1) How does Japan's leading automaker keep getting better?
2) What keeps competitors from emulating that performance?
One answer: The Toyota Production System (TPS). While Toyota carefully describes its fabled system as an operating philosophy for guiding the management of an entire enterprise, would-be followers typically think of TPS as a departmental solution that affects only the plant floor, suggests Stanford University professor Jim Matheson (also chairman, SmartOrg Inc., Menlo Park, Calif.). "Instead of also using TPS to optimize the strategic direction and management of an enterprise, many of the would-be emulators seem to have little strategy beyond the plant floor."
This, some would say, is why Toyota's North American auto division continues to gain market share, rake in profits, build new plants, have harmonious supplier relations and retain an enthusiastic workforce with relatively lower labor costs while General Motors Corp. and Ford Motor Co. continue on a downward financial spiral despite their use of TPS-derived practices at many plants.
The question is a critical one for U.S. manufacturing. The auto industry is the latest stalwart U.S. manufacturing sector in the past two decades to begin a tumultuous rebirth. Some industries that have undergone similar trials have come out stronger here, such as steel. Others, such as textiles, have not and have moved mostly overseas. Toyota's success in North America should be keeping U.S. manufacturing executives up at night. Not only has the company weathered a tenacious economic slog, but it appears to be the fastest runner in the race.
This year Toyota's newest facility begins operations at San Antonio, Texas. Assembly plant No. 7 has been announced for Ontario, and rumor has it that more are coming, observes David Cole, chairman, Center for Automotive Research, Ann Arbor, Mich. Cole speculates that Arkansas and Michigan may be possible sites for the future.
Meanwhile, expansions are underway at Toyota's Alabama and West Virginia engine plants, and hybrid vehicles are being added to the production mix at Georgetown, Ky., the company's first U.S. plant. Vehicle production in 2004 totaled 1,443,889 with suppliers receiving about $25 billion.
Watershed Event, Lopsided Response
Analysts unanimously describe Toyota's arrival in North America with TPS as a watershed in manufacturing -- one that will supercede the advances spawned by Henry Ford's evolution of mass production. (Interestingly, both mass production and TPS originated with companies where descendants of the founders maintain control.)
Toyota's manufacturing effectiveness was cited by last year's Harbour Report (Harbour Consulting, Ann Arbor, Mich.). Compared with the Big Three, Toyota was described as the most productive measured in terms of the hours required for vehicle assembly. Toyota's per-vehicle time: 27.9 hours compared with Ford and Chrysler at 37 and 35.9 hours respectively. The percentage decrease (2003 versus 2004) came to 5.5% for Toyota, 4.2% for Ford and Chrysler and 2.5% at General Motors.
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These figures possibly reflect that the Toyota epoch in the U.S. began with a somewhat lopsided copying of TPS. Many U.S. followers preferred to think that emulating Toyota's production floor tools was enough, notes Jeffrey K. Liker, professor of Industrial and Operations Engineering at the University of Michigan. Stories of production floor revolutions far outnumbered revolutions reported in senior management thinking about customer value. Production efficiency seemed to be all that they sought. And that worked -- to a point.
Analysts report that GM's quality and manufacturing efficiency has risen since its NUMMI joint venture started. (See "Partnership Pays Off") as evidenced by GM's latest wins in the J.D. Powers product quality ratings. Some questions remain to be answered, however: First, how much have GM and other U.S.-based manufacturers learned (or failed to learn) about the management strategy implications of TPS? Also, will TPS become as renown for enterprise-wide implications at U.S. manufacturers as it has for revolutionary and unprecedented attention to factory floor efficiency and quality?
The answer to the latter is that it won't happen unless manufacturers rethink and expand their disjointed use of TPS.
"Why is it that the TPS tools of lean, agile, TQM, TPM, re-engineering, just-in-time, cellular/continuous workflow and so on -- never seem to really pay off big [aside from Toyota]?" asks Michael Paris, president of Hinsdale, Ill.-based Paris:Consulting. His response: "Unless TPS is everywhere in an organization, it is nowhere. Too often managers pushing for performance improvements have a limited vision and scope. They fail to approach the executive team that has responsibility for the entire enterprise and authority over it."
Paris suggests that an enterprise philosophy is obligatory to gain competitive benefits from TPS or lean manufacturing:
- First, planning must be thorough. The quest may start with managing production inventories, but it should extend to the factory walls and far beyond. Indeed the goals and objectives of each functional group within the enterprise must be aligned with all the others if progress is to be made.
- Also, managements must understand that the change touches every aspect of the enterprise. There should be no units with their own metrics, agendas and turf. Every business unit is a line unit and must behave and be measured that way -- period.
Toyota likes to say that TPS is at the heart of everything that it does as an enterprise, says Matheson. "Another way to understand Toyota's system is to look at it as being value-based -- -being driven by the need to continuously deliver more value to the customer. In contrast many of the new users of TPS tools tend to ignore that issue. The short-sighted tendency is to focus on little more than a cost-based strategy."
Matheson is not against controlling costs, but he maintains that cost management must effectively co-exist with corporate strategies promoting and growing quality and customer value. "By itself, cost reduction is not a strategy unless you want to commoditize or go out of business."
Matheson says it is important to make a distinction between managing the manufacturing process and managing the company that does manufacturing.
Success With Suppliers
One area where U.S.-based companies and Toyota have diverged is supplier relations. While certainly there are some shining examples of supplier relations among "lean" manufacturers other than Toyota, these have been overshadowed by across-the-board mandates at large OEMs that push pressure for cost-cutting disproportionately onto suppliers' shoulders. This move to make their companies more competitive has actually made them less so. Toyota's dominance proves this.
"The process needs low cost and quality, and Toyota is a role model example of how to use cost and quality to get on the playing field," Matheson says.
Armed with cost and quality control at the process level, Toyota can concentrate on a value-based enterprise product strategy focused on customer value. Losers are those competitors with little more than a cost-cutting strategy. These are the companies that tend to harass suppliers with cost-cutting demands.
"Instead of building and maintaining collaborative supplier strategies, Toyota's U.S. competitors seem to be on a different, riskier path," notes Matheson. "The danger is that innovation suffers when supplier relationships hinge only on cost-cutting demand. Toyota recognizes that fulfilling the enterprise potential of TPS requires a substantial cultural shift toward collaboration and continuous improvement, both internally and externally. The changes have to permeate senior management thinking."
For instance, Toyota's $800 million facility in Texas will assemble the full-sized Tundra. Supplier proximity was a concern that was solved by incorporating an on-site supplier park that will accommodate 21 suppliers.
Despite this closeness, Toyota diverges from its competitors on make-versus-buy decisions. The company is not as interested in outsourcing as some of its American and European competitors, says Ron Harbour of Harbour Consulting. He's referring to such examples as Chrysler's construction of a Toledo, Ohio, plant where three suppliers contribute to the assembly process of the Jeep Wrangler. A more extreme example is a Brazilian auto plant where VW locates suppliers for the purpose of assembling vehicles.
Overall, Harbour says today's vertical integration at Toyota would have been typical of the practice at GM 30 years ago. But at the same time Toyota has demonstrated a commitment to strengthening its suppliers. While suppliers Visteon and Delphi were separated from Ford and GM (See "In Search Of New Outlets"), Toyota continues its commitment of close collaboration with suppliers, including increasing its equity position in suppliers such as Denso.
Toyota's supplier collaboration targets value in both vehicle pre-launch and post-launch situations, says Erlanger, Ky.-based Jamie Bonini, general manager, supplier commodity engineering for Toyota. He says pre-production collaboration -- two to three years before the launch of a vehicle -- centers on identifying and solving potential problems to the mutual benefit of both parties.
"A typical challenge can be the packaging of a new part. The considerations include how the packaging interfaces with the supplier's process, product shipment and finally with how the part moves into production at a Toyota plant. While packaging design is conceptually simple, each contact point can pose multiple challenges of productivity and cost."
Bonini says collaboration is critical "because everyone touching the package has different -- sometimes conflicting -- concerns that must be accommodated." For example, at the end of the supplier's production line can the parts be quickly and easily loaded into the packaging? Then in shipment the cost desirability of high density packaging must be weighed against the risk of vibration damage in transit to a Toyota plant. With supplier collaboration Bonini says the packaging of a purchased part can produce winning results in every venue -- not only on Toyota's assembly lines.
Supplier collaboration also provides substantial value in post-launch scenarios, even if the defect rate of delivered parts is very low, Bonini says. The focus is on making it easier (and less costly) for the supplier to maintain and even improve that low defect rate for delivered parts. "I've worked on instances where we were able to reduce the supplier's internal scrap rate for a valued supplier from 20% to less than 2%." He says such efforts strengthen a supplier and encourage future win-wins. "There's more value to be gained by collaborating with a supplier than by merely harassing them on cost."
Keeping R&D Close To Production
Locating R&D facilities in North America also plays into maintaining and strengthening the supplier relationships. The recent addition of the Calty Design Research Studio at the Ann Arbor, Mich., Technical Center is in step with Toyota's increasing manufacturing presence in North America, explains Ann Arbor-based Bruce Brownlee, senior executive at Toyota's external affairs division. The overall corporate goal: to serve the North American market with product designed, made and sold by North Americans. The philosophy also satisfies the need for close collaboration with the North American manufacturing facilities, Brownlee says.
The product that most closely demonstrates that goal is the all-American Toyota Avalon. Introduced in the 1995 model year as a replacement for the Cressida, the Avalon represents the research efforts of Toyota's Ann Arbor, Mich., Technical Center with help from support facilities in California, Arizona and Massachusetts (near MIT in Boston). At Ann Arbor the primary activities includes such things as vehicle parts and material design, regulatory affairs, and emission certification. California's Calty Design Research (Newport Beach) does the styling. Toyota's total North American R&D employment: about 750 total, of which about 600 are in Ann Arbor. Brownlee says the total engineering staff numbers 550 with about 200 support associates.
"A lot of what we do is work with our suppliers in a 'hands-on' mode. They have offices in our center to facilitate the value engineering of parts and components. Working together, we reduce part complexity, improve performance and evolve less expensive parts of ever-higher quality. Collaboration, not confrontation is our mode of operation."
To maximize the value of supplier input, collaboration begins at the earliest stages of the design process, says Randy Stephens, executive program manager for development and operations.
For Toyota, the Avalon represents the value made possible when TPS-enhanced business processes optimize a product for a geographically specific market, Stephens says.
Value-based organizational philosophies such as TPS increase the failure risk for those following conventional cost-based strategies, says Matheson.
Matheson's advice: "Anyone seeking to emulate Toyota's success should start with the first of Toyota's 14 management principles as outlined in Liker's book, The Toyota Way. "Base your management decisions on a long-term philosophy, even at the expense of short-term financial goals."