Solving (see Figure 1-1).
The Toyota Way and the Toyota Production System (Toyota's manufacturing method) are the double helix of Toyota's DNA; they define its management style and what is unique about the company. In this book I hope to explain and show how the Toyota model of success can be applied in any organization, to improve any business process, from sales to product development, marketing, logistics, and management. To assist you in this journey, I offer numerous examples of what Toyota does to maintain such a high level of achievement as well as explore companies from a variety of industries and service operations that have effectively applied Toyota's principles.
The Toyota Production System (TPS) and Lean Production
The Toyota Production System is Toyota's unique approach to manufacturing. It is the basis for much of the "lean production" movement that has dominated manufacturing trends (along with Six Sigma) for the last 10 years or so. Despite the huge influence of the lean movement, I hope to show in this book that most attempts to implement lean have been fairly superficial. The reason is that most companies have focused too heavily on tools such as 5S and just-in-time, without understanding lean as an entire system that must permeate an organization's culture. In most companies where lean is implemented, senior management is not involved in the day-to-day operations and continuous improvement that are part of lean. Toyota's approach is very different.
What exactly is a lean enterprise? You could say it's the end result of applying the Toyota Production System to all areas of your business. In their excellent book, Lean Thinking, James Womack and Daniel Jones define lean manufacturing as a five-step process: defining customer value, defining the value stream, making it "flow," "pulling" from the customer back, and striving for excellence. To be a lean manufacturer requires a way of thinking that focuses on making the product flow through value-adding processes without interruption (one-piece flow), a "pull" system that cascades back from customer demand by replenishing only what the next operation takes away at short intervals, and a culture in which everyone is striving continuously to improve.
Taiichi Ohno, founder of TPS, said it even more succinctly:
All we are doing is looking at the time line from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time line by removing the non-value-added wastes. (Ohno, 1988)
As we will see in more detail in Chapter 2, Toyota developed the Toyota Production System after World War II at a time when it faced very different business conditions than Ford and GM. While Ford and GM used mass production, economies of scale, and big equipment to produce as many parts as possible, as cheaply as possible, Toyota's market in post-war Japan was small. Toyota also had to make a variety of vehicles on the same assembly line to satisfy its customers. Thus, the key to their operations was flexibility. This helped Toyota make a critical discovery: when you make lead times short and focus on keeping production lines flexible, you actually get higher quality, better customer responsiveness, better productivity, and better utilization of equipment and space. While Ford's traditional mass production looks good when you measure the cost per piece on an individual machine, what customers want is a much greater variety of choices than traditional manufacturing can offer cost-effectively. Toyota's focus in the 1940s and '50s on eliminating wasted time and material from every step of the production process—from raw material to finished goods—was designed to address the same conditions most companies face today: the need for fast, flexible processes that give customers what they want, when they want it, at the highest quality and affordable cost.
A focus on "flow" has continued to be a foundation for Toyota's success globally in the 21st century. Companies like Dell have also become famous for using short lead times, high inventory turns, and getting paid fast to rapidly develop a fast growing company. But even Dell is just beginning on the road to becoming the sophisticated "lean enterprise" that Toyota has developed through decades of learning and hard work.
Unfortunately, most companies are still using the mass production techniques that worked so well for Henry Ford in the 1920s, when flexibility and customer choice were not important. The mass production focus on efficiency of individual processes goes back to Frederick Taylor and his "scientific management" at the beginning of the 20th century. Like the creators of the Toyota Production System, Taylor tried to eliminate waste from production processes. He observed workers and tried to eliminate every second of inefficient motion. Mass production thinkers have long understood that machine downtime is another obvious non-value-added waste—a machine shut down for repair is not making parts that could make money. But consider the following counter-intuitive truths about non-value-added waste within the philosophy of TPS. * Often the best thing you can do is to idle a machine and stop producing parts. You do this to avoid over production, the fundamental waste in TPS.
* Often it is best to build up an inventory of finished goods in order to level out the production schedule, rather than produce according to the actual fluctuating demand of customer orders. Leveling out the schedule (heijunka) is a foundation for flow and pull systems and for minimizing inventory in the supply chain. (Leveling production means smoothing out the volume and mix of items produced so there is little variation in production from day to day.)
* Often it is best to selectively add and substitute overhead for direct labor. When waste is stripped away from your value-adding workers, you need to provide high-quality support for them as you would support a surgeon performing a critical operation.
* It may not be a top priority to keep your workers busy making parts as fast as possible. You should produce parts at the rate of customer demand. Working faster just for the sake of getting the most out of your workers is another form of over production and actually leads to employing more labor overall.
* It is best to selectively use information technology and often better to use manual processes even when automation is available and would seem to justify its cost in reducing your headcount. People are the most flexible resource you have. If you have not efficiently worked out the manual process, it will not be clear where you need automation to support the process.
In other words, Toyota's solutions to particular problems often seem to add waste rather than eliminate it. The reason for these seemingly paradoxical solutions is that Ohno had learned from his experiences walking the shop floor a very particular meaning of non-valued-added waste: it had little to do with running labor and equipment as hard as possible, and everything to do with the manner in which raw material is transformed into a saleable commodity. For Ohno, the purpose of his journey through the shop floor was to identify activities that added value to raw material, and get rid of everything else. He learned to map the value stream of the raw material moving to a finished product that the customer was willing to pay for. This was a radically different approach from the mass production thinking of merely identifying, enumerating, and eliminating the wasted time and effort in the existing production processes.
Excerpted from The Toyota Way by Jeffrey K. Liker Copyright © 2004 by McGraw-Hill. Excerpted by permission of McGraw-Hill. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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