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Toyota Troubles: Fighting the Demons of Complexity

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Shook, John
3/9/2010

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