Toyota's New Challenge

Famous for its production system, the automaker is seeking additional competitive advantage from -- gasp! -- information technology.

The year: 1990. A five-year study by the Massachusetts Institute of Technology predicts the demise of mass production as a competitive strategy. Its replacement: the Toyota Production System (TPS). ". . . We believe lean production [TPS] will supplant both mass production and the remaining outposts of craft production in all areas of industrial endeavor to become the standard global production system of the twenty-first century," asserted James P. Womack, Daniel T. Jones, and Daniel Roos in The Machine That Changed the World (1990, Rawson Associates), the book presenting their work. Having "raised all ships" with TPS, Toyota Motor Corp. is starting the 21st century by initiating a new global standard for manufacturing. Admits Fujio Cho, presi-dent of the automaker, "Toyota's biggest challenge is information technology." The bottom line: Look for a powerful new synergism between IT and TPS that will differentiate Toyota from its competitors. Already under way is a new IT initiative, a private B2B exchange that will bring startling new efficiencies to Toyota's supply-chain management in North America, claims Gerald Braga, corporate manager of procurement and supply chain management, Toyota Motor Sales USA Inc., Torrance, Calif. That's not to say the company's supply chain is underperforming. "Right now, [if you] benchmark us against our competitors on the logistics side you will find that we're the organization to beat in terms of fill rate, inventory turns -- the management of the whole logistics chain." Clearly, Toyota is not content resting on those laurels. "What we're finding is that we've got the processes, but we don't have the speed of communication that we need to be able to lead in a growing market," Braga says. "We're challenging ourselves over a three-year period to make a 50% reduction in inventory. We're also looking at increasing the speed at which we can process information -- about a 40% increase in speed from the receipt of the order to processing it, providing that to our supplier, and then filling the requirement." The project's scope targets Toyota's North American parts supply network, encompassing 1,500 Lexus and Toyota dealers and its 450 suppliers. Braga says "the initiative is the largest project that we've taken on as Toyota Motor Sales in North America. The project received board approval in June and will involve a two-and-a-half-year time horizon to become fully operational. We have a complete buy-in from Toyota Motor Corp. with the understanding that if we can do what we say we can, our initiative could become a global standard for Toyota." Butterfly-like agility The project, code-named Monarch, is designed to carve new operating efficiencies out of a $350 million to $400 million inventory that turns over four times annually with a little over three months of supply. "Our objective is to cut that in half and get down to one and a half months of supply with seven to eight inventory turns annually -- a 50% reduction in inventory and about a 40% increase in speed from receipt of the order to processing it through our supplier and then filling the requirement." The Monarch name, Braga explains, represents the metamorphosis of a ponderous caterpillar-like organization into one that is as agile as a butterfly. He adds that "one of the things that Toyota does extremely well [with TPS methods] is to take individual processes and manage those processes to perfection. However, the problem that we had here . . . is that North America's geographical scenario is fundamentally different from Japan. We had essentially the same processes that we designed [to be effective] in Japan, but [here we have] a different geographical market and population distribution. On the logistics side of our business, we started out with relatively outdated systems that were designed 30 years ago and are still operational at Toyota. COBOL and batch processing are still running. "We decided that taking the individual processes and continuing to refine the process would not get us where we need to be. Essentially, the existing systems are not compatible with the speed we need to get product to market and properly forecast requirements throughout the country. The problem that we face today is that demand fluctuates so widely and we don't have the tools to [properly] predict demand fluctuation." Toyota's solution is centered on i2 Technologies Inc., Dallas, and its TradeMatrix product that will be used to manage inventory and better predict delivery dates. The software company's supply-chain planner allows the automaker to manage inventory more carefully at a part-number level. "As the demand occurs, the information will transmit on a daily basis to our suppliers, and they will respond to that demand with daily deliveries to our distribution points in North America," Braga explains. The key components of the initiative, he says, begin with reengineering of the existing operational system, bringing in a data warehouse to interface with the operational system, and designing the interfaces between demand-forecasting modules, the supply-chain modules, and the supply-chain strategy modules. The biggest technical challenge he foresees is designing the data warehouse and establishing the proper data integrity for that repository. But he is not minimizing the human reengineering issues. "A thorough cultural and philosophical reorientation will be necessary to gain all that the new systems can deliver. The new software is very powerful and we have to make sure that the people are trained in the full breadth of the software and that they really migrate from being just inventory analysts to being inventory business managers. They will have to be able to make the right decisions in terms of how much to buy, when to buy it, and where the product needs to be across North America." Braga says Toyota also is considering other ways to sharply telescope upfront engineering time frames from a service-parts standpoint. "We want to cut by half the time we had previously needed to define the configuration, determine the demand strategy, get suppliers set up, and have the parts available when the product rolls out." Winning production values Cho's positioning of the IT challenge as Toyota's biggest is provocative to industry experts who have watched the company compete and succeed on the manufacturing values made possible by the Toyota Production System. The concept originated in the 1950s as a means of achieving mass-production efficiencies with small production volumes. At that time Toyota's annual production volume was only a few thousand vehicles. Today the company claims to be the world's third-largest automaker with global sales of 5.4 million units in 1999 (including 671,665 units produced by its subsidiary Daihatsu Motor Co. Ltd.). Toyota has four vehicle plants in North America, with a total capacity of over one million vehicles. "In addition, we now have two engine plants, an aluminum-wheel plant, an aluminum casting plant, and a special-parts and body-parts plant," notes Teruyuki Minoura, president and CEO, Toyota Motor Manufacturing North America Inc. In 2001 production will begin in an automatic-transmission plant. It is easy to miss the significance of TPS if you look no further than Toyota's standard fact sheets that simply say "the Toyota Production System has become the basis for highly efficient 'lean' manufacturing in industries worldwide." While true, there is a corporate modesty in that statement that doesn't fully explain the company's competitive success. As one auto analyst puts it: "Toyota's success is led by unusual quality delivered at very competitive prices -- sometimes despite the styling." Last year, J. D. Power and Associates announced the results of its initial Quality Survey. Toyota was able to dominate the top three plant awards and capture the No. 1 position in nine out of 13 vehicle segments in which Toyota vehicles are represented, adds Minoura. TPS has rewarded Toyota so well through process simplification and efficiency that a whole rhetoric of "lean manufacturing vs information technology" has grown up, notes industry analyst Martin Piszczalski, Sextant Research, Ann Arbor, Mich. Cho's assertion that IT is Toyota's biggest challenge suggests that although implementing the solutions may be difficult, IT and TPS may not be "either/or" considerations. Rather, Cho is suggesting a new synergism for competitiveness in the e-business marketplace. Cho's intent may be explained by a study on plant efficiency by the manufacturing consulting firm of Harbour and Associates Inc., Troy, Mich. It reveals the steadily narrowing gap of efficiency between Japanese transplants and GM, Ford, and Daimler Chrysler over the last several years. In an August speech at Traverse City, Mich., Minoura said, "Toyota can no longer afford to stand still or make only a small gain. That's why Toyota must ask itself the hard questions." The issues he identified: What are the strengths and weaknesses, and what must Toyota strengthen in order to survive in this era of mega-competition? Cho's answer: Derive more value from IT. And since the value of IT derives from execution, Toyota could have an implementation advantage by using TPS to adapt IT as a superlative competitive tool. Diverse approaches Superficially, at least, the manufacturing solutions supplied by TPS and IT seem worlds apart. For the fans of lean, the manufacturing mantra seems to be that less is best, explains Piszczalski. "That means less in terms of inventory, material movement, floor space, variability, and fewer steps, options, and choices in work. In contrast, the IT approach seems to imply that more is best -- more information, flexibility, functions, features, increasingly comprehensive business processes, and more people involved in the decision-making process." "Add to that a further complication of the human tendency to look at IT as an alternative to solving the real issues on the plant floor," notes Mike DaPrile, vice president, manufacturing and operations support, Toyota Motor Manufacturing Kentucky Inc. (He directs and manages over 8,000 employees in Kentucky.) "Those IT believers think information will solve everything, but the essence of the IT solution is in what you do with the information, to make it effective without risking confusion and information overload." DaPrile came to Toyota after 25 years with GM where he says, "I had so many more computers than I have here!" Critics of the lean approach to manufacturing tend to decry the rigid scripting required, contending that process flexibility is lost, yet DaPrile points out that TPS in his plants is flexible enough to permit vans to be interspersed with cars on his production lines. His processes also can intermingle right- and left-hand-drive vehicles. Meanwhile, some devotees of lean tend to overstate their criticism of IT-based solutions, says Piszczalski. They describe them as overcomplicated because the manufacturing processes were not properly optimized in the first place. In addition, Piszczalski alludes to lean criticism of computer-based planning and execution. "They think the computer approach needlessly removes control from the plant for what they think is the questionable purpose of centralization." Piszczalski says those critics see the computer at the center of a disconnect between the reality of the plant floor and the computer-generated schedules and inventory counts. But computer-based solutions have their validity, especially since manufacturing will, if anything, become more and more complex, adds Piszczalski. He says advanced planning and scheduling systems (e.g., i2 Technologies) may be IT's strongest suite in a production context. "While the lean approach wants to minimize if not eliminate production variability, manufacturing enterprises are increasingly being drawn into a rapidly changing e-business environment. Maximum flexibility at the last minute has new competitive significance." Faced with rapidly changing market conditions and capacity constraints, Piszczalski asks, can managements make do with a kanban approach in lean manufacturing? Ideally, he adds, the opposing views will come together and each concept will compensate for weaknesses in the other. Piszczalski says such a reconciliation process already is guiding the solutions from such software vendors as Oracle Corp., American Software, and i2 Technologies. TPS, some industry analysts believe, may tend to delay technology investments, but they also think it can inevitably maximize the benefits from such corporate spending. Braga says TPS is very effective in process optimization by focusing on getting rid of muda (waste). "What we haven't done as well is take advanced technology and use it to our advantage. We need to figure out how to make process management and information technology work in synchrony."

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