Why Toyota Won & What Happens Next

Project Lean EnterpriseParis

James P. WomackChairman, Lean Enterprise Institute

May 10, 2006

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By the End of 2006…

• Toyota will pass GM to become the highest volume motor vehicle manufacturer and the world’s largest manufacturing firm by sales.

• GM with its mass production system -- praised by Peter Drucker, described in detail by its inventor Alfred Sloan, and operated with remarkable continuity for more than eighty years since its completion in the 1920s – will have been deposed by Toyota with its lean production system.

• Exactly why did Toyota win?

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Common Wisdom GM had:

• Excessive wage costs for its unionized workers.

• Pension crisis with salaried and unionized retirees.

• Uncompetitive factories with low-quality products.

Toyota had:

• Lower compensation costs due to young work force.

• A weak currency in Japan.

• A lucky break from high oil prices in recent years.

As a result:

• Toyota won.

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Why Toyota Actually WonA complete business system, previously the world’s

best, has been beaten by a better business system, which is the new world best practice.

Toyota’s method for:

Listening to the customer and engineering products

Managing and developing suppliers

Dealing with customers (Japan only)

Running production operations

Managing policy to achieve and sharpen alignment

Created overwhelming competitive advantage.

(And production operations may well be the least important of these!)

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Some Evidence• Toyota’s selling prices are much higher than GM’s

due to refinement, delivered quality, and durability.

• Toyota is able to get new designs to market vastly faster than GM as market conditions change,

• Toyota needs fewer hours of engineering and less capital to launch products with a given capacity.

• Toyota’s suppliers have higher margins and lower selling prices, better quality & fresher technology.

• GM’s steady decline in its home market has created a pension crisis that confuses cause with effect.

• As a result of weak policy management, GM has been very slow to change.

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Prognosis

• GM (and Ford) will shortly undergo profound transformations, with new managements, and remake themselves in the image of smaller Toyotas (just as Ford remade itself in the image of a smaller GM when Henry Ford died.)

• Toyota will work hard at managing the political aspects of the transition and obsess – quite appropriately – about “big company disease”.

• Remember that GM reached its peak in 1955, the year Sloan retired. Toyota will shortly see a generational shift as Eiji Toyoda and Fujio Cho disappear from the scene. Is this Toyota’s zenith?

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What Happens Next?

• Chinese and Indian companies emerge as the “next Toyotas”? Possible, but not soon and there is no evidence of a new Chinese or Indian business system – only high energy and low factor costs.

• Losers like Nissan continue to merge, creating a stable global oligopoly? Possible but difficult – mergers usually fail in the auto industry and there will be a steady stream of new entrants.

• The focus of this industry shifts from selling brilliant objects to solving mobility problems? My and Dan Jones’s belief.

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The Age of Brilliant Objects• Most striking achievement of lean production has

been introduction of truly superlative objects, with few defects, high refinement & great durability.

• But is this all consumers want today?

• As we look ahead we can see that the consumer’s most precious asset is not money but time.

• Today’s brilliant objects often squander consumer time because consumption – better called problem solving -- is a complex process of searching for, obtaining, installing, maintaining, repairing, upgrading & recycling brilliant objects.

• No current-day auto company (possibly excepting Toyota in Japan) addresses this problem.

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The Age of Lean Solutions• If consumption is a problem-solving process, it

follows that there should be principles of lean solutions similar to the principles of lean thinking (value, value stream, flow, pull and perfection.)

• Dan Jones and I propose the following: Solve my problem completely Don’t waste my time Provide exactly what I want Exactly where I want Exactly when I want Continually reduce my total cost (time, money and

hassle) to solve my problem.

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How Would This Work in Auto Industry?

The simple problem of auto repair:

• In a typical repair sequence the consumer takes many time-consuming steps through a complex process simply to schedule and complete a repair.

• In Europe the chances that the repair will be done correctly and completed at the time promised are only about 60%. (That’s 400,000 ppm defective in quality terms.)

• Yet this is simply a process, with consumer and provider components, like any process in manufacturing.

• It can be mapped and dramatically improved!

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The Problem of Auto Repair

Dan Jones recently worked with a large car dealer in Portugal to test our hypotheses:

• For typical repairs:

Consumer time expended cut in half.

Fraction of jobs done wrong and late halved.

Total cost of a repair to the dealer cut by 30%.

Job satisfaction in the dealership much higher.

Win-win-win for consumer, provider & employees simply by mapping the process and applying lean principles!

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But This Is Only Part of Total Problem

Consumers must also:

• Search for the vehicles needed.

• Obtain (lease or buy) them.

• Arrange delivery.

• Register, insure, and inspect them.

• Repair them in the event of mishap.

• Upgrade them as necessary.

• Recycle them.

This is time consuming and often frustrating.

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A Mobility Solution

A mobility provider:• Obtains the vehicles you need – any type from

any manufacturer• Brings them to you.• Registers, insures and inspects them.• Maintains them.• Repairs them.• Upgrades them.• Recycles them.

For considerably lower total cost (to you and the provider) than current “mass consumption” methods.

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The Challenge for Existing Car Makers

• Most of us want access to the complete range of brands, not just Toyotas for example.

• Car companies tend to be very “assets backwards”, determined to “move the metal”, specifically their own metal.

• Mobility providers are likely to be a new type of retailer rather than a new type of car company.

• Even Toyota may face a challenge to its role in the consumer’s life.

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Lean Solutions• Can be devised for any problem – healthcare,

shelter (i.e., housing), long-distance mobility (i.e., air travel), personal financial management, personal logistics (i.e., shopping.)

• Reduce total cost to consumer and provider while lessening everyone’s hassle.

• A simple matter of creating brilliant processes to solve every problem, by better specifying true value and taking out waste!

• Turning consumers and providers from antagonistic strangers into long-term partners.

• The logical next step in lean thinking in the age of brilliant solutions!