Thursday, August 5, 2004
Rapid growth tests Toyota
Automaker faces massive pressure to meet tough sales and market share targets
By Christine Tierney / The Detroit News

TRAVERSE CITY ?Toyota Motor Co.p.’s earnings and sales may be growing by leaps and bounds, but President Fujio Cho senses potential pitfalls as the automaker faces growing pains.

Toyota is confronting enormous challenges as it strives to meet ambitious sales and market share targets without eroding the company’s sterling reputation for engineering and reliability.

The sense of crisis we feel, despite increasing sales and profits, stems from our fear that we have not kept up,?Cho said Wednesday at an annual auto industry conference here. Particularly fears that we have not kept up with environmental issues, the demands of globalization, and the need to develop our people for the future.?

Japan’s biggest automaker wants to control 15 percent of the global auto business by the end of the decade, up from 12 percent now.

To achieve the growth targets and prevent complacency due to its recent success, Toyota is accelerating plans to shift research, design and engineering responsibilities to North America and other regions, he said.

Obviously, using only Japanese advisers cannot be done any more,?Cho said. “We are developing new methods that will help all our key regions become self-reliant.?

To develop the next generation of leaders, Toyota, based in Japan’s rural heartland, has started an executive development program that gathers promising executives for two weeks of special training annually.

Participants will spend one week in Japan to gain a deeper understanding of the renowned Toyota Production System, and one week in Philadelphia at the University of Pennsylvania’s Wharton School of Business to gain insights from outside experts.

We are trying very hard to promote locally recruited people to top positions in every region,?Cho said.

A diverse staff is essential for Toyota as the company becomes increasingly global. It is on track this year to overtake Ford Motor Co. as the world’s second-largest automaker, ranked by unit sales.

Still, the company is worried that rivals are gaining ground.

Hyundai has quality and prices that have caught customers?attention ?not to mention ours,?Cho said. General Motors now has plants and products that are standouts. Ford has great trucks and turnaround profits. Chrysler's new 300 is flying out of showrooms. Honda has top quality and new hybrids coming. Nissan is on fire, with the fastest growth of anyone in the business.?

In the United States, Toyota is stepping up training to counter a shortage of supervisors skilled in its manufacturing methods. The move comes as the automaker prepares to open a new truck plant in Texas.

We have certified over 60 group leaders so far, and will continue rolling out successful training like this to all our team members,?said Cho, a 44-year company veteran who once headed Toyota’s assembly plant in Georgetown, Ky.

Gary Convis, current head of Toyota’s operations in Kentucky, said the company’s manufacturing philosophy traditionally was passed on from person to person in Japan. Cho himself was mentored by the founder of the Toyota Production System, Taiichi Ohno.

But the company’s rapid expansion has left little time to train and nurture a new generation of managers about the company’s vaunted production system, Convis said.

They have gotten more methodical and systematic about how to teach it,?he said.

In the United States, Toyota has increased its share of the light truck market to 12.9 percent, up from 8.7 percent five years ago. Last month, its U.S. sales surged 18 percent, bolstered in part by the runaway success of its fuel-efficient Prius gasoline-electric hybrid.

Toyota is boosting production in Japan of the Prius by 50 percent to 15,000 vehicles a month to fill a long backlog of orders. Next year, it hopes to sell 300,000 hybrids.

Cho said the company is studying the possibility of producing a hybrid vehicle in the United States. Toyota plans to launch a Lexus hybrid, the RX 400h, and a hybrid version of the Toyota Highlander SUV, but the models will be delayed until early next year.

Two years ago, with Toyota streaking ahead in sales and profitability, the company announced a plan to reinvent?itself, based on the traditional Toyota principle of kaizen, or constant improvement.

The company laid out objectives to address environmental concerns in the auto industry and train more managers and engineers to execute aggressive expansion plans around the world.

Steady success is good, but it can foster serious weaknesses,?Cho said Wednesday. “Complacency sets in and before you know it, you are in trouble.?

His concern might seem surprising, coming from the head of a company that reported a 32 percent increase in operating income for the quarter ended on June 30.

But David Cole, chairman of the Center for Automotive Research in Ann Arbor, said Toyota clearly does not intend to rest on its laurels.

The real concern,? Cole said, Is how do you change and improve from a position of success??

TOYOTA CITY, Japan -- Toyota Motor Corp., one of the most successful companies in the world, is scrambling to overhaul itself.

After nearly doubling its revenue in the past decade and redefining competition in key parts of the auto business, Toyota suddenly finds itself confronting mushrooming quality problems. Torrid growth has spread thin the company's famed Japanese quality gurus. This means that, in places like Toyota's Georgetown, Kentucky, plant, the pressure is on to retrain American workers to take up more of the slack. At the same time, Toyota has launched a world-wide campaign to simplify its production systems.

It is the kind of paradox many highly successful companies face: Getting bigger doesn't always mean getting better. Toyota's net income of 1.16 trillion yen ($10.46 billion) in the year ended March 31 not only exceeded those of rivals General Motors Corp. and Ford Motor Co. combined, but set a record for any Japanese company. Toyota continued the trend Tuesday, reporting a 29 percent rise in net income for the quarter ended June 30, to 286.6 billion yen, up from 222.5 billion yen in the year-earlier period. Group sales rose 10 percent to 4.51 trillion yen.

Toyota's next big goal is to expand its share of the global market to 15 percent over the next decade, from 10 percent now. That would make Toyota roughly the same size No. 1 auto maker GM is today.

But there are signs that the company's ambitious growth agenda is straining human and technical resources and undercutting one of Toyota's most critical strategic advantages: quality.

Toyota still tends to outscore most rivals, including Detroit's three big auto makers and European brands, on industry surveys of quality and reliability. But Toyota's lead has narrowed and in certain key segments disappeared. "Toyota quality isn't improving as fast as it should," Toyota's president, Fujio Cho, admits in an interview.

To stop the quality slide, Mr. Cho says Toyota has launched multiple "special task forces" at trouble spots in places such as North America and China to overhaul shop-floor management. Toyota also has established a Global Production Center in Toyota City to train midlevel factory managers so they can more effectively run plants outside Japan. Toyota now is re-evaluating some of its most fundamental operating strategies.

"We are getting back to basics," says Gary Convis, a Toyota managing officer who is also president of the Georgetown plant.

An important part of that effort focuses not on machines or high-speed information technology, but on replicating a special class of people who were instrumental in making Toyota a manufacturing powerhouse during the past 25 years.

When Toyota first began opening factories in the U.S. in the mid-1980s, kicking off its dramatic global expansion, some of the most important people in the new plants weren't top executives, but midlevel Japanese managers commonly known as coordinators.

These coordinators were experts in Toyota's lean-manufacturing techniques and philosophies, commonly known as the Toyota Production System, or TPS. These coordinators, usually with 20 or more years of experience, generally shunned classrooms, instead training American shop-floor managers and hourly associates by attacking issues directly on the assembly line.

A central concept was that there is an endless possibility for kaizen, or continuous improvement, in every process. The Toyota coordinators tried to make each worker a "thinking machine," capable of constant learning.

The principles behind lean production took shape over five decades, starting with efforts in the 1930s by one of the company's founding fathers, Kiichiro Toyoda. The Toyota system took its current form during the 1950s with the leadership of Taiichi Ohno, a Toyota engineer who drew inspiration from a trip to the U.S. during which he watched how a supermarket stocked its shelves using a just-in-time delivery of goods.

Mr. Ohno preached there are seven forms of muda, or waste, in any process. When Mr. Ohno trained recruits to Toyota's elite Operations Management Consulting Division, he drew a chalk circle in front of a process on the assembly line and told the trainee to watch that job until he could identify how it could be improved. A trainee could stand for nearly a day before he was able to satisfy Mr. Ohno with his answer.

When Mr. Ohno began applying his production approach full-scale, Toyota factories achieved huge gains in productivity and efficiency. The marriage of efficient production to an obsessive concern for quality helped Toyota establish a reputation for bullet-proof reliability that remains a huge competitive advantage.

By the late 1980s, lean production was a deeply entrenched way of life at Toyota, which governed just about every aspect of its corporate activities.

Hajime Oba, a TPS guru, likens the system to a form of religion. Managers at Detroit's Big Three auto makers, he says, use lean techniques simply as a way to slash inventory. "What (they) are doing is creating a Buddha image and forgetting to inject soul in it," Mr. Oba says.

But as years went by, Toyota discovered that its corporate faith was getting watered down as the company spread its operations world-wide, and hired generations of employees ever more distant from Mr. Ohno.

A case in point is Toyota's massive factory in Georgetown, Kentucky, the first plant the auto maker built in the U.S. from the ground up.

Georgetown began production in 1986, and throughout the 1990s the plant routinely claimed the top spots in J.D. Power and Associates' widely watched Initial Quality survey for cars sold in the U.S.

But after being named North America's second-best plant in 2001 behind Toyota's Canadian plant in Cambridge, Ontario, Georgetown has slumped. This year, it ranked No. 14, after placing No. 15 in 2003 and No. 26 in 2002. Two GM plants in Michigan, the Lansing Grand River Cadillac factory and a large car plant in Hamtramck, and Ford's luxury-car factory in Wixom, Michigan, were North America's top three plants this year.

One big problem at Georgetown has been language. Most of the Toyota production-system masters speak fluently only in Japanese. Most of their American employees speak only English. The linguistic and cultural barriers make deep discussions on lean production almost impossible, and can cause other problems.

Another issue is time -- or the lack of it. As sales of Toyota vehicles in the North American market took off, Toyota factories had to ramp up quickly to keep up with demand. That meant a plant like Georgetown had to rapidly promote American shop-floor managers and hourly associates, instead of nurturing them gradually in the Toyota manufacturing way and deepening their skills and knowledge.

Mr. Oba found many shop-floor leaders would spend too much time in their offices, instead of prowling the factory floor coaching and leading kaizen projects with assembly workers.

"Demand for ... high volumes saps your energy," says Mr. Convis. "Over a period of time, it eroded our focus." High turnover among workers and managers on the shop floor also "thinned out the expertise and knowledge we painstakingly built up over the years."

But by far the biggest headache at Georgetown now stems from a scarcity of TPS coordinators from Japan.

As the auto maker stepped up the pace of factory openings globally, those expansion plans meant fewer coordinators for older, more established plants like Georgetown.

At Georgetown, one glaring symptom of trouble, its top executives say, is that some hourly assemblers began ignoring standardized work processes -- considered one of the biggest sins inside Toyota plants because of the impact on the consistency and accuracy of manufacturing.

Georgetown also lost some lean-production masters to age and competitors. Kazumi Nakada, a TPS master who worked in tandem with Mr. Cho, the then-Georgetown president, to launch Georgetown in the mid-1980s. But Mr. Nakada left Toyota in 1995 to join GM, which was intensifying its efforts to catch up with Toyota in vehicle quality by copying its manufacturing methods. Mr. Nakata worked at GM overhauling its manufacturing system in Europe, and now works for the big auto parts maker, Delphi Corp., a former GM unit whose leaders are vigorous Toyota Production System converts.

By the time Mr. Convis arrived at Georgetown in mid-2000 from the GM-Toyota plant in California, Georgetown was showing signs of trouble. Yet, the plant's management was in charge of leading Toyota's effort to set up a pickup-truck plant in Tijuana, Mexico. Mr. Convis asked his superiors in Japan for help, in the form of TPS masters who could work on the Mexico project. The reply was a "flat no," Mr. Convis says.

That was "a real wakeup call," Mr. Convis says.

To shore up Georgetown's mastery of lean production to a level where it could function without relying so much on Japanese TPS coordinators, the plant's top management circle launched an emergency 18-month project in 2000 in order to gradually build back up the core of its front-line managers. The effort has since continued as a more formalized Organization Development Group.

Among the first things Mr. Convis and other managers did was drag about 70 midlevel managers through projects at various parts producers for "real life" kaizen. The goal was in part to "embarrass the hell out of them" in front of suppliers whom they had been used to bossing around, says Mr. Oba, the then-president of the nearby Toyota Supplier Support Center. Mr. Oba agreed to help out Mr. Convis in implementing the project.

Still, in 2002, Georgetown suffered one of the biggest blows to its track record for quality. The plant began pumping out the new Camry sedan in the fall of 2001, and soon buyers began griping about the car's spongy brakes and cup holders that interfered with the shift lever when a tall travel mug was placed in them. Long skinny plastic strips, call "Mohican molding," that covered up weld marks on the car's roof also sometimes peeled off, in part because of lack of testing.

Those problems helped to send the number of customer complaints about the quality of the new Camry soaring in the annual initial quality survey by J.D. Power. In 2002, the car had 117 problems per 100 vehicles and was the sixth-best vehicle in the survey's "premium midsize car" category. Just two years earlier, in 2000, the Camry was America's best vehicle in that segment.

Since then, the Camry's initial quality ranking has declined to No. 7 in 2003 and No. 8 in 2004 despite the fact that the number of customer complaints declined. Rivals are improving their cars faster than Toyota is.

Now, with some rivals closing the gap in efficiency and quality, Toyota is scrambling to take lean production to a new level -- one that is simple enough it could function without the constant help of Japanese coordinators with 20 years of experience or more in lean production.

The company, among other efforts, is trying to augment its traditional hands-on approach to teaching TPS principles with more systematic and easier-to-understand tools, such as "TPS manuals."

In Toyota City, Toyota has established a Global Production Center, which aims to train shop-floor leaders for Toyota factories outside Japan.

Another related effort is the Organization Development Group Mr. Convis helped set up at Georgetown, which aims to more slowly and extensively nurture American shop-floor managers in TPS and create future leaders of the plant who won't have to rely on Japanese TPS gurus to run day-to-day operations at Georgetown. A similar effort is also going on at New United Motor Manufacturing Inc., the plant in Fremont, California, Toyota owns jointly with GM.

But the most critical part of the effort is on display in a new assembly system at Toyota's Tsutsumi plant in Toyota City -- a new standard bearer of the Toyota production way that is now being spread to North America and China, among other places.

A typical assembly line is lined with makeshift shelves. At most Toyota plants, those racks normally hold just 80 minutes worth of components. With several different models coming down the same line (Tsutsumi makes six to seven different models in both of its assembly lines), workers have to be sure to pick the right parts from the shelves. That can mean sorting through more than two dozen versions of the same basic components in some cases.

Tsutsumi eliminated almost all the parts shelves that used to flank the plant's snaking assembly line and designed a system where logistics workers synchronize packages of parts according to the order of vehicles heading down the assembly line and deliver them in small containers placed inside a welded vehicle body.

Error proofing, or what Toyota calls "poke yoke," (po-kay yo-kay) is increasingly important for the auto maker, because as the company's plants began sprouting around the world, it has learned it can't count on having a work force that is as steeped in Toyota's traditions, or as loyal and motivated, as Toyota City factory workers whose quality and efficiency stunned rivals in the early 1980s.

At the Fremont, California, plant Toyota jointly operates and owns with GM, turnover is as high as 8 percent, compared with 2 percent at Toyota's Japanese plants.. Georgetown is the first large-scale Toyota plant outside Japan trying to take lessons from the new production system devised at the Tsutsumi plant. In one work area on Georgetown's No. 1 assembly line, where it builds a Camry or Avalon every 58 seconds, an operator used to have to make multiple decisions in choosing particular visors and seatbelts from the parts bin with 24 different kinds of visors and nine different seatbelts, depending on a vehicle.

Georgetown wanted to limit the number of decisions an hourly worker makes to two or less per vehicle. So under a new system installed earlier this year after months of preparation, the same operator now receives parts for each vehicle in a small plastic container. In that container are a set of visors and seatbelts that match the car in front of the worker at that moment. The result: The operator makes "zero decisions" in picking parts, says John Stewart, a manager at Georgetown.

"This reduced the mental burden on our team members," says Mr. Stewart. In each work area, Mr. Stewart and other shop managers work on three areas: "smooth flow, memory simple and motion simple," he says.