Here’s to Toyota

Jim Womack
4/15/2003
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More than twenty years ago Dan Jones and I made an important discovery. On a trip to Japan we concluded that there was really no “Japan, Inc.” or standardized way of doing business. Instead there were many companies pursuing a variety of approaches, some very good and some mediocre. Most important, we concluded that best of the best was Toyota. This company, rather than anything generically “Japanese”, became our image of the business system to copy or exceed.

In the years since we reached this conclusion, we’ve often wondered what would happen to the lean movement if Toyota faltered. Fortunately, we’ve never found out because Toyota has marched from victory to victory over the past twenty years while sharing its business system freely with the world.

In the mid-1990s, Toyota set a goal of a 10% market share in the global motor vehicle market by 2000 and in 2000 Toyota’s share was 10.01%. Last year Toyota announced a new vision to achieve a global motor vehicle market share of 15% by 2010, which will push Toyota past GM and Ford as the global market share leader.

This is not being done at the expense of profits, which have been rising steadily in step with growing market share. In the 2003 fiscal year ended March 31, Toyota will report profits of about $10 billion US on about $125 billion in sales. With a return on sales of nearly 8%, Toyota is now the most profitable car company excepting Porsche (with a 17% ROS this past year), a company one twenty-fifth the size of Toyota which has transformed its business using Toyota methods, as Dan and I reported in Chapter 9 of our book “Lean Thinking”.

The two best features of Toyota’s continuing success for the rest of us are (1) that the techniques are freely available and (2) that they work without any need for brilliant product breakthroughs.

Freely available: Like Henry Ford, whose ideas on flow production Toyota transformed, the company has always been remarkably open, even to direct competitors. All of its facilities around the world have been open to visitors from the very beginning and Hajime Ohba at the Toyota Supplier Support Center in the USA has been available for more than a decade to teach the Toyota system to anyone willing to learn. Our humble efforts at LEI in North America, the Lean Enterprise Academy in the UK, Lean Institute Brasil, and the Lean Enterprise Institute in Turkey have been directed to writing down the techniques in plain language (and local languages) so anyone can implement them, even without the benefit of a sensei like Ohba-san. Therefore, those failing to apply Toyota techniques in their businesses can’t claim that the problem is a lack of access to the details of the system.

No brilliant product breakthroughs needed: The other great feature of the Toyota system is that it is built on brilliant processes – information management from order to delivery, product development from concept to launch, operations management from raw materials to customer – and not on brilliant product innovations. In fact, Toyota has usually been a follower with new product concepts like pick-ups and SUVs (with the hybrid Prius as a notable exception.) Yet it has been the most successful auto company of the last fifty years. I dwell on this point because few of us can hope to have truly brilliant product ideas (and certainly not often), but all of us can create brilliant design and production processes day by day if we have sufficient determination.

Thus the Toyota gift is freely available all over the world and requires only persistent application rather than flashes of inspiration.

With appropriate thanks given, let me hasten to add that not even Toyota is perfect. Richard Schonberger – a stalwart leader of the lean movement from the very beginning – has recently claimed that Toyota has not been “walking the talk” for a key indicator of lean practice – inventory turns. He points out that Toyota’s company-wide turns have fallen from more than 80 in the 1960s to about 12 today, and follows this observation to some rather gloomy conclusions about the future of the lean movement.

In my and Dan Jones’s view, Richard has identified an important symptom – Toyota’s turns really have fallen – but has come to the wrong diagnosis and prognosis. Toyota’s turns have not fallen because its individual plants are less lean. We visit them frequently and know that this is not true. Rather Toyota’s turns have fallen because of the steady global expansion of Toyota without the ability to globalize and regionalize its production system at the same rate.

In the 1960s Toyota created practically all of the value in its products within a short distance in Toyota City and sold most of its output in the Japanese domestic market. In addition, it sold its finished units at the factory gate to the independent Toyota Motor Sales Company, meaning that the Toyota Motor Company carried no finished-unit inventories. Its lean methods inside Toyota City made 80 or more turns quite practical. (Remember that turns are calculated by dividing the cost of goods sold during a year by the average value of the raw materials plus work-in-process plus finished goods on hand during the year. This means that shorter value streams always produce higher turns, other things being equal.)

As Toyota began to sell abroad, it suddenly needed to ship finished vehicles vast distances by sea. What was more, because it could no longer build most vehicles to customer order as it did in Japan (due to the long lead times for shipping), Toyota had to create stocks of finished units in each export market. At first these vehicles were owned by independent foreign distributors and were not carried as inventory on Toyota’s books once they left the boat. However, over time Toyota bought out its foreign distributors and in 1982 merged with its Japanese distributor to form the current-day Toyota Motor Corporation. This had the effect of transferring all finished units not at dealers onto Toyota’s books and dragged down inventory turns.

Then, after 1984, Toyota began to establish assembly operations abroad, supplied initially by parts makers in Japan. Even with frequent shipments from suppliers, mountains of parts were always on the ocean, pulling turns down further. Over time Toyota has worked hard to establish a parts base within each region, but the steady growth of Toyota assembly operations has always run ahead of its ability to create local parts manufacturers and in any case the local suppliers are not nearly as close to Toyota assembly plants or as tightly coordinated as they are in Toyota City.

Therefore, even Toyota has a lot of work to do to fully “walk the talk” for its extended value streams, now stretching across the world, and doing this will be a continuing challenge as it moves to the head of the global automotive industry. I look forward to an upturn in inventory turns at Toyota in the years ahead and anticipate that members of the Lean Community will be involved in this campaign as Toyota suppliers.

Let me sum up with an expression of thanks for what Toyota has accomplished for our common benefit and a hope for Toyota getting even leaner in the future.

Best regards,

Jim

Jim Womack

President & Founder

Lean Enterprise Institute, Inc. USA

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