Toyota 2010/Crisis at the World’s Largest Automaker

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Read the Toyota case. Provide answers to the following questions. 1 page maximum (single space), A4 size, 12-point font size, 1-inch margin around.
1. What do you think were the main and most important causes of the Toyota crisis?
Don’t just repeat phrases or paragraphs from the case, but think more deeply about the
Question. You would need to go more deeply than just listing bullet points.

2. What should Toyota do to restore its reputation and competitive advantage?

In addition to the attached file, about the Toyota case, you may find this article useful. It is a report from harmstad university or you can use any other supporting document. You don’t have to write it APA, just a question and answer.
www.diva-portal.org/smash/get/diva2:349746/fulltext02

yale case 09-040 february 3, 2010
Toyota 2010
Crisis at the World’s Largest Automaker
Arthur Swersey1
Andrea Nagy Smith2
Catherine Forman3
Jaan Elias4
In winter 2010, the Toyota Motor Corporation faced a crisis. Following a number of highly
publicized accidents involving Toyota vehicles, the company was forced to recall millions of cars
with potentially deadly defects. Toyota shut down production at several of its North American
plants, halted sales of some of its most popular models, and issued a public apology. Customers
fled the showrooms, and Toyota sales in the U.S. dropped 16 percent in January 2010.
Additionally, the U.S. government promised to get involved as both the Obama administration
and Congress threatened investigations.
Observers were astonished. Toyota had built a reputation for the reliability of its automobiles.
Over a period of decades, the company had pioneered lean manufacturing and a stringent quality
control system that had become the envy of the world. Building on this success, in the late 1990s,
Toyota’s leadership had set a goal of capturing a 15 percent share of the world auto market. From
2000 to 2005, Toyota had steadily expanded its global manufacturing capacity and had also
worked to reduce costs by benchmarking to Chinese manufacturers.
The strategy seemed to work. By 2005, Toyota was worth more than the Big Three American car
companies put together, and The Economist called it “The Car Company in Front.”5 By 2007,
Toyota achieved its goal of becoming the largest car manufacturer in the world.
However, at the end of the decade, significant problems appeared. In the mid-2000s, the number
of recalls on Toyota vehicles began to increase. The company’s quality rankings slipped, and in
2007 its vehicles were downgraded by Consumer Reports. By 2009, Toyota recalls affected over
four million vehicles in the United States alone. In December of 2009, The Economist, the same
magazine that had lauded the company just five years earlier, now declared on its cover “Toyota
Slips Up.”6 Other publications followed suit with equally prominent stories about slipping quality
at Toyota. The New York Times published a front page story under the headline “Toyota’s Slow
Awakening to a Deadly Problem,”7 and The Wal Street Journal pronounced, “Toyota Is Unable
to Hit the Brakes on Crisis.”8 During January 2010, broadcast news outlets featured nearly daily
updates on Toyota’s woes.
l
Auto industry analysts suggested that the company’s rapid expansion had strained Toyota’s
ability to control its quality. In winter 2010, the company that had become one of the great
success stories of the automobile industry faced a crisis that could cost it billions of dollars and
threaten its survival. Observers wondered what, if anything, the company could do to restore the
quality of its products and its reputation for reliability.
A Brief History of the Toyota Production System
Toyota’s unique production system evolved because of the competitive disadvantages that the company
faced after World War II.
The Toyota Motor Corporation was founded in 1937 for the purpose of building trucks for the Japanese
army. After the war, as it made the transition to commercial car production, the company faced a number
of challenges. In particular, it needed to produce a wide range of vehicles in small numbers at low cost in a
war-ravaged economy. But the efficiencies that drove the big American carmakers were not suitable for car
production in Japan, which was a fraction of that in the United States. American methods emphasized
large batches made on highly specialized machinery, but this system was not cost-effective for low-volume
demand, especially in a country that had little capital for investment following the war.
In the 1950s, Toyota executives, led by executive Taiichi Ohno, visited the United States and toured a
Ford plant with its assembly line production. The Toyota delegation noticed that Ford produced only a
few automobile models, and they also observed the large amounts of inventory in the factory and the
resulting inefficiencies.
While the Toyota executives were in the United States, they also visited a Piggly Wiggly grocery store,
where they observed that shelves were stocked with many kinds of food and that goods were restocked
only after they were sold.
Inspired by the American supermarket, the president of Toyota, Kiichiro Toyoda, put in place the first
Just-in-Time system, which also came to be known as the Toyota Production System (TPS). The central
goal of the system was to eliminate waste by delivering materials to the point of production only when
they were needed.
The particular methods of the TPS practiced today are attributed largely to Taiichi Ohno. During the
1950s and 60s, Ohno developed a series of production techniques that emphasized flexible resources, with
regards to both machinery and employees, and an increase in productivity through the elimination of
waste.
Ohno embodied the culture of change and improvement that came to distinguish the Toyota Motor
Corporation. He personally mentored many of the executive leaders of Toyota, as well as hundreds of
production managers and supervisors.
The system developed by Ohno made Toyota viable in postwar Japan, enabling the company to produce a
variety of automobile models in low volume at low cost. Eventually Ohno’s system also gave the company
a way to compete with the high-volume, more mechanized systems of the US automakers. The Toyota
Production System resulted in reduced lead times, lower costs, and higher quality, which over time
enabled Toyota to become as profitable as all other car companies in the world combined.
As Toyota gained strength, its production system became the topic of hundreds of books and articles on
ways to increase efficiency in production. Most notably, in 1990 MIT professor James Womack conducted
an extensive study of auto manufacturers in which he concluded that the Toyota Production System was
destined to “change the world.”9 Womack coined the term “lean manufacturing” to describe the theory of
the Toyota Production System, and he claimed that Toyota principles could be applied to any production
process—administrative, retail, or service, as well as manufacturing.
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Pillars of the Toyota Production System
The Toyota Production System is a method of organizing mass production that differs in important
respects from the assembly line and the associated scientific management principles developed in the
1920s.
Toyota describes its production system as a “philosophy” that aims at “the complete elimination of all
waste.”10 Specifically, Toyota identifies seven types of waste, or “muda,” that creep in at all stages of the
production process:
1. Over-production ahead of demand;
2. Excess motion of people or equipment more than is required for production;
3. Unnecessary waiting of people or equipment for the next production step;
4. Excess movement of products beyond what is required to perform the processing;
5. Over-processing or incorrect processing as a result of poor tool or product design;
6. Excess inventory of raw materials, work in progress, and finished products;
7. Excess rework required by the manufacture of defective products.
The Toyota system attempts to expose the hidden causes of inventory-keeping and then to create a
production process that minimizes waste. Every person, machine, and building should be adding value to
the final product, the automobile.
Two methods are recognized by the company as the “pillars” of the Toyota Production System: the Just-
In-Time method of controlling the quantity and timing of production, and the Jidoka method of assuring
quality. (See Exhibit 1 for a glossary of Toyota Production System vocabulary.)
Just-In-Time Production Control
The “Just-in-Time” manufacturing system means that Toyota makes only “what is needed, when it is
needed, and in the amount needed.”11
Push versus Pull
In manufacturing systems prior to TPS, production was controlled by work orders back-scheduled from a
final production schedule. The amount of goods produced was based on the bill of material, the lead time
required to make the components, and the cost of setting up the machinery or ordering the part. Because
setup costs and scrap rates were high, managers scheduled long production runs to offset these expenses.
In order to accommodate these production runs, work orders were scheduled far in advance of needs.
Work was “pushed” onto the shop floor from an overall manufacturing plan.
The layouts of plants were of two types: a final assembly line where the product moved at a steady rate
down a conveyor with carefully timed work at each station, and back shops where the component parts
were made in large batches and stored in cribs for use on the assembly line. In the back shops, parts
traveled back and forth across the plant between operations and often waited in front of each operation.
Large batch sizes meant that a work order took a long time to complete at each operation. Assigning work
to machines and employees was handled by a supervisor and directed by production control expediters.
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Taiichi Ohno reasoned that much of the waste in such a system could be addressed by pulling material
through production instead of pushing it. Production would be initiated by a signal from the following
operation, not by a work order generated in advance from a production plan. By producing only what was
needed, the excess work-in-process inventory of parts would be greatly reduced.
In traditional “push” systems, the manufacturer produces goods and then tries to find buyers, but in the
Toyota system all production is linked to demand.
Kanban
During the 1950s Ohno devised a technique called “kanban” to implement the just-in-time system. In the
kanban method, parts for many models are available at each station. When a part is used to build a
subassembly, the preceding station (the station that produced that part) is signaled to make another. Each
operation produces only to replenish what is used up by the following operation.
There are many ways to signal the need for replenishment, the most common being kanban cards. In
Japanese, “kanban” means “sign-board.” These cards are marked with codes indicating the type of part,
the location where it is used, and the supplier that provided it. When a part is used, a card is sent to an
internal or external supplier requesting a re-supply. A withdrawal kanban card is used to get material
from a storage area, and a production kanban card is then sent to the work station to produce more
material. Other methods for signaling the need for replacement are lighted boards or empty shelf space.
Kanbans enable a steady flow of material through the system, by sending a signal at the precise moment
when more materials are needed. Kanbans also can signal a change in the mix of parts needed depending
on final demand. As the model mix on the final assembly line changes, the replenishment kanbans
change. What to produce and in what quantity is signaled by the following operation all the way from
final assembly through the back shops to suppliers. Production is pulled from final assembly.
One-Piece Flow
The ideal pull-based system would consist of a one-piece flow of materials through the production line,
with no excess inventory. The technique of kanban does not in itself eliminate excess inventory. The
quantity on the kanban card tells the station how many to produce, but this quantity may be fairly high.
In addition, there may be several kanban containers of parts at an operation. In order to reduce inventory,
the number of containers and the quantity on a kanban card must be reduced to as close to one as
possible.
Interconnected Techniques
In order to make the number of kanbans small, Toyota developed a set of interconnected techniques.
When material is pulled through the production system, and when the batch size is close to one, there is
no room for error in quality, quantity, or timing. Supporting operations must be closely synchronized.
It is said that inventory is like water that “hides the rocks.” As Ohno reduced the quantity on kanbans and
reduced the number of kanbans, “rocks,” or other sources of waste in the system, were revealed. As a
result, other methods for reducing waste had to be put into place. These elements are interconnected and
cannot be implemented effectively without putting all of them into place.
Reduced Setup Time
In order to decrease the quantity on a kanban card, which makes small lot production economically
feasible and allows flexibility in manufacturing different variations of the final part, machine setup costs
must be reduced. All machined parts require specific tooling: a drill bit size, a stamping mold, a grinding
wheel, and a computer program. Every time a different part is created, the tooling must be changed, and
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this requires machine changeover time or setup time. The longer this process takes, the more expensive
small batch sizes become.
One of Ohno’s colleagues, Shigeo Shingo, developed what is called Single-Minute Exchange of Die, or
SMED, in which changeovers are targeted to be done in less than ten minutes. In order to reach this goal,
the operator prepares for the changeover while the machine is running; these are known as external setup
tasks. Then the worker uses various devices to minimize the time needed to switch tools while the
machine is stopped; these are known as internal tasks. Setups are practiced and analyzed many times to
refine the changeover tasks and improve the process.
Takt Time
If material is being pulled to support the final assembly schedule, it must be produced at the same rate as
that schedule. Each station must manufacture the requisite number of parts in the requisite amount of
time. This is accomplished by determining the required cycle time for the final product from final
demand, and then calculating the cycle time for each supporting activity from final assembly cycle time.
This cycle time is called takt time, the German word for beat. It is the beat of the plant.
Takt time varies, depending on demand. Every 10 days Toyota dealers provide the factory with details
about orders, and based on that information, the factory makes a production plan. The plan can be
adjusted up to three days before the car is manufactured.
Takt time for a production facility is calculated by dividing the number of minutes in a day by the
production requirements for a day at each operation. The beat of the final assembly drives the beat of all
supporting activities. For example, if one car is produced every minute, then four tires, one steering
wheel, two front seats, one transmission, four pistons, etc., must be produced every minute. This means
that tires must be produced one every 15 seconds.
Adhering to takt time results in an even flow of production. As The Economist described the process,
“Everything is minutely synchronized; the work goes at the same steady cadence of one car a minute
rolling off the final assembly line. Each operation along the way takes that time. No one rushes….”12
Mixed-Model Assembly Schedule
In order to maintain steady production in the stations that support final assembly, the model sequence
must be mixed. If all cars with sunroofs were produced only one day out of the week, the supplier that
fabricates sunroofs would either have to produce inventory in advance of the schedule or be idle most of
the week.
A mixed-model final assembly schedule smoothes production in the back shops and allows kanban to
remain small. This practice of evening out the production flow is known as “heijunka.” A beneficial
byproduct of heijunka is that the manufacturer can quickly respond to changing demand. It is not
necessary to wait for “sunroof day” to make a car with a sunroof; instead, the mix of cars can be adjusted
each day.
Multi-Skilled Employees
In order to produce multiple models with the same resources, machines must be generic and flexible, and
employees must be multi-skilled. Toyota does not use specialized machines or groups of machines that
can make only one kind of part. Instead they use flexible equipment that can produce multiple parts, and
they train employees to operate multiple types of machines. This means that employees are seldom idle: if
there is a decline in demand for one type of task, they turn their attention to another task.
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Cells and U-Shaped Layout
The Toyota system attempts to avoid the waste of traditional manufacturing that operates in a process or
department layout. In this system, workers perform an operation on a product in large batches, before
sending the product on to the next department. The result is large inventories and long throughput times.
In this system, all machines of the same type are grouped together in one department.
In the Toyota system, consecutive operations on a part (both workers and machines) are located as close
to each other as possible in a manufacturing cell. As soon as one operation is completed, the product is
passed on to the next operation. Toyota found that the best way to do this was to place machines in a U
shape so that the cross-trained workers can move from one machine to another to reduce idle time. This
cell layout is referred to as a product layout, because a particular cell would produce parts in one product
family. In contrast to a department layout, a cell would have different types of machines placed side by
side.
In a process layout (separate departments) producing in large batches, there is a great deal of indirect
labor that comes from material handling to move parts from one department to the next. A batch of (say)
100 parts does not move to the next process until all 100 parts are completed; in other words, all of the
parts in the batch wait until the last one is finished. In contrast, with a product layout and small lot
production, parts move from operation to operation quickly, thus reducing throughput time and work-inprocess
inventory. In addition, quality improves because a worker can inspect a part coming from the
previous operation, and there is more of a sense of teamwork.
Standard Work
In order to make sure every activity meets takt, work methods must be standardized. Employees list the
tasks required to make each part, measure the minimum time required for production, agree on the best
methods, and post standard work sheets that describe and sequence the tasks. When demand changes,
takt changes, and so do the standard work sheets.
Workplace Organization
The workplace must be organized so that everything needed is accessible. This enables the factory to
reduce setup time and meet takt time. Toyota developed a system called 5S—sort, straighten, shine,
standardize, sustain–that organizes the workplace and reduces wasted movement.
First, everything in the area—tools, material, instructions, reports, personal items—is sorted, and only
those items needed for production are stored in the work area. Then items are placed where they can be
accessed easily during work, and the locations are labeled. When not in use, items are put back in storage.
Everything has a place, and everything is in its place.
The work area is kept clean at all times. As a result, it is easier for employees to notice problems, such as
oil on the floor by a machine. Usually employees are given time at the end of the day to clean up. Finally,
the rules and procedures are agreed upon by all employees in the area (“standardize”), and all employees
participate in finding ways to improve the area (“sustain”).
Total Productive Maintenance
Because each stage of the production system is linked together with little inventory between stages,
machines cannot break down during production hours. Operators do preventive maintenance on their
machines at regular intervals during the work week. Tasks are posted and checked off when
accomplished. Periodic overhauls by maintenance personnel are done on off shifts according to a lifetime
maintenance plan for the machine. This is called total productive maintenance.
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Jidoka
The second pillar of the Toyota Production System is jidoka, which involves the automatic detection of
defects. The concept originated with a loom invented by Sakichi Toyoda. The loom stopped automatically
whenever it detected a broken thread. By employing machines that automatically detect defects and stop
operating, jidoka frees operators from watching machines, enabling them to do more productive work.
Over the years, Toyota developed a number of techniques for putting this quality system into practice.
Andon Boards
Employees are given the power to stop the assembly line in order to call attention to a defect. They pull a
cord or touch a switch, and a signal is given to the team leader, usually a light on a board called an
“andon.” The team leader comes immediately and tries to fix the problem before the end of the
workstation’s takt time. If the problem cannot be fixed in time, the line stops until the problem is
resolved.
Employees are expected to call for help if they have not completed the required tasks by the middle of
their takt time, even if there is no defect. The team leader prevents future incidents by either training the
employee in the proper standard work, or changing the tasks to make it possible to complete them within
takt time.
Improvement Cycle
When a defect is discovered, Toyota employees engage in a process called “the five whys,” asking why the
defect occurred, and then why the problem that caused the defect occurred, all the way back to the source
of the problem. This method of discovering and fixing defects is called the daily improvement cycle.
Poka-Yoke
Poka-yoke devices are devised to foolproof a process, thereby preventing defects from occurring. Pokayoke
devices prevent employees from incorrectly assembling a part, packing a part, painting a part, etc.
Often these inexpensive devices involve a change in the design of the part.
For example, one manufacturing plant found that a car radio circuit board could easily be mounted
upside-down, because the circuit board was symmetrical. The solution was to make the circuit board
asymmetrical by cutting a notch on one side. After the improvement, the circuit board could not be
mounted upside-down, because it would fit into the frame in only one configuration. As a result of this
small mechanical adjustment, the quality defect was eliminated.
Kaizen
Toyota’s system of quality control and production control depends on active employee involvement.
Integral to TPS is the principle of “kaizen,” or continuous improvement, in which workers continually
think of small ways in which to improve the quality and efficiency of their tasks.
Toyota asks all employees to participate in the “daily improvements” of poka-yoke, work area quality
circles, and project teamwork. Employee suggestions are taken seriously and a high percentage of them
are implemented. For example, during the 2009 financial crisis at Toyota, an executive vice president said
that the company received 30,000 cost-saving proposals from employees, suppliers, and other partners. 13
Toyota has a policy of “stable employment that avoids simple layoffs and terminations,” because it is
committed to encouraging the development of employee skills and creativity.14 Layoffs disrupt labor-
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management relations and hinder that development. In the company’s current code of conduct,
employees are expressly asked to participate in improving the company in return for stable employment.
This philosophy of employee involvement and continuous improvement began with the first presidents of
the company. In 1935, Toyota executives published the teachings of Toyota founder Sakichi Toyoda as the
Toyoda Precepts, one of which urged each employee to pursue continuous improvement.
Supplier Networks
An essential part of Toyota’s quality control was to integrate its operations with those of its suppliers.
Toyota found that in order for the just-in-time pull system to function, its suppliers had to follow all of
the requirements of the Toyota Production System. Not only the machines but also the parts had to be
defect-free, because in a just-in-time system, a defective part will stop the flow of production.
During the time that Toyota was developing the elements of its own production system, it was also
developing a new method of relating to its supply base. The company selected the best suppliers and
developed close, long-term relations with them. In exchange, it exacted a high standard of quality. The
supplier was required to operate with defect-free quality, mixed-model production, on-time delivery with
the right part in the right quantity, and short lead times. As a visitor to Toyota’s Kyusha plant in Japan
explained,
Toyota produces only what is ordered. Dealers have to make a unit commitment 30 days in
advance of the production month, then lock in their specific orders five days in advance. At that
time, specific requirements are transmitted to Toyota’s suppliers, and they then have a three-day
lead time to sequence the parts required for each vehicle, which are then delivered in hourly
increments straight to the production floor.15
Toyota’s supply system requires reciprocal obligations: Toyota commits to long-term contracts with a
supplier and provides training and resources for improvement. The supplier is then expected to adopt the
Toyota Production System, including a commitment to continuous improvement in quality and
reductions in cost. Toyota shares production data with the supplier for planning purposes, and in return
the supplier opens its books to Toyota. The automaker collaborates with suppliers in the design of parts
and provides resources for them to design improvements in their own parts.
In order to support the just-in-time delivery of product and the mixing of models on a daily basis,
suppliers must be in close proximity to assembly plants. These relationships are not built easily, since the
most important characteristic of a supplier is that it is able to provide consistent on-time delivery and
defect-free quality. This requires training and many times an overhaul of the company’s production
systems. Toyota’s training institute was created as much to train suppliers as Toyota employees.
Success, Then Growth, Then Crisis
Over time, as Toyota implemented its production system, it gained a reputation for producing high
quality cars at low cost. As a result, during the 1970s and 1980s, it was able to expand its overseas sales
and production. In 1980 Toyota had 11 factories in nine countries, but the bulk of its production was
domestic. By 1990 it had 20 factories in 14 countries. (See Exhibits 2 and 3 for a chart of production
facilities by country.)
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Global Vision 2010
In 2000, Toyota reached a ten percent market share in global auto sales, placing it fourth among the
world’s car companies. The company decided to commit to a set of goals, among which was a target of 15
percent market share by 2010. Observers noted that by setting this goal, the company was committing
itself to a far higher rate of growth than it was accustomed to sustaining. One analyst figured that Toyota
needed to grow at a compound annual growth rate of seven percent per year for 10 years, in contrast to its
four percent CAGR over the previous decade.16
From 2000 to 2005, Toyota opened 11 new plants in seven countries: the United States, Mexico, the Czech
Republic, Poland, France, Russia, and China. By 2005 Toyota had 46 factories in 26 countries, and more
than half of its production was outside Japan. By 2007 two-thirds of its workers were employed outside
Japan.
Along with opening new manufacturing plants, Toyota increased its proportion of outsourcing until in
the mid-2000s it was sourcing between 70 and 80 percent of the cost of the automobile from suppliers.17
Toyota built networks of suppliers around plants in all 26 of the countries where assembly plants were
located. As Toyota president Fujio Cho explained in 2008, “At Toyota, ‘global’ means localizing
production in principal markets.”18
In addition to increasing sales, Toyota global vision strategy committed the company to a cost-cutting
campaign called “construction of cost competitiveness for the 21st century” or CCC21. The company aimed
to cut supplier costs by 30 percent and to benchmark those costs to Chinese parts-makers.19 Toyota hoped
to realize these savings by working closely with suppliers.
By 2004, auto analysts were reporting that the company appeared to be reaching many of its goals. The
company’s growth in production capacity led to an equally impressive growth in sales. In April 2007,
Toyota announced that its first-quarter sales had surpassed those of General Motors, a development that
The New York Times saw as inevitable: “Toyota’s ascendancy, which many in the industry have predicted
for some time, is another milestone in America’s long decline from unchallenged industrial
preeminence.”20 Indeed, in 2008 Toyota’s yearly sales topped those of GM, and Toyota became the largest
automobile maker in the world. Market share by 2008 was just below the 15 percent goal.
Quality Problems
However, at the same time as it was reaching its Global Vision 2010 goals, the quality of Toyota’s major
models unexpectedly began to slip.
Before 2006, the three top-selling Toyota models—the Camry, the Corolla, and the Rav4—were regular
winners of overall quality and dependability awards. But from 2006 through 2009, those models, which
comprised over 40 percent of unit sales, did not win any quality awards from J. D. Powers in North
America or in Germany. The Lexus division luxury models won multiple awards in those years, but they
comprised only 13 percent of unit sales. Toyota’s recalls began to rise, exceeding those of its competitors
Honda and Nissan. (See Exhibit 4 for details.) In October 2007, as a result of the decline of quality on
three models, Consumer Reports stopped its practice of automatically recommending all Toyotas.
Even worse, an increasing number of recalls put Toyota quality further in the spotlight. Some of the
vehicle problems resulted in driver deaths: most notably, in August 2009, a state trooper and his family
were killed in an accident in San Diego when the accelerator stuck on their Lexus. The National Highway
Traffic Safety Administration said that it had received reports of over 100 incidents in which accelerators
had been stuck, and the Los Angeles Times claimed that 1000 complaints about the same problem could
be documented. In 2009 Toyota was forced to recall four million cars with accelerator problems in the
United States.
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Toyota vehicles manifested other safety problems, as well, including tire corrosion, engine stalling,
exhaust system defects, and faulty steering rods, all of which caused the recall of several million vehicles in
the United States from 2004 to 2009. In 2007 the company settled one lawsuit from customers
complaining about oil sludge in car engines, and it was the subject of another lawsuit alleging that it had
covered up defects at its Nummi California plant.
Overall in the United States, the number of Toyota vehicles affected by recalls began to skyrocket. In 2000
there were about 8,000 Toyota vehicles recalled; in 2003 there were 200,000 recalled; and in 2005 there
were 2.3 million vehicles recalled. In Japan, as well, the company began to struggle, with its share of
recalls rising from 1.4 percent in 2001 to 34 percent in 2005.21
Financial Difficulties
At the same time as it was struggling with quality problems, the company began to suffer financially. In
2008, for the first time since 1939, Toyota reported an operating loss. The worldwide recession was an
obvious source of declining sales figures. A related problem was a strong yen, which reduced earnings on
exports. Early in 2009, Wharton professor John Paul MacDuffie said,
“The yen is a big headache for the Japanese right now. Added to everything else, it’s a tremendous
burden. It’s one thing to deal with a dramatic shift in exchange rates that made products more
expensive for consumers in good times; now it means you have to persuade people to pay more
when they are still not buying cars. If you take drastic declines in demand and add on the strong
yen, which makes their cars much more expensive, it’s a very tough challenge.”22
Global Vision 2010 Abandoned
Reluctant to shut down facilities, Toyota instituted other cost cutting measures. In mid-2009, the
company announced that it would close its joint venture with GM in California. Toyota also said that it
would postpone the opening of a plant in Mississippi, and would shut down other manufacturing lines in
North America. Most significantly, it announced that it would no longer pursue its goal of 15 percent
global market share by 2010.
Quality and the Workforce
The overarching problem, as many saw it, was that in its drive to expand, Toyota had neglected its
commitment to quality. As one analyst put it, “At some point, Toyota became a victim of its own success.
The company’s double quick expansion, from perennial underdog to voracious overlord, has
compromised their unique selling point: product quality.”23
Toyota CEO Fujio Cho had acknowledged in 2005 that such fast growth would bring challenges.
According to The Economist ,
He sees his greatest challenge as maintaining Toyota’s high standards in such areas as quality
while it grows so fast across the globe. For Toyota has only recently started to transform the way
it is run to make itself a truly global company rather than a big exporter with a string of overseas
plants. 24
Many believed that the transformation to a “truly global company” had not come soon enough.
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Challenges in Translating the Toyota Way
One particularly difficult problem that Toyota faced in its global expansion was training managers in the
Toyota Production System.
From its inception, Toyota had taught both factory workers and managers its Just-in-Time and Jidoka
techniques through apprenticeship. There was no manual; rather, training took place on the shop floor
through practical experience in making improvements. Ohno mentored hundreds of Toyota managers,
and they in turn mentored others. As Ohno envisaged the system, it was not a set of techniques that could
be enumerated in a book and then applied in any setting. In 1983 he wrote,
Since the Toyota production system has been created from actual practices in the factories of
Toyota, it has a strong feature of emphasizing practical effects, and actual practice and
implementation over theoretical analysis.25
When Toyota first began to open manufacturing plants outside Japan, skeptics wondered whether the
company’s unique production system could be taught to foreigners. Some observers suggested that the
system was so interconnected with Japanese culture that it could not be applied in other settings,
especially in western countries. However, during the 1980s, Toyota had successfully translated its
principles to far flung plants outside Japan. For example, beginning in 1988 Toyota had opened an
assembly plant in Georgetown, Kentucky, and had painstakingly trained American workers, managers,
and suppliers in the Toyota system. In the late 1990s, as Toyota was formulating its Global Vision 2010, it
seemed as though the company had proved that its principles that could be applied anywhere in the
world.
However, the rapid expansion of the early 2000s strained the company’s ability to transmit its production
methods through mentoring alone. In 2001, in an attempt to explain its system to new managers, the
company began to produce documentation and training courses. The company codified its philosophy as
the “Toyota Way,” and it established the Toyota Institute to train foreign managers in the essentials. But
even with formal courses, the Toyota system did not come naturally to new managers. According to one
analyst,
Like a religion, converting to TPS takes time (about two years or more), an organizational
commitment to cultural change, and the acceptance of new values by everyone–especially
management. In return the process optimization that TPS makes possible can lead to huge
paybacks in inventory reduction, increased product quality, and a relentless elimination of any
waste that hinders efficiency. If not a religion, TPS is at the very least a rigorous philosophical
approach to organized activity….26
As one American manager new to the company put it, the Toyota Way was “a shock to the system.”27
Workforce
In addition to the difficulty of training foreign managers and workers, observers also pointed to a lack of
sufficient manpower at all levels of the company.
One source of this problem was the retirement of experienced people. According to an industry analyst,
In a number of facilities, older workers with extensive knowledge of their plants and processes are
retiring, leaving their jobs to workers who are not as yet in step with their work. As a result,
Toyota, which built market share on a reputation for top-quality products, has experienced recalls
and quality problems ….28
11 toyota
As experienced employees retired, Toyota did not necessarily replace them. Instead, the company had
hired temporary and part-time workers and had pushed its existing staff to work ever longer hours.
According to a 2006 article in the Japanese magazine Weekly Toyo Kezai, Toyota’s productivity in Japan
had increased significantly between 1998 and 2005, from 47.8 cars per employee to 58.7. (See Exhibit 5 for
details.) The results were not necessarily good, said the authors: “the consequence is extreme fatigue, with
engineers working in the field inevitably having quality problems.”29
Others wondered if quality problems could be traced to a generational shift in the workforce. Observers
noted that in Japan a workforce that had proudly dressed in Toyota uniforms and joyously engaged in
performances of the company song was being replaced by younger workers with individualistic attitudes
who wore t-shirts and baseball caps. One visiting production expert referred to it as the “Americanization”
of the Toyota workplace.
Suppliers
Putting together supplier networks at the same time the company was trying to force down costs was also
creating problems. Because of a shortage of engineers experienced in CAD (computer-aided design),
Toyota had outsourced some design and engineering work to its suppliers. However, it was becoming
clear that these suppliers were not being given proper oversight:
The shortage of in-house talent has forced Toyota to outsource, relying on its parts suppliers to
design key components. At the same time, the automaker has increased the amount of parts
sharing among different models. The practice has dramatically increased the scope of a “single”
failure, as witnessed by last October’s recall of 1.27m Japanese vehicles. Goldman Sachs estimates
that design faults (e.g. rubber parts not thick enough to withstand engine heat and joints too
weak to hold together) account for 68% of Toyota’s 2004 recalls.30
Suppliers were also being called on to train shop floor workers in Toyota’s new plants. According to The
Wall Street Journal,
As it races to add new factories in North America and around the world while trying to maintain
quality, Toyota Motor Corp. is bringing in outside help to run its much-studied and much-copied
“lean manufacturing” system. For as long as Toyota has existed, the company has relied mainly
on its own highly-trained workers for manufacturing expertise to ensure that all Toyota plants
conform to the rigorous Toyota Production System…. But now, the world’s second-biggest
producer of automobiles after General Motors Corp. is scrambling to find enough in-house
Toyota Production System experts. In a significant shift, Toyota is turning to affiliated assemblyspecialist
companies to cope with the challenges of its ambitious plan to grab 15 percent of the
world auto market—about as much as GM has today—by 2010. Chief among those challenges: a
shortage of quality gurus. There are signs the company’s torrid growth agenda is straining
Toyota’s human and technical resources and allowing competitors to catch up with it on quality,
one of Toyota’s most critical strategic selling points.31
Cost Cutting
One of the largest problems, according to observers, was that Toyota’s ambitions to save money were
taking a toll. According to one analyst, Toyota’s “constant focus on cost cutting has created devastating
production glitches” 32
As a result of this change, it appeared that some key principles of the Toyota Production System were
being ignored. In 2007 Koki Konishi, the head of the Toyota Institute, told The New York Times that he
was concerned that some managers were not allowing workers to stop the assembly line when they
spotted a defect.33 The focus was shifting to speed and immediate cost savings.
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The Crisis Deepens
On October 2, 2009, Toyota president Akio Toyoda made a public apology for Toyota vehicle defects that
had led to a fatal crash in San Diego.34 Besides apologizing, Toyoda outlined a strategy for the company:
In his first press conference since taking the job, Mr. Toyoda painted the company as having
overextended itself in an effort to make big cars and big profits in the American market. He
promised to take a 30-per-cent pay cut himself, and offered a back-to-basics strategy that would
see the company develop new and separate strategies for each of the regions it is targeting: North
America, Europe and Japan, as well as emerging markets like China and India.35
However, in the succeeding months, the crisis only deepened. The recalls multiplied, involving more and
vehicles across an increasing number of models. The U.S. Congress promised an investigation, and the
U.S. Transportation Secretary requested a direct meeting with Toyota’s CEO. In early 2010, recalls began
to affect cars Japan and Europe, as well. By late 2009 Toyota had suffered greater financial losses than its
competitors Honda and Nissan, and the worst was yet to come. The Wall Street Journal reported,
The immediate impact of Toyota Motor Corp.’s recalls and sales stoppages is estimated to cost
the company around $1 billion, but the longer-term damage to the auto maker’s hitherto
impeccable brand is set to be much larger….36
Toyoda and other executives faced a crisis that the company had not seen since it first entered the
consumer automobile business after World War II. The company had built a production system that was
proved superior to American manufacturing methods and was said to have transformed industry
throughout the world. But somehow, in the process of that transformation, the company had forgotten
the basics. As The New York Times reported, Toyota had neglected a key Jidoka technique:
In Toyota lore, the ultimate symbol of the company’s attention to detail is the “andon cord,” a
rope that workers on the assembly line can pull if something is wrong, immediately shutting
down the entire line. The point is to fix a small problem before it becomes a larger one. But in the
broadest sense, Toyota itself failed to pull the andon cord on this issue….37
As Toyota’s managers coped with the immediate crisis, others wonder how the company could restore the
quality of its products and its reputation for reliability.
The assistance of Saburo Yoshida with Japanese translations is gratefully acknowledged. This case has been developed from
published sources for pedagogical purposes. The case is not intended to furnish primary data, serve as an endorsement of the
organization in question, or illustrate either effective or ineffective management techniques or strategies.
Copyright © 2010 Yale University. All rights reserved. To order copies of this material or to receive permission to reprint any or
all of this document, please contact Case Study Research and Development Yale School of Management, 135 Prospect Street, New
Haven, CT 06520, or email at [email protected].
13 toyota
Endnotes
i
1 Professor of Operations Research, Yale School of Management.
2 Project Editor, Case Study Research and Development, Yale School of Management.
3 Adjunct Professor of Management, Southern Connecticut State University.
4 Director, Case Study Research and Development, Yale School of Management.
5 “The Car Company in Front,” The Economist (Jan. 27, 2005).
6 “Toyota Slips Up: What the World’s Biggest Car Maker Can Learn from Other Corporate Turnarounds,” The
Economist (Dec. 10, 2009).
7 The New York Times, Feb. 1, 2010.
8 The Wall Street Journal, Jan. 29, 2010.
9 James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine that Changed the World (1990; New York:
Free Press, 2007).
10 Toyota company website, http://www2.toyota.co.jp/en/vision/production_system/origin.html
11 Toyota company website, http://www2.toyota.co.jp/en/vision/production_system/just.html
12 “The Car Company in Front,” The Economist (Jan. 27, 2005).
13 Automotive News, Nov 9, 2009.
14 Toyota company website, http://www.toyota.co.jp/en/environmental_rep/03/jyugyoin.html
15 Kevin Meyer , “Toyota’s Kyusha – Manufacturing Ballet,” www.superfactory.com
16 Bob Emiliani, “Toyota’s Denouement,” Superfactory: Resources for Lean Manufacturing, www.superfactory.com,
September 2009.
17 J.K. and T.Y. Choi, “Building Deep Supplier Relationships,” Harvard Bus ness Review 83 (December 2004), pp.
104-113.
18 “The Toyota Sequoia,” Toyoland, http://www.toyoland.com/trucks/sequoia.html.
19 “A China Price for Toyota,” Business Week (Feb. 21, 2005).
http://www.businessweek.com/magazine/content/05_08/b3921062.htm
20 Keith Bradsher, “Toyota Tops G.M. in Sales for First Time,” The New York Times (April 24, 2007).
http://www.nytimes.com/2007/04/24/business/24cnd-auto.html?_r=3
21 Jan Miller, “When Did Toyota Get to Be a Company Like This?” Panta Rei blog, August 2, 2006.
22 “Biggest by Default: Toyota May Be Number One, but It Still Faces Challenges,” Knowledge @ Wharton (Feb.
24, 2009). http://knowledge.wharton.upenn.edu/article.cfm?articleid=2155
23 Frank Williams, “Toyota: [Falling] Quality Is Job One,” The Truth about Cars (Aug. 18, 2006).
http://www.thetruthaboutcars.com/toyota-falling-quality-is-job-one/
24 “The Car Company in Front,” The Economist (Jan. 27, 2005).
25 Taichi Ohno, Foreword to Yasuhiro Monden, Toyota Production System (Georgia: Industrial Engineering and
Management Press, 1983), p. i.
26 John Teresko, “Toyota’s New Challenge,” Industry Week (Jan. 15, 2001), p. 71.
27 Martin Fackler, “The ‘Toyota Way’ Is Translated for a New Generation of Foreign Managers,” The New York
Times (Feb. 15, 2007).
14 toyota
28 “Biggest by Default: Toyota May Be Number One, but It Still Faces Challenges,” Knowledge @ Wharton (Feb.
24, 2009). http://knowledge.wharton.upenn.edu/article.cfm?articleid=2155
29 Takahiro Hasegawa, Akihiro Nomura, and Keiji Umesaki, “Toyota,” Weekly Toyo Keizai (July 29, 2006), pp. 28-
37. Translation by Saburo Yoshida.
30 Frank Williams, “Toyota: [Falling] Quality Is Job One,” The Truth about Cars (Aug. 18, 2006).
http://www.thetruthaboutcars.com/toyota-falling-quality-is-job-one/
31 Norhiko Shirouzu, “Mean but Lean, Toyota Seeks Outside Help — With In-House Quality Gurus in Short
Supply, Auto Maker Turns to Its Assembler Affiliates,” The Wall Street Journal (July 14, 2005), p. B4.
32 Frank Williams, “Toyota: [Falling] Quality Is Job One,” The Truth about Cars (Aug. 18, 2006).
http://www.thetruthaboutcars.com/toyota-falling-quality-is-job-one/
33 Martin Fackler, “The ‘Toyota Way’ Is Translated for a New Generation of Foreign Managers,” The New York
Times (Feb. 15, 2007).
34 Hiroko Tabuchi and Micheline Maynard, “President of Toyota Apologizes,” The New York Times (October 3,
2009), p. 1.
35 Mark MacKinnon, “How It Became Japan’s Detroit: Nowhere Is Japan’s Manufacturing Slump More visible and
Visceral than in Toyota City,” The Globe and Mail (July 18, 2009), p. B1.
36 Daisuke Wakabayashi, Mariko Sanchanta, and Yoshio Takahashi, “Toyota Faces Fallout over Recall,” The Wall
Street Journal (Feb. 1, 2010). http://online.wsj.com/article/SB10001424052748704107204575038750582835286.html
37 Bill Vlasic, “Toyota’s Slow Awakening to a Deadly Problem,” The New York Times (Jan. 31, 2010).
http://www.nytimes.com/2010/02/01/business/01toyota.html?scp=2&sq=toyota&st=cse
15 toyota
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Exhibit 1: Glossary of Toyota Production System Vocabulary
Andon: Toyota’s system for calling attention to a defect at the point of production. Typically the
worker pulls an andon cord, which lights up a signal on an andon board.
5S: sort, straighten, shine, standardize, sustain; Toyota’s techniques for organizing the workplace
and reducing wasted movement.
Five whys: the process of asking why a defect has occurred, and then why the problem that
caused the defect occurred, through five iterations, in an attempt to solve the problem at its
source.
Heijunka: the process of evening out the production flow so that model variations are spread out
rather than clustered together, the result being a mixed-model final assembly schedule.
Jidoka: Toyota’s system of quality control; the devices and practices that keep defective parts
from getting to the next operation.
Kaizen: Japanese word for “improvement”; incremental ways in which every employee improves
the quality and efficiency of their work.
Kanban: a system, involving cards, lighted boards, or empty shelf space, for sending a signal at
the precise moment when more materials are needed at a particular point in the production line.
Muda: waste that occurs in the manufacturing process, chiefly as the result of excess inventory.
Poka-yoke: mechanical devices, such as a checking tool or a holding tool, that prevent defects.
Takt: the “beat” of the plant; the time in which each operation of the production system must
happen in order to maintain an even production flow and meet each day’s production requirements.
Takt time is calculated by dividing the number of minutes in a day by the production requirements
for a day at each operation.
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Exhibit 2: Toyota Plants outside Japan
As of the end of March 2008, Toyota conducts its business worldwide with 53 overseas manufacturing
companies in 27 countries and regions. Toyota’s vehicles are sold in more than 170 countries and regions.
Location
Start of
Operations
Number of
Employees
Vehicle
Production*
North America
Canada British Columbia Feb. 1985 302 –
Ontario Nov. 1988 5,091 303
California Nov. 1971 606 –
Kentucky May 1988 7,632 515
Missouri Jan. 1993 1,129 –
West Virginia Nov. 1998 1,389 –
Indiana Feb. 1999 4,279 284
Alabama Apr. 2003 1,012 –
U.S.A.
Texas Nov. 2006 2,205 139
Latin America
Argentina Mar. 1997 2,949 69
Brazil May 1959 3,090 63
Colombia Mar. 1992 1,860 –
Mexico Sept. 2004 834 34
Venezuela Nov. 1981 2,327 17
Europe
Czech Republic Feb. 2005 3,320 105
France Jan. 2001 3,959 262
Poland Walbrzych Apr. 2002 2,074 –
L g Jelcz-Laskowice Mar. 2005 1,069 –
Portugal Aug. 1968 690 –
Turkey Sept. 1994 3,963 161
U.K. Sept. 1992 4,926 278
Russia Dec. 2007 600 –
Africa
Kenya Aug. 1977 311
South Africa June 1962 9,557 146
Oceania
Australia Apr. 1963 4,903 149
Middle East
Bangladesh June 1982 66 –
* Vehicle production reported in 1,000s. Only final assembly plants report vehicle production – other plants manufacture parts.
18 toyota
Location
Start of
Operations
Number of
Employees
Vehicle
Production*
Asia
Tianjin Oct. 1997 413 –
Tianjin May 1998 793 –
Tianjin July 1998 1,821 –
Tianjin Jan. 1999 233 –
Tianjin Oct. 2002 12,281 271
Changchun Dec. 2004 767 –
Tianjin Dec. 2004 231 –
Guangzhou Jan. 2005 1,241 –
Chengdu Dec. 2000 2,057 5
China
Guangzhou May 2006 4,614 170
Taiwan Jan. 1986 2,793 99
India Bangalore Dec. 1999 3,614 52
Bangalore July 2002 836 –
Indonesia Jakarta May 1970 5,332 66
Jakarta 2004 – 86
Malaysia Shah Alam Feb. 1968 3,270 45
Sungai Choh 2005 – 22
Pakistan Mar. 1993 2,079 36
Philippines Makati City Feb. 1989 1,929 19
Laguna Sept. 1992 1,045 –
SamutPrakan Dec. 1964 12,722 436
SamutPrakan May 1979 – –
SamutPrakan May 1988 1,100 63
Thailand
Bangkok July 1989 2,260 –
Vietnam Aug. 1996 854 18
* Vehicle production reported in 1,000s. Only final assembly plants report vehicle production – other plants manufacture parts.
Source: Toyota company website, http://www2.toyota.co.jp/en/facilities/manufacturing/worldwide.html
19 toyota
Exhibit 3: Toyota Plants, Japan
Locations of Toyota manufacturing facilities
20 toyota
Toyota Plants
Name Main products
Start of
operations
Number of
employees
Honsha Plant Forged parts, hybrid system motors, Land Cruiser chassis Nov. 1938 2,506
Motomachi Plant Crown, Mark X, Estima Aug. 1959 4,582
Kamigo Plant Engines Nov. 1965 4,128
Takaoka Plant Corolla, Vitz, ist, Ractis, Auris, Scion xD Sept. 1966 4,984
Miyoshi Plant Transmission-related parts, cold-forged and sintered parts July 1968 1,745
Tsutsumi Plant Prius, Camry, Premio, Allion, Wish, Scion tC Dec. 1970 6,340
Myochi Plant Suspension cast parts, suspension machine parts June 1973 1,641
Shimoyama Plant Engines, turbochargers, VVT, catalytic converters Mar. 1975 1,997
Kinu-ura Plant Transmission-related parts Aug. 1978 4,081
Tahara Plant LS, GS, IS, GX, RAV4, 4Runner, Land Cruiser, Vanguard, engines Jan. 1979 10,370
Teiho Plant Mechanical equipment, moldings for forging and casting and resin-molding dies Feb. 1986 1,872
Hirose Plant Research and development and production of electronic control devices, ICs Mar. 1989 1,290
Toyota Motor Kyushu,
Inc.
IS, ES, RX, Harrier, Highlander, engines, hybrid system motors Dec. 1992 4,762
Toyota Motor Hokkaido,
Inc.
Automobile parts including automatic transmissions, transfers, aluminum
wheels
Oct. 1992 1,691
Toyota Motor Tohoku
Co., Ltd.
Production of mechanical and electronic parts Oct. 1998 277
Notes
1: As of March 2007 (automotive operation or products and number of vehicles produced are as of December 2007). Figures for numbers of employees are as of the end of the fiscal
year.
2: Production figure for the Honsha Plant indicates Land Cruiser chassis production.
3: Toyota Motor Kyushu, Inc., Toyota Motor Hokkaido, Inc. and Toyota Motor Tohoku, Inc. are 100%-owned subsidiaries of Toyota Motor Corporation.
Source: Toyota website, http://www2.toyota.co.jp/en/facilities/manufacturing/
21 toyota
Exhibit 4: Toyota Recalls Compared to Honda and Nissan, Japan, 2000 to 2005
Total number of cars recalled during the selected years.
Note: this chart does not take into account the differences in sales volume.
Source: Weekly Toyo Kezai, July 29, 2006
Number of Recalled Cars in Japanese Market
(in thousands)
0
500
1000
1500
2000
2500
2000 2001 2002 2003 2004 2005
HONDA
TOYOTA
NISSAN
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Exhibit 5: Toyota Car Production per Employee, Japan, 1996 to 2005
Annual
Production
(in thousands)
Employees
1996 3,500 65,224
1997 3,421 64,806
1998 3,086 64,998
1999 8,212 65,290
2000 3,422 65,005
2001 3,364 66,820
2002 3,513 65,551
2003 3,558 65,346
2004 3,749 64,237
2005 3,863 65,798
Source: Weekly Toyo Kezai, July 29, 2006
Toyota Per-Worker Car Production
in Japanese Market
40
50
60
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
(number of cars)