Toyota Bashing

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It seems we have a new pastime in this country: Toyota bashing.  It started when the first round of accelerator problems were announced and became a full-blown fad after the issue resulted in suspending sales of the company's most popular products.

Even Transportation Secretary Ray LaHood got into the act, saying that anyone who owns a Toyota vehicle should "stop driving it" (he later recanted his statement).  Call up virtually any news site today and there's a good chance you'll find something negative about Toyota.

I'm not here to downplay the seriousness of the accelerator problem.  The company deserves some of the criticism because of the massive scope of the problem.  We spend a lot of money on our cars and expect them to work safely and reliably.  Toyota's reputation for quality has also most likely contributed to the fallout in this situation.  They have been a hugely successful company for many years now and they have to take their licks just like any other company facing a massive recall.

The problem I'm having is that some of the criticism seems to be based on politics or ignorance rather than facts.

Lean is Not the Problem

The Wall Street Journal (WSJ) ran a story last week entitled, "How Lean Manufacturing Can Fail," claiming that the Toyota Production System contributed to the accelerator problem because of standardization of parts across models and a reduced number of suppliers.  I can see how someone who doesn't understand lean could think this, but the WSJ is a respected business news source and its reporters should know better.

Lean has been a key to the company's success (in terms of quality and profitability).  Standardizing parts across models - which, by the way is not just a "lean" concept - is what makes cars affordable.  It's the way the high volume automakers (as well as manufacturers in many other industries) do business.

Reducing the number of vendors also contributes to improved quality because it enables the company to work much more closely with each supplier.  Also, more suppliers means more variation in incoming products - thereby increasing assembly time and quality problems.

CEO Visibility

Another issue that's causing problems for Toyota is the lack of visibility of Akio Toyoda, the company's CEO.  Although I agree that this problem was large enough to warrant more media presence from Toyoda, it's really not how Japanese executives operate.

To demonstrate the difference between U.S. and foreign companies, how many people can name the CEO of Honda?  Volkswagen?  Total?  ING?  These are among the world's largest companies, but very few people can name their chief executives.  CEOs of foreign companies don't tend to grab the spotlight the way American executives do.  Toyota is learning a difficult lesson right now that Americans expect swift assurance from the chief executive that the problem is being resolved.

Japanese companies (especially Toyota) also tend to study problems methodically and do not jump to implement fixes until they feel they truly understand the causes.  Unfortunately, when we're talking about an issue like this, those using the product get very nervous about their personal safety while the problem is being analyzed.

Political?

My guess is that the media bashing is also heavily political, in nature.  American automakers have been beaten down so badly - mostly by Toyota - over the last several years that the buy American sentiment is driving many of the attacks. I guess we'll learn more about this when Volkswagen takes over as the world's number one automaker as a result of this crisis.

Several months ago, I wrote that Toyota had taken its eye off the ball and, as a result, problems were starting to surface (see Taking Your Eye Off the Ball).  It was evident to me back then that, in its push to supplant  General Motors as the world's largest automaker, Toyota seemed to forget what got them there in the first place.

I also wrote in the blog that it appeared that their problems were being addressed.  They have a new CEO and he seems to be refocusing the company on its fundamental purpose (to enrich society through carmaking).  I also don't believe that the bad habits the company developed had been around long enough to cause major damage to their culture.

My guess is that they will survive this slip-up and return to the number one spot over the next few years.  Toyota tends to be a very long-term focused company and I'm betting that they won't take short-term action that will result in hurting their future.  The company undoubtedly does not want anything like this to happen again, but if it does, they really need to channel their obsession with learning toward improving the way they deal with the American media.

World Class Suppliers Need World Class Customers

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As part of their effort to slash the cost of auto parts by 30% over the next three years, Toyota met with its suppliers last week to enlist their help in the process. Based on their reputation for dealing with suppliers, I'm guessing that Toyota will approach the process in a much different manner than most companies, and the process will be very successful.

Instead of squeezing suppliers by beating down prices and lengthening payment terms, companies like Toyota work with suppliers to find improvements in designs and processes that lead to real and sustainable cost reductions. When approached in this manner, the supplier and customer benefit from the process and the savings result in strengthening, rather than weakening, the supplier.

Two Glaring (and Common) Examples

I once worked with a Fortune 500 company that issued a policy for its divisions to lengthen payment terms to all suppliers. Based on the formula, the new policy could result in payment to a supplier being delayed by up to 90 days after receipt of the product or service.

Procurement professionals at a particular division for the company (Division A) implemented the policy and were praised (and rewarded) by the corporate office. One of Division A's suppliers was another division of the company (Division B). As a result of the change in policy, Division B cut off shipments of a critical component to Division A because it paid its invoices too slowly. Because of this, Division A's shipments fell because it couldn't get the component elsewhere; costs increased (due to production stoppages); and profits dropped because of its inability to ship and invoice its customers. Division B's profits also fell because it stopped shipping to Division A.

And another . . .

In another example, a friend of mine owns a company that supplies parts to the Detroit automakers. During a visit to one of the automaker's factories, he noticed a problem in the production line with the assembly of a particular model. As part of the process, the car was flipped to enable installation of a particular subassembly. Problems occurred because the subassembly could not be completed until the car was turned back upright, and it frequently fell apart before it could be secured.

On his own accord, my friend developed an inexpensive grommet that could be placed on the subassembly to properly secure the parts as the car was flipped upright. After the final assembly was bolted together, the grommet could be easily cut away, thereby completely eliminating the problem.

the customer adopted the idea and changed the process to utilize the grommet. Even though the grommet was a very low cost part, the automaker's procurement department - in an effort to further reduce the cost - decided to purchase the grommet from a competitor instead of from the company owned by the person who developed the part. In a situation where a supplier - without direction from the customer - took the initiative to solve a problem that caused delays, extra costs, and headaches for the customer, the customer displayed a lack of respect for the supplier by awarding the business to another company. Needless to say, my friend was not motivated to solve future problems for the customer.

Stop the Madness

The above examples are unfortunately fairly typical of western business. If we are to come out of the recession strong and ready to compete, we have got to learn that the relationship with a supplier is based on more than price and payment terms. A company cannot win if its suppliers lose. Besides the obvious, who wants to do business with a loser anyway?

Taking Your Eye Off the Ball

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Nothing can get you back to your roots faster than a significant and unexpected drop in profits. As the worst economic year in recent history starts to wind down and companies begin to think about budgets and plans for next year, it is a perfect time to reflect on several items, including how to be ready for growth when the economy rebounds, and how to strengthen the organization to avoid significant damage when the next downturn occurs. The best way to begin assessing these issues is to return to the fundamentals and assess whether or not the organization has strayed from its stated purpose.

Many companies are finding that the success they experienced in the years preceding the recession actually led them to unintentionally deviate from their intended purpose. Some of these organizations are now refocusing on their missions as a way to emerge from the current downturn and return to long-term profitability.

TOYOTA

When people lose - or are afraid of losing - their jobs, one would fully expect a drop in automobile sales. Because of this, it is not surprising to see Toyota's revenues and profits to fall during the current recession. What is surprising, however, is the extent of the losses incurred. For a company recognized as one of the best run over the last 50 years, the large loss Toyota incurred over the last year or so has been staggering.

So what really led to Toyota's decline? How can the company that invented lean, treats its suppliers as partners, and has been so successful for so long go from earning almost $22 billion in operating income to losing more than $5 billion within one year?

I believe that the problems at Toyota resulted from the company's leaders taking their eyes off the ball over the last 1-2 years. Overtaking General Motors as the world's largest automaker seemed to become their main objective. In the race to be number one, they forgot what got them to that point in the first place: making high quality cars that people want to buy (or, as their mission states, to enrich society through car making).

I regularly read about CEO Akio Toyoda and other Toyota executives working to get the company back on track. Back on track means that they were off track - and off track means that they strayed from the path that made them successful.

For years recognized as the producer of the highest quality cars in the industry, Toyota has experienced a fairly large number of quality problems over the last few years, which may be a result of the enormous growth the company has experienced recently. In the past, managers would rise up through the ranks and be well-versed in the Toyota way, which meant they understood the systems and process for assuring (and continually improving) quality and productivity. As they battled GM for the top spot in the auto industry, however, their growth exceeded their ability to develop leaders and their quality suffered.

Recent comments made by the company's senior leaders means that they recognize the need to refocus before things got out of control. It is very common in business for companies to lose their way and not realize that anything is wrong until the organization is in severe trouble - which can take several years. Understanding the need to refocus now means that Toyota can fix things before significant damage occurs.

WHOLE FOODS MARKET

Whole Foods started as a modest grocery store in Austin, Texas and, within 25 years, grew into a major chain with more than 250 stores in the U.S. and U.K. Throughout the last few decades, the company became synonymous with healthy, organic and unaltered whole foods. Customers paid more to shop at Whole Foods, but were usually guaranteed to find a wide variety of healthy items in return.

Just like many businesses offering premium priced products over the last year two years, however, Whole Foods experienced a drop in revenues and profits. Rather than cut costs, close stores, and lay off workers, however, company CEO John Mackey decided to revisit the company's roots to return to profitability. As with Toyota, it appears that Whole Foods got caught up in its own success and strayed from its purpose during a period of high growth.

In an August 5, 2009 article in the Wall Street Journal, Mackey admitted that the company sells, "a bunch of junk." He went on to say, "we've decided if Whole Foods doesn't take a leadership role in educating people about a healthy diet, who the heck is going to do it?"

As Whole Foods grew into more of a mainstream supermarket, it replaced much of its healthier fare with gourmet foods. When the recession hit and people became less willing to pay more for gourmet foods, however, the company suffered. This, along with a few other factors, led Mackey to look closely at the reasons for the company's problems and come to the conclusion that Whole Foods had strayed from its purpose.

By definition, whole foods are foods that are unrefined, unprocessed, and resemble what they were in nature. What Mackey found when he recently walked through one of the company's stores was a large selection of white bread, gourmet desserts, and refined oils - in other words, foods that are not even close to being whole - the company's roots.

I'm betting that Whole Foods will succeed in returning to its purpose - and profitability - because Mackey realized that the company lost its focus before too much damage was done. The company has not strayed for very long and, like Toyota, can fix itself by reminding its team members why the company was created in the first place and what made it successful.

IT'S NOT ROCKET SCIENCE

The point of all this is that companies must regularly take time to reflect on their purpose to keep from taking their eyes off the ball. Consumer tastes change, technology changes, economic conditions change, but a company's fundamental purpose - it's raison d'etre - should not.

Cars will continually change in terms of technology and design, but Toyota's commitment to enriching society through car making cannot change or its employees will become confused and its customers will cease to see a difference between a Toyota and any other brand of automobile. If Whole Foods strays from its purpose of providing healthy, organic, and unrefined foods, it will lose the customers who will begin to question why they are paying more for the same products offered at Kroger or Safeway.

Do you run the risk of straying? If it can happen at companies like Toyota or Whole Foods, it can pretty much happen anywhere.

GM Product Development & Efficient Cars

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GM Fallout?

BusinessWeek reported in its February 23 issue that Bob Lutz, the “legendary” product chief at General Motors will resign at the end of 2009. The report states that, “The thought of designing cars to meet Washington’s fuel economy rules – as opposed to consumer tastes,” drove him to retire.

This article once again reminded me one of the key reasons GM continues to suffer. The exercise about going to Congress to ask for billions in taxpayer aid and the scrutiny they have had to undergo throughout the process has seemingly not increased their humility one bit. They have lost the auto industry’s number one spot – a position they have held since 1931 – to Toyota (and appear primed to lose the number two spot to Honda in the not-to-distant future), and have apparently not learned anything through the process.

Maybe it’s me, but I fail to see how GM has been designing cars to “meet consumer tastes,” over the last several years anyway. If they had, they would not have lost the top spot to Toyota. And to think that it is only Washington – and not the consumer – who cares about higher fuel economy, shows the culture of hiding your head in the sand continues.

Besides higher quality, better fuel economy, lower costs, innovative production techniques, and a happier workforce, Toyota’s cars are more exciting than GM. And when I visited the Detroit-area last October, the high number of Toyotas and Hondas told me that Detroiters now feel the same way. When I think of “cool” cars for different age groups, I think of the Accord, Civic, Lexus, Prius, BMW 3-Series, Mini Cooper, Scion, and a few others, but can’t seem to recall any GM cars that fall into that group.

So, as GM moves into a new era of product design, they have got to increase the cool factor of their cars. Oh, and while doing that, it wouldn’t hurt to also work on the quality, reliability, cost, and fuel economy.

On another subject . . .

Does the Government Really Want Electric or Hybrid Cars?

Like many Americans over the last several years, I could not understand the seemingly complete lack of interest that the government has in assuring the success of hybrids or fully electric cars in the U.S. The Bush administration gave token tax breaks to purchasers of hybrids a few years back, but it didn’t make sense why the incentive was limited to only a small number of people who first purchase the cars.

The reason has recently become clear to me – and it will be tested as we watch how committed the Obama administration is to the development of high mileage or combustion-free automobiles.

The U.S. and state governments collect a great deal of tax revenue on sales of gasoline ($0.47/gallon for gasoline and $0.536/gallon for diesel). If we move away from gasoline engines to non-combustible engines, this huge source of revenue will dry up. Determining what will replace the fuel tax is destined to be a hotly debated and highly charged political issue – and probably one that politicians are not ready to tackle given the current state of mind of Americans.

Another Toyota Advantage

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Toyota has announced a $250 million ad campaign to introduce 0% financing on 11 of its models. At first glance, it looks like another attempt by an automaker to generate business during the latest slowdown in U.S. auto sales. After all, Toyota sales have been hit hard during the last several months – last month showing a 32% drop over September 2007. Digging a little deeper into this campaign, however, gives a little more insight into the Toyota way of doing business and how they are able to offer a type of incentive that would be very difficult, if not impossible, for its U.S. rivals to match.

Toyota has approximately $19 billion in cash, while Ford and GM are hemorrhaging. While the growth in Toyota sales over the last several years, as well as sales of high margin cars like the Prius, is part of the reason that the company is sitting on such a large amount of cash, it doesn’t give the whole picture. It wasn’t very long ago that GM and Ford were selling SUVs and pickup trucks at record levels and hauling in huge amounts of profits. The difference is that Toyota holds on to its cash so it can weather a downturn in business while Ford and GM (as well as many other U.S. businesses) give theirs away as bonuses to executives. Toyota executives are paid well, but their compensation does not come close to the amounts received by their counterparts at U.S. companies.

Although reading reports from analysts would make one think otherwise, it is ridiculous for any company to assume that it can achieve growth and profitability every year. Toyota understands this and puts away a portion of its profits every year to provide a cushion for years when business drops off. Fortunately for Toyota, it has been a number of years since they experienced a downturn, so their level of cash reserves has grown to enormous levels.

Keeping cash from the good years enables Toyota to offer 0% financing to its customers now while GMAC and Ford Motor Credit struggle to find the cash to stimulate sales. And this situation has even more far reaching consequences than are visible at first glance. If, for example, GMAC does not have the cash to offer customers financing, its sales will continue to slide, causing a further decline in profits which forces it to use more cash to finance its operations. This results in further declines in the amount of cash available to offer customers and further reduces sales and profits. This type of downward spiral is difficult to escape. This type of situation appears to be driving the move by GM to purchase Chrysler which, at the moment, has several billion in cash reserves.

Another benefit to Toyota’s cash position is its ability to keep paying workers while it temporarily shuts down production in its factories. Workers at the Toyota plants affected by the shutdown are still paid to come into work. Instead of building new cars and increasing inventories, however, they attend training classes in safety, quality, and productivity, and work to improve the processes so when production starts up again, they are even more efficient. This practice also keeps employee morale high and increases the level of commitment people have to the company.

Time will tell if Toyota’s 0% financing offer will work to stimulate sales. It may be that people are not willing to buy a new car when they don’t know if their jobs are secure or their investments will recover. About the only certainty in the foreseeable future, though, is that “The Big Three” will be GM, Toyota, and Honda. By purchasing Chrysler, GM will hold onto the top spot for a little while longer.

Practices Leading to a Death Spiral

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Keeping up with business news today can be depressing. Layoffs, plant closings, and job moves continue to occur and have become so commonplace that they don’t warrant much more than a mention in the news. It’s also interesting that, not too many years ago, many of the companies in trouble today seemed pretty much invincible. They were large, strong, and very profitable. So what happened?

Many of the reasons blamed for the downfall of companies are somewhat sensible: poor economic conditions, rising energy costs, natural disasters, terrorism, etc. There is no doubt that these external issues affect company performance. If these are the causes of a company’s troubles, why do competitors in the same industry serving the same customers perform much better?

It comes down to the job of managing – which is to continually build the health of an organization. Just like the human body, an organization has an immune system. As long there are no severe external stressors, an organization with a weak immune system can appear successful (just as a person with a weakened immune system can appear healthy). As soon as something external – and completely out of the control of the business – occurs, the weakened immune system becomes evident and performance drops off severely.

By the time external events occur and a company’s profits and/or market share shrink it is too late. Company decline has begun and executives do not feel they have the time to work on issues that don’t have immediate impact. The company enters crisis-mode and begins to make drastic cutbacks – including plant closings, layoffs, and severe budget cuts – in order to return the company to profitability. Although these items are often well-intentioned, these actions cause damage that often cannot be repaired and the company sinks further into the death spiral.

Companies that continually work on improving their health still have problems. In fact, they recognize that the job of improvement is never done. Toyota is a very strong company, but still runs into problems now and then that affect its performance.

Improving Organizational Health

There are six common practices in organizations that gradually break down its immune system and set it up for failure. Even if the organization appears to be successful, the existence of any of these practices is a sign that troubles are ahead. Stopping these practices begins the process of building the company’s health, thereby reducing the effect of external events on its future.

Practice 1: Losing Purpose

The first practice is forgetting the purpose of the organization and focusing on purely financial results. Companies need profits to survive, but they are not the reason for their existence. An organization is created to serve a need in society. It is vital to remember that need in order for the company to stay focused and successful. The more it strays from its fundamental purpose, the more teamwork breaks down as people define purpose within their own area of specialization (e.g., salespeople define it in terms of sales; accountants define it in terms of cost control and financial results; etc.).

Profits result from sticking to the purpose and doing it well.

Practice 2: Number-Obsession

Number-obsession occurs when managers attempt to run the organization from a spreadsheet instead of through people, processes, and purpose. It is not uncommon today for a manager or executive who spends more time with a spreadsheet than his or her team members.

Meetings that consistently start with review of numbers and financial results is a sign that number-obsession exists. Unfortunately this practice, which was initiated during the 1950s has become pervasive throughout American industry to the point that, a person who is not good with numbers little chance of rising to the executive ranks.

Practice 3: Squeezing Suppliers

Supplier squeezing refers to basing the relationship with suppliers on the basis of price and payment terms. Suppliers are a part of a company’s system and it is important to understand that, when a supplier suffers, its customers also suffer. Squeezing suppliers results in lower quality products and services, longer leadtimes, and a breakdown of trust with your suppliers.

To measure suppliers accurately, it is important to include the costs of extra inventory due to quality and delivery problems, longer processing time due to variation in incoming materials, cost of incoming inspection, rejections by the customer, and nonmeasurable costs like design support and expertise that a supplier can provide.

Practice 4: Undervaluing Employees

Balance sheet aside, companies that treat employees as an expense do not value their contributions. On the employee side, there is little pride of association with the company. Employee turnover is high, layoffs are common, and employee morale is low.

On the other hand, companies that treat employees as assets invest heavily in training and development. Employee turnover is low and morale is high. The management team is made up of people who have risen through the ranks and have a great deal of experience with the company’s products, processes, culture, and customers.

Practice 5: Dirt, Clutter and Damage

Workplaces that are dirty, unorganized, and equipment is worn and broken. Productivity and quality is usually low, while accidents rates and costs are high. Companies that do not respect their assets – do not respect their people.

There is an unfortunate preventive maintenance paradox characteristic of American companies: When business is good, there is no time for preventive maintenance – When business is bad, there is no money for preventive maintenance.

Practice 6: Operational Fragmentation

Operational fragmentation occurs when the organization is managed by breaking it down into individual departments and setting separate objectives for each component. All to common, objectives are set for individuals and departments that conflict with each other. People meet their objectives – especially when tied to compensation – which does damage to the organization as-a-whole.

Organizations need to be led as a system – not as individual components. Objectives should be organization-wide so everyone can work together for the good of the company.

More detail about the practices, including how to identify their existence and eliminate them, is available in my book, Avoiding the Corporate Death Spiral: Recognizing & Eliminating the Signs of Decline (Quality Press, 2006).

The American Auto Industry Does It Again

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Here we go again. General Motors announces further plant closings and layoffs. It makes one wonder how much longer this can go on. Eventually, GM executives will run out of plants to close and people to fire and have to look in the mirror at the true cause of the problems they face.

A manager’s ultimate responsibility is to build the health of the organization so that it can withstand the external pressures that cause decline. Just like people, organizations have an immune system. A weakened immune system may go unnoticed as long as there are no external influences or stressors that can cause disease or decline. Organizations and people with compromised immune systems may even feel strong and healthy as long as the environment is friendly. Once exposure to an external event or stressor occurs, however, disease sets in and decline begins. At this point, drastic measures need to be taken (e.g., layoffs/plant closings for an organization or surgery/chemotherapy for a person) to attempt to stop the decline. It is during times like these that people realize how much easier – and enjoyable – it is to work on improving health than fighting disease.

General Motors and Ford claim that legacy costs and an unexpected shift in demand to fuel efficient cars are the causes of their problems. After all, both were fat and happy a few short years ago when they ignored the market signs and raked in huge profits from SUVs and trucks.

Things have gotten to the point where Toyota is also facing declining sales in the U.S. market. A first for Toyota, they are responding by closing down their truck and SUV factories for three months in an effort to reduce the inventory of large, slow-moving vehicles. The difference? Toyota is NOT laying off any of the 4400 employees affected by the closing. Instead, they are keeping workers on the payroll and using the time for productivity, safety, and quality training.

Imagine the loyalty that Toyota is gaining from its workforce by taking this action. This gives the workers the feeling that they are just as much a part of the company as management. Do you think GM and Ford workers that remain after the layoffs and plant closings feel the same way? Do you think that Ford and GM executives care what the workers think?

An executive who continues to layoff workers because of economic problems is like the captain who runs into rough seas and throws crew members off the ship. Isn’t this the type of leadership we used to see in stories about pirates?

It’s no secret why Toyota continues to improve and innovate in its manufacturing process while Ford and GM continue to . . . well, be Ford and GM.