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Updated: April 14, 2011 16:59 IST

Crisis insights from an auto icon

D. Murali
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Title: Toyota Under Fire. Author: Jeffrey K. Liker and Timothy N. Ogden. Photo: Special Arrangement
The Hindu Title: Toyota Under Fire. Author: Jeffrey K. Liker and Timothy N. Ogden. Photo: Special Arrangement

When a crisis hits, a company that is simply trying to survive the crisis, to get back to the status quo ante, is never going to do better than that; but a company that is dedicated to continuous improvement, to constantly moving the goalposts to a higher level of performance, will expect much more from its crisis response, observe Jeffrey K. Liker and Timothy N. Ogden in ‘Toyota Under Fire: Lessons for turning crisis into opportunity’ (McGraw Hill).

While, as the authors note, it is only time that will tell how the current generation of Toyota leaders has lived up to the standards of its predecessors, the book provides a detailed sketch of the innards of the company through the days of recall and recession.

Governance structure

Not many may be aware that Toyota is one of a small number of major Japanese companies maintaining the tradition of having an internal board of directors, instead of a board with independent outsiders. Toyota’s board is almost entirely composed of lifetime Toyota executives, the authors inform.

The reason, as they elaborate, is that the company feels that outsiders who do not know TPS (Toyota Production System), have not lived the Toyota Way, and have not spent years refining their problem-solving capabilities in the TBP (Toyota Business Practices) template simply cannot provide the kind of oversight and insight necessary for the company to maintain those central advantages.

One also learns that Toyota’s board plays a very different role from that typically played by boards of, say, the U.S. companies, where directors who are primarily outsiders, often with full-time jobs of their own, meet between four and eight times a year to review a set of plans made by management. In contrast, board members in Toyota “spend a significant amount of their time in the company’s factories, literally walking the shop floor, and visiting offices and dealerships around the world. Toyota’s value of genchi genbutsu demands their presence at the work site to check processes firsthand.”

Recession response

The company evolved its long-term goals in the form of ‘Global Vision 2020,’ which set the agenda for R&D as a focus on fuel-efficient, environmentally friendly vehicles, the authors recount. They add that the company concurrently got its board’s Emergency Profit Improvement Committee (EPIC) to initiate efforts to return the company to profitability as quickly as possible by reducing costs, adjusting production volumes, and addressing other newly revealed vulnerabilities and weaknesses of the company.

One of the decisions of EPIC was to revise the target of operating profitably from 80 per cent capacity to 70 per cent. The book instructs that the 80 per cent target had been based on historical patterns of demand fluctuations, with the company using temporary labour and overtime to produce at 100 per cent capacity during peak periods. EPIC found – during the recent recession in the mature markets – that the 20 per cent cushion was not enough, because demand could swing more wildly than they had planned for.

Cost cutting

Getting to profitability at 70 per cent capacity meant cutting fixed operating costs both in the plants and in all support functions, the authors narrate. “As any factory manager can tell you, cutting operating costs by even a few percentage points is difficult. Cutting operating costs by 12.5 per cent would be a multiyear project. Cutting operating costs by 12.5 per cent in the most efficient and productive factories in the world in less than two years strains credibility. Yet that’s the goal the committee set.”

A common way to achieve big cost cuts is to lay off workers, as evidenced by the announcements of 65 per cent of the Fortune 100 companies in 2009. But not so in Toyota because it views its people with experience in TPS and TBP as an appreciating asset, the authors remind. “For Toyota, letting go of workers who had received years of training in continuous improvement and problem solving would be self-defeating. It was these well-trained, experienced employees that the company needed if it was to find ways to cut costs and improve efficiency.”

Pay drop

The effect of fall in volumes and production cuts was that temporary labour got reduced to zero, and the team members’ overtime and bonuses came to an end, the book traces. “For many workers, that meant more than a 10 per cent drop in take-home pay.”

Interestingly, at TEMA (Toyota Engineering and Manufacturing, North America), a ‘shared sacrifice model’ was instituted. Accordingly, if the hourly workers were going to be taking home 10 per cent less, managers and executives took larger temporary pay cuts; and as per a sliding scale, vice presidents and above took more than a 30 per cent salary cut until profitability was restored.

Among the other cost-cutting measures in TEMA were the sale of the corporate jet, the giving up of business class travel by managers, and the saving of electricity in corporate offices by kaizen groups. “Saving money became a goal of continuous improvement. Lots of small efforts, rather than a few big cuts made by a senior executive added up to big savings.”

Data display

Driving change in Toyota was the transparency, unlike as in most companies where ‘it is rare for an hourly employee to even see data on cost, and often, as a matter of policy, management does not want these employees to know the real costs.’

For instance, in TMMK (Toyota Motor Manufacturing Kentucky), team members used the metrics boards posted in every area of the plant – normally mostly focused on quality and safety kaizen projects – to find opportunities to save money, the book mentions. “Another structure for kaizen is quality circles, which at TMMK are organised voluntarily by hourly employees on paid overtime. The circles use TBP to solve bigger problems then they can handle during a normal day when they are working production.”

Focus of these circles was on things such as reducing scrap and repairs, as captured in a quote of a Toyota employee, thus: “We could go through our logs to find where we had the most scrap or scratches, and maintenance logs on when they were coming out to fix something, and see the costs associated with that.”

Result of efforts

The book chronicles how the quality circle efforts saved $2 million on just one of two assembly lines in TMMK in 2009, through a device invented by a team to aid in recycling the flow racks (roller conveyors on frames that move parts to the assembly worker), which have to be rebuilt whenever there is a change on the assembly line. “This team built a machine that could disassemble the rollers and separate them into bins of steel, plastic, and aluminium parts so that each could be recycled rather than thrown away. The invention has been finding its way to other Toyota plants, and the team has submitted the paperwork to get it patented.”

A section on ‘teamwork’ underlines how Toyota drills into each worker the team attitude from day one. Yet working in whatever teams one is part of is not enough, the authors caution. “There needs to be a constant focus on understanding the weak points in teamwork and communication and looking to improve those blockages that prevent the right people from communicating about the right things. This is an endless journey for every company.”

Recommended read for the many insights one can draw from an iconic auto player.

**

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