Column Archive: March 2010

New United Motor Manufacturing, Inc. closes its doors for the final time this Thursday, April Fools' Day. It is a sad occasion for anyone who has been touched by NUMMI over the years. It is a time for testimonials, such as the outstanding treatment by Frank Langfitt for an hour-long special "NUMMI" on National Public Radio's "This American Life". I can't remember hearing a better documentary radio show, featuring interviews with many individuals who have played key roles in the NUMMI story over the years. I suggest - no, I insist - that you give it a listen.

Unfortunately, for every yin there's a yang, in this case in the form of an article by Bob Herbert in the New York Times: "Workers Crushed by Toyota" (link: http://www.nytimes.com/2010/03/16/opinion/16herbert.html?scp=6&sq=herbert&st=cse ). I would like to give Herbert the benefit of the doubt. Surely he simply received bad counsel and was erroneously informed - otherwise he would never write such nonsense. But, upon closer reading, his nonsense is no one's responsibility but his own.

Herbert attacks Toyota for the closing of the NUMMI plant in Fremont, California. In previous columns ("Arigatou NUMMI", "Was NUMMI a Success?", "How NUMMI Changed Its Culture") I've written about the significance of this historical venture, and in my Sloan Management Review article I shared some lessons I learned while working there. Herbert's column merits a response because it reflects a fundamental misunderstanding of what NUMMI was all about. Both NUMMI and Toyota deserve better.

NUMMI Closing Misrepresented
Herbert's hollow outrage is evidence of how extreme the Toyota-bashing party has gone. I concur wholeheartedly with Herbert's wish that NUMMI remain open. Having played a role in NUMMI's beginning over 25 years ago, I am sure that I am saddened far more than Herbert by the unfortunate turn of events. But he totally misrepresents the situation.

Toyota was in fact lambasted (due to ignorance) when they moved in, and lambasted (due to ignorance) again as they exit - after being left holding the bag by GM. A federal lawsuit in 1984 almost prevented NUMMI from ever even happening. Even then, the judgment handed down by a federal judge limited the life of the GM-Toyota joint venture to 12 years. NUMMI only survived beyond that because Toyota (not GM) petitioned 10 years later to vacate the order, a request that was granted.

Bottom line: no one in the auto industry can make a business case to produce automobiles in California. Toyota - not GM which wanted out of the JV for years and was able to use Chapter 11 as an excuse to ditch Fremont - has tried to do the right thing fighting against the unfriendly economics for years.

I can't claim to know all the facts weighed by Toyota or GM in making their business decisions to exit NUMMI. Neither can Herbert. But that doesn't prevent him from outrageous statements such as, "The company could keep the plant open and profitable if it wanted to." Herbert can't possibly know that to be true. What is most outrageous here is the double-standard Herbert brings to lay all the blame on Toyota. If we want to speculate on the business case for all the parties here, an equally strong or stronger case can be made to "blame" GM, or even the state of California for NUMMI's unfortunate closure.

Herbert blames Toyota for "crushing the workers", but the fact is that this is the second time for GM to pull out of the same community, each time with no regard for the community or the workforce. Where was Herbert when GM pulled out of Fremont in 1982? Or when Ford pulled out of Milpitas, ten miles away? Or when GM closed Van Nuys, or Oakland, or South Gate, all also in California? There are no other auto factories in CA today because the business case hasn't been there to justify it for 30 years. Toyota stayed this long IN SPITE OF the lack of business case, and in spite of the fact that GM has long desired its second exit from the plant.

Let's not forget that Toyota's decision to enter the JV in the first place salvaged a mess left by GM in Fremont two years earlier. The plant had been a disaster prior to its first shuttering. A Wall Street Journal article from the time reported: "When GM closed its Fremont plant in 1982, laying off about 5,000 workers, an extraordinary 800 grievances were pending and absenteeism regularly passed 20%. Beer bottles littered the parking lot and even a union request for a fan in a plant telephone booth had to go to the negotiating table." ["GM, Toyota, UAW Are Nearing Their Goals," John Bussey and Mike Tharp, Wall Street Journal, May 20, 1986] By the way – after Toyota introduced its production and management systems, that absenteeism reduced to a steady 2%.

Gold Rush in Reverse

What does Herbert mean by "California has been very, very good to Toyota."? Last July, BusinessWeek ran an article ["Toyota, GM End Long, Costly Marriage," David Welch, Business Week, July 1, 2009] that said "Then there is the higher cost of doing business in California. Since 2000, the Golden State has lost 456,000 manufacturing jobs mostly due to rising costs. Corporate tax rates are double the national average, according to Jack Stewart, president of the California Manufacturers & Technology Association; electricity rates are one-third more." Toyota is following the same business logic that chased all of those manufacturing jobs out of the state. Why single out Toyota to blame for that?

At the time GM and Toyota made their respective decisions, Toyota was losing money and market share. Volumes were falling. A recovery of both profitability and volume had just begun for GM, which was already starting to look for more volume at about that same time. Yet GM backed out of the plant while Toyota continued to produce cars and employ workers.

Note the timeline. In July 2009 - AFTER filing for bankruptcy - GM announced that "as part of its long-term viability plan, General Motors has decided that its ownership stake in the New United Motor Manufacturing Incorporated (NUMMI) joint venture with Toyota will not be part of the 'New GM'." Clearly, they didn’t believe they could make a positive business case for the plant. In August, Toyota announced that it had lost $819 million for the first quarter. At the end of the month, Toyota announced that it would end production at NUMMI at the end of March 2010. In other news that August, GM announced that it planned to raise its overall U.S. production 20% in the third and fourth quarter, and that it would reinstate 1500 jobs. "'The uptick is an encouraging sign that vehicle sales are turning around,' said Tim Lee, GM group vice president of global manufacturing and labor." ["Toyota Weighs Shutting California Site," Norihiko Shirouzo, Wall Street Journal, August 19, 2009.] By the way, in that same announcement, GM said that it would be adding shifts to plants in Lordstown Ohio and Ontario Canada.

$280 Million of Ingratitude
Herbert also attacks Toyota's business logic. But, regarding NUMMI's profitability and productivity (the plant's biggest contributor to profitability), relatively speaking, for Toyota, I'm guessing that NUMMI would have had easily the lowest productivity of any of its plants in North America. For GM, I believe that NUMMI has lately been middle of the pack. GM didn't choose to close ALL plants, just some, so just because they were in Chapter 11 does not automatically mean they had to pull out of NUMMI. With risks and some costs shared with a joint venture partner, good (for GM) productivity, growing volumes, an ongoing need for small, fuel efficient vehicles, you could argue that GM could easily have made the decision to stay with NUMMI.

Further, even granting (as we should) GM its right to make business decisions as they see fit - in this case pulling out of NUMMI - what is the justification for how they exited? Twenty-five years of partnership with Toyota (50/50) and with the UAW and the local community and they simply walk away, for the second time from the same community, workforce and union local.

"Toyota is paying the state back with the foulest form of ingratitude," charges Herbert. The facts say otherwise. On March 18, Toyota announced that it will pay $280 million to fund transition support for NUMMI's salaried and hourly team members. This is in contrast to the payment from General Motors of, let's see, that would be precisely $0. I don’t know but that's probably the same they offered the workers when they laid them off in 1982.

Herbert condemns Toyota for its "ingratitude." What did the state of California do to take advantage of the incredible gift (new production paradigm; new model of labor-management relations) that NUMMI/Toyota gave them? Did they build an industry-friendly environment to attract more businesses and auto suppliers? No. They sat and watched as company after company fled the area, fled the state. Instead of being vilified for bucking the trend (self-inflicted by the state) of exiting, Toyota should be lauded for staying long after every other automaker fled.

Labor Pains
As long as we're passing around blame, let's not forget the national and international levels of the UAW. Instead of learning from the outstanding success of its outstanding brothers and sisters at the UAW Local 2244, UAW leadership remained suspicious of the innovative and successful model of labor-management relations pioneered by NUMMI. NUMMI and UAW Local 2244 signed their first collective bargaining agreement in June 1985, with the company and union committed to resolving problems together and seeking mutual trust. But, UAW national and international leadership remained skeptical, stuck in a 1950s mindset of adversarial labor-management relations, as they watched their membership plummet over the years.

Imagine if the State of California and the UAW had together embraced the NUMMI model and made CA into the land of the world's best environment for businesses and workers to work together for mutual prosperity! Instead they chose years of business-unfriendly policies and inaction rather than aggressive action to retain and attract business. Now they expect Toyota to now do FOR them instead of asking what they could do for themselves.

Toyota's ongoing involvement as GM's JV partner at NUMMI has been a matter of loyalty as much as anything else. Under ordinary circumstances, Toyota would never close an operation it had invested in. Toyota has a track record of proving time and again the lengths to which it will go to preserve jobs well past the apparent business need for them. When NUMMI opened, Toyota didn't receive ANY of the product from the plant, so NUMMI wasn't even part of Toyota's marketing plan. Toyota added its own product to the mix when GM couldn't sell enough to keep the plant running at anywhere near capacity. Until Toyota added the dowdy Corolla FX hatchback in about '88, the plant was running at about 70% capacity. GM would've laid off the extra workers; Toyota gave them additional training.

In the beginning, Toyota had many concerns about transplanting perhaps the most important aspect of its production system - its way of cultivating employee involvement - in getting started. How could workers with such a bad reputation support us in building in quality? How would they support the concept and practice of teamwork?

As it turned out, the "militant" by reputation workforce of the old GM Fremont plant was not an obstacle. Of course, problems cropped up but they were overcome through the effort of all involved. In fact, UAW Local 2244 members didn't just accept Toyota's system, they embraced it with passion. They took the quality of the plant from GM's very worst to GM's very best - not just bad to good, from worst to best - in only one year. The exact same workers, including the old supposed "troublemakers." (Again, see SMR article.)



The fact is, for either GM or Toyota, we don't know and won't know all the facts around their respective business decisions to exit. But, it is certainly a stretch to hold Toyota more culpable than GM just because they were left holding the bag.

Remember the Alamo
Herbert states that NUMMI was de facto a Toyota production facility, quoting production figures carefully chosen from the years 2002 to 2009, when sales (and therefore production) were down for GM and strong for Toyota. But, percentage of product per partner is incidental to responsibility as a 50/50 joint venture partner. Investment in a factory - whether joint venture or wholly-owned - means investment in the people and assets with an eye to their value beyond product mix allocation at a given point in time. Probably Herbert didn't know that initially Toyota received no product at all from NUMMI, with all of the production going to GM. Over the course of the 25 years of the joint venture, a little over 25% of the product went to GM. Note, however, that in recent years the low volume of GM product was not due to anyone's strategic intent - GM just couldn't sell the product in the volumes they would have liked. The increase in percentage of production the past few years wasn't because of any long term plan for Toyota to take over NUMMI - it was simply because Toyota could use capacity that GM didn't want at that time.

That ignorance did not prevent Herbert from calling "a cold and irresponsible act on Toyota's part, a decision that was not necessary from a business standpoint." I guess Herbert knows a lot more about Toyota’s business situation than I do. What I do know is that Toyota was facing fundamental challenges in terms of excess capacity at a time of lower demand. It was faced with owning the remaining automobile production plant in California - a state that had witnessed the exodus of more than a dozen other plants over the years. As Herbert states, "Shutting down the plant will be another milepost in the long erosion of California's once-thriving auto industry."

That is the one statement that Herbert makes with which I can agree, in both fact and sentiment. It is indeed a sad state of affairs that a once-proud industry is now a thing of the past. But, don’t blame losing the battle on the last-standing soldier at the Alamo.

NUMMI's Magnitude
NUMMI was hugely important to American manufacturing. NUMMI proved that the best, supposedly "Japanese," production methods in the world could work on American soil with American labor. An early motto at NUMMI was "Best of Both Worlds." I truly believe NUMMI in its heyday embodied that motto in principle and in practice. And, if lean production and lean thinking and the lean enterprise are the way forward for American organizations in all industries, NUMMI was the most important lens for the world outside Toyota to see it up close.

The story of NUMMI is a hugely important one in the history of American industry. In the mid-1980s, NUMMI offered the first close-up look at what later became known as lean production. While many visitors in the 1980s marveled at the technical details of the Toyota Production System, others raved about the new model of labor-management relations that NUMMI spearheaded.

If NUMMI made business sense for Toyota as a solely-owned operation, Toyota would surely stay and keep the plant open. Without a joint venture partner, we can only assume that the numbers just don't add up. It's as simple as that. Rather than outrage at Toyota for leaving due to a situation that makes for an impossible business case, Herbert would serve his readership better to encourage the building of business environments that attract and keep good employers. With such an environment in place, I'm sure both Toyota AND General Motors would have made different decisions.

Agreement - and Closure
The closure of NUMMI is indeed unfortunate and I am joined by thousands of others in lamenting its demise. The employees of NUMMI didn't care about the geopolitical environment that brought about the creation of the joint venture 25 years ago, and they don't much care about the macro-economic trends that have contributed to its termination today. The employees - hourly and salaried - of NUMMI did their part to show a better way of working together. They deserve better treatment now, from all parties, not just Toyota.

john

An Interview with Professor Takahiro Fujimoto, Manufacturing Management Research Center, University of Tokyo

As Toyota's crisis has unfolded the past few weeks I have been in regular touch with the most knowledgeable "Toyota watcher" of all, University of Tokyo Professor Takahiro Fujimoto. Taka first became famous for the important research he conducted at Harvard Business School with Kim Clark on Toyota’s product development system. Since then, having returned to Japan, Taka has written many informative books, including The Evolution of a Manufacturing System at Toyota, The Birth of Lean, and Competing to Be Really, Really Good.

I asked Taka to give us the benefit of his perspective on Toyota's woes through a simple Q&A. You will see repeated reference to "monozukuri" and the "monozukuri gemba." The literal meaning of monozukuri is simply "making things." But like other simple terms such as kaizen or gemba, the Japanese use of the term monozukuri takes on deeper meaning - call it the "art, science and craft of making things" - with connotations of something close to a national philosophy and a reflection of national character. Toyota's troubles, along with other indications of industrial decline, have led to national dialogue in Japan concerning the loss of monozukuri leadership. That backdrop can be read in many of Taka's remarks, which limit themselves to not only Toyota, but which concern Japanese industry as a whole.

The Emergence of Complexity

John Shook: The rash of recalls and embarrassing public hearings in Washington represent an unprecedented crisis for Toyota. What is your take on what has led up to this state of affairs?

Takahiro Fujimoto: The current series of problems represents a massive failure on the part of Toyota. And Toyota must take full responsibility for ending up where it is today. But the root causes of these problems are not easily identified. Many internal and external factors have combined in a complex mix. These include misjudgments by Toyota, and overconfidence in its own quality. The factors also include increasingly complex vehicle design, production increases and globalization, and the resulting explosive rise in the number of related problems. While some of these factors are specific to Toyota, others affect the industry as a whole.

I won't join the critics who are questioning the integrity and quality of the entire company, and who are looking for simple solutions to the current complex state of affairs. We must be careful about judgment until investigating the actual problems more thoroughly.

I have had ample opportunity to examine the company and do not believe that Toyota's guiding principles are the source of its troubles. Nevertheless, I do find that Toyota's operations have stumbled in both attentiveness and ability.

Shook: Can you name one primary factor that has contributed to this?

Fujimoto: Again, it is difficult to name one just factor because the root causes are extremely complex. Toyota has absolutely made its own errors: clearly there are specific aspects of Toyota's organizational culture that lurk behind its poor decision-making. Moreover, I have observed an air of arrogance that may certainly have weakened Toyota in recent years. Yet it must be noted that Toyota faces the same huge challenge as any other company of its scale, in terms of product, market, and production complexity - all the challenges of globalization. The automobile companies of developed countries have been and will continue battling what we might call the demon of complexity - a long-distance obstacle course on which they are challenged to build their capabilities.

If there is one primary reason for the crisis, it is that this overwhelming complexity exceeded Toyota’s organizational capability.

The conditions leading up to this affect all major global automakers. Vehicles in developed countries become ever more complex for several reasons. For one, the governments of developed countries have imposed strict regulations governing safety, emissions, fuel consumption and so on. Meanwhile, the requirements of customers have also grown more stringent. Such preconditions mean that industrial design teams have to solve what is in effect a vast set of simultaneous equations. One response has been to limit the shared use of components, and to seek product-specific optimization. And so technologists have developed extraordinarily elaborate - and complex - electronic control systems as a means of modularizing their designs with these constraints. The vehicles demanded by customers in the developed economies of the 21st century contain software with more than 10 million lines of code.

Up until now, Toyota has led the race in dealing with the increasing complexity of functionality, the capacity needed to produce an increased number of vehicle models, and the challenge of managing an increasing global organization. In fact, Toyota has been an industry-leader in vehicles with complex designs, such as mass-produced luxury cars and hybrids. And yet the integrated organizational capability that drove Toyota's success and leadership in the U.S. market could not hold together in recent years, which betrayed its dark side. Despite their best efforts to build capability, they were unable to conquer these demons of complexity.

The Roots of Toyota's Troubles

Shook: How much of the trouble would you attribute to specific decisions made by Toyota, as opposed to the general challenge of complexity facing all global companies?

Fujimoto: Toyota's great success of recent years put the company in a unique position, which led to some of its mistakes. The company was running too fast enjoying the tailwind of years of dramatic growth. When the financial boom in America generated increased demand for luxury cars, Toyota was able to meet that demand by tapping into its strong Japanese operations specializing in the mass production of complex products of high quality. Consequently, Toyota's volume of luxury cars exported to the U.S. rose rapidly, which generated unprecedentedly high profits. The company then invested that profit by rapidly expanding production volumes, and increasing the number of manufacturing facilities and product lines. As a result, Toyota found itself leading the world in production volume. As a trailblazer to develop environmentally-friendly vehicles, they also led the field in the "complexity race."

However, when the U.S. boom turned to bust, Toyota's fortunes were reversed. The collapse of the American market for luxury cars, and a misguided period of investment into U.S. truck factories caused the red ink to start flowing. The rapid increase in the number of overseas factories and new models simply exceeded the amount of quality managers available. Observers suspect that the failure to evaluate and approve components designed by overseas suppliers lies behind the problem with the accelerator pedal.

Most important of all, Toyota's new position as global leader appears to have influenced leaders to lose sight of a fundamental way of thinking at the company. Toyota's thinking had always been "seek quality, and volume will follow". But the looming prize of becoming the world's number one automaker led some managers to replace the company's quality first policy with a "plan for volume and achieve volume" approach. The result was to chase volume and overextend on quality - a flaw that was amplified by the multiplying effects of increasingly complex designs and rapidly increasing volumes.

Shook: What other factors have you identified as key? How have senior managers reacted to this crisis and criticism after years of success and praise?

Fujimoto: Having spent the '90s being admired for producing the world's best quality, an arrogance born of overconfidence started to appear in certain sections of headquarters. The signs of that unfortunate arrogance are clear. The number of customer complaints received by the company is significant. And yet even as quality problems and accidents occurred, Toyota leadership clearly responded by saying, "our quality is perfect - it's the user's fault." This attitude is a severe departure from Toyota's true management philosophy and demands correction.

Toyota certainly knows that there is no excuse for a company to avoid full accountability. More than ever, businesses must be self-critical and accept responsibility whenever there is a disconnect with customers; or they cannot win trust from customers and society in general. Businesses should never say things like "we didn't envisage this type of use," or "it's the driver’s fault," or "it's just a question of how the customer feels."

Businesses have to realize that in this age of complexity, not only technology but customer requirements have also advanced. For instance, Toyota made some recent recalls on the basis that "certain customers felt uncomfortable." What had previously been regarded as acceptable is now unacceptable. If Toyota wants to lead, it has to stay ahead of advancing customer requirements.

Shook: Have you observed the same kind of negative changes in the factories, at the production gemba?

Fujimoto: I have never seen this kind of arrogance at a Toyota factory, the company's monozukuri gemba.

It is critical at times like this, when reports in the media dramatize the waning of the foundations of all Japanese monozukuri (manufacturing), to be sure to evaluate actual conditions at the monozukuri gemba. The reliability of monozukuri is a function of the overall balance of production gemba capability with demands placed on it. The collapse of that balance is one of the causes of the current problem. However, as far as I have been able to discern, there are no indications of the collapse of the fundamental capabilities of the engineering and production operations of Toyota or other Japanese manufacturers.

It is highly probably, however, that the burden of keeping pace with the increasing complexity of today's automobiles exceeded the pace of building capacity at the gemba. Broadly speaking, the overall complexity of the products and the industry itself is an underlying cause of Toyota's situation. The company's product development and engineering organization, which has defined itself by stretching the limits of electronic application as exemplified by the hybrid vehicles and high-end electronics for luxury vehicles for the U.S. market, was in this case defeated by the complexity. Rather than characterizing the situation as a "decline of product development capability", a more appropriate characterization would be to state that the "development and engineering burden was simply too great".

Regarding the specific problem of Toyota's sticky accelerator pedal, I suspect that functional requirements and basic design constraints were assigned to the American supplier CTS, which then conducted the detailed engineering design. Even so, ultimate evaluation of all vehicle components is the responsibility of the automobile manufacturer. It is possible that Toyota’s supplier quality evaluation capability was insufficient.

Despite all this, I will share that I personally walk and observe Toyota’s gemba regularly and can state that capabilities at the company’s core operations are still healthy. Given its extraordinary abilities to learn, I fully expect Toyota to quickly recover.

Shook: Can you discuss how two commonly cited factors - the commonization of parts, and the increased use of temporary workers - may be tied to the current crisis? In the U.S., commonization is frequently cited as an important factor. In Japan, the issue of temporary workers and their impact on teamwork has been a topic of great debate for several years.

Fujimoto: Certainly excessive parts commonization can be an invitation to problems. This is a complex issue.

At a February 4 financial briefing, Toyota executive Yasuhiko Ijichi stated that it is possible to achieve both high quality and low cost. This position must be considered from the two dimensions of design quality and manufacturing quality. As Mr. Ijichi said, manufacturing quality improvement and cost reduction absolutely support each other. This belief is at the very foundation of Toyota's production system and quality control.

But, the relationship between design quality and cost reduction is not such a simple matter of linear cause and effect. On the one hand, the connection between costs and design standards is clear: the higher design standards of today's complex products increase costs greatly. That’s why product developers use Value Engineering (VE) to prevent designing in more functionality than is necessary. Beginning in the 1990s, over a period of about 10 years, Toyota realized over One Trillion yen ($10 billion U.S.) from VE. More recently, through such activities as reducing the number of different kinds of bolts, Toyota quickly increased the usage of common parts across new models.

On the other hand, it is common knowledge that with excess parts commonization, design quality problems can easily spill over to all models (that use a given part). A study by the Japanese Ministry of Transportation found that "parts commonization is one cause of product recalls." So, while to state that "quality and cost reduction can coexist" is absolutely true regarding manufacturing quality, design quality is a different and more complex matter.

As for the impact of temporary employees, it is commonly thought that the high rate of temporary employees has been a negative factor on product quality in Japan. I think the situation is a little more complex than that. Japanese vehicle assembler's percentage of temp workers in many factories is 20-23 percent lower than the level in consumer electronics factories. There is no evidence that increased presence of temporary workers has been detrimental to production gemba.

In fact, I believe that Toyota has responded to the complexity challenge with many innovative organizational practices involving its workers, including as the use of SPS (Set Parts System, an advanced form of kitting), increased quality control within each production process, and a revival of the role of the team leader. But in parts suppliers, the rate of temporary workers can reach over 60 percent, leading to conditions where standardized work has not been maintained. I speculate that the impact of such a high rate of temp workers in parts suppliers has been very high, and believe more research is needed to be able to say for sure.

The Path Forward

Shook: Given all this, what countermeasures do you recommend for the company?

Fujimoto: At a minimum, vehicles for advanced countries must be designed to meet even more stringent functional constraints and requirements in terms of safety, environment, trends, and styling. This is the fate of automobiles due to their nature as "high-speed, high-cost, big products that impact the public welfare." This means that firms must prepare to meet the challenge of the complexity problem by mobilizing all its employees toward advancements in such areas as design rationalization, refinement of electronic control systems and digital engineering, and quality control.

Companies wanting a strong presence in all world markets must maintain strategies for simple, low-cost products for the new middle classes of emerging markets as well as confronting the complex design challenges of products for the highly profitable US market - a market which has been a source of strength of the Japanese makers, especially Toyota. And so major changes must be made to meet the twin challenges of complexity and simplification.

Japanese auto makers must continue to embrace luxury and ecologically friendly cars and the associated battle with design complexity, while at the same time eyeing the demand for simple, low-cost, even 500,000 yen ($5,000 U.S.), cars for emerging economies.

Regarding the shift of customers into new price segments, it is a repeat (albeit reversal) of what occurred in the U.S. market 30 years ago. Automakers must create two separate internal groups: the "regular troops" to continue down the more complex path and "special guerilla forces" for engineering and production for low-price products.

Shook: I've been focusing in this space and elsewhere on the tremendous learning opportunities here for Toyota and for the rest of us as well. What opportunities do you see in that regard?

Fujimoto: I agree that the opportunities are great. This isn't a simple matter of the collapse of Japanese monozukuri capability. Toyota was defeated in this case by the demons of complexity. But, the general ability of Japanese manufacturers to cope with complexity is still world class. There is no course other than to redouble efforts to meet the challenge, with deep hansei (reflection) and needed changes.

Obviously there are technical and global management issues to study, but also there are issues to explore at the level of front line work at the gemba. One important question concerns how the extensive use of temporary workers may impact teamwork, quality and productivity, as well as problem-solving and kaizen capability of the organization. It is well-known that this capability has been a great source of competitiveness for Japanese monozukuri.

My own research group has begun a study with a Japanese auto manufacturer to explore the degree to which a team needs to be comprised of regular full-time employees in order to function as a "team." For example, regarding resolving problems on a production line, let's say that usually the line stops less than one minute. In our research we will study what needs to occur to solve problems that appear at such a rapid pace. Within that process, we need to clarify what specific things require a regular full-time worker.

With current levels of training and development technology, even temporary employees can be developed into a conventional "multi-function worker" in a matter of weeks. But naturally it is no simple process to develop a "super multi-function worker" possessing such skills as the ability to handle many processes, conduct speedy troubleshooting, take care of subordinates, inspect equipment, and perform continuous kaizen. It takes years to develop such capability, so regular workers have greater opportunity to develop those skills. For Japanese manufacturers it is critical to determine whether effective teamwork can be achieved with the ratio of regular to temporary workers of only a 50 percent or if a ratio of perhaps 70 percent is required.

For Japanese vehicle manufacturers and suppliers together, the current crisis represents a once in a lifetime opportunity to conduct a thorough assessment of the condition to enable continued survival in the context of right-sizing production capacity while preserving current domestic Japanese production operations with a high percentage of regular employees.

Shook: Thank you, Taka, for sharing your wisdom. We all, Toyota included, have much to learn here that can help us improve.

john

John Shook
Senior Advisor, Lean Enterprise Institute

I have previously introduced readers of this column to Robert Cole, Professor Emeritus at Berkeley, former long-time professor at the University of Michigan, and currently Visiting Researcher at Doshisha University in Kyoto. I hope some of you saw the PBS video linked in last week's column that featured Bob in an insightful interview about the significance of NUMMI.

Bob is the first American academic to seriously study the inside workings of Japanese industry. To those of us who have studied the history of lean or TPS, Bob's work predates even the critical work of Doc Hall, Richard Schoenberg, Norm Bodek and the other American discoverers of TPS in the late 70s and early 80s. As part of his graduate research in the mid-1960s, Bob worked at two Japanese auto suppliers as a production worker, leading to learning that he later captured in numerous writings, including the seminal Japanese Blue Collar, (University of California Press, 1971). Bob's early work was an inspiration for me to study Japanese business, many years before I finally had the chance to meet him (at his favorite Chinese restaurant in the Shiba Koen area of Tokyo).

Bob took note of the recent dialogue in this space with Jeff Liker and we agreed that he would share his thoughts. Over the years Bob has followed the "quality movement" as it developed in Japan and spread around the globe (see Managing Quality Fads, Oxford University Press, 1999). Remarkably, just before the Toyota story broke, he published, along with Michael Flynn, "Automotive Quality Reputation: Hard to Achieve, Hard to Lose, Still Harder to Win Back," in the Fall, 2009 issue of the California Management Review (http://cmr.berkeley.edu/search/issueContents.aspx?issue=396&volume=52&Num=1&qtr=Fall&year=2010 ). He is a long-term member of the American Society of Quality and an elected member to the International Academy of Quality, an association of 60 global quality experts dedicated to quality improvement. So it is especially appropriate that Robert Cole share his thoughts now regarding Toyota’s current quality problems.

Robert Cole:
John, thank you for inviting me to share my thoughts. Let me start by commenting on the topic of quality that you and Jeff discussed.

With quality, perception is everything. By that criterion alone, Toyota has a serious quality problem. Customer trust in Toyota has been shaken. It doesn’t matter if the media have hyped the problems or the politicians have politicized it. It is what it is. To have a reputation for high quality, that is to say, strong perceived quality, is to have won the trust of the customer. I still recall an interview I had some 20 years ago with Nakatsuka Isao, Director of the TQC Promotion Office at Toyota Jidō Shokki (Toyota Industries Corporation, formerly Toyoda Automatic Loom Works), one of the original Toyota firms. "Our most important objective is to deliver superior products to satisfied customers whose trust we must win," he said to me, adding, "If we deliver a product to the customer whose quality creates trouble for them, this will affect their trust in us. If we betray their trust, they will not buy our products for a long time!"

His words may prove prophetic. Until recently, survey results showed that twice as many customers intending to purchase a new vehicle trusted Toyota (and Honda) as they did the Ford and Chevrolet brands. Toyota has now put that trust at risk.

Many factors are working against Toyota which will keep this issue in the public eye. Even Toyota insiders, for one, acknowledge that the response to their recent quality problems has been slow, which makes it easy for critics to claim they engaged in a cover-up, thereby eroding trust. Perhaps as a harbinger of events to come, The Chairman of the House Committee that questioned Toyota executives just accused the company of withholding documents while fighting lawsuits filed by crash victims. Second, it appears that Toyota kept selling specific models despite knowing about their problems. If this aspect becomes clearly framed in the public arena in this way, it will significantly add to Toyota's pain. Third, the ensuing litigation will keep the issue alive in the public mind for some time, reminding consumers of Toyota's culpability. Along with the litigation, lawmakers have signaled there will be continuing congressional hearings and probes over the next few months, again keeping Toyota's behavior in the limelight. Fourth, unlike the Ford Explorer/Mercury Mountaineer tire problem in the year 2000, Toyota's quality problems cut across many different models and there are multiple problems. This suggests that they do not have a specific model problem but rather this is a case of company failure-a far more damning blow. Moreover, because the problem affects multiple models, they can't quietly discontinue a particular faulty model and thereby make the problem disappear (as GM did with the Chevrolet Corvair). Fifth, the testimony by Toyota leaders at the congressional hearings did nothing to inspire trust on the part of consumers. At best, the company comes across as equivocal and not on top of the problem. Moreover, Toyota's responses to customer complaints, which were read at the congressional hearings, project an image of a company that treats its customer's callously. Sixth Consumer Reports (CR), calling it an unprecedented event, recently withdrew recommendations on eight Toyota models suffering from unintended acceleration despite their high reliability ratings. This is a powerful signal to consumers, from an organization that has had a love affair with Toyotas for some 30 years, and an organization which has the most influence on consumers when it comes to new vehicle purchase decisions. Seventh, while problems with unintended acceleration are hardly unique to Toyota, they are now the company most associated with this issue in the public mind. Toyota's handling of this extremely complex problem, thus, will be the continuing focus of the public's attention.

Finally, Toyota currently doesn't have all the fixes they need to make this problem go away. At the congressional hearings, Akio Toyoda claimed that Toyota vehicles are absolutely safe. Yet Jim Lenz, President of Toyota's U.S. Sales Operations, told a different congressional hearing the day before, that he couldn't be totally certain that all the problems that have led to sudden acceleration have been identified and fixed. They can't have it both ways. You can’t tell consumers your cars are safe but you don’t have all the answers. This is not a credible position and hardly inspires customer trust.

Until they do have all the fixes they need, Toyota's quality failures will be kept fresh in the public mind. In particular, if consumers conclude that, perhaps as a result of revelations in lawsuits, Toyota kept selling specific models despite knowing about their defects, then customer trust in Toyota will be severely impaired. All this suggests that the costs to Toyota's quality reputation are likely to be significantly larger than most analysts are predicting. It will take some time for them to fully regain customer trust. Fortunately, for Toyota, they have a long history of reliability with many long-term customers; that should make their task easier than it might otherwise be. Moreover, because of their low cost structure, they have the luxury of being able to aggressively price in order to win back customers.

None of this is to say that Toyota's quality or its quality reputation is in free fall. They still are an extremely strong quality performer. Yet, it is the trajectory that has to be worrying Toyota executives. Quite apart from the issue of recalls, we saw a fraying of Toyota's reputation in recent years. CR reported, in its April 2008 issue, that three Toyota models were being dropped from its 2008 recommended list. Whereas 100% of Honda's tested vehicles made CR's recommended list, Toyota's recommended percentage fell to 73%, down from 85% the previous year. Moreover, by some readings, Toyota's quality ranking in CR has fallen below Ford’s in recent years.

To try to minimize Toyota's quality problem by saying that Toyota customers misused aftermarket floor mats reminds me of way people responded to the Audi unintended acceleration problem years ago. Audi defenders argued that the problem was that clumsy drivers couldn't shift their foot properly between the brake and the accelerator. Blaming customers for quality failures is never a good idea! You need to design for all kinds of drivers including clumsy drivers. Similarly, if customers are misusing aftermarket floor mats, you need to give them incentives to acquire fool proof mats and find a way to warn them against buying those mats that don't meet your standards.

John Shook:
Yes, on the one hand it seems possible to assign the current specific problems to isolated, special causes. On the other, quality problems have been growing for years. Toyota wanted growth, but not that kind. One question to be explored is whether there has been a company-wide lapse in quality consciousness or was any lapse isolated organizationally.

Robert:
Indeed, this leads us to ask are Toyota's quality problems emanating from the manufacturing side of the business? It certainly appears that this is the case. Reports of unintended acceleration go back quite a few years and the Prius quality issue has been identified as a software problem. Note that no amount of kaizen on the assembly floor would have avoided these problems. These are not assembly problems.

Based on my own long term study of Toyota's approach to quality and the various experts I have consulted in Japan, the source of Toyota's quality problems lie in its hyper-growth and the growing complexity of autos (not unique to Toyota of course). I have addressed these issues in my recently posted Harvard Business Review blog (http://blogs.hbr.org/cs/2010/02/toyota_the_downside_of_hyper_g.html) , but I would like to pursue one theme here.

Toyota's hyper-growth has its origins in President Okuda's 1998 challenge to his managers to double Toyota's global market share to 15% by 2010. Toyota managers enthusiastically embraced that target and reached it early, a truly remarkable feat. Yet, it is difficult for any organization which elevates quantity to be a number one goal to simultaneously hold on to a focus of providing the highest quality. This is well recognized in the quality literature. If not managed carefully, a quantity focus will drive down quality. Organizational incentives, both formal and informal, have a way of skewing to the primary target. In the environment created by its aggressive pursuit of growth, quality mantras like Toyota's "Customer First," have a way of morphing from institutionalized commitments to empty slogans.

Toyota's philosophy has been Customer First, as exemplified in the popular term (in Japanese manufacturing firms) "QCD" - where quality (Q) is given priority over cost (C) and delivery (D) , with the understanding that a quality focus is not merely compatible with cost reduction and increased delivery but in fact will often enable both. Put more simply, the traditional Toyota view is that the successful pursuit of quality will enable volume increases and cost reductions.

No doubt, President Okuda never intended to reverse that formula. But aggressive top leaders like Okuda underestimate the way in which their directives get transmuted as they travel through an organization. So Toyota managers, for example, became so busy pressing their suppliers to increase capacity that in some cases they became less interested in listening to supplier concerns about what such rapid capacity expansion might do to quality. Engineers were so pressed to use common parts to reduce costs that they did not have the human resources to address all the design problems that this created. In a recent article, Prof. Takahiro Fujimoto notes a Japanese Ministry of Transportation study which concludes that "parts commonization is one cause of product recalls." In short, it was not only volume targets which now were driving their approach to quality but also cost reduction that was driving their approach to design quality. Both of these run counter to the Toyota philosophy.

None of these problems (deviations from the Toyota way) are insurmountable and indeed production slowdowns should give Toyota the time they need to return to their root practices.

John:
The company has acknowledged that they've been slow. We should point out, however, that the kind of problem being scrutinized is extremely complex and vexing. Not just for Toyota, SUA (Sudden Unintended Acceleration) and concerns about EMI (Electromagnetic Interference) have plagued the industry for years. Still, difficult problem or not, the slow response seems uncharacteristic.

Robert:
That raises questions of efforts by Toyota to sustain and reproduce its work culture. As you and Jeff discussed, Toyota has made an enormous investment in training, creating manuals, videos, and other forms. The rapid pace of global expansion, however, has made the task ever more challenging. In keeping with my previous comments, I want to suggest that organizational culture is no match for diverging incentives. What do I mean by that? Consider the following postulate: Show me what people are rewarded and punished for in an organization, and I will show you how they will behave. To borrow a term from Dr. Deming, this is profound knowledge. In referring to incentives I don't limit the scope to explicit performance incentives, but focus on less formal incentives such as individual recognition and criteria for awarding challenging assignments and promotion. For much of Toyota's recent history, its powerful work culture has been reinforced and sustained through its alignment with its incentive structure. However, the focus on hyper-growth led to a growing divergence between its culture and its incentive system. Under those conditions, culture always loses. It starts to be deinstitutionalized. (As an aside I note that the use of the term DNA in this context (as in: quality is in Toyota's DNA) is misplaced since it doesn’t allow for deinstitutionalization.) Going forward, Toyota will need to realign its incentives with its traditional work culture before it can regain its footing.

John:
While I'm uncertain of the degree to which the company's formal performance incentives may have gotten off track - your reference to informal incentives is insightful here - it seems that the translation of the high level objective of growth came to overshadow everything else. Whether intended or not, whether reflected in skewed formal incentives or not, the effect was the same: behavior that betrayed the company's long-standing values.

Thanks, Bob, for your contribution not only today but for the past five-plus decades of groundbreaking work. Readers, I encourage you go to back and read the seminal work of Robert Cole.

john

John Shook
Senior Advisor, Lean Enterprise Institute