Toyota Case Study

Toyota: a case study

Background 

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Toyota Motor Company was founded in 1937 by the Toyoda family. Business was relatively unsuccessful until Eiji Toyoda introduced the method of lean production after studying Ford’s Rouge plant in Detroit in 1950. This lean production method became known as the Toyota Production System. The production executive, Taiichi Ohno, successfully helped Toyoda improve his company using this new production method and mode of thinking.

Environment 

Cultural 

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Economic 

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Company as a community: lifetime employment, access to company facilities, seniority-based wages (in return for 1/3 work force layoff in 1946) ; as a return, employees must be more flexible and actively promote interests of company >> Implications: labor = Fixed cost

Postwar conditions put Japan into a country lacking significant capital, so that Japan had to rely mostly on producing its own technology.

Political 

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The Ministry of Int’l Trade and Industry (MITI) encouraged Japanese firms to enter the automobile industry despite established competitors from the West by imposing high tariffs discouraging imports and prohibiting foreign ownership. Japan’s work force, under Western influence after WWII, grew more powerful and more demanding, thus limiting producers’ efforts to reduce labor costs.

Environment (cont.) 

Demographical 

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Technological  

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The domestic market was very small and un-uniform. Thus, goods had to be very tailored to specific consumer taste. E.g. luxury cars for officials, small cars for city residents, etc.

Commitment to innovation and improvement Large skilled-labor pool to draw from

Social 

Commitment by employees to work

Country Differences? 

Western “careers” vs. Japanese “community”

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Focus on long-term growth as opposed to short-term profits

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More interpersonal relationships with employees, suppliers, and customers

Organizational Structure 

Multi-regional lean enterprise

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Primarily network structure  

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Network of suppliers Network of dealers/distributors

Frequent interaction between all levels of the organization

Strategy – Lean Production 

Final assembly plant  

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Moved from “move the metal” mentality to kaizen Introduced idea of stopping assembly lines in order to correct problems before continuing As a result, quality improved and yields are close to 100%

Product development and engineering 

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Focused on leaders that knew all steps of a process rather than those with highly specialized knowledge; also, skill-building More emphasis on proactive thinking by employees Thus, increased productivity, product quality, and responsiveness to changing consumer demand “quality circles”

Lean Production – in more detail 

2 organizational features: 

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“Transfer max number of task and responsibilities to those workers actually adding value to the car on the line” “has in place a system for detecting defects that quickly traces every problem, once discovered, to its ultimate cause”

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Thus, need tight teamwork and open communication among workers (comprehensive info display system on electronic displays visible from all work areas)

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4 areas of importance: 

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Leadership: Toyota’s large-project leader w/power vs. Western coordinator Teamwork: from many functions, ties with department, and general interest in promoting team, not department Communication: conflicts resolved in beginning, more people => less people Simultaneous Development

Competitive Advantages 

Reliability

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Product variety 

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Production plants in North America build 2-3 products at a time, as opposed to one by Western firms. Firms keep models for an average of four years, as opposed to an average of close to ten years by Western companies. Western companies sell almost twice as many cars of the same model as Japanese firms do.

Suppliers – Lean Production Supply Chain 

Organized suppliers into functional tiers  

First-tier suppliers: worked together in a product-development team Second-tier: made individual parts

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Encouraged cooperation and communication among first-tier suppliers

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In –house supply operations turned into a network of “quasiindependent first-tier supplier companies”

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Substantial cross-holdings between Toyota and suppliers, as well as among suppliers themselves even though each supplier is an independent company

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Cross- sharing of personnel through 

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Toyota sending personnel to suppliers to compensate for greater workload Toyota transferring senior managers to suppliers for top positions

Suppliers – Lean Production Supply Chain (cont.) 

“market price minus” system, not “supplier cost plus” system  

Value analysis reduces costs Declining prices over life of model due to learning curve

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Production smoothing enables suppliers to maintain a constant volume of business

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Focus is on long-term relationships that underscores cooperation, teamwork, and gradual mutual improvement, rather than price through bidding as a way to choose a supplier

Consumers 

The market began to fragment in the 1960s as cars increased in popularity and became essential household goods.

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Marketing executive Shotaro Kamiya focused on building a sales network modeled after Toyota’s supplier network. 

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Distributors with a “shared destiny”: wholly owned companies or ones in which Toyota held equity “aggressive selling”: promoted long-term relationship between assembler, dealer, and buyers   

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Dealer => production system => build-to-order system Buyers => product development process Direct calls to households with large database of households and buying preferences Focus on repeat buyers Also focus on brand loyalty => “Toyota family”

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5 distribution channels in Japan: Toyota, Toyopet, Auto, Vista, and Corolla

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Closer and more familiar relationship between buyer and salesperson

Marketing 

Door-to-door selling/very customized

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Emphasis on “pull” marketing: giving consumers what they want

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Tight relationship with previous buyers to keep clients

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Sales personnel received intensive training before starting their jobs

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Up-to-date and detailed database of consumers helps keep track of trends, interests, and tastes

Competitors 

American companies upon which Toyota originally developed many of its own production processes from   

GM Ford Etc.

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Korean companies with planned production

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Other Japanese companies, especially Nissan and Honda

Problem 

Obstacle: inward focus of Japanese lean producers

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Lack the ability to think and act globally rather than from a narrow national perspective

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Backlash to Japanese direct investment in North American and Europe, a prominent reason of which is that it creates friction as a result of Japanese corporation biases, mainly two classes of citizenship in their organizations 

E.g. keiretsu

Possible Solutions 

Appoint native managers to head their manufacturing operations in North America and Europe

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Designate native supplier companies as source for certain categories of components

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Governments: restrictions on visas for Japanese employees at new facilities and in Europe, strong pressures to attain high levels of domestic content asap

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Author suggests: build a truly global personnel system in which new workers from North America, Europe, etc. where a company has design, engineering, and production facilities, are hired in at an early age and given the skills, including language and exposure to management in different regions, needed to become full citizens of the company  

Same for suppliers Need increased transparency

Conclusion – Watch for quality 

fear of repetition of Ford’s experience in Britain after 1915 

Wholesale substitution of domestic managers and suppliers, to deal with investment friction, will degrade performance of production system toward the existing level

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Evidence that plants that perform best are those with very strong Japanese mgmt presence in early years of operations and those that have moved slowly and methodically to build up their domestic supply base

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Need managers and suppliers that understand lean production and are committed to it, mostly Japanese

Financial figures 

In fiscal 2003, ended March 31, 2003, Toyota’s consolidated net revenues increased 9.2%, to ¥15.50 trillion, operating income rose 16.3%, to ¥1.27 trillion, and net income was up 34.9%, to ¥750.9

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ROE reached 10.4%, surpassing the short-term target of 10%.

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As of March 31, 2003, treasury stock repurchased by the Company totaled ¥1.38 trillion, or 416 million shares, and total shares issued and outstanding—excluding treasury stock—had decreased to 3.45 billion shares.

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In fiscal 2003, the Company paid its highest-ever annual dividend —¥36.00 per share, up ¥8.00 from the previous fiscal year.