When the 2008 Lehman Brothers bankruptcy triggered a global recession, Toyota Motor Company lost money. In December of that year, with a photo of Toyota board members bowing in shame, a New York Times headline trumpeted, “Toyota Expects its First Loss in 70 years.” “They’ve caught the same cold that Detroit has caught,” said Christopher J. Richter, senior analyst in Tokyo at Calyon Capital Markets Asia. “Everything is going wrong for Toyota this year.”
My reaction was anger at the idiocy of some of these articles. How could Toyota be compared to the Detroit automakers who were on the verge of bankruptcy? Why isn’t the focus on the 70 years of profitability and the huge cash reserves Toyota had piled up for a crisis just like this?
However, I soon discovered Toyota did not share my point of view. They were very unhappy about their loss. It was not because of the loss of a few billion dollars which they could absorb like an annoying mosquito bite. It was because, through serious reflection, they found serious weaknesses.
In Toyota Under Fire we chronicle how Toyota responded to the worst global recession since the Great Depression. Of course they downsized, but they did it by reducing a temporary workforce designed to absorb inevitable downturns in the business cycle. Management bonuses and overtime were eliminated. Less energy was used. Travel was reduced. But the jobs of long-term team members were protected.
I visited two of the hardest hit plants—truck plants in Indiana and Texas—and watched as people frenetically worked even though about half the production workers were not needed for production, with sales down about 40% from planned capacity. They were busy because they had gone from two shifts to one shift, maintaining a high production rate, and about half of the people produced cars for four hours, while the other half observed and worked on kaizen, and then they reversed roles.
The Japanese executive in charge of the Indiana plant calmly explained that they were investing in the future: “Every winter has its end,” he explained to me. And they were preparing. He showed data on the average age of vehicles and how more were being junked then purchased, and they needed to prepare for the expected sales boom—the boom we are now experiencing.
Back to the first loss of money in 70 years. Toyota did a great job of utilizing and developing their human resources with very low demand, but their reflection still identified a serious problem. There had been signs the truck market was declining in the United States, where gas prices were rising. There were even signs of the recession to come given the inflated housing market. Yet, Toyota in North America had built months of inventory of trucks. When gas prices almost doubled in the U.S. during the summer before the 2008 recession, Toyota was stuck with enough inventory to stop making any large trucks and sport utility vehicles for three months; during this time they did daily training and kaizen on the shop floor. Then the recession hit and the pain continued.
Toyota could offset a good deal of the downturn, reducing labor costs by about 20% through eliminating the variable workforce (the temporary pool) and overtime. But still 80% of costs were fixed. The board of directors set a target to reduce fixed costs to 70% so that Toyota, famous for its ability to flexibly respond just-in-time, could be ready for the next downturn.
Turning this goal into action is one of Toyota’s strengths and it is done through the hoshin kanri process. The target of lowering the break-even point required changes in all parts of the enterprise, including product development (e.g., more standard architecture and parts, value engineering), production control (satisfying customers while leveling the schedule, even with high variety), production engineering (developing simple, slim, flexible systems, often with lower capital investment and more manual work), supply chain (collaborating with suppliers to better respond to flexible volumes), and manufacturing (launching new vehicles more quickly, simple automation for material delivery, parts kitting, changing takt while balancing workload more quickly). Thousands of organizations developed plans for achieving higher flexibility and worked through the kaizen process of experimenting and learning.
By the time Toyota had achieved the lower break-even and billions of dollars in cost reduction, another problem eased up—the yen went from about 80 yen per dollar to about 110 yen per dollar. Since Toyota is committed to keeping jobs in Japan to benefit Japanese society, and maintain their hotbed of innovation in Japan, they benefited greatly, leading in the 2013-14 fiscal year to the most sales and the most profit of any auto company in history.
With the huge demand of 2014, and the deep cash reserves Toyota maintains, one might expect a massive spending spree—buying companies, buying new automated equipment, buying new plants in low-cost countries. Toyota did none of those things. They continued belt-tightening and Akio Toyoda announced there would be no new plants built. The hoshin kanri goals became: Do more with less. Find ways to utilize existing capacity while improving throughput, thereby producing more autos per square foot.
Toyota does not want creeping fixed costs to put them in the same bad situation in the next big economic downturn. They will be ready because of intensive and continuous improvement with a purpose.
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