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INSIDE THE MIND OF TOYOTA
INSIDE THE MIND OF TOYOTA
Management Principles for Enduring Growth

Satoshi Hino

Foreword by Jeffrey K. Liker

Translated by Andrew Dillon

PRODUCTCTIVITY
ey” press)

Productivity Press
NEW YORK, NEW YORK
Original Japanese book edition published by Diamond, Inc., Tokyo, Japan as
Toyota Keiei Shisutemu no Kenkyil. Copyright © 2002 by Satoshi Hino.

English edition copyright © 2006 by Productivity Press, a division of The Kraus

Organization Limited.

All rights reserved. No part of this book may be reproduced or utilized in any
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Library of Congress Cataloging-in-Publication Data

Hino, Satoshi, 1945-

[Toyota keiei shisutemu no kenkyt. English]
Inside the mind of Toyota : management principles for enduring growth /
Satoshi Hino ; foreword by Jeffrey K. Liker ; translated by Andrew Dillon.
Be cm.
“Original Japanese book edition published by Diamond, Inc., Tokyo, Japan
as Toyota Keiei Shisutemu no Kenkyt. ©2002”—T.p. verso.
Includes index.
ISBN 1-56327-300-4 (alk. paper)
1. Toyota Jidosha Kabushiki Kaisha—Management. 2. Automobile
industry and trade—Japan—Management—Case studies. I. Title.
HD9710.J34T6363313 2006
658—dc22
2005030271

09 08 070605 54321
Contents

Foreword Vil
Translator’s Foreword
Preface to the English-Language Edition

Introduction
Why Study Toyota?
An Outline of Toyota’s Growth XVlil
An Analytic Perspective on Companies XX1
Chapter Summaries xxii

Chapter 1: Toyota's Genes and DNA

The Men Who Created the Toyota Genes
DNA: How Toyota Genes Are Transmitted oy
The Managerial Temperament That Creates Enduring Growth 42

Chapter 2: The Toyota Paradigm 49

Values 50
Patterns of Thinking Ti
Forms of Behavior 83

Chapter 3: Toyota's System of Management Functions Se

TQC at Toyota 95
The Business Planning System 108
The Quality Control System 121
The Cost Management System 130
Financial and Accounting Systems 143
Managing Labor 146
The Office Work Management System 155
Computer System Management 163
vi Contents

Chapter 4: Toyota's System of Production Functions 173

The Marketing System 173
Individual Product Development Systems 181
The Design Management System 190
Production Technology 220
Purchasing 227
Manufacturing (The Toyota Production System) 239
Sales 241

Chapter 5: Product Power and Brand Power 247

Product Power 247
The Power of the Toyota Brand 264

Chapter 6: Toyota Management in the 21st Century 267

The Okuda/Cho System 267
Becoming a Leading Company in the 21st Century 270
Innovation in Product Development 284
Management Standards From Toyota 301

Index 313
About the Author 327
Foreword

When I wrote The Toyota Way, the purpose was clear: to stand apart from
the many books on specific elements of the Toyota Production System
(TPS) that merely emphasize “lean tools.” You cannot pull out a piece of
a system and expect it to perform. More importantly, Toyota has a much
broader management approach, which makes TPS work. Without it, TPS
is a lifeless drawing of a house.
The Toyota Way was intended to correct this misunderstanding
through a set of management principles, stories bringing the principles to
life, and easy reading to make the point crystal clear. It is obvious that
Satoshi Hino has a different and complementary purpose. Hino-san
draws on years of experience as an engineer in a Japanese auto company
and presents a very detailed and information-rich picture of Toyota’s
management system. He did not work for Toyota, but was a long-stand-
ing fan of Toyota and followed the company intensively. Unfortunately for
those of us who do not read Japanese, there is a rich base of articles,
books, and documents about Toyota in Japanese that have not been trans-
lated or are difficult to obtain. Fortunately, Productivity Press decided to
translate Hino’s book into English. I say “fortunately” because this book
is the real thing. It is filled with documentation and provides a deep
account of many aspects of Toyota’s management system.
If we estimate that The Toyota Way is 90 percent prose and 10 percent
facts and diagrams, I would guess that Hino’s work is made up of 60 per-
cent facts and diagrams. Without even reading the book, anyone deeply
interested in Toyota’s management system could get a tremendous
amount by just looking at the figures. Many of these I personally had
never seen before, despite twenty years of visiting and studying Toyota.
They helped fill in some holes in my knowledge.
One might expect a detailed, factual book to focus on the formal sys-
tems of Toyota’s structure and miss the philosophy. That is certainly not
the case with Hino’s book. Hino is well aware of the importance of Toyota’s
philosophy and traces the DNA of Toyota management both in biographi-
cal terms, looking at the history of leaders in the company, and in philo-
sophical terms, looking at the evolution of management thinking.
I have had many requests asking how Toyota excels at quality. The
question is usually framed in terms of Toyota’s quality control system. My
standard answer is to say that quality is part of every function, and every
vill | Foreword

person is an inspector checking the work passed to them and continuously

improving processes. Hino goes a step further. He presents and dissects
Total Quality Control as part of Toyota’s functional management system, a
system that is not well understood but is a key to their success. As in most
parts of the book, Chapter 3 gives a very detailed and factual account of
this simple and powerful system of management. We learn how Toyota’s
planning, quality management, cost management, finance and account-
ing, labor management, and more are organized and managed.
In Chapter 6, we get a glimpse of Toyota in the 21st century. Again, this
is more a factual account than a crystal ball projection of where Toyota is
heading. And again, we get an inside view that has been invisible to most
of us who do not read Japanese. For example, we get insight into how
Okuda shook up management of the company, dragging it into the 21st
century sometimes in direct conflict with Toyoda family members—
something very rare with previous leaders. We get some detail of the inner
workings that are leading Toyota to grow as a company from a family
business to a global company, but one that still maintains the Toyota
DNA—without which it would be just like any other automotive com-
pany. We also get insights into Toyota’s passion for reforming itself. Eiji
Toyoda repeatedly emphasized the main threat to the company—compla-
cency. He preached that the company must continually reflect deeply and
reshape itself aggressively to fit the changing environment. Certainly
Okuda and Cho continued this message in the modern age.
For me, this is a book that I will read through again and again, using it
as a reference for specific facts and in-depth analysis. It is a great com-
panion to The Toyota Way. The messages of both books are the same: To
understand Toyota’s success you must delve deeply into the underlying
management principles and culture. If you want facts, figures, charts, and
graphs that give you a detailed analysis and factual accounting, this is a
must-read.

Jeffrey K. Liker, Ph.D.

Professor, Industrial and Operations Engineering
University of Michigan
Translator’s Foreword

Barely twenty-five years ago, the Toyota Production System was largely
opaque to the Western world. With a few exceptions—Yasuhiro Monden’s
work comes to mind—the few available books on the subject were rough
going, and almost none of them were in English. In North America and
Europe, it was a visionary few who seized on and studied the first trans-
lations that I and others made of works by pivotal figures such as Shigeo
Shingo and Taiichi Ohno. As Toyota ideas spread, the subsequent suc-
cesses of these “early adopters” became a testament to the sustained effort
and resources they devoted to absorbing Toyota’s lessons and applying
them to their own organizations.
Things have changed quite a bit since the early 1980s, although not
always in predictable ways. That first wave of translations into English and
the conspicuous successes of the early adopters and ex-Toyota Group con-
sultants did not, oddly enough, seem to increase the demand for infor-
mation directly from Japan. Instead, these and other influences ushered in
a first generation of homegrown explicators, interpreters, promoters, and
students of Toyota thinking and practice. The Toyota Production System
(now sometimes called “lean production”) became domesticated, popu-
larized. It was reinterpreted as a collection of tools and techniques and
repackaged in simple, digestible language.
The good news in all this is that Toyota is infinitely more approachable
today than it was a quarter century ago. The bad news is that the flow of
information from Japan is still sluggish and still impeded by obstacles of
language, culture, and perhaps even our own impatience. We have
learned a great deal about Toyota in recent years, but the paucity of infor-
mation in English and other Western languages still conceals from us the
breadth and dynamism of Toyota’s achievements. And all the while, the
widely noted gap between knowledge and hard results—both in Japan
and in the rest of the world—seems to have grown wider.
So what should we do? How can we best absorb and profit from what
Toyota has to teach? Clearly, familiarity with words, tools, and techniques
is not enough. Nor is it enough to move equipment around or “raise
awareness.” These things are necessary, but they are far from sufficient,
and Satoshi Hino tells us why: The success of the Toyota Production
System can be separated neither from the painstaking action required to
build and sustain it, nor from the managerial structures and practices of
X Translator’s Foreword

which it is a part. Hino’s implication is clear: Build a strong managerial

infrastructure, learn relentlessly, and practice, practice, practice.
A long-time and meticulous observer of Toyota, Hino reminds us that
Toyota today is a triumph of humility over hype, of hard work and disci-
pline over rigid formulas and facile “solutions.” It is the embodiment of a
way of thinking about the world. And it is a moving target, too. Even as it
takes up new challenges in the new millennium—environmental friend-
liness, breakthrough fuel efficiencies, and systems integration, for exam-
ple—Toyota distinguishes itself by its distinctive worldview and by its
refusal to be complacent.
Hino’s book, originally published in Japan in 2002, sought to encour-
age a revival in Japanese industry by drawing the attention of Japanese
managers back to the sources of Toyota’s achievement. It was a call to
action, backed by hard evidence and considered conviction.
Our aim is not dissimilar. In publishing this English-language edition,
Productivity Press, the translator, and the author hope to take this mes-
sage beyond the Japanese manufacturing world and make it accessible to
managers in organizations around the globe. Globalization and intensify-
ing competition make the book particularly timely. Hino’s subject matter
is specific, but his implications are general: Theory and principles matter.
Documentation is critical. An organization’s success is intimately linked
to how its leaders think about work, people, and society.
These are powerful lessons, and Hino has them clearly in mind as he
guides us through the broader Management System that is the critical
underpinning of Toyota’s rise to prominence. The key to Toyota’s
strength, he says, is what lies beneath the surface of casual scrutiny: disci-
pline, information management, unshakable principles, and coherent
vision. And he gives details.
Unlike most Toyota watchers, Hino urges us to set our sights not on
replicating Toyota’s success, but on surpassing it. This point is crucial,
because it moves our attention away from slavish imitation of what is
visible on the surface and challenges us to tap into deeper and more pow-
erful mechanisms of excellence.
This is not a cookbook and it is not “Toyota Lite” It deserves serious
study, application, and experimentation. Learn how Toyota thinks, Hino
is telling us. Learn Toyota’s strengths, make them your own and then
exceed them.

Andrew Dillon
September 2005
Preface to the English-Language Edition

The Toyota Production System has been called a revolutionary successor to

Taylorism and the Ford system, and it is the subject of a great number of
fine explanatory books. Few companies, however, seem to have adopted
the Toyota Production System with success. Business process benchmark-
ing demands that a company develop best practices that surpass its com-
petitors. Even if a company becomes more profitable by introducing the
Toyota Production System, we cannot assume that it has adopted the Sys-
tem successfully. For that, the company needs to go beyond Toyota and
build its own unique production system. Until it does, it is merely follow-
ing in Toyota’s footsteps and will be unable to surpass its teacher.
Why is it that companies are unable to adopt the Toyota Production
System very well? The Toyota Production System is difficult to introduce
successfully without adopting the comprehensive Toyota Management
System, of which TPS is only one part, a management system that encom-
passes matters such as corporate culture, management policies, and busi-
ness methods.
I worked at a Japanese automotive manufacturing company until
1999, About 25 years ago, I became interested in the Toyota Production
System and began studying it in order to surpass the Toyota Motor Cor-
poration, the leader of the Japanese automotive industry. I could under-
stand the effectiveness of techniques such as kanban systems or andon
systems, but I couldn’t understand the thinking of the Toyota people who
worked out these unique methods. Their thinking—the structure of
their minds—seemed essentially different from that of ordinary people
like us. Unless we could grasp the structure of their minds, then even
though we might be able to copy the Toyota Production System, we
wouldn't be able to work out methods for going beyond it and we would
never prevail. I concluded that I had to unravel how it was that their way
of thinking came about.
At that point, I began to collect all sorts of information about Toyota,
not merely about the Toyota Production System. What interested me in
particular was the Toyota Management System, but unfortunately I came
across no books that analyzed and explained the Toyota Management
System in a systematic fashion. This was the start of my research into the
Toyota Management System. I have studied Toyota in the intervening
twenty years or so, and the present book is a compilation of those studies.
xii Preface to the English-Language Edition

General Motors and the Ford Motor Corporation, the U.S. automakers
that once held sway over the world’s automotive industry, have now fallen
into an extreme managerial slump. Their current fortunes show that their
20th-century management systems, complete with the waste, or muda, of
mass production, are no longer appropriate for the 21st century. A com-
pany with muda can be profitable in an age when demand exceeds supply,
but we are no longer in such an age. Moreover, waste in industry—for
example, the waste of overproduction or the waste of having people do
work that adds no value—eventually stresses the earth. The pessimistic
estimate that the earth may become uninhabitable by the end of the 21st
century is not necessarily unrealistic. Industry, which stresses the planet
more than anything else, needs to pay careful attention to the establish-
ment of management systems that eliminate all waste. A living example of
this is the Toyota Management System, a fundamental system that will
make it possible to ensure profits and protect the earth in the 21st century.
I hope all companies continue to grow and develop in the 21st century.
Learn the Toyota Management System from this book and use it as a basis
to build your own best practices.
This English edition comes some three anda half years after the book’s
publication in Japan in June 2002. Certain circumstances have changed,
and we have updated some obsolete data accordingly. As a basic principle,
however, the translated English edition has not been updated. This is not
the sort of book that needs to be rewritten every few years, since its goal
is to view the future from the perspective of a historical analysis. If any-
thing, I think the last three years have shown the “principles of enduring
growth” described in this book to be correct.
Four chief developments have taken place at Toyota during these past
three years: the completion of CCC21 (Construction of Cost Competi-
tiveness for the 21st Century)—the renewal of the company’s product
information system; the founding of the Toyota Institute; and the settling
of the company’s 2010 Global Vision.
As I mention in Chapter 6, CCC21 consists of activities to root out
costs from the planning stage in every department and every process,
including those of suppliers. CCC21 began in July 2000 and achieved its
original goal of ¥1 trillion total cost reductions within three years. Since
improved parts are introduced during model changes, moreover,
a mas-
sive cost reduction effect has automatically rolled over into model
changes for the globally strategic Vitz, Corolla, and Camry models. It
is
axiomatic that kaizen at Toyota never stops, so in the wake of CCC21,
Toyota is taking on VI (Value Innovation) activities that fundamentall
y
rethink design methods, including the appropriateness of materials.
Preface to the English-Language Edition _ xiii

Renewal of Toyota’s product information system involves the integra-

tion that I touch on in Chapter 6. In January 2002, Toyota unified the
management of all design information by taking part of the TIS (Total
Information System for Vehicle Development), shown in Fig. 3.14, and
restructuring it as E-BOMs (Bills of Material for Engineering) for design
development aspects that deal with product function information. The
company also took part of its SMS (Specification Management System),
restructured it as M-BOMs (Bills of Material for Manufacturing) com-
patible with the newly constructed E-BOMs, and began using the M-
BOMS for new models. The use of the new M-BOMs, extended to all
models at the end of 2003, has developed into a system of “Global Inte-
grated Parts Lists” that is uniform throughout the world. This has made
it possible to apply “knowledge management” to design, something that
for many years had been an area of concern. It has also made it possible
to standardize M-BOMs that had differed somewhat in factories world-
wide, thereby improving products, lowering costs, and shortening devel-
opment lead times. It also assures a basis for rapidly advancing global
expansion. Total investment in this initiative is reported to have been
¥200 billion, and this will not be recovered soon even if the initiative is
successful. If it fails, then it cannot help but shake the foundations of
management. Toyota is probably alone in the world in taking on such a
bold system restructuring. Now Toyota is trying to improve its competi-
tiveness by being the first automaker in the world to build a system of
PLM (Product Lifestyle Management).
The Toyota Institute was founded in January 2001 for the purpose of
transmitting the Toyota Way (booklets summarizing the Toyota manage-
ment philosophy) to interested parties throughout the world. (The Toy-
ota Way is introduced in Chapter 6.) Each year, several thousand
students from all parts of the world come to the Toyota Institute to study
the essence of the Toyota Way before returning home. Beginning with the
company’s entry into China around 1995 and followed by its aggressive
expansion into France and Eastern Europe, Toyota found itself plunging
headlong into global expansion and was deeply concerned that a lagging
extension of its internal logistical base might start to bankrupt the com-
pany. For this reason, it was judged necessary that Toyota men and
women of differing cultures and customs share and empathize with Toy-
ota values and exercise disciplined Toyota-style management in their
home countries. The result was the Toyota Institute. Toyota today is still
stretched to the limit, still walking a tightrope. The Toyota Institute was
launched at the last minute, and its effects will probably become appar-
ent only slowly.
xiv _ Preface to the English-Language Edition

Toyota’s “2010 Global Vision,” announced in April 2002, evolved from

the “2005 Vision,” also introduced in Chapter 6. Resting on an assump-
tion of a growing emphasis on recycling, the spread of advanced road and
traffic systems and motorization on a global scale, the 2010 Global Vision
calls for internal reform of engineering and product development, man-
agement systems, and profit structures. Toyota has set for itself the aim of
achieving a total global share of 15 percent by as early as 2010. At the time
the 2010 Global Vision was announced, GM held a 15 percent share and
Toyota’s share was around 11 percent. For Toyota to achieve a 15 percent
share would mean kicking GM out of its position as the world’s largest
automotive company, a goal that no one would readily believe. Yet Toyota
pulled ahead of Ford in 2003 and is positioned to pass GM in 2006, four
years earlier than it planned. At the end of the 20th century, GM and Ford
were making akilling in a pickup truck market that Japanese companies
had not even entered. Perhaps this led the American manufacturers to
commit the strategic error of losing a sense of crisis with respect to Japan-
ese manufacturers, but even so, Toyota is catching up faster than pre-
dicted. Toyota’s hot pursuit of its rivals can be extrapolated from the
company’s 21st-century business strategy (covered in Chapter 6), includ-
ing the completion of the CCC21 initiative, the renewal of the company’s
product information management system, and the founding of the Toy-
ota Institute. These developments validate the prediction that Toyota will
surely continue to grow in the 21st century.
Translations of this book were published in 2003 in Korea and Taiwan.
In Korea, Jaeyong Lee, managing director of Samsung Electronics, the son
and heir apparent of Samsung Group chairman Kunhee Lee, gave copies
of the book to over 100 Group executives with this note: “This is the most
impressive book I’ve read recently. I’d like you to read it” SS Kim, the
vice-chairman and CEO of LG Electronics, registered this book as No. 1
on the “CEO’s Bookshelf” section of his personal homepage. Samsung
and LG are rapidly growing global manufacturers of electric and elec-
tronics products and they are avidly reading this book with the goal of
growing even faster. I hope readers in the English-speaking world will use
this book to learn the principles of enduring growth, so that in the 21st
century their companies both increase profitability and ease their impact
on the earth’s environment.

Satoshi Hino
Fall 2005
Introduction

WHY STUDY TOYOTA?

The Japanese economy rushed into the 21st century on the heels of a “lost
decade,” and a way out is not yet in sight. Corporate reorganizations have
reversed course, and each year the number of Japanese companies
declines. Layoffs caused by restructuring have become commonplace, and
unemployment continues to rise to record levels. With the rise of China
as the “world’s factory,” Japan’s place in the world is in peril.
Microsoft’s president Bill Gates’s keynote address to COMDEX in Las
Vegas on November 12, 2000, included the following observation:

I keep near at hand a copy of My Years with General Motors by Alfred

Sloan, the great leader who made GM the world’s largest automaker.
The important thing here is how to make organizations endure once
the genius entrepreneurs who built them have passed on. In Japan there
are two companies that serve as suitable examples of this: Toyota Motor
and Sony. I'm not surprised when a company grows rapidly in the
space offive years, but I’m extremely interested in companies that con-
sistently generate superlative results over a twenty- or thirty-year
period. Do they have embedded in them some mechanism for perma-
nence? If they do, then a generational handoff won’t wipe out their tal-
ent and their vitality.

Former General Electric CEO Jack Welch, in a November 6, 2001,

interview with the Nikkei Sangyo Shimbun, addressed the question of
Japanese firms reeling from poor performance and seeking management
models in the West. Welch commented: “First of all, you have to learn the
terms of winning from the management techniques of companies like
Toyota. Japan has first-rate companies like Toyota and Sony. Firms like
Ricoh and Canon, too, have now pulled ahead of Xerox in the U.S. Japan
can find a way to break through the sluggish economy [by studying the
innovative methods of its domestic winning teams].”
As Bill Gates and Jack Welch observed, companies structured for
enduring growth lie right at our doorstep. By studying their examples,
21st-century Japan can once again become a model of prosperity in
the world.
xvi Introduction

On January 1, 2002, the Nikkei Sangyo Shimbun published a ranking of

companies according to their capacity for survival. “Survival potential” in
this instance took the form of an index expressing whether a company’s
profits were sufficient to guard against the risk of income fluctuations
after tax and other obligations had been satisfied. Reproduced below is
the formula used for this purpose:

Survival potential = actual business profits before interest payments —

survivability profits
Survivability profits = dividends + officers’ bonuses + corporate taxes +
interest costs and discount charges + risk charges
Risk charges = Standard deviation of the previous 10 years’ business profits
before interest payments on total capital X total capital (average of ini-
tial and final capital)

The companies ranked highest in survival potential were:

Rank Company Survival potential Survivability Profits
1 Toyota Motor Corporation ¥378 billion ¥207 billion
2 Take Fuji ¥193.1 billion ¥27 billion
3 Takeda Pharmaceutical ¥183 billion ¥45 billion

Toyota, which leads in survival potential and survivability profits, was

also in first place ten years ago. The results suggest just how enduring Toy-
ota’s business and profit bases really are.
Figure 0.1 is a map of strategic control in the automotive industry. Put
together by McKinsey & Company, it shows trends in the financial posi-
tions of automobile manufacturers in the period from 1994 to 2000.
The performance measure on the vertical axis (Price Book Ratio or
PBR) reflects the value of company shares in capital markets. Total cur-
rent value can be expressed by the curve defined by the product of PBR
and equity, shown on the horizontal axis.
As we see from this figure, Toyota is the industry leader, far surpassing
other firms. Ford raised its PBR and edged toward leadership at one point,
but its position is unclear since the Firestone episode in 2001. Although
General Motors and DaimlerChrysler have clearly grown in scale, their
results and strategic effectiveness remain questionable. As “integrators,”
they compare poorly with Toyota.
The secret of Toyota’s stubbornly persistent growth in diverse environ-
ments has been ascribed to difficult-to-imitate “core competencies.” But
in the current crisis, where the rise of China threatens to scuttle Japan,
reproducing Toyota’s core competencies and making them broadly
accessible to all Japanese companies has become a matter of critical need.
Introduction = xvii

Total
Current
Value in
Billions
of
Dollars

Performance
(PBR)

See . Integrators i ' 10

0 10 20 30 40 50
Book Value of Shareholders' Equity in Billions of Dollars
Source: "Winning in an Age of Polarization,’ Diamond Harvard Business Review, March 2001.

Toyota itself recognizes that it cannot survive alone while the rest of Japan
founders. Thus, through initiatives such as the Central Japan Industries
Association! and the Japan Organization for Innovation in Manufactur-
ing, Human Development and Quality,’ Toyota is working to standardize
and spread its management system. (See Chapter 6.)
It is difficult, however, for insiders to objectively evaluate an organiza-
tion. Toyota does not see firms at the “bottom of the bottom.” Its appraisal
begins at the “bottom of the middle.” For this reason, methods advocated
by Toyota are too far removed from the realities of most companies and,
at least initially, simply too difficult to follow.
In this book, we will be looking at Toyota from the outside, distilling
and explaining the essence of Toyota’s enduring growth in terms that
relate to other companies. The book is structured with the aim of making
it possible for other companies to perform on a par with Toyota.
The book is not aimed at companies in any particular industry, nor at
companies of any particular scale or history. As long as they have a desire
for managerial innovation, managers of any generation can build the
mechanisms of enduring growth into their own companies. The princi-
ples discussed in this work can be applied to any company in any indus-
try. Note that management functions do not vary according to scale
either; how big or small your company is does not matter.
xvill Introduction

AN OUTLINE OF TOYOTA'S GROWTH

Wanting to introduce Total Quality Control (TQC), a certain company,

Company A, invited a noted TQC authority, K, to provide guidance. Each
time K visited, he mercilessly pointed out problems within the company.
Members of the company’s TQC office assumed that K’s criticisms repre-
sented an objective view from the outside and felt obligated to listen to
them. They absorbed his fragmentary comments, collected them as the
“Sayings of K,” and distributed them throughout the organization. Figure
0.2 shows those “sayings” in the form of arelational diagram.
The company manager in charge of TQC lashed out at his staff. “What
were you thinking? Handing this stuff out will suck the energy out of the
company.’ Ironically, his outburst followed on the heels of K’s comment
that the company suffers from narrow vision!
TQC activities at the company became ceremonial. Before long, they
slowed to a crawl and were abandoned. The company could not break free
of the diagram of problems that K had pointed out. Its ability to compete
took a dive, and it eventually had to resort to layoffs.
Even now, I suspect, the company in this story does not really compre-
hend what caused it to slip and fall. It may not understand that K’s frag-
mentary and negatively charged comments made it impossible for the
company to see how to resolve any of its problems.
For a revised perspective, let’s take K’s remarks and turn them around
(see Figure 0.3).
A close look at Figure 0.3 reveals something nearly identical to an out-
line of Toyota’s growth. K was intimately familiar with the situation at
Toyota; as a consultant, he must have unconsciously applied the Toyota
construct.
The scheme in Figure 0.3 shows cause-and-effect relationships and can
pretty much be read as an outline of what needs to be done to create a
“company where sales lead to profits.” What isn’t clear, however, is how to
go about creating the “causes” in the lower half of the diagram. It won't
do any good to look for causes in limited observations, such as “benefits
from rural location (simple and honest).’ Only when a company exam-
ines the management situation at Toyota as a universal framework will the
rules and principles needed to shift to the sort of growth illustrated in Fig-
ure 0.3 become evident.
Introduction xix

~ How does
A stay afloat?

Untimely product introductions

_ with poor quality and high cost

_ Technicalcompetence
doesn't improve

PDCA cycle doesn't turn

| (it's always stuck in planning)

_No leadership Managers don't make system

by management - improvements

Weak management

Ignorance of management
technologies

Leaders & managers are

MIA

From top to bottom, the company

consists of competent artisans

No organized work methods (all

Confrontational individual-dependent)

What gets done is _ No functioning

.
formulaic organizational standards

No tradition of communicating
Arrogant and narrow
_ via documents

Suffers from rural

-Aband of storytellers
location (closed)
XX Introduction

DCA cycle turns smoothly

_ (visibly accumulating results)

Managers make system —

_improvements

Strong management .

| pede of management
technologies _
Introduction xxi

AN ANALYTIC PERSPECTIVE ON COMPANIES

Many books and documents have been devoted to the Toyota Production
System, but very few companies have adopted the system with success.
Parts are meaningful only in the context of a whole, and transplanting a
part tends to result in less-than-perfect functioning. Companies need to
adopt the system in its entirety.
Management is often compared to an iceberg. What is visible above the
water consists of a company’s output: the sales performance of its prod-
ucts and popular judgments on the strength of its brands. What deter-
mines all that, however, is what lies below the surface—the infrastructure.
One objective of this book is to break down the infrastructure further and
analyze Toyota's management system as an integrated corporate model.
By applying the model illustrated in Figure 0.4 to all companies, it is
possible to see the strengths and weaknesses in each element of the struc-
ture. Strength refers to the degree of growth potential.

Superstructure 5
P Product resultant product quality,
Power services and brand power
__ Brand Power
on-site work such as product
' System Production planning, design & development,
: Functions __ manufacturing and sales
managerial functions such as
System
—
Management
<
Functions
7
quality, cost, finance and
information
Infrastructure
shared attitudes concern-
Paradigms . ing management, work
and people

__. unique company “genes”

Genes & DNA transmitted by “DNA”

Figure 0.4 reveals the densities, or strengths, of each element of a com-

pany’s structure. Companies with strong superstructures and weak infra-
structures can be viewed as the “five-year growth” companies mentioned
by Bill Gates. They might ride a wave of good fortune or sell their products
xxii Introduction

based on the example of a smaller pioneer’s efforts, but are quite likely to
fail within ten or twenty years. Companies like these were once the dar-
lings of the public and have now gone under.
Conversely, companies whose superstructure is weak and whose infra-
structure is strong (like Toyota in the early years) are likely to generate
continuously superior results for twenty or thirty years.
Company A, cited above, is a company that grew by selling its techno-
logical prowess. It put all its effort into its superstructure and neglected
its infrastructure, subsequently weakening both. Companies (like pres-
ent-day Toyota) that are strong throughout are unshakably dominant.
Historically, Toyota began managing by filling in its infrastructure,
thereby building a company where strength extends all the way up to the
superstructure.
Companies with weak infrastructures are no more substantial than
Styrofoam pellets and will be blown about by the slightest breeze. Com-
panies with solid infrastructures, on the other hand, are like icebergs.
Strong winds may blow, but they won't budge.

CHAPTER SUMMARIES
In Chapter 1, Toyota’s Genes and DNA, we analyze Toyota with a focus on
“genes” and “DNA,” as illustrated at the bottom of the company model
presented in Figure 0.4. DNA is not the same as genes. It is, rather, the
medium of genes. Without DNA, even the finest genes would perish after
a single generation. The laws of biological evolution stipulate that reces-
sive genes are weeded out. If we extrapolate and apply this theory to a
company model, only growth genes can accumulate and evolve, as long as
DNA is present. We will examine the origins of the Toyota genes and the
process by which the DNA that transmits those genes was created. At the
same time, we will illustrate the principles for creating DNA that mediate
genes and for discovering and nurturing human talent capable of creating
growth genes.
In Chapter 2, The Toyota Paradigm, we analyze Toyota with a focus on
“paradigms,” situated on the second tier from the bottom of our company
model. Corporate paradigms are influenced by the genes passed down
from previous generations and, via a path from a system of management
functions to a system of production functions, determine the highest
order power of the company’s products and brands. Without clear com-
pany paradigms, the energies of managers and all employees cancel each
other within the company and are not directed outside. Sooner or later,
management collapses. In the presence of paradigms, the energies of all
Introduction — xxiii

employees are aligned, and management can draw on strength beyond its
own resources. We will explore the principles of paradigm formation and
untangle Toyota’s ethos, culture, and views on management, work, and
people—all of which were formed under the influence of the company’s
growth genes.
In Chapter 3, Toyota’s System of Management Functions, we analyze
Toyota from the perspective of the “management function systems”
located at the center of our company model. What we call management
function systems are the systems that govern basic management functions
shared throughout the corporate organization, such as quality, cost, tech-
nology, standards, personnel, information, and business. Quality
improvements, cost reductions, human resource development, and the
effective use of information all become possible via the creation of man-
agement function systems that transmit top management’s intentions
swiftly and accurately throughout the company and that draw out system-
improvement efforts from middle managers and shopfloor-improvement
efforts from employees. At Toyota, top management exerts leadership
based on Toyota paradigms, middle managers develop systems in accor-
dance with top management’s aims, and all employees quietly engage
in shopfloor improvement (kaizen). This chapter explains how Toyota
created systems that function in this way and reveals the principles of
building “functioning” management function systems.
In Chapter 4, Toyota’s System of Production Functions, we analyze Toy-
ota from the perspective of the “production function system” that exerts
direct sway over the “product power” and “brand power” situated at the
very top of the model. What we call the “production system” here refers
to the chain of actual operational functions (from product design to
manufacturing to sales) that take place in accordance with objectives set
by the management function system. If the production function system
is the warp, then the management function system is the weft that gov-
erns each production function. Many excellent studies of the Toyota
Production System have already appeared, and for the most part, we will
not venture into this territory. We will, instead, analyze Toyota’s pro-
duction function system by focusing on the areas of product planning
and design and present the principles for building an effective produc-
tion function system.
Chapter 5, Product Power and Brand Power, tells the story of the results
of all the activities we will have previously discussed: Toyota product qual-
ity, service levels, and brand strength. In this chapter, we introduce several
evaluations that authoritative third parties have made of Toyota’s accom-
plishments in these areas and confirm once again the effectiveness of a
xxiv Introduction

corporate substructure that links “genes” and “DNA” with a “production

function system.”
The final chapter, Toyota Management in the 21st Century, takes a broad
look at the sorts of strategies Toyota is adopting as it endeavors to man-
age in the 21st century. With the conviction that Toyota will undoubtedly
keep growing in the new century, we provide evidence for the soundness
of Toyota’s principles of enduring growth.

1. Chubu Sangyo Renmei

2. Nihon Monozukuri Hitozukuri Shitsu Kakushin Kiko
Toyota's Genes and DNA

THE MEN WHO CREATED THE TOYOTA GENES

Who created the Toyota genes, and what kind of genes did they create? To
answer this question, we need to examine the words and actions of past
Toyota leaders. Figure 1.1 gives an overview of the company’s leadership
up to the present.’

1950s | 1960s | 1970s| 1980s

|SakichiToyoda
|-- |
-Risaburo Toyoda --- —
Kiichiro Toyoda —
ShotaroKamiya

Shoichiro Toyoda
__ |Taizo Ishida

Hiroshi Okuda
Fujio Cho
TMS: Toyota Motor Sales
TMC: Toyota Motor Corporation
N.B. dashed lines show active periods, solid lines show presidential tenures

Sakichi Toyoda
Sakichi Toyoda was born in 1867 in the city of Kosai in Shizuoka Prefec-
ture. The spiritual legacy of Nichiren’ and the moral and economic teach-
ings of Sontoku Ninomiya’ are deeply rooted in the region, and both
2 Inside the Mind of Toyota

exerted a strong influence over Sakichi as he grew up. Although Sakichi

devoted his career to inventing looms, his beliefs as an inventor (resolute
follow-through, contribution to society and country, hard work as a
human duty) were a natural outgrowth of the teachings of Nichiren
and Ninomiya.
In his last years, Sakichi came to believe that automobiles were more
vital and useful to humans than looms were, and he entrusted the family’s
foray into the automobile business to his eldest son, Kiichiro. Indeed, the
fortune amassed by Sakichi through his loom inventions later provided
the capital for Kiichiro Toyoda’s entry into the automotive business.
“Build cars!” Sakichi is said to have told Kiichiro. “Build cars and serve
your country.”
Sakichi Toyoda died in 1930 at the age of sixty-three, but the principles he
espoused were passed down to future generations. Figure 1.2 summarizes
Sakichi’s words and deeds in the form of the Toyoda Precepts.

The Toyoda Precepts

The Toyoda Precepts were articulated five years after Sakichi’s death by his
son-in-law, Risaburo, and his eldest son, Kiichiro. Sakichi’s beliefs com-
bined the lessons he had acquired as a lifelong inventor with the teachings
of Sontoku Ninomiya and the doctrines of Nichiren Buddhism. |
Toyota's Genes and DNA 3

As company policies or management principles, the Toyoda Precepts

continue to be used—either in their original form or modified according
to the times, the environment, or particular company characteristics—in
eleven companies of the Toyota Group, including Toyota Industries Cor-
poration, Denso, and Toyota Auto Body. Common to all these companies
is an emphasis on the key words: “research and creativity” and “coopera-
tion and consistency.” Sakichi’s philosophy has become the traditional
spirit of Toyota and the Toyota Group companies. It lives on as the ideol-
ogy that binds the Toyota Group together.

Quotations from Sakichi

“You have no allies but yourself”

Sakichi had to rely on other people’s capital when he first began to put
an invention to practical use. The words cited here came from his expe-
rience of jumping through hoops to get what he needed. Kiichiro inher-
ited his father’s sense of independence and self-reliance. Under his
management, Toyota was not content simply to import technology from
Europe, the United States, and other countries with advanced auto-
motive industries. Indeed, this conviction became the motive behind the
awakening in Japan of an automotive industry based on distinctive
Japanese technologies.

“Open the window over there and take a look. It’s a big world
out there.”

Sakichi is reported to have said this to doubters around him when Toy-
oda Boshoku was expanding into China. He recognized that although
new behaviors always provoke opposition, those who are complacent will
be left behind and ultimately defeated. Sakichi’s words remind us that
active engagement with the new is the principal business of managers.
“The ultimate goal of invention is total practical application.”
“Don’t talk about true value without conducting exhaustive market
trials.”
Hard work is needed to bring an invention to completion, but practi-
cal application requires comparable effort. Japan is often criticized in the
world for simply applying things that have been invented in other coun-
tries. But invention without practical application is no more than a
hobby. Invention becomes innovation only when stable duplication is
4 Inside the Mind of Toyota

achieved on a meaningful scale and ata realistic cost. Sakichi was an inno-
vator who believed that invention only achieved its goal through practical
application, and it was in practical innovation that Japan’s strength
exceeded that of all other countries.

Kiichiro Toyoda
Kiichiro Toyoda, the eldest son of Sakichi, was born in Kosai City in 1894.
He entered his father’s company, Toyoda Spinning and Weaving, in 1920,
after graduating from Tokyo Imperial University.
In 1921, Kiichiro embarked on a tour of European and American
industry in the company of his sister and his younger brother-in-law, Ris-
aburo Toyoda. It was in America that he became convinced that the age of
the automobile had arrived. This was the genesis of Kiichiro’s dream of
building automobiles. He established an automotive division within Toy-
oda Spinning and Weaving in 1933, and set about the serious study of how
to build cars. Nineteen thirty-five saw the landmark unveiling of Toyoda’s
GI Truck.
Outlined below are Kiichiro’s basic concepts regarding automotive
manufacturing as formulated in Toyota Motor Sales—A History of the First
30 Years (1967, Toyota Motor Sales Company).*
1. The key to automotive manufacturing must be passenger vehicles, more
specifically, passenger cars priced for the general public.
2. The production of passenger cars priced for the general public must rely
on mass production supported by substantial research laboratories and
all necessary equipment.
3. Selling passenger vehicles priced for the general public is far more diffi-
cult than producing them.
4. Research and development are important. One must always stay ahead
of the times.
5. The automotive industry is an integrated industry that relies critically
on basic manufacturing prowess.
6. Actively adopt whatever technologies and knowledge of advanced
nations that can be beneficial in establishing the Japanese automotive
industry. This is not an argument for simple copying, however. Inge-
_niousness should modify imported techniques and ideas to adapt them
to Japanese realities.

After World War II, Japan’s economy entered a period of extreme defla-
tion. Even Toyota had trouble raising capital. Throughout this period,
Kiichiro repeatedly insisted that “managers are duty-bound to avoid
layoffs.” His guiding moral principle was “to avoid layoffs whene
ver
Toyota’s Genes and DNA 5

possible.” He sent memos to labor unions flatly stating that he would not
“engage in layoffs.”
But things got worse. By the end of 1949, with the company on the
brink of bankruptcy, Kiichiro barely succeeded in obtaining a loan from a
consortium of banks. The terms of the loan stipulated that “sales opera-
tions were to become independent” and that “excess manpower would be
let go.” Labor unions responded by launching a strike, and a major battle
ensued. With troubles coming to a head, Kiichiro reasoned that he could
not stay in his job if the only way to do so was to fire employees. In 1950,
he stepped down as president.
Kiichiro was succeeded by Taizo Ishida, who got the company back on
a firm footing by relying on the procurement boom prompted by the
Korean War. In 1952, with the firm’s fortunes on the rise, Ishida asked
Kiichiro to return as president. But two months later, at the age of fifty-
seven, Kiichiro suffered a cerebral hemorrhage, which ended his career.

Just-In-Time
Productivity in the United States in 1935 was estimated to be nine times
that of productivity in Japan. For Kiichiro, being able to compete on an
equal footing with automotive manufacturers in the advanced countries
of the West meant having to work out uniquely Japanese methods for
high productivity and low cost. One of the elements of this approach
was the “just-in-time” method (i.e., making what is needed, when it is
needed, and in the quantity needed). Just-in-time was born from the
realization that each process in the automobile industry required mas-
sive storage capabilities and from Kiichiro’s desire to find some break-
through that would allow him to take on companies in Europe and the
United States.
The just-in-time concept can be traced back to Henry Ford’s belt con-
veyor system. But because of Ford’s view that the market was production-
driven—that everyone would buy black cars as long as they were cheap
enough—the original purpose of the belt conveyor system was lost. Ford's
philosophy was transformed into a philosophy embracing mass produc-
tion: Whatever could be produced, should be produced in large quantities.
Ford’s My Life and Work was Kiichiro’s favorite book. Indeed, it was
Kiichiro’s study of Ford’s management and production system that led
him to discover the belt conveyor system’s original purpose and eventu-
ally to the idea of just-in-time.
The phrase “just-in-time” was already in use when construction began
on the Toyota plant in Koromo in 1935. Just-in-time thinking permeated
6 Inside the Mind of Toyota

the 10-centimeter-thick manuals that Kiichiro himself compiled for each

process and distributed to key players. He drove the point home to Toy-
ota employees in energetic lectures on the subject. Kiichiro’s thick manu-
als are the roots of Toyota’s production system. They lead directly to the
subsequent establishment by Taiichi Ohno of the kanban-system-based
Toyota Production System that we know today.
Kiichiro never challenged the advanced nations of the West with any
particular hope of success. Instead, he acted upon an unshakable desire to
“always stay ahead of the times through research and creativity.” Later, Eiji
Toyoda would write admiringly of the extraordinary courage Kiichiro
showed in founding an automotive company and establishing the Koromo
plant. Kiichiro, armed only with his own convictions, had plunged into the
automotive business when even the great industrial conglomerates had
deemed such a move too risky. Kiichiro’s resolve was shaped by the pio-
neering spirit he had inherited from his father, Sakichi, and the moral sup-
port he received from his stepmother, Asa, who once had declared that if
her son was reduced to begging, she would willingly join him.

Quality Improvement
Even sixty years later, Toyota employees recite the wise words of Sakichi
Toyoda and Kiichiro Toyoda.
Sakichi Toyoda:

“Always stay ahead of the times through research and creativity.’

“Don't talk about true value without conducting exhaustive market

trials.”

Kiichiro Toyoda:

“Study what customers want and reflect that in your products.”

“Improve the product by auditing the production system, as well as the

product itself”

Sakichi’s clear and simple words call straight to the heart; they are
really a psychological doctrine. Kiichiro’s phrasing may have a less direct
appeal but is the concrete expression of a considered methodology. It is
fair to say that modern Toyota quality represents a fusion of Sakichi’s psy-
chology and Kiichiro’s practicality.
Toyota's Genes and DNA 7

In November 1935, during the era of Toyoda Automatic Loom,

Kiichiro announced the completion—and the sales of several score—of
the company’s first vehicle, the GI Truck. Unfortunately, the GI was prone
to mechanical failures and the newspapers had a field day: “Toyoda Breaks
Down Again,’ the headlines read.° Shotaro Kamiya, who was then respon-
sible for sales, insisted that the vehicles had to be repaired for free, no
matter how much the repairs cost the company. This policy gradually
reduced failures, but the episode persuaded Kiichiro that it was extremely
difficult to resolve problems entirely by means of market trials within the
company. It was at this point that he began to emphasize “studying what
customers want and reflecting that in the product.” Vehicles were turned
over to customers for evaluation, and the results were collected and ana-
lyzed. Subsequent improvements to the cars reflected what customers
wanted. In organizational terms, the company set up exclusive Inspection
and Improvement Offices and Inspection and Improvement Committees.
Kiichiro’s advice to “improve the product by auditing the production
system, as well as the product itself” was an even more progressive idea.
Tracing the causes of quality problems upstream revealed a variety of con-
tributing factors. These factors included immature design and production
technologies, ignorance about how a product was used, and careless design
errors. The ability of production inspections to discover such problems is
extremely limited. Inspections are simply incapable of capturing the kinds
of quality problems that arise during product use. Kiichiro realized that
manufacturing quality is determined by work done across a range of
processes, including design, development, manufacturing, inspection, dis-
tribution, and service. Quality, he concluded, would not get better without
improvement of the work in all processes. Audits could objectively assess
work methods and suggest ways of improving them.
Kiichiro’s view of quality was precisely the one codified in 1987 by the
International Standards Organization as the ISO Quality Standards 9000
Series. The basic philosophy behind ISO 9000 is that all processes that
generate products contain numerous quality problems and that the audit-
ing and improvement of those processes is necessary for quality assur-
ance. Seventy years after the formulation of Kiichiro’s view concerning
process management, his insights became international norms in the
form of ISO standards.

Cost Reduction

Kiichiro also had firm ideas about pricing: “How many vehicles does
Japan have to make for its domestic cars to reach an appropriate price
8 Inside the Mind of Toyota

level? Everybody wants to know this, but nobody can answer the question
with certainty. What we do know is that we have to offer cars at a price at
which customers will buy them”
At the time, the prevalent view of an appropriate selling price was that
PRICE = COST + PROFIT (i.e., that one determined price by adding
required profit to cost). Kiichiro, however, believed that a more appropri-
ate formula—which later came to permeate Toyota—was that PROFIT =
PRICE — COST. In other words, profit was determined by subtracting cost
from a price set by the market. This concept was one that Kiichiro learned
from Henry Ford, who posited:

It may in some narrow sense be scientific to determine price by adding

up costs, but in a broader sense this method is not scientific at all. A
price determined in this manner is utterly useless if the product does
not sell. The price should be set low, first of all, so that everyone will
have to work efficiently for the business to be viable. Setting low prices
forces everyone to make an effort to squeeze out a profit. A company
discovers methods for manufacturing and selling when it has to make
do in straitened circumstances.

Kiichiro, who had studied Ford’s management and production meth-

ods, is thought to have applied Ford’s idea regarding the determination of
prices, profits, and costs to his own company philosophy.

Taking the Broad View

“When technology is in the hands of individuals, you can make supe-

rior parts but you can’t make superior vehicles,”

Consider the strange wooden bucket depicted in Figure 1.3. Its staves
are different lengths, and if you put water in it, it is the shortest stave—
or the hole situated even lower—that will determine the water level. An
automobile comprised of tens of thousands of parts is built through
tasks performed by thousands of people. If the technical or skill level of
even one of those people is not up to par, it is that person’s skill that will
end up determining the quality and reliability of the car.
Rather than focusing on individuals with extraordinary technical skills,
Kiichiro emphasized creating teams whose average skill level was high.
His primary tool for accomplishing this was the formulation of standard
operations.
Toyota's Genes and DNA 9

“Cars are not built by automotive companies alone. First-tier suppliers,

in particular, must be partners in research. We don’t just buy things
from them. We have them make things for us.”

Kiichiro saw the automobile as being a product of great breadth and

believed that stabilizing its quality could be assured only by going into
every nook and cranny of supplier plants and stabilizing quality there. As
the volume of Toyota business increased, Kiichiro rejected both uncon-
trolled increases in the number of suppliers and the rush to the suppliers
with the lowest prices. On the contrary, he emphasized the need to estab-
lish and maintain stable business relationships with first-tier suppliers
and to foster and guide the specialization of partner plants.
This policy stabilized relationships with suppliers, deepened personal
relationships, and laid a foundation for mutual prosperity with partner
plants. Like the strange bucket in Figure 1.3, the policy illustrates the wis-
dom of taking the broad view.

The Legacy of Kiichiro’s Management Innovations

After founding the Toyota Motor Company, Kiichiro instituted an extraor-
dinary number of management innovations.° Broadly speaking, one sees
Kiichiro’s legacy as the fundamental strategies to overcome the important
10 ‘Inside the Mind of Toyota

management challenges of each stage of the company’s development.

Rather than relying on technology imported from the West, he instead
took the long view that Toyota would never be able to compete with Ford
and General Motors without securing an independent automotive manu-
facturing base. Kiichiro’s extraordinary gift was that he saw through to the
essence of things.

Kiichiro’s Documentary Record

Kiichiro was a man of neither eloquence nor narrative skill, but he left a
great volume of writings behind, allowing us to gain a clear idea of his
thinking. Table 1.1 provides a chronology of his major writings.
It is astonishing to consider that nearly all of these documents were
written by Kiichiro himself, either as founder or as chief executive. Nearly
all of them are in the form of rules, memos, or manuals—procedures or
standards for running the business. This is exceptional as most executives
the world over, East or West, pick up a pen only when they have some-
thing to sign. They conduct their business orally and express their prior-
ities by the spoken word. Few chief executives write their own business
standards! As a manager who wielded his own pen and wrote out his own
business standards, Kiichiro was indeed extraordinary.

Shotaro Kamiya
In 1935, in order to strengthen Toyota’s sales department, Kiichiro
recruited Shotaro Kamiya, who at the time was the assistant manager of
GM Japan. Kiichiro had gone headhunting on his own, telling Kamiya,
“We can muddle through manufacturing because we have a good group
of technical people, but we don’t have anybody who knows anything
about sales. If you come over to Toyota,” he added, “you can have com-
plete control of sales.”
Kiichiro expected Kamiya to bring to Toyota a knowledge of market
strategies, covering franchise systems, store management, installment
sales, advertising, and service. He wanted Kamiya to do what he believed
was right and to bring on board the people he needed.
So Kamiya joined Toyota, bringing with him a number of his subordi-
nates from GM Japan. As Kiichiro had expected, Kamiya proceeded to
build a Toyota tradition of emphasis on sales.
We can identify three elements of Kamiya’s thinking that live on in Toy-
ota today: emphasis on the customer, a long-term perspective, and an
orientation toward information.
Toyota's Genes and DNA 11

umentname| a Contents / ]
Job Functions& Drafted to clarify and simplify lines of authority in the context of building an organization for the new
Job Descriptions |company founded in 1937. These assigned and distributed authority so that decision-making could
respond immediately to situations on the shop floor.
procedures) Kiichiro compiled many Guides and Job Rules so that jobs in all departments would be performed
Work Rules (job efficiently. The Guide for purchasing clerks pointed out "Fourteen Things to Remember About
performance | Purchasing.’ Among them, he writes, "Consider Toyota's subcontractor plants to be divisions of Toyota
standards) and make it a principle not to inflict change on them without good cause. Strive as much as possible to
— raise their performance.’ These laid down basic purchasing policies that are still alive in Toyota today.
__| Process Manuals] When the Koromo Plant was under construction, Kiichiro personally compiled these 10 cm-thick manuals in
| order to spread the idea of Just-In-Time in the company. He devoted himself to making sure JIT penetrated the
-| organization, distributing the manuals to the appropriate people and gathering employees for his energetic
__| lectures. These manuals constitute the roots of today's Toyota Production System.
Memo on This memorandum records Kiichiro's view of cost reduction. You begin with a set selling price and then
Cost-Cutting generate profits by lowering production costs. The Memo is displayed in the Toyota Museum.
or _| These set up an organized inspection system to guard against difficulties with incoming inspections of
_ | outsourced parts.
Regulationsfor|These Regulations clearly state that, in order to cut down on defects in outsourced parts, "we must
Inspecting §—_| provide guidance to subcontractors and strive to bring their level of defects down to nothing:" They
assign to inspections the important function of improving supplier materials and processes. This grew
into the Toyota attitude toward supplier management, i.e, that of guiding and nurturing suppliers.
The Company Kiichiro reorganized many of the Guides and Work Rules he had compiled at the time of the founding of
Organization _| Toyota. "You can do any job as long as you work according to rules,’ he wrote. This idea of "job
andaSurvey | standardization" became the basis for a summary of the company and the some 83 job rules that make
ofits Rules up "The Company Organization and a Survey of Its Rules."
He compiled this with a view to efficient management and smooth flows of information, with the
president and vice presidents looking after business policies and other executives in charge oftheir
alloted areas of responsibility. For the Toyota organization, this sort of organizational reform clarified
management levels, departments and the relationships between authority and responsibilities. It
resulted in a functional division of work.
Rules for Kiichiro believed that "the most shameful thing one can do is send a defective car out into society." To
Improving | prevent this, he established an Audit Improvement Section under his own direct jurisdiction and created
Audits — : J ne : : aa ;
Rules for Improving Audits. He brought Eiji Toyoda and others into the Section and they studied information
on all defects collected by the people in charge of service in the sales departments. When they determined
what needed improvement, they transmitted this information back to the service people by return notice.
These "Purchasing Rules" were a rewrite of Guides for purchasing clerks, "Consider Toyota's subcontractor
plants to be divisions of Toyota and make it a principle not to inflict change on them without good cause.
é Strive as much as possible to raise their performance.’ This has been consistent policy up to the present day.
Internal Regula-| |ncreased production accompanying the outbreak of World War Il in Europe led to a change in policies for
tionsforCon- | dealing with supplier parts—parts that accounted for 70% of costs. In addition to making a distinction
ie | between domestic and foreign products, this document defines internal and external sources and
| ~_ {specifies such matters as inspection frequency (i.e., when they can be omitted) and inspection methods.
Essentials
of_| Kiichiro instituted the Essentials of Establishing a Planning Department and Deliberative Council on the
Establishinga | occassion of his accession to the presidency of Toyota. This document enlarged the Planning
Planning | Department, a central organ for strengthening overall managerial competence, and clarified details of its
Department and organization, authority and management. Kiichiro himself served as chairman, To assist him, he set up a
a! Deliberative Council composed ofsix members, and the two entities covered all aspects of planning
oe work, Taizo Ishida, who at the time was a director of Toyoda Automatic Loom, was named as a member
handling machine tools, steel and automatic looms. The formation ofthese organizational entities both
professionalized the running of the business and made responsibilities and authority clear.
February ToyotaMotor | As the company grew in size, Kiichiro and others instituted the Toyota Motor Corporation's Corporate
1943 ae cs Regulations with a view to raising management efficiency. They then set about organizing internal
Regulations systems. Together with previous regulations concerning the organization, work, and other matters, this
document clarifies both the Board of Directors system and the status of executives and employees.
October | Audit — Under continuing harsh wartime regulations, Kiichiro re-established an Audit Improvement Committee
1943. =| Improvement _| jn order to raise quality and productivity. He assumed the chairmanship himself and issued Audit
as follows: "The
Sorniitice
Regulations Improvement Committee Regulations. The purpose ! : committee was described
of the :
, purpose of the present committee is to investigate and improve aspects of Toyota automobiles that
usage reveals to be inconvenient or deficient...we will investigate and improve areas that should be
improved as a result of use in actual society." Based on information from outside Toyota, this committee
conducted comprehensive examinations and research on market quality problems and functioned as
the supreme voting body on all technical matters. Kiichiro's management practices became a primary
factor in Toyota's priority on service and on the company's marketing power.

Source: From information in Sato, Yoshinobu. 1994. Sources of Toyota Management.

ed
12 Inside the Mind of Toyota

Emphasis on the Customer

“The user comes first, the dealer second, and the manufacturer third.”

Even before World War II, a corporate customer came to the sales division
and pressed Kamiya, who was then in charge of the division, for Toyota’s
position on selling cars. Kamiya didn’t hesitate: “The first person we think
of is the customer. The last person we think of is the manufacturer.”
It was a desperate and evasive answer. But the customer is said to have
gone away satisfied. The substance of this declaration later became a Toy-
ota slogan: “The user comes first, the dealer second, and the manufacturer
third.” This insight was ahead of its time, anticipating the modern rule of
marketing that dictates “Customer-oriented marketing first, then sales-
oriented marketing, then production-oriented marketing.”

The Long View

“Sales needs start-up capital every bit as much as production does”

From the beginning of Toyota Sales, no problem proved as perplexing as

the question of how to exploit latent demand. Kamiya inaugurated many
businesses in order to make this occur.
In 1954, he established the Toyopet Maintenance Company. He then
invested in a series of ventures, which included the purchase of the Japan
Driving School in Tachikawa, the establishment of Toyota Used Car Sales,
and the opening of Chubu Japan Driving School, said to be the largest
such school in East Asia. Additional capital went into Chiyoda Fire and
Marine, the Japan Design Center, the Japan Research Center, Interna-
tional Highways, Nagoya Broadcasting, The Japan Industrial Film Center
and the Chubu Japan School of Automotive Maintenance.
Kamiya’s reasoning was difficult for people outside Toyota to under-
stand. He was sharply criticized for imprudent use of capital at a time when
funds to support monthly installment sales were in short supply.
Kamiya’s response to his critics was that “sales needs start-up capital every
bit as much as production does.”
The company’s business,” he argued, “would come toa halt if we concen-
trated exclusively on latent demand for today and tomorrow. We have to
think five and ten years out and work to expand latent demand on that scale.
We must do it, even at the expense of immediate profit” And he moved
res-
olutely ahead with this plan.
Toyota’s Genes and DNA 13

Later, Kamiya observed, “A lot of people misunderstood me, but now

they seem to acknowledge that my judgment was correct”

“A peck of trout can only hold a peck.

In 1956, Kamiya overhauled the existing arrangement of one dealer-

ship per prefecture and introduced a system of multiple nationwide
dealerships. Kamiya’s celebrated response to the objections of existing
dealers was to say “A peck of trout can only hold a peck.” But increasing
the number of dealerships amounts to fitting in two pecks. Kamiya’s
argument was that doing so would generate huge cost reductions that
would benefit even the existing dealers. Surprisingly, the existing deal-
erships were won over by this reasoning and Kamiya’s concept became
reality. Kamiya articulated his commitment to the broad view and to
balance when he pointed out that “even if production takes the lead in
strengthening the system, things won't balance out if sales is going its
own way. Real management begins when you enhance production and
sales simultaneously.”

Information Orientation

When Iwao Imazu left the Nagoya Bureau of Industry and Trade to join
Toyota, Kamiya greeted him with a request. “We have no place for col-
lecting and analyzing information for the organization as a whole,”
Kamiya said. “I’d like you to set up a department that can help us under-
stand the whole picture.” Imazu responded by setting three conditions:
that no expense be spared, that he have access to first-rate people, and that
consideration be accorded the notion of work as play. Kamiya agreed, and
in December 1956, an Information Office was inaugurated as the prime
strategic entity within Toyota Motor Sales. The successor to the Informa-
tion Office, the Planning and Survey Department, is currently staffed by
some 60 people and brings together specialists in mechanical engineering,
mathematics, statistical analysis, and other fields to conduct wide-ranging
and ongoing studies and surveys.
As Imazu had requested, this internal organization draws on extraor-
dinary funds. In addition to semiannual Demand Trend Surveys, it con-
ducts a variety of sample surveys. Each year, the office carries out more
than five or six surveys at a cost of roughly 60 million yen; it requires some
six or seven hundred million yen annually, a sum that very few companies
would spend on market surveys.
14 Inside the Mind of Toyota

Kamiya was known as the “god of marketing,” but he did not attain
that status by experience or razzle-dazzle. He earned it with his relentless
focus on information.

Taizo Ishida

When Taizo Ishida was 38 years old, Sakichi Toyoda invited him to join
Toyoda Automatic Loom, saying, “You've been a businessman. So make
me some money!” Ishida, who had a natural gift for business, was later
appointed president of Toyoda Automatic Loom. When Kiichiro with-
drew from the presidency during the labor troubles in 1950, Ishida, while
still chief executive of Toyoda Automatic Loom, was named president of
Toyota as well. Accepting the promotion, he said, “In the event that I am
able to conform to each of your expectations, I would like to ask for your
approval in advance for Kiichiro Toyoda to return to the presidency.”
In essence, Ishida saw himself as Toyota’s caretaker. He had been
trained directly by Sakichi and sometimes called himself a “medium for
Sakichi’s spirit.” Ishida expressed himself with more than the usual self-
confidence and was endowed with verbal gifts rich in wit and polished
humor. Indeed, the record he left of many of his sayings remains the best
guide to the genes he bequeathed to Toyota.

Independence

“Guard your own castle.”

“Whatever you do, you need to accumulate capital resources that you
can use as you like.”

“Traditional self-reliance is a strong element in Toyota culture”

The agonizing experience of moving from invention to business without

money had led Sakichi Toyoda to adopt the philosophy that one had no
allies but one’s own self. “Don’t rely on others,” he had said, “but move
ahead by your own efforts.”
Ishida was deeply marked by Sakichi’s determination, and the painful
experience of dealing with banks during Toyota’s fiscal crisis in 1949 only
confirmed this attitude. Facing bankruptcy with a year-end balance short-
fall of ¥200 million, Ishida had been faced with the humiliating experi-
ence of going to banks and having low-level clerks ask him what he
Toyota’s Genes and DNA 15

wanted. The experience had nearly brought him to tears. For him, the first
principle of business was to take precautions that would preclude chasing
around after money.

Stinginess

‘I'm a very greedy guy. That’s what makes me work so hard. Always
wanting money drives me to work harder. And even when I’m making
money, I wonder what sort of manager I'd beif I didn’t make any.”

“I don’t recognize the utility of financial dealings. And I particularly

dislike the current fashion for financial activities involving companies
that exist only on paper. I believe the owner should always be around
to mind the castle. It’s fine to be a loner and it’s fine to be stingy.”

“Don’t begrudge money that’s being used.”

Ishida’s stinginess and his spirit of independence were two sides of the
same coin. He believed that he had to be tightfisted because independ-
ence required some sort of capital guarantee to avoid relying on others.
He was convinced, in other words, that a manager’s primary mission
was to make the company profitable. Ishida’s managerial style was inher-
ited by those who promoted Toyota’s financial independence through
the 1980s.

The Primacy of Equipment

“Plow the money you make back into equipment. You're not going to
raise efficiency with people. Do it with machines.”

“Investing profits in equipment rather than people is the way to avoid

layoffs.”

“Beat the other guys in the competition for equipment.”

Ishida’s notion that money has value when it is being used fed his view of
the pivotal role of equipment for continued production. He focused on
investing in equipment rather than people because he was determined
never to repeat the humiliation of being forced to lay off 2,000 workers
during the company’s great labor crisis. One example of Ishida’s adherence
16 —_ Inside the Mind of Toyota

to this ideal was the Motomachi Plant. Built in 1959, it gave Toyota a deci-
sive lead over Nissan at the dawning of the age of motorization.

Improve, Improve and Improve Again

“We inherit an insistence on ‘better products and better ideas’ from

old man Sakichi. Creativity and ingenuity are what I want everybody
to pursue.”

“Our final and highest goal is to make things better and cheaper. Qual-
ity improvement and cost reduction will probably always be important
themes for us.”

Eiji Toyoda and Shoichi Saito brought Ford’s suggestion system to Japan
as a souvenir of their visit to the United States in 1951. At first, they used
it as a system for eliciting creativity and ingenuity from employees, sim-
ply translating it and substituting the word “Toyota” wherever the word
“Ford” appeared. But within six months, the system was rewritten in the
Toyota fashion, and the result is the system the company uses today.
A contest among employees was held to choose a slogan. The winner,
“better products and better technologies,” was later modified to “better
products and better ideas.” Ishida may have used this phrase only to pro-
mote creativity and ingenuity, but Toyota’s intoxication with improve-
ment, or kaizen, began in Ishida’s day.

A Rural Spirit

“A rural spirit is Toyota’s greatest virtue and the one of which she
should be most proud.”

‘A farmer’s strengths are that his temperament and habits lead him
straight forward, that he doesn’t mind hard work, and that he doesn’t
shirk hardship. A farmer studies twice as hard as anyone else.”

“Do what's right and do it the right way?

Ishida’s “rural spirit” was his own interpretation of the third of the Toyota
Precepts: “Be sincere and strong.” If Toyota’s location in the heart of the
Mikawa district gave it an inferiority complex vis-a-vis the center, Ishida’s
words transformed this sense of inferiority into a source of company pride.
Toyota's Genes andDNA 17

The phrase “suffers from rural location” for Company A in Figure 0.2
contrasts sharply with “benefits from rural location” for Toyota in Figure
0.3. Clearly, depending on how you look at it, being in the countryside
can bea source of pride or shame, a strength or a weakness.
Nothing can be simpler than to say, “Do what’s right and do it the right
way.’ Yet nothing can be more difficult to understand or put into practice,
especially because most people have a hard time understanding just what
“what’s right” means in concrete terms.
“What’s right” means what’s good for the company and “doing it the
right way” means rejecting clever schemes and, instead, working steadily
and logically. When this way of thinking is commonly accepted in a com-
pany, conflicting views converge at “what’s good for the company,’ and
energies are multiplied by tireless application instead of being dissipated
by internal discord.
In most companies, the notion of “what’s right” is often confused with
the idea of “what’s convenient for me,” or “what will bring easy money.”
When this occurs, internal wrangling saps energy, and absurd and illogical
policies are formulated. The company’s issues and problems are postponed
or not resolved at all, and the organization grows exhausted. We need to
reflect anew on the meaning of doing what’s right and doing it the right way.

Eiji Toyoda
Eiji Toyoda was born in 1913, the second son of Sakichi’s younger brother,
Heikichi. After Eiji’s graduation from the Department of Engineering of
Tokyo Imperial University in 1936, Kiichiro invited him to join Toyoda
Automatic Loom, where Eiji was charged with working on Toyota’s auto-
motive business.
In contrast to Taizo Ishida, Eiji was a man of few words. Reticent and
seldom one to play to the crowd, he nevertheless ran the business single-
handedly, and it was he who built the Toyota we know today. Taizo Ishida,
with his first-rate merchant’s instincts, provided management support for
Eiji’s suggestions. Rather then citing Eiji’s words, we will take a look at the
genes Eiji left behind by citing a few examples of his thinking.

Eiji's Dream
Eiji never forgot what Kiichiro had said to him when he invited him to
join the automotive division of Toyoda Automatic Loom: “Nobody has
any business deciding whether we can make cars or not. The fact is that
it’s too late to back out. If youre a true engineer, then let us dream.”
18 Inside the Mind of Toyota

This one sentence was the start of Eiji’s involvement with automobiles.
Eyji didn’t show his feelings much, but he was imbued with the romance
of what engineering could achieve.

Seeing Through to the Essence

Shigemitu Miyake, the former chairman of Tokai Bank, had this to say
about Eiji: “He has an astonishing genius for being able to discern point-
lessness and waste.”
Eiji’s ability to see waste and to see through to the essence of things is said
to have been developed soon after he joined Toyoda’s Automotive Division,
when he was working in the company’s Auditing and Improvement Center
to resolve quality problems. Toyota had so many quality problems at the
time that it seemed almost as though the company was using the market-
place as a testing ground. Eiji remembered that period well:

“When we'd build a car that turned out to have a defect, we'd ask why
the affected part was bad and look for the process that caused the prob-
lem. My role was to improve the process, since we figured that if we
fixed the process, then there wouldn't be any more defects. Basically we
were doing what would now be called QC”

“Many companies have accounting departments and general affairs

departments, but both the name and the function of our Auditing and
Improvement Department were unique. It’s the same now as it was
then. We search out problems that need to be taken care of, and we
focus knowledge and wisdom on them until they’re solved.”

Continuing this sort of work for years results in the ability merely to
look at a problem to reveal its origins and true causes. The work formed
the background of Eiji’s belief in the primary importance of the shopfloor
and physical phenomena—a way of thinking that, through Eiji, went on
to permeate Toyota. .

Linking Departments
The 1960s in Japan were the Age of Motorization, and the Toyota
organization swelled rapidly during this period. As the company grew,
links between departments deteriorated and quality problems became
more common. Eiji was executive vice president of Toyota Motor Cor-
poration at the time and had jurisdiction over engineering, production
Toyota's Genes and DNA 19

technology, and production. Several times a year, the president would

gather top managers—section chief, and higher, for meetings, and Eiji
would invariably appeal for cooperation among departments. “I have
three things to ask of you,” he would say, and one of the three was
always better interdepartmental cooperation. This went on for about
ten years.
Eiji’s ideas about linking departments very likely originated in his abil-
ity to see through to the core of things. He had the insight to recognize
that product quality problems arose from insufficient cooperation among
departments.
Interdepartmental cooperation constituted one of the reasons for Toy-
ota’s subsequent development of TQC. It became a cornerstone of
Toyota’s growth, giving rise to such distinctive practices as Management
by Policies and Management by Functions.

A Philosophy of Manufacturing
In a talk at the Hall of Industry and Technology in July of 1994, Eiji cited
three points to explain his philosophy of manufacturing’ or the signifi-
cance of manufacturing:

“Fabrication is the foundation on which civilization is created.”

“Fabrication is the motive force of technological progress.”

“Fabrication moves people’s hearts and enriches their minds in the

same way that art does.”

These are profound words, spoken by a man who spent more than half
a century striving to build things.

Reading the Times

Eiji set great store in “reading the times.” In November 1989, he revealed
his secret for doing this in a speech presented at Nanzan University, which
had awarded him an honorary professorship.
“Experience has taught me two things. The first is, “Don’t oppose the
course of Nature’ In other words, you have to understand the great currents
of history and determine to follow them. The second is, “The future you
build will conform to what you want it to be? It’s fair to say that the history
of Toyota is the constant practice of these two seemingly contradictory
20 __ Inside the Mind of Toyota

principles. The judgments we’ve made, I think, have been consistently

based on the notions of putting the customer first and on contributing
to society.
“Think seriously and think hard. You won't often go wrong if you do. The
most important thing of all is to do your own thinking and to act on it.”

Eiji’s Distinctiveness
What made Eiji unique was his limitless humility and diligence in the face
of facts and truth. The manager at the top is a mirror of the company.
With a man such as Eiji leading them, all employees and all managers
could not help but be humble and diligent.

Taiichi Ohno
Taiichi Ohno went to work at Toyoda Boshoku in 1932. Sakichi had
passed away two years earlier, but for Ohno, the great genius of the inven-
tor remained in the company, and this “presence” would teach him what
it meant to work in a world-class company.
Ohno transferred to Toyota Motor in 1943 and set about reforming its
manufacturing division. After the war, Kiichiro instructed Ohno to “catch
up to America” in three years. As Ohno came to grips with the task of rev-
olutionizing production, he began crafting the unique Toyota Production
System that some have referred to as the “Ohno Production System”
Ohno’s own words reveal his thoughts and allow us to survey the genes
that he passed on to the Toyota Production System and to Toyota.

Going Beyond Common Knowledge

“Break free of conventional thinking. Think of each downstream

process as pulling from the one upstream.”

Conventional wisdom had always been that upstream processes send

parts to downstream processes in a “push” arrangement. Ohno turned
this idea on its head and devised a “pull” system, in which each process
goes to the previous one to draw only what it needs. This was the genesis
of the kanban system.

“Look at the production floor as a blank sheet of paper. Focus on the

issue at hand and ask ‘Why?’ five times.”
Toyota’s Genes andDNA 21

Kiichiro Toyoda had often told inexperienced managers to stand on the

shopfloor. His expectation was that direct observation of the shopfloor
would reveal essential truths about manufacturing. Ohno’s “Go watch the
production shopfloor!” harks back directly to Kiichiro’s admonishment.
However, standing absentmindedly on the production floor serves no
purpose and Ohno’s insistence on asking “Why?” five times precisely
expresses the method of observation he had in mind. This technique
revealed the essential causes of problems by forcing the observer to look
beyond what was visible.

“What matters for equipment isn’t the operating rate. It’s the potential
run rate.”

Equipment operating rates are used as indexes of manufacturing pro-

ductivity. This index has value as an indicator of resulting productivity.
But the minute you use operating rates as targets, you inevitably generate
quantities of unneeded products and components, and you waste materi-
als, electrical power, and other resources. Ohno stressed that equipment
had to be available to run when needed. He took aim at the heart of the
issue by creating the term “potential run rate”*—a Japanese homonym for
the word meaning “operating rate.”

Inventory Awareness

“As soon as processes are stable, reduce inventories between process

steps. This will bring new problems to the surface.”

“The purpose of reducing stocks between processes is to make latent

problems visible.”

Kiichiro had been interested in more than just inventories between

process steps. He had directed that all stocks be reduced because he saw
inventories as idle money. Ohno went one step further, declaring that
revealing latent problems was the real purpose of inventory reduction. He
believed that once processes were stable, reducing inventories between
process steps was a matter of constant repetition. It is likely that Ohno was
aware that this idea would not be universally popular; on one occasion, he
was nearly struck by a hammer wielded by a violent operator. Ohno dared
the man, “If you're going to hit me, then hit me.” From that day forward
he refused to wear a helmet.
22 Inside the Mind of Toyota

At the same time, Ohno was aware that “you won't solve anything by
burdening operators. Always use equipment to solve problems,” he said.
“And don’t frustrate people who are basically willing. Even when things
don’t turn out well, you have to give them a reason to do their best
because you appreciate their efforts. You don’t cut down on inventory
between process steps to torment operators. Your sole purpose should be
to reveal latent problems.”

A Human Element in Automation

“Overproduction is the worst waste of all. Equip all your high-speed

machines with automatic shutoff functions.”

“Automation should always include the human element.”

Ohno’s “automation with a human element” was a reference to mecha-

nisms that prevent high-speed machines from making defects because
they have the sense to automatically stop when defects occur. Later, this
notion was linked to the idea of a “stop cord” for operators along the pro-
duction line. Such devices make it obvious to everyone which process
steps generate defects and thereby make it possible to carry out rapid
investigation of root causes and take preventive action.
Visitors from Europe and the United States are often astonished at these
stop cords. In their plants at home, only a plant manager or higher manager
has the authority to stop the production line; any operator who stops the line
would be fired on the spot. Even in Japan, many managers think it is more
advantageous to keep a line running when defects occur and to rework bad
parts later. Certainly, in the short term, it often seems less problematic to
rework parts. But reworking parts makes it more difficult to investigate the
root causes of problems and to prevent their recurrence. And, in a
vicious
circle, latent problems will again rear their heads and cause new
defects.

Reaching Out

“The handoff from one process step to the next shouldn't be like a
swimming relay; it should be like a track-and-field event.”

In a swimming relay, one swimmer dives in when the previous

swimmer
touches the wall. In track-and-field, however, a baton passing zone
is set
up within which one runner hands the baton off to the next as
they run
Toyota's Genes andDNA ~— 23

side by side. Ohno’s analogy suggests that the handoff of work from one
process to the next should take place within a fixed zone of cooperation,
just as it does in a track-and-field event. Production processes will always
be unevenly balanced, but the product can flow smoothly overall when
processes can absorb one another’s variability.
This idea, encapsulated in the phrase “reaching out,” later spread
throughout Toyota. The underlying premise here is that no job is ever fin-
ished in one person’s work zone. A baton passing zone should be estab-
lished and each person’s responsibility includes seeing to it that the next
process has the job firmly in hand. A typical example of this can be seen
in the “resident engineer” system in which a development engineer takes
up residence in the manufacturing division for a given period of time dur-
ing a new product launch.

Shoichiro Toyoda

The eldest son of Kiichiro Toyoda, Shoichiro was born in 1925. He joined
Toyota Motor in 1952 and built Toyota management alongside Eiji Toyoda.
In the 1960s, when the introduction of TQC and the drive to receive the
Deming Prize became great opportunities for Toyota’s growth, Shoichiro
carried out substantial activities in his capacity as deputy general manager
supporting Eiji, who was general manager for QC Promotion. An engineer
and a man of a quiet temperament, Shoichiro stayed in Eiji’s shadow dur-
ing Eiji’s tenure as president of the company. Although little of what
Shoichiro said ranks as quotable, we can view the genes he created and
passed on by studying a few historical episodes that illustrate his thinking.

Fusing Toyota Motor and Toyota Motor Sales

In 1981, Shoichiro Toyoda moved from his position as executive vice pres-
ident of Toyota Motor to the presidency of Toyota Motor Sales. One year
later, the hopes of Toyota Motor’s president, Eiji Toyoda, came to fruition
when the two organizations merged to form a reborn Toyota Motor Cor-
poration with Shoichiro as president. This period saw the spread of vig-
orous TQC activities:

* 1981 QC activities at dealerships

* 1982 Executive QC seminars
+ 1983 Inauguration of the TQC Promotion Office
* 1983 TQC education for all managers
* 1983 Establishment of the QC Promotion Prize for Toyota dealers
24 Inside the Mind of Toyota

These activities suggest that Shoichiro, the TQC standard-bearer in the

old Toyota Motor organization, used TQC to merge that company with
Toyota Motor Sales. While the pre-merger Motor and Sales organizations
shared common roots, cultural differences had emerged between them.
Their respective management philosophies were like oil and water, Taizo
Ishida’s “squeezing a dry towel” approach at Toyota Motor contrasting
sharply with Shotaro Kamiya’s “first the user, then the dealer, then the
manufacturer” at Sales.
Shoichiro led an energetic campaign to blend the two cultures around
the time of the merger and succeeded in infusing the old Toyota Motor
Sales organization with QC perspectives and methods. Beyond that, the
merger had the unexpected effect of bringing about organizational
reform within Toyota Motor Corporation as a whole.

Organizational Reform at Toyota Motor Corporation

Managers from the mainstream old Toyota Motor company seemed
quite unhappy with the thinking prevalent at the former Toyota Motor
Sales.
Masaya Hanai, who was chairman of Toyota Motor Corporation at the
time of the merger (and formerly executive vice president of Toyota
Motor), rejected the “sloppy management” at Toyota Motor Sales. “I’m
making them think hard now,” he said, “and get by with a third of the
funds they used to expect.”
At the same time, managers and employees of the old Toyota Motor
organization were influenced greatly by the “free and open” culture of the
former Sales company. A new Toyota culture began to emerge, the gene-
sis of the organizational revolution that took place at Toyota in the latter
half of the 1980s.
Management in the old Toyota Motor emphasized “efficiency.” The
most effective way to expand an organization that emphasizes efficiency
is by division of labor and stratification, in other words, by building a
bureaucracy. Bureaucracies, on the other hand, lead to rigidity and so-
called “big company disease.”
Simply put, big company disease means the loss of creativity. Efficiency
and creativity exist in a reciprocal relationship to one another. The “free
and open” ethos of Toyota Motor Sales penetrated Toyota Motor just as
the latter organization began to appreciate the reciprocal relationship
between efficiency and creativity. This sparked a debate inside the com-
pany over whether Toyota needed to change and whether it could survive
in an age of creativity.
Toyota's Genes and DNA = 25

Nineteen eighty-four saw the launch of a group to consider organiza-

tional reforms within Toyota. A series of institutional reform proposals
came out of this group: “organizational flattening,” organizational “clus-
tering,’ the introduction of a system of performance evaluations, and a
campaign in which all employees were to be addressed by their names and
the honorific suffix “-san” rather than by their formal titles.
Iwao Isomura, senior managing director in charge of personnel at the
time, commented on these proposed changes:

“Toyota’s president, Shoichiro Toyoda, emphasized the “Three Cs:’

Creativity, Challenge, and Courage. But at every level of the organiza-
tion, from division head down to team leader, new ideas coming up
from below are quashed or lose their freshness. Our young people are
losing their enthusiasm because even when they take on a challenge,
they can’t change anything. They conclude that their only option is to
do as they’re told. [Toyota’s Great Experiment. ]”?

Efficiency had driven out creativity.

In meetings of board members and executives, Shoichiro responded by
evoking Toyota’s “big company disease” and calling vigorously for steps to
overcome it. In 1988, nearly all the recommendations of the Organiza-
tional Reform Study Group were adopted without modification.
The 1980s were distinctly upbeat years, with Japan lionized as “Num-
ber One” and with Toyota vehicles flying out of dealerships despite trade
frictions. But with Toyota still harboring a sense of crisis, it was Shoichiro
Toyoda’s clear vision and decisiveness that allowed the company to lead
the way and take command.

The Great Transition to the 21st Century

In 1990, Shoichiro initiated a shift in company focus from responsibility
to service. Under his direction, the duty of social responsibility was aban-
doned and the mission of contributing to society was adopted.
Two years later, the Toyoda Precepts were brought up to date in the
form of Basic Principles and issued in conjunction with the Toyota Action
Plan for Global Environment, better known as the Toyota Global Earth
Charter. The publication of these two documents occasioned consider-
able debate and criticism within Toyota, with some arguing that the com-
pany was headed into new sea lanes without a rudder and others that
Toyota had crossed ariver of no return. Even Toyota employees under-
26 Inside the Mind of Toyota

stood how different the values reflected in the new Principles were from
previous Toyota culture.
Shoichiro’s last accomplishment as president was to deal with the issue
of Development Centers, the only one of the series of late 1980s organiza-
tional reforms that had not yet been implemented. The so-called “clus-
tering” of the business had been hotly contested when first proposed and
arguments and debates had continued into the early 1990s.
The premise behind the Development Centers was the following: As
the division of labor progresses, the efficiency of individual workers
increases. However, overall efficiency falls with the increasing need for
communication between workers. Most importantly, creativity suffers.
Creativity does not take place in the absence of contextual knowledge.
The insight behind the Toyota Development Center System was to cap the
burden on individuals by limiting the range of responsibility for vehicle
models in those technical departments—such as product planning and
design—in which creativity was needed most. Exploration of this idea
began in 1984, but the system was not implemented until 1992. Toyota’s
movement from the structural reforms of the late 1980s to the Develop-
ment Center System of 1992 constituted a pioneering experiment among
large organizations worldwide. It attracted the notice of organizational
researchers and became arevolutionary paradigm for global companies
suffering from “big company disease.”
In Chapter 2, we will take a closer look at Toyota’s Basic Principles, its
Global Earth Charter, and its Development Center System. Each of these
decisions was Shoichiro’s contribution to the Toyota gene pool. Hiroshi
Okuda’s generation inherited and applied the genes that Shoichiro cre-
ated. Indefatigable managers kept them in use even during the so-called
“lost decade” of the 1990s and have passed them on to the 21st century as
part of the company’s rapidly progressing managerial patrimony (see
Chapter Six).
Even in his final years, Eiji Toyoda was a champion of ‘rationalization
or efficiency. Shoichiro Toyoda, who had at first carried the banner of
efficiency with Eiji, became at the end of his life a man whose primary
concern was coexisting with “people, society, and the environment.”
From his father, Kiichiro, Shoichiro had inherited a family treasur
e, a
maxim written in Chinese calligraphy. Hanging in his room
where all
could see, it read: “Heaven, Earth, and Man. Knowledge,
Benevolence,
and Courage.’ The underlying message was areflection of Shoichiro’s
phi-
losophy: Be mindful always of the rhythms of heaven, the utility
of the
earth and harmony among men, and do not forget to use your
knowledge
and wisdom to bring benevolence to society and to face challenges
with
Toyota's Genes andDNA =. 27

courage. In his final years, as Shoichiro reflected on his father’s career, his
own purpose in life, and the time remaining to him, one might say,
Shoichiro became a citizen of the Earth.

DNA: HOW TOYOTA GENES ARE TRANSMITTED

A Genealogy of Gene Transmission

Up to this point, we have looked at succeeding generations of Toyota lead-
ers, and we have examined words and deeds that still live today. Now we
must look at an important question: Why is Toyota alone in its ability to
transmit and propagate continuously the spirit, words, and actions of its
historical leaders?
Unlike Matsushita, Sony, or Honda, Toyota has not turned its inheri-
tance into founder-worship. Instead, its legacy manifests itself as the ven-
eration of principles.
Certainly, it is true that the founding family imparted a kind of cen-
tripetal energy to the organization via a heritage of words and actions. But
every company is created by someone, after all. Having a founder doesn’t
by itself account for Toyota’s distinctiveness.
Sakichi and Kiichiro Toyoda were not vastly different from most other
founders of companies. They all share certain characteristics: extraordi-
nary drive, an uncommon pioneering spirit, and stubborn perseverance.
Yet none of that explains why the spirit of Toyota’s creators continues
from one generation to the next.
Certainly Sakichi and Kiichiro Toyoda were not alone in leaving inspir-
ing words to their successors. Kiichiro was a taciturn man, with no special
verbal gifts. And yet his spirit, views, and attitudes have flourished to the
present day.
By contrast, we must look at Yoshisuke Aikawa, the entrepreneurial
genius who founded Nissan Motors. There is no doubt that Yoshisuke
Aikawa attracted many talented people to the Nissan organization by the
force of his clearly stated mission to “establish a first-rate Japanese auto-
motive industry.’ But those talented people did not inherit and build on
Aikawa’s spirit, words and actions.
The Toyota organization brings out the best even in ordinary people.
As it does so, it steers extraordinary people clear of the “charismatic lead-
ership” trap to which they are so prone and, instead, leads them to add
their own wisdom to those of their predecessors and to pass on the results
to their successors. This cannot be explained merely by referring to indi-
vidual people. There is something else. Clearly, there is something beyond
28 Inside the Mind of Toyota

the company’s particular founders and successors and employees that dis-
tinguishes Toyota from other organizations.
Professor Takahiro Fujimoto of the University of Tokyo is well known
as an automotive industry analyst and student of the Toyota Motor stud-
ies. In his book, The Evolution of a Production System (1997),” he makes
the following observation about unresolved issues in Toyota studies:

A clear picture or analysis has yet to emerge of internal organizational

patterns that bear on the question of whether Toyota Motor, as an
industrial organization, has drawn on unique evolutionary capabili-
ties. What sets Toyota apart, for example, in terms of its decision-mak-
ing patterns, its organizational culture, its managers’ values, its system
offormal procedures or its managerial style? And when and how did it
get that way?

Fujimoto goes on to cite what may be some of the distinctive elements

constituting Toyota’s evolutionary capability:
A pattern of thinking that links every trial to competitive strength
The tenacity to bring ideas to fruition even in spite of initial setbacks
A gritty willingness to use whatever means necessary to win
The successful maintenance of systems of formal rules
Succession practices that ensure policy continuity
a Mechanisms for emphasizing the continuity of Toyota management
meg
Oe
thinking among employees
Yoshinobu Sato, a researcher celebrated for his historical studies of the
Toyota Motor Corporation, lists prominent themes of Kiichiro’s career in
his book, Sources of Toyota Management (1994)":
1. An inventor’s philosophy influenced by his father, Sakichi
2. The confidence to build popular passenger vehicles gained through
enterprising and careful planning
Ingenious sales arrangements that stress the importance of users
The creation of manufacturing technologies for mass production
Broad ideas on what an organization should be and how to manage it
An emphasis on basic research
A commitment to passenger vehicle development
SU The will to take up the challenge of diversified technical innovation and
TASS
OE
commercialization
Together, Fujimoto and Sato summarize some of the elements of Toy-
ota’s distinctiveness. By combining these elements with K’s “Company
Growth Model” in Figure 0.3, we can arrange them according to histori-
Toyota’s Genes andDNA ~=-29

cal cause-and-effect relationships to form a “Genealogy of Gene Trans-

mission at Toyota, shown in Figure 1.4.

Traditions at the heart of Toyota

| + A pattern of linking all trials to competitive strength —
_» Perseverance even in the face of initial setbacks
A gritty willingness to use whatever it takes to succeed
Marketing schemes that emphasize users
Production technology for mass production
« An emphasis on basic research
+ Diverse efforts at technical innovation & commercialization

Functions of Documentation
+ Ensuring policy continuity
+ Away to stress the continuity of Toyota thinking on employees
_+ Preservation of a system of formal rules

revised/
codified
Shoichiro
revised/
Toyoda's genes codified
Documented Taiichi Ohno's
governed
Procedures
1 influenced governed
revised/
codified
Eiji Toyoda's
revised/
genes codified
governed
Evolving
B ¢
influenced, ‘ revised/
\ codified
Taizo Ishida's
genes
\ governed
\
A i“influenced ¢
I
I
| Kiichiro Toyoda's genes (tacit knowledge)
1
1 » Inventor's philosophy influenced by father Sakichi
1 * Confidence to build popular cars comes from enterprising & careful
influenced
influenced preparation
* Tenacity to develop passenger cars
+» Broad ideas about what an organization should be and how to manage it

A
' influenced

i Toyoda's genes (tacit kn

N.B. ‘influence’ means transmit tacit knowledge from one person to another; ‘codify’ means convert tacit knowledge to
formal knowledge (documented procedures); ‘govern’ means regulate management or work philosophies via documented
procedures; ‘revise’ means cause formal knowledge to evolve

ARTA dete ceria amma ce! 2Syas ee are otalk eds|a i

30 Inside the Mind of Toyota

As the figure shows, Kiichiro was influenced by the genes (tacit knowl-
edge) of his father. Combining them with his own distinctive contribu-
tions, he created more evolved genes (tacit knowledge), which he then
wrote down and codified in the form of “documented procedures” (formal
knowledge). These procedures, representing the knowledge of the organi-
zation, governed the thinking and values of capable men who
sustained Toyota in later years, men such as Shotaro Kamiya, Taizo Ishida,
Talichi Ohno, Eiji Toyoda, and Shoichiro Toyoda. Each of these subsequent
leaders added his own unique wisdom and values to produce even more
evolved wisdom. Everyone, in other words, introduced his own philosophy
and values that then interacted freely and in multiple dimensions with
those of every one else to produce new wisdom. In this way, organizational
knowledge evolves and increases through a formal process in which the
new knowledge is used to revise existing documented procedures or to
establish new documents. One generation’s tacit knowledge becomes genes
passed on to succeeding generations. The equation of documents and
DNA thus reveals “written procedures” to be “evolving genes.”

Documented Procedures

DNA is deoxyribonucleic acid, the medium for genes. Taking an analogy

from music CDs, the music is the gene and the CD is the DNA. To express
this relationship in terms of the documented procedures of a company’s
organizational knowledge, we can say that recorded procedures are the
genes and documents themselves are the DNA. The existence of the
genetic medium DNA is what permits genes to be transmitted from one
generation to the next and what permits evolution to occur in response to
changes in the environment.
Without documents (DNA), words would fly about in a chaotic game
of “telephone” in which information from one person would end up
meaning something completely different ten people later. The transmis-
sion would be broken. In a culture of only spoken words, not even the
finest managers and the finest people in the world can build a world-class
organization.
Managerial perspectives shift as times change, and documented proce-
dures are needed to keep those perspectives from disappearing altogether.
If procedures no longer suit the times, they need to be revised. The
process of revision is what we call “evolution,” and it is in this sense that
documented procedures are the same as evolving genes.
A passage from Toyota: A History of the First 30 Years, published in 1967,
further explains this concept:
Toyota’s Genes andDNA 311

[With Toyota’s launch in 1937,] a management organization was cre-

ated and job boundaries became clear. As various business functions
began to operate smoothly, notebooks of written procedures were estab-
lished, as were rules defining standards for how work was to be per-
formed. These rulebooks covered such areas as purchasing, ordering and
warehousing, materials, regulations for supplier loans and investments,
collections and sales, and rules for subcontractor orders. Rulebooks were
gradually codified and at the time of the organizational shift in 1939,
they were brought together as a set of nearly 83 Business Rules.

Let us take another look at Table 1.1, Kiichiro Toyoda: A History of his
Documentation. Here, one sees that Kiichiro was influenced by Sakichi’s
values and applied them as he understood them in concrete form to the
automotive business. These values acquired authority in the form of doc-
uments, and those documents eventually became the means for manag-
ing the organization.
A culture of documentation took root within Toyota because ways of
working were written down under Kiichiro’s leadership. After World War
II, in 1948, formal rules for documentation were written down and Toy-
ota’s documentation culture came into full flower.
It is possible that Kiichiro, who reportedly expressed himself poorly
and was not a very good speaker, needed written communication to run
his company effectively. In any event, documents became a means for the
transmission and propagation of Toyota genes. Without Kiichiro’s docu-
mentation, the Toyota organization would have lost its genes and the
company we know today probably could not have existed.

Toyota’s Documentation Principle

Table 1.2 is a summary listing of internal rules as expressed in various
Toyota-related materials.
The items we cite here (including some obsolete ones) are only a sam-
ple of Toyota rules, which are far more extensive. In addition, the table
shows only those rules above acertain level of applicability. If we were to
include low-level task instructions and the like, we would be listing tens
or even hundreds of thousands of rules. Year after year, the 83 rules that
Kiichiro formulated in 1939 are revised and amended as they are passed
down. They are also expanded and can be viewed as a massive system of
knowledge existing within Toyota.
Today, it is said that no Toyota manager can do his job without reading
a 600-page document of standards. The management of standards occupies
BZ. Inside the Mind of Toyota

a central place in a manager’s work, and not even the company president
has the authority to change established standards at will.

Board of Directors’ Rules

Board of Executive Officers' Rules

Organizational Management Rules De

[Xe
Dt
|
Job Authority Rules
Division of Duty Rules
Planning Council Rules
7 New Product Council Rules
_| Research Council Rules
| Equipment Council Rules
Intermal/External Mfg. Determination Council
Investment Council Rules
TMC/TMS Joint Council Rules
5} Safety Committee Rules
Audit Improvement Committee Rules
Rules for Handling Invention Ideas
Rules for Handling Innovations
Company Policy Management Rules
Rules for Establishing Long-Term Plans
Outsourcing Plant Financing & Invest. Rules
Quality Assurance Rules
Guidelines for Audits of Quality or Assr. Acts.
{ Initial Management Rules
_| Rules for Registered Problems
_| Guidelines for Promoting Recall Countermeasures
Rules for Waranty Repair Work
Cost Management Rules
Rules for Implementing Cost Planning
Rules for Managing Departmental Budgets
| Cost Improvement Prescriptions
_| Rules for Allocating Cost Mgmt. Work, annexed table
| Requlations for Controling Indirect Expenses|
Document Handling Regulations
| Prescriptions for Circulating Drafts for Approval
| Rules for Managing Forms
Detailed Rules for Implementing Forms Mgmt. Xe bt
pt
ob
xb
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Ok
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Rules for Technical Reports

Rules for Classifying Technical Reports
Rules for the Purchase & Storage of Meas. Equip.
Rules for Managing the Precision of Meas. Equi
| Product Research Rules
| Rules forProcedures Used atToyota Laboratories} —
Rules for Procedures Used by External Researchers
Prescriptions for Experimentation Research
| New Product Development Rules
t} Design Research Prescriptions
| Approved Drawing Prescriptions,
Dealing with Appr'dDrawingsPresecriptions
line

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| Production Engineering Development Rules| +x

Guidelines for Constructing QA Tables *
| Guidelines for Constructing Process Plans | x¥
Guidelines for Conducting Process FMEA w
| Guidelines for Process Surveys for Purchased Items]
Purchasing Guidelines for Constr. Comp. Insp. Methods} xx
ti Inspection Rules w
_| Rules for Dealing with Defects x
Rules for Op, Procedures
and Compilation Guidelines] x
Guidelines for Constructing Operating Procedures} 4
Guidelines for Constructing Operating Guidelines *
ha Tom Basan— Automobile Design Criteria
(TES) oa
Toyota‘’s Genes andDNA = 33

When Eiji Toyoda was executive vice president of the company, subor-
dinates could secure his reluctant agreement by showing him the proce-
dural documentation to back up decisions they had made. “The
documentation doesn’t make sense,’ he would reportedly say. “Fix it next
time.” Most bosses would probably tell their people to ignore the docu-
mented standards and do what they were told. Of course, such companies
probably have no standard work methods in the first place.
Japanese culture is traditionally hostile to documentation. A variety of
reasons have been proposed to explain this: impatience with reading, a
reluctance to do anything that might constrain future action, a desire not
to waste paper, and so forth. Whatever the cause, the result is an uncon-
scious habit that manifests itself as a reflexive rejection of documents. But
Toyota is different. All the basics of Toyota business exist as documents,
and written documents are the starting point for both action and
thought. In the context of Japanese culture, this documentation principle
marks a decisive difference between Toyota and other companies. (See the
section on Toyota's Business Management System in Chapter 3).
It does not necessarily follow that documentation and standardization
alone will automatically permeate a company and shape its organizational
culture. Mitsubishi Motors, for example, adopted ethical guidelines in
response to a 1997 scandal in which it was revealed that the company had
paid off an extortionist who threatened to disrupt its annual stockholder
meeting. These guidelines included an explicit ban on concealing recalls
and stipulated the establishment of an office overseeing ethics. But, on a
company level, rationality and conscience pretty much failed to function,
and the scandals have multiplied. Snow Brand Milk Products, whose
tainted products were at the center of an outbreak of mass food poisoning
in 2000, was committed to HACCP (Hazard Analysis Critical Control
Point) procedures and had implemented thorough document control. But
HACCP never became pivotal for managers and people on the shopfloor
because top executives did not take it upon themselves to build an organ-
ization in which fairness was either guaranteed or truly operational.

DNA and Organizational Capability

Figure 1.5 shows how organizational capability changes from one gener-
ation of managers to the next in a company with a documented corporate
DNA (Company X) and in one without such DNA (Company Y).
When a company possesses DNA in the form of documents, the orga-
nizational capabilities cultivated by each generation of managers are
transmitted undiluted to the next generation. The assumption here is
34 Inside the Mind of Toyota

Company X

Capability
Organizational =4 Market Demand
Level

Company Y

OC
oOorpPFNWHUADAN

Generations: Founder 2nd 3rd 4th 5th

that, without such documentation, the organizational capabilities of each

generation of managers vanish at about level 3 when the baton is passed
on to the next generation.
Suppose that corresponding generations in the two companies make the
same contributions to enhancing organizational capability. In this exam-
ple, the contributions made by the founder and the fourth generation of
leaders are the greatest. We can think of the fourth-generation managers
here as the “revitalizers.” Other generations are ordinary managers.
This hypothetical example makes clear that in Company X, each gen-
eration stands on the shoulders of the preceding one and that by the fifth
generation, managers have attained a high level of organizational capabil-
ity. In Company Y, on the other hand, each generation ofmanagers
“ratchets back” to the level of the previous generation. After five genera-
tions, the organization has barely reached a capability level that is one-
third of Company Y’s. If we imagine that the level of market demand rises
as shown by the dashed line in the figure, Company Y ends up constantly
in the red in and after the third generation.
All companies tend to have founders and “revitalizers” who substan-
tially raise their organizational capabilities. Over the long run, however,
they also have many managers who fall into the “ordinary” category.
What is important here is that the handoff from one generation to the
Toyota's Genes andDNA = 35

next not lower the organization’s capabilities. Some mechanism needs to

be in place so that those capabilities accumulate constantly, even under
“ordinary” managers. Even if a defective gene shows up, in other words,
the fact that documentation makes it visual means that succeeding gener-
ations will evaluate it and weed it out, either by discarding or revising it.
In this sense, the genetic medium—-DNA—‘is vastly more important than
the genes themselves. A company with DNA in the form of written docu-
ments is one that can evolve in the manner described by Darwin.

The Utility of Documented Procedures

Documented procedures means “standard ways of working” or what is
commonly known as “work standards.” A standard is the documented
expression of the best method known ata given point in time; it enforces
that method until a better one comes along. An organization as a whole
keeps improving its methods via a process of formal revision in which
improvements on past methods are incorporated into new standards.
Standards are therefore a form of human wisdom hammered out with the
aim of continually improving work methods.
The following quote from Shoichiro Toyoda eloquently describes the
role and effect of documentation. (It is excerpted from a keynote address
to the 67th Quality Control Symposium, sponsored by the Japan Union
of Scientists and Engineers, December 1998.):

An “innovative culture” is one we find in organizations that don’t hes-

itate to change the current state of affairs, in organizations that strive
continually to change and that accept that changing the status quo 1s
good. What supports such organizations at the most fundamental level
is the steady everyday business of continuous improvement (kaizen).
Kaizen requires, first of all, that standards be in place for whatever
business needs to be conducted in the workplace. And this doesn’t mean
simply pursuing results. The first step in kaizen is standardizing the
processes that produce results. When this principle is weakened, team
members lose a sense of where they belong and what their roles are. The
cycle of management comes to a halt and standardization becomes
inconceivable. Empty formalism takes over and no one does anything
unless there is a precedent.

Hitoshi Kume, professor at Chuo University, professor emeritus of the

University of Tokyo, and recipient of the Deming Prize, explains work
standards in this excerpt (from an address to the 55th Quality Control
36 Inside the Mind of Toyota

Symposium, sponsored by the Japan Union of Scientists and Engineers,

December 1992):

Work standards give objective clarity to the question of what it is we do

and where we do it. They illuminate the relationships between individual
tasks and the system as a whole and allow us to understand the purpose
of each activity in the context of the whole. They are at once cornerstones
of management, analyses of the current situation and points of departure
for kaizen. While records or data concerning the results of, say, sales and
design are generally available in the form of statistics or drawings, many
companies end up with management by outcomes and stalled kaizen
because there is no information about the processes that produced those
results. The role of documentation goes beyond simply specifying rules or
capturing the current situation. Documents illuminate the current situa-
tion and should be used as the point of departure for improving it.

Most standards are documents drawn up by staff members seeking only

to ensure that shopfloor workers follow procedures. At Toyota, however,
standards are both “points of departure for kaizen” and “evolving genes.”
Many people tend to emphasize the negative regulatory or coercive
aspect of standardization. But for an organization, it only makes sense to
stipulate that one should not follow inferior methods when better stan-
dard methods are available. Standards are more than mere rules, however.
Just like a high jumper’s bar, standards mark the maximum height cleared
by predecessors. A standard indicates the goal that everyone needs to
attain and thereby induces everyone to rise to challenges and to be cre-
ative. Humans simply cannot display creativity or the will to meet chal-
lenges when they cannot see the goal. We need to keep this central aspect
of standards firmly in view.
Standardization applies to four objects: concepts, protocols, proce-
dures, and things. Even when they don’t receive special attention, the
standardization of procedures and things proceeds without much diffi-
culty in manufacturing industries. This is because manufacturing could
not take place without them. As Table 1.1 indicates, Kiichiro Toyoda
placed particular emphasis on what we call “protocols”
Protocols, as used here, mean commitments concerning the execution of
the business made by the organization or among various job functions. Typ-
ical protocols include regulations delineating jobs and regulations specifying
the assignment of business duties. There are other organizational commit-
ments, too, both great and small, and the effectiveness of the organization is
determined by how well those commitments are coordinated and codified.
Toyota’s Genes andDNA 37

One form in which we encounter such protocols is in personal state-

ments concerning what one’s own organization does. The important
thing here is to show the interactions among protocols that indicate what
one does based on interrelationships specifying who (or which organiza-
tion) has responsibility or authority with respect to whom (or which
other organization). Clearly defining both protocol interactions and
interrelationships of responsibility and authority spells out tasks and
responsibilities for the future. Such clear statements may seem harsh, but
if we make organizational allowances for human feelings, we will either be
unable to establish protocols in the first place or else our protocols will
become collections of useless and hollow personal statements.
Protocols at Toyota are created in the context of the Management Sys-
tem Scheme shown in Figure 1.6.
A general flowchart is used for simple interactions, but in complex
cases, Input Process Output (IPO) charts, showing the inputs, processes
and outputs of individual departments, are appended to or cited by the
general flowchart.
Using words alone to express such organizational interrelationships and
work interfaces would place an extraordinary burden on readers and would
lead to unusable processes. Toyota’s Management System Scheme makes
everything clear at a glance and makes living, usable processes possible.
When applied to concepts, standardization is typically expressed in
words or in tree diagrams. Standardizing concepts constitutes the basis of
enhancing organizational efficiency. Even though there are different “Toy-
ota dialects,’ vocabulary seems to be uniform within Toyota. There is, in
addition, a strong impression that words are used with rigorous
precision. A typical example of a tree diagram used at Toyota is the Job
Structure Chart introduced in Chapter 3. Because these concepts are
advanced at Toyota, communication is effective and both work analyses
and kaizen proceed easily.
At this point, it is appropriate to introduce some observations made by
K, who first appeared in the preface of this work:
* Technology is a kind of culture, and its inheritors must not be mere
storytellers. Things need to be written down.
- Although devising new techniques may be a manager’s principal job, an
organization must be managed by balancing this function with the work
of standardizing the best experience of the past.
* Written documents are indispensable for enhancing the precision
of communications. Human culture arose from the written word.
In the same way, a company culture needs to be formed by means of
documents.
38 Inside the Mind of Toyota

Individual |PO Charts

all coordinated

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Input What? From ale
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Output What? What?

Information To where? To where? To 7?
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Toyota's Genes and DNA = 39

* Communication occurs when the other person understands. What a per-

son may have said is secondary. True communication is difficult. This is
where standards are required.
* Half of one’s energy can accomplish 85 percent of a task; the other half is
required to achieve the last 15 percent. Standards are what determine
how effective that energy is.
* The cars that Toyota builds are not substantially different from those
made by other automobile manufacturers. What is different is the effi-
ciency of the Toyota organization.

Bureaucratic Principles and the Negative Effects of Bureaucracy

As central elements of bureaucracies, standardization and documentation
are generally considered to be reactionary. For this reason, it is sometimes
difficult to explain Toyota’s evolutionary power in terms of standardiza-
tion and documentation. In this context, it is important to remember that
when sociologist Max Weber advocated bureaucracy a hundred years ago,
it was not reactionary at all. In fact, it was the most effective methodology
for managing organizations. The bureaucratic principles outlined by
Weber are worth examining here:
* Standardization: Work is performed on the basis of universal and gen-
eral rules.
+ Specialization: Work is divided into specialties by function.
* Professionalization: The performance of work requires specialized train-
ing and education.
* Depersonalization: Inequities disappear because conduct is based on
rules with the regularity of machines.
* Stratification: Hierarchies of authority are clear.
* Formalization: Jobs are in principle performed with documents as catalysts.
Such bureaucratic principles allow organizations to benefit from the
effects of accuracy, stability, reliability, efficiency, and uniformity.
The word “depersonalization” seems to deny human individuality, but
in its sense of “eliminating inequities, it does not at all contravene
humanity. “Depersonalization” simply means eliminating the injustice
of allowing people to live off an organization without obeying its rules.
The term aims to express a situation in which all members of the organ-
ization conduct themselves in an orderly and harmonious way in pursuit
of the organization’s goals. Perhaps “regular conduct” would have been a
more apt phrase.
Nevertheless, a carelessly run bureaucracy is prone to fall prey to neg-
ative effects:
40 Inside the Mind of Toyota

* Trained impotence: Patterns of conduct appropriate to a previous state

of affairs are carried over and randomly passed on when circumstances
change.
* Occupational psychoses: Constant repetition of the same task leads to
the development of particular likes, perceptions, and emphases.
* Goal shift: The observance of rules becomes an end in itself rather than
a means.
The word “bureaucratization” arose precisely because such negative
effects were observed in organizations of functionaries and civil servants.
In time, bureaucracies came to be seen as having reactionary attributes.
As a result, the word eventually became a synonym for “rigidity.”
Task forces that cut horizontally across an organization can comple-
ment a vertically aligned bureaucracy as a method for suppressing
bureaucracy’s negative effects, energizing the organization and sustaining
evolution. Indeed the adoption of such task-force-type management is
one method that has allowed the Toyota organization to evolve, even as it
rests on a bureaucratic foundation.
We will see in more detail in Chapter 3 how Toyota, since it was
founded, has made liberal use of a “committee system” to complement
its vertical management structure. When TQC was introduced into the
company in the 1960s, it was woven into a uniquely Toyota system of
“management by function” that cut across the organization. Even so,
Toyota had to flatten and cluster its organization to overcome the first
signs of “big company disease” that emerged in the 1980s. In the final
analysis, Toyota has enjoyed the benefits of Weber’s bureaucratic princi-
ples because it has proactively managed to cordon off the negative effects
of bureaucracy.
Bureaucracy remains the fundamental principle of organizational
management even today. A powerful organization can be constructed on
a bureaucratic foundation as long as it institutes reliable measures to
avoid falling prey to bureaucracy’s shortcomings. It can be argued that
Toyota has not entirely succeeded in constructing an organization that
reconciles the advantages and negative tendencies of bureaucracies, but
foresight and the search for optimal methods have made it the strongest
bureaucracy-based organization in history.

A Learning Bureaucracy
Within its bureaucratic system, Toyota has made active use
of the crucial
principles of documentation and standardization to transmit the
“genes”
of previous generations. At the same time, these principles provid
e suc-
Toyota’s Genes andDNA 41

ceeding generations with controls and also with goals to be surpassed, so

that new genes are added ina cycle of studying and revising improved
ways of working. This is the epitome of a “learning organization”
The characteristics of a learning organization are worth examining
here. Such an organization can be defined as one:
* in which people are ceaselessly stretching their capacities and are able to
bring about results they sincerely desire
* that gives rise to innovative and expansive patterns of thinking
* that soars in pursuit of shared goals
* that constantly studies how people can learn together
Within this framework, Toyota is a prime example of a learning organ-
ization. Although Toyota has been referred to as a group with an
“improvement addiction,” it is more accurate to call it a group with a
“learning habit.” Toyota is an organization that makes use of bureaucracy
to learn. It is, in other words, a “learning bureaucracy.”

Becoming an Industry Leader

The developments we have described have brought Toyota to the role of
industry leader (see Figure 0.1). Figure 1.7 summarizes the process by
which Toyota achieved this status.

___ Industry Leader

(see Fig. 0.1)

The strongest organization in history

_ Learning organization
An organization that adds wisdom
to the wisdom of predecessors

Documentation and
Other principles standardization principles

Bureaucracy
Bureaucracy's negative tendancies
42 Inside the Mind of Toyota

Bureaucracy lies solidly at the root of Toyota’s organizational manage-

ment. In particular, it was Kiichiro Toyoda’s insistence on the most
important basic bureaucratic principles of documentation and standard-
ization that eventuated in a “learning organization” in which succeeding
generations add wisdom to the wisdom of their predecessors. The devel-
opment of a variety of measures to increase organizational effectiveness
has allowed this learning organization to contain negative bureaucratic
tendencies and bring out bureaucracy’s positive principles. The result
is the strongest organization in history, the industry leader depicted in
Figure 0.1.
The principles of documentation and standardization constitute Toy-
ota’s DNA, the medium through which new wisdom is added to the wis-
dom (or genes) of preceding generations. It is the presence of this
DNA—used to more effect than in any other company—that has been the
key to Toyota’s success.
We have now clearly seen Toyota’s system for transmitting its growth
genes. What makes it possible for an organization to transmit its growth
genes is the creation within that organization of a transmission medium’s
DNA: a “culture of documentation.”

THE MANAGERIAL TEMPERAMENT THAT CREATES ENDURING GROWTH

Creating a culture of documentation (i.e., a system for enduring growth
that does not depend on individuals), is a fundamental condition for sus-
taining stable growth.
Yet it was one individual, Kiichiro Toyoda, who created this culture of
documentation. In all likelihood, Shotaro Kamiya or Taizo Ishida could
not have accomplished it. Without Kiichiro, Toyota would not be the
organization it is today.
At this juncture, it is important to identify universal principles for
selecting managers suited for permanent growth. What sort of managers,
for example, have the temperament to be able to create the conditions for
permanent growth? How does one find such potential managers, and how
does one nurture them?

Level 5 Leadership
Managers with the potential to create the conditions for permanent
growth need more than charisma. Charismatic leaders tend to see them-
selves as heroes and assume thata leader needs to compensate for the fact
that ordinary people are powerless, lacking in vision, and incapable
of
Toyota’s Genes andDNA 43

change. One cannot expect permanent growth from leaders who have this
view of employees—the people who carry the organization.
Leaders from whom one can expect permanent growth seem to be
people, like Kiichiro Toyoda or Jack Welch, who are single-minded and
focused. Some features of Kiichiro’s character are presented below:

* Taciturnity rather than eloquence

* A monomaniacal approach rooted in a sense of mission
* An absence of sociability
* Meditative thought in pursuit of essentials
* An emphasis on knowledge and theory as well as realistic practicality
* A long-range, comprehensive vision
* Careful consideration followed by bold and fearless action
* Deep compassion for others through his work

Jack Welch more or less shares the same characteristics as Kiichiro. A

figure celebrated in media headlines, Welch is a charismatic leader with a
strong personality who gives the impression of great volubility.
But the real Jack Welch is quite different. He is a man of few words
and speaks with a slight stammer. He is, in some ways, naive and even
shy. Because his massive restructuring and personnel reductions have
emptied buildings of people, he has been compared to a neutron bomb.
Few are aware of the pain he felt when hearing himself called “Neutron
Jack.” For Welch, public relations was an indispensable element of
corporate strategy; his charisma was no more than an intentionally
created role.
As we consider various theories of leadership, the examples of Kiichiro
and Jack Welch draw our attention to “Level 5 Leadership,” an article writ-
ten by Jim Collins (the author of Built to Last: Successful Habits of Vision-
ary Companies) and published in the April 2001 issue of Diamond
Harvard Business Review.”
From among 1,435 Fortune 500 firms, Collins selected a group of eleven
corporations that suddenly transformed themselves into “great” compa-
nies and then sustained extraordinary results for 15 years or more. He then
compared them to companies that had achieved great results but had been
unable to sustain them and attempted to discover the common variables
that distinguished the two. Figure 1.8 shows the divergence of these two
groups from the point at which the corporate transformation occurred.
Collins’s study divides leadership into the five types shown as hierar-
chical levels in Figure 1.9 and discovers astatistical relationship of cause
and effect. He posits that the corporate revolution cannot take place in the
absence of “Type 5” leaders.
44 Inside the Mind of Toyota

Index of accumulated share investment yields vs. market average

7.00

6.00

5.00

4.00

3.00 5

2.00

Effective Leader
Catalyzes commitment to and vigorous pursuit
ofa clear and compelling vision, stimulating higher performance standards

Competent Manager
Contributes individual capabilities to the achievement of group
objectives and works effectively with others ina group setting

Contributing Team Member

Contributes individual capabilities to the achievement of group
objectives and works effectively with others ina group setting

Highly Capable Individual

Makes productive contributions through talent, knowledge, skills
and good work habits

Source: “Level 5 Leadership,” Diamond Harvard Business Review,

April 2001.

Executives at the eleven companies Collins describes are,

in all impor-
tant respects, the same kind of people. Common characterist
ics are as
follows:
Toyota’s Genes andDNA 45

* They appear to be shy, modest and even cowardly.

* They avoid the limelight.
* They are utterly without pretension, but draw on a powerful and even
ascetic decisiveness in the face of reality.
* Their natures are divided between humility and strength of will, shyness
and audacity.
> They don’t talk much about themselves.
* They strive for betterment.
* They have wills of iron.
* They look outside themselves for the factors in strong performance and
if they don’t find them, they attribute success to “luck.”
* They are stoic in their decisiveness.
When Collins conducted his analysis, he gave clear instructions to his
survey team to avoid emphasizing the role of top managers in order to
avoid the pitfall of simply ascribing success to leaders’ achievements or
leadership. The facts shown by his data, however, are unequivocal.
Level 5 leaders are, in summary, those who possess the following
elements:
* In the face of reality, they are vigorously and stoically decisive.
* They have a passion for aiming high in whatever they undertake.
* They combine, on the one hand, a modesty that leads them to praise
their staffs and not talk about themselves and, on the other, an almost
pitiless steely determination.
* They put the company before themselves and expect succeeding genera-
tions to achieve greater success.
* They seek responsibility within themselves and the reasons for success
outside themselves (i.e., in colleagues or employees, external factors or
good fortune).
Collins cites the factors below to explain the behavioral characteristics
of Level 5 leaders:
* People are more important than anything else. People are the starting
point for these leaders. Strategy comes later.
* The Stockdale Paradox
This paradox is named for General James Stockdale, who was awarded
a Medal of Honor after surviving seven years of brutal detainment in a
Vietcong prison. Stockdale embraced two simultaneous and contradic-
tory disciplines: He recognized that the extraordinarily harsh realities he
confronted were real, but he held on to an absolute conviction that his
side would prevail in the end.
* The flywheel powers the breakthrough.
46 Inside the Mind of Toyota

The process that carries a good company to greatness is not achieved

overnight. It resembles the task of tirelessly pushing a giant flywheel
around.
- Hedgehog thinking
Think like a hedgehog and adopt a systematic and coherent approach.
A hedgehog would ask simple questions: “Why do some companies per-
form better than any other in the world?” “How could the business mod-
els of such companies best function?” “What factors best ignite the
passions of their employees?”
* Promote technological innovation
Resist the urge to pursue temporary technological fads. Be a pioneer in
carefully chosen technologies.
* A culture of discipline
One observes three coherent kinds of discipline: disciplined employees,
disciplined thought and disciplined behavior.
The qualities that distinguish Level 5 leaders from others can be recog-
nized in the distinctive character of Kiichiro Toyoda. Kiichiro is said to
have told his son, Shoichiro, “[In the automobile business,] all I did was
wave the baton. It was the people around me who did everything else.
Later on, people will probably make it sound as though I did it all by
myself.” This anecdote illustrates the temperament of a Level 5 leader.
Collins does not claim that the presence of a Level 5 leader is the sole
factor required to shift a company from good to great. He argues only that
it is an indispensable one. We can relate the results of Collins’s research to
the argument of this book as follows:
The indispensable requirements for moving from a good company to a
continuously great one are a culture of documentation and the nurturing
and development of Level 5 leaders.

Developing Level 5 Leaders

A group of newly appointed women CEOs put the following question to
Collins:
“We believe that what you say about Level 5 leadership is real. But we’re
confused. One of the reasons we got the jobs we have now is that we have
strong egos. Is the way to Level 5 leadership something we can learn?”
Collins's research had not taken him to the problem of how it was that
Level 5 leaders got to be the way they were, so he admitted that he did not
Toyota’s Genes andDNA 47

yet know the answer to that question. He hypothesized, however, that there
were two kinds of people in the world: those who do not have the seed of
Level 5 leadership within them and those who do. Then, he went on to say:

People in the former category are incapable of becoming Level 5 lead-

ers no matter how many tens of thousands of years they try. For these
people, work is a matter of ‘What can I personally get out of it?’ and has
nothing to do with what they may build or create or how they can con-
tribute. A cynical view is that the drive for supremacy or ambition of
Level 4 leaders stands in direct opposition to the humility you need to
be a Level 5 leader. What’s more, there is a myth among boards of
directors to the effect that becoming a great company requires an
unusually self-centered leader. As a result, one just doesn’t see compa-
nies with the persistence and soundness to transform themselves from
good to great and then remain great.

Collins has also argued that, even among people who possess the seed
of Level 5 leadership, the seed does not always germinate. In his view, no
methodology has yet emerged to make it sprout.
No doubt it is not easy to discover effective methods for substantially
increasing the proportion of seeds that will sprout. But a low germination
rate does not matter because we are only looking for a limited number of
top managers. What is important for a company is continually finding
managers who possess the Level 5 leadership seed and then building pro-
grams that nurture their potential in such a way that their desire to con-
tribute germinates and grows. These are not difficult tasks. Close
observation will reveal people who carry the right seeds. Their seeds will
sprout readily if one puts together education programs that touch off
their sense of mission based on common destiny.
Jim Collins’s book, Built to Last: Successful Habits of Visionary Compa-
nies, appeared in Japanese translation just before the manuscript of the
current volume was completed. A summary of the arguments in Collins’s
new book appears under the title, Reberu 5 Riidaashippu-ron,” in the
Japanese edition of the Harvard Business Review. | recommend taking a
look at it.

Endnotes
1. In what follows, I draw heavily on the following sources: Yoshinobu Sato,
Toyota Keiei no Genryu [Sources of Toyota Management] (1994), for material
on (1) Sakichi Toyoda and (2) Kiichiro Toyoda; Fujio Wakamatsu and
48 Inside the Mind of Toyota

Tadaaki Sugiyama’s Toyota no Himitsu |The Toyota Secret] (1977), for my

discussion of (3) Shotaro Kamiya; and Yoshinobu Sato’s Toyota Gurupu no
Senryaku to Jissho Bunseki [Strategy and Substantive Analysis of the Toyota
Group] (1988) for information on (4) Taizo Ishida.
. Nichiren Daishonin was a Buddhist monk in 13th-century Japan. He
founded the Lotus (Hokke) sect, popularly known as Nichiren Buddhism.
. Sontoku Ninomiya was a 19th-century Japanese agricultural leader,
generally regarded, even to this day, as a symbol of hard work and
perseverance.
. Toyota Jidosha Hanbai Sanjiinenshi.
a . N.B. The company at the time was called Toyoda.

6. Details of these may be found in Yoshinobu Sato’s 1994 Sources of Toyota

Management (Toyota Keiei no Genryi).
. monozukuri no tetsugaku.
. kadoritsu.
. Norioki Kobayashi. 1990. Toyota no Daijikken.
. Seisan
©Ooon Shisutemu no Shinkaron (Yuikaku Press, 1997). This title, published
in Japan, covers similar content to the re-edited English version, The Evolution
of a Manufacturing System at Toyota (Oxford University Press, 1999).
BIE Toyota Keiei no Genryu.
12: Datyamondo Habado Bijinesu Rebyu.
IS3 Level 5 Leadership.
49

The Toyota Paradigm

The word “paradigm” is generally translated into Japanese as kihan,

meaning standard or norm. We will use the term more broadly to encom-
pass such concepts as corporate culture and organizational ethos. The
Toyota paradigm has been formed by genes that are carried and trans-
mitted by the DNA of documentation. This chapter weaves historical
events into a look at just what sort of paradigm this is.
The development of the human race is the history of each generation’s
contribution to the wisdom or knowledge of its predecessors. The same is
true for companies: The key to permanent growth lies in having a robust
system for accumulating knowledge from one generation to the next. Toy-
ota accomplishes this by the effective use of what is arguably the greatest
of human inventions—documentation. From a layman’s perspective,
Toyota’s knowledge encyclopedia constitutes a unique paradigm.
The Design Management Institute, a leader among Japanese consulting
organizations, worked with Toyota after World War II. One of the senior
people who worked with the Institute recalls that era:

As an assistant to Shigeo Shingo' in 1955, I conducted training to

introduce IE (industrial engineering) to Toyota. That was the point
at which we discussed the introduction of the kanban system.
The term “design management” emerged around 1957, when
about twenty companies, including Toyota, Fuji Heavy Industries,
Prince, Mitsubishi, and NEC, engaged in activities hosted by the
Design Management Institute. Toyota was the most active of these,
and we had more to learn from Toyota than to teach it.
Around 1957, Toyota introduced twin reforms consisting of the
shusa system (i.e., matrix organization) and a Technology Manage-
ment Department (systematization). I was impressed to hear that
Toyota had created a Technology Management Department at
the same time that it introduced the shusa (heavyweight product
50 Inside the Mind of Toyota

manager) system because it knew that merely fiddling around with

the organization would distort relationships among people.
I was called to Toyota on several occasions to conduct improve-
ment studies. After the oil crisis hit, Toyota also invited me to carry
out a study of parts carryover, where there was much to learn from
the company’s thoroughness.
In 1980, I was asked to provide management training for Toyota
employees one rank lower than the managerial level, but I refused,
saying that I no longer had anything to do at such a company. I
ended up going anyway because some of the members of the Design
Management Institute at the time entreated me to. Toyota, they said,
was in over its head. We used work sampling to carry out improve-
ments in office work that led to “A Study in Raising White-collar
Productivity.”
As a result of these experiences, drawings management, data man-
agement, and design standardization all became crucial methods for
improving the efficiency of the design department. Toyota spends
about five times what other companies do on data management.

In this narrative, we glimpse a characteristic pattern of Toyota behav-

ior that impressed even a senior figure in a professional management con-
sulting organization. Toyota’s unique paradigm was already well
established.

VALUES
Management Philosophy
The most important determinant of the Toyota paradigm is clearly the
company’s management philosophy, including its management doc-
trines and basic policies. In most companies, management doctrines or
basic policies take the form of empty incantations or ornamentation and
tend not to penetrate the thinking of employees. Toyota, however, makes
sure these are recorded as formal documents, that they reach all employ-
ees, and that their penetration throughout the organization is moni-
tored. This allows Toyota to shape the values, thinking, and behavior of
all employees.
Paradigms change with the times. The evolution of Toyota’s manage-
ment doctrines and basic policies reveals which parts of the Toyota para-
digm have altered over time, thus giving us an overview of what at the
company has changed and what has not.
The Toyota Paradigm 51

The Toyoda Precepts

The Toyoda Precepts were drawn up by Kiichiro Toyoda and Risaburo Toy-
oda in 1935 as a summary of Sakichi Toyoda’s teachings. Even after World
War II, the Toyoda Precepts long remained enshrined as the principles of
Toyota and the Toyota group. Because the precepts had been formulated
before the war, certain aspects of their language became unsuitable for the
modern era, but there was nothing dated about their spirit. As Table 2.1
shows, the Toyoda Precepts can be interpreted in a way that is quite mod-
ern. In their spirit, all of the Toyoda Precepts are perfectly comprehensible
today. As a progressive doctrine expressing management as a mission, the
precepts have lost none of their luster through the years.

Toyoda Precepts : - _ Modern Interpretation

1. Regardless of position, work In their work, all company employees, without respect to rank,
together to fulfill your duties faith- | should join together to strive in concrete form for the
fully and contribute to the develop- development of the broader world
ment and welfare of the country
You should dedicate yourself to studying the wisdom of your
2. Always stay ahead of the times
predecessors and to staying always on the cutting edge by
through research and creativity
creating ideas that surpass theirs.

3. Avoid frivolity. Be sincere and You should eliminate waste, concentrate energy on what is truly
strong. effective and build a lean and fit company

4. Be kind and generous. Strive to With a sense of shared destiny, you should help one another
create a home-like atmosphere. within the company and build family-like friendships.

5. Be reverent and conduct your life | As you conduct business with an awareness of belonging to the
in thankfulness and gratitude. earth and a mindfulness of the blessings of your region and
society, you should act with the intention to preserve the earth
and to give back to society.

Postwar Basic Principles of Management

Toyota’s team lineup and organization grew rapidly as the company rode
the wave of motorization that began in the latter half of the 1950s. It soon
became evident, however, that this growth was accompanied bya deteri-
oration in quality and a souring of relationships among the company’s
various departments. Toyota decided to improve things at this point by
taking on TQC, a movement that was evolving into company-wide QC.
In the context of promoting TQC, in January 1963, Toyota announced a
52 Inside the Mind of Toyota

threefold corporate policy comprising a basic policy, a long-term policy,

and an annual policy. The basic policy expressed the company’s funda-
mental management philosophy:
1. We will strive to develop Toyota throughout the world by harnessing all
energies inside and outside the company.
2. We will improve Toyota’s results as a quality leader by our relentless pur-
suit of good products and good ideas.
3. We will contribute to the development of the Japanese economy
through high-volume production and low prices.
The policy was not intended as a substitute for the Toyoda Precepts but
as a business vision based on the precepts. It bears little relation to the
precepts, however, and creates the strong impression that the precepts had
been put on the back burner in the race toward high growth. The basic
policy has historical significance as the motive force responsible for the
Toyota we know today, but with its exclusive focus on company growth, it
gave too prominent an expression to what Taizo Ishida at the time called
vainglory.’ During this period, Toyota was hardly progressive in its socio-
economic activities and was ridiculed for its selfish isolationism. The basic
policy certainly leaves an impression of self-righteousness and selfishness.
The first and second oil shocks constituted a turning point that led
Toyota to grow into a world-class company. Heeding criticism of its isola-
tionism, Toyota began to turn outward. In 1983, one year after the merg-
ing of Toyota Motor and Toyota Motor Sales, the company’s basic policy
was revised as follows:
1. While deeply cognizant of our mission in the automotive industry, we
will actively contribute to economic and social development in Japan
and worldwide.
2. We will strive for the sound development of Toyota throughout
the
world by harnessing all energies inside and outside the company.
3. Through ingenuity and effort, we will work to improve corporate effi-
ciency as we sustain a youthful management culture.
4. We will improve Toyota’s results as a quality leader by our consta
nt and
relentless pursuit of good products and good ideas.
5. On a basis of mutual trust between labor and manag
ement, we will
develop people capable of meeting the challenges of the times.
On surface, this may appear to echo the principles of the Toyod
a Pre-
cepts, but at closer examination, this revised policy does not
appear to
be grounded in the loftiest concepts of the Toyoda Precepts.
One still
gets the feeling that it has been extrapolated from a preoccupat
ion with
high growth.
The Toyota Paradigm 53

By the latter half of the 1980s, European and North American compa-
nies were growing increasingly bitter over the flood of Japanese exports,
and the backlash from overseas had become intense. Domestically, Toyota
had become a mammoth corporation and there was mounting criticism
of its persistence in maintaining a “Toyota first” attitude and of its
inward-looking orientation.
Figure 2.1 shows public perceptions of the time. The consensus was
that Toyota might have been a firm from which others wanted to learn,
but that it could not be called a good company.

w
av
<
oO
fol
E
°
o
To
°
°
Japan IBM Kao Sony
9
e
°

£
ao

x
<
S
ce

Hitachi
Nissan
- Seisakusho
Ranking of ‘Companies from which one can learn’ ——>

Source: Shukan Daiyamondo [Weekly Diamond], 22 Aug 87 and Nikkei Bijinesu [Nikkei Business] 4 Jan 88

Even within Toyota, there was a sense of great crisis among those who
saw the company and its employees losing public support. In study
groups and other forums within Toyota, debates arose over how the com-
pany needed to change. From this point in time, Toyota finally began
shifting from its defensive “What’s wrong with good, cheap products?” to
a sincere consideration of how it could become a “grown-up company
capable of understanding other people’s woes.”
Toyota began to get serious about improving its corporate image. The
man at the tiller for this important shift was the company president,
Shoichiro Toyoda.
54 Inside the Mind of Toyota

Basic Principles for the 21st Century

Shoichiro Toyoda presented his Basic Toyota Principles in January 1992.

Table 2.2 shows these Basic Principles and how they reflect the Toyoda
Precepts. A slightly revised edition of the Basic Toyota Principles was
issued in 1997.

Toyots Basicbundplos (publched 1d, with slight revisions,1997) _|the Toyoda Precepts
re . Honor the language and spirit of the law and undertake open and fair (New)
corporate activities to be a trusted corporate citizen of the world.
2. Respect the culture and customs of every nation and contribute to
economic and social development through corporate activities in the Industry and
communities. patriotism
3. Dedicate ourselves to providing clean and safe products and to strive for
a liveable earth and the building of abundant societies through all our Industry and patriotism,
activities. gratitude and thanks
4. Create and develop advanced technologies in various fields, and provide
outstanding products and services that fulfill the needs of customers Research and creativity
worldwide. being ahead of the times
5. Foster a corporate culture that enhances individual creativity and
teamwork value and that is based on mutual trust and responsibility Warmth and friendship,
between labor and management. a home-like atmosphere
6. Pursue growth in harmony with the global community through
innovative management. (New)

7. Work in open dealings with business partners in research and creation to Research and
achieve stable, long-term growth and mutual benefits. creativity

With the Basic Principles of 1992, Toyota for the first time absorbed the
spirit of the Toyoda Precepts, clarifying its relationship to customers,
employees, business associates and other stakeholders, and expressing a
clear awareness of the company as a corporate citizen of the world. The
Basic Principles subsequently led to the formulation of a long-term
vision, a medium- and long-term business plan, and long- and short-
term corporate policies.
January 1992, the same month the Basic Principles were published, also
saw the publication of a Toyota Action Plan for Global Environment,
commonly known as the Toyota Global Earth Charter. Toyota began con-
crete action in February 1993, when it published The Toyota
Environ-
mental Action Plan, specifying more concretely how envir
onmental
policy would be reflected in company activities. The Toyota Global
Earth
Charter was revised in April 2000 and a third Environmental
Action Plan
was published for the years between 2001 and 2005. Toyota’s
homepage
The Toyota Paradigm 55

on the Internet records the plan in detail over five pages, giving specifics
and agendas for such items as safety measures, a system of interventions,
and internal structures and roles. Although one may question whether
such openness is a good idea, the information provides a glimpse of the
extent of Toyota’s seriousness and confidence.
In fact, the rapid movement from the publication of the Basic Princi-
ples in 1992 to Toyota’s safety and environmental initiatives has been
impressive. The unveiling (in December 1997) of the Prius, the world’s
first hybrid passenger car (combining a gasoline engine and an electric
motor) was the culmination of a project launched in 1992. Selling at the
unprofitable price of ¥2.5 million per vehicle, the Prius symbolized Toy-
ota’s engagement with environmental issues and marked a break with the
company’s insistence on producing only cars that make money. To con-
sumers, it imparted the strong message that Toyota was ahead of the curve
in the environmental field. Toyota added a hybrid version of the Estima
minivan in June 2001; in August of that year, a hybrid version of the
Crown was also introduced. Fujio Cho, the president of Toyota,
announced a plan to increase production of hybrid vehicles tenfold to
300,000 units in 2005.
Programs to recycle scrapped vehicles also advanced. In 1999, Toyota
achieved a vehicle recycling rate of 88 percent, the highest level in the
world. In Europe, with its progressive recycling regulations, the recycling
rate for scrapped vehicles is expected to rise to 95 percent by 2015. Toyota
announced its plans to attain that goal ten years earlier, in 2005.
Environmental policies are moving forward rapidly as well. In April
1998, Toyota’s Design and Development Division became the first among
domestic manufacturers to achieve ISO 14000 status for environmental
management. In 1999, Toyota became the first carmaker to receive ISO
14000 certification for all its plants. At the same time, the company
demanded ISO 14000 certification of all its suppliers.
In the Year 2000 Environmental Management Survey published in the
Nikkei Sangyo Shimbun on December 5, 2000, Toyota had jumped from
twenty-first place the previous year to fourth place. Ricoh was in first
place, Japan IBM was second, and Canon was third, but when one con-
siders that the industrial waste produced by such office equipment man-
ufacturers is both miniscule and simpler in composition compared with
the waste produced by automobile makers, Toyota’s fourth-place ranking
is extraordinary. Beginning with Nippon Denso, which jumped from
eighty-ninth place to fifth place, there were seven major Toyota suppliers
within the top 50 companies. Environmental protection had clearly
become a paradigm for Toyota and its affiliates.
56 Inside the Mind of Toyota

The year 1996 saw the formulation of Toyota’s Principles for Social
Contribution Activities:
1. In accordance with the basic themes of promoting research and creati-
vity and building an affluent society, we will actively develop activities
that contribute to society.
2. We will endeavor to foster an organizational ethos that allows each and
every employee to carry out independent activities as an individual citizen.

The company launched these activities in 1998 by establishing a dedi-

cated department and a Committee on Social Contribution Activities
headed by the president and chief executive officer. These late 20th-
century developments in company policies announced Toyota’s intention
to live as a citizen of the earth in the 21st century.

Perspectives on Work
Toyota’s management philosophy includes views of work that are
expressed neither in the company’s management principles nor in its
policies. Several of these merit a closer look.

Business Goals and Business Sense

The majority of people who look for jobs at automobile companies
choose to do so for the simple reason that they like cars. Even if they rise
in the organization and become managers, they may remain in the cate-
gory of car buffs. As Figure 0.2 shows, groups of skilled craftsmen
throughout the organization are composed of people enticed by the prod-
uct but who never grow as company employees.
In Toyota's case, the organization was founded with the intent to, as the
Toyoda Precepts put it, “contribute to Japanese society through manufac-
turing.’ Historically, the automobile was selected as the most appropriate
means to accomplish this. Consequently, new employees who enter the
company for the simple reason that they like cars will eventually be influ-
enced by Toyota’s founding principles and will become aware that auto-
mobiles are a means to achieving the real purpose of contributing to
Japanese society. It is not difficult to imagine that a vast difference sepa-
rates the business results of a group of people who come together merely
because they like cars and a group of people with an ideological commit-
ment to contributing to society.
Shuichiro Honda was an automobile enthusiast all his life. But Honda’s
business was entrusted entirely to Takeo Fujisawa, and it was Fujisawa’s
The Toyota Paradigm 57

instructions that were followed in all matters relating to business. For Fuji-
sawa, not surprisingly, automobiles were a means to achieve business ends.
In 1955, the Japanese Ministry of International Trade and Industry
(MITI) came up with the idea of building a national car that would sell
for $1,000. At the time, Toyota was selling its Crown for $3,300 to $3,600,
and a price of $1,000 seemed out of the question. Eiji Toyoda, however,
recognized that there was merit in MITT’s idea. He justified immediate
development plans by explaining, “Kiichiro built this company to make
cars that ordinary people would use. We can’t ignore an idea that had
been with the company since its founding.” After six years of unswerving
commitment to the project, Toyota offered the first Publica for sale for
$1,055 in 1961. Six years later, in May 1967, the price was lowered to $997
and the goal was finally achieved.
Nissan Motor considered the idea of a popular car to be premature and
so hesitated before implementing MITI’s concept. Its version of the
$1,000 vehicle, the Sunny, was introduced in April of 1966, five years after
the Toyota Publica went on the market at $1,055.
The Publica was judged to be too plain and didn’t sell very well, but its
five-year lead over Nissan gave Toyota a decisive edge in improving its
sales network. Forthrightly facing the challenge of a popular, inexpensive
vehicle, moreover, became the driving force that gave birth to cost plan-
ning, Toyota’s revolutionary cost-management method (see Chapter 3).
Toyota also learned that, at least when it came to high-ticket goods such
as automobiles, Japanese consumers preferred deluxe models to standard
models. All these lessons were applied with the unveiling (in October
1966) of the first-generation Corolla, a model that marked the definitive
divergence of the fortunes of Toyota and Nissan.
The Publica could not have been developed without a clear business
sense. Eiji recalled that the most valuable benefit of all was the satisfaction
of having done a job worth doing.
Either at the time of a company’s founding or during the early stages of
its growth, a point arrives at which its employees have to see products as
instruments of the business. From early on, managers have to imbue the
organization with the sense that the business goal is to contribute to soci-
ety and that products are a means to that end.

Perceptions of Competitors and Allies

Both leaders and ordinary employees in the Toyota camp will tell you that
the target is GM. And they were saying this even back in the days when
GM considered Toyota to be little more than “trash.”
58 Inside the Mind of Toyota

In his book, Building People and Products the Toyota Way,’ Yoshihito
Wakamatsu of Toyota OB recalls being asked by a Toyota director in 1963
to prepare a balance sheet comparing GM and Toyota costs. “In terms of
sales at the time,” he writes, “GM was 60 times larger than Toyota. Even if
we knew the cost gap between two such dissimilar companies, I won-
dered, what was the point?”
Kiichiro Toyoda had the advanced automobile-producing nations of
Europe and North America in his competitive sights from the very found-
ing of Toyota, and he availed himself of every occasion to make the entire
company understand that the big American and European carmakers were
the competition. Hearing top executives tell of their grandiose dreams and
their romantic ambitions is what led all employees to say that GM was the
target. This premise of having a grand competitor was behind Kiichiro’s
hitting on the idea of just-in-time, Taiichi Ohno’s work on the Toyota Pro-
duction System, and Eiji Toyoda’s commitment to building Toyota’s solid
business foundation by introducing TQC. It also induced all Toyota
employees to rush excitedly toward the goal. Today, GM is within reach.
After the war, when feudal squabbling dominated the Japanese market
for two-wheeled vehicles, Honda proclaimed itself the best in the world. It
set its sights on winning the Isle of Man Race and finally became number
one. Many readers no doubt still remember the front-page photographs
and articles celebrating Honda’s victory in the Isle of Man Race. One Honda
manager at the time considered Honda’s Shizuoka city plant’s claim to
world championship to be perilously close to bragging, but the world
champion mentality later led Honda to achieve the best fuel efficiency in
the world. This news, too, leapt to the front pages of newspapers. These
brilliant achievements excited all of Japan and sent Honda surging ahead.
In Japan’s period of rapid economic growth, the country’s number two
automaker, Nissan, settled on Toyota as its competition. For a while,
Mazda, one of the automotive companies in the running for third place,
set the goal of becoming a “clear number three.” The result? Honda
swallowed Nissan, and Mazda was overtaken by Honda and Mitsubishi.
Nissan and Mazda had set goals they thought they could just reach with a
little bit more effort. This mindset was an illusion, and they were taken
over by stronger competitors.
There is a hardheaded rule of business to be learned from all of this. No
matter how closea firm is to being “trash? it should set its sights on com-
peting with the biggest and best companies in the world. Defeatism
spreads through an organization the minute it assumes that underdog
challengers will be swept away by the champion—and with defeatism, one
way or another, comes an eventual need to withdraw from the market.
The Toyota Paradigm 59

Firms that aspire to become world champions have a unique perception

of their allies as well. At first glance, the Toyota group appears to consist of
client/supplier relationships that are extremely cold and almost excessively
stern. But suppliers sense that they are built on a well-intentioned motiva-
tion for mutual success, so that even the harshest demands rarely cause
resentment or hostility. Shogo Tsuru, the former chairman of Nippon Oil
Seal, has commented that “Toyota has two faces. It is a stern father and a
compassionate mother.”
Toyota’s vendors and customers invariably recall having been trained by
Toyota. Init, a company charged with creating the homepage for Gazoo,
Toyota's e-retailing venture, underwent roughly three months of special
training on multi-skilling, leveling, standardization, and techniques
for building quality into processes. As a result, Init reduced its fees from
¥1.6 million for a 160-hour job to a half-million yen for a 50-hour job. A
company already possessing a high level of technical expertise, Init
absorbed the efficiencies of the Toyota Production System and now con-
tinues to enjoy rapid growth in both sales and profits. Yasuhiro Hayami,
Init’s president, recalls that “it didn’t matter whether the product was auto-
motive or digital. We had the muda-elimination (waste) mindset beaten
into us.”
While Toyota continues to set exacting goals, it sends people out to pro-
vide guidance on improving quality, cost and productivity, and to share its
knowledge. The result is that streamlining continues and profits rise for
Toyota suppliers. Customers are pleased, and gratitude toward Toyota pro-
duces a kind of centripetal force. This arrangement has enormous advan-
tages for Toyota. Being able to grasp the true state of the workplaces of
parts makers and sales and logistics companies allows Toyota to accumu-
late valuable knowledge needed to reduce manufacturing costs.
With buyers eager to buy parts at the lowest prices possible and sellers
always wanting to sell for the highest prices possible, suppliers and their
customers often try to outfox one another. On the other hand, when com-
panies and their vendors work together to lower costs and improve prof-
its, the entire car becomes a more competitive product, and sales allow
both sides to prosper. Companies with the desire to succeed need to work
out positive and concrete policies that foster diligence and trust between
them and their suppliers.

Attitudes Toward Work

For many decades now, Toyota has continued to organize independent

study groups‘ to conduct kaizen, or improvement, activities. Certainly,
60 Inside the Mind of Toyota

these activities do receive a certain amount of human and financial assis-

tance from the company, but an examination of the activities suggests that
the Toyota employee’s attitude toward work is one of “group research
into work.”
The Toyota Technology Group and the Toyota Management Study
Group are representative examples of independent study entities. Because
of the tremendous influence it has had over Toyota management for many
decades, the historical activities of the Toyota Management Study Group,
in particular, should not be overlooked.
Toyota Motor—A History of the First Twenty Years (1958) describes the
Toyota Management Study Group as follows:

Doing a job well calls for unremitting study and effort. Persuaded of
this fact, like-minded managers and workers independently organized
a Toyota Management Reading Group (later called a study group) on
February 7, 1955. At the beginning, participants read management-
related journals and hosted lectures and studies and discussions in
order to learn about various issues relating to modern management.
Currently there are 200 members. The group subscribes to such jour-
nals as Manejimento [Management], Jimu to Keiei [Business and
Management], Kojo Kanri [Factory Management], Manajimento
Gaido [Management Guide] and Kigyo Kaikei [Corporate Finance],
and the company helps out with part of the expenses. Early in 1957,
group members formed a reading circle to study Office Management
and Control by Professor George R. Terry, an American authority on
office management. Later, in March 1958, the group began publishing
the quarterly journal Toyota Management. In this way, members
worked to improve their management skills by studying together and
by learning from one another.

The Toyota company history may point to the importance of the Toy-
ota Management Study Group, but outsiders are unaware of the group’s
existence. Toyota Management became a monthly journal soon after its
inception and is still published today.
Toyota Management is not generally circulated, but it is widely distrib-
uted among Toyota’s customers, suppliers, and dealers. The author of this
work had an opportunity to see the journal some ten years ago and was
amazed at the scope and extent of the study group’s activities.
It is surprising enough to realize that independent study group activities
have been maintained for nearly half a century. What is even more astonis
h-
ing is the comprehensiveness of the journal, Toyota Management. Its
50 to 60
The Toyota Paradigm _ 611

pages brim with management studies, survey results, articles, descriptions of

new management techniques, roundtable discussions, lecture reports, occa-
sional essays, literature from abroad, reports of translations of foreign doc-
uments, summaries of speeches from inside and outside the company,
sales and production data for a variety of companies, reader’s pages, and
even space for thumbnail book notices. Naturally enough, the principal
content consists of management studies, articles, and descriptions of new
management techniques, all very comprehensive and of high quality.
To cite an example, new management technique descriptions and lec-
ture reports from the 1960s include the following titles:
* Industrial dynamism
* Investment and production
* How to assess and evaluate educational needs
* Recent design theories and their applications
* New planning and management techniques
* Cost management
* The Monte Carlo Method applied to capital investment planning

Even the brief book notices, which include insights by the likes of Peter
Drucker, are written in a style that allows readers to absorb the essence of
the books without reading them. No space is wasted.
Thus, at a time when the expressions “business management” and
“management technologies” were not even current in Japan and when
companies were concentrating on improving proprietary technologies,
Toyota, through its independent study group activities, was surveying and
researching progressive business management techniques and dissemi-
nating them throughout its organization.
Masao Yamamoto, a company director (later executive vice president)
and the originator of Toyota’s management study groups, makes the fol-
lowing observation in the preface to the March 1958 inaugural issue of
Toyota Management.

Recognizing that significant recent issues in industry involve technolog-

ical innovation and modern management, the Toyota Technology
Group addressed the subject of technological innovation and the
Toyota Management Study Group squarely took on the problem of
modern management methods. In doing so, they advanced the modern-
ization of Toyota management and both became influential internal
study organs. In the three years since the founding of the Toyota Man-
agement Study Group, the board of directors has been run following the
recommendations of the group, and the efforts of the group have, in
62 Inside the Mind of Toyota

both tangible and intangible ways, spilled into the boardroom like a
breath of fresh air. There is no denying that the group has served to
steer us in new directions.

The observations of members of the Toyota Management Study Group

are also worth including here (the quotes are excerpted from Toyota Man-
agement’s special 40th Anniversary Issue, December 1995, Vol. 38):
“T still clearly recall Taizo Ishida, the president at the time, telling us
jokingly that if we young people knew so much about management, we
could take over his job for him.”
“Three issues preoccupied me as we moved ahead with the activities
of the Toyota Management Study Group: first, that we root ourselves in
macroeconomic views, second, that we relate our work to regional,
national and world society, and third, that we take steps to be ahead of
the times.”
“In those days, the Toyota Management Study Group would actively
give advice directly relating to the business. On many occasions, sugges-
tions from special editions of the Toyota Management Study Group’s
journal were actually implemented in the business.”
The orientation of Toyota Management shifted over the years. In the
TQC era of the 1960s, the journal reported many studies, surveys, devel-
opments, improvements, and implementations on such topics as quality
control, cost management, office and information management, person-
nel and labor management, plant management, and computer systems
management. The vitality of solid management research activities seen in
submissions from that period is almost overwhelming.
In the 1980s, perhaps influenced by the free and easy culture of the old
sales organization after the merger of Toyota Motor and Toyota Motor
Sales, research papers submitted to the journal centered around new
questions, for example, “Is it all right for Toyota to be greedy forever?” or
“What stance should the new Toyota adopt in order to break free of the
old Toyota?”
In the 1990s, studies and debates in the journal were preoccupied with
addressing 21st-century issues, including how to be a global company,
rebuilding relationships with suppliers, ecology studies, studies on the
information society, the role of women in the company, and Hiroshi
Okuda’s theory of corporate morality. These writings hastened Toyota’s
reinvention of itself as a “beloved” company.
In the May 1988 issue of Toyota Management, a corporate organization
study group, composed of six members drawn primarily from the Devel-
opment and Technical departments, published a major thirty-page essay
The Toyota Paradigm 63

under the title “Creating a New Corporate Organization.”® The authors

argued that the Toyota organization, having matured and become alarge
corporation, was falling prey to a Gresham’s Law of managerial behavior,
in other words, that urgency was taking precedence over importance.
They pointed out that big company disease, which stifles the flowering of
individual ability, was creeping through Toyota. They went on to analyze
the lessons to be learnt from the past—i.e., Henry Ford’s system, Alfred
Sloan’s system of business divisions at GM, and Japanese management of
the 1980s—and proposed a new paradigm for Toyota. Achieving it, they
determined, would require an organizational revolution in development
(the weak spot of Japanese management and historically the slowest area
to reform), and they proposed the creation of an organizational entity
they called an Ultimate Development Department (Kyukyoku no Kai-
hatsu Bumon). Structurally, this entity was basically the same as the
Development Centers that Toyota implemented in September 1992 in
what was billed as the greatest organizational reform since the company
was founded.
In his book, On Organizational Reform at Toyota’ (1990), Kozo Nishida
tells the story of these proceedings:

Nineteen eighty-four saw the launching within Toyota of a 100-member

“Personnel Systems Study Group.” And between May and June of
1985, I lectured on the theme of solutions to current organizational
and personnel issues. As an organization grows in size, it loses its
institutional vitality and develops what has been called big company
disease: bureaucratization, symptoms of institutional Gresham’s Law
and declining morale. I argued that the solution requires a steady
transformation into a creative organization, and that organizational
clustering [okukurika] and flattening were important steps in that
process. One can’t tell how much influence this argument had on Toy-
ota’s later institutional reforms, but the changes I advocated seem to
have taken place.

Kozo Nishida’s lectures were most likely sponsored by a branch of the

Toyota Management Study Group. From the late 80s to the beginning of
the 1990s, this sort of independent study group activity seems to have
prompted a string of reforms in organizational culture. Among these
were the sanzuki campaign to address people using the neutral suffix
~san rather than their official company titles, the three stamp campaign
to reduce the number of stamps needed for the approval of decisions,
and organizational flattening. The study group activity also seems to be
64 ~—_ Inside the Mind of Toyota

connected to the historic Development Center reform implemented in

1992 (i.e., the limiting of responsibilities and the clustering of work for
particular vehicle types). We will discuss the Development Center system
later, but as we see from these examples, there can be little doubt that the
activities of the Toyota Management Study Group brought fresh air into
the executive suite for nearly half a century.
The Toyota Management Study Group consisted of 70 people at its
inception in 1955, but by the mid-1990s that number had grown to
16,000. As an interesting contrast, an annual subscription for Toyota Man-
agement cost ¥600 (or ¥50 per issue) in 1958, but the price has not
changed since then.
Eiji Toyoda, then senior managing director, was the chairman of the Toy-
ota Management Study Group at the time the journal Toyota Management
was founded. Even as Eiji moved up through the ranks to become executive
vice president, president, and chairman, he remained chairman of the study
group for nearly 30 years. In every January issue, he contributed a New
Year's message in which he outlined his expectations for the study group
commensurate with the management environment of the time.
All the same, the Toyota Management Study Group’s activities have
come catastrophically near collapse on several occasions in the course of
the entity’s long history, and the group has faced the possibility of sus-
pension or disbanding. However, it has survived until the present day,
probably because of Toyota executive management’s unequivocal support.
Another independent study group, the Toyota Technology Group, was
centered in the engineering division and focused on technological issues.
Founded in 1948, it has since published the quarterly Toyota Technology.’
In 1991, Toyota Technology was recast as the semiannual Toyota Technical
Review. Formed so that members could learn from one another and pol-
ish their technical skills, the Technology Group’s principal activities
include research presentations, skills forums, technology festivals
such as
Idea Olympics, meeting proceedings, technology companions, and the
publication of pamphlets on automobile technology. Pamphlets pub-
lished by the group include Automotive Facts, An Automobile Glossary,
Production Facts, Car Electronics, and Automobiles and Data
Processing.
Large companies that have similar study groups are probably not
very
numerous. And firms that have been running such groups actively
for a
half-century are certainly rare. If one reflects on the research on
work, the
bold and frank initiatives transcending horizontal and vertic
al bound-
aries, and the free and open discussions that characterize them, it
is easy
to conclude that these study groups are an important source of
vitality for
Toyota Motor as a whole.
The Toyota Paradigm 65

Perspectives on People
A View of Human Beings
Some people have the impression that Toyota management conceives of
humans as cogs in a machine whose primary aim is always production. In
fact, there are numerous books that have criticized Toyota for its inhu-
manity. In a typical example, Masaki Saruta offers this criticism in his
book, Labor Management in the Toyota System:

The superior suppleness and flexibility of Toyota’s production system

are due to the fact that all systems are built to give priority to produc-
tion, that—from hiring, working hours and the wage system to human
relations and even voting behavior—everything subordinates human
beings who can be manipulated at will.

Here, however, it is important to counter with Toyota’s basic philoso-

phy regarding people:
“Respect for human beings means not having people engage in waste-
ful work or jobs. That elevates the value of human beings and in turn con-
stitutes respect for them”
Toyota’s philosophy has been defended by Yoshito Wakamatsu
and Tetsuo Kondo in their book, Building People and Products the Toy-
ota Way:”°

There seem to be people for whom the name Toyota Production System
conjures up an image of inhumanity, but this 1s a mistake. The essence
of the Toyota Production System is that each individual employee 1s
given the opportunity to find problems in his own way of working, to
solve them and to make improvements, and that employees work as one
to build a better company. This organizational culture is the most
important key to adopting the Toyota Production System and making
it work.

Jack Welch of General Electric attached great importance to people and

through Work-out and Six Sigma activities tapped their creativity to raise
their sense of participating in management. He tells this story in the com-
~ pany’s 1989 Annual Report:

I want GE to be the kind of company whose employees hurry to work

every morning because they want to try out things they’ve been think-
ing about the night before. And when employees go home, rather than
66 Inside the Mind of Toyota

forgetting what happened at work that day, Id like them to tell their
families about it. When the whistle blows at the end of the day, I hope
workers will be surprised that they haven’t noticed the time go by;
I hope the plant becomes a place where people will question why the
whistle is needed at the end of the workday in the first place. And I hope
that employees will improve their jobs every day. I hope that by organ-
izing their experiences they make their own lives richer and, by doing
so, that they make their company into the best one on earth. This is a
corporate culture with no boundaries: open, participative, and excit-
ing. And you can see it in new companies that are reaping one success
after another.

Welch has said that Japan (and by Japan, he means primarily Toyota)
served as a business school for GE. He hints at this when he refers to “new
companies that are reaping one success after another” and “a
corporate culture with no [national or other] boundaries.” From GE’s
perspective, Toyota is a new company.
Since most of us take it for granted that American and European work-
ers do not take work home, it is surprising to see this idea openly
expressed in a Western company’s public relations magazine. At the same
time, Welch’s words suggest that we have entered an era in which such a
notion has become essential to improving corporate performance.
Mochio Umeda, the president of Muse Associates, describes Japanese
corporate culture as follows (excerpted from “The Magic C-Grade Nature
of Japanese Companies,’ February 12, 2001. Nikkei Business):"

For many years, we have been raised in a work environment in which

the company functions not simply as a place for work, but as a place for
living and even playing. Playing through work is truly enjoyable. Noth-
ing can replace the joy we feel when the work goes well and when work
and play come together in the “simulated family” ofpeople whose faces
we see every day. This was the “salaryman” culture of Japan after the
war. Companies in the United States are nothing more or less than
places to work and there is a growing trend toward stockholder man-
agement and speed management. Companies like this may get good
results, but they are lonely places. From the vantage point of anyone
who has ever experienced the enjoyment of working at a Japanese com-
pany, the sense that something is missing in Western corporate culture
is acute. At the same time, Japanese companies probably pay too high
a price for sustaining this enjoyment.
The Toyota Paradigm _ 67

Even if companies that view people the way Toyota or GE do are the
only ones that can grow in the 21st century, that doesn’t mean we should
forever feel nostalgia for Japan’s salaryman culture to the point where we
sacrifice work and life. In trying to learn from Toyota and create new par-
adigms, perhaps the greatest challenge will be the ability to accept Toyota’s
view of people.
Toyota employees come in contact with Toyota’s corporate view of
people from the time they enter the company, so they are naturally accus-
tomed to it. By changing our values, we, too, should be able to accustom
ourselves to it. But to do so, we truly need a paradigm shift.

Approaches to Developing People

Toyota managers often wrap up their talks with references to “building
people.”

“Production is the starting point for creating value and creating civi-
lization. Without production there is no technological progress. Pro-
duction always takes place by virtue of people and their accumulated
know-how. Unless you nurture people, therefore, you can’t even begin
working.” (Eiji Toyoda)

“IT is ultimately nothing more than a tool. We must not forget that its
effectiveness rests on the foundation constituted by production. Devel-
oping engineers and technicians is crucial to expanding production. As
we communicate the importance of production to the younger genera-
tion, we also need to take a new look at what forms education should
take.” (Hiroshi Okuda)

We may think that all of this is obvious and that we don’t need to hear
it. But the “people building” here seems to differ in nuance from what we
usually have in mind. When we talk about “building people,’ we generally
mean developing their technical knowledge and abilities. But Hiroshi
Okuda and Eiji Toyoda were talking about building enthusiasm for the
work. Where motivation exists, technical knowledge and skills will follow.
Abraham Maslow, the psychologist famous for his five-step hierarchy
of needs, explains this another way: “People will rarely come to grips with
programs imposed upon them ina situation where there is no sense of
crisis. But they will enter the fray willingly if they themselves have con-
tributed to creating the program.”
68 Inside the Mind of Toyota

This seems to be Toyota’s approach to developing (or motivating)

people.
We often hear the following view about developing people: “You can
lead a horse to water, but you can’t make him drink. It’s the individual
who decides whether he wants to develop his abilities or not.”
This is a frequent excuse for not educating people. It amounts to say-
ing, “We won't teach anyone who doesn’t ask to be taught.”
Toyota’s approach is to make the horse want to drink by making it clear
to him that he'll die of thirst if he doesn’t. The idea is constantly to draw
out the motivation in people.
The education provided to new employees, for example, can have an
enormous impact in their lives at a company. In Toyota’s case, general
technical employees are given two months of factory training in the first
year and three months of sales training in the second year after hiring.
The reason for the sales training in the second year is that it gives employ-
ees a sense of the direct connection between their jobs and the sales floor.
At Toyota, it is important to drawalifetime of motivation from people by
taking them away from their usual jobs at the high point of their second
year of employment and having them experience the cutthroat environ-
ment of sales.
Another motivational technique may be found in Toyota leadership’s
constant talk of crisis. The prime motive force supporting Toyota’s pros-
perity in the 20th century was a sense of crisis in the company and an
insatiable drive to reduce costs.
Toyota uses such methods to build “creative tension” within the com-
pany. By minimizing the number of employees who merely rent their
physical labor and who mentally draw a line around their work lives,
Toyota has become a “kaizen organization,” striving constantly for
improvement.
An economist once observed that “managers use human psychology to
raise morale,” and Toyota takes a psychological approach to nurturing
individuals and the organization.

Perspectives on Things

Perspectives on Information
In Chapter 1, we recounted how Shotaro Kamiya, the president of
Toyota
Motor Sales, told Iwao Imazu in December 1956 that Toyota had
no cen-
tral location for collecting and analyzing information for the compa
ny as
a whole; he wanted to establish a department that could
understand the
The Toyota Paradigm 69

big picture. We explained that this was the genesis of Toyota’s Information
Strategy Department and the basis for later Toyota excellence.
Toyota Motor chairman Hiroshi Okuda, who came out of the old Toy-
ota Motor Sales organization and who was probably trained directly by
Kamiya, elaborated:

Toyota’s information network is informal but impressive. For example,

Toyota people excel at gathering information about, say, who’s visiting
the U.S. from which company and what sorts ofpeople they’re meeting
with. They just don’t talk about it. Because they have this information,
they know really fast what steps they have to take to avoid running into
trouble. (“How Far Does Toyota’s Competence Go?” April 10, 2000,
Nikkei Business.)

Okuda’s observation that Toyota’s network is informal means that, in

addition to an organization of information-gathering experts within the
company, all departments in the entire company collect information as
part of their everyday activities.
In the spring of 2000, Toyota’s own information network caused con-
siderable agitation when it picked up the news that GM was considering
investing capital in Honda. Quite apart from the question of whether the
information was accurate, it is just one example of the power of Toyota’s
information network.
Toyota is a company that happily publishes internal information of the sort
that most companies treat as secret. But as Okuda suggests, not many details
leak out about Toyota’s information-gathering or information-management
methods or systems. Toyota is known as generous when it comes to gather-
ing and transmitting information, but the range of information gathered
and transmitted is strictly managed. This is hardly surprising, since Toyota
leadership believes that “information determines a company’s destiny.”
In recent years, a typical method of using information has been popu-
larized as “benchmarking,” a procedure for designating another company
or organization as a criterion for comparison and then studying its “best
practices.” Tadaaki Jagawa, the president of Hino Motors (and former
executive vice president of Toyota Motor) has noted that “Toyota's motive
power probably lies in its eternal benchmarking.” Toyota’s long history of
establishing its own best methods after scrutinizing Ford and General
Motors stretches back to the days of Kiichiro Toyoda. Since that time, Toy-
ota has grown by devoting extraordinary energy to the collection and
management of information and then, using benchmarking procedures,
by setting specific goals and working out its own best practices.
70 Inside the Mind of Toyota

Perspectives on Knowledge and Documentation

We have explained how Toyota systematically manages the genes repre-

senting the wisdom of earlier generations, how it enhances them, and how
the mediating DNA of documentation is required to transmit them. It
does not matter whether the documents are on paper or in computer
media. Valuing documents makes it possible to operate a system of
knowledge management in the organization.
In the context of knowledge management, there are three kinds of
knowledge: (1) unprocessed data; (2) information and records that have
been processed once and express significance and value; and (3) rules
(standards) derived from multiple sources of information and records
that answer the question “if this, then that.” In Chapter 1, we discussed in
some detail the philosophy and values behind Toyota’s standards; here we
will examine Toyota’s information and records.
In the article entitled, “Another Look at Toyota’s Integrated Product
Development,” published in the July-August 1998 issue of the Harvard
Business Review, Diamond Harvard Business," Durward K. Sobek, II et al.
explain Toyota’s effective use of documents as an efficient means of
exchanging information:

When a problem arises that requires coordination between depart-

ments, the standard procedure is to put together reports including a
“problem-solving plan,” “important information” and a “recom-
mendation,’ and then distribute these documents to the depart-
ments concerned. The recipients are expected to read and study the
documents and to provide feedback by telephone or individual
meetings or sometimes by compiling reports based on other docu-
ments. One or two iterations of this will result in a considerable vol-
ume of information going back and forth and the participants will
reach consensus on most points. Only when insurmountable dis-
agreements occur will meetings be held to resolve the problem
through direct dialogue. .
Problem-solving meetings of this sort are prepared for by making
sure that all participants understand the important issues before-
hand and that everyone has considered proposals and countermea-
sures that approach the problem based on the same data. Since such
meetings focus on resolving a specific problem, time isn’t wasted
obtaining a consensus among the participants. This contrasts with
many U.S. companies in which attendees show up at meetings with-
out having done any preparation at all. The first half of the meeting
The Toyota Paradigm 71

is wasted in defining the problem and then participants scramble to

deal with a problem they’ve hardly had time to think about.
Toyota frequently relies on written communication as the first
step in problem-solving, but the company avoids the massive paper-
work that afflicts bureaucracies. In most cases, engineers will write
clear, concise reports on one side of a sheet of A3 paper. These
reports are all written in the same format so that everyone under-
stands where to find the problem definition, the engineer and
department handling it, the results of analysis and proposals for res-
olution. A standard format also allows engineers to check whether
all important aspects are covered.
Toyota has built a culture, moreover, in which reading this type of
report is seen to be valuable and indispensable for the smooth con-
duct of work.

The reference here to a standard format on A3 paper means a stan-

dardized form on which questions of “why?” and “because” need to be
written in designated places by the engineer.
Toyota also excels at meticulous recordkeeping. In examining Toyota
documents that trace the progress of the company in detail from the
prewar period on, including the period in which Toyota Motor was sep-
arate from Toyota Motor Sales, one can find a number of appended
records and minutes. A close look at such documents reveals past
approaches toward the business and what steps need to be taken in the
future. Toyota’s records are not simply records. They can be viewed
almost as chronicles because they provide a summary of the past and
lessons for the future.
The most chronicle-like of all company records is the official company
history. In most companies, such official histories are treated like PR mag-
azines or commemorative works rather than as historical records. Their
principal purpose seems to be to introduce the marvelous company prod-
ucts or the company’s factories or equipment. Toyota's official company
histories are clearly histories of the company’s management. Obviously,
they also include descriptions of the company’s products and factories
and equipment. For the most part, however, they are devoted to improve-
ments and innovations in management, such as the streamlining of trans-
port operations, the evolution of quality control, supplier assessments,
and systems to promote creativity, the supervision improvement system,
the mechanization of administrative work, and the promotion of TQC.
The emphasis, in other words, is on recording how the company has rev-
olutionized the way it works.
72 Inside the Mind of Toyota

As one of the editors of Toyota’s company history explains: “Former

British Prime Minister Winston Churchill is said to have kept his own
published World War IJ memoirs at his side as he contemplated the future
of Britain and governed the country. As editors of the company history,
we would be overjoyed if we were able to put together a history that will
be used the way Churchill used his memoirs.”
Many Toyota scholars, including this author, have sought the secrets of
Toyota’s growth by collecting and analyzing quantities of information con-
tained in Toyota Motor’s official 20-, 30-, 40- and 50-year histories and in
the 30-year history of Toyota Motor Sales. It is likely that this is not the fate
the editors of those histories had in mind for their works; nonetheless,
there is much we can learn from these histories and from other records.
Toyota's system of Failure Reports, developed from an observation
made by Eiji Toyoda, is perhaps an example of how such records can be
systematically used as one element of knowledge:

In our company we tell people to take bold action because it’s all right
if they fail. If they do fail, we have them write a report on the failure.
We have to do this because if they just remember it without writing it
down, then the lesson doesn’t get transmitted to the next generation.
There used to be a time when somebody new would have some tri-
umphant approach to something and then end up repeating a mistake
that had been made ten years earlier.

Eyi said this in the early 1960s and Toyota staff subsequently took up the
idea and created a system of Failure Reports. (See the section on cost planning
in Chapter 3.) To prevent the repetition of even small errors, everyone is
expected to write up the reasons for the failure and what steps can be taken to
avoid it. Even if the players change, a recurrence of the same error can be pre-
vented by checking these records. The accumulation of these improvements
forms the basis for what are known as the world’s most reliable cars, (see
Chapter 5). With increasing interest in recent years directed at actively evalu-
ating the “value of failure,’ we see that Toyota was 40 years ahead of the trend.

PATTERNS OF THINKING
Perspectives
Toyota people have the habit of looking at things from two perspectives:
“muda elimination” and “foresight.” In this section, we will examine how
these perspectives are expressed and how they are acquired.
The Toyota Paradigm 73

Muda Elimination

Toyota management is centered on the elimination of muda, or waste.

But Toyota’s perspective on waste is substantially different from the per-
spective adopted by the rest of us. By now it is common knowledge that
inventory is waste, but when we actually see inventory on the shopfloor,
we tend to see either something necessary for production to run
smoothly or else evidence of healthy manufacturing. Even for produc-
tion line problems, as long as we build systems to fix the problems after
the fact, we consider it more efficient on the whole not to stop the line.
We are willing to make things we don’t want because it would be a waste
to stop our machines.
Toyota does not view inventory in terms of productivity but in terms
of cash flow. Nearsightedness is rejected even when it comes to produc-
tivity on the line, which is measured by the long-term losses incurred
when problems recur. Even in the case of equipment, Toyota sees greater
evil in cash flow impediments resulting from overproduction than it does
in lower operating rates. In other words, Toyota looks at things from a
company management perspective rather than a shopfloor productivity
perspective. Although this explanation may make intellectual sense,
developing the reflexes to respond to conditions in this way is extremely
difficult. At Toyota, these reflexes are nothing new.
Taiichi Ohno said, “There is a secret to the shopfloor just as there is a
secret to a magic trick. Let me tell you what it is. To get rid of muda you
have to cultivate the ability to see muda. And you have to think about how
to get rid of the muda you've seen. You just repeat this—always, every-
where, tirelessly and relentlessly.”
Later, Eiji Toyoda commented, “Problems are rolling all around in
front of your eyes. Whether you pick them up and treat them as problems
is a matter of habit. If you have the habit, then you can do whatever you
have a mind to. You don’t have to look for them. You just pick them up.”
These were not merely words. When Kiichiro Toyoda ordered Tatichi
Ohno to catch up to Western automobile companies in three years, Ohno
looked for ways to do just that—every hour of every day. When Kiichiro
told Eiji to deal with product problems fast, day in and day out, Eiji ana-
lyzed and took action to eliminate the causes of problems. For both men,
this experience honed an ability to “see through to the essence.” It culti-
vated in them a muda-elimination perspective and the instinct for finding
and dealing with latent problems.
Although formal knowledge—standards, procedures and documenta-
tion—may be important to improving business outcomes, in the end, it
74 Inside the Mind of Toyota

is tacit knowledge—human instincts—that is decisive. This is why organ-

izations need systems and mechanisms to hone the instincts of individu-
als. At Toyota, a paradigm of “cultivating the ability to see muda”
permeates the entire organization.

Foresight
Toyota is said to manage from a sense of crisis. But as Hiroshi Okuda said,
“A sense of crisis comes ultimately from being able to see what’s up
ahead.” And “seeing what’s up ahead” means “trying to see what’s up
ahead,’ in other words, an anticipatory perspective or foresight.
Representative examples of this anticipatory perspective are Eiji Toy-
oda’s “decision-making that grasps major historical trends” and Shoichiro
Toyoda’s “21st-century shift in the nature of Toyota.”
Eiji’s foresight is shown to perfection in the construction of the
Motomachi plant on the eve of the motorization boom of the 1960s. At a
time when Japan’s total monthly production of passenger vehicles was
around 7,000, the Motomachi plant, completed in September 1959, had a
production capacity of 5,000 passenger vehicles per month. Furthermore,
the plant had the potential for expansion, up to 10,000 cars per month.
The Motomachi plant by itself was large enough to have satisfied the total
demand for the country, and executives from other companies who were
invited to the plant’s opening ceremonies could not hide their astonish-
ment. Dealers, on the other hand, feared they would be unable to handle
cars produced at the plant that would be forced on them. Yet the plant was
running at capacity by the end of 1959, and the Motomachi plant became
a major factor in Toyota’s gaining a decisive lead over Nissan. Everyone
praised Eiji’s foresight.
Early in 1990, Eiji gave voice to a sense of crisis when he questioned
whether it was really a good idea to keep making cars the conventional
way and whether Toyota could, in fact, survive in the 21st century with-
out major developmental changes. His observations triggered the start of
Toyota’s “Project G” (for “global”), which led to the development of the
Prius hybrid car. The Prius was originally scheduled to come out in 1998,
but Hiroshi Okuda’s remark that Toyota “risked being in second place
again” spurred the company to be the first in the world to bring such a
vehicle to market, and the Prius was introduced in December 1997,
Honda people were furious because they were convinced they should
have been first with a hybrid vehicle. It wasn’t until 1999 that Honda
introduced the world’s second hybrid car, the Insight. Being second does
not create the same stir as being first, and the media barely noticed. Prius
The Toyota Paradigm 75

was an epoch-making event for Toyota. Ranked as number two at the end
of the 20th century, the company jumped into first place. And this was the
result of Eiji Toyoda’s and Hiroshi Okuda’s “sense of crisis*—in other
words, their foresight.
Shoichiro Toyoda’s foresight is revealed by the shift in the nature of
Toyota that he implemented during the period between the second half
of the 1980s and the arrival of a new company president in 1992. Exam-
ples of his relevant activities include the flattening of the organization in
1989, the sanzuki campaign to address everyone the same way regardless
of rank, and the reform of the seniority wage system. Other examples are
the NOW (New Office Way) 21 campaign to improve office work in 1991
and the unprecedented shift to an engineering Development Center sys-
tem. The move to a Development Center system, in particular, is seen to
be the greatest organizational reform since the founding of the company.
It was decisive in determining how Toyota would build products in the
21st century.
The Development Center system is extremely interesting and holds
many lessons from a management perspective. We can summarize its
implementation asaseries of steps:
* In 1989, with dissatisfaction intensifying among the young engineers
who constitute the backbone of engineering functions, engineering
began to take a hard new look at things.
- After a year of study in which outside consultants were brought in to
provide objectivity, it was observed that the functions of both chief engi-
neers and junior engineers had been falling.
- A draft of measures specifying what to do in order to move things in the
desired direction began early in 1991. A year of study resulted in a pro-
posal that, without increasing the burden on individual engineers, said
engineering jurisdiction over models should be “clustered” and that the
range of models for which engineers would be responsible should be
limited. For example, the plan proposed that, within a limited group of
models, an engineer who may have specialized for decades in designing
wiper systems, would now be responsible for designing entire upper
bodies—including wiper systems. The plan combined job enrichment
and job enlargement, with outstanding results.
* In 1992, came the decision-making phase of the reorganization. A
“Future Program for the Twenty-first Century” (FP 21) organizing com-
mittee was established, with the senior managing director and managing
director at the time (Kinbara and Wada) appointed as chairman and vice
chairman, respectively. After the decision had been made to introduce a
Vehicle Development Center system, Chairman Kinbara made provi-
sional appointments of the center’s director and of the department heads
716 Inside the Mind of Toyota

within each center. They formed several individual teams that started
working on the specifics.
* General Motors, in order to promote the use of common components
and to reduce costs, had carried out organizational reforms that concen-
trated design and engineering teams into three groups: luxury cars, mid-
size cars, and compact cars. Toyota studied the history of these reforms
and concluded that GM had not achieved the desired results because of
an inadequate understanding (before the fact) of the needed changes.
Based on this judgment, Toyota began to explain to the relevant depart-
ments the aims and nature of the reorganization—several months before
implementing the changes.
* Having gone through this process, Toyota waited until the time was ripe
and launched the Development Center system on September 25, 1992.
Four centers were established: Development Center 1 for mid-size and
large front-engine, rear-wheel-drive vehicles (FR); Development Center
2 for small front-engine, front-wheel-drive vehicles (FF); Development
Center 3 for commercial vehicles and RVs; and Development Center 4,
responsible for developing basic common technologies, such as drive
trains and electronics.

“Mainstays of Technical Department, Young Engineers Vaguely Dissat-

isfied,” published in the May 1988 issue of Toyota Management, is a clear
example of the sort of study group reports that were noted above in the
discussion of attitudes toward work. Taking this into account, we see that
the impetus for the shift to the Center system goes back to 1984 inde-
pendent study group activities focusing on institutional reforms (see the
section on Shoichiro Toyoda in Chapter 1).
This is a summary of what we can learn, directly and indirectly, about
the transition to the Development Center system. What we would like to
focus on here is the New Development System Concept that Toyota’s TQC
Promotion Office presented at the Toyota Group’s Quality Management
Conference in November of 1991, about a year before the transition to the
Development Center system. The New Development System Concept is
shown in Figure 2.2.
What we might call the “traditional pattern” of development involved
a 48-month process in which each model went through planning, design,
trials and evaluation, and preproduction steps before arriving at volume
production. In the “future pattern,” a separate development and planning
process prepares engines and major components (q, B, y, etc.) that have
the potential for common use among models. Then, considerable time is
spared planning the development of new models, while the time required
for design, trials, evaluation, and preproduction is minimized. The con-
The Toyota Paradigm 77

Development

lead time trials/evaluation}

preproductio

i (by major
Model X component) future pattern
7 |FRI EY
: development
planning design __
Development
lead time design
trials/evaluation
preproduction

Source: Transformative TQC,' Nikkei Sangyo Shimbun, 23 March 1992

cept of the future pattern aims to simultaneously enhance product

strength and shorten development lead time.
In the Development Centers as actually implemented, core technolo-
gies for common automobile components (a, f, y, etc.) are assigned to
particular centers, and a horizontal linking mechanism (called the
“mother” system) is built into the network. This “mother system” covers
Design Center 1, which handles body and chassis engineering; Design
Center 4 (engine and electronics technologies); the Design Division
(design policy), which doesn’t belong to any of the centers; and the Engi-
neering Management Division (development systems and development
resource management). The “mother” division has authority over per-
sonnel in the other centers, and the role of other functions becomes that
of spreading practices laterally.
The facts we have just examined suggest that the reasons for shifting to
the center system can be summed up in terms of three farsighted aims
developed with an eye to the 21st century:
1. Energize engineers who had developed tunnel vision because of extreme
specialization.
2. Restore the proper role to chief engineers whose jobs had been reduced
to negotiating with too many people and scraping together components
to build cars.
78 Inside the Mind of Toyota

3. Establish a new development system that enhances product strength

and shortens lead-time.

Toyota made the move to a Development Center system in September

1992. In March 1993, August 1993, and January 1995, Nissan, Mazda, and
Ford, respectively, reorganized their own development organizations on
the Center model. Each of these companies adapted its organization to its
own scale and none built a system exactly like Toyota’s. Fundamentally,
however, they were the same.
Toyota had begun concrete investigations of the Center idea in 1984,
and it took a full eight years for the reorganization to come to fruition.
The other companies spent about a year in their transitions, and it is no
surprise that things did not go smoothly for all of them. Mazda, whose
organization was too small for a Center system, went back to the tradi-
tional arrangement of departments by product function in June 1996.
Ford launched a system with five centers, but the view within the
company was that five was too many; in 1998, Ford pared back to three
centers. At Toyota, the story was rather different. A system for electronics
engineering development had been of some concern when the company
shifted to a Center system in 1992; but after nine years, in January 2001,
Toyota succeeded in launching a fifth development center.
Toyota's formal deliberations about a Center system began in 1989, ata
time when the Japanese automobile industry was riding high and Toyota’s
own sales and business profits were soaring. Why consider a change
involving fundamental revolution at such a time? As Kinbara, who
was
then senior managing director of engineering, said, “If we had waited
until problems came to the surface, then it would have been too late. We
had to solve them before that.”
Switching to the Center system was a revolutionary shift in the history
of the company. Reorganizing at a time when there seemed to be no
prob-
lems was clearly a reform made with a view to the 21st century. The
effect
of the change was a reported 30 percent reduction in developmen
t costs
and 10 percent savings in resources. The RAV4, the first vehicl
e born after
the change to the Center system, was built with 40 percent of its
compo-
nents coming from other models.
But the aims of the Center system were not limited to this
sort of effect
on. resources. They also showed up in the product itself. Toyot
a’s intro-
duction of the Prius anda series of other “un-Toyota-like” produ
cts in the
late 1990s can also be traced to the Center system. Truly, these
are exam-
ples of Shoichiro Toyoda’s foresight.
The Toyota Paradigm 79

Habits of Thinking
Systems Thinking
The just-in-time concept advocated by Kiichiro Toyoda is a good example
of Toyota’s systems thinking. Just-in-time does not treat each process step
as independent, but, rather, sees an entire system of linked processes.
Construing things in this way naturally leads to a broad view, to a view
oriented toward the future, to a view that seeks optimization of the whole.
Within the company, the kanban system was worked out as a result of
such thinking. Outside the company, keiretsu, or group relationships,
were established with suppliers.
From the end of the 1980s to the early 1990s, the keiretsu of Japanese
industry were criticized in the United States and the West as being
closed systems. Toyota faced such criticism head on, declared that it
would become an “open” company, and inserted the words “open and
fair” into the Basic Principles it promulgated in 1992. Not long after-
wards, the United States worked out the concept of Supply Chain Man-
agement, its own version of keiretsu, and sang the praises of the
economic prosperity of the 1990s. American and European countries,
which are said to be strong at systems thinking, learned systems think-
ing from Toyota’s ketretsu.
Meanwhile, the culture at Toyota, as we saw in Chapter 1, was one of
“reaching out.”” An upstream process would establish a “baton passing
zone” with the next process, without a rigid boundary, and work would
flow from one process step to the next. This has allowed Toyota plants to
achieve a high degree of line balance by absorbing unevenness between new
and experienced workers and between the loads of different process steps.
Because work proceeds along overlapping processes in the develop-
ment stage, upstream process work can be adjusted by anticipating the
needs of the next process, and the next process can prepare itself for a
changeover as it anticipates the impact a new product will have on its own
operations. The chief engineer resolves differences of opinion between
upstream and downstream processes. This is the system that Product
Development Performance authors Takahiro Fujimoto and Kim Clark,
along with other automobile industry researchers, later dubbed “concur-
rent engineering” or “synchronized simultaneous engineering.”
By rejecting absolute delineations among departments, this system
allowed people to share in work beyond their traditional jurisdictions and
made that sharing one of the company’s strengths. The idea of unclear
boundaries may be incompatible with the concept of a system, but Toyota
has always been ready to overturn traditional concepts when the need arises.
80 Inside the Mind of Toyota

Getting at Essences
Toyota employees don’t perform their work aimlessly. Their perspective
on work drives them to ask why their own jobs and activities exist in the
first place. Their goal is to get at the essence. A typical example of this is
Taiichi Ohno’s admonition not to confuse work and movement. (In
Japanese, these two words are written with characters differing only in
that the former includes a graphic element meaning “person”). Work,
Ohno said, refers to production activities (such as actually processing or
assembling things). Movement, on the other hand, is mere motion (such
as transport or changeovers) that generates no added value. One of the
focal points of the Toyota Production System is its insistence on removing
motion from processes.
This culture of looking for essences also lives in administrative depart-
ments, which are prone to slip into bureaucratization. Titles of articles
published in Toyota Management (e.g., “What is Administrative Work?”
or “What is the Point of Compiling House Organs and Company Histo-
ries?” or “Why do we Manage Documents?”) reveal administrative work-
ers taking a hard look at the meaning (or essence) of their own jobs.
At its most fundamental, reengineering asks why we do something in
the first place rather than asking how we can do it faster or better or at a
lower cost. Reengineering, which was fashionable several years ago, is said
not to be an idea imported from Japan, but it is a strategy that has been
utilized at Toyota for many years. The habit that Toyota employees have
of looking for the essence of everything consistently allows them to create
things one or two steps ahead of other companies.

An Emphasis on Theory
Toyota management emphasizes theory. A clear example of this is Toyota’s
product strategy.
Toyota’s leaders—whether Eiji Toyoda, Shoichiro Toyoda, Hiroshi
Okuda or Fujio Cho—all advocated the theory of an annual production
of 200,000 to 300,000 of their basic models, which constitutes the eco-
nomic production unit, the minimum needed to reap the benefits of the
mass production effect.
What we are calling a basic model here refers to cars of a single type or
platform, a production line or car line.
In 1956, G. Maxcy and A. Silberston published their “automobile pro-
duction cost curve,” commonly known as the Maxcy-Silberston
curve,
shown in Figure 2.3.
The Toyota Paradigm 81

2
pes
fe
©>
—_,
wt
.a
3°
Vv
fe
So
t
3
3
°
2
a

0
0 100 200 300 400 500 600 700 800 900 1000

Annual production volume (1,000 vehicles)

Source: Curve by G. Maxcy & A. Silberston, 1956

At Toyota, the Maxcy-Silberston curve (elsewhere a nearly forgotten

theory) continues to hold sway. The fact that Toyota leaders all say the
same thing means that this theory is at work throughout the company. A
company so thoroughly permeated by a given theory avoids a good deal
of guesswork.
In his 1997 book, The Evolution of a Production System,” Takahiro Fuji-
moto analyzes the Toyota experience of simultaneous model diversifica-
tion and production growth during the period between the dawning of
motorization in 1960 and the collapse of the economic bubble in 1992.
According to Fujimoto, the number of passenger vehicles Toyota pro-
duced (a) and the number of basic Toyota models (estimated platforms:
b) both increased steadily from 1960 to 1992, while the number of pas-
senger vehicles per model (c = a + b) reached aceiling of just over 200,000
after 1970. Toyota’s progress can be summarized as follows:

1960s
In order to achieve recognition in the market, Toyota concentrated its
energies on a limited number of models based on the ability of Taiichi
Ohno’s Toyota Production System to deliver high productivity even under
high-diversity, low-volume conditions.
82 Inside the Mind of Toyota

1970s
Without increasing the number of basic models, Toyota strove (through
marketing and other means) to reach a production volume of 200,000
vehicles per model. We can assume that, at least peripherally, the first and
second oil crises had some influence in shaping this policy.

1980s and Afterward

Toyota gave birth to a new model each time production of a basic model
reached 200,000 vehicles.
The introduction of belt-conveyor flow operations and relentless stan-
dardization allowed Henry Ford to produce two million Model T cars per
year and to lower the price of automobiles through the mass production
effect. GM’s Alfred Sloan established a strategy of “wide variation? but at
its peak around 1955, GM was producing 1.5 million Chevrolets per year.
If we view these events in terms of the Maxcy-Silberston curve, however,
the mass production effect is reduced once the level of 200,000 to 300,000
vehicles for each basic model is reached.
Working within the parameters of the Maxcy-Silberston curve, Toyota
did not seek a mass production effect once the production of a basic
model reached 200,000 to 300,000 vehicles per year. Toyota judged that it
would be more profitable to increase overall sales by bringing out new
models and developing and absorbing new customers. Toyota, in other
words, combined the Maxcy-Silberston curve and Alfred Sloan’s “wide
variation” strategy to create a new strategy and introduced a new model
whenever an existing model’s production reached 200,000 to 300,000
vehicles per year. By combining Ford’s strategy of mass production using
conveyor systems and Sloan’s strategy of “wide variation” to match every
customer's pocketbook, the company developed a third strategy, one
which “generated new models the Toyota way.”
It is not only to automobiles that Toyota has applied the Maxcy-Silber-
ston curve. Soon after the Maxcy-Silberston curve was published, Toyota
began using the theory for components as well, investigating what the
curve would look like for each component and how many parts would
constitute an economic production unit. It then established component
production plans and common component plans aimed at achieving
those economic production units (see the section on Cost Planning
in
Chapter 3).
The Toyota Paradigm 83

FORMS OF BEHAVIOR
Decision Making
Initiative from Above
Decision making in Japanese companies is generally a bottom-up affair,
in which employees on the shopfloor make suggestions that are then scru-
tinized and decided on by senior executives. With enough effort, that
approach may have been sufficient for an era of economic growth, but the
21st century has brought with it the need to shift the role of planning
functions upward. The reality is, however, that many companies are still
operating by “team management.” This may be because they cannot find
a suitable new management style, but one suspects that there is also a fun-
damental unwillingness to replace a style that managers find comfortable.
At Toyota, from the executive staff on up, the higher your position, the
more you lead in making decisions and taking action.
In addition to regular board meetings and meetings of executive vice
presidents, Toyota’s decision-making organization includes individual
departmental conferences to promote management functions, general
meetings to promote line operations, and a project organization encom-
passing regular committee meetings for the purpose of problem solving
(see Chapter 3, Figure 3.3). A company executive presides over each of
these groups and, depending on the matter under consideration, the pres-
ident or executive vice presidents may take personal charge of activities.
This is not management in which senior managers comment on sugges-
tions coming from below; instead, they take personal responsibility for
thinking, deciding, and acting. Strong managerial leadership is exerted in
all forums for resolving issues and solving problems. Whenever a serious
issue arises, executives are at the center of investigating the matter.
All companies have executive training programs, but these can be spo-
radic and diffuse. Toyota conducts regular and intensive training based on
real management issues. Normally, an executive training session is held at
the end of August each year.
In a keynote address given in 1998 at the 67th Quality Control Sympo-
sium sponsored by the Union of Japanese Scientists and Engineers,
Shoichiro Toyoda presented some interesting insights on management:

I'd like to point out three fundamental principles of TQM that need
to permeate an organization—that need to breathe—in order to build
a culture, which dares to change or to draw out the creativity in people.
The first is an emphasis on the customer, the second is constant
84 Inside the Mind of Toyota

improvement [kaizen], and the third is the participation of all employ-

ees. A lot of managers preach total participation, but don’t participate
themselves. Total participation is fundamental for breaking through
sectionalism and the tendency to sub-optimize.

At Toyota, total participation means that executives participate by leading.

Toyota executives have a good grasp of what is going on. They share an
understanding even of fairly technical matters. This is true of the Maxcy-
Silberston curve we introduced above and also of the following technical
remarks by company leaders:

“Presses and the bodies that come out of the presses give us a prime
example of the mass production effect. In the automobile industry, con-
sequently, press plants will always have a difficult time matching the
competition unless they attain a standard size.” (Eiji Toyoda, senior
advisor, 1996)

“We need to limit variety of unit parts we make (with dies), but it does-
nt matter how many of those are in sets, or assembled components, as
long as the customer demands them. Currently we are avoiding costs by
using a (computerized automation) system for sets.” (Akihiro Wada,
then senior managing director, 1993)

The fact that Toyota executives share this sort of theoretical knowledge
suggests that they are all exposed to lectures given by experts both inside
and outside the company. Within Toyota, in fact, study sessions aimed at
executives are held so that leaders thoroughly understand planning pro-
posals based on new concepts. While the phrase, “study sessions aimed at
executives” makes for odd grammar, it means, essentially, that providing
a forum for executives to acquire specialized and theoretical knowledge is
the rule whenever planning proposals are made.
Busy executives in most companies steer clear of new concepts or the-
oretical knowledge that would take much time to understand. Some feel
that learning things from subordinates is beneath their dignity in the first
place and would find the idea of “study sessions aimed at executives”
unpalatable.
Debate among Toyota executives is lively, so much so that Toyota board
meeting discussions sometimes resemble brawls. Through heated
debate,
everyone tries to figure out what is best for the company. Taizo Ishida
has
commented on this phenomenon:
The Toyota Paradigm 85

They call Shotaro Kamiya the “god of sales” and often I would be com-
pletely dominated by him. But making and selling are jobs with their
own distinct premises and legitimate characteristics. When it came to
work, I would say what I wanted to say and sometimes we even got into
fierce fights. But fights involve an intensely close relationship and in
that sense we were a perfect combination.

Eiji Toyoda entrusted production management to Taiichi Ohno, pro-

duction engineering to Masaaki Noguchi, and accounting to Masaya
Hanai. There were fierce arguments among the three, and it was Eiji who
settled them.
A description of Toyota board meetings appears in The Toyota Secret by
Fujio Wakayama and Tadaaki Sugiyama (1977):"

Kyube Tanaka, a Mitsui Bank advisor and Toyota Motor auditor, was
utterly impressed. According to Tanaka, Toyota Motor board meetings
would run for a minimum of two hours without any chitchat. One
would hardly have thought this was the most profitable company in
Japan. Everybody focused on how costs could be lowered further and
whether there was any waste (muda) in systems or materials. From
around a square table, opinions flew from all directions.

Tanaka himself has made similar observations about these meetings:

Toyota board meetings are more animated than any I’ve ever
known. ... Toyota is one of Japan’s top companies, butitfeels like one
that’s in the prime of its youth. ... Toyota is utterly without pride. It’s
always talking about trying harder and harder. Even now, when
exports are booming, they’re working out actions based on the impor-
tance of domestic demand. They change their minds fast, too. We meet
once a month, andI feel rejuvenated every time. ... On the other hand,
it completely exhausts me.

In 1977, Toshihiko Yamashita became the new president of Matsushita

Electric Industrial Company, one of Japan’s premier corporations, at the
age of 57. On that occasion, there was much talk of this exceptional pro-
motion, such as company founder Konosuke Matsushita's decisiveness,
and how, from a position as a director with no title, Yamashita leaped
twenty-five senior board members to the presidency to deal with details.
One newspaper carried the following remark by Matsushita: “Yamashita’s
86 Inside the Mind of Toyota

an interesting guy. He keeps speaking up from the back of the room in

executive meetings.”
A young Toyota executive reacted to this story by saying that it made
him think that Matsushita must be behind the times. “If the new presi-
dent speaking out from the back of the room is so noteworthy,” he said,
“then does that mean that other executives aren't talking very much? In
Toyota meetings, we’ve long thought it normal for people to speak up
even from the back of the room.”
Osamu Katayama, in The Toyota Method (1998),” cites Kingo Saito,
the director of the Toyota Commemorative Museum of Industry and
Technology:

(Hiroshi) Okuda doesn’t just make decisions fast; he makes them

almost instantaneously. His in box is nearly always empty. He comes to
decisions while the documents are being prepared, so when he gets
them, all he has to do is sign. On the other hand, fierce debates and
incredibly intense communications go on during the process leading up
to a decision. For us, telephone calls at home or in the car are a daily
occurrence. We grab people at lunch to talk. There are no assigned seats
at the tables, so we sit next to the person we need to and sometimes
argue while we're eating our special of the day or our curry. This image
is the true face of Toyota, although maybe it’s not well understood.

Historical events have influenced the activism and leadership of Toyota

managers. When the company was founded in 1937, Kiichiro wrote the
following description into the job duties he defined. (Excerpted from Toy-
ota Motor—A History of the First 30 Years, 1967. Emphasis mine):

Department manager
The department manager supervises the entirety of the department and
does so to the utmost of his ability and without omission. Consequently,
the department manager deals with important issues directly and takes
personal charge of matters not attended to by subsection managers and
subsection chiefs. He strives to ensure that all work assigned to his depart-
ment is performed without omission.

Subsection manager
The subsection manager is in charge of the subsection as a whole and, in
addition to striving to ensure that subsection work is performed without
omission, handles important subsection matters personally. He performs
the work of subsection chiefs and subsection staff when they are not pres-
The Toyota Paradigm 87

ent and accepts as his personal responsibility any matters that may arise
that do not fall within the jurisdiction of either subsection chiefs or sub-
section staff.
It is rare to find formal job descriptions that lay out so explicitly what
leadership by example really means. The requirement that one lead by
example has been formalized at Toyota ever since the company’s found-
ing, and those who have not complied have not been promoted.
Eyi Toyoda is said to have accorded special emphasis to the responsibili-
ties of executives. When Eiji was president, he gave a speech to all his sec-
tion heads in which he made the following point (excerpted from the
January 1996 Special 40th Anniversary Issue of Toyota Management, vol. 39):

I want you to use your own heads. And I want you actively to train your
people on how to think for themselves. You may all be in charge of
departments and sections in this company, but it won’t do for you
merely to leave to your subordinates everything that needs thinking.
I’m not saying that you should think about all problems by yourselves.
But, at the least, I do want you to be trained to think about and resolve
major issues on your own.

A quote from the director named to the chairmanship of the 1977

Parts Commonization Committee (Sachio Fukushima, 1978. Toyota
Parts Commonization from the Parts Planning Stage, supplemental edition
of the journal JE) further illustrates this commitment to Toyota’s man-
agement style:

The purpose of this committee is not limited to minimizing, through

standardization and commonization, the number of parts existing at
this particular point in time. It is to establish a system for managing the
work of design so that true standardization and commonization can be
accomplished on a permanent basis.
We need to satisfy the demands of performance and durability on
the basis of fundamental design principles of lightness, compactness,
low cost and commonization.
Commonization should proceed from current designs. Our basic
approach should be to select from what we currently have. But we
should also be willing to use new designs if they result in parts that are
lighter or more compact.

Words such as these can come only from one accustomed to develop-
ing solutions and policies.
88 Inside the Mind of Toyota

The administrator of the Commonization Committee responded:

These [i.e., the Chairman’s] words were harsh ones, but they gave us a
point of reference for making decisions in situations where we were
grappling with conflicting demands. This was enormously helpful in
giving designers a positive understanding of parts commonization
activities.

It is obvious that Toyota’s monolithic management has taken shape on

a foundation resting on this paradigm of leadership initiative.

Plodding Along
Toyota leadership takes a long time to make up its mind, but when it does,
its ability to execute is amazing. We have already seen how it took eight
years of deliberations before the Development Center system was imple-
mented. Another typical example is the 1997 launch of the Prius hybrid
car that had its roots in the G21 Project of 1991.
Before implementing a new project, Toyota works its way through
deliberations of purpose, means, risk equivalence, and consensus build-
ing, and all this inevitably takes time. Toyota’s “anticipatory perspec-
tive” brings the company to such deliberations much sooner than is
ordinarily the case, and the time spent in exhaustive discussions up
front allows a quick response to unforeseen issues that may emerge later.
The result is that Toyota achieves its goals much faster than most com-
panies do. In his Inventor’s Journal, Sakichi Toyoda uses the expression
“plodding” (chin’utsu chidon) to describe the preliminary deliberations
required to anticipate what will come next. Toyota has taken Sakichi’s
teaching to heart.
Smaller companies often like to talk about taking “quick, small steps,” or
the value of “quick and dirty” actions. Such a view calls for caution,
though. Even when a manager emphasizes the need for quick action as a
warning against endless deliberation, skimping on preliminary investiga-
tions or skipping preparatory discussions results in treating the symptoms
rather than the disease. Managers are cheered byaflurry of activity on the
shopfloor because it is easy to see and it can raise equipment-operating
rates. Hope eventually fades when positive business results fail to appear
over the long run.
In The Fifth Discipline: The Art and Practice of the Learning Organiza-
tion, Peter M. Senge urges us to “beware of treating the symptoms. A solu-
tion that deals with only symptoms, rather than root causes, is often
The Toyota Paradigm 89

profitable only for a short period of time. “Over the long run,’ he warns,
“the same problem crops up again and there will be more calls to treat the
symptoms. At the same time, there is the danger that one’s ability to elim-
inate the root causes of problems will deteriorate. . ..”
“Plodding” has the same meaning as “careful and slow,’ the opposite of
“quick and dirty, Cultivating institutional foresight means that “plod-
ding” actually gets you to deliberations more quickly, and preparatory
discussions mean that the overall time is shorter. The result is a “careful
and quick” approach that speeds the attainment of goals.
“Quick and dirty” and “quick, small steps” never result in “careful
and fast.”

Follow-up, Yokoten
Follow-up and yokoten (lateral propagation) are distinctive features of
Toyota’s organizational culture.
To meet someone from Toyota is to be astonished by his habit of fol-
lowing up. You may expect that he has been kind enough to forget about
some troublesome matter that once came up, but he is sure to ask about
it. When you tell him that, for some reason or other, you want to pretend
that it never happened, he will have the good grace to drop the subject.
We are not talking about absolute rules of behavior. As long as the reason
is clear, then the Toyota employee has the flexibility not to make an issue
of your having stopped in midstream. The purpose is to monitor what is
happening and to reject vagueness. The idea that Toyota is “monitoring”
must make a lot of industrial ears burn.
Activities that followed after Toyota won the TQC and Deming Prize
introduced in the 1960s are typical examples of Toyota follow-up. Toyota
not only spread improved practices to its suppliers and its dealerships, it
conducted rigorous training every few years for staff and for department
and section heads, a practice that continues to this day (see Chapter 3).
This example takes follow-up beyond the level of monitoring and raises it
to the level of active building on what has been learned.
Koichiro Tokuoka, a vice president of Fleishman-Hillard Japan who
used to work at Nissan Motor, had this to say (Nikkei Information Strat-
egy, June 2001: Lectures on Nurturing Change Leaders): “The difference
between Toyota, which built solid production and sales systems, and Nis-
san, which failed to do so and never manifested its strengths, resides in
whether or not the company put the principle of hansei, or reflection, into
practice. [This is why] Nissan never developed the organizational ability
to create change leaders.”
90 Inside the Mind of Toyota

When Tokuoka talks about reflection, he is not referring simply to ret-

rospection. He means follow-up.
Another word frequently heard at Toyota is yokoten (lateral propagation).
Around 1985, an executive at Daihatsu grumbled:

At Toyota, when a problem shows up in one type of engine, they con-

sider every way to deal with it and then make improvements (follow-
up). Up to that point, Daihatsu does the same thing. At Toyota,
though, the rule is that they take the improvement and try it out
with other engine types to see whether it is better or worse than the
current practice. If it’s not worse, then they change the design and
apply the improvement to all engine types (yokoten). Toyota points
to three benefits of this approach: (1) It enhances their image or
appeal vis-a-vis the customer; (2) they can lower costs by producing
common parts in volume; and (3) it makes things easier for service
plants. We think the idea would be good for Daihatsu, too, but we
can’t manage to keep up.

To find the origins of Toyota’s yokoten culture, we have to go back to the

1960s, when Eiji Toyoda was introducing TQC into the company. Toyota
was expanding rapidly in the midst of the motorization movement at the
time, and the company was awash in problems concerning quality, man-
power, and internal communications. Eiji brought in TQC to resolve
these problems. In the course of TQC activities, Eiji would constantly call
for laterally linked improvements. Then executive vice president of the
company, Eiji made this appeal in June of 1963 in an address to all divi-
sion and section heads at a ceremony announcing salary raises and new
appointments:

There weren’t too many managers when the company was small. We'd
see one another from time to time and we could talk to each other.
I think contacts among us were very smooth and close. The size of the
staff has ballooned recently, though, and'I think our contacts with
each other have worsened considerably. This is why I want those of
you in managerial positions to work hard at staying in touch with
people at your same level and at exchanging accurate information.
Now that we have multiple production plants, there are several
groups of people scattered throughout the company who do the same
kind of work that you do. When each plant learns something—this
includes, for example, knowledge about accidents and knowledge
about performance—I‘d like you to transmit this knowledge to the
The Toyota Paradigm 91

other plants immediately. Our main plant has done a terrific job of
increasing efficiency while the Motomachi Plant, unaware of this, has
looked at other companies’ plants and come away impressed. We don’t
make an issue of this. (January 1996. Toyota Management, Special
40th Anniversary Issue, vol. 39).

Just as Eiji’s admonition to record failures prompted the staff to set up

a system of “failure reports,” it is not difficult to imagine that his call for
improvements in lateral solidarity was transmitted to staff departments,
who then devised yokoten mechanisms.

Dynamism

Experimentation
The Tokai Research and Consulting Company, a private economic think
tank, issued a pamphlet entitled, “Companies that Win and Companies
that Lose.” The excerpt reproduced here is particularly relevant:

Here are the characteristics of winners: They are driven by the urge to
make interesting plans. They determine what tactics to adopt by look-
ing at projected business results a few months out. They find original
and ingenious ways to ensure that management policies permeate the
organization. Losers are different: They only look at the current
month’s figures and criticize people because of them. People who don't
know the shopfloor determine new plans on the basis of past actions.
Their instructions consist entirely of invoking manuals, rules and con-
formity. They delude themselves into thinking that management polt-
cies can permeate an organization by being distributed in printed
form. They only write daily business logs when it is convenient. In other
words, the difference between winners and losers boils down to the
people who are doing the managing.

“Don’t be afraid to fail,” is a phrase heard in almost all companies. But

companies in which that attitude is truly embedded in the culture are few
and far between. The reason is simple. Most companies have loser-type
managers, as described above, whose daily behavior contradicts the
meaning of “don’t be afraid to fail.”
Kaneyoshi Kusunoki, former executive vice president of Toyota Motor,
notes: “Toyota’s top managers berate people who don't try to come up
with new ideas or who don’t take up new challenges, but not people who
92 Inside the Mind of Toyota

try something and fail. The role of senior managers is said—and is per-
ceived—to be to help subordinates with new ideas or challenges and not
to criticize them. That’s what makes trial and error possible.”
According to Eiji Toyoda, “It’s fine if you fail in this company. Just don’t
shy away from taking action”
Iwao Isomura, vice chairman of Toyota Motor, has gone so far as
to declare that “success is the mother of failure and failure is the father
of success.”
Toyota suffered for a long time from its image as conservative or sec-
ond-rate when it came to doing business. In terms of technology, though,
Toyota has always been progressive. The launch of the Prius finally
brought a more accurate image of the company to the world’s attention.
Honda and Toyota share very little in the way of common culture, but
they are alike in their drive to confront challenges without fear of failure.
One might even say that Honda surpasses Toyota in this respect. Where
Toyota uses a negative expression (Don’t be afraid to fail), Honda puts it
in the affirmative: “Fail!” Senior workers and bosses at Honda tell new
employees over and over again to fail. An affirmative phrase has a much
greater impact on people than a negative one. Honda even awards an
annual Failure Prize of one million yen to the employee who has achieved
the biggest, i.e., most significant, failure. Failure will not be feared in such
an environment. Indeed, at Honda, there have been numerous employees
who have taken on what can only be considered crazy challenges. Honda
was the last entrant to the automobile business, but this aspect of its cul-
ture is said to have enabled it to achieve a rate of operating profits in
excess of Toyota’s and allow it to tread an independent path without get-
ting caught up in the global rat race.
It is easy to talk about not fearing failure or confronting challenges, but
good results can hardly be expected if efforts are haphazard. Independent
hypotheses and an experimental approach to verification are indispensa-
ble. This experimental spirit is very much encouraged at both Toyota and
Honda. It is important that managers, senior employees, and bosses urge
their subordinates to experiment once a hypothesis has been established.

Risk Taking
The willingness to take risks has features in common with a spirit
of
experimentation, but there are slight differences. By risk taking, we mean
the willingness to leap into the unknown once you have thought a prob-
lem through and still don’t know what the correct answer is. You select
one alternative from among those that are possible, and then try it.
The Toyota Paradigm 93

This willingness to take risks is exactly what Sakichi Toyoda was refer-
ring to when he talked about research and creativity and getting a jump
on the times. “Open the windows,” he said. “It’s a big world out there”
From his engineer’s perspective, Kiichiro Toyoda also wrote about the
willingness to take risks: “Japan has a lot of engineers who work at desks.
When it comes to implementation, though, they lose confidence and
haven’t got the courage of their convictions when other people criticize
them. Engineers like that can’t build cars. Success in this industry
demands engineers who have the courage and the decisiveness to imple-
ment ideas.”
In an interview with Eiji Toyoda, which appears in the 2001 book Ori-
gins of the Toyota System’ by Takahiro Fujimoto and Koichi Shimokawa,
we see further evidence of this mindset:

Question: You've been directly managing Toyota since it was

formed. What’s the most difficult decision you've had to make?
Mr. Toyoda: No decision was particularly difficult. Or maybe they
were all difficult [laughter].
Question: [ once heard from an Honorary Chairman that the deci-
sion to build the Takaoka Plant was quite a difficult one. Produc-
tion of the Publica had just begun and it was only selling about
7,000 vehicles per month at the time. The entirely new Corolla
was still in the design stage and you built the new plant to make
30,000 Corollas. It was said that was an amazing leap.
Mr. Toyoda: It was certainly a big decision. I can look relaxed about
it because things turned out well, but if they hadn’t, then we
would have gone under.
Question: That turned out to be a good decision. And that’s what
opened the gap with Nissan. ...
Mr. Toyoda: It was a tremendous risk.
Question: For Motomachi it was a big decision and then for
Takaoka it was a big success.
Mr. Toyoda: It was a risk. I must have thought about it long and
hard when I made the decision, but when it went well, I forgot all
that [laughter]. That’s why I say there were no difficult decisions.
If I had messed up, then ’'d remember.

Eiji Toyoda’s modest tone somewhat masks his true meaning: When
faced with an issue, you think about it as hard as you can and if things
work out, then you forget about it. What is clear, however, is that he was
naturally willing to take risks.
94 Inside the Mind of Toyota

A willingness to take risks is not the same as recklessness. Ultimately, it

is a choice of one of several carefully considered alternatives that is illu-
minated by one’s own personal convictions. Basically, none of the alter-
natives is going to result in a big mistake because all of them have been
thought through.
Eiji often spoke about a mathematics teacher he’d had in high school
who told him, “When you think you’re right, when you think your
answer's good, then following through can make you lord of heaven and
earth. Keep forging ahead. Stay the course. Keep going.”
This mindset, which naturally expresses itself as a willingness to take
risks, also protects against the failure that comes of being a prisoner
of success.

Endnotes
1. Shigeo Shingo was a pioneer who analyzed the Toyota Production System
from the standpoint of industrial engineering and popularized it through
numerous books, including, A Study of the Toyota Production System from
an Industrial Engineering Viewpoint (English translation published by
Productivity Press, 1989).
. yuiga dokuson.
. Toyota-shiki hitozukuri monozukuri.
. jishu kenkyukai.
. Toyota Jidosha Nijunen-shi.
. Atarashti Kigyo Sosiki no Sozo.
Toyota no Soshiki Kaikaku o Kangaeru.
WON
uh. Toyota Gijutsu.
ONDA
9. Toyota Shisutemu no Romu Kanri.
10. Toyota-shiki Hitozukuri Monozukuri.
11. Nihon kigyo ga motsu ‘C-kyu-sei’ no maryoku, Nikkei Bijinesu.
12. Sobek, II, D.K., Liker, J.K., and Ward, A.C., “Another Look at Toyota’s
Integrated Product Development,” Harvard Business Review, Vol. 76, No. 4
>
July-August, 1998; pp. 36-49. Toyota Seihin Kaihatsu o Sasaeru Soshiki
Noryoku. Daiyamondo Habado Bijinesu.
13. Seisan Shisutemu no Shinkaron.
14. Toyota no Himitsu.
15. Toyota no Hoshiki.
16. Toyota Shisutemu no Genten.
95

Toyota's System of
Management Functions

TOC AT TOYOTA
The systematic establishment and consolidation of Toyota’s management
function system began with the introduction of Total Quality Control
(TQC) in 1961. TQC activities at Toyota went beyond quality to target all
important management functions, including cost, personnel, administra-
tive work, and information. As a result, TQC at Toyota involved activities
to consolidate and facilitate all management functions at the company.
Toyota’s distinctive management system came into being while the com-
pany was competing for the Deming Application Prize, which it won in
1965. The management-system setup at this time form the foundation of
the current Toyota system. To discuss and learn from Toyota’s manage-
ment system requires that we unravel the history of TQC at Toyota. It is
no exaggeration to say that the secret of Toyota management lies in Toy-
ota’s TQC. Reading the official thirty-, forty- and sixty-year Toyota
Motor’s company histories makes this clear.
Masao Nemoto, a former senior managing director of Toyota Motor
who played an important role during the 1960s when TQC was intro-
duced and developed within the company, claims that Toyota methods
consisted of seven elements: “(1) TQC, (2) concurrent engineering
(CE), (3) the Toyota Production System (TPS), (4) human resource
development, (5) labor-management trust, (6) long-term relationships
with parts manufacturers, and (7) long-term relationships with dealer-
ships.” (Fujimoto, Takahiro and Koichi Shimokawa. 2001. Origins of the
Toyota System).' Figure 3.1 takes this fundamental assertion and gives it
a structure.
A management or business system is composed of two subsystems: a
management function system, which runs the organization, and a pro-
duction function system, which generates products. At Toyota, (1) TQC
was brought in and positioned to encompass both the management func-
tion system and the production function system.
96 Inside the Mind of Toyota

a “ A Vv «
¢ Long-term \ ; Long-term :
trelationships
3 aAS q relationships?

Relationships
based on trust OPeripheral
aan

The production function system can be further divided into a new

product development process for bringing new products to the market-
place and a more narrowly defined production process, which steadily
manufactures, ships, sells, and services products. At Toyota, the former is
carried out by (2) concurrent engineering (CE), and the latter is the focus
of the (3) Toyota Production System (TPS).
Since TQC deals with managing the quality of people, (4) human
resource development can be situated in the same region as (1) TQC. (5)
Labor unions, (6) parts manufacturers, (7) dealerships, and other organi-
zations are located in appropriate positions around the periphery of Toyota.
Nemoto does not touch on the subject, but one element of the Toyota
management system that we cannot ignore comprises the administrative
regulations (rules, prescriptions, and guidelines) discussed in Chapter 1.
Administrative regulations work as a management system connecting the
management function system with the production function system, so I
have inserted (8) work rules at the intersection of the matrix formed by
these two elements. Toyota’s administrative regulations document and
systematically formalize the tacit knowledge generated by TQC, CE, TPS,
and human resource development activities. In doing so, they form a
solid framework for the Toyota management system as a whole.
We discuss the Toyota management function system in Chapter 3 and
the production function system in Chapter 4.
Toyota's System of Management Functions 97

Please note that, in what follows, we have quoted liberally from the
Toyota Motor Corporation’s twenty-, thirty-, forty- and fifty-year histo-
ries and have not indicated the precise sources of citations from those
works. Sources for other citations have been noted.

What Is TOC?
We should begin by defining the essence of TQC. The Deming Prize
guidelines issued by the Union of Japanese Scientists and Engineers
(JUSE) give the following ten evaluation categories:
Top management leadership, vision, and strategy
TQM management system (daily management, policy deployment, etc.)
Quality assurance system
ae
a
oatManagement systems by management element (cost, delivery,
safety, etc.)
Human resource development
Information use
TQM philosophy, values
Scientific methods
Organizational strength (core technologies, speed, vitality)
SO Contribution to the achievement of company goals
ea?
a. Continuous attainment of company goals
b. Good relationships with customers, society, business connections,
and stockholders, etc.
c. Results and future plans

Because of its name, TQC tends to be construed either as a quality sys-

tem that targets only the quality function of management or else as a
management system with a quality bias. As the Deming Prize evaluation
categories show, however, TQC encompasses nearly all management
functions, from the attitudes of top management and management sys-
tems to costs, human resources, and information. These categories may
not have been defined this way when Toyota introduced TQC and when
it applied for and won the Deming Prize in the 1960s, but, considering the
subsequent course of events, we think it fair to say that Toyota embraced
TQC froma similar perspective.

How Toyota Came to Introduce TOC

In remarks he made on the occasion of a Deming Prize on-site assessment
on September 20, 1965, Eiji Toyoda explained what led Toyota to intro-
duce TQC into the company:
98 Inside the Mind of Toyota

We launched sales of the Crown, Japan’s first real passenger car, at the
beginning of 1955 and were fortunate that the market’s reaction was
very positive. The company grew rapidly after that. Various problems
showed up, too. Personnel doubled and production increased nearly
sevenfold, but quality improvements didn’t keep pace with efficiency
gains. With the increase in new employees, inadequate education, inex-
perienced and insufficiently skilled managers and poor lateral commu-
nications all became conspicuous problems. At the same time,
competition on the basis of quality was intensifying among companies
in the same line of business. For our part, we realized, first, that top
management had to make quality targets clearer and to ensure that all
employees understood them. Next, we had to build systems to enhance
functional cooperation among the various departments. On the basis of
these two realizations, we decided to expand our QC activities to the
entire company.

Toyota’s rationale for introducing TQC involved facing up to how

badly the company was doing (i.e., to its organizational and personnel
weaknesses) and then stating its problems honestly. This was the first fac-
tor in the company’s success with TQC, and it allowed Toyota to avoid
Packard’s Law, which asserts that no company can succeed when sales
growth consistently outpaces personnel growth.

Introducing TOC and Winning the Deming Prize

The following have been cited as goals or were clearly key issues in Toy-
ota’s introduction and promotion of TQC:

Purposes of Promoting TQC

1. To withstand trade liberalization and other challenging conditions by
developing a world-class Toyota, both in name and substance
2. Conduct an epoch-making reform of management
3. Enable the development and production of high-quality, low-priced
products

Critical Promotion Issues

1. Raise awareness of quality and cost through total employee participa-
tion and establish a management system by function
2. Conduct new product planning appropriate to demand trends and
smooth new product startups
3. Strengthen systems of cooperation with Toyota Motor Sales and major
vendors |
Toyota's System of Management Functions 99

Basic Principles for Activities

1. Thoroughly apply the principle of Quality First
2. Thoroughly apply the principles of building quality into the process and
of assuring subsequent processes
Raise problem awareness and promote continual kaizen
Be relentless in seeking problem causes and in preventing recurrences
Promote management based on facts and data
Ove Clarify job responsibilities, improve and standardize the conduct
of work
7. Promote management by total employee participation (policy deploy-
ment, QC circles)

Figure 3.2 shows the history from the time Toyota introduced TQC to
its winning of the Deming Prize.

Stage One (Introduction, 1961-1962)

The Quality Control Committee and its administrative office, the Quality
Control Department, played central roles in the first stage of the intro-
duction of TQC, carrying out an educational campaign to raise cost and
quality awareness and spreading QC training. At the same time, a move
was launched to reduce defects by half.
As these efforts deepened awareness of the benefits and effects of QC,
the traditional and long-rooted manufacturing shopfloor view that qual-

oN

_ Stage
2 (promotion) | Stage 3(stabilization)

Round1 Round 2 Round 3 Round4 Round5 |Round6

July

1, Introduce TQC throughout the | 1. Promote TQC. 1. Clarify manage- 1. Establish man-
company. Attain international Prepare system for ment philosophy for Sots
quality and cost standards. winning
: the Deming | each function and _ |with particular
emphasis on
Prize. complete manage- | quality assurance
2. Conduct campaign to cut ment system. and cost
. defects in half. 2. Prepare system management.
Emphasis/ for management by | 2. Raise level of
Policy function. statistical 2. Thoroughly roll
techniques. out, apply and
manage
company-wide
policies in every
department.

Smooth RT40 (Corolla) Preparation and completion of manage-

Main Reduction by half of defects
ment system, promotion of overall system,
Promotion | involving claims, mat'l shortages
Theme and rework, etc. launch including Toyota Motor Sales and suppliers
; Planning Office-->Planning C Promotion Office
Quality Control Dept. Raccaich OEE Q
100 Inside the Mind of Toyota

ity will improve if you tighten inspections began gradually to shift in the
direction of what in QC is called “building quality into the process.”
These efforts bore fruit and, for customer complaints, materials and pro-
cessing defects and rework, Toyota succeeded in reaching its initial goal
of cutting defects in half.
Over the course of three days, from July 19 through July 21, 1962, Toy-
ota conducted its first company-wide audit. This audit revealed several
problems, including insufficient understanding of the true purpose of
company policies and resulting inconsistencies among the divisional poli-
cies designed to implement them.
Almost immediately, management policies that had already been
announced were codified, and plans were made to ensure that every
employee was thoroughly cognizant of them. In early 1963, a company
policy composed of three parts—a basic policy, a long-range policy, and
an annual policy—were given to department and deputy department
heads and section chiefs. These specified guidelines for how Toyota
should proceed and what goals it should achieve; it also clarified various
measures for the purpose of meeting those goals. At the same time, the
gist of company policy was communicated and distributed to managers of
group-leader class and above, so that everyone might become thoroughly
familiar with it. The results of the audit were connected to the establish-
ment of Toyota’s Policy Deployment System, which we will discuss later.
Settling on a company policy—consisting of a basic policy, a long-
range policy and an annual policy—and then making sure that all man-
agers are thoroughly familiar with it is fundamental to managing a
company, but a surprising number of companies fail to implement such
policies systematically. Studying Toyota’s policy deployment would benefit
any firm in which basic policies, long-range policies, and annual policies
are unconnected with one another, in which the president’s annual policy
speech does not match previous company policies, whose policies for one
year are developed without taking stock of the previous year’s policies,
or
in which policies written by each division are simply stapled together.

Stage Two (Promotion, 1963-1964)

Toyota's first company-wide TQC audit had highlighted another proble
m:
that of insufficient coordination among different departments of the
com-
pany. In the second, promotion, stage, the company took a fresh look
at the
work of each department in terms of its functions and consolidated
and
secured a new system of management by function. A system map
of man-
agement by function was drawn up (see Figure 1.6), and work
flow and
Toyota's System of Management Functions 101

relational rules both within functions and among functions were examined
and consolidated. At the departmental and section levels, documents and
other materials were prepared in order to distribute and coordinate work
among various sectors according to the work flow shown on the system
map and to clarify management issues and control points for managers.
In March 1963, the old assignment of staff members to divisions was
abolished in favor of a system in which multiple staff members were given
cross-functional responsibilities (see discussion below). This was done
because, at the time of the second company-wide audit, some staff mem-
bers had become profit representatives for their functions and this was
understood to be one element that damaged divisional cooperation. At
first, this new system was taken to refer to staff meetings by function; it
later evolved into function councils.

Stage Three (Stabilization, 1964-1965)

Fukio Nakagawa, Toyota’s president and CEO, asserted that the company
was to win the Deming Prize within one year. This was the starting point
for Stage 3 activities. Relations among the various functions were consol-
idated along the two themes of quality and cost control. On the quality-
control side, painstaking work was invested into achieving the goals of
building quality into each process and of assuring quality at the next
process. This effort was underscored by the substitution of the term
“quality assurance” for “quality control.” To make sure this philosophy
penetrated the organization, Toyota standardized the items that needed to
be implemented at each post and used those standards to establish a basis
of quality assurance activities throughout the company.
On the cost-control side, Toyota focused on three areas: cost planning,
cost maintenance, and cost improvement. At the same time, it renewed
links with quality-assurance activities and took a new look at the details of
cost-control activities at each step of the process, from product planning to
sales. The results of this were summarized in formal Quality Control Rules.
In this way, a system of management by function was finally established
by the systematic interweaving of quality assurance and cost control.
Staff members involved with individual functions and administrative
offices were to play central roles in promoting quality assurance, cost
control, human resource management, administrative management, and
other functions that cut across the entire company. The development of
each sector connected to these functions, furthermore, was to be coordi-
nated and promoted through company-wide audits and other means.
102 Inside the Mind of Toyota

Toyota also put together staff training programs, QC teams, QC circles,

and other promotion units at each level, and vigorously and relentlessly
carried out what was literally QC by total participation.
In May 1965, Toyota formally announced its candidacy for the Deming
Application Prize to be awarded that same year. It submitted a quality
control status report to the Deming Prize committee on June 20 and
underwent a documentary review. A total of 74 outside evaluators subse-
quently conducted thorough on-site inspections, beginning with the
Tokyo branch office on August 25, the Motomachi plant on August 30-31,
and company headquarters on September 20-21. As a result of these
inspections, the Deming Prize committee decided at its October 11 meet-
ing to award the 1965 Deming Application Prize to Toyota.
The competion for the Deming Prize was a major operation for every-
one in the company. One observer recalled that “employees couldn’t help
but be motivated to try their hardest when they saw that staff members
were cutting down on their own sleep time in order to compete for the
prize’—evidence that the example of staff leadership energized and invig-
orated everyone to reach the goal.

Effects of Introducing TOC and Winning the Deming Prize

Then Managing Director Shoichiro Toyoda, who, as vice director of Toy-
ota’s QC Promotion Office personally led the TQC effort. He summarized
the effects of introducing TQC across the entire company in a speech
delivered on July 30, 1966, to a special executive course at the 10th Qual-
ity Control Seminar:

Effect Number 1
Product quality improved. The costs of material and processing defect
s
and per-vehicle claims declined, and in March 1963, based
on estimates
proceeding from this, we confidently led other companies in extending
our warranty period.

Effect Number 2
Our share of the domestic passenger car market grew and
exports
increased overall. This was a result of applying TQC thinking
and meth-
ods to the goals of new product planning and to new product
startups. In
addition, the system of cooperation among related sectors advan
ced, and
the time it took to achieve target production figures improved
markedly.
This allowed us to satisfy the demands of the marketplace.
Toyota's System of Management Functions 103

Effect Number 3
Costs decreased as we had planned. Quality awareness and cost con-
sciousness penetrated to every corner of the company and, asa result, the
promotion of TQC along the themes of quality and cost brought about
extremely favorable results. The company’s balance sheet improved,
and we were able to render significant service to consumers by lowering
the prices.

Other Effects
We saw considerable improvement in Toyota’s “constitution,” or basic
health. Managers learned management methods and human relations
improved markedly throughout the company. A system took shape in
which everybody, from vendors to vehicle sales, cooperated to achieve
common goals. Responsibilities and authority became clearer and forums
were created in which frank discussions could take place. Quality Assur-
ance Rules and Cost Control Rules were standardized as a result, and
management stabilized.
The following comment about the introduction of TQC, made by an
employee of the company at the time, shows how TQC was perceived by
the rank and file:

At meetings in which team members reported on the results of QC

activities, the consultant would let fly with questions about why a par-
ticular problem had been chosen or what the point was. Each time he
did that—even when somebody else was doing the presentation—I felt
that I was gradually learning what management was all about and
that I was growing day by day. I’m sure, when they heard that the
Deming Application Prize winner had been chosen, that everybody in
the company was secretly thinking that now we'd start doing real QC.
It’s true that preparing to win the Deming Prize involved a lot of
formal stuff and that we spent a lot of energy doing it. Now I *m ready
to start working on a new QC, though. In addition to taking another
look at the business, I’m looking forward to a second campaign to
develop a kind of QC that’s down-to-earth, that involves everybody
and that’s integrated with our jobs.

Activities After Winning the Deming Prize

The Toyota we know today would not exist if TQC had been a one-time
affair. Introducing TQC and winning the Deming Prize was onlya start-
104 Inside the Mind of Toyota

ing point. Toyota has been diligently continuing and expanding TQC-
related activities right up to the present. Nissan Motor won the Deming
Prize in 1960, five years before Toyota did, but a backlash after winning
turned the Deming Prize into a “graveyard for QC” Toyota, on the other
hand, made the Deming Prize into a “cradle for QC,” and has sustained its
QC efforts to the present day. Below, we look back at Toyota’s TQC activ-
ities from the award of the Deming Prize to the present.

Follow-up Activities After Winning the Prize

At the 10th Quality Control Seminar previously mentioned, Shoichiro
Toyoda described what happened after Toyota won the Deming Prize:

From the moment we put ourselves forward as candidates for the

Deming Prize, my greatest concern was how we would sustain QC
after the evaluation process was over. The objectives provided by the
Deming Prize allowed us to make rapid progress in QC, but I was
looking around to see what form the backlash would take. Things are
different now. Everybody in the company realizes that QC is a useful
and convenient tool and everyone is eager and happy to continue
doing QC.

Toyota paid close attention to the route by which QC ended up being a

QC graveyard at Nissan and took great care not to fall into the same trap.
When it was awarded the Deming Prize, it took the opportunity not only
to review TQC progress to date but also to lay out policies for promoting
TQC in the future:
1. We will promote a comprehensive QC, centered on Toyota but also
encompassing our partner companies such as vendors and dealerships.
2. We will not be bound by form, but will establish simple and effective
management systems. We will turn the management cycle rapidly, with
rigorous emphasis on check and action steps.’
3. We will conduct full and comprehensive planning and, in harmony with
the various management systems and with a long-term perspective, we
will implement swift and correct decisions.
In December 1965, with the memory of having won the Deming Prize still
very much alive, Toyota conducted its seventh company-wide audit,
checking, among other things, which company policies of the year had
been achieved and what action plans had been set up in response to the
recommendations of the Deming Prize committee. The results of this
Toyota's System of Management Functions 105

audit were reflected in a 1966 company policy statement and slogans

(“Assure Quality in All of Toyota” “Eliminate Wasted Materials and
Time”). At the same time, the company began enhancing its cooperation
with vendors on QC matters.

“Assure Quality in All of Toyota” Activities (1965—)

When Toyota won the Deming Prize, the prize committee indicated that
one pending issue was the improvement of relationships with vendors.
Toyota had known that this was one of its weak points and so, beginning
in 1966, the company began extending TQC into its supply base. It
encouraged vendors to educate themselves about TQC and to promote
TQC independently. Toyota offered assistance from the sidelines and kept
an eye on outcomes in terms of quality and costs.
Toyota also introduced an All Toyota Quality Control Conference as
part of the Seventh Annual Quality Month in November of that same
year. The first conference was held on November 25 at the Toyota Educa-
tion Center and Toyota Hall. On that day, 250 people from seventy ven-
dors, fifteen people from Toyota Motor Sales and the dealerships, and 250
people from Toyota Motor Corporation enthusiastically participated in
presentation sessions and panel discussions.
Efforts such as these bore fruit. Kanto Jidosha Kogyo applied for the
1966 Deming Application Prize and carried away the award. In 1967,
Kojima Press Industry Co., Ltd., won the Deming Application Prize in the
small- and medium-sized enterprise category.
Toyota, in other words, did not relax after winning the Deming Prize.
Both internally and outside the company, it continued to expand and
apply TQC.

Second Deming Prize Evaluation (1970)

The motorization of Japan proceeded at a swift pace in the 1960s, and
in the space of a few short years, Toyota grew rapidly in the number of
vehicles produced, number of employees, and production equipment.
The philosophy and methods of TQC aided greatly in this brisk expan-
sion, but the number of people unfamiliar with TQC thinking grew as
well. For this reason, Toyota decided to disseminate TQC philosophy and
methods. The company adopted a policy of TQC promotion aimed at a
second Deming Prize evaluation in 1970.
At about this time, the Union of Japanese Scientists and Engineers
(JUSE) decided to award a Japan Quality Control Prize to companies
106 Inside the Mind of Toyota

that a second Deming Prize assessment identified as having achieved a

high level of excellence. A group from the Deming Prize committee vis-
ited Toyota in September of 1970 and conducted a vigorous assessment
over two days. As a result, Toyota achieved recognition for outstanding
results in the maintenance and improvement of quality through com-
pany-wide activities, and JUSE decided to award the company the first
Japan Quality Control Prize.

Establishment of the Toyota Quality Control Prize and Activities to

Expand Practices to Suppliers (1969-)
Toyota had promoted TQC activities among its suppliers ever since win-
ning the Deming Prize. To further increase the penetration of TQC prac-
tices among its vendors, the company instituted a Toyota Quality Control
Prize in 1969 with a view to motivating suppliers by providing them with
an attainable goal.
Shoichi Saito headed the evaluation committee that carried out the
first prize assessment at Kojima Press Industry Co. in June 1970. Subse-
quent assessments were conducted at companies such as Futaba Indus-
tries, MTP Chemical, and Taiheiyo Kogyo, all of which were awarded the
Excellence Prize that same year.
In the face of imminent capital liberalization, suppliers were highly
motivated to rationalize their businesses. Recall problems also abounded,
and quality-assurance concerns were growing more serious. This system
proved to be a tremendous stimulus for many companies.

Deepening TQC with Programs to Enhance Management Skills

(1979-1980)
In early 1978, Toyota began reviewing the way it was managing its board
meetings and strengthening the management of function-specific coun-
cils for quality, cost and engineering, etc. One of the high-level issues to
be dealt with was a perceived need to improve management skills. Com-
pany leaders felt that improvements in the efficiency of managerial and
indirect functions were lagging behind rationalization of the manufactur-
ing shopfloor and that there were more and more managers who had not
experienced the assessments connected with the Deming Prize or
the
Japan Quality Control Prize. A pledge to “improve managerial capabil
ities
and polish proprietary technologies” was added to the company policy
for
1979, and a two-year management skills improvement progra
m was
developed over the course of two years.
Toyota’s System of Management Functions 107

The following year, Toyota’s 1980 policy statement urged each division
to make its work more efficient by establishing an entirely new system for
conducting business. The engineering division had, in the past, been
exempt from this sort of activity and some were of the opinion that man-
agers and supervisory personnel in the professions should not have to par-
ticipate. President and CEO Eiji Toyoda would have none of that, however,
declaring that “the people who need management skills most are precisely
those who have to operate by persuading people who are not their subor-
dinates.” He made this a truly company-wide activity; all staff members,
from executive vice president Shoichiro Toyoda on down, were to spend
two years hearing improvement examples from all the department and
deputy department managers and grasping the essence of their problems.

Relentless TQC Education After the Merger of the Toyota Motor

Company (TMC) and Toyota Motor Sales (TMS) (1983)
The new Toyota Motor Corporation was born from the merger of the
Toyota Motor Company and Toyota Motor Sales in 1982, with Shoichiro
Toyoda assuming the post of president and CEO of the new company. In
February of the following year, Shoichiro launched a TQC Promotion
Office to press ahead with the All Toyota program in the new company, to
improve the health of the Toyota group, and to promote the development
of new people internally through TQC.
In June, the company conducted general QC training for all executives
below the chairman. After a lecture by University of Tokyo Professor
Emeritus Tetsuichi Asaka, group discussions were held on management
problems facing the company. More than 40 executives stayed and took
meals together by Lake Hamana for three days, taking part in numerous
successful discussions.

Penetration of TQC into Sales (1981-)

Nineteen eighty-one saw the introduction of QC activities for sales
outlets. A top management study session was held in 1982 to identify
knowledge and practices needed to strengthen management. In and after
August of the same year, QC Circle activity presentation sessions were
held to provide a forum for the exchange of information about the status
of activities and of sample results, as well as for dealers to learn from one
another. A Toyota Dealers’ QC Promotion Prize was established in 1983
to provide recognition to model dealerships and to raise the level of sales
outlets generally.
108 Inside the Mind of Toyota

Expansion of TQM into Toyota Central R&D Labs (1995)

Toyota’s Central Research and Development Labs had always been sacred
territory, but in 1995 the company introduced TQM even there. (JUSE
changed the TQC designation to TQM [Total Quality Management] in
1995.) The aim was to revolutionize management to raise the value of the
labs in an increasingly perilous economic environment. Policy deploy-
ment had more or less taken root after a trial period of a year and then
three years of expansion into the entire organization, and a number of
new systems for the laboratories were developed and implemented in that
period. Policy deployment proved as effective for the labs as it had for
other departments, and the company reported that the TQM philosophy
and methods provided a number of clues for streamlining research.
(Hinshitsu [Quality], the journal of the Japan Quality Control Society,
October 2000 and January 2001).

THE BUSINESS PLANNING SYSTEM

Decision-making Bodies
The managerial decision-making bodies at Toyota today are shown in
Figure 3.0.
The basic form of these Toyota decision-making bodies was established
in 1962 during the introduction of TQC and has not changed in the forty-
odd years since that time.
The executive vice presidents’ council is composed of managers at the
rank of executive vice president or higher. The council, which is Toyota’s
highest practical decision-making body, deliberates on major policy ques-
tions concerning the business environment or internal conditions, and on
business strategy, often involving matters requiring referral to the board
of directors.
The management council was formerly positioned to bring the func-
tion councils and general councils under unified control; even now, it
oversees function councils, general councils, and committees. Its role, at
least nominally, is to deliberate on major matters of business execution. In
fact, however, nearly all matters are considered and decided in function
councils, general councils, and committees in which key executives serve
as chairmen. The management council, in actuality, constitutes a forum
for deliberating and deciding on overall executive strategies relating to
these other bodies.
Toyota's System of Management Functions 109

Management Planning Dept.

Product Planning Dept.
TQM Promotion Dept.

Council
V.P. Accounting Dept.
a Chairman
nan Quality Assurance Dept.
is Vice-chairman Ordinary Organization |Technical Planning Dept.
| Oo Re . eg
3
e - President
| Development Center 1
ve ide:
= Production Planning Dept.
Main Plant
Motomachi Plant

Cost Council
Quality Council
Research Council
Product Planning Council
Production Council
Councils
Function
Purchasing Council
Sales Council
Personnel/Administrative Council

Technology Council
Production Engineering Council
New Product Council
New Vehicle Program Council
Councils
Equipment Council

Invention Committee
Audit Improvement Committee
CD Quality Improvement Committee

=i

Function councils, general councils, and committees do not appear on

formal organizational charts because they change year by year and
according to the issues at hand. Their existence is nonetheless clearly rec-
ognized by Toyota company regulations.
Stockholders’ meetings, boards of directors, and vice presidents’ coun-
cils are organizations that can be found in any company. The distinctive
110 Inside the Mind of Toyota

feature of Toyota’s organizational form is that function councils, general

councils, and committees exist as formal organizations and function at
the center of the ranks of management.
Function councils are bodies that carry out Toyota’s management by
function. They are established by selecting a number of functions impor-
tant to the entire company—e.g., quality, cost, personnel, administration,
engineering, production, sales—from among the management and pro-
duction function systems shown in Figure 3.1. Function councils choose
yearly objectives, which they present to general councils. During the
course of the year, they also conduct periodic reviews of progress. In a
sense, function councils are organizational bodies concerned with indi-
vidual business strategies. The chairman of a function council is a man-
aging director or a senior managing director; closely concerned division
managers or director-level division officers also participate.
General councils are organizational entities that deliberate and
decide on major issues in specific sectors, such as development, prepa-
ration for volume production, or purchasing. Such issues may include,
for example, the content of new products, new product development
schedules, equipment investment planning, or responses to market dif-
ficulties. They receive yearly objectives from the function councils,
incorporate them into annual business plans, and conduct periodic
reviews. They are, in other words, bodies whose role it is to take indi-
vidual business strategies coming down from the function councils,
integrate them into plans at a practical level, and then execute them. In
order to avoid any confusion about lines of authority, general councils
are chaired by managers who are lower in rank than those who chair the
function councils—ordinary directors responsible for specific depart-
ments or regular department heads. Other closely concerned divisions
also participate.
Committees are bodies that handle ordinary matters not dealt with by
business strategy. They may deal with important company-wide issues
that are common to all periods of time or with issues that are specific to
a certain period of time. In the former case, committees may be semi-per-
manent; in the latter, they may function within a limited time frame.
Committees are chaired by the staff members who are most suitably posi-
tioned to deal with the issue in question. On occasion, the president or
executive vice president may chair a committee.
TQM?’s hoshin kanri, or policy deployment, distinguishes between the
management of strategic issues, which are the seeds of future meals, and
issues of maintenance and control, which are grains for today’s and
tomorrow's meals. At Toyota, function councils and general councils deal
Toyota’s System of Management Functions 111

with strategic issues, and committees deal with matters of maintenance

and control.
Toyota makes decisions according to the complex system described
above, but the system is not rigid. Depending on the subject, the councils
can operate by changing shape like amoebae.

Policy Deployment
We have already cited Eiji Toyoda’s explanation for the need to intro-
duce TQC: “We realized, first, that top management had to make qual-
ity targets clearer and ensure that all employees understood them. Next,
they had to build systems to enhance functional cooperation among the
various departments.” Policy deployment was adopted to address the
first need.
Policy deployment refers to numerous systematic activities across an
organization by which it sets an overall business policy, or objective, and
then translates, or deploys, plans for achieving business targets into spe-
cific long-term plans, annual plans, sector plans, and personal plans, all
the while monitoring them and driving them forward.
Management by objectives was introduced from the United States in the
early 1960s and was widely used in Japan at the time in the context of TQC
activities. The strong tendency of management by objectives to stress
results, however, prevented it from achieving its original purpose of moti-
vating employees, and it was usually applied as a kind of quota scheme in
which management targets were simply distributed among individuals and
organizational units. In response to this, a system was hammered out in
which specific measures to attain business objectives were proposed by each
organizational unit and then deployed downward. This system was dubbed
hoshin kanri, or policy deployment. The prototype of policy deployment
was the flag management system piloted by Komatsu Seisakusho Co., Ltd.,
a Deming Prize winner in 1964, one step ahead of Toyota.
Toyota adopted policy deployment in 1961, at the same time it intro-
duced TQC. After several years of trial and error, the company created a
system of company policy deployment rules shown in Figure 3.4.
In the world of TQM, what is known as general policy deployment cen-
ters on the “annual plan” portion of the lower half of Figure 3.4. In recent
years, however, increasing consideration has been accorded strategic pol-
icy deployment, a conception of policy deployment that includes the
long-range plan portion in the upper half of the figure. Toyota has been
implementing strategic policy deployment for more than twenty years.
112 Inside the Mind of Toyota

Toyota’s General Planning Office (now the Business Planning Depart-

ment) is the administrative unit responsible for formulating the long-term
business plan. The primary mission of this general staff function is to ana-
lyze the demanding environment and to formulate strategy for the future.
The company policy (annual plan) published at the beginning of each
year is a melding of individual plans made by the staff within each man-
agement function and of an overall company plan produced by the Gen-
eral Planning Office. The policy’s formulation is predicated on the idea
that individual staff groups are not free to proceed with whatever plan
they want; for this reason, periodic adjustments are made so that work
can proceed along lines fixed by the General Planning Office.
The annual plan, shown in the lower half of Figure 3.4, is implemented
according to the following sequence of steps:

Step 1
Function councils determine specific company-wide actions needed to
achieve annual policy (objectives) derived from the long-range plan.
These objectives and actions form a matrix. The councils choose numer-
ical indices and target values to measure implementation status and then
assign the objectives to the various departments in the form of depart-
mental objectives.

Step 2
General councils in each department determine actions to implement in
order to achieve all departmental objectives received from each of the
function councils. Departmental objectives and departmental actions
form a matrix. The councils choose numerical indices and target values to
measure implementation status and then assign the objectives to the var-
ious sections in the form of sectional objectives.

Step 3
Each section draws up actions according to the same pattern and then sets
indices and assigns the actions to subsection heads, foremen, and group
leaders in the form of personal objectives.

Step 4
Finally, each individual draws up individual actions.
After this process of deploying objectives, the values of action indices
coming from individuals are aggregated and checked to see whether or
not they are sufficient to meet the targets. By repeatedly deploying objec-
tives and checking actions, the company settles on its overall objectives as
Toyota's System of Management Functions 113

Basic Policy Research & analyze + foreign& domestic car price

external system forecast
information [1] « market research
+ demand forecast (foreign/ —
domestic)
Board . + labor market forecast
decision LTP draft terms + domestic economic forecast
+ domestic industry trends
+ other trends affecting the
company
Draft individual plans
[2]
+ comprehensive long-term new
Adjustterms — product plan
+ production (sales) volumes by
month & make
Long-Term
Plan + major capital investments
Calculate long-term + materials & purchased parts
orecast forecasts
+ labor, manning & efficiency
forecasts
Board Make general + estimate of labor terms (hours,
decision evaluation labor costs)

[3]
Adjust forecast,
issues [5] make long-term
calc. estimates for
profitcalc. bal. cereus
sheetcalc. conditions with
Board ye EDPS calculation
Draft annual policy
decision model

[4]
Draft by function :
+ profitability...ROI
+ safety...sufficiency of internal
reserves vs. capital investment,
Board Make general etc.
Annual
Plan decision adjustments & draft + productivity...value-added
productivity, etc.
[7]
Roll out/implement [5]
+ achievement of goals, policies &
implementatiion items; im-
[9] Evaluate [6] plementation status and issues
+ goals, policies & implementation
items needing continuation,
abandonment, revision or
resetting

[6]
+ goal achievement check using
[9] , [8] [7] management data
+ check policy rollout and imple-
+ revision of current
« terms for setting « revision of mentation status using
year's target policy
following year's implementation business & function
implementation
policy target values items assessments
items

Management Strategy
Source: Sorimachi, Takashi. "Kankyo Henka to Keiei Senryaku no Tenkai" [Environmental Change and
Deployment].
eee eeeea June 1978. eee
114 Inside the Mind of Toyota

all sectors approach agreement on the suitability of targets and the possi-
bility of implementing specific actions.
Managers at each level conduct quarterly or semiannual reviews at
which they check for discrepancies between targets and results and, if
need be, either speed up the plan or revise objectives and actions.
One important point in implementing policy deployment is that objec-
tives and the specific actions needed to achieve them be determined and
deployed downward simultaneously. If objectives are communicated down-
ward before actions are proposed, then policy deployment becomes nothing
more than a quota system. Management encouragement will bring no results.
As Shoichiro Toyoda explained in a keynote address at the 67th Quality
Control Symposium sponsored by the Union of Japanese Scientists and
Engineers in December 1998:

It’s also important that the system proceed on the basis of shared views
between the team determining objectives and actions above and the
individual units or individuals below. That’s why, at Toyota, we decide
these things through exhaustive discussions in study sessions or off-site
retreats. Merely communicating through documents will give you a kind
of policy deployment in form only, long on work and short on results.

In the Toyota policy deployment system described above, top manage-

ment sets strategic policy, middle management makes tactical plans, and
work improvements are carried out at the bottom. This clear structure
makes it possible for everyone at every level in the company to cooperate
in achieving company goals.
When we talk about the “bottom” at Toyota, we are referring to sub-
section heads, foremen, and team leaders; we do not include general
employees and workers. The term also excludes QC Circles. The purpose
of QC Circle activities is education and training.
Policy deployment is a powerful device if it is applied smoothly. It is
currently enjoying a boom in popularity in the world of TQM.
Even ISO 9001, overhauled in December 2000 to yield practical results,
refers to policy deployment as a systems approach and positions it at the
root of quality management.
Policy deployment translates overall company goals down to the level
of the individual and so naturally expands as the deployment proceeds. As
long as suitable documentation and management procedures are estab-
lished, the system can be applied without problems.
Toyota publishes its current policy and business objectives on its Inter-
net homepage. Proposed and executed in the context of Toyota's policy
Toyota's System of Management Functions 115

deployment system, these policies and objectives are invariably aggressive

and can easily be viewed as one reason Toyota is becoming the world’s
number one carmaker in the first half of the 21st century.

Management by Function / Cross-Functional Management

Under the guidance of various TQC experts and based on Eiji Toyoda’s
second reason for introducing TQC (the need to “build systems to
enhance functional cooperation among the various departments”), Toy-
ota focused on its key business functions and created a method of linking
them horizontally.
In what follows, we have drawn principally on an article by former
Toyota managing director Shigeru Aoki. “Cross-Functional Management
for Executives” appeared in the February—April 1981 issue of Hinshitsu
Kanri,’ a journal published by the Union of Japanese Scientists and Engi-
neers. Extracts from other documents will be cited where they appear.
Figure 3.5 shows a diagram of the general concept of management by
function at Toyota. In this example, we select six key functions (from
quality to personnel and administration) from among all the functions in
the company that need to be managed and relate them to organizational
entities within the company, from product planning to sales operations.
Policy deployment is a method of managing horizontally according to the
strength of these relationships.
Management by function is a technique created by Toyota. Because
there was no precedent, the technique was conceptualized and re-concep-
tualized quite a bit before it took hold.
Management by function was first applied in April 1962. Thirteen
functions (nine business functions and four production functions) were
selected for this purpose, and management of these functions was
assigned to a body called the Planning Council.
After a second company-wide audit in March 1963 found that executives
tend to become profit representatives for their sectors, the company
entrusted the management of most sectors to nonexecutive division heads
and abolished the system of executive responsibility for the divisions. Func-
tion councils were created and a system was adopted in which management
team members would concentrate on management of the functions. This
increased the number of functions to twenty-four ina single stroke.
Too many functions became difficult to manage, so the number of
functions was halved and functions were switched around. In the end, the
system of executive responsibility for the divisions was revived in March
116 Inside the Mind of Toyota

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1965 and, with the number of functions squeezed down to eight, staff
were assigned clear functional responsibilities.
This, finally, established the Toyota system of management by function.
The number of functions has risen and fallen somewhat since then, but
the basic contours of the system have remained in place.
The cause of these vicissitudes at Toyota boiled down to a lack of uni-
formity within the company as to the concept of a “function” With qual-
ity assurance and cost control being the most essential functions in the
company, it was necessary to go to each department to determine what it
had to do to fulfill those functions.
For each function, every department had to be clear about what it had
to do, and function councils were run for the purpose of achieving the
company’s function objectives for each year. abe agenda of these function
councils is presented below:

Goal-setting
Planning and actions to achieve goals
Planning for new products, equipment, production, sales, etc.
Critical “bottom-up” issues
Policies to remove obstacles to DO actions
ACTION required by the results of CHECKing
SSL CHECKs of yearly actions called for by company policies and the fol-
ia
Se
ONS
lowing year’s policies and actions
Toyota's System of Management Functions 117

8. Other matters necessary for fulfilling the functions

Function councils are also important bodies in terms of budget man-

agement and are centers for function budgets (one kind of departmental
budget). Among fixed cost budgets, the production function council
determines the equipment investment budget, the personnel function
council determines the employee budget, the sales function council deter-
mines the marketing budget, the engineering function council determines
the research budget, and the administrative function council determines
the expenses budget. (Toyota’s Production System.* The Japan Society for
Production Control, ed.)
Shigeru Aoki cites three key points necessary to the success of manage-
ment by function:
1. Select and define functions rigorously. Three issues are important here:
a. Clarify which functions are important to achieving the aims of the
company.
b. Clarify the roles of each department with respect to those functions.
c. Clarify the support functions required so that each of those depart-
ments can achieve its functions.
2. Don’t think of management by function as an informal system.
3. Make it clear that function councils, as organizational entities, occupy
a place next to the highest practical decision-making bodies within
the top management organization. Give them the power and authority
they need.

Vertical Departments Must Have Strong Implementation Capabilities.

The job of the function councils is to PLAN. Departments have to DO.
Plans set by the function councils cannot be achieved if departments are
unable to implement them. The power of vertical departments is not a
self-interested strength that says, “I’ve done all I can do,” but the strength
to be able to implement plans set by the function councils.
Toyota’s management by function has become an optimal system for
the company for the simple reason that Toyota kept remaking it until it
worked. Today’s management by function system is the product of forty
years of evolution.
In the West, management by function is referred to as “cross-func-
tional management; and under that name, it has been re-imported back
into Japan. This re-imported version, in reality, is often applied only to
hybrid team activities or used for one-time projects. Few companies use
management by function in the rigorous sense that Toyota does.
118 Inside the Mind of Toyota

The Committee System

Table 3.1 gives an overview, by year, of the names of various Toyota com-
mittees culled from company documents and other materials. Be aware
that the list is selective, not exhaustive, and committees formed to address
issues specific to a particular era have fulfilled their functions and have
been disbanded.
Committees that address themes of enduring importance—such as
the Safety Committee, the Audit Improvement Committee, the Inven-
tions Committee, the Ingenuity Evaluation Committee, the Quality Con-
trol Committee, and the Standardization Committee—are assumed to be
still in operation. From this perspective, we may deduce that there are
roughly ten to fifteen committees operating in all of Toyota at any given
point in time.
There are three distinctive features of the committee system at Toyota:
1. A committee’s place in the overall business organization is clear, and it
is a formal business entity. (As Figure 3.3 shows, committees appear on
organizational charts.)
2. Committees are run according to committee regulations and have spe-
cific briefs. The content of their activities is clearly specified.
Regulations for running a committee are documented at the same
time the committee is launched. These regulations clarify such matters
as the committee’s purposes, membership and roles, venue, issues for
consideration, decision-making methods, conditions of formation, and
budgeting procedures.
3. Managers personally take the lead in promoting the resolution of prob-
lems and issues.
Committees are chaired by the most suitable executives for the issues
addressed and, depending on the theme, even the president or an exec-
utive vice president of the company may serve as a chairman. The chair-
man takes the lead and conducts himself in such a way as to encourage
the resolution of problems at hand.
The fact that Toyota accords explicit status to committees via organiza-
tional charts and committee regulations derives from the paradigm of
documentation discussed in Chapter 2. The personal leadership of the com-
mittee chairman reflects the company’s leadership-by-example paradigm.
In. most companies, committees occupy an ill-defined place; it is far
from clear by whom, where, and when a committee’s plans and results
should be reviewed. Somebody has an idea or gives instructions for form-
ing a committee, people somehow show up, and everybody breathes in
and out while doing whatever it is they’re supposed to be doing. When the
organization changes or people are shifted around, the committee diesa
Toyota's System of Management Functions 119

Audit Improvement Comm. improve technology by auditing internal & external quality problems President Kiichiro Toyoda
Mgmt Research Comm. rationalize management methods; find better forrns of management
_ {Invention Ideas Comm. review & implement invention ideas Sr. Mar dir Eiji Toyoda
establish & implement policies to improve transport efficiency
Innovaton Review Comm. promote innnovation, review & reward suggestions
Quality Control Comm. promote QC methods adopted starting 1949
negotiate claims compensation work between Toyota Motor (TMC) & Sales (TMS)
7-man Complaints comm. set policy for vehicle complaints between TMC & TMS
~ {TOC Promotion Comm. (TMS) TQC promotion in TMS sales departments included in TMS Deming Prize drive
promotion of parts norms, standards & references
establish company-wide production maintenance system
iToyota Traffic Environment Comm. deal with changes in the environment around Toyota
Comm. on Computer Use consider the use of electronic computers throughout the company
Special Comm. on Recalls deal swiftly & accurately with Transport Ministry's systemnization of recalls
{Cost Planning Comm. consider cost planning from a company-wide perspective
{Corolla Cost Improvement Comm. improve profitability hurt by 1st oil shock
Corona Cost Improvement Comm. improve profitability hurt by 1st oil shock
Crown Cost Improvement Comm. improve profitability hurt by 1st oil shock
{Parts Commonization Comm. improve profitability hurt by 1st oil chock Dirs. Aoki & Moriya
promote business improvement (hold sectional, departmental and company improvement meetings)
info. & Coms, Network Comm. overhaul Toyota-wide information and cornmunication systems and examine future systems | Ex. VP Hiroyasu Ono
{Distribution Comm. promote streamlining ofdistribution expected from TMC/TMS merger Dir. Shoji Ban
FQ (Flagship Quality) Comm develop & promote highest quality for flagship car Celsior
{Information Comm. build information network extending from dealers to suppliers Ex. VP Kaneyoshi Kusunoki
Officework Innov. Comm. radical reform of work methods; 50% improvement in officework efficiency Sr. Mgr. Dir Tsuyoshi Oshima
enhance aspects of exterior product appearance, including match, alignment & finish |-
enhance quality of exterior paint
~_|Automation Comm. improve & promote ergonomics as a means of lowering attrition in technical work areas |Sr. Magy.Dir Tsuyoshi Oshima
CS Enhancement Comm. develop and implement CS (customer satisfaction) ideas introduced from the U.S} Pres. Shoichiro Toyoda
Social Cont. Activities Comm. promote shift from 'social responsibility’ to ‘social contribution’
improve & promote J.D. Power IQS/CS| product quality indices Dir. Mamoru Kaita

Comm. to Enhance the Appeal ofSkilled Wrkplc. improve & promote issues relating to the decrease in skilled workplaces
_|Comm, to Reduce Supplied Parts improve profits hit by the collapse of the bubble
Comm. to Adjust Nos, of Models and Comps. improve profits hit by the collapse of the bubble
expand purchases of high-price, high-function components from overseas suppliers
reform development of EQ (development code name for Corolla)
APEAL Comm. improve & promote J. D. Power APEAL product satisfaction index
CD Quality Enhancement Comm. improve CD (customer delight) quality, including APEAL
improve & promote J. D. Power VDI long-term quality index
study platform integra tion strategies
Reliability Comm. enhance product reliability
Information System Comm. review & decide on information systemization themes
Standardization Comm. iOI promote internal standardization
Gah
&Gs
meer

have been omitted, as have

N.B. Committees created for special events such as plant construction or the editing of company histories
committees under function councils and lower organizational structures.

natural death. Even when an executive is named to chair the committee,

he looks at proposals coming from below and then gives his own on-the-
120 ‘Inside the Mind of Toyota

spot opinion or instructions; in many cases the proposals will have van-
ished from his mind before the next meeting. One cannot expect such
committees to yield the kind of results that Toyota’s committees do.

Line and Staff

Toyota is distinctive for the intricate interweaving of its line and staff
organizations.
Among the various unusual names Toyota gives to its organizational enti-
ties, we find the designation sokatsushitsu, meaning general office or secre-
tariat. This appellation originated in 1953 in an Inspection Department
Secretariat established by then Inspection Department head Shoichiro Toy-
oda to handle such matters as inspection equipment design, precision meas-
urement, and quality control. Later, organizations with the word
“secretariat” attached were set up in departments throughout the company.
The role of the secretariat in modern-day Toyota departments is to take
business strategies and managerial policies coming from the executive staff
and spread them appropriately throughout the department. This system
implements the management by function arrangement discussed above.
In most companies, organizational units corresponding to Toyota’s
secretariats are probably administrative departments or offices. But it is a
rare administrative department that operates the way Toyota’s secretariats
do. In nearly all cases, the staff of administrative departments keeps a
respectful distance from line departments. Unless management goes out
of its way to make staff responsibility and authority crystal-clear, staff
members inevitably stay in the background as “good wives and wise
mothers.” Only when problems arise do they rush like fire trucks toafire.
The president of one company once referred to his staff department as
his “nonline organization.” He removed the words “management” or
“control” from the names of organizational entities and replaced them
with the term “administration.” This would be like changing Toyota’s
“secretariats” to “administrative offices.” In any event, the company pres-
ident in question wasn’t about to overhaul the organization of his staff
departments. The staff were bound to the boss’s decision, but their
reason
for being had been repudiated by the president and their departments
withered. Far from being firefighters or even good wives and wise moth-
ers, they ended up trapped. True management disappeared from the com-
pany in favor of routine. This might have been acceptable if the company
was prospering, but, alas, that was not the case.
Even in cases that are not so extreme, executives with a “line first”
mindset who want to set about restructuring activities by reflexively par-
Toyota's System of Management Functions 121

ing down their staffs, may want to consider the possibility that they may
follow the same path the hapless company president described above. In
the first place, the staff system is a modern one that came into being 100
years ago as a scientific management tool. Repudiating it pushes us back
100 years to an unscientific era of home handicraft industries and master-
apprentice relationships.
We can cite the following as reasons to explain why staff functions do
not drift away from line functions at Toyota:
1. Top management attaches just as much importance to staff functions as
it does to line functions.
2. Line and staff are each given clear responsibilities and authority, and
they must respect one another’s authority.
3. Outstanding line people are periodically rotated into staff positions so
that a bureaucratic and high-handed staff culture does not have a
chance to develop.
4. More than anything else, staff people are educated to understand that
their position is to support the work of the line.

THE QUALITY CONTROL SYSTEM

Quality Assurance
The idea of building quality into the process lies at the root of quality
assurance at Toyota. In other words, whatever needs to be guaranteed is
assured in every process, including product planning, design, production
preparation, purchasing, goguchi production (Toyota’s term for real pro-
duction), inspection, sales, and service. The reason for this is that the
majority of quality problems occur when a vehicle is in use; inspections at
the point of shipment can never eliminate them. Nor can inspections at
the point of shipment catch damage or dirt that occurs after vehicles have
left the factory. Assuring quality during the period of a vehicle’s use
requires strict adherence to relevant standards during prior stages, such as
product design and production preparation. Additionally, making sure
that work procedures in the post-shipment process are strictly followed is
an effective way to assure quality once a vehicle leaves the plant.
Toyota regularly conducts independent audits to evaluate and assess
whether activities at quality assurance steps are performed appropriately
and whether the quality of the resulting product is acceptable.
These two activities—building quality into the process and independ-
ently auditing the process—have been the basic elements of quality assur-
ance at Toyota ever since Kiichiro set up an Audit Improvement Office.
122 Inside the Mind of Toyota

These ideas inform Toyota’s Quality Assurance Rules (standards speci-

fying the details of quality assurance work) as well as a quality assurance
system map, a flowchart showing how work proceeds through different
departments.
Figure 3.6 shows a quality assurance system map presented in the
October 1996 edition of the JUSE journal, Hinshitsu [Quality], by Kat-
suyoshi Yamada, a former head of Toyota’s TQC Promotion Office.
Although Katsuyoshi Yamada presents this quality assurance system map
as a typical current map from a “certain Deming Prize-winning company,’
the reader may be assured that it comes from Toyota. Careful verification is
called for, however, because the chart contains a wealth of important infor-
mation. It is important, therefore, to look critically at each of the rules, pre-
scriptions, and guidelines that appear in the “major company regulations”
column at the right of the chart. From these we see that this Deming Prize-
winning company’s overall system of development and production man-
agement is strikingly familiar. The review meetings mapped in the middle
of the chart refer to design reviews, and the fact that the numbers on the
chart skip around (DR1, DR3, DR6, etc.) indicates that the chart is an
abridgement. In all likelihood, a complete quality assurance system map
would occupy at least ten sheets of 11” x 17” paper. Such a map would
reflect quality assurance for the whole company, but we would likely see
quality assurance maps for individual departments as well, with the total
running to nearly 100 pages. In an industry like automobile manufacturing,
only a grand design can yield a functioning quality system.°
Since product quality is largely determined at the product develop-
ment stage, cooperation between the quality assurance and product
development departments is critical. At Toyota, a specially designated
staff member coordinates the work of executives responsible for quality
assurance and product development. The staff executive responsible for
quality assurance, moreover, operates a “reverse Resident Engineer
(RE)” system to check at the development stage that past problems do
not surface in new products. The company also establishes product
audit offices within product development departments as part of an
umbrella quality system.

ISO 9000/0S 9000

The International Organization for Standardization (ISO) published its
ISO 9000 International Quality Standards series in 1987. Using ISO 9000
as a foundation, the Big Three automakers in the United States drew up
and published QS 9001 quality standards for their suppliers. Toyota
Toyota’s System of Management Functions 123

‘Long-Term Mgt Plan

ote Dept Dept
ajor Company
regulations

(1) Guidelines for Constructing Demand

Quality Deployment Tables
ong-Term Business Plan * (2) Guidelines for Constructing
Quality Tables
Market Research —————(Market Research) (1) (2) (3) (3) Guideines for Constructing
J Configuration Deployment Tables
New product planning ; * (4) Design Review Rules
' * (5) Guidelines for Constructing
Product
Planning BasicPlan ' Subsystem Deployment Tables
' * (6) Guidelines for Constructing QA
'
Tables
* (7) Guidelines for Implementing
Design FMEA

Yj, (8) Guidelines for Drawing up

ye)
EE} Process Plans
o x (9) Guidelines for Implementing
a Process FMEA
u tr (10) Guidelines for Making Limit
oO Samples
2
a +r (11) Rules for the Management of
Guidelines for Drawing up Work
Procedures
* (12) Guidelines for Drawing up
Work Procedures
* (13) Guidelines for Drawing up
Work Guidelines
tr (14) Guidelines for Conducting
Process Studies for Purchased Parts

(15) Machine & Equipment

Procurement Prescriptions
(16) TMS (Production Engineering
Standards)
vr (17) Rules for the Procurement &
Storage of Measurement Devices
yx (18) Guidelines for Drawing up
Preparation
Product Component Inspection Methods
wr (19) Guidelines for Approval of
Approved Inspection Methods
wr (20) Rules for Controlling the
Precision of Measurement Devices
yr (21) Guidelines for Implementing
QC Process Tables
vr (22) Rules for Initial Management
xx (23) Inspection Rules
tr (24) Guidelines for Conducting
Initial Quality Measurements of
Purchased Parts
(25) Basic Contract for Component
Transactions
(26) Memorandum on Quality
presi a oy Assurance
SS So wr (27) Guidelines for Commissioning
delive So to each related Inspections
plan step wy (28) Guidelines for Processing
a Quality Defect Notices
yx (29) Rules for Processing Defects
(30) 31) |
Quali rr audit} ------ eat wr (30) Rules for Registration Issues
wr (31) Guidelines for Reporting Major
(32) Registration Quality Defects
* (32) Guidelines for Conducting QA
QA activity audit Activity Audits
Sales
Audits
Quality
Service
and
|
1. Legend——> path 2. The head of the Quality Management Council N.B.
conducts a QA activity audit for all steps 1. sr indicates quality rules created
> feedback path before the introduction of TQC
2. & indicates quality rules created
G® task 3. Numbers in brackets refer to major company rules afterthe introduction of TQC
Comments [22] meeting
Reviews
Source: Yamada, Katsuyoshi. "Shinseihin Kaihatsu Kyoka no tame ni Dazain Rebyd 0 Saihyoka" [Re-evaluating Design
in order to Enhance New Product Development] Hinshitsu [Quality], Vol. 4, No.4 October 1996.

already had TQC/TQM firmly in place and saw no need to obtain ISO
9000/QS 9000 certification, but its European plants needed ISO 9000 for
business purposes, as did Toyota group suppliers doing business with
124 Inside the Mind of Toyota

companies in the United States and Europe. As the leader of the Toyota
Group, Toyota applied for ISO 9000/QS 9000 certification, “for the pur-
pose of learning.” The engine division achieved ISO 9001 certification in
1996, and the Hirose Plant obtained QS 9000 certification in 1998. The
certification was subsequently renewed after each mandated evaluation,
and then was returned.
The requirements of ISO 9000/QS 9000 were more than satisfied by
practices and systems that Toyota had established through its TQC/TQM
activities, including policy deployment, management by function, top
management diagnoses, process control, design reviews, document con-
trol, quality audits, and quality education and training. ISO 9000/QS
9000 was unnecessary for Toyota, moreover, because it was incomplete: It
did not deal with cost, one of the twin pillars of management.
Its involvement with ISO led Toyota to translate a set of its quality doc-
uments into English and send them to its European plants to obtain ISO
9002 certification. For suppliers, Toyota set up an ISO consulting team in
its quality assurance department and even began providing related assis-
tance on its web pages.
Hitoshi Kume, a professor at Chuo University and professor emeritus
at the University of Tokyo, has won the Deming Prize and is an authority
on TQC. As the Japanese representative to ISO quality control and qual-
ity assurance councils, he has also been deeply involved in the formula-
tion of the ISO 9000 series. Kume describes ISO 9001 and TQC in terms
of a metaphor.
“ISO 9001,” he says, “is like a university entrance examination and the
Deming Prize is like a senior thesis.” ISO 9001 can be compared to an
entrance examination because it involves activities to prepare an organization
to give specified, correct answers. TQC and the Deming Prize, on the other
hand, can be compared toa senior thesis because those aspiring to succeed
come up with their own issues and find their own path to resolving them.
The number of ISO 9001-certified companies continues to increase, but
one rarely hears of companies that have transformed themselves using ISO.
This is hardly surprising, considering that ISO 9001 specifies only mini-
mum conditions. It goes without saying that a company becomes much
stronger when it puts together a senior thesis for which it must find its own
topic and solve its own problems through the independent application of
TQC methods. This is precisely what Toyota did. It took up TQC to address
its own issues and themes, and it hammered out its own solutions.
If the key thing is coming to grips with your own issues and themes, it
does not matter whether the means you use are derived from ISO 900]
or
TQC. It is probably fair to say that the reason for Toyota’s success is that
Toyota's System of Management Functions 125

Toyota would have gone after and solved its problems even if TQC hadn't
called for it.

Gathering Market Quality Information and Handling Claims

W. Edwards Deming, who came to Japan in 1950 at the invitation of the
Union of Japanese Scientists and Engineers, talked about new product
development in terms of what he called “The New Way.”

The New Way

1. Design products (on the basis of suitable tests).
2. Manufacture them and test and inspect them on the manufacturing line
and in the laboratory.
3. Sell them.
4. In service, test the products and conduct market surveys to learn users’
reactions to them and the reasons that some people don’t use them.
5. Redesign products in response to consumers’ reactions to cost and
quality.
Deming advocated repeating the above cycle over and over again.
We see from the expression “in service, test the products” that Deming
considered the market to be a forum for quality improvement in new prod-
uct development. Toyota’s founder, Kiichiro Toyoda, similarly saw vehicle
quality as being difficult to verify and assure solely with tests performed at
the company. He believed that the accumulation of responses to quality
problems in the marketplace was one basic method of quality assurance.
This belief was based on the premise that even if performance and func-
tion can be estimated by theoretical calculations, there are many aspects
of quality that can be predicted only by rules of experience.
In order to make predictions from rules of experience, one needs a
mechanism for collecting the experience of the marketplace, i.e., for gathering
massive amounts of appropriate market quality information. Quality infor-
mation from the marketplace is by nature extraordinarily difficult to organize,
however, and its content is not easy to grasp. Such data depends, after all,
on the voices of customers who are novices in terms of technology, and it
arrives by telephone, fax, registration forms, sales slips, and a host of other
means througha variety of organizations. Some customers send letters directly
to the company, and some information comes from government agencies.
Toyota has adhered to Kiichiro’s position on gathering quality infor-
mation from the marketplace and has devised various means to increase
the reliability of the information it gets. It has coded and entered as com-
puter data the symptoms, circumstances, locations, conditions, and
126 Inside the Mind of Toyota

causes of product problems. Even specific locations on vehicle body pan-

els that are susceptible to dings or scratches have their own codes, so it is
now easier to gather, collate, and analyze reliable information. Having
collected data in this way for decades, Toyota can use multivariate analy-
sis (see the next section on Statistical Methods) and other statistical
means to derive cause-and-effect formulas (rules of experience) to pre-
dict, for example, what factors result in what problems. Understanding
these things helps clarify what needs to be done to eliminate problems.
It was in 1963, in the midst of the introduction of TQC, that Toyota
began using the word “reliability” and collecting and analyzing informa-
tion in earnest. One central type of quality information was data on
claims during the warranty period. Other types of quality information
that proved useful included the following:
1. Follow-up surveys of new vehicles on the market (these were called Ini-
tial Circulation Special Market Surveys)
2. Data gathered on commercial users and private users
Se Regular market surveys
4. Data collected from Japan and around the world on natural and social
environmental conditions in which vehicles are used, national charac-
teristics concerning how people treat vehicles, and other data on
regional characteristics
Quality information gathered in this way is used in a problem registra-
tion system and followed up on until problems have been resolved. This
system was established in 1962 in order to prioritize market quality infor-
mation across the company clearly on the basis of urgency, not merely on
the technical judgments of individual departments. The procedure for
problem follow-up is outlined below:
1. Select problems from the marketplace on the basis of fixed criteria and
then categorize and register them according to their urgency.
2. Determine the responsible departments and encourage resolution.
3. Measure the effect of actions taken, verify that steps have been taken to
prevent recurrences, and remove problems from the register.
The key point here—verify that steps have been taken to prevent recur-
rences—lies in Step 3. All companies have groups assigned to work on
preventing problem recurrences, but when recurrence prevention is per-
functory, it is virtually useless.
It is crucial to organize human resources and systems capable of
checking—technically and theoretically—that recurrence prevention is
really effective. Similarly, rather than setting a deadline at two months or
three months, those involved in the process must be prepared to wait
Toyota's System of Management Functions 127

until measures are in place that will truly prevent a problem from recur-
ring. What tests the competence of the organization is whether items on
the register accumulate to the point where they clog the system. Man-
agers who face problems squarely will be able to take truly effective
actions to prevent problems from recurring. Companies that are casual
about their system of problem recurrence prevention, on the other hand,
will never see their quality improve.
Even by world standards, as we will see in Chapter 5, Toyota’s quality
stands out. This is the result of long years of steady engagement in qual-
ity control and quality assurance activities. Toyota’s quality costs are low:
Its ratio of customer claims to sales is half of what it is for other Japanese
carmakers and one-third of what it is for American auto manufacturers.
When quality improves, claims and costs decrease, and when claims
decrease, products sell better. Quality sells.
Quality obeys laws of experience, so quality improvement requires
planning for 100 years. If you look for results in three or five years, you
will not get them. What you need is long-range policies and plans that will
be in operation tens or scores of years after you are gone.

Using Statistical Methods

Experimental design, the Taguchi Method, and multivariate analysis are
three typical statistical methods or quality control methods.
Where performance is determined by multiple and variable factors,
experimental design or design of experiments is a method of drawing up
experimental plans that make it possible to get to the top of the mountain
by the shortest route. Toyota learned the efficacy of experimental design
when its Inspection Department introduced the method from the West in
1951 and applied it to a cylinder block casting process suffering from a
high rate of defects (Toyota: the First 20 Years). Use of the method subse-
quently spread throughout the company.
The Taguchi Method, also known as robust design, is a planning
method that minimizes quality costs by seeking out those parameters that
are the least sensitive to external disturbances. Its creator, Dr. Genichi
Taguchi, has won many academic and industrial awards, including the
Deming Prize in Japan in 1960 and induction into the American Auto-
motive Hall of Fame in 1997. Taguchi used experimental design as a step-
ping-stone to develop and establish his unique Japanese statistical
methodology in the 1970s. Japanese companies shied away from Taguchi's
model because of its abstruse theories and idiosyncratic vocabulary; the
method first gained currency in the United States in the 1980s. The
128 Inside the Mind of Toyota

Taguchi Method is said to be one of the technologies responsible for the

renaissance of United States industry in the 1990s. Still in the process of
development, the method was re-imported into Japan in the 1990s under
the name “quality engineering.” A Quality Engineering Society was estab-
lished in 1998, and systematization of the method continues.
Multivariate analysis is a method for analyzing multiple cause-and-
effect relationships within a large mass of data. Wal-Mart’s data ware-
house became famous, for example, when the company deduced a
cause-and-effect relationship between sales of diapers and beer, and sub-
sequently moved beer next to the diaper aisle. The prime function of the
data warehouse is to perform multivariate analysis.
Asastatistical technique, the Taguchi Method came into the spotlight
in Japan around the middle of the 1990s. Oddly enough, the words
“Taguchi Method,’ “robust design” or “quality engineering” are rarely
heard at Toyota. From the late 1980s into the 1990s, when Toyota was
broadly promoting the teaching and diffusion of quality control and sta-
tistical methods under the banner of an “SQC Renaissance,” the Taguchi
Method was the one technique that failed to appear on stage. Denso
and certain other companies in the Toyota group have vigorously sup-
ported Quality Engineering Society activities. Only Toyota has turned a
cold shoulder.
What Toyota has done is to accumulate past examples and data from
the entire Toyota group in a systematic, stratified, and electronic format
and then use computer (“office automation”) analysis of these to derive
answers to most problems and issues. With two weeks provided for the
resolution of problems, the time-consuming experimental design and
Taguchi methods are hardly ever used. Multivariate analysis, on the other
hand, is applied to past examples and data.
Ordinarily, since data from the past are not collected and managed sys-
tematically, problem-solving activities often call on experimental design
or the Taguchi Method to find solutions to singular problems. When
enormous quantities of past data are managed as systematically as they
are at Toyota, however, multivariate analysis is certainly more effective
than experimental design or the Taguchi Method.
We again recall the words of a prominent figure of a management con-
sulting organization introduced at the beginning of Chapter 2: Toyota
spends about five times what other companies do on data management.
Toyota imported experimental design from the United States after the war
and then painstakingly used it to solve problems. The company has been
spending five times what other companies do to collect data, with the
result that nearly all problems can now be solved by using past data.
Toyota's System of Management Functions 129

Toyota does not scorn the Taguchi Method, however. To increase

design speed and lower manufacturing costs in the future, Toyota recog-
nizes the need for a technique that can identify robust design parameters,
i.e., those whose impact on performance with respect to design tolerances
is slight. For this reason, the Taguchi Method is beginning to find its own
niche within Toyota and this niche is likely to expand in the future.
Toyota has 700 statistical specialists (at the Ph.D. and consultant engi-
neer level) and a system that enables four of them to assist each depart-
ment head. As a result, matters are proposed and considered on the basis
of data even in departments, like design and sales, where decision-making
relies on experience. When a new vehicle is launched, for example, esti-
mates are made even of how many flyers distributed on which days of the
week will draw how many people.
There are two underlying reasons responsible for these arrangements:
(1) Staff departments control the key resources of people, material, and
money. Actions that do not call on staff departments such as the TQM
Promotion Office do not turn out to be Toyota’s assets. (2) Improvement
can neither take place nor be sustained unless the company as a whole
comes to grips with quality problems.
Toyota has thirteen administrative centers, so that even if each
one attains a 99 percent quality level, the total is only 0.99 to the power
13 = 0.88 (88 percent). This serves to illustrate why statistical methods
are needed.

Responses to Quality Issues in Recent Years

In the 1960s, a thriving consumer movement promoted by Ralph Nader
and others in the United States transferred power over quality matters
from the hands of producers to the hands of consumers. Organizations
such as Consumers Union (publisher of Consumer Reports) and J. D.
Power and Associates began publishing independent vehicle product eval-
uations. In recent years, quality surveys and reports have expanded
beyond mere initial failures to address breakdowns over time, as well as
appearance, feel, and other qualities, including sellers’ attitudes toward
customers and service.
Asa result, manufacturers have had to shift away from production and
sales-centered marketing policies—in which their sole energies went into
selling—and toward customer-centered marketing, which entails making
improvements in all quality areas important to customers. Toyota
responded to data from Consumers Union and J. D. Power early on, and
as a result, has grown to be the premier quality company in the world. In
130 Inside the Mind of Toyota

Chapter 5, we look in more detail at recent quality issues, Toyota’s

responses, and the results.

THE COST MANAGEMENT SYSTEM

A History of Cost Management
Kiichiro Toyoda seems to have struggled more with cost than with qual-
ity at the time he founded Toyota Motor Company. If Toyota
studied the technologies of the advanced nations of Europe and North
America and gradually improved its products, then at some point it
could be expected to produce vehicles consistently on a par with those
nations. Cost, however, was hugely vulnerable to the mass production
effect in Japan, a country far inferior to the United States in terms of geo-
graphical size, national resources, population, and purchasing power.
Underground resources such as iron ore, coal, and petroleum, moreover,
were as good as nonexistent. Given these limitations, Japan could not be
expected to engage in mass production on the same scale as the United
States. Even with Japan’s low wages at the time, it was difficult to imag-
ine building automobiles at a cost comparable to U.S. cost.
In the Toyota Museum, there is a treasured memo dating from the
spring of 1937. Entitled “Cost calculations and future prospects,” it is
Kiichiro Toyoda’s cost estimates for the founding Toyota Motor Company.
In January 1987, addressing a joint meeting of the Kyohokai (an associa-
tion of parts suppliers) and the Eihokai (an association of suppliers of
molds, gauges, and jigs and of plant and equipment contractors), Eiji Toy-
oda spoke of Kiichiro’s war on costs:

“Kiichiro worked out detailed cost reduction plans by component part

and estimated the expected cost reductions. But he didn’t start off hav-
ing achieved 100 percent of his goals. He began under certain condi-
tions and then devised other cost reduction measures on the basis of
actual results. He was determined to forge ahead the way he had
described in the memo. There’s no doubt but that he was prepared to
lose everything”

It is likely that the question of cost was a constant concern for Kiichiro.
This was the context in which he proposed just-in-time, a way for even
small-lot production to be profitable. At Kiichiro’s bidding (and to bring
profits even with high diversity, small batch production), Taiichi Ohno
hammered out the Toyota Production System, which kept costs down
during the company’s inception and expansion.
Toyota's System of Management Functions 131

It goes without saying that a company cannot secure a sound financial

footing merely through just-in-time or TPS cost-cutting on the shopfloor.
Company-wide cost management methods must be established.
Toyota’s introduction of scientific cost management methods begins
after World War II, when it brought in standard costing and other man-
agement accounting methods from the United States in 1950. The details
of this process are told in Toyota: A History of the First Fifty Years (1987),
but certain pivotal events are discussed below:

The cost of a vehicle is largely determined at the planning and design

stage. Moreover, not much in the way of cost improvement can be
expected once full-scale production begins because manufacturing
equipment in the age of mass production has become larger and more
specialized. As one way through this problem, in late 1959, Toyota for
the first time considered cutting costs at the planning and design stage
by setting a target selling price of $1,000 for the Publica, then in the
prototype stage. Results were good and the Publica managed to become
a “people’s car” at a mini-car price. This success in meeting price tar-
gets at the planning and design stage subsequently took root in the form
of VE (Value Engineering), and the procedure came to be followed for
the development of each new vehicle and for each model change. At the
same time, a so-called cost planning system took shape in which the rel-
evant departments at each stage of the process, including design, trials
and production preparation, cooperated with one another to achieve
target costs.

Toyota introduced VA (Value Analysis) in 1962 and all the engi-

neering departments worked together to hold parts reviews with
each of their suppliers.
Toyota launched cost management first by putting together a system
of cost maintenance that depended on managing departmental costs.
Then the company established a system of cost improvement for fur-
ther reducing estimated costs and added cost planning at the new
product planning stage. The cost management system honed through
this process eventually earned the acclaim of the Deming Prize evalu-
ation committee when it conducted an audit in November 1965.
Toyota set up a cost planning committee in September 1969 to
take a broad look at cost planning. This was followed by the estab-
lishment of a cost planning section in the Engineering Department
and the realization and strengthening of cost planning systems in a
number of departments, including the Production Technology
132 Inside the Mind of Toyota

Planning Office, accounting and purchasing control. The forms of

cost planning functions were able to evolve along with their goals.

The Cost Management System

Cost Management Rules, a document drawn up in the course of TQC
activities in the 1960s, lays out Toyota’s cost management activities.
While prescribing a clear framework for various activities at each
departmental level, Cost Management Rules emphasizes the tangible
side of things as well: interdepartmental cooperation and raising cost
awareness. Figure 3.7 shows the framework of Toyota’s cost manage-
ment system.

Cost Planning
* From new vehicle planning and design through production preparation,
cost planning refers to early activities to ensure target profits by building
in costs.
* Skillful planning at this stage is ten times more effective than cost
improvements at the manufacturing stage.

Capital Investment Planning

* Cost planning looks at a vehicle vertically, whereas capital investment
planning, which involves large sums of money and difficult issues of
investment leveling, looks at a vehicle horizontally.
* Based on how total costs can be lowered, capital investment planning
considers such choices as the innovative or the tried-and-true, dedicated
or multipurpose equipment, and manual labor or machines.

Cost Maintenance and Cost Improvement

* Cost maintenance refers to activities for sustaining reference labor costs
while adhering to standard operations and to maintaining raw material
reference units. It is the foundation of cost management.®
* Labor, materials, energy, and other processing costs that vary according
to operability are managed in accordance with variable budgets.
* Cost improvement [or cost kaizen] activities are those that lower refer-
ence labor costs and reference breakdown units’ by changing standard
operations, materials, or processing methods.
Although not shown in Figure 3.7, activities to create “opportunity
profits” constitute one link of cost improvement. Unlike ordinary activ-
ities, these work toward significant cost reductions in major projects.’
Toyota’s System of Management Functions 133

Profit Plan . Product Plan

specifications / price

Cost Plan

Cost Cost
by
Department
Control
Budget Improvement Capital
Investment
Maintenance

Source: Japan Production Management Association, ed. The Toyota Production System, Fig. 9.2. 1996.

Cost Planning
Cost planning occupies a particularly important place in Toyota’s system
of cost management. Figure 3.8 shows categories of cost by the point at
which they arise.
The chart provides a qualitative illustration of Toyota’s assertions that
“the cost of a vehicle is largely determined at the planning and design
stage. Not much in the way of cost improvement can be expected once
full-scale production begins” and that “skillful improvements at the plan-
ning and design stage are ten times more effective than at the manufac-
turing stage.”
It was Toyota’s experiential grasp of what is shown in this chart that led
the company to develop a new method of “cost planning that applies VE
at the new car development stage” and to try using it in the development
of the Publica, (see Chapter 2, Perspectives on Work).
VE is described as “organized research for the purpose of achieving
needed functions at minimal cost” These needed functions are factors
that assure quality, so that VE can be seen asa bridge or ferry running
between quality assurance and cost management.
In February 1965, The Society of Automotive Engineers in Japan
(JSAE), published an article in their Japanese-language journal, Review of
134 Inside the Mind of Toyota

}SO)
pazeynuind5e

<

————> product development process

Costs generated Fabrication | Costs generated Costs generated

before fabrication Costs after fabrication (2)| after fabrication (2)

R&D costs, etc. Material costs General mgt costs Sales promotion
trial mfg costs processing costs costs, service costs,
Indirecticosts disposal costs etc.
N.B. Horngren and Foster [1991, p.44]
Source: Kato, Yutaka. Genka Kikaku [Cost Planning]. 1993.

Automotive Engineering. Entitled “The role of VA in the Automobile

Industry—with special reference to cost planning,” it was written by
Koichi Tanaka, the head of Toyota’s Technical Administration Depart-
ment. Tanaka's article is both crucial for understanding cost manage-
ment—and, especially, cost planning—at Toyota and useful for grasping
the way Toyota works and thinks. This article is considered to set the tone
for cost management at Toyota even today and is summarized below sec-
tion by section.
1. Foreword
This paper is not a manual of specific VA/VE procedures, but, rather, an
exposition of how an organization can draw maximal effect from VA/VE.
2. VA Applications and Issues
At Toyota, VE is called cost planning, and VA is referred to as cost
improvement. Toyota sets standards for accrual costs in the production
department for each quarter and calls activities to maintain these stan-
dards cost maintenance. These three items—cost planning, cost
_ improvement, and cost maintenance—are collectively dubbed the three
functions of cost management. The following principally deals with cost
planning activities, since these have the greatest effect.
3. Managing the cost planning function
Cost planning at the new product development stage can be broken
down into six steps, designated 0-5 in Figure 3.9.
Toyota’s System of Management Functions 135

Step 0 (cost planning target survey)

Collect and analyze information relating to demand forecasts and
sales prices.
* Compare the sales price forecasts and quality targets of competing com-
panies in Japan and in export destinations, conduct customer satisfac-
tion surveys and other market research, and analyze information linking
demand forecasts and sales prices.
Study sales profits by vehicle model.
* The sales price is not calculated by adding profit to costs. It is determined
as a function of the competition’s prices and the consumer’s latent abil-
ity to pay.
* The total sales profit by model is also a function of the life cycle and the
time required to implement model changes and minor changes. Other
factors are price changes, development investment costs and capital
expenditures.
* These considerations determine the time and substance of new product
development, as well as which models have priority for the application of VE.
Analyze and quantify the relationship by model between production
volumes and costs.
* Construct a Maxcy-Silberston curve (see Figure 2.3) for each process
step—e.g., presswork, forging, casting, and machining—so that these
steps can be aggregated into a picture of the model as a whole.’
* Make it possible to grasp the relationship of total life-cycle production
volume to the choice between the depreciation of multipurpose equip-
ment and the investment costs of dedicated equipment.
Understand the costs implied in technical trends.
* Understand the cost implications of trends in materials, production
technologies, and factory management methods.

Step 1 (setting cost-planning targets)

* Clarify management’s policies, strategies and intentions.
- Manufacturing costs and sales costs determined in this step are not
immutable until the period of new product launch. Revise them as
appropriate, depending on changes in market trends and the emergence
of competing vehicles.
- Targets set at this stage are indicated by VE activities conducted in the
course of the development process, during product planning, prototype
studies, and production preparation.
* Use the basic production volume and projected vehicle life to check later
estimates and conformance to goals.
136 Inside the Mind of Toyota

‘(basic plan policy —

prgduction units)

Casting
Dept,

Forging
Dept. ~

‘Motomachi Bo ly Dept.
Main/Motomachi Assy Depts.
Motomachi No,|2 Assy. Dept.
Source: Tanaka, Kéichi. "Jidosha Sangy ni okeru VA no Yakuwari" [The Role of VA in the Automotive
Jid6sha Gijutsu [Automotive Engineering]. February 1965. Industry],
Toyota's System of Management Functions 137

Stage4 | Stage 5
stimates by part and VE activities) (standard cost setting)

set sales price

price investigation price investigation

meeting meeting”

fabrication cost
estimate

cost
improvement
comparison of ratios of

appriasal
drawings_ study revisions to target |
major functions ‘cost determination by part
similar parts
calculated weight
process as for
step 4)

productivity investigation
cost reduction proposal

~ (P)(M) (W)mat'ls ()(M) (W) setting est.

ki
units labor cost est.Ls est. ofjigs, tools, dies
(ewe eee

<= ia cme |

Eo materials& w eg est. die cost 3 same as above

aa ||| a
same as mH |. same as above =
138 Inside the Mind of Toyota

Step 2 (assignment of costs by function)

Survey and organize the costs and weight structures, by function, of
each model currently in production.
* The Accounting Department generally puts together cost structures by
departments, such as manufacturing and purchasing, where costs are
generated. These need to be further subdivided by design function, e.g.,
engine, transmission, propeller shaft, white body, interior trim, and exte-
rior trim.
- Again by function, create a table of cost per unit weight (¥/kg) for major
components.
* These are useful because automobiles seldom undergo comprehensive or
radical structural change.

Understand the cost structures by function of competing vehicles.

* Survey the retail prices of parts at competitors’ dealerships. This method
helps ensure fairly precise estimates of other companies’ costs.

Determine the parts composition of the new product.

* Determine the parts composition for each model (type) before going
into detailed parts designing.
* Study which components can be carried over from those currently in use
and which need to be designed for the new model, along with how much
commonality there is among new product types. The number of newly
designed parts and the total number of parts will depend on the extent
to which common (carried over and shared) components can be used.
Capital expenditures will vary accordingly.

Combine basic plans and goals of the new product, break down costs
by design function, and assign target costs according to basic
specifications, weight, and principal materials.
* Assign costs in proportion to specific percentages by which elements
such as seats, linings, and interior trim are to be upgraded with respect
to previous models. These distributed costs, in other words, are a cost-
based quality measure indicating the degree of quality that must be
designed in.

Step 3 (target costs and their redistribution)

* Along with satisfying performance requirements, designers for each
function put together detailed parts drawings within designated limits of
weight and cost.
Toyota's System of Management Functions 139

* Parts drawings are designed after detailed specifications are verified

against the chief designer’s intentions and then checked against the cost
planning staff’s macro-level estimates to make sure they fall within plan
in terms of cost.
- If necessary, the allocation of costs to functions may be revised in
response to problems during the prototype testing stage. When consid-
ering detailed parts drawings, the most important thing at this stage is to
determine whether volume production will necessitate the rebuilding or
redesign of the current equipment in use. Then compute the required
capital expenditures.
* Technical standard costs are derived by multiplying the extent to which
current parts will change by average cost variations. Production costs, on
the other hand, are obtained by adding costs arising out of specific man-
ufacturing elements.

Step 4 (VA in the prototype period)

Use standard parts.
* Shapes, dimensions, and monthly usage totals of basic parts such as nuts
and bolts are arranged into tables that are distributed to all designers.
Parts similar to existing parts cannot be redesigned without the permis-
sion of the responsible manager.

Commonize parts and processes.

: The first five digits of standard ten-digit part numbers at Toyota are stan-
dardized to the functional unit, so it is easy to compare drawings of sim-
ilar parts. In designing new products, this makes it easy to use uniform
parts and build uniform processes.”
* When problems or other reasons necessitate designing new parts that are
different from parts already in use, the new parts are not designed in iso-
lation. They are made so that parts previously used in other models can
be changed as well."

Conduct process capability feedback.

- Each part that is currently in production is classified according to the
current processes. The capabilities of these processes are maintained
according to the precisions as defined in design criteria. For processing
methods such as casting, die-casting, forging, presswork, and machining
in particular, data (technical standards) relating to dimensional differ-
ences, tolerances, surface precision, and difficulty (cost) can help prevent
a drift toward excessive quality that does not show up in designs.
- Design criteria emphasize strength, function, and durability, but other
items have recently been appended, such as cost-related selection of
140 ‘Inside the Mind of Toyota

materials and processing methods, cost calculation methods, and the

capacities of related processes on an economic level. Failure histories and
past problem recurrence prevention actions relating to similar parts have
also been added.”
* Confirming producibility is not the only purpose of prototypes. Of
greater relative importance is the verification of functions and perform-
ance. Occasionally, these two purposes contradict one another. When
this is the case, prototype vehicles for functions and those for pro-
ducibility are prepared separately, and comparative evaluations of the
two groups of prototypes are conducted. Analysis then indicates how to
secure both function and performance on the one hand and producibil-
ity on the other.

Use knowledge from supplier plants.

* Supplier plants must be treated with the attitude that they will generate
good suggestions.
* Purchased parts deserve the greatest energy investment since they are
responsible for over half the total cost of an automobile. At appropriate
stages of prototypes, teams composed of designers, purchasing agents,
people responsible for inspection, and production engineers should visit
supplier plants to conduct VE investigations.

Make estimates with prototype drawings and prototype parts.

* Conduct cost estimates for key parts (the 20-25 percent of parts that
account for 80-85 percent of the cost). Consider multiple key part
designs, build comparative tables and compare these with technical
requirement sheets before settling on a final version.”
* As data accumulate and the relationship between design specification
variations and cost variations becomes clear, a comparative table of cost
expenditures evolves into a [proper] cost table.
* Before prototype drawings assume their final form (i.e., when they are
still in the study and planning phases), top managers attend and preside
over parts study sessions with all concerned.
* These practices have the secondary effect of speeding up the decision-
making process and saving time. They spotlight problems in the cost
management system and facilitate its improvement.

Step 5 (Setting reference costs)

* Since none of the target costs in previous cost planning steps specify pro-
duction conditions relating, for example, to what kind of production line
will be used, a standard cost table is now used to arrive at target costs
using the cost differentials among parts technologies. It should be noted
that since the production line is determined at the production stage,
Toyota's System of Management Functions 141

costs will change depending on production conditions. They are called

standard costs.
* Because the company’s management strategy exerts enormous influence
over profit plans at this stage, the following points are taken into con-
sideration when effective capital expenditures are made and when seri-
ous study is invested in putting together economical manufacturing
processes:
— Reconfirmation of demand and production estimates
— Operations estimates and plans for equipment and manning once
volume production has begun
— Comprehensive integration with all company long-term plans
— Preparation of equipment, machines, tools, dies, and gauges for
volume production
* Use the model life cycle to set profit and cost plans.
* Based on the model life cycle, the person charged with purchasing con-
cludes parts purchase contracts with suppliers.

Cost improvement (Postproduction VA).

* Explain reduction targets for each model in terms that are easy to
understand.
* Since costs are actually being generated, organize VA activities on a
company-wide and systematic basis.
- Assign target reduction amounts according to responsibilities for cost
generation.
* Speed up action to respond to VA suggestions coming from vendors.
Whenever decisions are delayed, communicate the reason for the delay
and specify the date a response may be expected.
* Clarify how VA-related cost reductions will be evaluated and make plans
to reward the effort that goes into making suggestions.

Finally...
* I continue to pray that the Japanese automobile industry will understand
the true essence of VA and that it will use creative VA in an organized way
to develop into a global enterprise.

What we have seen above is the Toyota cost management system as

developed over the course of the TQC activities the company introduced
during the 1960s. The last sentence of Tanaka’s paper is striking. In it, we
glimpse both confidence in Toyota’s cost management and Toyota's sense
of responsibility as leader of the Japanese automobile industry.
Toyota has found it inefficient for the design department to implement
VA by changing parts specifications after the start of production. The
usual practice now is to concentrate VA on manufacturing method
changes in the plant and for the design department to concentrate its
142 Inside the Mind of Toyota

principal efforts on VE during the new product development stage. The

design department has practiced VA only twice: at the time of the oil cri-
sis in the 1970s and during the collapse of the economic bubble in the
early 1990s.
It is not at all unusual for companies to begin the production of new
products without having met cost targets. In case targets are not met,
companies want to conduct some sort of recovery operations (i.e., design
changes for the purpose of VA) even after production on a completed
design has begun, perhaps even as a punishment for designers who failed
to meet the targets. If designers do not achieve targets, it is not for lack of
effort. Assigning punitive recovery activities to them after the fact is
demoralizing. It is wiser to use the same time to have them do VE for new
products than to have them conduct inefficient postproduction VA. Toy-
ota, like many other companies, begins production even when targets are
missed. The difference is that Toyota does not burden designers with VA
after production begins. As seen above, whether or not a company can
take a total systems approach to the cost marks the difference between a
vicious circle and a virtuous one.
We can cite an example of a president of a certain company who sighed
with relief once his cost control system was up and running. “Now I’m
free of the burden of cost,’ he said. The trouble was that his company
never achieved its cost targets. “We always get off to a strong start;” he
lamented, “but we’re always last coming around the final lap.” In his com-
pany, recovery activities are the norm.
This company president is wrong on two counts. First, he assumes
there will come a time when he can relax about costs. Secondly, he thinks
he does not have to start managing until the final lap.
What built the Toyota we know today is that, even as the company set
up a scientific system of cost management and developed cost manage-
ment methods, it has always set aggressive cost targets and has endeavored
to meet them.

FINANCIAL AND ACCOUNTING SYSTEMS

On its balance sheet for 2001, Toyota’s consolidated profits neared one
trillion yen, making it the most profitable company in the history of
Japan. Its financial income was 553.1 billion yen, corresponding to ¥2.63
million per employee. In other words, Toyota would earn the equivalent
of nearly half of the average of its employees’ wages, even if it did not sell
a single car.
Toyota’s System of Management Functions 143

Toyota: A History of the First 50 Years (1987) recalls the events that
brought Toyota to this financial position:

Rationalization activities (following the first oil crisis in 1973), cou-

pled with adjustments in the sales prices of exported vehicles, led to a
rapid recovery in Toyota Motor Corporation business results after June
1975. Company policy had meant, too, that the massive capital invest-
ments of the late 1960s had in principle been covered by Toyota’s own
funds, so the company was able to exploit shorter equipment lives,
accelerated depreciation, and a system of special depreciation. In
addition, Toyota was well supplied with its own capital because it had
made efforts to keep various reserves and contingency funds and had
increased its capital by issuing stocks at market prices at just the right
times. With its policy of limiting outside borrowing as much as posst-
ble, it was able to eliminate debts from the debit and credit categories
of its accounts.
Even when reduced car production during the oil crisis rapidly cut
into capital, suppressed capital investment and increased profitability
led to a recovery, and capital exceeded 300 billion yen at the end ofJune
1977. Financial profits during the same period reached 45 billion yen.
As a result, while the technical and production departments were work-
ing hard to cut costs through kaizen, the accounting department was
making efforts to put every bit of surplus capital to profitable use. Debt
repayment and the redemption of company bonds led to a decreased
interest burden, and this, coupled with increased profits, built a struc-
ture of profits outside of sales. The significance of this becomes increas-
ingly evident in a period of low economic growth.

Yasuhiro Monden, in his Toyota Management System (Productivity

Press, 1993. tr. Bruce Talbot, pp. 26-27), analyzes Toyota’s financial activ-
ities as follows:

1. Toa very large extent, Toyota has tended to procure capital through so-
called internal capital, which consists largely of retained profits and
depreciation expenses. Even when Toyota turns to external sources to
procure capital, such procurement is usually covered by owner’s capital
(stock) increases and convertible bonds. Consequently, we can recog-
nize how Toyota has remained firmly committed to meeting its own
capital needs in line with its policy of debt-free management.
2. To maintain and expand its capital from retained profits, Toyota has
emphasized its positive support for plant investment, new car devel-
opment funding, and investment in support of affiliated companies.
144 Inside the Mind of Toyota

Nevertheless, Toyota has also recognized the need for an external secu-
rity net for its main business, which is very sensitive to economic
downturns. Therefore, it has also pursued capital operations outside
its main business that can be counted upon to remain profitable
regardless of conditions affecting the automobile industry. Such oper-
ations have concentrated on investing in negotiable deposits; tempo-
rary bonds, large-sum, variable-interest time deposits; and other
investment vehicles that offer safe, reliable, and high-yield returns.
Toyota has been conspicuous for its strong aversion to stock mar-
ket investments. This conservative approach is seen as part of
Toyota’s staunch policy of putting its main business before all other
considerations.
3. When increased investments toward tangible, fixed assets cannot be
covered by Toyota’s internal capital, Toyota has tended to liquidate some
of its massive securities holdings.
4, Whenever Toyota has found itself with excess capital, it has tended to
channel such capital toward further investments in support of affiliated
companies or for acquiring more securities.
5. Whenever Toyota’s main business has floundered amid depressed busi-
ness conditions, Toyota has eased off on its tangible fixed assets invest-
ments and support for affiliated companies.

Another point bears mentioning here. A major contributor to capital

creation at Toyota is the fact that the Toyota Production System cuts
stocks of materials, parts, work-in-process, and finished goods toa strict
minimum. There is, consequently, very little capital invested and stagna-
tion in inventory assets.
In all probability, the foresight of Taizo Ishida is responsible for Toy-
ota’s financial health. In fact, the prototype of Toyota’s financial system
emerged from a combination of Sakichi Toyoda’s formative experience of
starting a company with other people’s capital and from Taizo Ishida’s
post-World War II experience of being “penniless, pitiable and nearly
reduced to tears.”
Below, accompanied by quotes from Taizo Ishida, are Toyota’s financial
rules as summarized by Yoshimasa Kunisaki in his book, Toyota’s Rules of
Management (1979).

Financial Rule 1
Know that all loans are fearsome enemies.

“No enemy is more terrible than money, and no friend is more trust-
worthy. Other people’s money—borrowed money—quickly turns into
Toyota's System of Management Functions 145

an enemy. Money is a trustworthy ally only when it is your own; only

when you earn it yourself”

Financial Rule 2
If you have money left over, turn as much of it as possible back into equip-
ment to raise the efficiency of your machines.
“Leftover money should be returned to capital. Increasing productivity
through headcount is wrong. Production improvement always has to be
achieved by raising the efficiency of machines.”

Financial Rule 3
Always be prepared to welcome good fortune or luck.
“Good fortune or luck isn’t simply a matter of chance. What makes for
good fortune is always being prepared for tt.”

Financial Rule 4
In using capital, always expect the worst.
“A manager should always manage under the presumption that the
worst will happen; that the hard times will last all year.”

Financial Rule 5
The bigger the company gets, the more you should cut expenses.

“This isn’t a point one needs to drive home to salaried workers, but
sales people need to have the discipline to maintain the same lifestyle
with the same salary no matter how much sales go up.”

During the period of the bubble economy, a prominent economics

commentator observed that “any company that doesn’t get into money
management when it has 2 trillion yen of surplus capital is a fossil.”
“Toyota is a manufacturing company,’ Eiji Toyoda retorted. “We don’t
need to make money in high-risk, high-return investments.” After the col-
lapse of the bubble it became clear which of them was right.
Hiroshi Okuda recalls that Eiji Toyoda “taught me that stocks are
sometimes high and sometimes low.”
Clearly, Taizo Ishida’s lessons are still very much alive.
We see Ishida’s words as being passed down, not by some oral tradi-
tion, but as documents within Toyota. Examples are the Financial Man-
146 Inside the Mind of Toyota

agement Regulations, which codify the methods analyzed by Yasuhiro

Monden, and the Guide to Financial Management, which records things
Ishida actually said, words that would be impossible to transmit accu-
rately by word of mouth.

MANAGING LABOR
Labor management encompasses such matters as hiring; employment,
education and training, personnel, wages, welfare programs, and labor-
management relations. Toyota’s practices in many of these areas are dis-
tinctive, but in this section we will deal with career training and personnel
management, two topics directly related to skills and motivation.

Career Training
Motivation
Table 3.2 compares levels of education of members of the board at Toyota,
Nissan, and Honda.
Since it adopted a system of “corporate officers” in 1999, the Nissan
Motor Company has very few board members, so a strict comparison is
not possible. Still, the proportion of Nissan board members who gradu-
ated from the University of Tokyo is quite high. As a matter of interest, the
proportion of University of Tokyo graduates among the 44 board mem-
bers in 1998 was 45.5 percent. This is a historical tendency at Nissan.
Before Carlos Ghosn, the current president, four generations of Nissan
presidents had graduated from the University of Tokyo. Ironically, in
1999, when Nissan came under the umbrella of downgraded Renault cap-
ital, the front page of the Asahi Shimbun (March 28) mocked the weak-
nesses of “MITI, the Industrial Bank and Tokyo University.”
For firms of their size, there are few University of Tokyo graduates sit-
ting on the boards of directors at Toyota and Honda. Honda’s nearly ten
percent of high school graduates is noteworthy as well.
Toyota and Honda differ substantially from one another in terms of
management policies and vehicle development aims, but they appear to
have similar views on training. For each of these companies, human
moti-
vation, or “drawing out willingness,” is central.
With the knowledge and grades one acquires at school of little use in
the corporate world, it is willing people who carry a company forward.
Table 3.2 probably looks the way it does because Toyota and Honda
put
their energies into developing and training willing people rather than
into
fussing over report cards.
Toyota's System of Management Functions 147

ZY
: University of | Other University ‘High School
| TokyoGraduates Graduates— Graduates

10 (15.6%) 54 (84.4%)

13 (48.1%) 14 (51.9%)

4 (9.8%) 33 (80.4%) 4 (9.8%)

Soichiro Honda created mechanisms for encouraging generations of

willing people. His “Failure Prize” which awards one million yen annu-
ally to an employee who takes up a major challenge but fails is but one
example. Eiji Toyoda declared in no uncertain terms that “the cardinal
aim of personnel management is to motivate each person via the under-
standing that comes of education,” and he worked to have that ethos per-
meate the entire organization.
The phrase, “cultivating people”® ordinarily means raising skill levels,
but at Toyota, hitozukuri refers to the same thing that Eiji Toyoda talked
about, i.e., motivating people. This is accomplished by a psychological
approach, with education and training only one means among many.
Managers and more experienced employees in Toyota are always asking
themselves how to motivate people and are always looking for ways to
maintain contact with junior colleagues.
Indeed, many aspects of Toyota’s cultivation of people suggest a psycho-
logical approach. Whether consciously or unconsciously, Toyota freely uses
a string of behaviorist theories such as Maslow’s five-stage Hierarchy of
Needs, McGregor’s Theory X and Theory Y, Herzberg’s Motivation-
Hygiene Theory, Argyris’ Immaturity-Maturity Theory, and various indus-
trial psychology theories from the past few years as well as counseling and
coaching theories that have recently been in the limelight. One of the points
148 Inside the Mind of Toyota

we would most like to emphasize in this book is the importance of using

psychological approaches to increase the motivation of all employees.
Motivation lies at the root of Toyota’s personnel management. With this
in mind, we would like to turn to Toyota’s education and training system.

The Education and Training System

Table 3.3 show Toyota’s “Three forums for skill development.”

“In the execution of work” means on-the-job training and (2)

“group education” refers to systematic in-house education consist-
ing primarily of off-the-job training (3) “Autonomous activities.”
refers to the informal education that was once the foundation of
Toyota's personnel management.

On-the-Job Training (OJT)

OJT occupies the core of training activities at Toyota. It is supported by
the personnel system and by group education, and these three elements
function as one to promote effective training.
OJT may be defined as education and training in which a superior sys-
tematically and deliberately imparts to a subordinate knowledge, skills,
problem-solving capabilities, and attitudes necessary for the job. OJT is
conducted in four steps:
Step 1: Hold preliminary discussions with the person to be trained in
order to inspire him to want to learn (motivation).
Step 2: Prepare learning materials, locations, and trainers. Rehearse the
training session.
Step 3: In the actual training session, train by first demonstrating and then
observing the trainee performing the task.
Step 4: Once the training is completed, assess what has been learned and
repeat training if necessary.
Toyota and its affiliated companies post OJT Status Maps on their
shopfloors that make it clear that OJT is being carried out in a planned
and deliberate way.
The planned OJT described above is not carried out to the exclusion of
everyday OJT. Toyota supervisors will toss out the following sorts of ques-
tions to employees while the latter are working:
1. How do you perform this job?
2. How do you know you're doing the job correctly?
Toyota's System of Management Functions 149

(1) In the Execution of Work _

[1] Taking up the challenge of work at a higher level
[2] Planned on-the-job training
_ [3] Direct coaching by a higher-level manager or manager from another department
(2) Group Education
[1] Painstaking hierarchical training-
[2] Personal training by top management
[3] Unique Toyota training _
[4] Participant-centered training
[5] Practical shop-floor training _
_ [6] Training handed down by individual advisors
_ (3) Autonomous Activities _
[1] QC Circle activities
[2]‘Creativity
and Ingenuity’ Suggestion activities
[3] Various human relations activities
| [4] ‘Autonomous study activities’ (Toyota Management Study Group, Toyota
Technology Group)(from Toyota Motor Skills Development materials)

Source: The Japan Society for Production Management, ed. 1996. The Toyota Production System

3. How do you know that, when youre done, you haven’t made any
mistakes?
4. How do you handle problems when they come up?
(Bowen, Kent et al. 1999. “Decoding the DNA of the Toyota Production
System.” Harvard Business Review, September—October).
Every businessperson—and not just shopfloor operators—ought to be
able to answer these questions. Yet one wonders how many really can do
so with accuracy. On the shopfloor, the answers will be provided in the
form of (1) written procedures, (2) control points and inspection points,
(3) control charts, and (4) procedures to follow in case of abnormalities.
With these as a reference, one should be able to answer on one’s own. And
the quality of the work should rise markedly.
An examination of the data suggests that, even at Toyota, OJT does not
always go smoothly in administrative and engineering areas. In most com-
panies, in fact, OJT seems not to progress well in environments where work
is not as routine as it is on the factory shopfloor. OJT in such cases has a ten-
dency to turn into a sort of pre-modern “master and disciple” pair coaching.
Truly effective OJT (even in administrative or technical areas), requires
constructing an OJT Promotion Map for everyone, preparing written
procedures for the four OJT steps mentioned above, and insisting that
they be used. Each department, moreover, needs to manage an OJT plan
150 Inside the Mind of Toyota

and track its OJT status, and the company as a whole needs to hold OJT
reporting sessions and OJT assemblies.

Group Education (off-the-job training)

The following are distinctive characteristics of Toyota’s system of group
education:
* Education is fundamentally in-house. The human resource development
department independently prepares a plan, arranges trainers to come
from inside and outside the company, and implements the training. Even
when educational programs developed outside the company are used,
they are customized for Toyota. Toyota keeps its educational competence
from deteriorating by implementing training plans on its own even
when the content of the education is outsourced. The Toyota principle of
self-reliance, evident in the manufacture of automobiles, also applies to
education.
* That said, Toyota actively uses external education organizations. The
company is careful to keep up with progressive educational methods.
* The company organizes courses (Critical Job Professional Seminars) that
are expected to provide training for professional management as well as
skills transmission in the workplace. These Critical Job Professional
Seminars are classes in which managers transmit some of their own pro-
fessional expertise to their subordinates at the chief clerk level and below.
* Training mechanisms are set up to take new employees in administrative
and engineering areas and quickly make them into first-rate business-
people and “Toyota people” who pledge allegiance to Toyota.
* In order to cultivate broad perspectives in its managers, Toyota organizes
management lectures and exchanges, with a variety of industries and
with the National Personnel Authority.
* The Toyota Production System is, of course, registered as a formal sub-
ject in the training curriculum. This training is given to managers in
administrative and engineering posts as well as to technical managers.
* QC education, as one would expect, is extensive.
* Language education is popular, reflecting the current era of internation-
alization. In 1998, Toyota executives held discussions with professors
from the Wharton School to construct a training program and launched
a management school of short-term overseas seminars to train interna-
. tionalists. This management school is another vehicle for spreading the
Toyota way throughout the organization.
* Toyota provides training to assist customers and others outsid
e the
company.
Each person at Toyota undergoes approximately three days of group
training annually. If we take into account the workplace training
con-
Toyota's System of Management Functions 151

ducted in addition to this, the total comes to 6 days. Roughly 3 percent of

labor hours, in other words, are invested in training.
Toyota also has a system of training for its executive staff, which can be
loosely defined as a merit promotion encouragement system. Mecha-
nisms are in place to help staff understand what they need to learn before
they can qualify for merit promotions and to inculcate staff with the sense
of responsibility they will need after such promotions. These mechanisms
seem to constitute a thoughtfully elaborated system rooted in the psy-
chology of cultivating a sense of mission that draws on both the desire for
promotion and the satisfaction of having been promoted.

Autonomous Activities

We turn now to education through autonomous activities, the last cate-

gory in Table 3.3. We find QC circles and the suggestion (teian) system
here because at Toyota, the purpose of both of these systems is to
develop personnel and skills rather than to make work more rational or
more efficient.
Masao Nemoto, formerly in charge of Toyota Motor Corporation’s
TQC Promotion Office, puts it this way:

Improvements by shopfloor managers contribute far more to produc-

tivity and quality than do QC Circles or kaizen suggestion systems. The
ratio between the former and the latter is about 80:20. Improvement
(kaizen) activities were clearly worked out as the mission for foremen
and team leaders from around 1955. Kaizen is their job and they are
charged with making major improvements themselves. The basic idea
is that you shouldn’t be asking QC Circles to do the work of foremen
and team leaders.

When Toyota’s suggestion (teian) system grew in the 1980s, many sug-
gestions would be in progress simultaneously. Toyota consequently mod-
ified the system so that job improvement suggestions were linked to real
skills development.
The designation, “Various human relations activities” in Table 3.3
refers to four things:
1. In-house group activities
2. PT (personal touch) activities
3. Activities to make company dormitories more cheerful
4, Toyota Club activities
152 Inside the Mind of Toyota

Criticism has recently been leveled at the idea of exploiting informal

organizations by formalizing them. This practice no longer suits the times
and one sees fewer instances where it occurs. Nonetheless, it appears that
informal organizations still play a quiet role in training at Toyota.
In Chapter 2, we discussed autonomous study activities, including the
Toyota Management Study Group and the Toyota Technology Group,
shown in Figure 3.3.

Personnel Management
Two effective means of imbuing all employees with company policies and
goals are slow-acting motivation building and fast-acting personnel evalu-
ations. Companies that suffer because their employees do not necessarily
do things the way they are told or do not spring into action when the whis-
tle blows should immediately link personnel ratings and company policies.
Toyota adopted the management by function system shown in Figure
3.5 when it introduced TQC in the 1960s. This was a “one man, mulTti-
boss” arrangement, meaning that an employee’s personnel evaluations
would be made by more than one person. When the company brought in
design reviews in the 1970s, it set up a system of conducting personnel
evaluations that actively addressed design reviews (see Chapter 4). The
introduction of the Development Center system in 1992 gave a “mother
department” authority over personnel in other departments (see Chapter
2). The personnel evaluation system at Toyota, then, developed in step
with major organizational innovations.
In his book entitled The Toyota System’ (1998), Osamu Katayama offers
the following analysis of recent movements in Toyota’s personnel system:
* The “challenge program” launched by Toyota in July 1996 is a forum in
which diverse people use their creativity in diverse activities to build a
vital company. Against a background of structural change in the envi-
ronment, the program places diversity and creativity at its core.
* Toyota has incorporated three pillars into its challenge program. The
first is a revolution in the cultivation and use of people. As an example
of this new orientation in personnel development, Toyota has worked
out a progressive policy of enhancing labor flexibility to cultivate and
_ Support employee activities even outside the company. The second pillar
is a revolution in the awareness and work methods of administrative and
engineering personnel. This incorporates specific policies, for example, a
system for self-study and training, casual days, the STRETCH individual
development program, the U-TIME system, and flexible work hours.
The third pillar is a revolution in organization and management. This
Toyota's System of Management Functions 153

means better matching the framework of the organization to the content

of the work, enhancing competitiveness in new businesses as well as old
ones, and actively decentralizing with a view to improving service. Toy-
ota assigns people full-time to limited-term project teams, moreover, to
resolve issues that cut across the organization or to address topics of
major importance or urgency.
* Personnel evaluation criteria are made explicit. For managers, for exam-
ple, task creativity counts for 20 percent; task execution, 30 percent;
organizational management, 20 percent; use of human resources, 20 per-
cent; and popularity, 10 percent. Evaluation criteria for staff members
assign 50 percent of the score to professional knowledge and ability and
the remaining 50 percent to the same categories used to evaluate man-
agers: creativity, execution, management, use of human resources, and
popularity.
* Three features distinguish the promotion system introduced by Toyota.
First, it abolishes chronological promotions in favor of a system in which
employees always have the opportunity to move upward. Second, it eval-
uates each person in terms suitability, competence, and results. Promo-
tions at the class-2 level of key posts and above are different. For
managers, once need has been thoroughly investigated, placement is
determined by fitting the right person to the right position. For staff
positions, determinations are made by matching appropriate placement
and remuneration to past performance.
- It is worth noting that multifaceted assessments form a subsystem of eval-
uations for promotion. These complement evaluations in areas that are
difficult for superiors to judge and involve assessments from subordi-
nates. One feature of this system is that assessments from other managers
are called upon to sort out discrepancies among views coming from sub-
ordinates.
As we can see, Toyota is revising traditional Japanese employment
practices such as lifetime employment, the seniority system, and corpo-
rate welfare at a rapid pace. But rather than trying to repudiate traditional
Japanese management practices, it is refining them in order to activate its
human resources for a new era.
In 1998, when a U.S. bond rating service threatened to downgrade Toy-
ota on the pretext that it uses a lifetime employment system, then presi-
dent of Toyota Hiroshi Okuda made headlines by protesting. “It doesn’t
make sense,” Okuda said, “for Japanese companies and culture to be
measured arbitrarily according to the culture of an American bond rating
company. It especially doesn’t make sense to reject lifetime employment.”
Lifetime employment means just that—a guarantee that the company
will not fire its employees. For managers, this is the highest moral imper-
ative. The existence of this imperative is what makes managers strive des-
154 ‘Inside the Mind of Toyota

perately to be profitable. It is linked to their morale. Toyota may be revis-

ing its lifetime employment, seniority and corporate welfare systems, but
it is inconceivable that it would abandon them completely.
Tokuichi Uranishi, the head of Toyota’s Corporate Planning Division,
puts it this way: “There is talk of the collapse of ‘lifetime’, but I prefer to
keep thinking of this company as one where people would like to be for a
long time.”

THE OFFICE WORK MANAGEMENT SYSTEM

By “office work,” I refer to work that mediates horizontal and vertical
activities in an organization. Organizational activities would be impossi-
ble if there were no office work, and the organization itself could not exist.
Toyota conceives of office work in this way and devotes extraordinary
energy to its management. Figure 3.10 shows a schematic view of Toyota’s
office work management system.
In this section, I will look primarily at three aspects of Toyota’s office
work management system: the management of office work (office work
efficiency), the management of documentation, and, within this second
area, the management of standard instructions (job standards).

Managing Office Work (office work efficiency)

Toyota began coming to grips with the management of office work
around 1950, at a time when the concepts of office work and office work
management were as yet undeveloped. What follows is an overview of the
history of office work management at Toyota taken from Toyota: The First
20 Years (1958).

With preparations for rebuilding the company complete in 1950, two

managing directors with engineering backgrounds, Eiji Toyoda and
Shoichi Saito, toured automobile industries in the United States and
learned that mechanization was surprisingly advanced in America,
even in office work. Astonishing statistical and accounting machines
were in use everywhere, and office work proceeded with great speed
and accuracy. As soon as the two executives returned to Japan, they
directed the Management Research Office to begin looking into intro-
ducing IBM, Remington, Land, and other statistical and accounting
machines into the company. As a result of their investigations, they
realized that the organization of office work at Toyota was insuffi-
ciently rationalized and that no system suitable for mechanization.
Toyota’s System of Management Functions 155

Work
Component
Table
Management,

Ad hoc )-
7-7 Instructions
Instructions

Standard
Instructions
Forms
Management
General
|] {Communication \Communicatons

Reports
Management
of Old Editions
Records

Reference
Documents

existed. Mechanizing office work generally demands that office work

organizations and procedures first be rationalized in such a way that
they can be assigned to machines. The proper method is to wait until
the work has been streamlined before you bring in machines. Ratio-
nalizing office work is not such a simple task, though. This is why Toy-
ota, after various studies, decided to do things the other way around.
It would be most effective, the thinking went, to introduce the machines
first and use them to spur rationalization of the work. Fully expecting
to have to paya bit extra for the learning process, we signed a contract
for two sets of IBM machines, including two brand-new accounting
machines that had hardly been used in Japan at all.
The mechanization of office work once more brought the problem of
rationalizing work to the top of the agenda. The first issue we took on
was the company-wide control and management of forms that, in a
sense, constitute the tools and dies of office work. In early 1958, the
Management Research Office collected forms from the entire company
and inaugurated a system of form registration. The company laid a
foundation for the use of the IBM machines by designating form man-
agers for each department, plant, and section, laying out rules for forms
and establishing criteria for form design.
Office work began to show its full potential once a balance was
struck between technology and the work itself. While technologies
156 Inside the Mind of Toyota

advanced, office work always lagged far behind. In order to have office
work improvements precede automatically, the Statistical Research
Office (later the Management Research Office) took the lead in con-
structing a Business Component Table in May 1956. This table formed
a basis for the rationalization of office work by specifying the compo-
nents of the business itself in the same way that a parts table lays out
the components of an automobile. Toyota put this table to regular use
and completely revised it in May of each year. In order to promote
rationalization, Toyota, in 1957, used the table as the basis of a Short
Course on Flow Analysis that went a long way toward propagating the
methods throughout the company.

All this took place soon after World War II, when office work manage-
ment was still a new field in Japan. White-collar productivity is Japan’s
weak point even today, and in this context, the progressiveness of Toyota’s
office work management merits particular praise. The origins of Toyota’s
practices in this area are not well known, but, as we have seen, they take
us back to Eiji Toyoda’s visit to American automobile industries in 1950.
In the years since, Toyota has continued making improvements in
office work, and has organized company-wide office work improvement
events every ten years or so. In 1980, as we saw at the beginning of Chap-
ter 2, for example, Toyota joined with one of Japan’s top management
consulting firms to improve office processes in its design department. The
company implemented its C50 Campaign (to cut office work by 50 per-
cent) in the second half of the 1980s and the NOW (New Office Working)
21 Campaign in the first half of the 1990s.
The Business Component Table described in Toyota: The First Twenty
Years represents a critical concept in raising the efficiency of office work.
A table of this sort, also known as an office work function system map,
focuses on the work functions needed to achieve business goals and plots
their cause-and-effect relationships on a tree diagram. In the sample table
shown in Figure 3.11, for example, categories 1-3 give the structure of
office work. At Toyota, this structure is uniform throughout the company
up to category 3.
Below are five points highlighting the utility of standardizing the busi-
ness component table:
1. More efficient compilation of business component tables
A component table is drawn up whenever adjustments are made
to
the business. Standardizing the table saves work in constructing
new
ones.
Toyota's System of Management Functions 157

2. More effective organizational reform

One crucial point in constructing a business component table is to
avoid being dragged down by current organizational structures. Punc-
tions always need to be developed according to what they should look
like. At the same time, one needs to approach the current organization
under the assumption that one is reorganizing it in accordance with the
content of the business. Toyota’s 1961 formulation of rules for appor-
tioning office work on the basis of a component table (Toyota: The First
30 Years) raises the possibility of using such tables to change organiza-
tional systems.
3. More efficient management of office work
A table of parts shows an automobile’s manufacturing processes in a
tree structure. Such tables make it possible to produce cars efficiently.
As Toyota: A History of the First 20 Years points out, making adminis-
trative tasks more efficient demands a component table of business
work analogous to a parts table. Standardizing the business task ele-
ments by the unit of business work component that appear in the right
half of Figure 3.11—e.g., written procedure numbers, frequency, time
required, input destination, input information, output destination,
and output information —provides ready firepower to new and tem-
porary workers and gives clues to improvements based on what is over-
all the most suitable thinking.
4. Standardization of the management of data and research materials
Since common business components are used to manage items such as
business standards, data, research materials, business plans, and minutes,
the interrelationships among these materials can be accessed automatically.
5. Linkages among different business functions
Different business functions are tied together by common business
structures, so investigations can easily be made into compatibilities, bal-
ances, trade-offs, etc. As shown in Figure 3.12, for example, the compo-
nent tables of business work on the leftmost of each of the quality
assurance work and the cost management work tie together two differ-
ent functions: quality function and cost function. This example shows
only the first category of the business; ordinarily detail would extend to
categories 2 or 3. Consequently, at each stage between product planning
and sales and service, it is easy to investigate compatibilities, balances,
and trade-offs between the distinct functions of quality and cost.
Figures 3.6 (the quality assurance system) and 3.9 (the cost planning
management system) may appear to have no relation to one another, but
in fact, as Figure 3.12 shows, they are tightly bound to one another by
business structures.
If we take all management functions—cost, quality, engineering, per-
sonnel, information, etc.—and write them out in terms of their common
158 Inside the Mind of Toyota

business components, the linkages among them automatically become

accessible, and one sweep of the eye suffices to reveal their comprehensive
relationships. The result will be improved management efficiency.
Toyota's System of Management Functions 159

In his book, The Evolution of a Production System” (1997), Takahiro

Fujimoto cites three distinctive characteristics of the competitive strength
(or organizational routines) of Toyota-style development and production:
(1) overcoming trade-offs, (2) flexibility, and (3) organizational learning
and kaizen. Toyota did not create the first of these, overcoming trade-offs,
out of thin air; it was a concept that evolved from the use of business com-
ponent tables.
This, then, is what it means when Toyota: The First 20 Years tells us
that Toyota created a foundation of business rationalization so that
office work improvements would progress automatically. We can only
marvel that this point of view emerged a mere ten years after the end of
World War II. One clearly sees the fruits of work conducted at the time
by the Toyota Management Study Group, whose activities centered on
studying American office management (see the section on Views of
Work in Chapter 2).

Managing Documents
In modern terms, we might refer to “document management” as “knowl-
edge management.” Knowledge first becomes useable by an organization
when documentation turns the tacit knowledge of individuals into formal
knowledge.
In this section, we will address the management of documents other
than business standards. Since business standards playacritical role
in Toyota’s management system, we will deal with them in the follow-
ing section.
All companies are aware that assistants manage documents. In the 21st
century, however, when information and knowledge management can
determine the fortunes of a company, that is simply not enough. Toyota
invests enormous energy in the management of documents. Toyota tack-
led the rationalization of office work soon after the end of World War IJ,
but it was not until the 1960s (with the introduction of TQC and the com-
petition for the Deming Prize) that Toyota came to grips with reorganiz-
ing document management in a serious and systematic way.
An outline of Toyota’s document management activities at the time is
presented below:

Form Management (standardization of forms)

Documents converted to forms are sometimes called the tools and dies of
office work. Standards should be imposed for office procedures that fol-
low no standard, and documents that have no fixed format should be for-
160 Inside the Mind of Toyota

malized. These measures will contribute to solving four problems simul-

taneously: expense, labor, time, and accuracy. In the same way that com-

. Forecast demand and project 1. Set target costs and target invest-
market share. ment costs based on new product
2. Meet market quality expectations. planning and long-range profit plan.
a. Set and allocate appropriate 2. Allocate target costs to depart-
quality and cost targets. ments responsible for design.
b. Prevent recurrence of major 3. Allocate target investment costs to
quality problems. departments responsible for equipment.

1. Design trials. 1, Estimate costs on the basis of

a. Match with quality targets. prototype drawings.
b. Test and study performance, ‘| 2. Assess probability of achieving cost
function and reliability, etc. targets.
2. Design full-scale production. 3. Conduct VE in order to minimize the
(verify necessary QA conditions) gap between target costs and
estimated costs.

1. Estimate costs based on process plan

1. Arrange processes to fulfill design and equipment plan.
quality. 2. Assess probability of achieving cost
2. Create appropriate vehicle targets.
inspection protocols. 3. Implement measures to minimize gap
. Assess full-scale production trials. between the two.
. Ensure process capacities. _| 4. Assess the economy of capital
investment plans.
5. Assess the economy of production
plan, production terms and sourcing.
. Confirm qualitative and
quantitative supplier capabilities. 1. Assess economy of order plans and
2. Verify product quality through purchasing plans.
first-off inspections. 2. Control purchased part prices.
. Support enhancement of 3. Improve purchased part prices.
suppliers’ QA systems.
. Bring fabrication quality into _ | 1. Encourage cost maintenance and
conformity with quality standards. cost improvements.
. Ensure suitable process a. Manage fixed cost budget.
management. b. Improve key project costs.
. Maintain process and machine c. Raise cost consciousness among
capacities. employees.
1. Check fabrication quality through
1, (Same as above).
first-off inspections.
2. Determine whether vehicles can be
dispatched or not.

1, Prevent quality deterioration during

1, Measure and conduct overall
packing, storage and transport.
assessment of actual new product
2. Train and conduct PR on correct use
costs.
and maintenance.
3. Check new vehicles.
2. Participate in analyses and
deliberations of work checks, Cost
4. Analyze and feed back quality
information. Function Council, Cost Council and
various committees.

Source: Aoki, Shigeru. Amended and revised from "Cross-Functional Management for Executives
(2)."
Quality Management, March 1981.
Toyota's System of Management Functions _161

puters are used to organize office data into databases, formalized docu-
ments are used to rationalize office work.

Document Circulation Rules

* Documents should flow in sequence only to people directly concerned
and some work should be accomplished at each step in the flow process.
(Do not transmit information that has no added value.)
* Have specialists transport documents.
* All documents should be handed over to the last management station in
a timely manner.

Filing
Document classification numbers determine the success or failure of fil-
ing. At Toyota, such numbers derive from business component tables.
Categories 1 to 3 are uniform across the entire company and individual
departments draw up categories 4 and 5 as appropriate for filing or other
managerial work. While the documents department from time to time
conducts document audits, departments where the state of filing is poor
are invariably those that have not made structures below category 4.

The System of In-house Technical Reports

Products have to be winners in the eyes of users if the company is to sur-
vive. To achieve this, technical product data needs to be collected, recorded,
and fully reflected in the next generation of products. Engineering
standards are a manufacturer’s most valuable technical knowledge asset,
but they are only effective when they are backed up by technical reports.
Technical reports must be managed with the same care as engineering
standards are. Toyota’s tradition of technical development is built on this
kind of thinking.
Toyota prescribed rules for technical reports in 1965 and at that time put
together a company-wide system—still in use today—which includes such
elements as a report structure for managing technical reports (hierarchically),
data index criteria, and usage procedures. Nowadays all technical reports are
kept in electronic form and from within Toyota and the Toyota group these
can be freely accessed or subjected to analysis by data sampling or other sta-
tistical means. (See the section on using statistical methods in this chapter.)

Managing Business Standards

Knowledge management breaks down into four phases in accordance
with Ikujiro Nonaka’s Theory of Knowledge Creation:
162 Inside the Mind of Toyota

1. Acquire tacit knowledge in reporting sessions or study groups (social-

ization)
2. Convert to explicit knowledge and common property (externalization)
3. Combine with prior knowledge in the organization to generate new
explicit knowledge (combination)
4. Individually digest shared formal knowledge and make it one’s own tacit
knowledge (internalization)

Since results are generated by people, the most important step in this
process seems to be (4) internalization, but since internalized knowledge
moves with individuals, it cannot be used by an organization. This is why
the highest form of organizational knowledge is the explicit knowledge
created as a result of phase (3), combination, in other words, standards.
As the highest form of knowledge, standards include both goal-seeking
processes and what-if mechanisms. Knowledge management, then, can be
said to be a theoretical extension of procedures for highlighting and learn-
ing standards in an organized way.
Table 1.2 provided an outline of Toyota’s business standards (or, in
Toyota jargon, kitei, or regulations). From this outline, we can derive a
comprehensive picture of the categories, systems, and content of the
company’s business standards. Table 1.2 assigns identifying marks
to distinguish between standards that were developed before and after
the introduction of TQC in 1961. Whereas most pre-TQC standards
were established at the level of the shopfloor operations, we can see
that many organizational and management standards were formulated
after TOC:
When Toyota received the Deming Prize in 1965, there may have been
some sense that the company had been engaging in the mass production
of inferior business standards. When the Deming Prize Committee
directed Toyota to overhaul its regulations, however, the company pub-
lished this goal as part of its annual policy and inaugurated a system of
regulation audits. Development ensued in both the quantity and the con-
tent of regulations.
Estimating Toyota’s total number of regulations from sources such as
Table 1.2 and the company’s organizational charts, there are probably
some 200 rules, an equal number of prescriptions, and perhaps 3,000
guidelines. If we include lower-level procedures, norms, and criteria, the
total probably comes to tens or hundreds of thousands.
As a matter of principle, Toyota’s business standards are not written out
in long-winded prose, but expressed by management system maps such as
the one shown in Figure 1.6. Explanations, attached to business stan-
Toyota's System of Management Functions 163

dards, record such information as the standards’ backgrounds, histories,

bases, reference data, and issues for the future. The main text is a conclu-
sion, in other words, and the explanation is process information. These
explanations constitute important data that can be used as educational
material, matter for discussion, or material for getting at the root of
improvements.
Looking at these structures, systems and achievements of Toyota’s sys-
tems for the management of documents and regulations, we can appreci-
ate the astuteness of an assertion made by one of the elders of a top
Japanese consulting firm previously cited in Chapter 2, i.e., that Toyota
spends five times as much on data management as other companies do.
Toyota operates on the premise that slashing resources that go to the pro-
duction line while investing five times as much as other companies do to
manage data and office work is the way to win.

COMPUTER SYSTEM MANAGEMENT

Toyota’s massive computer system is described in detail in Toyota: A His-
tory of the First 40 Years (1978), Toyota: A History of the First 50 Years
(1987), and Automobiles and Information Processing, published by the
Toyota Engineering Society in 1989. Three aspects of this system promise
to be of increasing importance: PDM (product development manage-
ment), SCM (supply chain management), and the company-wide infor-
mation system.

PDM (Product Data Management)

Designers ordinarily work according to the following process:
1. Receive product specification information—including product sum-
mary, destination, performance, and equipment specifications—from
the product planning division.
2. Bring together the functional components (functional product com-
ponents) needed to implement product specifications, and define for
each component such characteristics as performance, function, and
mass. This information is included in what is called product function
information.
3, Construct a manufacturing sequence table (parts lineup) of prototype
parts and production parts and use drawings and individual design doc-
uments to specify manufacturing methods, including materials, pro-
cessing, and assembly techniques. Next, they release this information to
parts suppliers, manufacturing, etc., via the prototype and purchasing
164 Inside the Mind of Toyota

departments. This information, including the parts lineup, is referred to

as parts specification information.
As shown in Figure 3.13, the relationships among product specifica-
tion information, product function information, and parts specification
information form a complex matrix. So, to support the designing, the
manufacturing industry, as shown in Figure 3.14, puts together data-
bases of these three types of information and develops application pro-
grams based on them. This total process is called Product Data
Management, or PDM.
As Figure 3.14 indicates, Toyota has two computer programs in the area
of PDM: TIS (for managing product specification information and pro-
totype parts specification information) and SMS (for managing produc-
tion parts specification information). Product function information
cannot be managed in an integrated, company-wide system, and may be
in designers’ heads, handled by individual designers on personal comput-
ers, or managed separately as CAD/CAE data by the design department.
Toyota’s system, in other words, does not provide complete support to the
design function.
Other companies have built systems similar to Toyota’s TIS and SMS.
There is nothing unique about these systems, so we will omit further dis-
cussion of them and turn, instead, to product function information.

Product Specification Information

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Toyota's System of Management Functions 165

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Product
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TIS = Total Information System for vehicle development

SMS = Specific Management System

In a paper entitled “Toward the Construction of an Information Basis

for Automobile Manufacturing in the 21st Century,’ published in the Jan-
uary 1996 issue of the Japanese—language Review of Automotive Technol-
ogy, the journal of the Society of Automotive Engineers of Japan, Satoshi
Kuroiwa of Toyota Motor Corporation’s IT Engineering Division
describes a future PDM system for integrating data in the new vehicle
development process. He sketches this out as a vision for all companies
because the realization of such a system, shown in Figure 3.15, can be
expected to have a revolutionary impact on quality, cost, and timing in
new product development.
Kuroiwa looks to CALS (Commerce at Light Speed) as an enabler for
PDM. CALS is an international computer data standard currently
under development. Even before CALS is realized, though, establishing
[robust] management of product models and of technical information
for the development process holds the key to making a future PDM sys-
tem like the one depicted a reality. Product models and technical infor-
mation for the development process refer to the product function
information (including functional product components) shown in Fig-
ure 3.14.
If development process information is managed in an organized fash-
ion, it can be consulted rapidly and appropriately when needed for model
166 Inside the Mind of Toyota

<<
OE ELT Sry

KS
nformation on competing
hicles

rts |Schedule
manager | -,

Product model

Source: Kuroiwa, Satoshi. "Toward the Construction of an Information Basis for Automobile Manufacturing
in the 21st Century,’ Automotive Engineering, January 1996.

changes and minor changes. One can expect marked improvements in

product development speed, built-in quality and cost, and efficient parts
carryover. In recent years, all carmakers have reportedly begun to focus on
the challenge of cost management in the early stages of development,
before parts specifications have been determined. Cost control becomes
possible from an early stage if product function information, put together
before parts specifications are determined, is managed in an organized
way. Reforming and speeding up the development process has become
central to competitive strategies in recent years and systematizing product
function information is an important strategic theme.
In the automobile industry, one seldom, if ever, hears of companies
that are managing product function information in an organized and
effective way. Nissan and Ford began managing product function infor-
mation in the mid-1980s, but functions and parts ended up jumbled
together and true management seemed impossible. The sheer quantity of
component parts in an automobile means that repeated design changes
occur at the development stage, and this makes company-wide manage-
ment of product function information difficult.
A decade has passed since Kuroiwa published his paper. There is still no
unified management of engineering data in which CAD data, which is
typical product function information, is not linked to parts specification
Toyota's System of Management Functions 167

information. Even now, it appears that Toyota has not developed a com-
pany-wide system to manage product function information.
How companies implement the sort of PDM shown in Figure 3.15 will
be an important factor in their competitiveness.

SCM (Supply Chain Management)

There has been a great deal of talk in the past few years about supply chain
management as a global standard for manufacturing industries in a new
era. Dell Computer’s supply chain management is often cited in such dis-
cussions. Dell’s product inventory time—from receipt of an order until
shipment—is only two days, which puts it far ahead of competitors like
Hewlett Packard and Gateway (at both companies, product inventory
time is a week). Dell has used its supply chain management as a weapon
in a low-cost attack to drive the other two, formerly excellent companies,
from the marketplace. The success or failure of supply chain management
structures will soon determine the survival of companies throughout the
manufacturing world.
SCM is a combination of Toyota’s keiretsu strategy, M. E. Porter’s value
chain strategy, and Eliyahu Goldratt’s Theory of Constraints. SCM
arranges upstream and downstream organizations in a chain and glob-
ally optimizes quality, cost, timing, and quantities for all processes, from
parts suppliers to sales outlets. To do this, it levels out the flow, both by
feeding resources into the chain at the point where the most value is
added and by solving problems at the bottleneck. Computer systems are
indispensable tools.
Toyota began by moving toward SCM as a computer system in the
1980s, linking suppliers, Toyota itself, body makers, dealers, and the
North American region with a Toyota Network System (TNS). Since the
phrase, “supply chain management” did not exist at the time, Toyota
referred to this process, which can be viewed as the prototype of SCM, as
Production—Sale Integration. The overall structure of TNS in 1991 is
shown in Figure 3.16.
Nineteen ninety-one was a time when networks were still in their
infancy in Japan, so the satellite communications network seen in the fig-
ure indicates that the system was extraordinarily advanced for its time.
Toyota faced a number of challenges, including information systems
issues (such as the standardization of communication systems) and con-
cerns about how to deal with communication protocols. From a business
point of view, there were additional challenges:
168 Inside the Mind of Toyota

/, storage& |
exchange
ze J\, |
TNS-B TNS-S

Source: Kumabe, Eiichi, Executive Director, TMC. "The Development of a Strategic Information System for Integrating
Production and Sales." OR Enterprise Salon lecture materials, 1991.

* The establishment of uniform and standard business protocols across the

Toyota group
* Overall standardization of the Toyota group
* A revolutionary shift of criteria for evaluating the systematization of
information, from costs and earnings to the concept of investment
The standardization of business protocols refers to standardizing the
transactions (interfaces) among organizations. The fact that this emerged
as an issue shows that within the Toyota group, nonvalue-adding conver-
sion and processing were being performed by the receivers of information
who were adapting it to their own organizations.
Overall standardization within the Toyota group means further stan-
dardizing areas in the Toyota group as a whole where work was not stan-
dardized. This shows that computerization was not reaching its full
potential in places where work was insufficiently standardized.
Moving from costs and earnings to the concept of investment means
evaluating information systems by opportunity creation rather than by
efficiency. This hints at the degree to which Toyota sees opportunity cre-
ation in the field of SCM as its trump card.
Toyota's System of Management Functions 169

A Company-wide Information System

In Nikkei Information Strategies (October 2001), Susumu Miyoshi, a
Toyota Motor Corporation executive vice president who is the company’s
Chief Information Officer noted:

The biggest problem with Toyota’s information systems is that all the
regions and companies have built different ones.
We’re in an age of furious change and it still takes a long time to
close the monthly accounts.
Unfortunately, other systems, like production management and
materials sourcing and distribution, are in the same situation.
When we developed systems in the past, we didn’t look at how to link
individual systems to the Toyota group’s global information strategy.
Frankly, a lot of people in Toyota management used to consider the
information systems department to be no more than a team for pro-
cessing business data. That was the past. Now we’re in an age in which
the activities of the information systems department can affect Toyota
competitively.
We repeat and explain that perspective, and in a variety of forums
now, and the thinking ofpeople in charge of shopfloor systems is chang-
ing fast. This gives us a foothold as we devote all our energies now to
the current challenge of systems integration.

Susumu Miyoshi describes Toyota’s current system as a patchwork and

indicates that improving the efficiency of its parts may not lead to a more
efficient total system, but may even damage future prospects for system-
atization. In the area of PDM that we touched upon above, for example,
the fact that SMS and TIS were set up without considering an overall
PDM system now means not only that SMS and TIS do not work well
with one another but that, together, they impede the systematization of
product function information. Here, as in the case of SCM (integrating
production and sales), the problem does not so much originate in the
computer systems as it does from a lack of coordination and consolida-
tion in the business. An information systems department regarded as no
more than a business data processing team was in no position to take the
initiative in revolutionizing or overhauling the business. Or the problem
may have been that it intentionally avoided such issues. It shows, at any
rate, that SCM still cannot operate at a satisfactory level in Toyota.
The fact that it takes more than a month to generate monthly balance
sheets is a problem that exists everywhere, and Toyota has not managed
170 ‘Inside the Mind of Toyota

to avoid this tendency. Improving such patchwork systems requires con-

siderable effort, and because it is not considered a big problem, it is often
put on the back burner. Toyota now realizes that the activities of the infor-
mation systems department can affect it competitively, however, and it is
looking to acquire new competitive strength by facing up to the difficult
issue of rebuilding and integrating information systems throughout the
company. Don’t take your eyes off Toyota.

[N.B. The author is unable to locate the source of Takashi Sorimachi’s

paper, “Environmental Change and the Development of Management
Strategies” (Kankyo henka to keiei senryaku no tenkai). Anyone with infor-
mation on the matter is invited to contact the author.|

Endnotes
1. Toyota Shisutemu no Genten.
2. “Rigorous emphasis on check and action” later became part of Toyota’s
culture of follow-up and yokoten.
3. Quality Control.
os. Seisan Shisutemu no Shinkaron.
5. Toyota’s quality assurance system is also described in an article by Ryosuke
Ozaki, of the Toyota Motor Corporation’s TQC Promotion Office, in the
March 1993 issue of Keiei Shisutemu [Management Systems], a journal of
the Japan Industrial Management Association. The reader is encouraged to
refer to this as well as to Katsuyoshi Yamada’s article. For an overall
understanding of Toyota’s quality assurance rules, these two articles, in
conjunction with Shigeru Aoki’s article, “Cross-Functional Management
for Executives,’ published in Hinshitsu Kanri [Quality Control] (Feb—April,
1981), are highly recommended.
6. By “reference,” I mean standards that should be challenged and improved.
7. In other words, the standard amount of raw material consumed per
product per hour.
8. For details of Toyota’s cost management system, it is worth consulting the
Shigeru Aoki article, “Management by function for executives,” that was
cited in the section on management by function.
9. This is referred to in the “Emphasis on Theory” section of Chapter 2: The
extension of the Maxcy-Silberston curve into parts.
10. ‘The last five digits designate the specific part numbers.
11. This practice was the cause of the “Daihatsu lament” cited in the section on
follow-up and yokoten in Chapter 2.
12. This may be seen as a system inspired by Toyoda’s admonition to “write
failure reports,” cited in the section on perspectives on knowledge and
documentation in Chapter 2.
Toyota’s System of Management Functions 171

Nee Nowadays this procedure applies not just to key parts but to the
management of all components.
14, Author’s note: Ishida became president of Toyota in early 1950 when the
company was near collapse as a result of its labor struggles. Toyota’s
fortunes recovered swiftly, when military procurement for the Korean War
began immediately afterward, in June 1950. Ishida’s assertion that “good
fortune or luck isn’t simply a matter of chance” was his response to the
popular view that he had been lucky. The truth is that the military
procurement boom was an opportunity that presented itself equally to all
comers. What set Toyota apart from other companies was that Toyota knew
what to do with the opportunity and that it took steps to prepare itself for
the hard times that followed the boom.
Ds hitozukuri, literally, “building people.”
16. Toyota no hoshiki.
Wy Toyota Shisutemu Shinkaron.
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173

Toyota's System of
Production Functions

Production functions, as used here, are the series of process functions

that, in a manufacturing industry, extend from research and develop-
ment, through product planning, design and development, manufacture
and sales, to handing over the product to the customer. This chapter
looks at Toyota’s production functions, with chapter sections following
the numbering system shown on the production function system dia-
gram in Figure 4.1.'

THE MARKETING SYSTEM

Product Policies

One important issue in the automotive marketplace concerns product

mix strategy, i.e., how to structure products hierarchically and how to sus-
tain derivative products. Establishing a product mix strategy makes it
possible to draw in a broad range of customers with diverse values and to
move customers to more luxurious vehicles as they advance in age and
income. It makes it possible, in other words, to entice and embrace cus-
tomers.
In strategic terms, Toyota pursued afairly incoherent course of prod-
uct development when it introduced the mid-size Crown in January 1955,
the compact Corona in May 1957, and the low-priced Publica in January
1961. Afterwards, Toyota filled in the gaps in its vehicle lineup when it
introduced aseries of high-volume models starting with the launch of the
Corolla in October 1966, followed by the Carina, the Corolla Mark II, and
the Vista/Camry. Nowadays the product lineup is seamless and Toyota has
put together a full line based on the idea of a product hierarchy.
This account suggests that something in Toyota’s product strategy
changed between the June 1961 launch of the Publica and the October
1966 introduction of the Corolla.
174 Inside the Mind of Toyota

2. Individual Product
Development System

(1) The Shusa (Chief Engineer) System

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3. Design Management System

(1) Standarization (2) Product Diversification/Parts Minimization (3) Project
Management (4) Product Information Management (5) Design Reviews

Akira Kawahara, former Toyota Motor Sales managing director and

author of The Essence of Competitivity’ (1995), tells a story that may
explain the change:

I think it was the spring of 1964. I came across an article about former
GM chairman Alfred Sloan’s book, My Years with General Motors, and
immediately arranged with Toyota USA to get me a copy. The book
taught us what we needed most to learn at precisely the moment we
needed to learn it. It was published exactly at the time that Toyota’s
vehicle development had reached one set of goals and was groping
around for where to go next.
Sloan had to devote considerable effort to imposing coherent mana-
gerial control over an automobile company that had grown through a
succession of mergers and consolidations. Since our aim was to grow
bigger in the future, we thought we might perhaps be able to do better
than GM byacareful reading of Sloan’s struggles, experience and
warnings. In developing new vehicles, for example, or in setting up a
new sales network, we thought we could plan our expansion if we put
a priority on not being bound by the legacy of the past. We felt we could
refer to Sloan’s extraordinary strategic thinking to develop and avoid
wastefulness in ways that had been impossible for him. It was as though
the book had been written especially for us. .
Toyota's System of Production Functions 175

We even thought that the longer it took our rival companies to

become aware of Sloan’s book, the better. Fortunately, the Japanese
translation wasn’t published until October 1967, long after the original
(1963). Apparently, many automobile company managers and other
Japanese didn’t know of the existence of the book until the translation
came out.

These nearly four years were a valuable period of strategy formulation

that had an enormous impact on the subsequent development of the
Japanese automobile industry. That in itself conferred an advantage on
those who came in contact with the book and digested its contents earlier.
The book was useful in many ways, one of them being in what it had to
say about product policies.
The real story of the publication of Alfred Sloan’s My Years with Gen-
eral Motors was that Part I of the book was first excerpted in Fortune mag-
azine in 1963; the entire text was published in the United States in book
form in January 1964. In Japan, a translation of the first Fortune Part I
excerpt ran in installments in the journal, President (Purejidento) from
November 1963 to April 1964. In October 1967, the entire text was trans-
lated and published by Diamond. Thus, only excerpts from Part I of
Sloan’s My Years with GM were available in Japan at roughly the same
time the original version was published.
As a matter of interest, an abridged translation of Part II of My Years
with GM appeared in installments in Toyota Management in the twenty
months spanning February 1965 to September 1966. The original book
obtained by Kawahara was subsequently acquired by the Toyota Manage-
ment Research Association, which published installments of Part I in
Toyota Management. I omitted Part I, of which an abridged translation
had already appeared in Purejidento. Thus, prior to the publication in
Japan of the entire text of My Years with GM, it is likely that many man-
agers and others at Toyota had avidly read Part II of the book in install-
ments and had read, as well, the abridged translation of Part I that had
appeared in Purejidento.°
“This book demystifies the magician’s tricks,” recounts Yoshihiko
Higashiura, the translator of Part II for Toyota Management. He fur-
ther notes:

Sloan writes with true honesty of having been confused and of having
made mistakes. This sort of thing is more useful to us than success sto-
ries are. It gives us the impression that even the great GM is within our
grasp. We are given courage by the plain fact that GM is managed by
176 ‘Inside the Mind of Toyota

entirely unremarkable people using entirely unremarkable ideas. This

is why I felt I was looking at a magician’s secrets.

The product policy that proved useful to Kawahara was the full-line
policy of offering vehicles for every purse, every purpose, and every per-
son. A brief outline of this policy follows:
1. Arrange products from lowest-price to luxury vehicles and manufacture
a car in each price category. Build luxury cars in volume, however, and
stay away from ultra-luxury cars that cannot be mass-produced.
2. Allow neither large gaps to open anywhere in the range between the
lowest and highest price categories nor even occasional small gaps, to
the extent that the greatest advantage of mass production might be lost.
3. No products should overlap in any price range or category.

This product policy formed the foundation for the competitive strat-
egy that Sloan had implemented:
1. In the past, the market for automobiles was considered to be bipolar,
with a mass market, represented by the Model T at one end and a luxury
car market at the other. Sloan saw the car market as a homogeneous
spectrum and arranged five models according to the policy described
above, from the Chevrolet—considered to be a car for the masses—to
the Oakland (Pontiac), Buick, Olds and the luxury Cadillac.
2. The troublesome market for used cars at the time was put to work as a
means of dealing with the Model T Ford. In other words, GM’s lowest
priced vehicle, the Chevrolet, was planned as a more expensive and
higher performance car than the Model T when new, but its second-
hand value after a year would make it cost less than the Model T. Thus
GM would be able to satisfy the demands of people looking for inex-
pensive second-hand cars.
3. GM adopted a method of competing with vehicles on both sides of its
series. Sloan considered it dangerous to succeed without competition.
The product policy and competitive strategy described above consti-
tuted fundamental principles of GM product development. They allowed
GM to push Ford aside in 1926 and to enter a golden age as the world’s
largest automobile maker and the world’s largest manufacturer. An
excerpt from Sloan’s book provides an interesting insight on the history
of GM’s transformation:

From today’s perspective, we may find it strange that GM in the 1920s

not only lacked the concept of management, but even the concept of an
automobile industry. That is the undeniable fact, however. Every busi-
ness needs some notion of the industry to which it belongs. There is a
Toyota's System of Production Functions 177

logical way to run a business when you know the reality of the indus-
try and the environment in which it 1s situated.

Sloan’s policies were hammered out as the result of his keen perceptive-
ness. He had an astute understanding of the car market and, in turn,
recognized what car manufacturers must do to respond to this market
appropriately. My Years with General Motors is filled with pearls of wisdom
about all aspects of modern business management, including finance-
centered management, the division system, committee systems, and com-
pensation systems—ideas that are almost taken for granted today.
But the book underscores a basic truth: If it was Ford who built the
prototype of a 20th-century manufacturing industry, it was Sloan who
built the prototype of 20th-century management.
As Kawahara notes, Toyota was ahead of its rivals in absorbing and
integrating Sloan’s product and business strategies into its own manage-
ment system. In Toyota Reborn—People and Strategy* (E. Rheingold,
1999), Hiroshi Okuda extrapolates: “Sloan’s and Ford’s contributions
continue to shape modern industry. Toyota employees will need to con-
tinue reading books about these two men.”

Marketing Theory
It was from 1956 to 1957 that Toyota first came up with the idea of scientific
sales promotion. Opinions were divided over a minor change to the Crown,
and a suggestion was made that customers be consulted. Sales techniques that
had relied on experience and “feel” were revised while the company developed
demand forecast methods that polled consumer preferences and fashions.
Nowadays, scientific techniques of marketing and marketing research
are widespread, and there are established theories in place for marketing
methods and techniques. Examples are M. E. Porter’s strategies of com-
petition and competitive advantage and Philip Kotler’s principles of mar-
keting. All companies can be assumed to have built marketing systems
according to Porter’s and Kotler’s strategies and principles.
During the period of the economic bubble, Mazda adopted afive-
channel sales policy to compensate for its inability to offer full product
lines. The senior managing director in charge of sales who suggested the
five-channel policy boasted that he could “sell any vehicle with four
wheels” Mazda came out with what one well-known industry critic
denounced as a procession of “convenience cars,” and sales collapsed
along with the bubble. Mazda’s abandonment of theory in favor of sur-
prise moves and clever schemes invited the company’s decline.
178 Inside the Mind of Toyota

Toyota’s advantage over other companies in this area stems both from
its steadfast adherence to theory and from the fact that the ground-
breaking research office created by Shotaro Kamiya in 1956 (see Chapter
2) is still vigorous and functioning. Apart from these, Toyota has no
special secret plan.

Product Research and Production Technology Development

Figure 4.2 places Toyota’s research and development system on a matrix
formed of product system levels and research and development times.
Research based on a product R&D system of this sort proceeds as
shown in Figure 4.3. Eventually, a practical proposal is compiled and
referred to the New Product Council (see Figure 3.3) for approval.

Sources; Toyota Motor. 1998. "An Overview ofToyota Technical Centers.” and Motor Fan, January
1990 issue.

What is distinctive about Toyota’s new product research and develop-

ment system is that Toyota devotes as much energy to the development of
production technology as it does to product engineering research. The
development of production technology proceeds as depicted in Figure 4.4.
It must be noted that, in the last step of Figures 4.3 and 4.4, both
the accumulation of technology based on technical reporting rules
and standardization based on technical standard registration guidelines
are obligatory. All activities at Toyota conclude with a report and with
Toyota's System of Production Functions 179

standardization. This is the mechanism by which the company acquires

and accumulates institutional knowledge.

_ | Research [Tec Relevant | Relevant

| Council | Documents | _ Rules

Information on market, competitors, economy, etc.

(1) (1)
Annual Research
Implementation | Council Rules
Schedule

(2] (2)
Research Product
Conduct Conduct © Register Research Rules
planning for planning for|
~ directed independent (3) (3)
research research Product Rules for
themes __themes Research Experimentation
Schedule and Research
Work

Plan individual implementations

implement

Outcomes & conclusions

yrEst 5 (X)
Propose application Rules for
Technical
A — Reports
C Accumulate technology] (X)
T (Y)
Standardize (Y) Seen
for Entering
Technical
Standards
180 Inside the Mind of Toyota

Theme Research
Proposal Council Rules

(3)[3] (2)
(2]
Annual Plan Production
Engineering
Development
Rules

(3] (3)
Individual Theme
Plans Proposal
Guidelines
[4] (4)
Theme Guidelines for
Selection Drawing Up
Checklist Individual
Plans

(x)
Rules for
Technical
Reports

(Y)
Guidelines
for Entering
Technical
Standards
Toyota's System of Production Functions 181

Comprehensive New Product Planning

Toyota’s comprehensive new product planning process encompasses the
following steps:
1. For the purpose of product diversification, a Product Planning Depart-
ment reporting directly to the president conducts research and analysis,
and solicits ideas and criticism. It then draws up a product plan that
includes a product lineup and a schedule for introducing products to up
to roughly ten years in the future.
2. The Technical Planning Department receives requests from the five
development centers and domestic and overseas sales and, together with
the Technical Management Department, studies the allocation of devel-
opment resources and prepares a detailed comprehensive new product
plan for the following five years. Each year in March, the comprehensive
new product plan is presented to the Product Planning Council (see Fig-
ure 3.3) for the president’s approval and decision.
3. Based on the comprehensive new product plan, all affected departments
throughout the company settle on organizational staffing, equipment,
long-term expense, long-term outsourcing, long-term production
plans, and long-term sales plans.
4. For the development of new vehicle types or for model changes, a chief
engineer (shusa) is appointed for each vehicle nameplate. Before the end
of a concept submission deadline stipulated by the Design Research Pre-
scriptions (see below), the designated chief engineer submits an engi-
neering conception, detailing such items as the vehicle concept; its
intended geographical markets; target customers; performance image;
summary dimensions; cost, weight, and quality targets; and required
resources. Activities during this period are a “black box,” personally
directed by the chief engineer.
The preparation of a thorough long-range sales plan in Step Three is a
distinctive feature of Toyota’s comprehensive new product planning. This
recalls Chapter 3 (Automotive Planning Methods) of the Handbook of
Automotive Engineering, mentioned above, where “Product Planning and
Sales” is developed as an independent topic. This has been a Toyota
strength ever since the days of Toyota Motor Sales.

INDIVIDUAL PRODUCT DEVELOPMENT SYSTEMS

The Shusa System
We have already discussed Toyota’s shusa, or product manager, system at
length. Below, with themes in parentheses, we list the chief documentary
sources for information about the shusa system at Toyota. Toyota has
182 Inside the Mind of Toyota

abandoned the Japanese word shusa in favor of the term “chief engineer,”
but in order to appreciate the historical development of the position, the
old term shusa (product manager) will be used here.
* Fujimoto, Takahiro, and Kim Clark. 1993. Product Development Power.’
Tokyo: Diamond. (The heavyweight product manager).
* Fujimoto, Takahiro. 1997. The Evolution of a Production System.° Tokyo:
Yuikaku Press. (The heavyweight product manager, origins of the shusa
system, etc.)
* Japan Society for Production Management, ed. 1996. The Toyota Produc-
tion System.’ Tokyo: Nikkan Kogyo Shimbunsha. (Development of Toy-
ota’s shusa system).
* Nobeoka, Kentaro. 1996. Multi-Project Strategy.’ Tokyo: Yuhikaku.
(Development of Toyota’s shusa system).
* Tamagawa, Shuji. 1988. System Reconstruction as Seen in the Toyota
System.’ Tokyo: Pal Shuppan. (shusa authority).
* Shiozawa, Shigeru. 1987. Toyota Motors’ Shusa System.” Tokyo: Kodan-
sha. (Ten shusa articles).
* Nakazawa, Takao, and Manabu Akaike. 2000. Knowing Toyota." Tokyo:
Kodansha. (The shusa system).
* Sobek, II, D.K., J.K. Liker, and A.C. Ward. July-August, 1998. “Another
Look at Toyota’s Integrated Product Development, Harvard Business
Review, Vol. 76, No. 4, pp. 36-49.

Several topics related to Toyota’s shusa system are discussed below.

Toyota's shusa system came into being in 1953 and from that time for-
ward, the shusa were staff members with no authority to give orders to
the line organization. One shusa who was struggling with this situation
went to then senior managing director Eiji Toyoda and asked for clarifi-
cation of the shusa’s authority. “On any matter you think will be good for
the vehicle you're responsible for,” Eiji told him, “you can give your opin-
ion to anyone in the company. Know that you have the authority to give
your opinion.”
Tatsuo Hasegawa, afirst-generation shusa in charge of the Corolla,
compiled Ten Precepts for Shusa as a guide for staff members to succeed
in the shusa’s role. Eiji’s simple instructions, however, are probably a
better and plainer way of defining what a shusa is and what he is
expected to do. Nowadays, details relating to a shusa’s duties and the
conduct of his job are spelled out in formal “product development
rules” and elsewhere, but the basic spirit seems not to have changed
since Eiji’s time.
In the words of Akihiro Wada, a former senior managing director at
Toyota:
Toyota's System of Production Functions 183

The present system took root because the people who came before us
worked in such a way that everyone around them treated their opinions
the same way as they would do the president’s. Officially, we were
staff, but the system was built in such a way that we were called “emper-
ors” because of the way we were able to work. Even if other companies
try to install this system, they won't find it easy to make it stick.

From the 1970s through the 1980s, Japanese and Western automobile
companies introduced the shusa system. Just as Wada warned, however,
there were many companies in which the system never took root the way
it had in Toyota.
Being a shusa is a dream job at Toyota, but in extreme cases in other
companies, the shusa’s post can be a hated one. This happens because
managers tend to make the shusa bear all the responsibility for a particu-
lar model and then blame him for any problem or issue that may arise
concerning target performance, quality, cost, or delivery. Such targets are
rarely met and processes always move on nonetheless. As a result, every
time there is a development review, shusa in such companies are treated
like criminals and mercilessly strung up by management. At the same
time, line management is angry at the shusa as a management representa-
tive, and problems are neither treated seriously nor resolved. The shusa,
drawn out and haggard, comes to work early and goes home late. One can
hardly blame people in such companies for disliking the job.
Takahiro Fujimoto calls Toyota shusa “heavyweights,” but shusa at
other companies, although not exactly lightweights, are often treated like
handymen.
A shusa ultimately occupies a staff position. He may have certain func-
tional responsibilities, but it is the line organization that has to take final
responsibility. The shusa will be blamed if his own dereliction is the cause
of a poor outcome, but in most cases the cause is technical, and the line
bears ultimate responsibility. Companies without an organizational man-
agement culture that clearly separates line and staff functions (see Chap-
ter 3) will find it difficult, as Wada says, to implement the shusa system.
Toyota’s shusa system is an important and indispensable part of the his-
tory of the company. Oddly enough, the shusa system is not once men-
tioned in any of the five official 500- to 800-page company histories (the
20-, 30-, 40- or 50-year histories of Toyota Motor, or the 30-year history
of Toyota Motor Sales). One assumes that it was left out to avoid causing
discord within the company with accounts that would inevitably be seen
as lavishing praise on a particular position. Here again, we see vivid evi-
dence of a “psychological Toyota.”
184 Inside the Mind of Toyota

Individual gcse a
eae Product Planning ates Design Development

(Manufactured) (Manufactured (Manufactured)

Product Planning Product [Product Planning
Council (Commercial) Planning Council New Vehicle
Product Planning Council Council Promotion Council

Quality/cost/weight management, development

organization management, schedule management

Product
concept @DR3
drawings

Idea sketch

Action design

Prior produc Process design, production preparation

engineering studies prior production
@DR6

Component detail design, experiment assessment, Component

prototype delivery, approval request drawing submission manufacture,
delive
N.B. DR (X) : In-house design review, SDR (X) : Supplier design review
Toyota's System of Production Functions 185

Individual Product Planning and Design Development

Figure 4.5 outlines individual product planning and design development
processes at Toyota at the beginning of the 1990s. We assembled this fig-
ure from a variety of sources. Toyota has dramatically shortened its prod-
uct design and development cycle in recent years, and it is not likely that
the basic shape of this development process has changed. New events and
activities have no doubt been integrated into the individual product plan-
ning stage, and some types of events and their frequencies should proba-
bly have been deleted from the product design stage.

Individual Product Planning

The individual product planning period extends from individual product
development instructions (minus 48 months) to exterior design approval
(minus 26 months).
The first step of individual product planning involves the collection
and analysis of market evaluation information for the current model (in
the case of a model change) or a similar product (in the case of a new
model). The sequence of flow is:
(1) Policy setting for individual new product, (2) setting of individual
basic plan, and (3) design instructions to design department.
Broadly speaking, there are two kinds of market evaluation informa-
tion: quality information and sales information. At Toyota, the shusa does
not gather information regarding the market evaluation of current prod-
ucts each time a new product is planned. Instead, there is a system that
channels this information to each department on a regular basis.
The shusa concept in Figure 4.5 encompasses mainly the formulation
of the product positioning and product concept based on suggestions
from each department. By product positioning, we mean clarifying the
attributes of a given product and defining a user or market segment. For-
mulating a product concept means using the language of consumers to
specify which attributes the product should have based on the lifestyle,
values, tastes, behavior pattern, family structure, and income of the target
user identified in the product positioning process.
The shusa next proceeds to draw up a product plan by elaborating the
product concept in technical terms and clearly specifying the technical
requirements of the product. “Product concept elaboration” is the name
given to this translation from the language of consumers to technical language.
186 Inside the Mind of Toyota

Product Planning
On the basis of the product concept development table, image sketches of
external styling and interior design are begun, along with the design of a
“product plan diagram.” As the overall vehicle gradually takes shape,
designs are begun for the engine, suspension, and other functional com-
ponents. This process is called product planning.
Product planning is also called product packaging because it comprises
planning activities that break the vehicle down into modules, such as the
engine compartment, passenger compartment, underfloor, and trunk
compartment.
It is a Toyota tradition that the job of product packaging falls to designers
in charge of exterior styling and interior design. One rarely sees examples of
this arrangement at other companies. Toyota’s way may be more rational as
the objects of styling, design, and packaging are nearly identical. In any case,
better results are more likely if designers are permitted to work on designs
with as few constraints as possible. This is why activities in Toyota’s design
department have recently been divided between design work, which takes
place in a studio, and packaging, which takes place in a product room.

Design Quality Development

Figure 4.6 shows the flow of how, in the planning department of each
development center, quality demanded by the customer is translated into
manufacturing quality between the product plan and volume production.
Figure 4.7 extracts standards relating to activities for built-in quality from
the Key Company Regulations column in the Quality Assurance System dia-
gram in Figure 3.6 and assigns output categories for them. This is the flow:
1. Construct a “Demand Quality Deployment” table in accordance with
the relevant guidelines for making such tables and replace the quality
that customers seek in the product (consumer demand quality) with
technical quality characteristics or with substitute characteristics (prod-
uct demand quality).
2. Construct a “Quality Table” in accordance with the relevant guidelines
and translate product demand quality downward in hierarchical order
of product functions, defining demand quality (functional component
demand quality) at each level down to low-end items.
3. Construct a “Mechanism Deployment Table” in accordance with the
relevant guidelines and determine specific component mechanisms and
component configurations (functional component mechanism charac-
teristics) needed to achieve functional component demand quality at
each level of the product function hierarchy.
Toyota's System of Production Functions 187

(Work Standards) (Input/Output)

Consumer Demand Quality

Guidelines
for Constructing Demand |
_ Quality Deployment Tables

Product Demand Quality

Guidelines forConstructing Quality Tables

Functional Component
Demand Quality
Guidelines for Constructing
Product
PlanningConfiguration Deployment Tables
Functional Component
Characteristics
Design Review Rules

Guidelines
for Constructing Subsystem
Deployment Tables
¢__.
—}»
Bill of Materials

Guidelines for Implementing Design FMEA <

&Design Parts Specifications or

Parts Diagrams
Development
Guidelines for Constructing |
Quality Assurance Tables

Quality Assurance Table

Guidelines for Implementing |

~ QC Process Tables .

QC Process Chart

=.
Se Guidelines for Implementing Process FMEA >

Guidelines for Drawing up Work Procedure: >

Preparation
Production
Work Procedures
Guidelines for Drawing up Component >|

Inspection Methods

Inspection Standards

Teall ina 2|igGO en: ee An ee

4. In accordance with the timing of Design Review 1 (DRI, Product Plan-

ning Design Review), shown in Figure 4.5, and based on the Rules for
188 Inside the Mind of Toyota

Design Reviews, carry out a design review using the Planning Target
Checksheet, Demand Quality Deployment Table, Quality Table, Mech-.
Toyota's System of Production Functions 189

anism Deployment Table, and other tools.

5. When the first design review (DR1) is concluded, construct a Subsystem
Deployment Table in accordance with the relevant guidelines, derive prod-
uct structures needed to produce the product from functional component
mechanism characteristics, and draw upabill of materials (BOM).
6. In accordance with the guidelines for conducting design failure mode
effect analyses, identify and eliminate latent breakdown factors and use
the bill of materials to construct either parts specifications diagrams for
suppliers or parts manufacturing diagrams for in-house or outsourced
component manufacturing.
7. In order to assure a reliable transfer of this built-in planned design qual-
ity to manufacturing quality, collaborate with the production engineer-
ing department to construct a QA Chart, in accordance with the relevant
guidelines, that clarifies manufacturing control points and control items.
8. Following this, the production engineering, manufacturing, and inspec-
tion departments, in accordance with the relevant guidelines, succes-
sively construct a QC Process Table, Process Diagram, Operating
Procedures, and Inspection Criteria. Then volume production begins.”
Few companies define these procedures so elaborately or build in and
transfer designed quality to manufacturing quality with such rigor.

Prototype Innovation
All companies that design products have some sort of prototyping or trial
manufacturing process. At the same time, few can give a straight answer
when asked the purpose of prototyping. For many, it is merely an experi-
ment in manufacturing products within print tolerances using dedicated
prototype jigs, tools, gauges, dies, processing machines, assembly equip-
ment, and other tools.
Even when products or parts are built according to the blueprints, how-
ever, there will be subtle physical differences in the resulting parts depending
on whether dedicated prototype tools or regular production tools are used.
A prototype may be cut on alathe, for example, when, in regular produc-
tion, the part is made with dies. In a similar example, a sand-cast prototype
may be produced with a metal die. Even though the drawings may be exactly
the same, when prototype tools and production tools differ, problems often
arise with production parts where there is no problem with prototypes.
Some 50 percent of problems that occur before volume production are said
to be this type. Narrowing the gap between prototypes and production
parts, therefore, becomes a crucial issue affecting quality, cost, and timing.
Making prototypes with production tools would solve this problem,
but, if design changes should be required because of specification-
190 Inside the Mind of Toyota

related problems found after fabrication of prototypes, they would

necessitate modification or disposal of production tools, resulting in
enormous losses.
On this subject, Toyota drives home the following philosophy in its
own operations:
* Prototyping and regular production must be the same.
* Regular production methods are the foundation of both.
* Rather than seeing how close trial production tooling can come to regular
tooling, the principle is to use regular tooling. If regular tools can be cor-
related to trial production tools, then trial production tools may be used.
Toyota has gradually increased the proportion of trial runs it makes
with regular production tooling and set the goal of using all production
tools in 2001. For some parts, this is not necessary, so it is likely that Toy-
ota has not achieved this 100 percent. All the same, doing away with trial
production tooling is necessary for the epoch-making reduction in devel-
opment times that Toyota has set its sights on for the 21st century.

THE DESIGN MANAGEMENT SYSTEM

What is most distinctive about Toyota’s product development system is
the solidity of its design management.

Technical Criteria
A System to Promote Standardization
Standardization refers to methods and activities that make management
more efficient by minimizing the variety of concepts, protocols, proce-
dures, and things. Standards generated by standardization activities are
the crystallization of an organization’s highest knowledge, and the act of
revising standards drives progress. Standardization is important for all
organizations, whether they are in the manufacturing business or not.
Standardization may be the critical foundation supporting the Toyota
management system, but there are few reports on Toyota’s standardization
system. It can be surmised, however, that Toyota maintains a hierarchical
organization of regular and active entities charged with standardization: a
Standardization Committee for the company as a whole, standardization
working groups in each department, and standardization subcommittees
at the office and group level. There are, for example, subcommittees for
product engineering, production engineering, and service.
Toyota's System of Production Functions 191

Toyota began organizing a company-wide system for managing stan-

dardization when it introduced TQC in 1961. In 1966, after having won
the Deming Prize, Toyota’s planning department norms, standards, and
criteria were already several steps better organized than those of other
companies, both inside and outside the automobile industry.
Standardization is among the most important aspects of a manager’s
job. For each component in teardown activities of a competitor’s vehicle,
for example, the designated working group leader (department or section
manager) manages by identifying the optimum construction and then
standardizing and commonizing it.
When new or revised standards are proposed, a subcommittee com-
posed of section heads representing each of the departments prepares the
work for consensus by a council at the department head level.
Rules that affect the entire company are deliberated and decided by the
Standardization Committee. Once these rules are set, not even the presi-
dent can change the standards. A change requires the committee’s deci-
sion, even if this entails additional expense.
Below, are some examples of technical standards at Toyota that are
organized by this kind of system.

Standardization of Product and Component Structures

The Nikkan Kogyo Shimbun published the following information in an
article on December 23, 1992, after the economic bubble had collapsed:

Starting in January 1993, Toyota idled the No. 3 Assembly Line and
carried out mixed production of the Celsior at Tahara Plant No. 4,
where it builds the Crown Majesta. The aim is to raise the operating
rate of the new line. Executive Vice President Toshimi Onishi empha-
sizes the flexibility of the Toyota Production System, saying, “We can
always start Line 3 when demand goes back up again.”

The flexibility to put different vehicles on various production lines

requires the standardization of vehicle structures (such as engine com-
partments, passenger compartments, and underfloors) as well as the stan-
dardization of the location of components within those structures. No
matter how much apparent flexibility a production line may have, prod-
uct designs and production line processes will have to be modified as long
as vehicle structures and component locations are different for each
model. Not only do such modifications incur extra, non-value-adding
192 Inside the Mind of Toyota

expense, they also entail opportunity losses when a company cannot

respond quickly to fluctuations in sales or production.
As an example, three vehicle models (A, B, and C) would be nearly
impossible to run down the same assembly line if the locations of batter-
ies and air cleaners in the engine compartment, where components are
densely clustered, were all different:
A: battery on the right, air cleaner on the right
B: battery on the left, air cleaner on the left
C: battery on the left, air cleaner on the right
What would forcing these three models down the same line do? For
one thing, ergonomic considerations in an aging society would forbid
requiring assembly operators to carry heavy batteries and mount and
attach them on the left and then the right, depending on which models
come down the line. A uniform location for batteries, on the other hand,
would make it possible to use a mechanical mounting device.
When batteries and air cleaners are not always in the same place, the
locations of numerous other components in the engine compartment will
be different as well. For each car that came down the line, operators would
have to go back and forth, left and right, carrying all sorts of things: parts,
tools, assembly devices, equipment for adding water and oil, etc. This
would result in substantially decreased efficiency and in operational errors.

air cleaner
battery ¥.
ws :
++. partno.a
Vehicle B Ey
Sj

battery part no. b

aC < air cleaner

air cleaner part no. c Pes brake brake

eee master master vac
bates oom cylinder

Engine Room Top View

(left is direction of travel)
Toyota’s System of Production Functions 193

Non-uniform component locations constitute a major cause of parts

proliferation. Figure 4.8, for example, shows three vehicles (A, B, and C)
for which the functions and performance of brake mastervacs and master
cylinders are identical. These components connect to other parts, how-
ever, and because those other parts are in different locations, the vehicles
require mastervacs and cylinders on which the orientations of such items
as brake pipes and vacuum hoses are different. The result is a substantial
increase in the number of parts.
Development is also burdened because when component locations
vary, problems of interference, vibration, and heat damage have to be
checked and revised for each vehicle type during the product develop-
ment process. Cars these days are so rich in functions that tightly packed
engine compartment components barely allow access. Even in an age of
three-dimensional computer-aided design systems, avoiding interference
among engine compartment components while limiting vibration from
the engine and suspension remains the most time-consuming task in the
product development process.
The engine compartment is also the source of vibration and heat ema-
nating from the engine, and suppressing these requires considerable
proprietary technology. If technology cannot be shared when the arrange-
ment of parts in the engine compartment differs, then new technologies
have to be developed every time a model changes.
Standardizing the arrangement of components greatly alleviates the
sort of problems mentioned above. It brings the considerable advantages
of shortening development times, reducing the number of part types and
raising productivity at the manufacturing plant.
To return to the thread of our story, when we look at the locations of
engine compartment components used in the Crown Majesta, Celsior, and
Aristo, we find the air cleaners uniformly located on the right and the bat-
teries on the left. Not all component locations are uniform because there
are two engine types involved, in-line six-cylinder and V8. However, the
locations that are not uniform are for a few components with low tooling
costs, such as the power steering tank and the hydro-cooling fan tank.
Most component parts and functional parts with high tooling costs are
always in the same locations. Since this virtually eliminates the need for
design modifications or process changes, adapting the production line, as
Onishi says, to variations in sales or production becomes easy.
In historical terms, it was Nissan Motor that first tackled standardizing
engine compartment component locations when it completed the stan-
dardization of its FR (front engine and rear-wheel drive type) passenger
cars in the 1960s. Later, in the era of compact and popular FF (front
194 Inside the Mind of Toyota

engine and front-wheel drive type) vehicles, Nissan standardized its FF

passenger cars separately, and this arrangement remains today. Compo-
nent location standards for FR and FF vehicles have almost nothing in
common, so each group has its own standards.
While Toyota was one step behind Nissan, it standardized engine com-
partment component locations for its FR and FF vehicles simultaneously
from the 1970s on, with the result that nearly 70 percent of component
locations are analogous.
What this means is that it is nearly impossible for Nissan to mix
production of FF and FR vehicles on a single production line and that
commonization of FF and FR parts shows no progress. Toyota, on the
other hand, can mix FF and FR vehicles on its lines according to fluctua-
tions in sales or production. Parts commonization has also improved.
In “Product Development and the Management of Standardization?”
[a 1971 article published in Automotive Engineering (vol. 25, no. 9), Akira
Kaibara of Nissan Motor tells of the importance of—and gives methods
for—standardizing part locations. He also reveals how advanced Nissan’s
technology was at the time. One might even say that, with respect to stan-
dardization of engine compartment components, advanced technology
has backfired.
Honda, from the start, produced only FF vehicles and finished stan-
dardizing its engine compartment components in the 1970s. Perhaps in
the pursuit of technological innovation or progress, however, Honda
occasionally markets vehicles whose component locations do not con-
form to its own standards. In a legacy from its days as a motorcycle man-
ufacturer, Honda’s engines used to turn counterclockwise. In recent
years, however, as it supplies engines to General Motors and uses engines
and power train parts from other companies, Honda has gradually
begun to switch over to the generally accepted clockwise standard. In
conjunction with this change, Honda is revising its standards for engine
and component locations, which apparently should have entailed a very
huge investment.
In introducing its FF cars in the 1970s, Mitsubishi Motors conducted
trial-and-error experiments with transverse-mounted engines facing left
and right and then standardized by getting rid of all FR models, includ-
ing the luxury Debonair, in favor of FF cars.
Mazda has not taken up standardization of engine compartment com-
ponent locations, and components are configured differently even for
similar models such as the Demio, Familia, and Capella.
Toyota has relentlessly standardized parts configurations for under-
floors, cabins, and trunk compartments as well. Just as we saw
in the case
Toyota's System of Production Functions 195

of the engine compartment, standardization in these other units does

more than just increase the flexibility of responses to fluctuations in pro-
duction. It also gives rise to many other advantages in such areas as
development efficiency (including design, prototyping, and experimen-
tation), productivity in manufacturing processes, product quality, and
parts proliferation.
Toyota has also standardized unit construction and parts construction.
At Nissan Motor, for example, even for the same engine types, attach-
ment locations for alternators, air conditioner compressors, power steer-
ing pumps and water pumps, and other auxiliary parts differ according to
whether engines are mounted in FR cars or FF cars. At Toyota these are all
the same. Even when the engine type is the same, Nissan changes the loca-
tions of engine accessories, depending on whether it is installed on two-
wheel drive or four-wheel drive vehicles. At Toyota these are all the same.
Actually, in terms of function, space, mass, and variable costs, Nissan’s
separate standards are more advantageous than havingasingle set of stan-
dards to cover all cars.
Toyota, in contrast, follows the Maxcy-Silberston curve in Figure 2.3.
The idea is to pursue the mass production effect with the application of
uniform standards and not to optimize standards for individual models
up to the level of 200,000 to 300,000 vehicles in a given model each year.
Toyota adheres to this relentlessly.
Substantial results can be gained when this same principle of stan-
dardizing structures is applied in the context of value engineering (VE),
i.e., to techniques for reducing costs and increasing value through
VE. This is because standardized construction automatically extends
the effects of VE. Efficiency is strikingly poor, on the other hand, when
structures are optimized in isolation and VE has to be applied only to
individual cases.
Toyota rules prescribe that the same assembly sequences and the same
manufacturing equipment be used in all plants. There is no way that a
profitable method originating in one plant is not extended to other
plants. This is also based on the premise that a method that works at one
plant but not at another cannot bea true solution to a problem. In other
companies, each factory (or sometimes each production line) may have
its own assembly sequences or its own manufacturing equipment. From
and
the standpoint of local optimization, it is better for individual plants
equip-
lines to have their own assembly sequences and manufacturing
ons or
ment because they may have their own particular local conditi
and
environmental constraints. But the result is a proliferation of entities
196 Inside the Mind of Toyota

higher management costs. Flexible responses to production fluctuations

among lines become more difficult and knowledge cannot be shared.
‘Toyota’s high degree of standardization and uniformity in both prod-
ucts and plants guarantees sufficient flexibility to, as Onishi says, combine
production lines during economic downturns and return them to their
original state when the economy recovers.
In the increasingly polarized, survival-of-the-fittest world of modern
automobile manufacturing, the winners have product structures and pro-
duction lines that do not require design or process changes when moving
from one plant or line to another. At the same time, they produce
at capacity in such a way that plant or line changes are unnecessary. The
losers, by contrast, want to build and scrap plants and production lines in
a hurry; consequently, they are bedeviled by rigid products and plants
that require months to accommodate design or process changes. A full
understanding of the disparity merits considerable attention.
When we consider Toyota’s products and parts chronologically or
when we line them up against those of other companies, what emerges is
a method of working in which superior technological creations spread
rapidly (across the entire company) to other vehicle families in the form
of standard structures. One can only marvel at the thoroughness of this
lateral propagation."
Responding to a question about lateral propagation, one engineering
division executive said it is “just a part of the company culture.’ He
refuted the idea that any specialized organizational entity within Toyota
takes the lead in this lateral propagation. Although he was right to say that
no particular department takes the lead in lateral propagation, “company
culture” is not a very specific answer. One gets the impression that the
question was answered this way because he was hard put to explain things
he did every day without thinking about them.
We may posit that the reason for this aspect of Toyota culture derives
from a few relentless standardization rules for product and part structure:
* Superior technologies that people develop are obligatorily registered
either in the form of new standard structures or as modifications of
existing standard structures.
* When designing a new vehicle model, the person in charge of the design
is obligated to consult the standard structures.
* It is recommended that individual models be simplified (subtra
cted)
from standard structures.
* When the basis of a standard structure cannot be adopted, it
is manda-
tory either to correct the cause of its unsuitability or to make a new stan-
dard structure and reregister it.
Toyota’s System of Production Functions 197

+ Managers of design departments are obligated to administer and manage

according to the above rules.
Anything less thorough than this would fail to achieve the level of
culture.

Design Criteria
Design criteria refer to documents containing criteria for evaluating
design procedures and design results. A table listing only the criteria for
judging design results is an engineering checklist or a design review
checklist.
In an article entitled “Another Look at Toyota’s Integrated Product
Development,” (Harvard Business Review, Vol. 76, No. 4, July-August,
1998; pp. 36-49), Durward K. Sobek II et al. describe the quintessence of
Toyota design criteria:

Toyota, however, still maintains voluminous books of engineering

checklists to guide design work. These checklists act as the first cut
at designing manufacturable products that use common parts
across platforms. Engineering checklists contain detailed informa-
tion concerning any number of aspects, including functionality,
manufacturability, government regulations, and reliability.
Engineers use the checklists to guide the design throughout the
development process. The checklists are particularly important for
the intensive design reviews that every vehicle program undergoes.
What keeps these extremely large meetings from becoming chaotic
is that all engineers come withalist of all the items they need to ver-
ify from their perspectives. If the design conforms to the checklist,
the part is highly likely to meet a certain level of functionality, man-
ufacturability, quality, and reliability. If it does not, discrepancies
between the checklists and the design become the focal points of dis-
cussion among the divisions.
Once in place, design standards add predictability across vehicle
subsystems and between product design engineers and manufactur-
ing engineers.
Engineering checklists also facilitate organizational learning
across generations of vehicles. Toyota trains its engineers not only to
record product histories but also to abstract from that experience in
order to update existing capabilities. When an engineer learns some-
thing new, the knowledge can be incorporated into the checklist and
198 Inside the Mind of Toyota

then applied across the company to every subsequent vehicle. Those

lessons reside with the organization, not in one person’s head. If an
engineer leaves, the knowledge he or she has gained is captured in
the checklists and remains with the company.
Just as standardization is the key to continuous improvement on
the factory floor, standards are the basis for continuous improve-
ment in engineering design.
Standards are revisited every couple of months (as opposed to
being used once or put away for a couple of years); they never
become outdated. The frequent changes to the checklists also give
engineers continual opportunities to develop and hone their skills.
[In other words, they] ... build Toyota’s base of knowledge.
Many of Toyota’s current practices—such as an emphasis on writ-
ten communication, design standards, and the chief engineer—
seem to have been standard practice in the United States in the 1950s
and earlier. But in the 1960s and 1970s, as U.S. automakers neglected
their development processes, systems that were once sound and
innovative gave way to bureaucracy, internal distrust, and other dis-
tractions that brought the companies close to the chimney extreme.
In reaction, those companies seem to have swung toward the other
end of the spectrum. Results in the short term have been encourag-
ing, but the deficiencies of the committee extreme may well appear
soon. Some companies are discovering them already.

This article provides an excellent description of where and how design

criteria are used at Toyota. The last sentence of the paper refers to bureau-
cracy and the committee system that we noted in Chapter 1. U.S. auto-
mobile manufacturers, plagued by bureaucracy’s dysfunction, fell into an
extreme version of a “chimney” structure and then reacted by leaning too
much toward a project-centered committee system. In the end, they
ended up weakening the advantages of a bureaucracy, i.e., documentation
and standardization. Toyota has struck a balance between bureaucracy
and the committee system and manages to take the best from each.

The Production Engineering Structural Requirements Form

One distinctive feature of its product design is that Toyota excels in build-
ing new products from existing material. The Production Engineering
Structural Requirements Form is a typical standard used to accomplish
this. This standard summarizes the principal features of product construc-
Toyota’s System of Production Functions 199

tion to be adhered to during the product design stage from the point of
view of production engineering difficulty and equipment compatibility.
With its own input already incorporated into the standard, the design
department has used this standard to drive up Toyota’s productivity and
use of existing equipment dramatically. Clearly, the Toyota Production
System is not the only factor responsible for Toyota’s lean production.
Yoshio Komagine of production engineering comments on Toyota’s
TQC days in the 1960s:

I’m absolutely convinced that all the work we did preparing for the
Deming Prize has made a big contribution to the production prepara-
tion we do for body processing now. ... One example of this is the feed-
back to design during the drawings stage. We made a master model
that improved product quality reliability. The more we analyzed data,
too, the more we were able to learn about how the quality of the plans
determined overall quality, quantities, costs and timing. (Toyota: A
History of the First Forty Years. 1978.)

The feedback to design during the drawings stage and the master
model that Komagine mentions may be seen as precursors to the produc-
tion engineering structural requirements form. This concept of taking
knowledge from downstream processes and inputting it into the design
department is one of the preconditions for Toyota’s achievement of lean
production. Most companies leave this step out and consequently fail in
adopting the Toyota Production System.
Toyota’s system of using production engineering structural require-
ments forms eventually spread to other automobile companies and then
to other manufacturers. One suspects this was one of the reasons that
Japanese carmakers and manufacturing industries outstripped interna-
tional competition from the 1970s into the 1980s.

Product Diversification and Parts Reduction

Numbers of Vehicle Models and Engine Types

Figure 4.9 shows the number of passenger car and light truck models and
engine types for major Japanese automobile manufacturers at the begin-
ning of the 1990s.
Let’s assume that the figures for Toyota are the optimum. It would be
to
ideal, then, to plot the ratio of each company’s vehicles sold compared
Toyota on a straight line connecting Toyota’s figure with the origin. In
200 Inside the Mind of Toyota

0 10 20 30 40 50 60 Number of models

fact, however, we have to account for the fact that the lower ranking the
manufacturer, the more models it has to carry.
Nissan, at forty-five models, carried six fewer models than Toyota at the
time but had thirty-five engine types, the same as Toyota. Furthermore, as
we have already seen, for a single engine type, Nissan changed the location
of auxiliary equipment depending on whether the engine was destined for
an FE, FR, two-wheel drive or four-wheel drive vehicle. Thus, the true
number of engine types was even higher. Since Nissan’s sales volume at the
time was roughly half of Toyota’s, it is clear that Nissan was overextended.
Mazda had thirty-two vehicle models—nineteen fewer than Toyota—
but thirty-four engine types, nearly the same number as Nissan and Toy-
ota and far in excess of the ideal line. This figure, moreover, includes
rotary engines, which shared almost no common parts with gasoline or
diesel engines, so it is fair to say that the number of engine types was actu-
ally greater. Since it sold roughly one-fifth as many vehicles as Toyota,
Mazda had too many models and engine types far in excess of the com-
pany’s capacity.
Although Mitsubishi is situated close to the ideal line, the fact that its
sales volume was one-fifth of Toyota’s means that it, too, was carrying too
many car models and too many engine types.
Toyota’s System of Production Functions 201

Honda is also nearly on the ideal line. It, too, had a sales volume one-
fifth of Toyota’s, but when one considers that the lower-ranking manu-
facturers are obliged to overreach a bit, we can say that the number of
models and engine types produced by Honda was more or less what it
should have been.
We can see in this data one of the reasons that some companies grew
during the 1990s and others dropped out. From time immemorial, the
principle has been that the proper strategy for small and medium compa-
nies is to concentrate their resources.
It is not necessarily true to say that Mitsubishi Motors exceeded its
capacity in terms of numbers of vehicle models and engine types. The
company dropped out of the race in the wake of various problems, includ-
ing the 1996 sexual harassment scandal in the United States, the diversion
of profits to extortionists in 1997, and a series of recall cover-ups in 2000.

Numbers of Model Specifications

When the economic bubble collapsed in December 1990, Toyota inaugu-
rated a Committee for Optimizing Numbers of Vehicle Types and Parts,
which aimed for a 20 percent reduction in vehicle types and a 30 percent

Toyota (April 1984)

units ercent of i percent of
Erecifications specifications
percent of sales sold per ohne
50% specification 50%

1 unit

2~3
units

4~10
units

11~30
units
units

31~50
3150
units
units

over 50
over 50
units
units
1277 specifications) (148units/specifications) (700 specifications)
(60 units/specification)
total specifications total units sold total specifications
total units sold
19,349 230,000 37,000
153,569
units sold per specification: 7.9 units sold per specification: 6.2
Source: Kumabe, Eiichi. "OR Enterprise Salon" lecture
Source: "New TPS Trends,’ Kojo Kanri
materials, January 1991.
(Factory Management], May 1985.
202 Inside the Mind of Toyota

reduction in part varieties. The Weekly Oriental Economist’ (2 May 1992)

explains how the targets were established:

Toyota knew that for a given model, 80 percent of vehicle types cur-
rently being sold can satisfy 95 percent of the demand. The remaining
20 percent of vehicle types are inefficient, and this is the source of the
target of a 20 percent reduction in vehicle types. It was concluded that
5 percent of the demand would shift to other vehicle types. Restricting
the number of vehicle types would cut down on expenses for proto-
typing and experimentation. For parts, too, 70 percent were responsi-
ble for more than 90 percent of orders; therefore the target for parts
reduction was set at 30 percent. For 187 critical items, the reduction
goal was set at 45 percent.

Figure 4.10 shows the change in the sales structure of vehicle specifica-
tions for Toyota cars from 1984 to 1990.
The “model specifications” referred to in this figure are used to distin-
guish individual vehicles by defining, among other things, engine, body,
options, and color.
In the mere six and a half years from April 1984 to November 1990, the
total number of specifications rose by a factor of 1.9, from 19,000 to
37,000. At the same time, the number of vehicles sold per specification
dropped from 7.9 to 6.2. In 1990, specifications for which only one
vehicle per specification sold during the month accounted for nearly
60 percent of all specifications and almost 10 percent of all cars sold. At
the same time, cars for which over 50 vehicles per specification sold dur-
ing the month dropped from 50 percent to 45 percent of total sales over
the period of six and a half years, while the number of vehicles per speci-
fication rose from sixty to 148.
In other words, a polarization separated those specifications that met
the target from those that did not. Abandoning those specifications that
did not meet the target was the basis of the vehicle type reduction policies
and goals reported in the Weekly Oriental Economist.
Having absorbed Alfred Sloan’s strategy of wide variations, coherent
product diversification had been basic Toyota policy, and the company
had continued to pursue expansion of its range of vehicle types. One
might well question whether the company abandoned wide variation
strategy at this point.
Quoted in Nikkei Mechanical" (5 April 1993), Akihiro Wada, the
Toy-
ota Motors senior managing director in charge of Development Center
s
1-3, provides some insight on this. |
Toyota's System of Production Functions 203

[In 1993], I was made to take the chairmanship of an internal com-

mittee to reduce the number of vehicle types and component types.
The trouble was that cutting the number of vehicle types wouldn’t
reduce costs very much. Even if we had cars that sold at the rate of
only a score or two per month, it wasn’t as though they required that
many extra parts. It was just that there weren’t that many of certain
combinations. We could get rid of those cars, but it wouldn't improve
operability very much because we take care of things like that with
our system nowadays.
It isn’t true, either, to say that we were strangling ourselves with
model changes that were too frequent. Per-vehicle depreciation costs are
minimal for vehicles that we produce at a given quantity. Just because
we lengthen the model change cycle doesn’t mean that profits will sud-
denly go up. Indeed, it’s more profitable to come up with better ideas
and create good, low-cost products.

A supplementary comment on Wada’s notion of operability is in

order. What Wada is saying is that any effect from reducing the number
of vehicle types would be limited to factory operations. Since computer
systems are used to manage combinations, eliminating car types that are
really just different combinations of elements will not make operations
any easier.
Wada also refers to per-vehicle depreciation costs. By this, he means
that if any effect can be expected from lengthening the period of model
change, it would only be per-vehicle depreciation costs from an increase
in production volume during the model’s life cycle. Since Toyota reaches
the saturation point on the Maxcy-Silberston curve (see Figure 2.3), the
easing of depreciation costs would be slight.
The greater part of the increase in the number of model specifications
comes from combinations of options. There are many cases in which the
number of optional components as such does not rise. An increase in
combinatorial variety does not increase the number of expensive dies, and
in this era, in which computers manage variety, the cost impact is
insignificant.
Wada’s words hint at some disagreement within Toyota over model
specifications, but subsequent history makes it clear that Wada’s ideas
were understood within the company. The Committee for Optimizing
Numbers of Vehicle Types and Parts afterwards focused its activities only
on the “vehicle type” part of its mission, and the company continued its
product policy of wide variation.
204 Inside the Mind of Toyota

Returning to our discussion of Figure 4.10, Toyota in a mere six and

a half years rapidly raised its total vehicle sales by a factor of 1.5. A 190
percent increase in total specifications was one factor in achieving this.
Customers always lean toward diversification. In the final analysis, how-
ever, when satisfied with diversification, they select standard specifica-
tions. This is why the number of vehicles per specification sold above fifty
grew two and a half times.
The Law of L-shaped Diversification (unless applied to purely single spec-
ification products like the black-only Model T Ford) holds that diversifica-
tion will always lead to an L-shaped sales structure (i.e., one in which
specifications that sell and those that do not will distribute themselves in the
shape of the letter “L”). If, in 1990, Toyota had cut off specifications below
the level of one vehicle per specification, the result would not have been
zero. The remaining specifications would have formed another L shape, and
gradually, sales would have assumed the same structure as in 1984.
In other words, if Toyota had abandoned product diversification, both
total sales volume and the per-specification number of vehicles sold above
the level of fifty would have slumped. Fortunately, Toyota did not “kill the
bull in order to straighten out his horns.”
Products that come of unplanned diversification as often seen in
other general automakers are out of the question. Even for specifications
that combine option components, the first step in marketing is as Alfred
Sloan said, having, a concept of diversification from the customer’s per-
spective.

Parts Commonization
As Figure 4.11 shows, parts commonization belongs in the domain of
parts reduction.
Parts commonization can be divided into three methods: parts carry-
over, parts sharing, and parts substitution. Parts carryover refers to using
existing parts in new products. Parts sharing means carrying newly
designed parts across multiple new products. Both parts carryover and
parts sharing call for specific intervention at the new product design
stage. Parts substitution is a method for cutting down the number of new
parts after they have been created by making them interchangeable
and
then eliminating some of them. Within the larger category of parts reduc-
tion, functional integration refers to the consolidation of functional
com-
ponents that have been divided into multiple parts. Functi
onal
substitution means modifying the construction of components to
reduce
the numbers of nuts and bolts by replacing fastening functions.
Toyota's System of Production Functions 205

__| Parts Minimizationf-— — — A Parts carryover

A Commonization :

Vi

Parts sharing

Z
— Parts substitution

Ys

Be Reductions in Function
yO numbers of parts integration
Lp

< \
Functional
substitution

y ij *
Parts | Standardization of
standardization part construction

Overall parts
standardization .

Parts standardization means standardizing parts to be used in the

future. Although parts commonization and parts standardization are
sometimes confused, parts commonization involves activities that look at
carryover and sharing of specific parts during the development of specific
products; the concept of standardization does not enter into the picture.
In principle, parts commonization activities at Toyota involve the
systematic carryover and sharing of parts at the new product develop-
ment stage. Substituting already existing parts is inefficient and is rare.
Parts standardization, on the other hand, is a daily routine because
Toyota’s policy is to avoid as much as possible dealing with such mat-
ters after the fact.
Yoshifumi Tsuji, former president of Nissan, once said “We're adept at
many things when we’re slimming down. We’re not very good at all,
though, when we’re expanding.” He added, “At Nissan, we don’t do
enough preparatory research before we start something new, so that what
gets created ends up being like a wet towel. Our forte is squeezing the
water out of the wet towel afterwards.” Tsuji’s description can be applied
to many companies.
Even at Toyota, non-commonized parts tend to increase even where
oil crisis
commonization is possible. In times of emergency (such as the
with
and the collapse of the economic bubble), Toyota sometimes works
206 Inside the Mind of Toyota

suppliers in “cleanup” activities to commonize (or substitute) parts

retroactively.
One of these cleanup events took the form of parts commonization
activities following the first oil crisis. Sachio Fukushima of Toyota’s engi-
neering management division describes those activities in an article enti-
tled “Toyota Parts Commonization from the Product Planning Stage.””
(IE. 1978 Special Issue). His account is valuable for its description of Toy-
ota’s relentless organizational strength in spreading changes throughout
the organization once a decision was made and of the revolutionary
thinking among designers. These can easily be related to the senior man-
agement consultant’s description of Toyota parts carryover studies cited
in the beginning of Chapter 2. As the consultant noted, “There was much
to learn from their thoroughness.”
Also significant were the activities of the previously mentioned Com-
mittee for Optimizing Numbers of Vehicle Types and Parts following the
collapse of the bubble economy.
Figure 4.12 plots the numbers of managed parts by various automak-
ers and total Japanese automobile production in and after 1979.
The number of managed parts is the total of parts for current products
and service parts covering older products. In the case of automobiles,

No. of Managed Parts Automobiles Produced

(in tens of thousands of parts) (in tens of thousands of units)
150
(GINRXCERE) seh
~] Total vehicles ~
_| produced in Japan|.
|7
NEN
7 J

~~ parts managed by
_{ | each company RI

'79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 ‘99 ‘00 '01

N.B. For Toyota, the number of managed parts between 1991 and 1994 is (year)
interpolated from 1990 and 1995 data.
For Honda, the number of managed parts up until 1991 includes 2- and
4-wheeled vehicles. For 1992, it is assumed
to include only 4-wheeled cars.
Source: Based on data from the Japan Automobile Manufacturers
Association, the Japan Auto Parts Industries
Association and other sources
Toyota's System of Production Functions 207

parts for previous products may be used in the marketplace for twenty to
thirty years, so service parts need to be managed for at least twenty years
after a product has been discontinued. In other words, the number of
managed parts has a characteristic of going to be added up each time a
new vehicle model is marketed.
This characteristic of the market accounts for a rapid increase in man-
aged parts during the 1980s, when virtually all carmakers were increasing
new model and derivative vehicle production. Although we have no con-
tinuous data for Toyota from 1991 onward (and for other companies from
1993), Toward Maintaining the Automobile Base in the 21st Century, pub-
lished in Automotive Engineering in January 1996," notes that total man-
aged parts for Toyota reached 1.5 million in 1995, and it is likely that other
companies followed suit. At the same time, with the collapse of the bub-
ble economy in the 1990s, Japan’s automobile sales volume as a whole
declined and returned to the 1979 level.
The number of managed parts includes more than just parts stocks; it
is also an index of quantities of jigs, dies, inspection fixtures, tools,
machines, castings, and forgings. All of these must be managed for a min-
imum of twenty years, so administrative costs are enormous. In their
book, VRP (Variety Reduction Program),” published in 1988 by Japan
Management Association, Toshio Suzue and Akio Takahashi of JMA Con-
sulting state that parts management costs account for 45 percent of the
total cost of parts in the automobile industry.
Easily performed parts management simulations led many to fear that,
at this rate, none of the companies would be able to stay in business for
long. All the manufacturers therefore focused on numbers of managed
parts as a key improvement indicator and tackled the challenges of parts
variety reduction and parts commonization.
Parts commonization became all the rage in Japan in the first half of
the 1990s, and hardly a day went by when the topic was not mentioned in
the newspapers. Companies competed by releasing parts commonization
ratios each time they announced the launching of a new model car. Crit-
icisms of designers were published as well; “designer ego, for example,
was cited as the reason for Nissan’s slow advance in commonizing parts.
Only the media were amused by such stories, however. The all-impor-
in
tant customer viewed these news reports with a cold eye. Consumers
general want their cars to be gleaming and entirely new. They are not at
the
all interested in new models with old parts. Car sales stayed soft and
.
trend prolonged sluggish consumption after the collapse of the bubble
to
In this environment, Toyota was the only automaker that refused
by the
publish parts commonization ratios even when asked to do so
208 Inside the Mind of Toyota

media, and this was the case despite the fact that Toyota had long carried
over some 50 percent of its old parts. (“An integration-oriented system for
registering and managing information on parts tables.” IE, February
1975).” Nor did Toyota, always attentive to the impact its comments might
have on consumers, ever say anything critical about anyone in the com-
pany. We described Toyota’s “psychological approach” in our discussion in
Chapter 3 of how the company cultivates people, and again in the current
chapter, in the section on the shusa system. Here, we see that Toyota also
excels in a “psychological approach” to dealing with its customers.
By combining Figures 4.10 and 4.12, we see that Toyota’s number of
managed parts per vehicle specification (known as the modular design
[MD] index) fell from 39.8 in 1986 to 31.1 in 1990. A simultaneous
drop in the MD index and rise in vehicle model specifications substan-
tiates Toyota’s ability to, as Akihiro Wada says, make vehicle types by
combination:

The MD index is illogical in the sense that it is the ratio of quantities

in different dimensions. The denominator is the number of current
product specifications and the numerator is the cumulative number of
parts, including past parts. It is nevertheless valuable in revealing basic
trends. Calculations of MD indices for other companies yield results
that are several times greater than that for Toyota. In other words, Toy-
ota has a greater ability than do other companies to commonize and to
generate large numbers of specifications with small numbers of parts.

Even with this high degree of success, Toyota people would say that
they have a long way to go and that commonization remains a major
issue. To this day, one of Toyota’s executive vice presidents is leading the
effort to promote commonization.
Figure 4.12 tells us that the number of managed parts in all the com-
panies in 2001 is about four times what it was in 1979. The number of
vehicles produced, meanwhile, remains similar to what it was in 197%
This is one element that makes management difficult for car companies
that have not reformed the way they run their businesses. Even auto com-
panies that are currently doing well cannot relax, because the specter of
the number of managed parts lurks in the shadows. Limiting part num-
bers remains the primary concern in the 21st century. In the final section
of this chapter, we will show steps that Toyota is taking to hold
down the
number of managed parts.
Toyota's System of Production Functions 209

Reducing Numbers of Parts

Methods of reducing the number of parts include functional integration
(joining together functional components that were once separate) and
functional substitution (or changing the construction of components so
as to reduce numbers of nuts, bolts and other constituent parts).
In terms of manufacturing and service, functional integration is
divided into several categories, such as body panels and intake and
exhaust pipes. For each, the point is to consolidate nonfunctional parts. It
should be noted that the consolidation of functional components such as
radio cassette players belongs to a different genre whose purpose is not to
reduce parts but to create multifunctional products.
Functional integration to reduce the number of parts involves pro-
duction equipment improvements, which make it possible to press
integrated body panels (see the section on Production Technology,
below) and to switch from segmented intake lines to molded one-piece
plastic units.
Functional substitution to reduce the number of parts includes reduc-
ing the numbers of fasteners such as bolts, nuts, washers, and the like.
Parts reduction encompasses more than merely cutting down the num-
bers and types of parts. It brings many other advantages, such as increas-
ing part hardness and strength, making parts lighter and quieter, and
enhancing ease of assembly.
Toyota does a remarkable job of reducing the number of its parts.
Relentless parts-reduction efforts target every product component,
even often-ignored parts deep inside the engine. Toyota adopts a flexi-
ble approach in which exhaust pipes for manufacture are integrated
and exhaust pipes for service are segmented for ease of handling.
The total number of parts to be managed may rise, but there are few
parts to be seen on the production line. Moreover, Toyota’s special
strength in yokoten (lateral propagation) comes into full play, so that a
structure that proves itself for one model will be used in all models
within a few years.

Parts Standardization
has
Because the standardization of product and component structures
is no need to
been discussed in earlier sections of this chapter, there
broader
include the details of standardized parts construction within the
context of parts standardization.
210 Inside the Mind of Toyota

Overall parts standardization refers to standardizing the totality of

components and focuses on bolts, nuts, and similar part elements. At Toy-
ota, all part elements are standardized and registered, and no new design
can be made for similar new parts without the permission of the Design
Control manager. This system works because the Design Control depart-
ment has the authority to determine part numbers.

Project Management

Managing the Development Schedule

The standard schedule for the development of a new product is prescribed
by design research regulations stipulated in formal Rules for New Product
Development. The design research regulations were formulated by the
Technical Administration Department in 1974, originally as rough guide-
lines. Standard schedules were determined according to the scope of
development involved, e.g., new product development, model changes,
minor changes, or mini-changes. A standard schedule was printed on the
top half of a calendar form, and detailed schedules for individual projects
were filled in by hand on the bottom half.
Later, in 1984, a revised and more detailed version of the design research
regulations was adopted. The Toyota Standard Development Schedule of
the early 1990s took the shape shown in Figure 4.5. Detailed individual
standard schedules were added in the form of the individual departmental
IPO charts shown in Figure 1.6. This allowed huge information inputs and
outputs to flow without contradiction among the departments during the
development stage. Just like kanban on the production floor, moreover,
this
was a “pull” system in which each process would get information from the
previous process at appropriate times. By exerting psychological pressure
on the previous process, this pull system constitutes a mechanism that
encourages product planning, design, and other upstream processes
to
adhere to the schedule set by the standard. Development-schedule delays
would probably become the normal state of things in a “push” system
in
which upstream processes force information downstream.
Development lead times have now become so short that the standa
rds
in Figure 4.5 are already out of date. We can surmise, howev
er, that ‘Toy-
ota continues to create and apply this sort of standard even in an
age of
short lead-times.
Different standards exist for long-term planning for engine
s. Toyota
integrates design needs, layout needs, and comprehensive engin
e plan-
ning to construct long-term engine plans. At the point where
the shusa’s
Toyota's System of Production Functions 211

concept is submitted (minus 36 months), a new engine can only be

adopted for the new product once the Production Engineering Planning
Office consents.
The benefit of standards such as these is that they raise the level of man-
agement. Managers do not always know what information is needed—and
when—for their own and other organizations. These standards give man-
agers a panoramic view of information needs and can be used both as
checklists and as stepping-stones for improving the business. They make it
possible for managers to actually manage. And, in the future, they will
enable computerization of the management of development information
schedules—something that has probably already been done at Toyota.
The development process depicted in Figure 4.5 was more or less the
same one used at all Japanese automobile companies at the time. What
differed was whether this process was standardized or not. The utility of
standardizing the development process extends beyond eliminating the
extra effort required to think about development schedules for each new
product. Because the process does not change even when the product
does, applying knowledge that arises from similar experiences promotes a
learning effect. At the same time, the accumulation of similar knowledge
gives rise to new ideas, all of which makes it possible to improve quality
and cost performance and to shorten development times.
Some people hold that having standards does not change anything.
After all, even companies without standards will set new product devel-
opment processes by borrowing from previous models or other models.
ce
This view, though, emerges from a failure to understand the differen
between standardization and carryover. Once standardization is in place,
standards—even though they may be used with minor revisions—pro-
vide pivot points that do not wobble. They make similar experiences pos-
sible and they enable knowledge. Carryover does not have that firm pivot
point of standards, so there is no telling where it will wander over the
and knowl-
course of time. Similar experiences cannot be accumulated,
edge cannot be gained. This difference manifests itself over the long run
in significant disparities in organizational capabilities.

Managing Development Resources

people,
Toyota’s Product Development Department employs about 12,000
ct Plan-
with another 3,000 coming from outside companies. The Produ
is not
ning Department is a sales function that handles marketing and
included in these numbers.
212 Inside the Mind of Toyota

In the 1980s, there was a system for estimating labor costs according to
the scale of development projects, and estimates often matched actual
results. At the same time, numbers of prototype vehicles were set accord-
ing to standards: testing was a given and there were no adjustments to
development resources or development times. Nowadays, however,
experiments with dramatic reductions in development times have made
development resource estimates and (fixed) standards for numbers of
prototype vehicles meaningless. These practices have been abandoned in
favor of hoshin kanri (policy deployment methods).
In policy deployment, a time reduction target is set for the develop-
ment of each new product, the developers bring together their brain-
power to hammer out plans and policies to achieve it, and development
resources are determined for such needs as manpower and numbers
of prototype vehicles. In accordance with the Clark-Fujimoto Rule
(Takahiro Fujimoto and Kim Clark. 1993. Product Development Capabil-
ity)," which holds development resources to be proportional to develop-
ment time, this approach generally yields a low estimate for needed
resources. Excess development resources (such as manpower and proto-
type vehicles) get in the way and have to be eliminated.
If the pressure to shorten development lead-times ever slackens, Toyota
will probably revive its system of labor and resource estimates.

Managing Product Information and Technical Information

In his book, The Evolution of a Production System,” Takahiro Fujimoto
says that competitive product development and production planning sys-
tems in manufacturing industries must be superior to those of other com-
panies in at least two respects:
1. Creating product concepts and translating them into product designs.
2. Embodying product designs in products.
We have discussed the first point in the section on Individual Product
Planning. The second, an area of critical importance to a company’s com-
petitiveness, will be dealt with below.
Embodying product designs in products means conducting produc-
tion activities to transcribe product design information accurately, effec-
tively, and rapidly onto raw materials; the information is thereby
embodied in physical products. Fujimoto says that the key here is the pre-
cision and effectiveness of the processing and communication of the
product design information.
Toyota's System of Production Functions 213

Product design information encompasses, among other things, blue-

prints, parts tables, design change notices, manufacturing instructions,
adjustment guidelines, troubleshooting guidelines, and reports to gov-
ernmental authorities. Blueprints, as used here, cover design-specific
product plans, design review drawings, prototype drawings, manufactur-
ing drawings for mass production, supplied drawings and approved
drawings, etc. A product will not materialize if even one of these many
forms of design information is missing. Imprecision in any of this infor-
mation necessitates manual rework or supplementary operations and
greatly increases the need for development resources and development
time. Having a precise and effective system in place is the essential ingre-
dient to becoming a robustly competitive manufacturer.
Work in this area is basically a thankless business. Because it centers
mostly around maintenance, it is typically work that no one wants to do,
and companies are reluctant to use their best people to do it. This fact
alone creates the potential for such work to become a hidden bottleneck
in efforts to shorten development times and other development reforms.
Toyota has not reported much information on this subject recently, but
the reader is encouraged to refer to an earlier article published by Toyota
in the journal JE in February and March issue of 1975: “An Integration-
oriented System for Registering and Managing Information on Parts
Tables” The article explains Toyota’s parts table management system and
has many useful suggestions. It also provides a glimpse of the high level of
competence of the people who manage Toyota's parts tables.
Managing technical information refers to the management of other
companies’ product information, legal regulations, patents, production
engineering requirements, technical standards, design standards, techni-
cal reports, information on development costs and quality, examples of
exemplary design, examples of design problems (i.e., failure records), and
benchmarking data. It involves, in short, a knowledge management sys-
of
tem for designing. At Toyota, management protocols for each type
‘nformation listed above are formalized. Because they are managed sepa-
that does
rately, however, they area one-dimensional management system
of concern. The
not reveal interrelationships, and this has been an issue
sys-
PDM concept depicted in Figure 3.15 emerged in 1996, but the actual
tem seems not yet to have materialized.
the
Of particular importance in the realm of technical knowledge is
t has
development “white paper,’ which is compiled after developmen
Planning
ended and mass production has begun. At Toyota, the Product
tment)
Office (perhaps now the development center’s planning depar
214 ‘Inside the Mind of Toyota

draws up a development white paper within a month of the start of mass

production. The white paper summarizes gaps with targets, explicit state-
ments of responsibility, cost, weight, man-hours and expenses, etc. The
findings are then submitted to top management and other concerned par-
ties. This triggers the transformation of implicit knowledge to explicit
knowledge (e.g., technical standards), passes on technology, and is linked
to reviews of the product development system. Manufacturing industries
generally have new product development programs jostling up against
one another, and projects without development white paper are not
unusual. As long as this state of affairs persists, the knowledge and wis-
dom needed to advance and reform technology and development will not
appear no matter how often the development process is repeated. Any
company that aspires to permanence needs to take stock of this and to
implement this sort of “white paper” approach.

The Design Review System

The Significance of Design Review

Product development is a process that requires repeated exchange of
information to find points of compromise between the demands of
upstream processes whose role is to establish and modify products in
order to create customers and downstream processes intended to main-
tain the status quo in order to constrain investment. The more frequently
information is exchanged between upstream and downstream processes,
the more likely it is that a company will reach optimum compromise
points, i.e., good design prints.
If information flowing from upstream processes does not conform
with the demands or conditions of downstream processes, reactions
(often inconsistent reactions) will emerge from the downstream
processes. Besides, reactions to downstream processes often contain
contradictions. Since only upstream processes can coordinate the
reac-
tions of downstream processes, they have the complex and difficult job
of coordinating these reactions while staying alert to conflicts that
arise
in downstream processes. Particularly demanding is the design
work
involved in the process of converting specifications information
into
physical information. Simply put, if imprecise information (prints
) is
sent downstream, parts cannot be made right away. So,
the work of
upstream processes has no escape called compromise, and
their work is
very rigorous.
Toyota's System of Production Functions 215

In the automobile business, it takes five to ten years of experience

with development work for a new employee to become a full-fledged
developer. Even at that, there is a limit to the knowledge that any indi-
vidual human can accumulate, and the number of design changes
that take place during the product development stage of a single car
model is on the order of ten thousand. This is the context in which Toy-
ota introduced and implemented the Production Engineering Struc-
tural Requirements Form (see the section on Technical Standards,
above). By using this form, later processes can systematically determine
conditions and provide them to previous processes. This method has
proved highly effective.
Reliability programs or design reviews (DR), developed by the U.S.
National Aeronautics and Space Administration in the course of space
flight planning in the 1960s, are another method that Toyota has intro-
duced and developed for the purpose of mobilizing knowledge through-
out the company and, particularly from downstream processes.
Design review is a system in which downstream processes (and some-
times earlier processes in product planning departments) review results
from planning prints and other process information, blueprints, and pro-
totypes from upstream processes. Design reviews are common practice in
the space and aeronautics industries, where it is difficult to use repeated
prototype fabrications and experiments for verification.
Design review systems have recently begun to receive serious attention
subse-
in industries in general as mechanisms for preventing progress to
devel-
quent stages until criteria for built-in quality set for each stage of
system
opment have been cleared. One typical example of a design review
Rolf Eck-
is the “quality check gate” system that Mitsubishi Motors COO
corporate
rodt introduced from DaimlerChrysler in 2001 to support the
event
turnaround plan. The advent of design reviews marks an important
Interna-
for product development, so much so that even the ISO 9001
jargons,
tional Quality Standards, which in principle avoid technical
tes its use.
makes an exception for the term “design review” and stipula

Design Reviews at Toyota

Promotion
In 1988, Katsuyoshi Yamada, former head of Toyota’s TQC
Automobiles” at a
Department, gave a speech entitled “Design Review for
of Japanese Sci-
seminar on reliability methods sponsored by the Union
n review (DR)
entists and Engineers. In his talk, Yamada described desig
interest in design
techniques at Toyota. He traced the history of Toyota’s
216 ‘Inside the Mind of Toyota

review and explained how the company had cultivated and established it
as an effective methodology.
Figure 3.6 (the Quality Assurance System) shows the positioning and
implementation timing of design reviews at Toyota. Below, we will sum-
marize Yamada’s account of design reviews and supplement it with related
information.
* There were two underlying reasons for Toyota’s implementation of DR:
[1] the start of exports to the United States (1957—) and [2] a response to
emissions controls (1970-—). Especially in the case of emissions controls,
the company had few people with experience and needed to pass on that
experience to later models. It was judged that conducting design reviews
would be the most effective way for the organization to accomplish this.
Design reviews were actually begun in the mid-1970s.
* There were four underlying reasons for pursuing DR implementation:
1. While labor costs for testing in the development stage were on the
rise in order to respond to more detailed and higher-level demands
from the marketplace, the company had astrong desire to complete
product development in a short period of time.
2. The organization was growing with personnel increasing and getting
younger.
3. The massive scale of production led to huge losses if products failed.
4. Consolidation of the information system meant that vast amounts of
information were available from inside and outside the company, but
the right information was not getting to the right people at the right time.
* NASAss design review system linked contractors with contractees and so
could not be used as a model for Toyota. The company had to develop a
design review methodology of its own.
* The term “design review” was itself a problem. Translated into Japanese
as sekkei shinsa (design judging), it was misconstrued as a system for
finding fault with designs. The concept thus created negative opinions
(in some cases, flat-out rejection) before it could be explained.
* Encountering various bitter experiences along the way, DR finally took
root and was implemented step by step through incremental stages of
understanding (study, enlightenment, experimentation, acknowledg-
ment, organizational promotion, establishment). The acknowledgment
stage was reached between 1986 and 1987, when the Reliability Commit-
tee approved DR Implementation Guidelines in order to ensure the
application of design reviews throughout the company. The committ
ee
also provided a supplementary manual of standards, added as an
appen-
dix to the standards.
* Design reviews were applied to intermediate entities of an approp
riate
scale, usually designated as units, assemblies, systems, and compon
ents.
Toyota's System of Production Functions 217

Products and parts subject to design reviews were selected by the follow-
ing criteria:
1. Entirely new mechanisms.
2. Materials for which there is no usage experience or newly introduced
materials.
3. Newly designed parts susceptible to the influence either of the prox-
imity of car attachments or of conditions of usage or environment
(where problems have been likely to occur in the past).
4. Parts for which the management of process planning or manufactur-
ing processes need to secure critical functions (e.g., safety-related
items)
Once products or parts subject to design reviews were selected, a design
review planning form was filled out and then used by the Design Review
Office to manage DR progress.
Figure 4.13 shows a summary of design review implementation
procedures.
when
Design reviews are a type of gate management. The process stops
it goes outside some specified permissible zone. Development does not
stagnate, however, because in actual practice, nearly all items remain in
the permissible area.
Different people are responsible for design reviews at each different stage
of
of development. At DRI in the product basic planning stage, the head
Planning is in charge of design reviews. At product design stages DR2
and DR3, this function is the responsibility of the head of design. For
production, the
DR4, DR5, and DR6, when the design has moved into
for the
head of the Production Engineering Department is responsible
effects
reviews. For designers, design reviews can be nerve-racking: The
of DRs on personnel evaluations are significant.
burden, so
Too much data used in a design review adds to the designer's
ad:
the following guidelines are set to prevent information overlo
1. Blueprints
2. Specifications forms (or simple written explanations)
3. Design checksheets
4. The actual product or part (where feasible)
quality tables,
Additional items are presented where needed, including
and the results of
the results of design calculations, FMEA/FTA charts,
experiments.
prepared as one link
A design checksheet (item [3] above), traditionally
part) that are
of design standardization, is a list of items (for each
. The checksheet
absolutely indispensable to proceeding with the design
opment schedule,
brings together in one place such items as the devel
indications, pertinent
required functions, product characteristics, print
it is to be used in
laws, norms, standards, and past problems. Ostensibly
218 Inside the Mind of Toyota

tandem with design standards (standards that record pass/fail criteria for
design procedures and design results). Bringing the checksheets into the

Lan,

ementation Procec

Dept. under review Reviewing Dept.

DR Proposal
(X months before DR launch)

Prepare explanatory
materials

DR session Guide
(with DR checklist) ‘ oo
Prepare review
material

Follow-up
remaining issues
Take stock at each juncture:
+ Is the DR complete?
+ Have lingering issues
been resolved?
Toyota's System of Production Functions 219

design review process is also useful since corrective action is indicated

when a design is deficient.
* When the reviewers receive design review data, they first verify them
according to the design review checklist shown in Figure 4.14 and then
conduct the review on the same day. Note that there are as many as 200
detailed points to review.
* As we see from this DR checklist, evaluation in a design review is not
confined to quality and reliability, but covers all aspects of development,
including cost. The executive Function Council (see Figure 3.3) carries
out independent quality, cost, production engineering, and other assess-
ments, but it is within the practical course of a design review that a com-
prehensive assessment is performed.
- There are two styles of design reviews: one performed by Toyota in-
house and the other used for suppliers (see Figure 4.5). Even for in-
house design reviews, suppliers participate either by assisting the person
responsible for the design or by presenting DR materials themselves.
There is a strong desire in all this to have suppliers participate in the
design review process as frequently as possible. The Kyohokai, an asso-
ciation of Toyota suppliers, has created and runs a system of supplier
design reviews linked to the timing of the Toyota design reviews shown
in Figure 3.6.
» The effects of design reviews are very difficult to assess, but the number
of design changes at the start of production has dropped substantially.
* It has taken more than ten years since the introduction of design reviews
for Toyota to confirm their effectiveness and to reach the point where
they have become part of the daily work of the design department.

This summary of Toyota’s design reviews is based on Katsuyoshi

Yamada’s paper and other information. Toyota's design review system
becomes clearer still when the information presented here is read in con-
junction with the Harvard Business Review article, “Another Look at how
Toyota Integrates Product Development; introduced earlier in our dis-
cussion of design criteria.
At the start of the 1980s, word that Toyota was putting energy into
design reviews spread, and DR became fashionable. Many companies
noted,
implemented DR, only to abandon it after a year or so. As Yamada
ers or
design reviews either became forums for heaping blame on design
ng
they did not last long because design departments resisted them, claimi
design-
that design reviews were a wasteful duplication of discussions that
problems
ers had with concerned departments on a daily basis. Such
ted by
could have been avoided if DR implementation had been regula
ns about
guidelines. Guidelines might have dealt effectively with concer
220 Inside the Mind of Toyota

schedules, weight plan, performance & quality, overseas CKD, domestic

roduction, production planning, cost planning, novelty, target region,
baae layout plan, commonization, standardization
component parts, foolproofing, tolerances, strength, functions,
mechanisms, test conditions, failsafe devices, special design, ease of
assembly, conditions and frequency of use, breakdown rate, service life

checks, maintainability, repairability, adjustments & exchanges,

‘undamageability'

_ | processability, ease of inspection, equipment capacity, ease of assembly,

{standardization
transport and storage conditions, transport efficiency
legal conformity, environmental impact (pollution), market environment,
: maintenance
Source: Seki, Toshir et al. 1980. Basic Automotive Planning and Design, in Library of Automotive
Engineering, vol 2. Sankaid., p. 8.
Review Items
<
22)
>
Cy Schedules (development master schedule, drawings schedule, trial manufacturing schedule)
me} | (1) Any problems with the drawing schedule?
AL (2) |s consideration given to drawings or trials that will be bottlenecks for component completion.
S Weight plan
v
.
a

fa} (1) Can target weight configuration be achieved?

(2) Any weight calculation problems?
| (3) Has sufficient consideration been given to weight reduction?

Performance & quality

(1) Can target quality be achieved?
| (2) Any quality forecast issues?
(3) Has sufficient consideration been given to quality improvement?

Cost Planning
(1) Can target cost configuration be achieved?
(2) Any cost calculation issues?
(3) Has sufficient consideration been given to cost reduction?

Commonization & standardization

(1) Have commonization and standardization been maximized?

_| Component parts
| (1) Has the number ofparts been kept to a minimum?
(2) Have proven parts been used appropriately?
(3) Are proven structural components being used optimally?

Foolproofing
(1) Has consideration been given to failsafe mechanisms?
(2) Has consideration been given to foolproofing mechanisms?
(3) Are designs redundant?

duplicated work or might have prevented excessive criticism of designers

by promoting constructive criticism. As noted above, even Toyota strug-
Toyota's System of Production Functions 221

gled when it first introduced design reviews because it was unable to

secure the understanding of designers and reviewers. Toyota, however,
had the backing of its company-wide Reliability Committee, and within
ten years, the company was able to institute design reviews. Toyota's
strength lies in a willingness to spend ten years mastering something per-
ceived to be worthwhile.

PRODUCTION TECHNOLOGY
Because it contains the word “production,” the term production technol-
ogy is often treated as an element of the Toyota Production System. Draw-
ing from Taylorism, the Toyota Production System involves manufacturing
operations improvements in the industrial engineering sphere. Production
technology, on the other hand, is the field of engineering that exists inde-
pendently between product development and manufacturing.

The Place of Production Technology within Toyota

Production technology [i.e., production engineering] has come to occupy
a vital place at Toyota in its role of giving material form to the quality,
appearance, reliability, and cost of Toyota products. The production tech-
nology development system shown in Figure 4.4 illustrates, for example,
that production technology is on a par with the product research man-
agement system (Figure 4.3). Even in the setting of product specifications,
the Production Engineering Office plays an important role:
1. Once mass production trials are completed, production technology
evaluates and checks to ensure that the condition of new materials and
new methods will cause no trouble on the line.
2. This applies across the board, whether to engines, airbags, or plas-
tic parts.
be
3. Since production trials consume research costs, OK’d items need to
“sold” to the shusa (chief engineer). That is to say, when it comes to new
to
products, the Production Engineering Department has the authority
accept or reject parts made using new materials or new methods.

Manufacturing Technology at Toyota

Manufacturing Technology and Its Position
es for
Production technology can be divided into two types: technologi
es for
plant layout and process design (making things flow) and technologi
y large
assembling and processing (making things). There have beenafairl
222 Inside the Mind of Toyota

number of studies and reports dealing with plant layout and process
design at Toyota, so we will not deal with these topics here. We will con-
centrate, instead, on technologies for assembling and processing (here-
after referred to as manufacturing technologies).
The birth of new manufacturing technologies very often makes the
birth of new products possible. In most companies, neither new manu-
facturing technologies nor new products come into being, because
production engineering is treated as a downgraded form of product
engineering.
Product engineering determines the functions and structures of prod-
ucts whereas manufacturing engineering determines the workmanship of
products, including their quality, appearance, reliability, and cost. Getting
at the truth behind the Toyota’s reputation for high quality products
requires research in the area of manufacturing technology.

Manufacturing Technology and Quality

The LS430 and RX300 (sold in Japan as the Celsior and Harrier, respec-
tively) are models that Toyota markets in the United States under the
Lexus brand. To understand why Lexus ranked first in the J.D. Power
IQS (Initial Quality Study) survey of luxury cars in 2000 (see Chapter 5),
Business Week interviewed Kousuke Shiramizu, Toyota’s executive vice
president in charge of production.

Question: How did Toyota go about setting a global benchmark for

quality with its Lexus line?
In building the Lexus, our operating principle has been to cut the
margin for error in half. Everything was fair game, such as reducing
the small space between body panels. This helps reduce wind noise
when the car is being driven. We also went to extremes to rethink the
way we made cars—everything from the casting of the stamping
dies used to form the car’s metal parts to the exterior finish. Previ-
ously, our mainstay cars had gaps [between the front and rear doors]
of about 7 millimeters. Our goal for the LS 400 was to cut that aver-
age in half, to 4 mm.

Question: How do you ensure that the quality will carry through
the assembly process?
When we started, it was hard to systematize the way we put
together parts. But we developed processes for everything, right
down to the way the seat leather is cut. Now, thanks to advances in
Toyota's System of Production Functions 223

production technology over the past decade, it’s all systematized to

allow for mass production. All of that knowledge results in better
stamping dies, which then makes it easy to produce on greater scale.

Question: Why are stamping dies, or molds, so important in the fit

and performance of components?
Take the two exterior side panels on a car. Each of these is basi-
cally made up of four main components. When put together to form
a panel, there’s a lot of room for minor aberrations such as cracks
and wrinkles. So we developed a mold press that stamps all four
parts as a single component. That made it a lot easier to mass pro-
duce them with fewer quality problems. We’ve adopted these
approaches in the manufacturing of all Toyota models. So that’s a
clear spin-off benefit from the development of the Lexus line.

(September, 2001. “From the Nexus of Lexus.” Business Week, No.

3747, p. 28.)
An automobile body is a soft enclosure made of thin sheets of metal
welded or bolted together. Distortion in the welding process or a part's
own weight may deform a part section by 5 millimeters or so. There are
as many as scores of other sources of distortion as well, including subtle
factors such as differences in lots of sheet metal or inventory storage
times. Controlling the causes of distortion in car bodies is an extremely
difficult business. Given this situation, manufacturers establish fixed gaps
to prevent doors and panels from interfering with one another even if dis-
tortion occurs. They also change from round to oblong bolt holes to make
assembly and adjustment possible even in the presence of distortion.
The description above does not mention it, but bolt holes on Toyota
vehicles are round. Success in controlling more than scores of subtle dis-
tortion factors made it possible for Toyota to narrow the gap between the
front and rear doors from 7 millimeters to 4 millimeters. It is no ordinary
technology that allows this level of gap reduction.
It is easy enough for Shiramizu to talk about building a press that could
stamp out four parts as a single component, but, in fact, there is nothing
easy about it. A car body functions as a single unit and by rights should
be made asa single piece, but for ease of production it is broken up into
several tens of parts with no individual, independent functions. Side pan-
els should really be built as single units, but considerations of press capac-
ity, space, transport difficulty, and other issues have always meant that
automobile makers have divided them into four separate pieces. Being
224 Inside the Mind of Toyota

able to make four-part panels as single parts will strike anyone who knows
the shopfloor as an amazing feat because it means that all impediments to
this have been cleared.
Shiramizu also says that Toyota had systematized procedures for all
processes, “right down to methods for cutting seat leather.” Usually, seat
leather is cut at first-tier or second-tier suppliers. Systematized proce-
dures, therefore, encompass not only in-house plants and assembly lines
but also the standardization and systematization of procedures at parts
suppliers. Even the mighty Toyota must have found this difficult. Shi-
ramizu’s assertion that the completion of systematization of all processes
has made large-scale production possible and that the knowledge they
have accumulated along the way helps develop better dies merits atten-
tion. These are important words.
It is natural that making the gap between parts smaller or eliminating
the gap itself by making them a one-piece part should contribute to radi-
cal reduction in wind noise and elimination of dents or scratches during
the part assembly and transport.
J. D. Power began conducting IQS evaluations in 1986. Cutthroat com-
petition to improve IQS performance has reduced major problems so
much that IQS scores are now determined by factors such as wind noise at
high speeds (when the gaps in parts are reduced or integration eliminates
them entirely, wind noise automatically diminishes and damage to parts in
assembly and transport naturally goes down) and slight scratches. It is easy
to see why Lexus, when evaluated by IQS criteria, is rated number one.
If we compare cars with smaller panel gaps—or no gaps at all—to cars
with wider gaps, the cars in the latter group are obviously perceived in a
less favorable light. Differences like these are reflected in another J. D.
Powers quality index: APEAL (see Chapter 5). Capable manufacturing
technology is what accounts for the fact that Toyotas, in recent years, have
been highly ranked in the United States for appeal.
Toyota builds the Celsior and Harrier at its Tahara Plant. When pro-
duction of the Celsior began at the end of the 1980s, a Tahara Plant pro-
duction engineer made the following observations:

We're confident we have the best fit-and-finish quality of any

automobiles in the world. There is still no car anywhere that can com-
pare with a Toyota.

Fit-and-finish quality is fundamentally a consequence of the way

we manufacture vehicle bodies, of how much we can improve body
precision.
Toyota's System of Production Functions 225

All the “covers” on a car, including doors, hoods, trunk lids, and filler
caps, etc., need to close correctly the first time, with no adjustments in
assembly. This has been the rule for ten years (since the end of the
1970s). It’s a product of merging production engineering and body con-
struction technology.

In many ways, we are number one in the world in press technology.

Teardowns of other cars reveal a manufacturer’s quality levels and tech-

nical capabilities. The assertion that “there is still no car anywhere that
can compare with a Toyota” comes from tearing down other companies’
cars. The reference to closing “correctly the first time, with no adjust-
ments in assembly” can be linked to Toyota’s round bolt holes. From this
account, we also learn that “this has been the rule for ten years” (since the
end of the 1970s). It is just this sort of long-term accumulation of manu-
facturing technology that has made it possible for Toyota to achieve its
sensational shrinking of body gaps from 7mm to 4mm.
Toyota’s reputation for a high quality fit in the interior and exterior
trim is well established, too. Parts are built so that the quality of fit can be
reproduced no matter who assembles or reassembles them. And this is
not achieved by adding extra parts. On the contrary, it comes from inge-
nuity that works in the direction of reducing the number of parts and
lowering costs.
A visit to the Tahara Plant reveals no special inspections going on to
raise the Celsior’s IQS score. One gets the feeling, instead, that the princi-
ple of “building quality into the process” is an everyday practice. Full
of
complements of manpower and equipment are at work on the finish
vehicles at companies that compete with the Celsior for high IQS rank-
ings. Other companies, for example, will run high-speed chassis roller
tests up to 160-240 km/hour whereas the test for the Celsior usually stays
below the 120 km/hr range.

Process Capability
’s
The Tahara Plant production engineer also commented on Toyota
process capability:
e,
The Takaoka Plant has the best figures for defects, at 0.5 per vehicl
for
including body, painting, assembly, and components. The figure
rework
assembly alone is 0.08 per vehicle, which corresponds to two
operators per shift.
226 Inside the Mind of Toyota

We have 55 people on kaizen (improvement) teams for Takaoka’s

three lines. The company as a whole has been charged to reduce
indirect labor, but we’ve been told at the same time to expand our
kaizen teams.

People in the industry will appreciate right away how extraordinary

these figures are for defects per vehicle, assembly problems, and rework
operators. Note, also, that the idea of expanding kaizen teams emerges in
a context of decreasing numbers overall. Many companies that are still
trying to increase the number of line employees at the expense of staff
would benefit from studying the Toyota experience.
When compared to the numbers of other companies, Toyota’s low
numbers for both per-vehicle defects and rework operators, show that
design tolerances (allowable manufacturing error) for Toyota products
are broad enough to accommodate manufacturing variability—or,
rather, that manufacturing variability is narrow enough with respect to
design tolerances.
Generally speaking, fitting the variability in manufacturing processes
into design tolerances requires either 100 percent inspections or Cp
(process capability) index values of 1.33 or above, as shown in Figure 4.15.
A Cp value of 1.33 or higher means arate of 3.4 defects out of 1 mil-
lion (effectively 0), which makes it possible to get by with sampling

Non-conformance
| region

30 30

Process Capability Index (Cp) = i

Non-conformance conditions
(for Toyota ) Co>=1.33
Source: Monden, Yasuhiro. The New Toyota System. 1991.
Toyota's System of Production Functions 227

inspections or other simple inspection methods. Succeeding in making

parts that “close correctly the first time” is the same as achieving Cp val-
ues of 21.33. Engineering capability at this level supports the claim that
Toyota is the world leader in all aspects of production technology.
A Cp value of less than 1.00 requires 100 percent inspections. In our
discussion of body assembly above, the justification for using oblong bolt
holes and adjusting each part is that the Cp is below 1.00. One may imag-
ine that the defect rate goes to zero when 100 percent of the parts are
adjusted, but, in fact, human error enters into the adjustment, and the
defect rate will inevitably rise above the 3.4 per million level achieved
when the Cp is less than or equal to 1.33.
This is why Toyota works to bring the Cp for all processes to less than
or equal to 1.33, either by enhancing the precision of manufacturing
equipment or by broadening design tolerances. Blindly increasing the
precision of manufacturing equipment would send capital costs soaring,
so broadening design tolerances is desirable wherever possible. This is one
incentive for using the Taguchi Method (for widening design tolerances)
that was discussed in Chapter 3 in the section on statistical methods.
Toyota set out to achieve Cp21.33 for all processes in the midst of its
continuous quality improvement activities after receiving the Deming
Prize in 1965. This is why Toyota’s reported achievement of Cp21.33 in
car bodies at the end of the 1970s is reasonable and why we can assume
that the company now possesses even more formidable manufacturing
technologies.
In his book, The Toyota Method* (1998), Osamu Katayama publishes
an interview with Kazuo Okamoto, a director at Toyota Motor in charge
of the development of the Celsior.

First, we got together the production engineering people at the plant

and formed a “flagship” quality committee to make dramatic improve-
ments in manufacturing precision. Then we put together a system of
design and experimentation support.
For example, we needed a device for balancing the propeller shaft
as it turns that was capable of more precise measurements than the
balancers used on previous Toyotas. Ordinarily, someone would say
“You can’t measure that precisely” and that would be the end of it.
When Ichiro Suzuki (the Celsior’s chief engineer) reported on the
problem through the FQ Committee, though, he brought along some
production engineers and had them ride in a vehicle with higher num-
bers and got them to admit the difference. The production engineers
tus
had no choice but to develop a higher precision inspection appara
228 Inside the Mind of Toyota

than had been used in the past. The same kind of thing happened for
all the parts.

Here, we see a production engineering department recognizing its

gatekeeper role and bringing about a revolution in attitude to open up a
new era.

PURCHASING

Growing Together
The way Toyota sees its parts suppliers has not changed fundamentally
since Kiichiro’s day. The theme is “growing together.” Kiichiro’s view of
suppliers is basically the same as the one we introduced in Figure 1.3 with
the picture of the strange bucket. The notion of growing together grew
out of the idea that the performance of the weakest supplier determines
the performance of the entire group of companies.
Toyota's Purchasing Rules, formulated in 1939, contain the following
statement:

“We consider subcontractor factories to be our branch factories and in

principle do not change to other subcontractors for frivolous reasons. To
every extent possible, we will endeavor to improve the performance of
those factories.”

Takahiro Fujimoto cites a typical example of “growing together” in his

book The Evolution of a Production System® (1997):

The B___Company, when it was founded in the 1960s, would fabri-

cate, test, and then manufacture parts according to complete manu-
facturing prints supplied by Toyota. It also undertook formalized work
such as the compilation ofparts tables and print control. During this
period, the company kept sending “guest engineers” to Toyota and
improved its percentage of print approval as it eventually went to the
point where it could take charge of design nearly up to the vehicle level,
1.€., from approved drawings (detailed prints based on parts specifica-
tions from Toyota) to assembly prints to structural design prints. As it
entered the 1980s, the B___ Company added marketing planning to
its capabilities and grew to establish itself as an independent parts
supplier that could be entrusted with a comprehensive approved draw-
ing design system.
Toyota’s System of Production Functions 229

Thus, through a thirty-year association with Toyota, the B___Com-

pany expanded and grew to the point where it could participate with
other manufacturer groups (keiretsu). Results of this sort were not
achieved because Toyota grew, but rather, because both companies pros-
pered through Toyota’s philosophy of growing together.
As it had the previous year, Toyota came out on top in a 2000 ranking
of corporate income. It had successfully joined with suppliers to lower
manufacturing costs and reported a 40.6 percent increase in income. And
lest one think that Toyota was bullying suppliers to get such results, con-
sider this. Of the thirty top-ranking automobile parts suppliers on the list,
twelve were from the Toyota group. (Nikkei Business. 27 August 2001).

Keiretsu

In Toyota’s thirty-year company history (1967), we find an interesting

observation about keiretsu:

“Growing together” had been at the center of Toyota’s thinking about

suppliers since Kiichiro’s time, but concrete organizational improve-
ments had to wait until after World War II. In September 1952, Toy-
ota applied for the Diagnosis Guidelines for Machinery and
Equipment Enterprise Groups (keiretsu) that had been formulated by
the Japanese government’s Small and Medium Enterprise Agency in
July of the same year. Over the course of eleven long months, diagnoses
were conducted at Toyota, as the parent company, along with approx-
imately forty supplier plants. The results were edited in the form of
diagnosis reports and these then became the basis for recommenda-
tions for improvement.
Partly as a check on this process, Toyota conducted a second round
of diagnoses in April 1954. From the results of this second round, it
became clear that considerable improvements had been made to the
management systems of companies where assessments had been carried
out only two short years before. Sales-profit ratios, ratios offixed assets
to net worth, and production all rose one and a half times while defect
rates had been cut in half.
the
The formation of a Toyota enterprise group, or keiretsu, based on
tive.
philosophy of growing together proved to be extraordinarily produc
in the
The keiretsu survived and grew stronger through the 1980s until,
se
early 1990s, Toyota adopted the idea of an “open-door policy” in respon
230 Inside the Mind of Toyota

to U.S. criticism of the keiretsu. The keiretsu were not summarily disman-
tled, but membership into the keiretsu was opened.
Nowadays the word keiretsu is taboo at Toyota; it has been replaced by
the word “group.” Keiretsu implies a system, a far stronger connotation,
and the conclusion to be drawn here is that the taboo was adopted in
order to avoid friction. Indeed, the issue of keiretsu was not solely of con-
cern at Toyota. The following appeared in the August 20, 2001, edition of
the Nikkei Sangyo Shimbun:

Koichiro Toda, president of Unisia JECS, lets his true feelings slip out
when he says, “We never realized what a serious blow the disappear-
ance of the keiretsu would be.” As Nissan Motor starts to dismantle its
keiretsu system, they’re anxious to groom other suppliers outside of
Nissan. “But you can’t just go to a customer and start negotiating. It
takes time to get to that point,’ he explains sternly. “Our customer had
always been Nissan, so basically we don’t have the sales know-how we
need.” Toda says that he needs engineers who can design and develop
for other carmakers. “We may be adding people for a long time even
though we haven't got the sales.”

Dismantling keiretsu put Unisia JECS into a new environment, and its
cost structure can be expected to improve in the future. But even if it were
to succeed in achieving a cost structure that, like the Toyota group, can
“wring water out of a dry towel,” it is not likely to prevail over Toyota
group companies. It will continue to have the problem of the extra costs
of sales and of carrying engineers for multiple carmakers.
In July 2000, Toyota launched CCC (Construction of Cost Competi-
tiveness) 21, a campaign designed to bring about unprecedented cost
reductions. The Nikkei Sangyo Shimbun reported on this development in
on March 8, 2001:

CCC21 is not simply a campaign to lower the purchase prices ofparts.

It involves working with suppliers to lower their manufacturing costs.
On January 1, 2001, in order to pursue comprehensive materials and
other cost reductions, Toyota merged Procurement Departments 1
and 2, handling parts and materials, respectively, into a single inte-
grated system. This was a major shift, transforming purchasing
personnel from specialists in individual parts to generalists overseeing
the stream from materials to production processes. The aim is to
lower costs across the board, not by examining quality and cost in
Toyota's System of Production Functions 231

isolation, but by investigating their mutual relationships with methods

and equipment.

The cooperation of suppliers responsible for 90 percent of the num-

ber of parts and 70 percent of the costs of parts is indispensable to ful-
filling the promise of strategies such as CCC21. And the suppliers carry
part of the strategy precisely because of their continuous relationship
with Toyota. Dissolving the keiretsu means dealing with suppliers only on
the basis of price. We see what is happening to automakers who ruin sup-
pliers by pushing them to the point where purchase prices can go no
lower or who engage in “scorched earth” purchasing by wandering about
in search of suppliers with excess capacity. In the long run, they them-
selves will be ruined.

Faces of a Stern Father and a Compassionate Mother

Toyota does not cling stubbornly to kerretsu.

An executive in Toyota’s Purchasing Department observes that, “The

Toyota corporate culture of fostering parts suppliers is important, but
you can’t prevail in world competition without also adopting the
Western culture of selecting suppliers.” This was how a pilgrimage to
Paris began among TMC parts supplier affiliates. The reason was
that Toyota, in a joint-venture production of compact vehicles with
the PSA Peugeot Citroen Group, had adopted a policy of entrusting
parts procurement to PSA. Toyota is even forsaking parts suppliers
from its own keiretsu, saying that it will “introduce them to PSA, but
won't guarantee contracts.” (December 13, 2001. Nikkei Sangyo
Shimbun.)

When this Toyota executive refers to adopting the Western culture of

selecting suppliers, he is not talking about shifting to a culture of select-
ing suppliers. He is referring, rather, to creating a new Toyota way that
incorporates the European approach. The article uses the word “forsak-
ing, but this should not be interpreted as dismantling the keiretsu. On the
contrary, it means urging keiretsu suppliers to grow stronger by having
them engage in another kind of competition, in much that same way that
a lioness toughens her cubs by pushing them off a cliff.
Toyota is said to possess two faces: those of a stern father and a com-
passionate mother. Typical examples of this dual nature may be seen in
232 Inside the Mind of Toyota

the VA/VE suggestion system and in the claims compensation system for
marketplace defects.
The VA/VE suggestion system, created with the introduction of TQC
in the 1960s, is a system for getting parts makers to generate effective cost
reduction suggestions. Toyota had already spent four years making cost
tables and other preparations with a view to encouraging productive sug-
gestions. In addition, the company decided to raise the motivation of
parts suppliers by returning to them half of any cost reductions made.
The arrangement gave parts manufacturers high cost reduction targets
and a way to prosper if those targets were met. Even Toyota’s most
intense cost reduction efforts, then, would not impoverish its parts sup-
pliers. Some automakers still run VA/VE suggestion systems in order to
grab the profits for themselves, but with total vehicle sales volume not
expected to increase in the future, such a practice threatens to ruin the
group as a whole.
Here is how the system of claims for marketplace defects works. Ordi-
narily, when a design is outsourced, the outsourcing company fixes spec-
ifications and the supplier designs, manufactures, and delivers parts that
conform to those specifications. If the part causes some problem in the
marketplace, then responsibility for compensation is assigned depending
on where the problem occurred. If the problem lies clearly in the sup-
plier’s design, manufacture, or delivery, then the outsourcing company
seeks compensation from the supplier for any damages caused by the
problem. Anything else is deemed to be a problem with the specifications,
and responsibility falls to the outsourcing company. This way of thinking
means that unless the outsourcing company’s written specifications con-
tain an unreasonable requirement that there be “no problems in the mar-
ketplace,” the majority of marketplace problems become specifications
problems, and the outsourcing company cannot seek compensation from
the supplier.
Instead of adopting this “logical” approach, however, Toyota has a
“unilateral” policy that market claims regarding components are basically
the responsibility of the supplier. Not adhering to this, as Toyota tells it,
would be “rude to the supplier” or would deny the supplier the “chance
to grow.” The real purpose behind this policy is to establish for suppliers
a market problem analysis system and to promote market quality
improvements by suppliers. Toyota’s philosophy, in other words, is that
there is no way an automobile manufacturer can, by itself, guarantee the
quality of all of the twenty thousand to thirty thousand components in a
vehicle. The quality of the automobile as a whole cannot be guaranteed
unless each component maker sees itself as an independent manufac-
Toyota’s System of Production Functions 233

turer and puts in place all measures necessary to ensure the quality of its
own components.
On the basis of this thinking, Toyota has put together a “supplier recov-
ery system” (outlined below) in which claims cover the costs of defective
components + costs of related components + labor charges for repair.
1. Toyota sets an initial ratio for sharing the costs of a claim (e.g., x percent
for Toyota specification sheet and y percent for supplier approval
request print).
2. When aclaim occurs, Toyota seeks compensation from the supplier in
accordance with the initial cost-sharing ratio.
3. The supplier investigates the claim and, if agreeing with Toyota’s assess-
ment, pays according to the initial cost-sharing ratio. If the supplier does
not agree, it appends recovered problem parts themselves to its investi-
gation data and applies to Toyota for a change in the cost-sharing ratio.
4. The supplier and Toyota make an adjustment and determine a new cost-
sharing ratio.
Step 3 is particularly important. The supplier needs to have suitable
market research and analysis capabilities in order to be able to carry out
the third step.
When large enough sums are involved that this becomes a manage-
ment issue, an assessment is made with Purchasing at the center, and
Toyota sometimes assumes part of the burden. Here we see the “compas-
sionate mother” side of the company.
Given that its sales-to-claim costs ratio is only half that of other firms,
it is ironic that Toyota obliges component makers to shoulder nearly all
of the burden of market claim costs when for many companies, the
majority of such costs are borne by the finished goods manufacturer.
Toyota’s claim costs are low, however, precisely because Toyota has a clear
ideology of toughening suppliers by “pushing them off the cliff? a phi-
losophy that is directly connected to reducing the burden of claims costs
on suppliers.

Design Outsourcing Methods

Historically, the enormous number of component parts in an automobile
has compelled capital-poor Japanese car manufacturers to adopt design
outsourcing methods for relying on outside companies to design and
manufacture components. Design outsourcing takes place according to
the following specific procedure, known as the “approved drawing
method” (shoninzu hoshiki).
234 Inside the Mind of Toyota

1. The carmaker draws up parts specification drawings that document

required characteristics such as size, basic shape, design and perform-
ance, and reliability criteria, and asks parts manufacturers (often plural)
to take charge of design, prototyping, and trials.
2. Based on the parts specification drawings, the parts manufacturers
design part specifications including part shape, materials, components,
internal construction, and various other elements, verify these through
prototyping and trials, and submit approval request drawings and writ-
ten trial results to the automaker.
3. The automaker checks these and, if no problems are found, makes them
into approved drawings by stamping “approved” on the approval
request drawings.” It then contracts with one or more parts manufac-
turers to produce the parts for mass production.
4. The parts makers produce the parts in volume based on the approved
drawings.

Takahiro Fujimoto’s book, The Evolution ofa Production System

(1997), details the historical development of the approved drawing
method and the differences between Toyota’s practices and those of
other companies, especially Nissan Motor’s approved drawing system.
Among other things, Fujimoto points out that the approved drawing
system has long been in common practice in automobile companies
and that Toyota took the method, elevated it into a “system” through
documentation, and polished it into a method that benefits both auto-
mobile manufacturers and suppliers. He also posits that Nissan Motor’s
documentation of its practice lagged behind Toyota’s by about ten years
and that Nissan’s approved drawings were seen to involve multiple
overlapping tasks between Nissan and its suppliers, with the result that
Nissan was never able to draw as much benefit from the system as Toy-
ota did.
The work of design evolves little by little from the “soft” images and
ideas of designers into increasingly concrete and creative operations.
Breaking off part of that evolution and assigning it outside the company
inevitably creates a need for close communication. As a result, the prac-
tice has emerged of having engineers from parts suppliers take up resi-
dence at automobile manufacturers.
The conditions under which parts supplier engineers stay at Toyota
vary depending on the part in question, but ordinarily between five and
eight assistant design managers will be in residence for from one to two
years, with experimentalists asked to put in shorter stays when necessary.
The costs (salaries) of these residents are split, with Toyota's share paid in
a lump sum.
Toyota's System of Production Functions 235

Other companies use this system of resident parts suppliers as well. But
in other companies, the resident suppliers work with car manufacturer
engineers and are generally treated as employees on temporary assign-
ments. In many cases, moreover, the residence of parts supplier engineers
is considered to be a kind of “training” by the car company. Sometimes,
too, the car manufacturer does not pay the expenses of the resident engi-
neers on the pretext that supplier costs are included in the purchase price
of the parts during mass production.
Toyota’s view of this can be expressed as follows:

Any haggling or kickbacks between parts suppliers and the car manu-
facturer will eventually rebound and obscure the details of the prob-
lems. This will deprive the company of opportunities for improvement,
so fees for work performed are paid strictly for the stated reasons and
in a lump sum. The car manufacturer’s role is development, and the
parts supplier’s role is parts designs. When supplier employees are
treated on a par with Toyota employees, a kind of “complicity” arises
that diminishes engineering performance. And this is why a strict line
is drawn between the two.

Parts Outsourcing Policy

Shoichiro Toyoda said, “If we don’t make a part, we lose our understand-
ing of its cost unless we at least have a grip on the technologies involved.
We should outsource after we’ve made sure that we could make the part
ourselves at any time.”
Toyota is said to have set its criteria for the switch to an approved draw-
ing system in terms of its criteria for design outsourcing. These may be
expressed as follows: Ensure that parts design outsourcing does not hol-
low out Toyota’s technical strengths or drain away basic know-how. Con-
sequently, design work should not be frivolously outsourced merely for
the purpose of saving on in-house development resources.
Thus, at Toyota, the decision to outsource design work is made after
prior assessments and confirmations to guarantee that outsourcing will
not diminish the company’s technical strengths. Toyota’s fundamental
outsourcing policy, in other words, can be expressed as, “build technol-
ogy inside and build parts outside.”
At the end of the 1980s, Toyota responded to Nippon Denso’s” bid to
take charge of electronics-related systems, by saying that parts technology
was one thing, but that Toyota would handle the systems. And although
Nippon Denso was a sworn Toyota ally, Toyota proceeded to build a ded-
236 Inside the Mind of Toyota

icated semiconductor plant in Hirose to manufacture components as

sophisticated as microcomputer circuit boards. This example shows Toy-
ota’s deep commitment to the principle of “build technology inside and
build parts outside.”
Thus, Toyota outsources nearly all parts once it is able to design and
produce them at will itself. And through subsequent supervision and sup-
port of its parts manufacturers, Toyota arranges to prevent its parts design
technology capabilities from deteriorating.

Toyota has launched a revolution in production to a surprising degree.

For the first time in the history of car manufacturing in the world, it
produces tires inside an automobile plant and supplies them directly
to the assembly line.... Above all, the system Toyota uses now makes
it possible to reduce costs substantially. It is estimated that Toyota is
able to hold the cost of supplying tires to less than 50 percent of what
other automobile manufacturers pay. This is leading to a desperate
realignment in the tire industry and there is a significant possibility
that this will trigger a dramatic break in the price of tires. And that
can only bring about a major restructuring of the tire industry world-
wide. (May 8, 2000. Nikkei Business.)

Another characteristic feature of the relationship between Toyota

and parts manufacturers is that, in principle, Toyota issues orders to
multiple firms. Orders for a single part or similar parts are always sent
out to two or more suppliers (including in-house Toyota manu-
facturers). Along with minimizing risk and guarding against unforeseen
problems or defects, this is intended to raise the technical competen-
cies of parts suppliers by having them compete with and against
one another. This practice results in lower purchase prices, but that is
not the sole purpose. Most companies will push hard for lower prices
but will ease off once they get them. When prices fall for Toyota parts,
Toyota pushes hard to find out why. This is because it is more valu-
able to understand why prices fall than to understand why prices do
not fall.
The “continuing relationships” referred to in Toyota’s 1939 Purchasing
Rules apply nowadays to model changes and minor changes. For new
models, orders are targeted on a competitive basis. Even then, however,
such competition does not give undue weight to price. As illustrated in
the Supplier Guide (described later), competitions to choose suppliers
evaluate “overall managerial strength, including the attitudes of the com-
pany president.”
Toyota’s System of Production Functions 237

Outside Toyota, there are many companies that have adopted policies
of multiple supplier sourcing on the Toyota model. However, because
they make too much of competitive costing and expanding business rela-
tionships, they often outsource items to three or four suppliers even for
low-volume production models. This should lead to higher costs, but in
fact, deals are made at low costs. Something is distorted somewhere, in
other words, and the practice invariably leads to financial woes. Toyota
sets extraordinarily demanding standards for its suppliers, but it also
wants its suppliers to profit.
As we explain in detail in the final chapter, Toyota is moving toward
earning more volume through its CCC21 campaign. In connection with
this, Toyota is revising its policy of ordering from multiple suppliers and
changing to a system of single supplier outsourcing.

Toyota Suppliers’ Association Activities

No discussion of Toyota’s purchasing management can omit mention of
the activities of the Kyohokai and Hoeikai, which are associations com-
posed of Toyota suppliers. Yoshinobu Sato’s 1988 book, The Toyota Group:
An Analysis of Strategy and Substantiation,* provides details on this sub-
ject; only one example will be cited in this work.
Toyota suppliers associations put together management organizational
charts for parts manufacturers that are linked to Toyota's management
structure chart, and they have made them the common property of the
group. Around 1985, they created a Project Development System Chart
for parts suppliers that corresponds to Toyota’s Quality Assurance Regu-
lations and Design Review Usage Guidelines. In 1988, they compiled and
implemented a Cost Planning Activities Manual for parts suppliers that
corresponds to Toyota’s Cost Control Regulations.
Such activities have built up systems for partner plants that link to the
Toyota system, with the result that the entire Toyota Group has a single sys-
tem for quality assurance and cost management. The fact that Toyota has
created this situation means that supply chain management (SCM) has
long been implemented at Toyota. Other companies’ groups cannot put
together effective supply chain management because many have no qual-
ity control system chart or cost management system chart in the first place.

New Purchasing Policies

Toyota’s new purchasing policies are summarized systematically in A Sup-
plier’s Guide (for dealing with Toyota), a bilingual (Japanese-English)
238 Inside the Mind of Toyota

booklet of sixty-eight pages, plus appendices, distributed to parts suppli-

ers seeking to do business with Toyota. This booklet is, of course, updated
yearly, with the latest edition summarized on Toyota’s website homepage.
Because this guide provides a very good understanding of Toyota’s
philosophy on purchasing and the purchasing system, an outline of its
contents is presented below.
A. Introduction: Toyota has always made it a fundamental principle to
develop open, fair, and equitable purchasing activities to contribute to
society and to the economy (Emphasis added).
B. Toyota’s Purchasing Philosophy and System
1. Three Basic Principles of Purchasing
a) Fair competition based on an open-door policy
b) Mutual benefit based on mutual trust
c) Contribution to local economies based on good
corporate citizenship
2. Three Pillars of an Optimal Global Purchasing System
a) International cost comparison data base system—to help provide
suppliers with improvement targets
b) New supplier/new technology development programs—to
engage new suppliers and discover new technologies
c) Improvement support program for existing suppliers—Toyota
supports supplier improvement activities
C. Toyota Purchasing Activities
. Global expansion of Toyota production activities
. Purchasing organization and cooperative system
. Purchase items list
. Characteristics of products sought by Toyota
A . Toyota's active discovery activities (new supplier/new technology
PWN

development programs)
6. Profile of suppliers sought by Toyota (technology, delivery, produc-
tion, quality, cost), what Toyota aims for with suppliers (basic
philosophy)
D. Sales Promotion Method
1. Contact address, what Toyota wants to know when making contact—
summary of products promoted and company particulars
2. Summary of initial contact
3. Summary of presentation
Characteristics of Toyota Development and Production (approach)
mH Purchasing Process (original parts, materials)— System of supplier
mm
activities linked to Toyota development process
1. Planning steps
2. Prototype fabrication steps
3. Mass production preparation/Mass production steps
Toyota's System of Production Functions 239

(Ref: Toyota supplier selection criteria. In addition to general imple-

mentation capabilities in the areas of quality, cost, and delivery, manage-
ment attitudes are included in the selection criteria).
A. Purchasing Process (maintenance parts and accessories)
B. Purchasing Process (equipment, machinery, office equipment)
Steps and procedures for prospective new suppliers are explained sys-
tematically in the handbook outlined above. Since it has made clear what
companies need to do in order to do business with Toyota, criticisms ofa
closed keiretsu system are no longer applicable.
Moreover, the handbook and the appended contact form, which sets
out the items that need to be filled out in order to contact Toyota (the form
is also available on Toyota’s website), — allows prospective suppliers to see
for themselves whether they possess the capabilities necessary to do busi-
ness with Toyota. This effectively eliminates wasted time on both sides.
In any event, as Toyota states in the beginning of this booklet, what
the booklet contains has hardly changed over the years. Parts manufac-
turers have always been free to pitch their products to Toyota, and the
capable companies have been able to join the ranks of Toyota suppliers.
Companies that have suggested pricing their way into the ranks of sup-
pliers have been told not to overtax themselves and have been turned
away at the door.

MANUFACTURING (THE TOYOTA PRODUCTION SYSTEM)

Toyota’s system of manufacturing refers to the Toyota Production System
created by Taiichi Ohno. Many studies and explanatory books about the
Toyota Production System already exist, so the present work will touch
only on the main points concerning the introduction of the system into
the company.
The following summarizes key factors in the success of the Toyota Pro-
duction System (TPS).

1. The system reduces costs comprehensively through the relentless elimi-

nation of waste. The fundamental philosophy of the system is to ask how
overall efficiency can be raised rather than seeking partial efficiencies.
2. The two pillars of the system are just-in-time and jidoka
(autonomation).
3. TPS is a production system that works to (1) build only what is needed,
when it is needed, and in the quantity needed, (2) have each down-
stream process pull what it needs from each upstream process, and (3)
have a minimum of people.
240 Inside the Mind of Toyota

4. Leveled production: Hourly production quantities and varieties are

balanced for all processes.
Synchronization: Every process is provided with a system to constrain
it from producing too fast.
Autonomation: Lines are set to stop whenever abnormal situations
occur.
Visual management: All of this, moreover, is arranged so that it can be
understood immediately (e.g., using kanban and andon).
5. (A) Setup changeover times are made as short as possible in order to
minimize batch sizes. (B) Jigs and tools are kept simple and low-cost.

Despite the celebrity of the Toyota Production System and despite the
wealth of literature about TPS, very few companies have adopted the Toy-
ota Production System in its entirety.
Robert Eaton, the former chairman and CEO of Chrysler, which used
to be one of the Big Three automakers in the United States, declared in an
interview in the beginning of 1994 that “we have achieved production
efficiencies equal to those of the Japanese manufacturers. We have noth-
ing left to learn from Toyota.” Eaton’s comment was prompted by changes
in Chrysler that had come about when he hired consultants to introduce
the Toyota Production System into his company. Chrysler had subse-
quently succeeded in achieving broad increases in productivity.
Some months later, however, a Chrysler executive visited Toyota’s plant
in Kentucky, saying that he wanted to “check that Chrysler had learned
everything it could from the Toyota Production System.” From early in
the morning, he spent a full day earnestly touring the plant, and as he left,
he made this assessment. “This has been a truly exhausting day. I have
clearly confirmed that Chrysler hasn’t learned anything from Toyota.”
(Nikkei Business. April 10, 2000).
Michikazu Tanaka, a former senior managing director of Daihatsu
Kogyo who was personally trained by Taiichi Ohno, describes the main
features of the Toyota Production System this way: “In terms of results, it
involves reducing work-in-process, raising productivity and lowering
costs. But the real aim is to bring out the capabilities of each individual.
The ultimate aim is to draw out people’s motivation.” (Shimokawa,
Koichi and Takahiro Fujimoto. 2001. The Starting Point of the Toyota Sys-
tem).
Yoshihito Wakamatsu and Tetsuo Kondo in Building People and Prod-
ucts the Toyota Way (2001) and Masaharu Shibata and Hideharu Kaneda
in Toyota Shiki Saikyo no Keiei (2001) make similar arguments.
All the same, these arguments do not seem to suffice to make it Ppossi-
ble to adopt the Toyota Production System. For instance, the notion that
Toyota's System of Production Functions 241

inventory is evil or the idea of making stop cords to halt a production line
when a problem occurs owe more to a way of seeing things—to a view-
point or perspective—than they do to “building people.’ Conventional
thinking would lead us to conclude that inventory is necessary for smooth
production or that total efficiency is greater when we repair after the fact
any problems that occur on the line.
So what is the fundamental “way of seeing” of the Toyota Production
System, anyway? The question calls for a cogent and comprehensible
explanation. Without a basic understanding of this point, we may
adopt the Toyota Production System but we will be unable to apply it
and therefore unable to build a version of the Toyota Production Sys-
tem that will surpass other companies. If we cannot apply it, then noth-
ing will work.
Taiichi Ohno provides part of the answer: “There is a secret to shopfloor
technology just as there is a secret to juggling or to a magic trick. And I'll
let you in on the secret. To get rid of waste, train your eyes to find waste
and then think about how to get rid of the waste you've found. Do this
over and over again, always, everywhere, relentlessly and unremittingly.”
Ohno, however, does not explain what he means by “eyes that can find
waste. and therefore does not reveal the secret. The Toyota Production
System remains as elusive as ever.
One book that gets to the heart of the problem is Toyota’s Profit Sys-
tem—a Thorough Study ofJust-in-Time® (1993), written by Noboru
Ayuse, a former Toyota employee. Ayuse’s perspective on TPS can be sum-
marized as follows:
- There are two sources of profit in manufacturing. One is the generation
of surplus value and the other one is capital turnover.
* What the Toyota Production System does, essentially, is to increase the
capital turnover rate (i.e., invested resources versus sales). It’s a question
of how many times you go through the selling cycle or of increasing the
capital utilization rate. Being flexible, responding quickly to shifting cir-
cumstances, and reducing inventories are means of achieving that.
* Taylorism and the Ford system seek to increase efficiency. Efficiency is
the ratio of invested resources to production volume, or “productivity.”
There is no focus on whether what has been made sells or not, only on
how much is being produced. Ford could efficiently produce uniformly
black Model Ts, but lowering the manufacturing cost was meaningless
unless the cars sold.
- The Toyota Production System, then, is a system that focuses on quickly
building products that sell. This basic perspective is what resulted in
ideas such as leveling, SMED, one-piece flow, stop cords, availability rate
242 Inside the Mind of Toyota

(not operating rate, but the availability to run at any time). This is why
the Toyota Production System emerging after Taylorism and the Ford
System has been called revolutionary.

Even while Ayuse was at Toyota, he viewed Toyota from the perspective
of an objective outsider. He began writing the precursor to the book, the
internally published The Toyota System—A Toyota-style Production System
for the Purpose of Cost Reduction” because he vaguely suspected that
something was wrong. It is difficult for someone from Toyota to explain
things in such a way that outsiders can understand, but Ayuse’s book
accomplishes this because of its author’s objective stance.

SALES
Shotaro Kamiya is largely responsible for establishing Toyota’s sales sys-
tem. In 1935, when Kamiya was scouted by Kiichiro Toyoda and came
over to Toyota from GM Japan, Kamiya had GM Japan’s Chevrolet and
Buick dealerships one by one change over to the Toyota group. When the
Japan Automobile Supply Company (JASC) was dissolved after World
War II, moreover, he had leaders from the old Nissan group throughout
Japan switch one after another over to Toyota group dealerships. Both
before and after the war, the gap between Toyota and Nissan sales capa-
bilities was unmistakable. Later, when Toyota Sales split off from Toyota
Motor, Kamiya became president of Toyota Motor Sales and, proclaiming
his famous sales philosophy of “users first, then dealers, then the manu-
facturer,”’ came to be known as the “god of sales.”
In his book Toyota Management Rules,” Yoshimasa Kunisaki concisely
sums up the sales rules that Kamiya formulated:
Sales Rule No. 1: Sales is different from selling products. Sales is creating
the conditions that make selling easy.
Sales Rule No. 2: You don’t make things and then sell them. You make
things for people who buy them.
Sales Rule No. 3: Trust in a product comes from trust in the sales.
Sales Rule No. 4: The relationship between manufacturer and dealers is
one of co-existence and mutual prosperity.
Sales Rule No. 5: Sales should not skimp on investment.
~ Sales Rule No. 6: “Unreasonable effort” is sometimes required to seize
the right timing for a deal.
Sales Rule No. 7: Always ask what you should be doing to win the com-
petition for sales.
Sales Rule No. 8: Not even orders from small countries are to be slighted.
Toyota's System of Production Functions 243

Sales Rule No. 9: Make sure you can always cover your main line of work
when you make forays into other businesses.

These rules were compiled during an era of production-driven mar-

keting in which manufacturers could sell anything they could build.
Kamiya’s thinking, however, goes beyond sales-driven marketing to the
concept of customer-driven marketing. It was an extraordinarily progres-
sive idea.
Backed by this powerful sales network, Toyota garnered a 43.3 percent
share of the domestic market in 2000. Yet this seemingly rock-solid sales
network gives rise to a sense of crisis at Toyota, a situation noted by the
editors of the Weekly Diamond® as quoted in Toyota Management: The
Law of Winner Takes All (2001):*

A mid-level executive in the sales department says, “Seeing dealers as

distributors puts them in the most backward category of all.’ Not
enough action is being taken, he means, to respond to structural
changes among consumers or to strengthen the value chain (1.e., to pro-
vide value and garner profit after new cars are sold). Such structural
changes inevitably make heavy burdens of the large numbers of sales-
people and sales outlets that support competitiveness. As the president
of a Kanto Region dealership confesses, “I’m worried that, within five
years, Honda and the others that have fewer dealerships and people
could turn the situation to their advantage over Toyota.”

Certainly, the Japanese system of selling cars is said to lag far behind
that of the United States. This is why serious Toyota-type streamlining
was applied to the Kamiya-style sales system when Toyota Motor and Toy-
ota Motor Sales merged in 1982.
Shoichiro Toyoda explained this at the 67th Quality Management Sym-
posium sponsored by the Union of Japanese Scientists and Engineers in
1998:

Let me give you the example of one particular dealer. When we're talk-
ing about sales, the emphasis is always on market share and the num-
ber of vehicles sold, so there is a tendency to spend money in order to
differentiate oneself. But this doesn’t necessarily make for a healthier
organization in the long run. This particular dealer hadn’t had much
success in his steady attempts to improve the process between selling a
car and recovering payment and by lowering costs and returning prof-
its to customers in a bid to improve CS in its true sense of the word.
244 Inside the Mind of Toyota

At this point, he put together a team including manufacturing

kaizen experts to improve material flows for new vehicles and service.
This team succeeded in achieving results that until that time had
seemed impossible: They shortened the time between order receipt and
vehicle delivery, maintained 100 percent on-time delivery to customers,
and recovered nearly 100 percent of payments. A culture of continuous
improvement has taken root at this dealership and is beginning to pen-
etrate throughout the organization. We are beginning to see many deal-
erships like this one.

The team, including manufacturing experts that made improvements

to the dealership’s tasks, was the Business Improvement Support Office
guided by Shoichiro Toyoda’s eldest son, Akio Toyoda.
Within the sales division, the Business Improvement Support Office
was launched in January 1996. Its purpose was to introduce the Toyota
Production System into the sales division in order to increase the efficiency
of distribution and sales and to shorten lead-times. Used car distribution
became the first focus of the Business Improvement Support Office. At the
time, it took as many as forty days to change a used car into cash when it
was traded in. To speed up this cash conversion, a system was set up for
dealers to post traded-in cars at other dealerships via information network
terminals. As this developed, it was linked to the website Gazoo, which
offers information about new and used cars on the Internet.
Gazoo is an information system whose purpose is to eliminate as much
waste as possible in distribution and sales and to increase business effi-
ciency. Its ultimate goal is to directly link to the production department's
information system to achieve total make-to-order production. In this
way, the Toyota Production System is on the verge of a major revolution
in distribution and sales.

Endnotes
1. Chapter 3 (Automobile Planning Methods) of the first volume of the
Handbook of Automotive Engineering (Jidosha kogaku benran), published
by the Japan Society of Automotive Engineers in 1984, systematically
describes the planning, design, development, and production preparation
processes for an automobile and presents a brief discussion ofmarketing
strategies. The chairman of the chapter’s editorial committee and all eight
of its authors are Toyota employees, so it is probably fair to assume that
the
chapter describes work methods at Toyota. In the somewhat incoherent
Toyota's System of Production Functions 245

partial treatment of marketing strategy, we can see the lingering influence

of Toyota Motor Sales. Although the technical details are somewhat dated,
the chapter provides a good understanding of Toyota work methods. The
Handbook of Automotive Engineering is recommended as further reading
for anyone interested in more details.
. Kyosoryoku no honshitsu.
. The Japanese edition of Sloan’s My Years with GM (Diamond, 1967) is out
of print, but an abridged version was published in installments in the
Diamond Harvard Business Review (Daiyamondo Habado Bijinesu Rebyu) in
a series that began in January 2002.
. Shinsei Toyota—hito to senryaku.
. Seihin Kaihatsuryoku.
. Seisan Shisutemu no Shinkaron.
Toyota Seisan Hoshik1.
. Maruchipurojecuto Senryaku.
ONAUEA
. Toyota Hoshiki ni miru Shisutemu Saikochiku.
10. Toyota Jidosha Shusa Seido.
le Toyota o Shiru to iu Koto.
ee For details on each of the tools used in the quality deployment process
described above, please refer to the specialized quality documents.
i. Seihin kaihatsu to hyojunka kanri (in Jidosha Gijutsu).
14. yoko tenkai.
15; Shukan Toyo Keizat.
16. Nikkei Mekanikaru.
WW. Seihin kikaku dankai kara susumeru Toyota no buhin kyotsuka.
18. Satoshi Kuroiwa. Nijuisseiki ni muketa Jidosha Kiban no Seibi ni Mukete
(Jidosha Gijutsu).
1: Giho ni yoru—Seihin Kosuto Daun Manyuaru [Manual of Cost Reduction
using VRP Techniques].
20. Totaruka o siko suru buhinhyo joho no toroku—kanri shisutemu.
Ze Seihin Kaihatsuryoku.
La Seisan Shisutemu no Shinkaron.
23% Totaruka o siko suru buhinhyo joho no toroku—kanri shisutemu.
24. Toyota no hoshiki.
Tey Seisan Shisutemu no Shinkaron.
26. Author’s note: The term “approved drawing” (shoninzu) is not currently in
widespread use and individual companies use such equivalents as “received
drawing” (juryozu). In this book, we refer to these collectively by means of
the old appellation of “approved drawing.’
ose An electronics supplier.
28. Toyota Gurupu no Senryaku to Jissho Bunseki.
29. Toyota Shisutemu no Genten.
30. Toyota no shueki shisutemu—jasuto-in-taimu no tettei kenkyu.
246 ‘Inside the Mind of Toyota

ell . Genka Teigen no tame no Toyota-shiki Seisan Shisutemu—Toyota shisutemu.

32 . Toyota no keiei hosoku.
Oe) . Shukan Daiyamondo.
34 . Toyota Keiei Hitorigachi Hosoku.
247

Product Power and Brand Power

In Chapters 1 through 4, we have taken a systematic bottom-to-top look

at the infrastructure of the Toyota Management System. The suitability of
a company’s infrastructure can be judged in two ways: by the power of its
products (that is, whether or not the products and services ultimately
produced by its corporate activities appeal to customers) and by the
power of its brand (whether or not the company is attractive to con-
sumers). In Chapter 5, we will examine the power of Toyota products and
the Toyota brand in order to judge the suitability of its infrastructure.

PRODUCT POWER
Indexes for Assessing the Power of Products
Citing assessments by third-party organizations is an appropriate means
for making objective judgments. From the 1970s to the 1980s, the Amer-
ican consumer group Consumers Union and the market research firm
J.D. Power and Associates began independent product ratings and pub-
lished the results in their magazines and on the Internet.
Since 1986, J.D. Power has conducted independent automobile surveys
by sending questionnaires to general American consumers and publish-
ing the results of its evaluations by vehicle use and model category. In a
broader survey of “customer satisfaction” data, the company rates not
only the product quality, but also the attitudes of salespeople and post-
sales service. With respect to quality, the J.D. Power evaluations are more
technical—they also assemble peripheral data needed for problem solving.
This helps explain why automobile companies have paid increasing atten-
tion to J.D. Power data in recent years and why the media has become
interested in the Power ratings.
In this chapter, we will focus on five indices included in J.D. Power sur-
veys and published reports for automobiles.’
248 Inside the Mind of Toyota

10S (Initial Quality Study)

Measured after ninety days of ownership, this index looks at the number
of defects, malfunctions, and other quality issues experienced by con-
sumers and rates them in terms of problems per 100 vehicles.

VDI (Vehicle Dependability Index)

This index surveys the number of defects, malfunctions, and other qual-
ity issues consumers experience after four to five years of vehicle owner-
ship and scores problems per 100 vehicles.

APEAL (Automotive Performance, Execution and Layout)

Measured after ninety days of ownership, this index surveys the degree to
which consumers are satisfied with the uniqueness of vehicle design and
styling, ride and handling, engine and transmission performance, and
comfort and convenience. The results are published as a score per 100
vehicles.

SSI (Sales Satisfaction Index)

Following vehicle purchase, consumers are surveyed on such matters as
purchase processing, salesperson attitude, vehicle delivery and follow-up,
price assessment and financing, and insurance processes. Responses are
processed statistically to yield an index of customer satisfaction with sales.

CSI (Customer Satisfaction Index)

Measured after three years of ownership, the CSI calculates satisfaction
with dealership service by statistically processing evaluations of dealership
service department attitudes toward customers and experiences with
repairs and warranties. This index focuses.on matters of convenience,
such as days and hours required to perform the job, the service area, and
ease of scheduling appointments.

The Impact of Third-party Ratings

In 1976, Paul Bender published enormously influential research results
showing a 1:6 ratio between the cost of servicing existing customers and
the cost of acquiring new customers. The cost of turning an existing cus-
Product Power and Brand Power 249

tomer into a “repeater,” in other words, is a mere one-sixth of the cost of

winning a new customer.
In a 1975 to 1980 survey, the Office of Consumer Affairs of the U.S.
Commerce Department first reported on the qualitative existence of a
“word-of-mouth” effect by which repeat customers introduce others to
products, brands, and dealers.
In 1986, TARP (Technical Assistance Research Program) conducted a
study of the behavior of customers (in the United States) who have been
disappointed by defects, malfunctions, and other basic functional quality
problems. The survey results showed that 90 percent of customers go
away without saying anything and do not return. In addition, 85 percent
of those people tell at least 9 other people of their dissatisfaction, and 15
percent voice their dissatisfaction to 20 people.
This string of theories and survey data is corroborated in the car industry
by J.D. Power research on the relationship between CSI scores and customer
intentions to make a repeat purchase as well as on the relationship between
CSI scores and the word-of-mouth effect. These are shown in Figures 5.1
and 5.2 respectively, each of which shows a clear positive correlation.

Repurchase Intent

fei |
60 80 160 180 200
Overall CSI Score

Source: J. D. Power. 1991 Canada CSI Survey

Company awareness of customer service soared with the publication of

a number of scientific survey results of this kind.
250 Inside the Mind of Toyota

TT

70 80 90 100 110 120 130

Overall CSI Score
Source: J. D, Power. 1991 Canada CSI Survey.

The publication of product ratings data by Consumer Reports (pub-

lished by Consumers Union) and J.D. Power further raised interest in this
area. New customers are not drawn to cars from companies with below-
average scores and existing customers leave. New customers are naturally
drawn to top-ranking companies’ cars, and these are the cars that hold on
to existing customers.
Because the publication of Consumer Reports and J.D. Power data was
shown to have an impact both on the rate of new customer acquisition
and on the retention rate of repeat customers, Japanese automakers began
focusing efforts in the late 1980s on raising their Consumer Reports and
J.D. Power ratings. The companies put particular energy into improving
their J.D. Power scores since the J.D. Power data are based on technical
evaluations. The effort to raise J.D. Power scores resulted in an improve-
ment of Consumer Reports scores as well.

Toyota's Initiative
Of the five J.D. Power evaluation criteria, the oldest, inaugurated in 1986, is
the IQS. Since IQS is the most basic assessment of early malfunctions,
moreover, all the automobile companies began trying to improve their IQS
scores. This approach was the most orthodox method of resolving problem
items pointed out by the IQS. It, however, did not yield satisfactory results.
Product Power and Brand Power 251

The quality of cars nowadays has increased so much that the IQS reg-
isters small, almost unnoticeable problems that customers point out as
occurring “occasionally.” It is human nature to try hard to come up with
an answer, and when they are asked whether there are any problems,
people will end up remembering even minor problems from the past.
When there are many minor problems, addressing issues that come up
“occasionally” is like playing “whack-a-mole”: As soon as you fix one
problem, consumers will point out other ones from different categories.
In the end, there is little overall improvement. To improve IQS ratings, a
broad range of issues must be voluntarily addressed, including problems
not flagged by IQS surveys.
Toyota does not conduct any special activities in which the focus is lim-
ited to IQS. It has been quietly engaged in systematic activities to build
quality based on various data since before J.D. Power IQS surveys began.
Toyota can always come out on top of IQS ratings because IQS data are
among the market quality data it already uses.
This issue of quality-related criteria is discussed in Toyota—A History
of the First Fifty Years’ (1987):

In the fall of 1978, a series of quality-related demands came out of the

customary visits Toyota Motor executives made to dealerships. Quality
had been built into each process step at the factories, but the emphasis
had inevitably been placed on functional quality. As a result, the situ-
ation was that finishing touches on the products relied on new vehicle
inspections and rework conducted by Toyota Motor Sales or by dealers.
Toyota Motor Sales immediately adopted a company policy of
ensuring quality at shipping. What it found was dirt inside vehicles,
excess adhesive around vehicle bodies, out-of-position molding, and
inadvertently omitted nuts and bolts. The company revised its process
for checking intermediate processes in all the plants and took steps to
eliminate these sorts of careless errors by introducing equipment and
tools, securing labor for quality verification, and organizing a system of
inspections.
Improvement results were still unsatisfactory, though, and in 1980,
critical items were divided into categories, with designated categories
for improvement including, especially, the fit of doors, etc., wiring,
wrong or missing parts, and paint work. These became the focal points
for follow-up.

Such activities had a tremendous impact on IQS improvements. As a

result, Toyota ranks at the top of IQS assessments because, quite apart
252 ‘Inside the Mind of Toyota

from the J.D. Power ratings, it engages in improvement activities that

address all “customer-required quality” issues.
Toyota achieves high marks for VDI as well. Both IQS and VDI deal with
“must-have quality,” in other words, eliminating defects and problems that
should not be there in the first place. Ever since the days of Kiichiro Toyoda,
most improvement efforts have gone into must-have quality.
Toyota currently devotes the most effort to the category of APEAL
(attractive quality), which J.D. Power has been surveying since 1995.
“Must-have quality” and “attractive quality, shown in Figure 5.3, are
concepts defined by Professor Noriaki Kano of the Tokyo University of
Science in 1984.

Customer's Psychological Fulfillment

satisfied

unfulfilled |
single-element
quality
Peli
SEE
TOELEM
fooP

dissatisfied
Source: Kano, Noriaki et al. 1984, "Attractive Quality and Must Have Quality,’ Hinshitsu [Quality], vol. 14 [2].

Must-have quality is quality that the customer expects as a matter of

course even when a product is more perfect physically and has fewer
problems than it used to. The customer will be displeased if a product is
imperfect and problems occur. Attractive quality is quality whose absence
customers will forgive. When attractive quality is enhanced, on the other
hand, customers will be surprised, impressed, and pleased. There are
other types of quality as well, including “single-element quality” that, like
fuel consumption, fluctuates, and “indifferent quality,” which the cus-
tomer can take or leave.
Product Power and Brand Power 253

Must-have quality is a negative quality involving breakdowns or dys-

function, whereas attractive quality is a positive quality exemplified by
workmanship or craftsmanship. The Japanese word for quality (hinshitsu)
principally denotes negative quality, whereas the English word has both
positive and negative connotations.
Toyota devoted too much energy to raising CS (Customer Satisfac-
tion) during the period of the economic bubble, and the market
frowned on the “rich and fat” Corona and Corolla models it built.
Around 1993, after the bubble collapsed, the pendulum swung too far in
the other direction. Toyota introduced its excessively spare Tercels, Cam-
rys, and Vistas, all of which were hammered in the marketplace. After
this experience, the APEAL surveys begun by J.D. Power in 1995 were
perfect for Toyota because they offered an objective index of product
attractiveness.
Based on a Kano model with IQS on the horizontal axis and APEAL
on the vertical axis, Toyota announced that it would henceforth put
effort into the APEAL area. It formed an APEAL Improvement Com-
mittee in 1996 and tried to raise awareness through executive study ses-
sions, presidential speeches, and information sessions for affiliate
companies. Beginning in 1997, the company expanded these efforts by
establishing a Customer Delight Quality Improvement Committee to
evaluate representative models on a trial basis, and, in 1998, it extended
this to model changes for all vehicle types. The result of these activities
was a series of Toyota cars that scored high in the APEAL rankings.
Toyota’s close relationship with J.D. Power can be traced to 1968, the
year J.D. Power and Associates was founded. During the intervening
years, Toyota has usually stayed one or two steps ahead of other compa-
nies in terms of collecting market evaluation data. It goes without saying
that holding the lead in information-gathering means holding the lead in
product quality.
In J.D. Power ratings conducted in the spring of 2001, GM aggressively
advertised that it had improved its score by 11 percent compared to the
previous year and had overtaken Ford and Chrysler. But GM’s score put
it only in fourth place, after Toyota, Honda, and Nissan. Guy Briggs, who
led GM’s North American Manufacturing Division, said that GM was
tackling the lag in quality “as though it were a life-threatening disease.”
(Nikkei Business, September 3, 2001).
In an era in which anyone is free to read J.D. Power ratings on the
Internet, Briggs’s comment is not at all surprising.
But we have already noted that quality is not something that can
be improved by individual countermeasures. Everything connected
254 Inside the Mind of Toyota

with quality must be improved. And to achieve overall quality improve-

ment requires improvement in an entire infrastructure, as described in
Chapters 1 through 4. This is why quality has been called a “compre-
hensive management index.” The status a company accords to quality
determines the quality of that company’s management as well as the
quality of its products and services. It also determines the life of its
management.

IOS (Initial Quality)

IQS involves 135 questions in nine categories. It also surveys the condi-
tions under which problems occur (which, for the automakers, are clues
to the source of problems), and these bring the number of items studied
to more than 300.
The 135 basic items studied include questions such as, “Does the steer-
ing wheel slip?” “Do the brakes pull to one side?” “Does the engine lose
power?” Questions about the causes of problems might include such
items as, “Does the steering wheel slip to the left or the right?” “Does the
engine lose power when it is warm? When it is cold? If it is on city streets,
does it happen when accelerating from a stop?”

2005 10S Results

Table 5.1 gives the results (by top model in each category) of the J.D.
Power 2005 IQS ratings.
Toyota products, including the Lexus (Toyota’s luxury brand, sold in
Japan under the Celsior, Harrier, and other names), comes out firmly on
top of the IQS rankings, taking the number one position in ten segments,
more than half of the total of eighteen.
Scoring next in best-of-segment rankings are the GM group with four
segments, and Ford with two. They are putting up a good fight.
It bears noting here that Korea’s Hyundai and Kia enter the segment
rankings around second and third places. This shows the improved qual-
ity of the Korean carmakers, whose names began to show up in the top
three spots in 2002. From the 1980s to the beginning of the 1990s, sales of
cars from the Korean automakers stagnated as their position at the bot-
tom of quality rankings led to a reputation for cheapness and shoddiness.
Hyundai president Dongjin Kim expressed confidence in recent quality at
the October 2001 Tokyo International Automotive Conference sponsored
by Nikkei BP. In fact, U.S. sales for Korean automakers have shown strong
growth since 2001. 7
Product Power and Brand Power 255

___Car Segment | Ba deste tsi

__CompactCar
Entry Midsizecar Light-Duty Full-Size Pickup
Chevrolet Malibu Ford F-150 LD
Premium Midsize Car Heavy Duty Full-Size Pickup
Buick Century GM Sierra HD
Full-Size Car : Entry SUV

— EntryLuxuryCar Midsize SUV

Midsize Luxury Car 4 Full-Size SUV

Lexus SC 430 Lexus RX 300

ya Premium Luxury SUV
Lexus GX 470
Premium Sports Car [ Midsize Van
Nissan 350Z Toyota Sienna
N.B. Shading indicates segment
Source: J. D. Power 2005 IQS

Past 10S Trends

Table 5.2 shows the movement of various top-ranked brands from 1996 to
2005. A review of these ten years shows that Toyota has continued to
dominate with consistent first-place rankings.

1997 | 1998 | 1999 | 2000 2002 2003 2004 2005

25 £ Toyota (6)|Toyota (3) |Toyota (3) |Toyota (6) | Toyota (9)} Toyota (7) | Toyota (9) |Toyota (6) | Toyota (7) | Toyota (10)

Nissan (3) | Honda (3) | Honda (2) | Honda (3)| Honda (2) GM (4) GM (3) GM (4)
~22
5= 2 GM (2)
2c 2 : Subaru (1) 4 other Ford (2)
Ford (3) Ford (3) | Nissan (2) |}Companties| Nissan (2) Ford (2) | Mazda (2) Honda (3) Ford (2)
Ez o | Nissan (1)}
Je 3 jFlace! Ford (1) (1)

16 18 18

N.B. In parentheses are the numbers of segments in which the manufacturer achieved top ranking.
Results by brand name are given under the name of the manufacturer.
Source: J. D. Power 1996-2005 IQS.
256 ‘Inside the Mind of Toyota

In principle, the IQS sample size for each car is set at two hundred or
more vehicles, which gives a statistical margin of error of +/— 15 percent.
The fact that this 15 percent margin of error translates roughly into +/—
three IQS ranks should give an indication of how extraordinarily stable
Toyota’s performance has been.
We see solid progress in quality from U.S. automakers. While Honda
and Nissan used to occupy the second and third places in the rankings, in
the past five years, these have been replaced by GM and Ford. Over the
course of the last ten years, other Japanese and U.S. carmakers have never
consistently shown up with the most first place segment rankings.

Assembly Plant Awards

Each year, J.D. Power gives Assembly Plant Awards to factories that build
U.S.-market cars with high IQS rankings. Table 5.3 shows the assembly
plant awards for 2005.

| Platinum Toyota Tahara, Japan | 59

Gold —_— — _—

Silver Toyota Higashi-Fuji, Japan 67

Bronze Nissan Tochigi, Japan 79

Gold Ford Halewood, UK 70

Silver BMW Regensburg, Germany 79
Bronze BMW Munich, Germany 85
. Bronze Porsche Stuttgart, Germany 85
North/South | Gold GM Oshawa #2, Ontario, Canada | 8s
|
America = | _
..—=—COCOC SG GM Oshawa #1,
Ontario, Canada| 89|
Bronze Ford Hamfranck, MI 90
N. B. Score indicates number of defects per 100 vehicles. The name of the winner of the Asia Pacific Gold Award
is omitted because it is the same (Toyota's Tahara Plant) as the winner of the Worldwide Platinum Award.
Source: J. D, Power 2005 Initial Quality Study.

The Platinum Award is given to the best plant worldwide. Top-ranking

regional assembly plants worldwide are given the Gold Award, and second-
and third-place plants receive Silver and Bronze Awards, respectively.
Product Power and Brand Power 257

In the past, North American plants of Toyota, Honda and other Japan-
ese manufacturers had dominated the North American prizes, but
2002-2005 saw U.S. companies sweep this category. While this can be
seen as a result of quality improvement efforts by the U.S. plants, Toyota
still took the Platinum Award by a margin of more than 20 points.

VDI (Vehicle Dependability Index)

Based on the IQS study’s nine categories and 135 problem areas, VDI
points are derived from questions about repairs or additions to critical
parts stemming from time-dependent characteristics such as deteriora-
tion, rust, corrosion, wear, looseness, rattling, and discoloration.
VDI is an index that infers the residual value of used vehicles, i.e., their
trade-in price. Consumers have paid increasing attention to VDI in recent
years, because this index determines the true value of a new car by sub-
tracting the trade-in price from the new car price.

VDI Results for 2005

J.D. Power 2005 VDI rankings (with scores in parentheses) are as follows:
Ist Place: Lexus (139)
2nd Place: Porsche (149)
3rd Place: Lincoln (141)
4th Place: Buick (163)
5th Place: Cadillac (175)
6th Place: Infiniti (178)
7th Place: Toyota (194)
8th Place: Mercury (195)
9th Place Honda (201)
10th Place: Acura (203)

Hyundai, which has recently made striking improvements in IQS (ini-

tial quality), ranked 21st in VSI and Kia came in last, at 38th place, lower
than the industry average of 15th place. IQS and VDI survey questions are
essentially the same and the two scores generally correlate directly to one
another. IQS improvements for Hyundai and Kia have taken place within
the past two to three years and so their effects may not yet have shown up
in VDI (durable quality), which rates cars three years after purchase.

Past VDI Trends

Table 5.4 shows the movement of VDI rankings between 1997 and 2005.
258 Inside the Mind of Toyota

Lexus Lexus Lexus Lexus Lexus Lexus Lexus Lexus

(217) (167) (208) (216) (173) (159) (162) (139)

Cadillac | Cadillac | Cadillac Porsche Infiniti Infiniti Infiniti Buick Porsche

(240) (234) (241) (220) (219) (194) (174) (187) (149)

Audi Infiniti Benz Infiniti Jaguar Acura Buick Infiniti Lincoln

(242) (273) (254) (245) (250) (228) (179) (189) (151)

Infiniti Benz Infiniti Toyota Lincoln Honda Porsche Lincoln Buick

(261) (278) (269) (299) (253) (251) (193) (194) (163)

Lincoln Acura Buick Acura Acura Toyota Acura Cadillac | Cadillac

| (2690 (281) (288) (304) (255) (276) (196) (196) (175)

N.B. VDI scores in parentheses

Source: J. D. Power 1997-2005 VDI Survey

Although this table does not show it, the Lexus brand boasts over-
whelmingly superior durability, taking first place continuously in the eleven
years following J.D. Power’s inauguration of the VDI rankings in 1995.
The VDI shows solid improvement in quality from U.S. automakers
after 2003, with GM and Ford vehicles appearing in the range of second
to fifth places.

APEAL (Attractive Quality)

APEAL studies cover 114 items in eight categories.
These 114 items include questions such as passing performance on
high-speed roads, overall braking performance, the suitability of cup
holders for a variety of cups, and vehicle appearance and styling as seen
from the side. Users rate each item on a teh-point scale ranging from
highest (ten points) to lowest (one point).

APEAL Results for 2005

Table 5.5 gives J.D. Power APEAL rankings for 2005.
Out of a total of 18 segments, GM ranks first in the number of seg-
ments (five) in which it top-rated. Toyota and BMW are tied for second
and Chrysler and Nissan are in third place.
Product Power and Brand Power 259

Passenger Car Segments Mia ety tush

Compact Car! |. Compact Pickup
MINI Cooper Ee Subaru Baja
_ Entry Midsize car Light-Duty Full Size Pickup _
Chevrolet Malibu Cadillac Escalade EXT
Premium Midsize Car Heavy-Duty Full-Size Pickup
Dodge Ram Pickup HD
7 PultSize Car | : EntrySUV
Chevrolet Equinox
_ Midsize SUV
Nissan Murano
Full-Size SUV
Nissan Armada
Entry Luxury SUV
Lexus RX 330
Premium Luxury SUV
Lexus LX 470
Compact Van
Porsche Boxster Toyota Sienna
1. Includes the Entry Compact Car and Premium Compact Car Segments.
2. Includes the Premium Luxury Car and Luxury Sport Car Segments.
N.B. Shading indicates segment
Source: J. D. Power 2005 APEAL Survey

Past APEAL Trends

Table 5.6 shows the movement of various brands that have achieved the
top ranking between 1996 and 2004.

1999 2000 2002 2003 2004

oD

BS Vw (4) VW (3)} Toyota (7) Ford (5) | Toyota (4) GM(5)

Toyota (3) BMW(2) | Toyeta(3)

go
22 Royal) GM (2)|Toyota (3)| Nicsan(2) | BMW(3)
22 vwi2)| GM(3) GM(3)) ami) Chrysler(2)
of
2
<
20
Number
in
Segments
BMW (2)
Chrysler (2)
Honda (3) | Honda (2)
Nissan(2)

18
No, of Segments 13

ranking. Results by brand

N.B. In parentheses are the numbers of segments in which the manufacturer achieved top
name are given under the name of the manufacturer.
Source: J, D. Power 1996-2004 APEAL Survey.
260 Inside the Mind of Toyota

This table makes it clear that attractive quality has been a category in
which European and American cars are relatively strong. As we have seen,
Toyota experimented with activities to improve APEAL in 1997 and in
1998 extended these to all models. As we can see in Table 5.6, this has
resulted in incremental improvements beginning in 1998 and coming into
full flower in 2001, but not yet ina stable first-place ranking. Here we see
evidence for the argument that, no matter how high the quality of Japan-
ese cars, they are still bested in overall product strength by European and
American cars, with their longer histories.

SSI (Sales Satisfaction Index)

Product quality exerts almost no influence on SSI, which is mainly an
index showing the quality of treatment customers receive when purchas-
ing a vehicle.

SSI Results for 2004

In the J.D. Power SSI ratings for 2004, Jaguar and Lexus are tied for first
place, Cadillac is second, Mercury is fourth and Mercedes fifth, followed by
Lincoln, Buick and Hummer. With the average manufacturer’s ranking at
twenty-two, the only other Japanese carmakers scoring above average
were Infiniti at nineteenth place and Acura at twenty-first. American
automakers are strong overall in this category.

Past SSI Trends

Table 5.7 gives trends in SSI rankings from 1998 to 2004.
From Table 5.7, we see that American cars such as Saturn, Cadillac and
Lincoln occupy first place overall and that Lexus moves between second
and fourth place.
The SSI measures customer satisfaction with the salesperson’s attitude
without regard to product quality. U.S. companies are probably strong
here because they can offer comprehensive service rooted in locally-based
sales personnel training, coaching and incentive bonuses.

CSI (Customer Satisfaction Index)

CSI Results for 2004

J.D. Power 2004 CSI rankings are as follows:
Product Power and Brand Power 261

Oy
Cadillac Saturn Saturn Saturn Cadillac Jaguar
(142) (143) (887) (886) (889) (898)

on Cadillac Jaguar Cadillac Cadillac Cadillac Porsche Lexus

: (143) (142) (141) (885) (881) (888) (898)

Lexus Lexus Lincoln Lincoln Cadillac

: (142) (142) (141) (884) (880) (885) (896)

: a | | LandRover | Land Rover Infiniti Infiniti Lexus Mercury Mercury

(140) (140) (139) (883) (878) (885) (892)

och Volvo Mercedes-Benz Buick & others Jaguar Jaguar Saturn {Mercedes Benz
Ae (139) (139) (138) (882) (877) (885) (888)

SSI scores given in parentheses

SSI scoring method changed in 2001.
Source: J. D, Power 1998-2004 SSI Survey

lst Place: Lincoln

2nd Place: Cadillac
3rd Place: Saturn
4th Place: Lexus
5th Place: Infiniti
Other Japanese makes that ranked above the company average of 20th
were Acura, at 8th Place, and Honda, at 13th Place. In CSI rankings, too,
U.S. automakers are generally strong.

Past CSI Trends

Table 5.8 shows CSI ranking trends for the years 1999 through 2005.
The CSI involves the quality of service for breakdowns and other prob-
lems, so it is influenced by product quality as well as by the attitudes of
service personnel. Lexus, which scores well in IQS and VDS, was top-
ranked until 2001. The subsequent movement of U.S. companies to the
top position is probably due to the improvement in the quality of Amer-
ican cars since 2002.
CSI is a valid measure for evaluating overall product and service qual-
ity, and CSI rankings are generally given more weight than SSI.
262 Inside the Mind of Toyota

"1 1990 | 2000 | 2001

Lexus Lexus Lexus Infiniti Lincoln Lincoln
(815) (811) (903) (900) (900) (512) (515)

Cadillac Saturn Saturn Infiniti Buick Cadillac

(778) (807) (901) (897) (896) (509) (511)

BMW BMW Cadillac Lexus Acura Infinity Saturn

(775) (783) (893) (894) (895) (508) (505)

: Daewoo Volvo Infiniti Cadillac Lexus Cadillac Lexus

(774) (778) (882) (890) (895) (504) (504)

Infiniti Volvo Acura Volvo Lincoln Lexus Infinity

(771) (769) (881) (883) (895) (502) (501)

CSI scores given in parentheses.

Source: J. D. Power 1998-2005 CSI Survey

Consumer Reports Ratings

Table 5.9 shows the “Best 10 Cars” chosen by Consumer Reports on the
basis of reliability and performance criteria.

Luxury Sedans
—BMW330i
_ Toyota Lexus ES300
Lexus IS300
Saab 9-52.3t _
Small Sport-Utility Vehicles
ToyotaRAV4
Subaru Forester-S_
Ford Escape XLT
UTALa
HondaOdyssey EX
Toyota Sienna LE
Chrysler Town & Country LX
N.B. Overall ranking in test results
Source: “Consumer Report April 2001” Nikkei Business 2 April 2001
Product Power and Brand Power 263

These ratings can be seen as comparable to J.D. Power IQS (Initial Qual-
ity Study) evaluations. Four Toyota models were chosen by Consumer
Reports to be among the “Best 10 Cars,’ additional proof of Toyota’s com-
mitment to high quality.
Consumer Reports also publishes quality ratings of vehicles that have
been used between one and three and four and eight years. These ratings
are similar to J.D. Power VDI ratings. Here, Japanese cars are given nearly
all the top ratings, with Toyotas leading the pack and cars manufactured by
Honda, Nissan, Subaru, Mazda, Isuzu, Mitsubishi, and Suzuki following.

How Different Companies Have Responded

J.D. Power measures various data from the United Kingdom, Japan, Tai-
wan, Thailand, India, Indonesia, the Philippines, and elsewhere as well as
U.S. data. CSI and SSI and other surveys have been conducted each year
in Japan since 1993 but have not been made public. CSI and SSI studies
have also been carried out for used cars, and partial results have been
released to the public.
The leading five Japanese automobile manufacturers commission J.D.
Power to conduct IQS surveys of the Japanese and European markets,
providing funds for this purpose. Whether J.D. Power quality ratings and
customer satisfaction indices are made public or not, all the companies
recognize them to be a major factor influencing repeat sales. With the
data they receive, all of these companies analyze problem areas, study
causes, and take steps to make improvements. When problems and causes
are difficult to understand, they may pay additional fees to J.D. Power for
extended studies or follow-up telephone surveys of consumers.
All the data from Japan, the United States, and Europe (acquired at con-
siderable expense) create great challenges. The work of analyzing the data,
coming up with responses, and then implementing them is extremely dif-
ficult, especially for the design departments that come up with counter-
measures. All of the companies have multiple models in Japan, the United
States, and Europe, and it is a tremendous challenge to follow up on prob-
lems with existing models while simultaneously working on new model
development projects. J.D. Power survey data do not, of course, provide all
the information needed and various other means must be employed to
gather related information or obtain new information. In the meantime,
more pressing and immediate concerns must be dealt with. Therefore,
even if executives give instructions to take immediate and comprehensive
measures to address IQS, VDI, and APEAL issues for current models in
Japan, the United States, and Europe, design departments have not got the
264 Inside the Mind of Toyota

time or manpower to deal with “trifling historical information” for which

(unlike the J.D. Power data) there are no direct claims. Thus, information
diligently collected at great expense often ends up gathering dust.
Toyota apparently limits its improvement activities to addressing data
from American cars. Data from other regions is used only for assessing
results. The reason for this is that, for Toyota, the results of improvements
and corrective measures applied to its U. S. cars spreads to other areas
automatically via lateral propagation.’ (Recall the soundness of the “lat-
eral propagation” phenomena we have seen in previous chapters.) It is
basic Toyota policy, moreover, to avoid inefficient after-the-fact design
changes in the absence of major problems and to address leftover prob-
lems thoroughly for the next model. As a result, Toyota is able to obtain
maximum effect from minimal effort even when dealing with must-have
quality and attractive quality. J.D. Power quality rating data from the
United Kingdom, Taiwan, Thailand, and elsewhere shows that Toyota has
a solid and comprehensive hold on quality throughout the world.
When quality is poor, managers cannot simply turn around and issue
instructions to make everything perfect. They need to give instructions
after drawing up realistic scenarios for making steady quality improve-
ments with limited resources.

THE POWER OF THE TOYOTA BRAND

The “propensity to sell” can be defined as Product Power X Brand Power.
In an age in which emphasis is laid on a company’s social character, the
weight of brands is increasing. No matter how great the power of a prod-
uct, if its brand is weak, then the product will not sell.
As we saw in Figure 2.1, Toyota, in the latter half of the 1980s, was a com-
pany from which one could learn, but it was not a “good” company. In other
words, its products had power but its brand did not. Shoichiro Toyoda saw
this as a crisis, and from the end of the 1980s to the beginning of the 1990s,
he turned the rudder of the Toyota ship sharply in an effort to steer the com-
pany in a better direction. (See the section on foresight in Chapter 2.)
Several indexes of how this shift in Toyota management manifested
itself as changes in the power of the brand at the end of the 20th century
are presented below.

Brand Power in the United States

The American public opinion polling firm Harris Interactive compiled a
ranking of companies, Popular Brands in 2000, that placed Sony in first
Product Power and Brand Power 265

place for the second year in a row. Ford came in second (from fourth the
previous year), GE third (the same as the previous year), Toyota fourth
(from seventh the previous year), and GM fifth (from second in 1999).
The survey asked 2,461 American adults for the brand names of three of
their favorite products or services. Sony’s ranking was to be expected, but
Toyota pulled ahead of GM to an unapologetic fourth place. Ford’s prob-
lems with Firestone Tire precluded speculation about where Ford might
rank after 2001, and Honda was not ranked among the top ten. (May 5,
2001. Sankei Shimbun.)

Brand Power in Japan

Corporate Brand Score Ranking
Results from the Fourth (2000) Corporate Brand Score Ranking con-
ducted by the Nihon Keizai Sangyo Shimbunsha put Sony in first place,
Toyota in second, and Honda in third. (February 14, 2001. Nikkei Sangyo
Shimbun).

Brand Japan 2001

In the Brand Japan 2001 survey carried out by Nikkei Business Publica-
tions, Toyota was in first place, NTT DoCoMo in second, and Sony in
third. No other automobile company figured among the top thirty
firms. These results came from questionnaires that went to some 3,000
business and technical Internet users, so the study can be seen as a
survey of relatively intelligent “knowledge workers.” With eight elec-
tronics or IT firms among the top ten, this survey favored IT-related
companies; the fact that Toyota ranked first shows that Toyota was
widely accepted within the target population of the survey. (May 21,
2001. Nikkei Business.)

Survey of Brand Recall

In a Brand Recall Survey conducted in September 2001 by Nikkei Busi-
ness Publications, Sony came in first place, Toyota in second, and Honda
in third, followed by Uniqlo, Louis Vuitton, and Matsushita Electric. Here
again Toyota ranked very high.
It seems fair to say that the results above show that Toyota has already
shaken off the vestiges of its earlier image and has moved from being a
“company to learn from” to being a “good company.”
266 Inside the Mind of Toyota

Endnotes
1. The J.D. Power ratings data that appear in this chapter have been updated
since the original Japanese publication of the book in 2002. This English-
language edition incorporates the most recent data available.
2. Toyota Jidosha Gojunen-shi.
3. yokoten.
267

Toyota Management
in the 21st Century

The aim of this book has been to analyze previous almost unchallenged
information about Toyota and extrapolate from this analysis the princi-
ples of the company’s enduring growth. In previous chapters, we have
focused on the past, and we believe we have been able to achieve our aim.
In this last chapter, we will use recent Toyota data to view what sort of
strategy the company is using as it sets about the task of management in
the 21st century. Provided we gain the conviction that Toyota will con-
tinue to grow in the 21st century, we will substantiate the principles of
enduring corporate growth.

THE OKUDA/CHO SYSTEM

In May 1999, Hiroshi Okuda, then president of Toyota, was named chair-
man of the Japan Federation of Employers’ Associations. In June of that
year, Okuda resigned as president of Toyota and assumed the chairman-
ship of the Toyota Motor Corporation. Shoichiro Toyoda, the direct
descendant of the Toyoda family, withdrew from this position to become
honorary chairman, and Fujio Cho was chosen as the company’s new
president.
At the time, Okuda stated: “I have turned over the day-to-day work of
the presidency of the Toyota Motor Corporation. I will continue to make
judgments and refine needed strategies from a broad perspective so that
the Toyota Group as a whole will grow stronger and take its place among
the major players in the world.”
On his appointment to the presidency of the Toyota Motor Corpora-
tion, Fujio Cho made it clear that he would play his part in maintaining
the Okuda system, declaring, “The company has had an easy time of it
thanks to the decisive speed with which Mr. Okuda has set a clear direction
for management. I will hold firmly to the same line.’ With this, these two
men assumed control of the management of Toyota in the 21st century.
268 Inside the Mind of Toyota

Okuda’s Ambitions
On August 10, 1995, Toyota’s president Tatsuro Toyoda succumbed to ill-
ness, and Hiroshi Okuda was abruptly named as his successor. He
declared himself “truly shocked, adding, “I would have been happy to
take on the job had I been ten years younger.’
Such bluntness is typical of Okuda. When asked by the press about his
aspirations as president of the company, he responded immediately, “’m
going to tackle three major management issues at Toyota. The first is our
lag in product planning. The second is our declining market share in
Japan. And the third is that we are behind in overseas expansion.”
From that point on, Toyota moved at lightning speed in an automo-
bile industry racked by upheaval. It went on the offensive in a series of
managerial moves, including further consolidating management of the
group by turning Daihatsu Motor Company into a subsidiary and by
acquiring a controlling stake in Hino Motors Ltd. Under Okuda’s direc-
tion, Toyota also speeded up overseas operations in North America,
China, and Europe, rolling out a massive sales campaign and recovering
a 40 percent market share while implementing measures for internal
reform and new projects.
On September 9, 1996, one year after being named president, Hiroshi
Okuda was interviewed by the Nikkan Kogyo Shimbun. In the interview,
Okuda spoke candidly about what had been achieved and about his vision
for the company’s future:

We've accomplished alot, but I'd be embarrassed to take personal credit

for it. I've just brought to fruition some projects that had been building
up. This company has always been refining what it inherits, so even
though you might talk about the “Okuda regime,’ that’s not what’s
going on at all.
I'd like to expand the company even more if I can. But it can’t be
about all take and no give. I want us to be a “moral” company to whose
growth society will be glad to have contributed.
Another ideal I have is that I don’t want our management to spend
all its time plugging leaks in the dike. I want us to build one or two
new dikes.

Okuda was saying, in other words, that his celebrated speed manage-
ment was equivalent to plugging leaks in the dike and that he did not want
to be judged by such work. He wanted to be remembered for building one
or two new dikes.
Toyota Management inthe 21st Century 269

A Response to Hereditary Succession

Okuda has sometimes spoken bluntly to members of the Toyoda family,
and because of this, there have been rumors of poor relations between
the descendants of Sakichi Toyoda and the president. One typical exam-
ple of the discord between Okuda and the Toyoda family concerned
Toyota’s participation in Formula One (F1) races and the purchase of
the Fuji Speedway. The decisions to involve Toyota in these enterprises
were Okuda’s.
Shoichiro Toyoda, the honorary chairman of Toyota Motor, had other
opinions: “I’m against participating (in the F1). Along with Eiji (Eiji Toy-
oda, supreme advisor), I say we shouldn't do it.... I never told anybody
to buy (the Fuji Speedway). On the contrary, ’'m the one who held the
deal up.... I’ve always said that I wanted to use cars as a means of con-
tributing to society. We’re trying to be an industrial company.”
Shoichiro went so far as to declare, “You don’t elevate the fortunes of a
car company by winning the Formula One.” (May 18, 2001. Yomiuri
Shimbun Chubu.)
Eiji and Shoichiro Toyoda had expanded Toyota while saving every last
pencil stub, worn-out eraser, and scrap of wastepaper. That they should
react negatively to Formula One, for which several billion yen might van-
ish in a single event, was perfectly natural.
In the end, though, Okuda announced Toyota's participation in For-
mula One in January 1999; in November 2000, he bought the Fuji Speed-
way. Fujio Cho, in referring to Formula One, said that “motor sports is a
culture and young technical guys have grand dreams about it. This is a
move to capture the hearts of young people.”
Because Okuda implemented his plans in spite of opposition from
leading figures of the Toyoda family like Eiji and Shoichiro Toyoda, there
may be some truth in the rumors of a strained relationship.
Okuda has attempted to counter these rumors by saying, “It’s unfortu-
nate that people think we’re fighting or something. I have a good rela-
tionship with the Toyoda family.’
It is more than likely that Okuda believed that he had persuaded Eiji
and Shoichiro Toyoda amicably to accept his decisions about the Formula
One and the Fuji Speedway.
When Okuda promoted Shoichiro Toyoda’s eldest son Akio Toyoda to
the post of director, he declared, “I’m giving him a chance because he’s
from the Toyoda family. I'll make him a director, but after that he’s on his
own.” On another occasion, he said, “We shouldn't depend on the Toyoda
family forever. Blood thins out over time.”
270 Inside the Mind of Toyota

Here one can see Okuda’s clear departure from the notion that Toyota
belongs to the Toyoda family. For employees and executives in a new era
whose watchwords are independence and self-reliance, centripetal man-
agement and a hereditary system centered on the Toyoda family is simply
inappropriate. The idea is already foreign to most people, and it can be
viewed as the last obstacle to Toyota’s becoming more “open.”
It is conceivable, in the future, that Akio or Shuhei Toyoda (Eiji Toy-
oda’s third son) might accede to the company’s presidency. But this will
not be a return to imperial rule. It will have to be obvious to all that the
president is the right man for the job. In 1967, media editorials implied
that Eiji Toyoda had been named president “because he was a Toyoda.”
His rebuttal to this was “everybody would agree now that, at the time, Eiji
was the right man for the job.”

The Second Founding

Okuda has noted:

We think of the controlling strategy of every era as the ultimate one,

but the environment changes, thinking gets revised, and a new strat-
egy triumphs. Then the environment starts to change again. We have
to find new ways to grow and prosper in the 21st century.... With
concern about environmental change on the rise, we are called upon
to build a new paradigm for new reforms and products.... We can
get off to a spectacular start in the 21st century if we act with the
same boldness that Toyota’s founders did. (Reingold, Edwin. 1999.
Toyota: People, Ideas, and the Challenge of the New. London: Pen-
guin Books.)

In recent years, Okuda has referred repeatedly to “a second founding”

of Toyota. His building of one or two new dikes leads directly to this “sec-
ond founding” and away from a centripetal focus on the original found-
ing family. The time has come for “the same boldness” practiced by
Toyota’s founders.

BECOMING A LEADING COMPANY IN THE 21ST CENTURY

Toyota's 2001 Annual Report to investors marked a striking departure
from the past. Previous annual reports had concentrated on reporting
business results. In the 2001 Report, though, Toyota’s chairman, Hiroshi
Okuda, and president, Fujio Cho, describe their management policies and
Toyota Management in the 21st Century 271

strategies for the 21st century. In his preface to the Annual Report, Hiroshi
Okuda states, “Toyota has taken every opportunity to make aggressive
efforts to disclose and seek your understanding of what we think is valu-
able, what we do to achieve it, what we are about to do, and what the state
of management is.”
Cho takes the basic management policies Okuda refers to and discusses
a concrete strategy for reforming Toyota. Toyota’s 2001 Annual Report is
the first step toward Okuda’s “aggressive disclosure.”
In a variety of forums, Okuda and Cho have recently been active in
issuing information concerning Toyota’s policies and strategies. At the
Tokyo International Automotive Conference sponsored by Nikkei BP and
held on October 22 and 23, 2001, Fujio Cho gave a talk entitled “The Toy-
ota Way in the Twenty-first Century: Things to Change and Things to
Keep.’ At the International Automotive Roundtable sponsored by J. D.
Power Asia Pacific and held on October 25, 2001, Hiroshi Okuda gave a
talk entitled “Toyota Motor’s Management Strategy—A Leading Com-
pany for the 21st Century.”
Toyota’s management strategy for becoming a leading company for the
21st century is structured as shown in Figure 6.1, which summarizes
Okuda’s and Cho’s statements in the 2001 Annual Report, the Interna-
tional Automotive Conference sponsored by Nikkei BP, and the Round-
table sponsored by J. D. Power.

Toyota's Vision for 2005

Toyota’s 2005 Vision shown in Figure 6.1 was published in January 1996
and is based on the company’s Basic Principles established in 1992 (see
Table 2.2). In 1995, when Okuda was executive vice president, he directed
the Management Planning Department to create this vision in order to
give concrete shape to what Toyota would look like in ten years. Behind
this vision lay ambitious quantitative goals for such things as consolidated
sales growth, operating profits, and numbers of vehicle sales to be
achieved by 2005, goals that kept sight of what was occurring at GM and
Ford. “Some people call becoming number one in the world “hegemony,”
said Okuda, “but the chairman (then Shoichiro Toyoda) and I share an
underlying commitment to that goal.”
Toyota had already become a giant corporation, one with a tremen-
dous influence on society. A policy to expand even further necessitated
staying in harmony with society. “From the 20th to the 21st centuries,”
Okuda predicted, “the new winds of world environmental issues, global-
ization, and the IT revolution have swept across the automotive industry.
272 Inside the Mind of Toyota

ee

New Winds Blowing across the Auto Industry from the 20th to the 21st Centu

(Global Environmental Globalization | . IT Revolution

Issues ] ae :

)(1] Harmony with

\ the global
9 environment f
Secure stable
volume sales
4(2) Harmeny with
he world economy . :
industries ) . Use resources
aS effectively

Ensure
apppropriate profits
Harmony with — -
stakeholders

Source: Based on Toyota Motor. An Outline of Toyota 2001.

Toyota Management in the 21st Century 273

Within five or ten years, there will be a major paradigm shift that will
redefine the car industry and even cars themselves.”
One of the issues raised by this sort of prediction or premonition is the
achievement of “harmony with society,’ shown in Figure 6.1.
At the same time, achieving harmony with society requires managerial
strength and this calls for the second pillar in Figure 6.1: “Secure a man-
agerial base.”
Combining these two pillars yields “harmonious growth.”
At the Roundtable sponsored by J. D. Power Asia Pacific on October
25, 2001, Hiroshi Okuda referred to the ten years following the estab-
lishment of the 2005 vision in 1996 as Toyota’s “second founding” and
explained how reforms would be led by the integrative capabilities of
the Toyota Group. The details were basically the same as the “four
strategies for radical change at Toyota” that Fujio Cho described in the
Annual Report.

Four Strategies for Radical Change at Toyota

Priority Investments in Technological Development
On this subject, Cho observed:

There can be no doubt that the 21st century, too, will be a century of
technological development for the automotive industry. What will be
different from the 20th century, however, is the increasing importance,
not of car technology per se, but of technologies at the interface of soct-
eties and individuals. As we can see in the case of fuel cells and ITS
(intelligent transport systems), though, developing such technologies
currently requires enormous investments of capital and time, as well as
superior talent. It is vital that we continue to eliminate more waste and
increase efficiency and productivity so that we can invest the resulting
profits in protecting the global environment, contributing to the econ-
omy and to industry, and living in harmony with the local community.
And we have to speed this development cycle up.

Toyota’s development plans concerning the environment, safety tech-

nologies, and information technologies are described in detail on the
company’s Internet homepage. We will not repeat what can be found
there, but it is important to note that Toyota’s enthusiasm on these sub-
jects is quite evident.
274 ‘Inside the Mind of Toyota

Driving Globalization Forward

International cooperation in environmental technologies is the first pri-

ority in dealing with future globalization. Environmental technologies
require massive research and development capital. At the same time, envi-
ronmental technologies are not an element of product competition; they
are essential technologies with which cars must be equipped. For the
industry as a whole, it is unwise for companies to make individual invest-
ments in basic technologies that are not grounds for competition. It is
preferable for each company to build cooperative relationships to shoul-
der the mutual burden of development using the technologies in which
each is strong.
Toyota has built cooperative relationships with automotive companies
worldwide and is in the process of actively offering its pioneering hybrid
technology and other technologies to GM, Ford, and other companies
around the world. Even as it remains fiercely competitive as an
automaker, in the field of environmental technology, Toyota is trying to
cooperate to ensure that the entire industry survives.
Toyota’s second globalization initiative involves the globalization of
production. “Toyota’s worldwide sales are roughly divided one-third
each among Japan, North America, and then Europe and other regions,”
explains Cho. “But in order to become a truly global company, we
are looking to grow as we contribute to the development of those
areas through the most competitive and most appropriate sourcing and
production.”
The globalization of production aims at producing vehicles worldwide
while achieving the following three: reducing the cost of finished vehicle
exports (reported to cost ¥150,000 per vehicle), preventing trade frictions,
and contributing to local economies.
When Okuda was president, he conducted a fierce assault on Toyota’s
lagging overseas advance, an issue he had raised when he took over the
presidency. In August 1997, he announced a production joint venture with
India. He made public the construction of a second plant in France in
December of the same year and then made plans for expanding engine
plants in the United Kingdom and the United States in January 1998. In
April of the same year, he declared that Toyota would expand the produc-
tion of passenger cars in the United States. Altogether, he announced
nearly 300 billion yen in overseas investment in the span of barely a year.
In July 2000, an ambition Hiroshi Okuda had had ever since becoming
president was realized when the Tianjin Toyota Motor Company, Ltd.,
was established and began operations as a joint venture with the Tianjin
Toyota Management inthe 21st Century 275

Automotive Group of China. The Tianjin Toyota Motor Company, Ltd.,

came into being soon after the start of joint passenger car engine produc-
tion in 1998. “It was,” said Okuda, “as though we were desperately rush-
ing to catch the last bus.”
In order to balance production and sales, Toyota began introducing
world standard production equipment to allow for flexible production
adjustments on a global scale. The company announced that in 2002 it
would complete the conversion of all its volume production lines in the
world to “global lines,” flexible body welding lines on which asingle fix-
ture can accommodate eight different car models. (November 1, 2001.
Nikkei Sangyo Shimbun).
Toyota’s third globalization initiative is to give its managers and
employees a feeling for the wider world. In 1996, the company set up an
International Advisory Board so it could hear management-related advice
from foreign experts. Composed of ten government and industry experts
from Asia, Europe, and the United States—including, for example, for-
mer Federal Reserve Board chairman Paul Volker—the board holds meet-
ings twice a year and exchanges views with Toyota management on global
and local matters.
“We are confident,” said Takashi Hata, the general manager of Toyota’s
Global Human Resources Division, “that we can groom the world’s best
operational managers in-house. But educating higher-level managers is
difficult to do entirely inside the company.” Because of this, Toyota began
combining its know-how with that of universities, one of the results of
which was a new educational system introduced in 1999 for executive staff
candidates. Trainees picked from around the world hole up at the Whar-
ton School of the University of Pennsylvania for two weeks of daily group
discussions.

Enhancing Cost Competitiveness

Enhancing cost competitiveness is essential to triumphing in the unfold-
ing global “mega-competition.” Waste elimination is a sort of house spe-
cialty at Toyota, but lowering costs in the future will require new
perspectives. We will be discussing strengthening cost competitiveness
through radical changes in product development inalater section of this
chapter; here we will focus on enhancing group unity, one of Toyota’s cost
competitiveness strengths.
“In order to keep coming out a winner among mightily shifting global
alliances” Cho explains, “we will firm up our capacity to concentrate the
wisdom and resources of the [Toyota] Group.”
276 Inside the Mind of Toyota

In fact, ever since the beginning of the Okuda regime, Toyota has been
working to enhance the group’s ability to concentrate resources. It
acquired Daihatsu Motor. It increased its stake in Hino Motors and made
Hino a Toyota subsidiary. And it sent staff-level employees into affiliated
companies such as Denso, Toyoda Automatic Loom, and Aishin Seiki.
Toyota drew public attention in April 2001 when it chose Tadaaki Jagawa,
the powerful executive vice president and apparent successor to the Toy-
ota presidency, as president of Hino Motors.
Enhancing the ability of the group to concentrate its forces does not
stop at matters relating to capital or people, however. Toyota examined
cost structures in Japan via cost competition with Volkswagen, with
which it had a technical partnership, concluding that, while costs on the
manufacturing shopfloor are low in Japan, the country has a high cost
structure overall. It found the cause of this high cost structure to be
redundant work occasioned by multilayered horizontal and vertical rela-
tionships between carmakers and parts suppliers. This led Toyota to take
up the challenge of making mutual adjustments and enhancing the con-
solidation of products, parts, and technologies within the group, all with
the aim of promoting parts commonization and reducing overlapping
research, development, and design tasks.
Nineteen-ninety saw consolidation of the development functions of
seven auto body manufacturers, with the functions of three companies in
the east (Kanto Auto Works, Hino Auto Body, and Central Motor Com-
pany) going to Kanto Auto Works; the functions of four companies in the
west (Toyota Auto Body Company, Daihatsu Auto Body, Toyoda Auto-
matic Loom, and Araco) were concentrated at Toyota Auto Body.
For its parts suppliers, Toyota decided to revise the “multiple
companies for one component” policy that had been the cause of
different types of components coming from the same parts specifica-
tion drawings. It did away with redundant parts among suppliers of
such items as interior trim, brakes, ABS, steering wheels, and air bags,
and it strengthened moves toward concentrating on one supplier for
each item category. “We're going to take a bold new look at the busi-
ness,” announced president Takashi Matsuura of Toyota Gosei, a com-
pany that shared damping rubber and air bags with Toyo Rubber. “If
we don't,” he added, “we'll never be able to keep up with Toyota’s
CCC21 (see details in the section on reforming product develop-
ment) cost improvement activities.” (October 26, 2001. Nikkan Kogyo
Shimbun).
In his 1997 book, The Evolution of a Production System,: Takahiro Fuji-
moto gives the percentages of automobile purchased parts that are mar-
Toyota Management inthe 21st Century 277

ket items, approved drawing parts, and loaned drawing parts, as well as an
international comparison of the percentage of common parts.
Approved drawing parts are parts for which parts specifications are
turned over to the local parts supplier, and detailed design and manufac-
turing are entrusted to the supplier (i.e., outsourcing both design and
manufacturing). Loaned drawing parts are parts for which the carmaker
produces detailed parts drawings, and only the manufacturing is left to
the supplier (i.e., design insourcing and manufacturing outsourcing).
Outsourcing generally means that suppliers are free to design parts, so
that the percentage of approved print parts and the percentage of com-
mon parts are inversely proportional to one another, whereas loaned
drawing parts and common parts are directly proportional. Market items
are standard articles, so the percentage of market items and the percent-
age of commonized parts are proportional. These relationships are shown
in Table 6.1.

"Percentage of purchased
parts costs occupied by
market goods

_ Percentage of purchased
parts costs occupied by
approved drawing parts

Percentage of purchased
parts costs occupied by
_loan drawing parts

Percentage of common
parts

Source: Fujimoto, Takahiro. 1997. The Evolution of a Production System, extract from Table 6.3

In Japan, the trend is shifting from a supplier-dependent model, in

which design is outsourced, to a car manufacturer-centered model, in
which plans are insourced and manufacturing is outsourced. Accompa-
nying this shift is a rise in the percentage of common parts. It is probably
fair to assume that the trend in Japan is influenced by moves at Japan’s
biggest automaker, Toyota.
278 Inside the Mind of Toyota

The enhanced consolidation capabilities and reorganization of supplier

responsibilities discussed above promote design insourcing and manufac-
turing outsourcing for the Toyota Group as a unit and seek to strengthen
cost competitiveness by increasing the proportion of common parts.
In Japan in the 1980s, the proportion of approved drawing parts—i.e.,
the proportion of design outsourcing—was high. Outsourcing design
meant that the work of product and parts research, development, and
design partially overlapped between carmakers and their parts suppliers. In
the case of drawings, this gave rise to three types of drawings managed by
the manufacturer—the car manufacturer’s specification drawings, the sup-
plier’s approval request drawings, and the carmaker’s final approved draw-
ings. Each of these overlapped the others by about 50 percent in terms of
information content. Even when specifications drawings were the same,
moreover, the detailed design would differ depending on the supplier to
which it was issued. Different parts resulting from the arrangement were
inevitable. Insourcing design and outsourcing manufacturing places a
greater burden on the automaker, but it eliminates redundancy in research,
development, and design work overall. A drawing becomes simply a kind of
manufacturing print (loaned drawing), and drawing management costs fall
by two-thirds. Even when the outsourcing company makes a change, there
is no increase in the types of parts. The Japanese (Toyota) strategy in the
1990s of enhancing cost competitiveness can be viewed as a total group-ori-
ented strategy of design insourcing and manufacturing outsourcing.
Table 6.1 further shows that trends in the United States were the dia-
metric opposite of those in Japan. In fact, in 1995, GM broke off its inter-
nal parts division into a separate company, Delphi Automotive Systems.
Ford followed, breaking off its internal parts division as Visteon in 1997.
Both new companies did most of their business with their respective par-
ent companies (in 2001, the figure for Delphi is 68 percent and for Visteon,
it is 84 percent). When a parts division that has strong design capabilities
and that used to be part of automobile development becomes a separate
company, the proportion of market items and approved drawing parts
naturally increases and the proportion of loaned drawing parts decreases.
As a result, the proportion of common parts fell. In the past, it was widely
accepted that the low proportion of common parts for Japanese manufac-
turers was due to lean production processes and fat design processes. Now
design processes at Japanese manufacturers are becoming steadily “leaner”
It is interesting to speculate whether American companies split off
their parts divisions because they attributed Japanese cost competitive-
ness to technically capable parts suppliers who actively participated in
development and to a high proportion of approved drawing parts.
Toyota Management inthe 21st Century 279

From the end of the 1980s to the beginning of the 1990s, European and
U.S. car companies were greatly influenced by comparative studies of the
Japanese and U.S. automobile industries published in numerous books
and articles, including, for example, Product Development Performance, by
Kim Clark and Takahiro Fujimoto (1991). Utilizing the 1980s data pre-
sented in Table 6.1, these two authors reported that technically capable
Japanese parts suppliers are highly involved in development and that the
proportion of approved drawings is high, a correlation that may explain
why Japanese cost competitiveness is so strong.
In contrast, GM and Ford have left themselves with little parts-
related data, information, and know-how. It is rumored that GM and
Ford employees are no longer capable of visiting the now independent
Delphi and Visteon, nor are they capable of reading the materials they
find there.
This raises an additional interesting point. In contrast to Toyota, which
has been consolidating and reorganizing the entire Toyota Group with an
ultimate view to eliminating redundant functions, simplifying hierarchi-
cal structures, and promoting parts commonization, GM and Ford have
moved ahead with outsourcing and organizational fragmentation. It will
be very interesting to see which approach is better.

Enlarging the Value Chain

As shown in Figure 6.2, one element of Toyota’s IT-based business strat-
egy is vertical supply chain management (SCM) extending from parts
suppliers to dealerships. SCM promises to be enormously effective when
IT is woven into Toyota’s robust system of just-in-time production.
Intersecting with vertical SCM, the “value chain” expands business
along the horizontal axis. This is a strategy that pursues an economy of
scope, both by pursuing a carmaker’s economies of scale and by extend-
ing the value chain to new domains related to the automobile industry. It
should strengthen Toyota’s position as a comprehensive “mobility com-
pany” and works to put information technologies to broad use.
The five-part initiative is outlined below:
* Gazoo.com, a car-related e-commerce site
- ITS, targeting the building of business around next-generation traffic
systems
- An information terminal business targeting the refinement of car navi-
gation systems and increasing the value-added component of cars
- An electronic payment business using the TS3 (TS Cubic) Card
+ And finally, a network business linking all four of the above.
280 Inside the Mind of Toyota

Customers

Source: Diamond Harvard Business, ed. "Dismantlement and Reconstruction of the Value Chain." Diamond.

Toyota is concentrating its energies on the information and communi-

cations business on one hand and the credit business on the other. Toyota
management believes that creating synergies among these will be increas-
ingly important in the future. Details may be found in Toyota’s 2001
Annual Report and the 2001 Outline of Toyota.

New Directions in Building People

Toyota's Crisis
In the new-year statement made at the beginning of 2001, at the start of
the 21st century, Hiroshi Okuda told Toyota executives: “I want you to
make a revolution with the idea that you are going to overthrow the old
Toyota. Toyota's weaknesses will become apparent to you when you look
at the company, not just from its own perspective, but from the stand-
point of other firms. By overthrowing the old Toyota, you'll be able to get
to the core of things.”
At the Roundtable sponsored by J. D. Power Asia-Pacific on Novem-
ber 25, 2001, Okuda reiterated this idea: “A new Toyota will not develop
unless we overthrow the old Toyota. The results we are achieving now
don’t come from management. I think they come from hard work on the
Toyota Management inthe 21st Century 281

shopfloor and because other companies haven’t been doing so well. We

need to break the old Toyota paradigms and build a new Toyota corpo-
rate culture.”
Okuda rarely minced words but even so, these were extraordinary
words. They exude Okuda’s strong sense of crisis and focus on the work
of Toyota employees.
For a long time now, Toyota leaders have repeatedly said that “build-
ing products means building people.” The theory is eminently reason-
able: Since people are the ones who build products, you have to build
good people if you want to build good products. The way to build good
people, according to Toyota philosophy, is to “work on their minds.”
Toyota executives and managers have been working on Toyota employ-
ees according to a theory of motivation that asks how to get people to
want to do things.
In Taiichi Ohno’s time, the method for motivating people was to make
them uncomfortable. This technique was based on the premise that new
ideas would come when people felt they had to do something to remove
discomfort. It was the most effective method for an era in which many
people went hungry. The fact that Toyota management continues to run
its business with a sense of crisis stems from a vestigial underlying sense
of hunger.
The world is a more prosperous place now, though; one can live with-
out slaving away all the time. It is a global age, too, and diverse values now
permeate society. As Okuda has observed, “The Japanese are losing their
fighting instinct.” At Toyota, which has long been viewed to have a win-
ner-take-all philosophy, morale is starting to go slack in response to voices
from both inside and outside the company.
This phenomenon creates a critical situation for Toyota, which has
grown the way it has because of a kind of collective obsession with mak-
ing work more rational. It is because Okuda feels this crisis that he uses
radical language to castigate his own company. “We're stamping large ele-
phants,” he says. “We’re at scenic Mikawa, but we’re sitting in a guest
room with an alcove. ... Overthrow the old Toyota!”
It has been whispered since the start of the 1990s that the prime issue
for Toyota in the 21st century would be to sustain its collective obsession
with making work more rational. And, indeed, things at the company are
reaching acritical point. Toyota’s crisis now is that Toyota employees as a
group are losing their fighting instinct and their creativity. No matter how
extraordinary the talent may be in the upper reaches of management, it is
the employees who shoulder the business. Implementing the 2005 vision
requires many new people who can carry out the business of the second
282 Inside the Mind of Toyota

founding. A new theory is needed to draw out motivation in people, one

that does not rely on the centripetal energy of the Toyoda family, one that
is not based on a sense of hunger, and one that is compatible with a
global world.

The Toyota Way 2001

In April 2001, Toyota compiled a booklet containing the most impor-
tant slogans and phrases from the company culture that, from Toyota’s
perspective, must not change. These are shown in Figure 6.3: The Toy-
ota Way 2001.

ontinuous
Improvement \N
_ relentl es:

Source: Tsukuda, Yoshio. 2001. Why is Toyota Alone So Profitable in these Times of Upheaval?

Toyota Way 2001 shows what sort of values people who work at Toyota
share and how they should behave from the standpoint of how the Toyota
Basic Principles manifest themselves in the activities of the company. The
implication is that Toyota should be aggressive in changing everything else.
At the core of the Toyota Way are continuous improvement and respect
for people. Respect for people means having each working individual fully
demonstrate his abilities and receive commensurate evaluations and
rewards. It means, conversely, not giving him work that is wasteful or does
not add value.
Toyota Management inthe 21st Century 283

The rest of Figure 6.3 needs no explanation. It is an extremely neat and

logical system.

Drive Your Dreams

Figure 6.3 is overly theoretical, however, and not powerful enough to

motivate people directly, to rouse their will to get things done. With this
in mind, Toyota, in 2001, published a new corporate slogan for the start
of the new century: “Drive Your Dreams.” This expression conjures up the
notion of new values-creation professionals who, from their own places
and their own perspectives, all nourish dreams worthy of their predeces-
sors and press forward to achieve those dreams.
At the Tokyo International Automotive Conference sponsored by
Nikkei Business Publications and held on October 22 and 23, 2001,
Honda senior managing director Takeo Fukui gave a talk entitled “Honda
Brand Identity” and introduced the new Honda global brand slogan cho-
sen in January 2001: “The Power of Dreams.” Honda reportedly came up
with the slogan after examining the unique nature of the company since
it was founded.
At the same conference, Honda’s president Hiroyuki Yoshino gave a
speech entitled “The DNA of Honda.” In the speech, he explained that
Honda’s DNA was the realization of dreams. New employees are encour-
aged to develop their own dreams—no matter how many years it takes—
and to use the company to make those dreams come true.
Borrowed from the phrase “the American dream,” Honda’s slogan has
been in use for many years. The general public has come to see the expres-
sion as being a characteristic of Honda. Inside Honda, too, if you look at
what constitutes “Honda-ness,” you end up with the idea of “dreams.”
This is Honda’s centripetal force and the source of growth that, in barely
half a century, has seen Honda surge through the principles of economies
of scale and scope.
Toyota’s “Drive Your Dreams” looks as though it has unintentionally
appropriated some of Honda’s stock. Toyota’s slogan, however, is
intended to dispel an image long colored by the company’s traditional
urgent “sense of crisis,” an image that can no longer stir the affluent
people of the current age. It is with the bright image of future dreams
that Toyota people will work and demonstrate abilities beyond expecta-
tions. “Making dreams come true” is a key phrase for developing people
in the 21st century.
284 Inside the Mind of Toyota

INNOVATION IN PRODUCT DEVELOPMENT

From the end of the 20th and into the 21st centuries, the new winds of
environmental issues, globalization, and an IT revolution have been
sweeping across the automotive industry. As Figure 6.1 shows, Toyota has
felt these new winds and has envisioned a major paradigm shift in cars
and in the automotive industry over the next five to ten years. In response,
Toyota is trying to get ahead of the times by bringing about a drastic
change in the way it develops products.

Toyota's Strategy for Reforming Product Development in the

21st Century
The first tremors of a revolution in development at Toyota appeared in the
shift to the Development Center system in September 1992. It is reason-
able to assume that Toyota’s aims in this shift encompassed the new devel-
opment system concept shown in Figure 2.2.
In 1994, when Fujio Cho was president of TMM (Toyota Motor Man-
ufacturing), the Toyota Motor plant in the United States, he visited the
Ford factory in Atlanta—said to be the most productive plant in the
United States—and was highly impressed. Toyota had a higher density of
individual operations and was better at making use of people, but Ford
had fewer parts and fewer operations, with the overall result that Ford
used fewer people than Toyota. Until that time, the Toyota Production
System had concentrated on the shopfloor and, if anything, had worked
mightily to remove waste from shopfloor processes. Cho was convinced
that the path toward the future would have to be one that integrated pro-
duction and design. He was optimistic because Toyota was already mov-
ing in that direction (i.e., making the design work lean).
Akihiro Wada, who (in 1994) was a Toyota Motor senior managing
director bringing together Development Centers One to Three, cited
“earnest checking is necessary in advanced stages” as one factor in short-
ening development lead-times:

We can shrink lead-time if the components, suspension, body, and

frame are finished before completing the exterior design. We can’t cut
the time, though, if several problems that hadn’t emerged during the
advanced stages come out after we get to full-blown prototype vehicles.
We have to be able to do more conscientious checking at the earlier
stages. This also means that we must not send vehicles to full-scale
trials if they haven't been checked.
Toyota Management inthe 21st Century 285

From around 1995, Toyota began hammering out a rough strategy for
serious reform of the development process for the 21st century. Figure 6.4
gives a comprehensive view of the product development revolution as it
stands today.

nthe 21st Century |

€21 (platform consolidation, expansionof derivative vehicles) €21: Century 21

C7} NBC NBC-Y EQ EQ-Y NBC: New Basic Car

a}
)
= Vitz derivative
SS
2a EQ: Development code for Corolla
@ < EQ-Y: Corolla (EQ) derivative
i)

=
= 1 (Development Lead Time Reduction) ee
Eco: Ecology
er
ee
~J
<x CD: Customer Delight
CCC21: Construction of Cost
EcoTechnologies, cD Quality,etc.
Competitiveness 21

CCC21(Reductions in Manufacturing and Parts Costs)

Source: Based on "Toyota's 21st Century Growth Strategy,’ Nikkei Sangyo Shimbun, 27 December 2000.

C21 is a strategy for expanding derivative vehicle models by consoli-

dating platforms, AD21 is a strategy for shortening development lead-
times, and CCC21 involves cost-reduction activities by component. While
C21, AD21, and Eco Technology strategy and CD Quality strategy activi-
ties are underway for individual models, CCC21—Toyota’s strategy for
revolutionizing 21st-century product development—cuts across all mod-
els. Each of these strategies is examined below.

Platform Consolidation and Expansion of Derivative Models

From 1993 to 1995, Toyota carried out activities focused on cost in order
to rebuild its international competitiveness after the end of the economic
bubble. In 1996 and 1997, it put its energies into product-power-enhanc-
ing VE activities with the aim of becoming the world’s number one man-
ufacturer. From 1998 onward, it decided to roll out C21 activities for this
same purpose.
286 Inside the Mind of Toyota

C21 involves two kinds of activities: (1) consolidating platforms and

chasses and expanding product variations, and (2) unit and platform cost
reductions.
A platform is a chassis on which certain functional units and compo-
nents have been mounted. This section of the vehicle is referred to as a
common base, or platform, because it can be carried over through gener-
ations of models and commonly used on different model names. The
Japanese word for this is shadai, literally “vehicle base.” The concept of a
platform is not restricted to automobiles, but can apply to any product.
Because a platform isn’t visually apparent to the customer, the idea has
spread that, as long as there is sufficient product power, it can be used
across multiple generations—without modification, by suitably increas-
ing or diminishing chassis length or width or by substituting functional
units or components on the chassis. Alternatively, a single platform can be
used for multiple vehicle models as long as product power can be sus-
tained. All this has the effect of making it possible for a chassis and the
functional components on the chassis to be used and shared among spe-
cific models for a specific period of time.
This concept has long existed in both Japan and the United States, but
because it was implemented on a case-by-case basis, there are many
instances in which it failed when it ended up generating look-alike
models. What is distinctive about recent moves is that, by implement-
ing the idea in a planned fashion across the whole company and by pro-
viding for differentiation among products, Toyota has consolidated
platforms and sustained Alfred Sloan’s strategy of expanding product
variations.
Having cut development costs by 30 percent with the Vitz, Toyota used
the same New Basic Car (NBC) platform to expand (via yokoten) to deriv-
ative models such as the Funcargo. It then rolled out the Corolla in the
same way, moving ahead with the technique of successively consolidating
platforms while increasing the number of derivative models.
Outlined below are Toyota’s plans for consolidating passenger vehicle
platforms (excluding its RV models):
FF [Front-engine, Front-wheel Drive] Vehicles
I. NBG;
Vitz, Funcargo, Platz, bB, Will Vi, Yaris (Europe)
2. Corolla Class:
Prius, New Corolla, Corolla Fielder
3. Medium Class Vehicles with inline 4-cylinder, 2-liter engines and simi-
lar front suspensions:
Vista, Corona, Carina, Ipsum
Toyota Management inthe 21st Century 287

4. FF 3-Numbers:
Camry, Windom, Avalon (all U.S.-produced)
FR [Front Engine, Rear-Wheel Drive] Vehicles
5. Inline 6-Cylinder Vehicles with similar front suspensions:
Progrés, Altezza
6. FR Monocoque Medium High Class:
Aristo, Crown, Mark II, Chaser, Cresta
7. High Class:
Celsior

Toyota has created a Platform Committee to promote platform consol-

idation. With members drawn from chief engineers’ and designing, pro-
duction engineering, and marketing departments, the committee puts
together a Platform Commonization Study Table for each platform com-
ponent system. For each base vehicle’s platform, common components
and evolving components are examined and submitted to the committee,
which then deliberates on their suitability.
Given lingering concerns about the wholesale carryover and sharing of
components by platform, it may be that this system will be revised by
combining it with the “modular design” approach described below.

Shortening the Development Cycle

Activities aimed at shortening development lead-times began in earnest at
Toyota around 1995. Toyota gave the name AD21 to these activities and
began standardizing them in 1998. The aim of what is usually referred to
as shortening of the development cycle is to minimize product planning
obsolescence by compressing the period between planning and market
launch. Its major effect is the Clark-Fujimoto Rule described in Chapter
4: “Development resources are proportional to development time” (e.,
shortening development lead-time will diminish development resources).
Toyota is trying to realize a momentous shortening of the development
period, with the aim to drastically reduce development resources.

Shortening Lead-time Through Platform Consolidation

For the Ipsum and Spacio, which went on sale in 1995 and made use of the
Corolla platform, and for the new model RV Harrier, which used the Cel-
sior platform, the period of time between exterior design approval and
volume production was cut to between fifteen and eighteen months, two-
thirds of the previous timeframe.
288 Inside the Mind of Toyota

The Ipsum, Spacio, and Harrier were not simply “tacked on” to Corolla
and Celsior platforms. The Corolla and Celsior platforms had been devel-
oped to accommodate the subsequent derivation of the Ipsum, Spacio,
and Harrier.
With these precedents and successes, Toyota launched AD21 activities in
order to shorten development lead-times on a regular and rational basis.
A new standard process for the period between decision on the exter-
nal design and volume production called for (1) eighteen months for a
newly established or improved platform, with one advanced trial and
one formal trial, (2) fifteen months for basic platform carryover, with
just one formal trial and (3) twelve months for 100 percent platform
carryover, with no trial. This was established as the standard develop-
ment pattern.
Toyota has rolled out AD21 to all projects successively from the start
of 1999. The first vehicle to which it was applied was the Vitz, which
went on sale in 1999. Because the Vitz involved a newly established
or improved platform, production began eighteen months after
approval of the exterior design. As Figure 4.5 shows, the standard
schedule in the past had been twenty-six months, meaning that AD21
lopped off eight months (or one-third of the total time) in a single
stroke. For the bB, a Vitz platform carryover model that went on sale in
February 2000, the standard for development was fifteen months and
one formal trial because it involved basic platform carryover. Even the
one formal trial was omitted in this case however, and the bB made it
to volume production in thirteen months.

Shortening Lead-time by the Fujimoto Method

In his article “Organizational Problem-solving in Support of Product Devel-
opment,” published in the January 1998 issue of Diamond Harvard Busi-
ness, Takahiro Fujimoto introduced a model of shortening lead-times by
shifting the decision-making curve forward along with lead-time reduc-
tion policies and examples from a number of companies. In the second
half of the article, Fujimoto refers to “the capacity for system emergence
and evolution observable at Toyota,’ a reference that suggests that many
of his insights came from Toyota. Indeed, the entire article can be viewed
as the result of an analysis of Toyota policies and activities. Based on Fuji-
moto’s model (and by taking into consideration additional information
this author has acquired) we can represent the structure of Toyota’s lead-
time reduction activities as in Figure 6.5:
Toyota Management inthe 21st Century 289

Front-Loadingof pele corey and Problem-

| Solving Curves < YY
v
+ Enhances gate management _
=
we « Allows virtual verification by CAD/CAM/CAE
2 (improves parts interference, ease of assembly,4
°
_
a key performance characteristics)
-
c * Brings downstream process work forward
wv
~
6
+ Reforms suppliers
—_
Problems
of
NumberProject
the
Current
in
+ Allows early die fabrication
3
Me

oe
Resolved
be
Needing
to +t Lead time reduction
2
Vv Problem resoluton curve | Ra policies
£
s Projects
Previous
by
Left
2 Knowledge Transfer Increase
+ Allows dedicated team activities toextract and
resolve earlier-stage bottlenecks
+ Allows database accumulation of previousdesign
‘review results.
« Facilitateslateral preprqstionttoo subsequent and
Chief ¢ > Mass
other models
Engineer
Concept ,
Development Lead Time Production
Start

Source: Based on Fujimoto, Takahiro. “Organizational Problem-Solving Capabilities in Support of Product Development,’
Diamond Harvard Business, January 1998.

Shortening Lead-time Through V-comm

The trump card of lead-time reduction tools is an IT-based virtual devel-
opment system, which is a cutting-edge, strategic IT technology for using
computers to deal with every element of development (e.g., contour
design; performance design; prototyping; assembly; experimentation;
jig, die, gauge, and tool design; equipment design; and plant and process
design). Although various systems, such as CAD/CAM (Computer Aided
Design/Computer Aided Manufacturing), CAE (Computer Aided Engi-
neering), CAT (Computer Aided Testing) and CAPP (Computer Aided
Process Planning), have been used in this area in the past, a virtual devel-
opment system synthesizes and applies all these as three-dimensional
data.
In the September 10, 2001 issue of Nikkei Business, Kousuke Shiramizu,
Toyota’s executive vice president responsible for production technology,
explained how Toyota has benefited from such technology:

[After external design approval, ] we can move from design to assembly

in twelve months for a new model Corolla-class vehicle. No company
in Europe or the United States can match this. For them, the goal is to
get the job done in less than 30 months. We're working on getting it
290 Inside the Mind of Toyota

down to ten months. In strategic terms, this constitutes an enormous

difference.
But ten months is still too long. We want to make the lead-time so
short it will astonish everyone. For example, building dies for a new
Lexus used to take us seven months, and now we can build them in two
months. Our current target is to do it inside of one month.
About 80 percent [of processes for which we used to build actual
models have now been moved to computer screens]. It used to be that
only highly skilled technicians could check places that were difficult for
hands or tools to reach, but now we can use computers.
“[Computers] have been a big help [in cutting costs]. They are
nearly entirely responsible for our no longer needing to build trial vehi-
cles. In only ten years, the number of Toyota models has grown by
about 50 percent.... where there used to be about 40, now there are
about 60. And basically we’ve done all of this without increasing our
research and development department staff.

For carmakers around the world, Shiramizu’s revelations may seem

more threatening than miraculous.
The computer system Toyota uses for these lead-time reductions is
known as V-comm (Visual and Virtual Communications) and is basi-
cally the same as Mazda’s MDI (Mazda Digital Innovation), described in
detail in Osamu Imada’s book, Technology, Management, and Labor in
Modern Automobile Companies.‘ These systems carry out design, proto-
typing, experimentation, and trial production all by computer, reducing
the number of advanced and formal trials and achieving simultaneous
improvements in development lead-time, development costs, and prod-
uct quality.
At the Manufacturing IT Forum 2001, sponsored by the Nihon Keizai
Shimbunsha and held on November 19, 2001, Toyota managing director
Akiyoshi Watanabe introduced Toyota’s V-comm inatalk entitled “Using
IT and Revolutionizing Development and Production Engineering
Processes: Future Developments.”
Watanabe said that V-comm is particularly effective in dealing with
such issues as component interference problems in places like the engine
room (where parts are densely packed together), operability problems in
assembly, and appearance problems (such as gaps in exterior body panels),
and distortion. He demonstrated production trials using a computer to
build three-dimensional data on products, production equipment, and
operators, and then simulated whether the product flowed smoothly,
whether there was any interference with equipment, and whether excessive
Toyota Management in the 21st Century 291

loads were being placed on operators. It was like seeing into the future.
V-comm development began in 1996; since that time it is said to have cut
the number of development stage design changes per model dramatically,
from 10,000 to a current level of 400-500 (i.e., to one-twentieth of what it
had been). Mazda worked out the concept of its MDI before Toyota devel-
oped its V-comm, but there is evidence to suggest that Toyota’s concept
has bounded ahead.

Cutting Manufacturing and Parts Costs with Modular Design

How CCC21 Was Launched
In July 2000, Toyota initiated cost-cutting activities it called CCC (Con-
struction of Cost Competitiveness) 21, whose aim was to reduce costs by
an average of 30 percent over three years, or bya total of1 trillion yen.
CCC21 activities aggressively pursue cost reductions at the most funda-
mental level, from concept development with suppliers through the roll-
out of integrated “concept-in” activities.
In the course of joint parts purchasing discussions that Toyota had held
with Volkswagen since the end of the 1990s, the two companies decided
to compare the costs of their respective parts purchases. Toyota’s Procure-
ment Department was brimming with self-assurance when it took up the
challenge, but it was blindsided by the results. Many VW parts, it seemed,
were less expensive than Toyota parts. A thorough investigation into
Japan’s high cost structure revealed that nearly all parts cost more in
Japan, arealization that led to the birth of CCC21.
Below are excerpts from a Nikkei Sangyo Shimbun (December 27, 2000)
report on CCC21:

“We were like the proverbial frog at the bottom of a well. It's quite
frightening that we were unaware of the true state of affairs.’ Then
senior managing director Katsuaki Watanabe was in charge of pro-
curement for Toyota Motor and he gulped when he saw the report his
subordinates brought him. Chairman Hiroshi Okuda was the one who
immediately sounded the alarm. “Toyota has always been called a
company with strong cost competitiveness. But we've been lulled into
thinking we were the best in the world. Now the emperor has no clothes.
I can’t help but feel uneasy about whether Toyota really is better at
making things than other companies are.”
“Toyota’s overseas cost-cutting competition has come back to us like
a boomerang,” said senior managing director Ryuji Arak. When
292 Inside the Mind of Toyota

Toyota learned that domestic and foreign rivals were cutting costs at an
unexpectedly rapid pace, Toyota began preparing a counterattack. At
the core was CCC21 (Construction of Cost Competitiveness), a cost-
reduction program with the goal of slashing parts manufacturing costs
by 30 percent in three years. Toyota set up 173 “absolute cost” items
whose costs had to be reduced in order to beat the international com-
petition. In addition, it used common parts as much as possible in its
vehicle models and shifted to a philosophy of “component compatibil-
ity” for maximizing the mass production effect. “Instead of making
parts to fit the car,’ said one Toyota executive, “we are making cars to
fit the parts.” They made a matrix of model compatibility on the verti-
cal axis and component compatibility situated on the horizontal axis
and set up a system for pursuing synergistic cost reduction effects (see
Figure 6.4).
Each team then proceeded to take a radically new look at the items
for which it was responsible, starting with the design step. They linked
design simplification with reductions in the numbers ofparts and other
types of production streamlining, and finally, even with the consolida-
tion ofproduction functions and other kinds of cuts to fixed costs. From
upstream to downstream, they used concurrent engineering (CE) to
extend cost-reduction activities in synchrony and in parallel with
one another. Watanabe’s strategy was this: “We’re not simply lowering
the purchase prices ofparts. We’re working with suppliers to reduce the
actual manufacturing cost of those parts.”
The cost reduction target for the 173 items altogether comes to a total
of 1 trillion yen. If CCC21 stays on track, Toyota manufacturing will
once again achieve chairman Okuda’s aim of occupying a position
where it surpasses other companies.

The Modular Design, Aim of CCC21

The Nikkei Sangyo Shimbun article cited above suggests that the basic phi-
losophy of CCC21 is probably “modular design,’ a phrase that Toyota has
not widely used in public. As Figure 6.6 indicates, modular design is a
technique for designing a variety of new products by combining a
restricted number of component types.
Lego is a typical example of “modular design.” By combining a lim-
ited number of block types, one can make a variety of products, such as
cars, airplanes, or buildings. This analogy may seem silly, but, as Figure
6.7 illustrates, the Swedish truck and bus manufacturer Scania has been
using Lego-like modular design for over fifty years. Because of recent
Toyota Management inthe 21st Century 293

Final Products

Source: Kodate, Akira and Toshio Suzue. 1983. A VRP Plan Cutting the Number of Components in Half.
N.B. VRP = Variety Reduction Program

industry interest in the concept, Scania is now conducting, jointly with

Lego of the Netherlands, a worldwide caravan campaign to publicize
modular design.

Source: "Profit Follows Principle—50 Years of Modular Design Philosophy,’ Nikkei Business, 5 January 1998.
294 Inside the Mind of Toyota

In the section dealing with product diversification and component

minimization in Chapter 4, we noted that part numbers per vehicle at
Toyota (i.e., the modular design [MD] index) is a fraction of what it is for
other carmakers. Even so, Toyota is still trying to lower its MD index.
In the January 1998 issue of Diamond Harvard Business, Kim Clark and
Carliss Baldwin published an article entitled “Product Modularity for Next-
generation Innovation” [in which they explain the history and philosophy
of modularization and some of its uses. They define modularization as “the
provision of design modularity using small-scale subsystems, each of which
can be designed independently from products or other components and
which function in a unified way.” In the sense that it encourages efficiency
and innovation, they argue, “modularization (modular design) is particu-
larly effective in such industries as automotive and finance.”
In a dialogue with economist Masahiko Aoki, published in the Nikkei
Sangyo Shimbun (July 31, 2001) as Modularity behind Growth Spurs Lead-
ing-Edge Industrial Competition,’ Carliss Baldwin had this to say: “The
concept of modularity is getting a lot of attention among economists.
Some people even say it is one factor in the gap in economic growth
between Japan and the United States. Once the rules of connecting mod-
ules to one another are established, individual modules can work together
independently.”
Applied to producer goods such as computers and machine tools,
modular design brought about dramatic development and economic and
industrial growth in the 20th century. In the 21st century, modular design
is advancing through the world as a leading-edge concept about to be
implemented for consumer goods, such as passenger cars, where the
emphasis is on design and styling.

Modular Production and Modular Design

Modularization as generally discussed in the popular press is not the same
as modular design; it is, in fact, something that can be more appropriately
termed “modular production,” which can be explained as “bundled deliv-
ery. In order to minimize the number of assembly processes at the
finished goods maker, the supplier “bundles together” physically proxi-
mate parts for delivery, regardless of their functions or characteristics. For
example, air conditioning system condensers and engine cooling system
radiators (or sheet metal door systems and door functional components
and plastic trim) are “bundled” and delivered as assemblies.
Modular production takes work that finished vehicle makers used to
perform and shifts its management to parts suppliers. As may be
Toyota Management inthe 21st Century 295

expected, it lowers labor costs (due to the wage gap between the carmaker
and suppliers), it reduces total assembly time, and it makes inspections
between processes easier.
Because the production engineering concept here comprises assem-
bling different functional parts, however, one concern is that this practice
diminishes product engineering capabilities that require functional
thinking.
The Research Institute of Economy, Trade, and Industry (RIETI) was
an independent administrative agency and the forerunner of the Research
Institute of International Trade and Industry within the Ministry of Inter-
national Trade and Industry (MITI), now the Ministry of Economy,
Trade, and Industry [METI]). At a RIETI-sponsored conference on
“Modularization—A Shock to Japanese Industry” held on July 13, 2001,
Nobuo Okubo, executive vice president of Nissan Motor—which was
promoting modular production—said that Nissan predicted that modu-
lar production would lower costs by 5 percent and cut defects between
processes to one-fifth of their previous level. At the same time, he said
there was some fear that technology might become a black box and that
influences on vehicle performance made painstaking decisions about the
extent of modular production a point of concern.
At the Tokyo International Automotive Conference sponsored by
Nikkei Business Publications and held on October 22, 2001, Majdi Abu-
laban of Delphi Automotive Systems stressed that in order to discover the
advantages of modular production, other than the reduction of the labor
cost, automakers must trust parts supplier and give them development
responsibilities and authority. Abulaban’s comments reflected the frustra-
tion of a parts supplier who wanted to expand business opportunities and
was trying to explain the advantages of modular production to the man-
ufacturer of finished vehicles.
Since modular production often involves a mega-supplier of bundled
delivery units, some industry analysts suggest that cost advantages emerge
in modular production in line with the progress of parts commonization
and mass production. This leads to a kind of “putting a roof on a roof”
effect, however, in which primary suppliers become secondary suppliers
and secondary suppliers become tertiary suppliers. With a multilayered
hierarchical structure being one of the factors contributing to Japan’s high
costs, this arrangement results in a high-cost structure overall. Moreover,
as Okubo says, there is a concern that modular production can lead to
technological black boxes. Its overall advantages have yet to be proven.
Modular design, a technique for designing various new products by com-
bining a limited number of component types, is fundamentally different
296 Inside the Mind of Toyota

from modular production (bundled delivery). To begin with, the word

“module” conveys the idea of combination, compatibility, and common use.
“Bundled delivery” may convey the idea of assembly, but it does not suggest
combination, compatibility, or common use. Thus, referring to bundled
delivery as “modular production” is inaccurate. Ford and the Mazda Group
still use the expression “full service supplier, a far more appropriate term.
Nonetheless, since the tendency to use “bundled delivery” as “modular pro-
duction” is currently prevalent, our discussion below follows suit.
Toyota’s view of modular production is that it is partially effective and
in some cases has no drawbacks, so it does not reject the concept across
the board. Toyota does reject the idea of its wholesale use, however,
because it diminishes the automaker’s overall technical development
capabilities. Rather than bundling components without regard for their
functions, however, Toyota is more oriented toward “systemization,’ i.e.,
bundling components from the same functional family. In doing so, Toy-
ota is applying the principles of modular design. Toyota’s thinking is that,
for example, an air conditioning system, is a system of components that
belong to the same functional family. Thus, even though components
such as the air conditioner unit, condenser, compressor, and evaporator
are not physically close to one another, they should be bundled together,
and parts suppliers and organizations involved in the production and
assembly of these components should be rearranged accordingly. Com-
ponents are sometimes delivered separately, as they always have been.
Modular production emphasizes production, whereas systemization
emphasizes design. Toyota’s orientation is to emphasize design. This is a
reasonable choice since we are moving from an era in which production
added value to one in which design adds value.
Furthermore, Toyota has declared that in the 21st century, the Toyota
Group overall will grow as a system integrator that reorganizes work par-
tially by modular units but overall by system units, and that becomes skilled
at both modular production and systemization (modular design). Rather
than being swept along by the fashion for modular production, Toyota has
thought for itself and has devised its own unique and new approach.

Previous Examples of Modular Design at Toyota

Previous instances of modular design at Toyota (or, more properly, the
Toyota Group) begin in the late 1970s at Toyota Motor’s sworn ally, Nip-
pon Denso (now Denso).
In 1981, Nippon Denso shocked radiator component suppliers around
the world when it developed and marketed a revolutionary new type of
Toyota Management in the 21st Century 297

radiator, the SR radiator. An article detailing the story of the new devel-
opment appeared in the journal of the Japan Society of Mechanical Engi-
neers in January 1985, and in 1985 the radiator won the JSME’s
Technology Award. A paper on the new radiator was subsequently pre-
sented in 1986 at the 29th National Meeting on Standardization and was
later published in the journal of the JSME (April 1988).
These papers are valuable references for manufacturing industries and
are recommended reading. The summary below comes principally from
the paper by Kazuhiro Ohta and Mineo Hanai, which was published in
the April 1988 issue of the JSME journal under the title “Flexible Automa-
tion and Design—An Example of Automobile Radiators.”
Nippon Denso’s SR radiator was first put through a VE analysis result-
ing in both product diversification and component minimization, Le., a
smaller, lighter, higher performance product with fewer components.
These apparently conflicting features were achieved by means of core
diversification combinations shown in Figure 6.8.

Core Diversity
280~ 425 /7types
tank

Ona RS

fin pitch (fp)

core width (cw)

a
Sa
aeee
Naess
fate
So
a
oo.

rit‘o)

of
Source: Ohta, Kazuhiro et al. "Flexible Automation and Design—The Example of Automobile Radiators. Journal
The Japan Society of Mechanical Engineers (SME), April 1988.

Nippon Denso had no special term for the method, but this was
modular design. For the core in Figure 6.8, for example, a mere 28 types
of fin tubes make it possible to build 7 X 11 X 4, or 308 core varieties.
Standardizing the cores also minimized the types of components sur-
rounding the core, including upper tanks, lower tanks, and side brackets.
298 Inside the Mind of Toyota

In the past, designers would make fresh designs in response to carmaker

demands. This meant that components varied infinitely and investment
and maintenance costs for parts, equipment, and dies were enormous.
Modular design is a good concept, but the approach is difficult to
adopt if no consideration is given to the carmaker that mounts the parts.
Most carmakers send orders to suppliers after the design of the vehicle as
a whole is completed, so sometimes the external portions of Nippon
Denso’s SR radiator would assume their characteristic shapes to conform
to the shape of the vehicle. The external shapes of radiators mounted in
Toyota vehicles, however, were all uniform, a reflection of Toyota’s incli-
nation to build the car around the components.
The basic requirements of modular design call for using fixed incre-
ment spacing (or module numbers) and standard product and com-
ponent dimensions. In Figure 6.8, the module numbers are as follows:
(425 — 280) + 7 » 20mm spacing for height, (668 — 328) + 11 » 30mm
spacing for width and (3.5 — 2.3) + 4 = 0.3mm spacing for fins (f. p.,
or fin pitch).
From the perspective of module numbers, we can glimpse instances
where Toyota Motor itself occasionally leaned toward modular design. We
see that care was taken to vary wheelbases by 80mm increments, for
example, and that module numbers were applied to the leading-edge
coordinates of combination switches in an attempt to standardize switch
levers. Since modular design is difficult to apply piecemeal, however, Toy-
ota did not venture into modular design beyond this level.

Approaches to Modular Design

In the 20th century, modular design progressed for producer goods for
which little emphasis is placed on product appearance and styling (com-
puters and industrial machinery, for example). In the 21st century, Toyota
is revisiting modular design and applying its concepts to the totality of
product design, component design, and related equipment design.
Through the ensuing product diversification, component minimization,
and the concentration of production functions, Toyota is lowering the
cost of manufacturing itself.
Toyota Motor executive vice president Katsuaki Watanabe has this to
say about component modularization: “When it comes to component
modularization, Toyota focuses on how to change designs. We’re moving
ahead with modularization and systemization with an approach that asks
what is a good design, what is good performance, what is good quality,
and what is a good way to make things.”
Toyota Management in the 21st Century 299

Clearly, when Watanabe says “component modularization” he is not

talking about modular production, but about modular design predicated
on systemization.
In response to predictable future changes, Hiroshi Okuda has cited the
“cassette system” (simplification of frame construction) as a subject that
deserves study (Weekly Diamond, ed. Toyota Management and the Law of
the Last Man Standing).* This, too, may be seen as a reference to modu-
lar design.
Tadaaki Jagawa, who moved from an executive vice presidency at Toy-
ota to become the president of Hino Motors in April 2001, says, “Toyota’s
Kyohokai [supplier group] is the focus of modular design for trucks.” In
real terms, this means that when it buys parts from Kyohokai suppliers,
Toyota also covers development costs and certain types of new invest-
ments needed for driving modular design.
In March 2002, Hino Motors announced a business partnership with
Scania, the Swedish truck and bus manufacturer which has been using
modular design for over fifty years (see Figure 6.7). The official
announcement cited “global complementarity” as the purpose of the
partnership, but given Hino’s sluggish performance, Jagawa’s aim was
probably an attempt (through modular design) to revive a truck and bus
business whose sales showed little prospect of recovery.
The words and actions of men like Watanabe, Okuda, and Jagawa show
that 21st-century Toyota is reinventing itself by seriously rethinking the
idea of designing automobiles like Legos.
In the January 2002 issue of Diamond Harvard Business, Lee Fleming et
al. published “Pitfalls of Faith in Modularization,”’ an article warning
against excessive modularization (modular design). The authors opine:
“Many firms seem to be misusing the technology, destroying opportuni-
ties for breakthroughs and hollowing out the innovation process.” One
wonders what country they are talking about. In the United States, we see,
modular design has advanced to the point where articles are coming out
to warn against its shortcomings.
Modular design is all about high quality and low price, but it also carries
within it the risk that products will look tired or overly simple. In driving
modular design, it is critical, as Fleming et al. maintain, that “once modu-
larization has progressed to a certain point, those in charge of research need
to let developers ‘play’ with highly interdependent technologies in order to
maximize the possibility of breakthroughs.” Japan, as a whole, has not yet
reached that level.
In the 20th century, modular design developed around producer goods
for which exterior design was not particularly important. The reason that
300 Inside the Mind of Toyota

it did not spread to cars and other consumer goods where external design
is important is that there were no universal procedures on the market for
driving modular design. What is needed now is a general theory for
applying modular design and for that theory to spread.

Reforming the Management of Product Information

One important issue in the design revolution is that of constructing a
basic system for managing knowledge across the entire company—espe-
cially design department knowledge. Product development is a job that
calls for total mobilization of company knowledge to increase the added
value of product information while clarifying internal constraints. Two
things are needed to perform this job efficiently.

1. Faster what-if analyses (i.e., asking what changes will cause what to
change) by increasing the frequency per unit time of information
exchange among departments
2. Obtaining new knowledge from this process and increasing the number
of goal-seeking simulations (i.e., asking what is the shortest path to
achieving the goal)

As we saw in Chapter 3 in the section on computer system manage-

ment, making this possible requires the establishment of a company-
wide product function structure to serve as a basic means for the unified
management of design information and design knowledge. It then
means creating the PDM (Product Data Management) system shown in
Figure 3.15.
Toyota has probably begun resolving these issues already. If Toyota is
going to cut development lead-time to an unprecedented 10 months and
implement modular design as the ultimate form of product development,
then it is going to have to establish PDM and make it possible to conduct
what-if analyses and goal-seeking simulations.
In March 2002, Toyota announced that it was replacing Caelum, an in-
house CAD system that it had already put on the market, and that it
would use CATIA (made by Dassault in France) for interior and exterior
contoured components and Pro/Engineer (made by Parametric Technol-
ogy in the United States) for mechanical components. Both CATIA and
Pro/Engineer are CAD systems with concurrent engineering functions
that are well established in their respective fields. Best of all, they are each
capable of performing integrated management of PDM information from
CAD, CAE, component tables, and engineering information. The system
integration described by Toyota’s chief information officer and executive
Toyota Management inthe 21st Century 301

vice president Susumu Miyoshi (see Chapter 3, A Company-Wide Infor-

mation System) has finally begun at the most basic level.

MANAGEMENT STANDARDS FROM TOYOTA

Hiroshi Okuda has said, “An important task for a manager is that he come
to management with his own image of what kind of Japan he wants to
build and what kind of company he want to make.”
When he was appointed to the chairmanship of the Japan Federation
of Employers’ Associations (Nikkeiren) in May 1999, Okuda announced
that during his tenure (of two terms and four years), he wanted to bring
the national unemployment rate to 3 percent, or nearly full employment.
Okuda’s goal suggests a management standard that Japanese industries
should aim for. Toyota, under Okuda’s influence, began emerging as a
“good company” willing to lend a hand to the economic recovery of Japan
as a whole.
One tangible change appears in positive outside initiatives conducted
by Toyota managers. Another is the standardization of the Toyota man-
agement system and its active transmission outside the company.

Outside Activities by Toyota Management

The year 2000 might well be said to mark the inauguration of Toyota’s
extra-corporate activities. As numerous Japanese companies adopted
the Western system of outside directors, many companies invited
important individuals at Toyota to join their boards. In response to
these requests, several Toyota managers began to make contributions at
other companies:
* May 2000. Sakura Bank. Shoichiro Toyoda and others become outside
directors.
* September 2000. Consolidation of Sanwa Bank and two other banks.
Toyota chairman Okuda joins as an outside director.
* November 2000. Aioi Insurance Company. Toyota president Cho joins as
an outside director.
* November 2000. Nomura sets up a management consulting organ. Toy-
ota chairman Okuda and four others become external advisors.
* January 2001. NEC Management Advisory Committee. Toyota president
Cho and others join as external committee members.
At the end of July 2001, when NEC announced a management plan for
broad restructuring, Cho, then on the Management Advisory Commit-
tee, called for a thorough investigation into the reasons for the delayed
302 Inside the Mind of Toyota

decision. “Why do you have to restructure so much production equip-

ment and so many people now?” he asked. “Management needs to verify
the situation again.” NEC president Nishigaki stressed the utility of the
Management Advisory Committee, saying, “We’ve heard about the pro-
duction revolution at Toyota Motor and gotten many valuable sugges-
tions.” From this scenario alone, we get a glimpse of the enthusiasm
Toyota managers showed for spreading Toyota-style management
beyond Toyota.

Standardization and Transmission of the Toyota Management System

Standardizing Indexes for Assessing Management

In September 2001, a public-service corporation called the Central
Japan Industries Association (CJIA, Chubu Sangyo Renmei) completed
its Japan Management Standards (JMS) in cooperation with Toyota
Motor and other companies representing Central Japan. In addition to
Toyota, fifteen other companies, including Sony EMCS, Minokamo
TEC, and Seiko Epson created the standards as a new management
assessment system that could be applied to manufacturing firms in a
variety of industries.
JMS divides the management of a manufacturing firm into two
rubrics: functions (management functions) and processes (production
processes). The functional rubric is divided into seven areas: manage-
ment, human resources, quality assurance, cost, environment, safety, and
financial returns. There are seven areas on the process side as well: devel-
opment, production technology, purchasing and procurement manage-
ment, shopfloor management and kaizen, equipment maintenance,
manufacturing quality, and sales capability. Each of the fourteen areas
undergoes a detailed evaluation of management methods and organiza-
tional systems, with some 395 diagnostic categories in all. Each category
is rated on a four-point scale of 0, 2, 4, or 5. Midpoint rankings have been
eliminated in order to avoid vague diagnoses. Figure 6.9 shows a portion
of a JMS checksheet.
Central Japan Industries Association explains the JMS as follows:

The JMS makes it possible to grasp the management activities of a

manufacturing firm in terms of the intersections of seven functional
areas and seven process areas. Combined with a 0, 2, 4, or 5-point
ranking, it shows the route needed to improve company performance as
a three-dimensional matrix.
Toyota Management in the 21st Century 303

Class: Production Cat. 1: Shop-Floor Mgt. & Kaizen Cat. 2: Production Planning Diagnosis Date:
What & How Comments
3.1.5.1 Order Information Collection
[1) Sharing of production] listening, with [Sales and Production departments share| Checksheet
latest sales data check information on the latest sales results,
information Sales and Production departments share oe
information on the latest sales plan.
[2] Consistency of listening, with Production Control establishes weekly and
order data check daily schedules and adjusts them in order to
information and satisfy the demands of downstream processes Evaluation
production plan Establishes monthly plan by coordinatin ° *
aes
production plan and order information : Criteria
listening, with Analyzes special sales, regular sales and
[3] Existence of Data data check seasonal variability for trends
Trend Analysis Understands order results as trends.
Looks at sales strategies and time of sales
Class: Production Cat. 1: Shop-Floor Mgt. & Kaizen Cat. 2: Production Planning Diagnosis Date:
Category 3 Good Acceptable
Ratings 5 pts 2 pts 2 pts 0 pts
3.1.5.1 Order Information Collection
(1] Sharing of latest sales |Sales and Production departments share > order information is collected but not |order information is hardly
information information on the latest sales results. reflected in the production schedule |understood at all
[2] Consistency of order _|Coordinates production plan with order 5 :
infor pede information monthly and establishes alan isestablished monthly by
: weekly and daily schedules to satisfy the reconciling the production schedule
production plan demands of downstream processes. and order information
Analyzes special sales, regular sales Understands order
aad seasonal variability
results as trends.

almost no understanding of
Source: Central Japan Industries Association, 1 August 2001.
cauinment, human,outsourcing

The JMS involved constant on-site collection of actually imple-

mented management practices from fifteen top companies that have
shown continuous evolution and growth. These were studied exhaus-
tively over the course of two years in order to identify the most impor-
tant categories common to manufacturing firms. For manufacturing
companies, then, these may be called management “genes of growth
and DNA of evolution.” JMS checksheets are used consistently at each
phase, from diagnosis of the current situation to improvement
(kaizen) based on the results of that diagnosis, to later evaluation.
Finally, the Central Japan Industries Association provides recognition
to companies that have attained a certain level.” (From the Central
Japan Industries Association homepage)

Quite coincidentally, the shape the JMS takes, as intersections of seven

(management) function areas and seven (production) process areas,
resembles the structure of the Toyota Management System shown in Fig-
ureiel:
It was president Tadaaki Jagawa of Hino Motors who triggered the for-
mation of the JMS during his tenure as executive vice president at Toyota.
On September 14, 2001, Jagawa spoke about the origins and history of the
JMS at a reception during which completion of the JMS at the Central
Japan Industries Association was announced:
304 Inside the Mind of Toyota

The decade (of the 1990s) caused us a lot of frustration. When we

thought about reviving the Japanese manufacturing industry, we argued
that we wanted to rediscover the sources of Japanese management. With
the global economy entering our field of vision, three themes emerged
when we considered how we might advance. The first was to take our
comprehension of tacit knowledge and make it explicit. Next, this didn’t
mean qualitative transmission of knowledge. We needed a quantitative
rollout. Third, we had to make it open.
As for the JMS, top managers, middle managers, and shopfloor
management all need to have some things in common. Or rather,
things get moving when they do. I think of the JMS as a means for that.
When you diagnose and analyze your own company and you have
some sort of what’s often called a benchmark, then you need to get
management plans and the true state of management to penetrate to
every corner of the company.
I think it will be a truly encouraging endorsement if the JMS is used
by companies that have in common the fact that they manufacture
things. The CJIA’s JMS looks at the management know-how of fifteen
strong companies representing the Central region—well, there are
other aspects as well—but to put it bluntly, I think they’re about 70 to
80 percent similar to one another. If I had my way, Id like to take this
soon to Southeast Asia and elsewhere overseas so it could be of use to
management around the world. And Id like to move quickly to sys-
tematize it by including the thinking of various professors and not just
business leaders. I'd like manufacturing to be in the spotlight again and
I'd like a new, evolved Japanese management to be able to leap proudly
out on the world stage again.

Toyota had had what might be called a Toyota version of the JMS some
two years before this. When Tadaaki Jagawa suggested creating the CJIA’s
JMS on the basis of the Toyota version, certain people at Toyota opposed
the suggestion at the implementation level, arguing that the know-how
was Toyota property. Jagawa’s view was that all companies have unique
know-how and that the significance of this initiative lay in synthesizing
Toyota's knowledge with that of other companies. Along with obtaining
permission from then-president Okuda, Jagawa secured the participation
of many people inside and outside Toyota and did everything he could to
ensure the success of the CJIA’s JMS. Jagawa, who left his position as exec-
utive vice president at Toyota and began serving as president of Hino
Motors on April 13, 2001, was at one point a strong candidate for the
presidency of Toyota. He had come up from the trenches of production
Toyota Management inthe 21st Century 305

engineering via procurement, personnel, and management planning, fol-

lowing an admirable career path that creates good managers. When Fujio
Cho chose Jagawa to be president of Hino Motors Co., he told Hino he
was sending them an ace. Jagawa is indeed afirst-class manager with a
broad vision, and under his direction, future trends at Hino Motors Co.
will bear watching.

Japan Organization for Innovation in Manufacturing, Human

Development, and Quality
May 23, 2001, saw the launch of the Japan Organization for Innovation in
Manufacturing, Human Development, and Quality, Nihon Monozukuri
Hitozukuri Shitsu Kakushin Kiko, usually called the Nihon Monozukuri
Kiko, a management research organization that sought an ideal Japanese-
type management model for “creating high added-value products and
services.” Since Toyota Motor emeritus chairman Shoichiro Toyoda was
named honorary board chairman of the Nihon Monozukuri Kiko and
former Toyota executive vice president and current Denso chairman
Akira Takahashi became managing director, jokes are made about the
organization being about standardizing Toyota management or relying on
Toyota to rebuild quality. Takahashi doesn’t deny the jokes.

“We'll be successful,” Takahashi says, “if we can be a catalyst for Japan

to generate a great business model in order to brink back its interna-
tional competitiveness.

“Japan has ISO 9000 anda variety of other business quality standards,
but from a manager’s perspective, these are merely fragmentary and, as
might be expected of schemes made principally by academics, they have
aspects that are difficult to understand. Even ISO 9000 is nothing more
than a sort of passport for qualifying to do business. And as far as
improving the quality of management is concerned, one can hardly say
it’s the real thing.

“What’s being demanded of companies now is that they build new

business and improve the efficiency of existing business, in other words,
that their management be quick-witted and good at change. Managers
will probably find things easier to understand if we show ourselves to
be heading in the general direction of building a business model in
partnership with existing quality standards groups and industry, gov-
ernment, university, and other research organizations.”
306 Inside the Mind of Toyota

The activities of the Nihon Monozukuri Kiko are based on three policies:
1. Instilling in employees and managers a sense that it is important that
management increase trust, joy, and vitality.
2. Rebuilding and promulgating a Japanese management model in a
form that is easy for managers to understand and that centers on self-
assessment and kaizen.
3. Collaborating with existing organizations to develop a Japanese man-
agement model.
Based on these policies, the organization was to propose a sample new
management model to industry in three years.
(The above is excerpted from “Japan Organization for Innovation in
Manufacturing, Human Development, and Quality Launched” June 19,
2001. Nikkei Sangyo Shimbun).”
The Nihon Monozukuri Kiko drew together a broad spectrum of
business people and academics who hoped to rehabilitate Japanese
manufacturing and formed them into eight working groups. Three
years later, in April 2004, each working group announced its achieve-
ments to the public:
Working Group 1: New Product Development Working Group
1. Report on the Activities of the New Product Development Working Group
2. Narrative New Product Development
Working Group 2: Working Group for Business Process Innovation
1. The Front Lines of Business Process Innovation
2. The Front Lines of Business Process Innovation, Digest Edition
Working Group 3: Working Group for Customer Value Creation
1. A Customer Value Creation System to Change Japan, from Manufacturing
to Service and Agriculture
Working Group 4: Working Group for the Development of Self-Diagnosis
Methods for Management Systems
1. Self-Diagnosis Methods for Management Systems
2. Appendix to Self-Diagnosis Methods for Management Systems: A Table of
Self-Diagnosis Methods
Working Group 5: Executive Development Working Group
1. Proposal for a Development Program for Executives in Technical Fields
Working Group 6: Working Group for the Development of Quality Experts
1. A Proposal Concerning the Development of Quality Experts for the Revival
of Manufacturing
2. Proposal: A Quality Expert Development Course for the Revival of
Manufacturing
Toyota Management inthe 21st Century 307

Working Group 7: Working Group for the Development of

Shopfloor Personnel
1. Practical Notes on Developing Shopfloor Personnel
2. Bringing Dreams to the Shopfloor—Promoting Individual Growth
Working Group 8: Working Group for Improving the Quality of
Health Care
1. Building a Healthcare Management Model Based on ISO 9000

Even without going into the details of the above outcomes, surely we
can see that this was a historical attempt to consolidate Japanese manu-
facturing wisdom. We can expect a resurgence of industrial prosperity as
this wisdom spreads and is applied throughout Japanese industry.
It is a fine thing that busy and senior people like Shoichiro Toyoda and
Akira Takahashi often take on activities of this sort that are tantamount to
volunteer work. Probably they can do so because they are convinced that
the Toyota Production System can be of help to the development of soci-
ety and because they feel a sense of mission and want to contribute. What
used to be jokingly referred to as an imperious “Mikawa Monroe Doc-
trine” is already a thing of the past.

Using Human Resources at Toyota

The Japanese economy was still sluggish when Okuda was named chair-
man of the Japan Federation of Employers’ Associations (Nikkeiren) in
May 1999. As previously noted, he announced that he wanted to bring
Japan’s unemployment rate to 3 percent. In July 2001, the unemployment
rate topped 5 percent.
“We know what we have to do,” said Okuda when he was selected to be
a private-sector member of the [Prime Minister’s] Council on Economic
and Fiscal Policy. “All that’s left is the implementation.” At the first meet-
ing of the council on January 6, 2001, Okuda declared, “It is vital that this
council consider measures to rectify our country’s high cost structure.’
Wherever one looks in the Japanese economy, one finds numerous jobs,
systems and organizations that generate no added value. This amounts to
wasteful consumption of the nation’s energy.
The unemployment rate began to fall as the Japanese economy began
to show signs of recovery in 2003. In the view of economics scholars and
analysts, however, this was not the result of strength, but rather, of early
“restructuring” effects of plant closings and personnel reductions. This
would not close the gap and make Japan internationally competitive with
the renascent nations of Europe and North America nor with the rapidly
308 Inside the Mind of Toyota

growing economic region of East Asia. Nor would it do to rely on stalled

national policies of economic reform.
The Central Japan International Airport Company, Ltd., was founded
in May 1998 with former Toyota executive Yukihisa Hirano as president.
He applied rigorous Toyota-style management to the project, saving ¥60
billion, for example, by using a bidding system for landfill suppliers dur-
ing airport construction. The overall savings for building the airport
amounted to ¥124.9 billion. As a result, when the new airport opened in
February 2005, the ¥655,700 landing fees for a jumbo jet were far lower
than comparable fees at Narita Airport (¥948,000) and Kansai Airport
(¥825,600), both of which are struggling with deficits. The use of a T-
shaped terminal building to shorten flows and reduce connection times is
another example, moreover, of prolific Toyota-style kaizen activities at the
airport. Toyota has begun to step out and teach by example.
Starting around 2007, the first generation World War II baby boomers
will reach retirement age in Japan and leave companies in large numbers.
We have already seen the beginnings of this so-called 2007 Problem
involving the loss of the valuable human resources that developed and
sustained postwar Japanese manufacturing. Declaring that he wants to get
“manufacturing seniors back to the plate” Takahiro Fujimoto of the Uni-
versity of Tokyo has established a course at the university to train “senior
instructors in manufacturing” with a view to using these resources to rais-
ing the standard of Japanese technology.
Toyota will be no exception to the loss of the baby boomer generation.
In order to continue using these valuable resources within the company,
Toyota is taking the lead in the industry of applying to all employees a sys-
tem of rehiring those who have reached the retirement age of 65. Not con-
tent to rely on national economic reforms, Toyota has also begun to teach
Toyota-style reform by providing the society at large with “Toyota sen-
iors” such as Hirano, who was trained within the Toyota system.

The “Leaning” of Industry on a Global Scale

The earth is in a bad way. There is a possibility that the planet may
become uninhabitable by the end of the 21st century. The prime culprits
are materials that burden the environment emitted by secondary manu-
facturing industries and by fossil fuel-powered products, such as the auto-
mobile, produced by those industries. At the rate we’re going, our
enjoyment of convenience will deprive our grandchildren of the right to
exist. Unfortunately, people find it difficult to let go of any convenience
they have once enjoyed. .
Toyota Management inthe 21st Century 309

The solution to this problem lies in lessening the burden on the earth
as we maintain conveniences that we currently enjoy, in other words, in
becoming “leaner.” Becoming leaner means reducing wasteful energy use
and increasing energy efficiencies. When energy is invested into achieving
a given goal, that energy can be divided into energy used effectively and
energy used wastefully. Energy efficiency is the proportion of energy used
effectively. Reducing energy used wastefully increases energy efficiency.
That is what becoming “lean” means.
Only 20 percent of the energy (fossil fuel) put into an automobile is
used effectively. 80 percent of it is released into the air as carbon dioxide
and heat energy. Hybrid vehicles raise energy efficiency to 30 percent and
proportionately lower the release into the air of carbon dioxide and heat.
This represents the “leaning” of a power device and a mechanism by
which the burden on the earth can be reduced.
The Toyota Production System is called a “lean production system,”
and the situation on the production shopfloor is one in which production
energy and production equipment operations are minimized with respect
to the products of production. The fact that Toyota continues to lead
Japanese industry in environmental management is not unrelated to Toy-
ota’s lean production system. A Toyota-style “leaning” of industry 1s
needed on a global scale. And soon.
At the Nikkei BP-sponsored Tokyo International Automotive Confer-
ence in October 2001, Okuda gave a ten-minute speech outside the
planned agenda. In it, he said the automobile industry faces three chal-
lenges as it looks toward the future:
1. Overcoming problems of exhaust emissions and waste products and
making technical breakthroughs for sustainable development
2. Establishing an international system and rules of competition
3. Merging people and vehicles through information technology
A careful look at these three points reveals that each of them is con-
nected to reducing the burden on the earth’s environment:
1. In 1997, Toyota launched sales of the Prius, the world’s first mass-
produced hybrid vehicle. 2003 saw afull model change, with a further
improvement in fuel consumption accompanied by significant
improvements in running performance. Steady technical breakthroughs
are proceeding.
In recognition for the Prius launch, as well as for its construction of
environmental management systems (including responses to ISO 14001)
and its active disclosure of environmental information, Toyota received
the “Global 500” award from the United Nations Environmental
310 Inside the Mind of Toyota

Program (UNEP) in 1999. This prize is awarded to individuals and

organizations for achievements in environmental protection and
improvement for sustainable development. In cooperation with the
Toyota Foundation, whose purpose is to subsidize research and citizen
action, Toyota commemorated its receipt of this award in 2000 by set-
ting up an assistance program to fulfill the ideals of the award.
On this point, Okuda has said that we need “technical and international
consolidation and standardization of automobile functions.” By “auto-
mobile functions,” he means the “functional product components” we
refer to in the computer system management section of Chapter 3 and in
the section in the present chapter on revolutionizing the management of
product information. He was proposing that functional product compo-
nents be consolidated and standardized on an international basis.
The basic functions of cars have not changed at all in the more than
100 years since the automobile came into being. Even if methods and
performance have improved, the functions of engines, drive trains,
steering wheels, brakes and suspensions, are the same as they were in
automobiles 100 years ago, and consolidation and standardization
across companies and countries is quite possible. Currently, each
automaker creates and manages its own functional product compo-
nents, so the waste is considerable.
Consolidating and standardizing the functional components of auto-
mobiles would lead to substantial improvement in the flow of product
and parts information for the entire automobile industry, including
component suppliers. This is because functional product components
provide basic coding systems for managing product and parts informa-
tion. Having one standard for functional product components across
the automobile industry and linking everything with IT would make the
flow of product and parts information between automakers and com-
ponent suppliers much smoother and make it possible to spread “lean”
globally.
At present, we see the spread of international CALS (commerce at
light speed) standards for the common digital management of products
throughout their entire life cycles. If functional product components are
standardized, then a revolutionary new information age will be born
and the economic effects will be incalculable.
This idea is obviously not limited to the automotive industry. The
basic functions of most of the products in the world have not changed
since those products came into being. The concept, therefore, can be
_ applied to nearly all products.
An automobile is a secondary living space, a space in which various
kinds of information for living should be as accessible as they are in the
primary living space. By providing an environment inside the vehicle in
which one can gain access to information on such matters as traffic,
Toyota Management inthe 21st Century 311

traffic jams, necessary products and business, the wasteful use of auto-
mobiles can be greatly reduced and the burden on the earth’s environ-
ment lessened.
Toyota is beginning to deal in earnest with the protection of the earth’s
environment. In order to justify their own reasons for existence, indus-
tries worldwide in the 21st century should study Toyota’s lean manage-
ment—i.e., the Toyota Management System—and use it as a foundation
for building their own strengths.

Endnotes
Seisan Shisutemu no Shinkaron.
shusa.
Seihin Kaihatsu o Sasaeru Soshiki no Mondai-kaiketsuryoku.
Gendai Jidosha Kigyo no Gijutsu, Kanri, Rodo.
. Jisedai no Inobeshon o umu Seihin no Mojuruka.
. Seicho no Kage ni Mojuruka Ari, Sentan Sangyo de Kyoso Unagasu.
Furekushiburu Otomeshon to Sekkei—Jidoshayo Rajieta o Rei ni Shite.
. Shukan Daiyamondo, ed. Toyota Keiei Hitorigachi no Hosoku.
. “Mojuruka” Shinko no Otoshiana.
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index

A3 paper, 71 Bottleneck, 212

“Absolute cost” items, 292 Brand power, 247, 264-65
Abulaban, Majdi, 295 Briggs, Guy, 253
AD21 activities, 285, 287, 288 Broad view, 8—9
Administrative centers, 129 Bubble economy, 81, 146, 177, 191, 206,
Administrative regulations, 96 207
Age of Motorization, 18 “Building people,” 67-68, 240, 280-83
Aikawa, Yoshisuke, 27 “Building quality into the process,” 100,
Aishin Seiki, 276 Ls
All Toyota Quality Conference, 105 “Bundled delivery,’ 294-96
American Automotive Hall of Fame, 128 Bureaucratic principles, 39-41, 198
Aoki, Masahiko, 294 Business Component Table, 157-59
Aoki, Shigeru, 115, 117 Business Improvement Support Office,
APEAL. See Automotive Performance, 244
Execution and Layout Business Planning Department, 112
“Approved drawing,” 233-34, 277, 278 Business planning system
Asahi Shimbun, 147 committee system, 118-20
Asaka, Professor Emeritus Tetsuichi, 107 cross-functional management, 115-17
Assembly sequences, 195 decision-making bodies, 108-11
“Assure Quality in All of Toyota,’ 105, 107 line and staff, 120-21
“Attractive quality,’ 252, 260, 264 management by function, 115-17
Audit, 100, 105, 116, 122, 132 policy deployment, 111-15
Automation, 22 vertical departments, 118
Automotive Performance, Execution and Business rationalization. See
Layout (APEAL), 224, 248, 253, Rationalization activities
258-60 Business standards, 161-63
Autonomation (jidoka), 239
Autonomous activities, 151-52 C21 strategy, 285-86
Ayuse, Noboru, 241 C50 Campaign, 156-57
CAD/CAE data, 164, 167
Baldwin, Carliss, 294 CAD/CAM (Computer Aided
Basic Toyota Principles, 54 Design/Computer Aided
Behaviorist theories, 67, 148 Manufacturing), 289, 300
Benchmarking, 69 CAE (Computer Aided Engineering), 289
Bender, Paul, 248 CALS (Commerce at Light Speed), 166,
“Best 10 Cars,” 262-63 310
“Big company disease,’ 25, 40, 63 Capital investment, 132. See also Cost
Big Three automakers, 239 management system
BMW, 258 Capital turnover rate, 241
Boards of directors, 109, 110, 146-47 CAPP (Computer Aided Process
Body gap reduction, 223-24 Planning), 289
Bolt holes, 223, 224 Car manufacturer-centered model, 277
314 ~— Index

Carryover, 211 ‘Companies from which one can learn,

Cash flow, 73 53, 265
“Cassette system,” 299 Company history, 71-72
CAT (Computer Aided Testing), 289 Company-wide audit. See Audit
CATIA, 300 Company-wide information system, 163,
COCO 3 72765285 169-70
launch, 230, 291-92 Competitive strategy, 176
modular design aim, 291-94 Component locations. See
modular production, 294-96 Standardization
CD Quality strategy activities, 285 Computer Aided Design/Computer
CE (Concurrent engineering), 79, 96, Aided Manufacturing (CAD/CAM),
292, 300 289, 300
Center system. See Development Center Computer Aided Engineering (CAE), 289
system Computer Aided Process Planning
Central Japan, 302 (CAPP), 289
Central Japan Industries Association Computer Aided Testing (CAT), 289
(CJIA), 302-4 Computer programs, 164, 169-70
Central Japan International Airport Computer system management, 163-70
Company, Ltd., 308 company-wide information system,
Central R&D Labs, 108 169-70
“Challenge program,” 153 product data management, 164-67
Charismatic leaders, 42—43 supply chain management, 167-69
Chief engineer, 198. See also Shusa system See also Total Network System
“Chimney” structure, 198 Concurrent engineering (CE), 79, 96,
Cho, Fujio, 267, 269, 270-71, 275, 284, 292, 300
305 Constant improvement. See Kaizen
Chrysler, 240, 253, 258 Construction of Cost Competitiveness
Chuo University, 35, 124 (CEO) 2s See EE@2t
Churchill, Winston, 72 Consumer Reports, 130, 250, 262-63
CJIA (Central Japan Industries Consumer Satisfaction Index (CSI),
Association), 302—4 249-50, 260-62
Claim handling, 125-27 Consumers Union, 130, 247
Clark, Kim, 79, 211, 279, 294 Continuous improvement. See Kaizen
Clark-Fujimoto Rule, 212, 287 Corporate policy formation, 112, 113
“Clustering,” 25, 26, 63 Corporate reform, 43, 44
Collins, Jim, 43-47 Corporate slogan, 16, 282
Commerce at Light Speed (CALS), 166, Cost competitiveness, 275-79
310 Cost control, 166
Committee for Optimizing Numbers of Cost Control Rules, 103
Vehicle Types, 203, 205 Cost Control Seminar, 104
Committee on Social Contribution Cost Management Rules, 132
Activities, 56 Cost management system
Committee system, 118-20. See also capital investment planning, 132
specific committee cost maintenance/cost improvement,
Commonization, 87-88, 204-8 132
Common parts, 277, 292 cost planning, 57, 132, 133-43
Communications systems, 168, 280 cost-planning targets, 138, 142-43
Index 315

costs by function, 138 Defects, 18, 22, 229, 232-33, 249

history, 130-32 Dell Computer, 167
postproduction VA, 141—42 Delphi Automotive Systems, 278, 279,
reference cost setting, 141 295
target costs, redistribution, 139 Deming, W. Edwards, 125
VA in prototype period, 139-40 Deming Application Prize
See also CCC21 activities after winning, 104-8
Cost reduction, 7—8, 290, 291-92 drive to receive, 23
Council on Economic and Fiscal Policy, effects of winning, 102—4
307 guidelines, 97
Councils, 109-11, 112, 114 recipient, 104, 105, 112, 124—25, 128
Cp value. See Process capability second evaluation, 105-106
Creativity, 26, 281 stages prior to winning, 99-102
Creativity, Challenge, and Courage won by Toyota, 89, 95, 97, 102, 162, 227
(Three C’s), 25 Denso, 3, 128, 276, 296, 305. See also
Credit business, 280 Nippon Denso
Crisis. See “Sense of crisis” Depersonalization, 39
Cross-functional management, 115 Derivative models, 285-87
CS (Customer Satisfaction), 253 Design
Culture insourcing, 278
of discipline, 46 tolerances, 225-26
“reaching out,’ 79 Design Management Institute, 49-50
isalaryman,i 66-67 Design management system
Toyota company, 282 design criteria, 197-98
Toyota Production System, 65 design department knowledge, 300
Western, 231 design review system, 213-19
yokoten , 90, 196 parts reduction, 199-209
Culture of documentation. See DNA product diversification, 199-209
Customer focus, 12, 83. See also J.D. production engineering form, 198-99
Power and Associates project management, 209-13
“Customer-required quality” issues, 252 standardization, 190-96
Customer Satisfaction (CS), 253 structural requirements form, 198-99
Customer Satisfaction Index (CSI), 248, technical criteria, 190—96
260-62 Design review (DR)
checklist, 220
Daihatsu Motor Company, 90, 240, 268, DRI, 187, 189
276 significance of, 214—15
DaimlerChrysler, 215 at Toyota, 215-20
Dassault, 300 Development Center system, 26, 64,
Data management, 50, 129, 163 75-78, 88, 152, 284
Debt-free management, 144 Development schedule, 209-11
Decision making Development “white paper,’ 213
follow-up, 89-91 Diamond Harvard Business, 294
initiative from above, 83-88 Discipline, 46
plodding along, 88-89 Distortion, 223-24
See also Leadership; Management; Diversification, 203—4, 297
Yokoten
316 Index

DNA Failure Prize, 92, 147-48

bureaucratic principles, 39-41 Failure reports, 72, 91
documentation principle, 31-33 Federal Reserve Board, 275
documented procedures, 27-30, 35-39 FF vehicles, 193-95, 286-87
founders and “revitalizers,’ 34 Fighting instinct, 281
genealogy of gene transmission, 27-30 Financial and accounting systems, 142-46
industry leadership, 41-42 Financial rules, 145-46
organizational capability and, 33-35 Fit-and-finish quality, 224
Documentation Fleishman-Hillard Japan, 89
A3 paper, 71 Fleming, Lee, 299
management, 159-62 Flexible production, 275
perspectives on, 70-72 Flywheel powering breakthrough, 45—46
principle, 31-33 Follow-up, 89-91
of procedures, 30-31, 35-39 Ford, Henry, 63
written communication emphasis, 198 belt conveyor system, 5, 82
See also DNA on pricing, 8
Downstream process, 79, 214 prototype, 177
DR. See Design Review Ford Motor Company, 69
“Drive Your Dreams,” 283 cooperative relationship, 274
Drucker, Peter, 61 ifull service supplieri, 296
Dynamism, 91-94 Model T, 176, 203
parts information, 279
Earth’s environment, 54—55, 273, 308-11 product function information, 167
Eaton, Robert, 240 suggestion system, 16
Economic bubble, 81, 146, 177, 191, 205, Ford System, 241
206, 207 Foresight, 72, 74-78
Economic production unit, 80, 82 Form management, 159
Eco Technology, 285 Formula One (F1), 269
Education, 148-54 Fortune 500 firms, 43
Eihokai, 130-31 Fossil fuel, 308-9
Employee. See People FR vehicles, 193-95, 287
Energy efficiency, 309 Fujimoto, Professor Takehiro, 81, 93
Engine, 210, 191-93 approved drawing system, 234, 279
Engineering checklists, 197 Clark-Fujimoto Rule, 211
Engineering Department, 132. See also competitive strength, 159, 212
Development Center system concurrent engineering, 79
Engine types and vehicle models, “growing together,” 228
199-200 lead-time shortening, 288
Enterprise group. See Keiretsu manufacturing instructors, 308
Environment. See Earth’s environment shusa system, 183
Environmental protection, 54-55, 270, Toyota’s evolutionary capability, 28
271, 273, 308-11 Fujimoto Method, 288-89
Ergonomic considerations, 192 Fujisawa, Takeo, 56-57
Essences, 80 Fuji Speedway, 269
Excellence Prize, 106 Fukui, Takeo, 283
Executives, 83-84, 109, 151, 281 Fukushima, Sachio, 206
Experimental design, 128, 129 “Full service supplier,’ 296
Experimentation, 91-92 Functional integration, 208
Index 317

Functional substitution, 208, 209 Higashiura, Yoshihiko, 175-76

Function councils, 117 Hino Motors Ltd., 69, 268, 276, 299,
“Future Program for the Twenty-first 303-5
Century” (FP 21), 75 Hinshitsu Kanri, 115
Hinshitsu (Quality), 108, 122
G21 Project, 88 Hirano, Yukihisa, 308
Gap reduction, 223-24 Hirose Plant, 124
Gazoo, 59, 244, 279 Hoeikai, 237
General Electric (GE), 63, 65-66, 69 Honda
General Motors (GM), 57-58, 69, 174-77, dealerships, 243
274 education, board members, 146-147
Development Center system and, 75 Failure Prize, 92
Honda engines, 194 FF vehicles, 194
North American Manufacturing fuel efficiency, 58
Division, 253 global brand slogan, 283
parts-related data, 279 hybrid vehicle, 74
General office, 120 legacy, 27
General Planning Office, 112 vehicle models/engine types, 200
Gene transmission. See DNA Honda, Shuichiro, 56, 147
Ghosn, Carlos, 146 Hoshin kanri, 111-15, 212
“Global 500” award, 309 Human development, 305-11. See also
Globalization, 274-75 People
GM. See General Motors Human resources. See Labor
“God of sales, 85, 242 management
Goguchi production (real production), Hybrid passenger car, 55, 74, 309
122 Hybrid technology, 274
Goldratt, Eliyahu, 167 Hyundai, 254, 257
“Good company,” 53, 265, 301
Gresham’s Law of managerial behavior, IBM machines, 155-56
63 Imada, Osamu, 290
Group education, 150-51 Imazu, Iwao, 13, 68
Group relationships. See Keiretsu Improvement. See Kaizen
“Growing together,’ 227-29 Inappropriate component arrangement,
192
HACCP (Hazard Analysis Critical Individual product development systems
Control), 33 design development, 185-90
Hanai, Masaya, 24, 85 individual product planning, 185-90
Hanai, Mineo, 297 planning target checksheet, 186, 188
Hansei (reflection), 89 prototype innovation, 189
“Harmonious growth,” 272, 273 quality deployment flow, 186, 187
Harris Interactive polling firm, 264 shusa system, 181-83
Harvard Business Review, 47 Industrial engineering (IE), 49
Hasegawa, Tatsuo, 182 Industry leadership, 41—42
Hata, Takashi, 275 Information
Hayami, Yasuhiro, 59 design department knowledge, 300
Hazard Analysis Critical Control determining company’s destiny, 69, 280
(HACCP), 33 gathering, 126
Hedgehog thinking, 46 management orientation, 13-14, 68-69
318 Index

perspectives on, 68-69 IT-based virtual development system,

product, 212-13 289-91
systems, 169-70 IT Engineering Division, 165
technical, 212—13 ITS (intelligent transport systems), 273
See also Knowledge management
Init, 59 Jagawa, Tadaaki, 69, 276, 299, 303-5
Initial Quality Study (IQS), 222, 248, Japan Automobile Supply Company
250-52, 254-56 (JASC), 242
Innovation, 35, 46, 305-11. See also Japanese culture, 33
Product development Japanese Ministry of International Trade
Input Process Output (IPO) charts, 37 and Industry (MITI), 57
Insourcing design, 278 Japanese society, 56, 281
Inspection Department, 128 Japan Federation of Employers’
Intelligent transport systems (ITS), 273 Associations (Nikkeiren), 267, 301,
Interdepartmental cooperation, 18-19 307
Internal capital, 144 Japan Management Standards (JMS),
Internal Toyota regulations, 31-32 302-5
International Advisory Board, 275 Japan Organization for Innovation in
International Standards Organization Manufacturing, Human
(ISO), 124 Development, and Quality, 305-11
Internet, 55, 244, 265, 273 Japan Quality Control Prize, 106, 107
Inventor’s Journal, 88 Japan Quality Control Society, 108
Inventory Japan Society of Mechanical Engineers
awareness, 21—22 (JSME), 297
evil, 240 Japan Union of Scientists and Engineers,
as waste, 73 D590
IQS. See Initial Quality Study JASC (Japan Automobile Supply
Ishida, Taizo, 5, 42, 84-85 Company), 242
on financial rules, 145—46 J.D. Power and Associates
foresight of, 145 Assembly Plant awards, 256-57
on improvement, 16 CSI and, 249-50
on independence, 14-15 “customer satisfaction” data, 247
as president, 62 indices for automobiles, 247-48
on primacy of equipment, 15-16 IQS evaluations, 224
quotations, 14-16, 145-46 Platinum Award, 256-57
on rural spirit, 16-17 Roundtable, 280-81
on stinginess, 15 surveys, 247-48
‘vainglory, 52 vehicle product evaluations, 130
Isle of Man Race, 58 See also specific index
ISO 14000 certification, 55 Jidoka (autonomation), 239
ISO 14001, 309 JMS (Japan Management Standards),
ISO 9000/QS 9000, 7, 124-25, 305 302-5
ISO 9001, 115, 124-25, 215 Job composition, 160
ISO 9002, 124 JSAE. See Society of Automotive
ISO (International Standards Engineers in Japan
Organization), 124 JSME (Japan Society of Mechanical
Isomura, Iwao, 25, 92 Engineers), 297
IT-based business strategy, 279-80
Index 319

Just-in-time method, 5—6, 58, 79, 131, Labor crisis, 15

239, 279 Labor management, 307-8
autonomous activities, 151-52
Kaizen career training, 146-48
activities at airport, 308 group education, 150-51
autonomous activities, 151-152 labor crisis, 15
documented procedures, 35,36 on-the-job training, 148-50
experts, 243 personnel management, 152-54
management insight, 84 Lateral propagation, 89-91, 196, 209, 264.
organization,’ 68 See also Yokoten
points of departure for, 36 Law of L-shaped Diversification, 204
teams, 225 Leadership
at Toyota Way 2001 core, 282 common characteristics, 44-45
work, attitudes toward, 59-60 by example, 87, 120
Kamiya, Shotaro, 42, 68-69 hierarchical levels, 43, 44
customer focus, 12 in industry, 41—42
“god of sales,” 85, 242-43 Level 5, 42-47
long view, 12-13 at Toyota, 1
management philosophy, 24 See also Decision making; Management
quotations, 12, 13 Lead-time reduction, 284, 287—91
recruitment, 10 “Lean production system,” 309
research office, 178 Lean system, 309, 311
Kanban system, 20, 49, 79, 210 Learning bureaucracy, 40-41
Kaneda, Hideharu, 240 “Learning organization,” 40-41, 42
Kano, Professor Noriaki, 252 Lego, 292, 293, 299
Kano model, 253 Level 5 leadership, 42-47
Kanto region, 243 Leveled production, 240
Katayama, Osamu, 86, 152, 227 Lifetime employment, 154
Kawahara, Akira, 174-75, 176, 177 Line department, 120-21
Keiretsu, 79, 167, 228, 229-31, 239 Loaned drawing parts, 277
Kia, 254, 257 Loom inventions, 2
Kim, Dongjin, 254 “Lost decade,” 26
Kinbara, 78
Kitei (regulations), 12, 32 Make-to-order production, 244
Knowledge management, 70-72, 162. See Managed parts, 206-8
also Information; Tacit knowledge Management
Komagine, Yoshio, 199 council, 110
Komatsu Seisakusho Co., Ltd., 112 by function, 38, 40, 101, 115-17
Kondo, Tetsuo, 65, 240 functions, 159
Korean automakers, 254 job descriptions, 86-87
Kotler, Philip, 177 by objectives, 111-12
Kume, Professor Hitoshi, 35-36, 124-25 philosophy, 50, 52
Kunisaki, Yoshimasa, 145-46, 242 postwar principles, 51-53
Kuroiwa, Satoshi, 165-67 skill enhancement, 107
Kusunoki, Kaneyoshi, 91-92 standards from Toyota, 301—11
Kyohokai (supplier group), 130, 218, 237, system, subsystems, 95-96
299 “team management,” 83
320 ~— Index

temperament, 42—46 Miyake, Shigemitu, 18

theory, 80-82 Miyoshi, Susumu, 169-70, 300
twenty-first century principles, 54-56 “Mobility company,’ 279
See also Business planning system; Model specifications, 201-4
Decision making; Design Modular design (MD)
management system; Leadership; approaches to, 298-300
Toyota Management; Twenty-first index, 207-8, 294
century management modular production and, 294-96
Management Advisory Committee, 301-2 at Toyota, examples, 296-98
Management by Functions, 19 See also CCC21
Management by Policies, 19 Monden, Yashuhiro, 143, 146
Management function system, 95—96 “Mother department,” 152
Management Research Office, 155-56 Motivation, 68, 146—48, 240, 281, 282. See
Manufacturer groups. See Keiretsu also Behaviorist theories
Manufacturing. See Toyota Production Motomachi Plant, 16, 74, 91, 93
System Muda, 59, 72-74. See also Waste
Manufacturing technology, 221-25 Multiple supplier sourcing, 236
Marketing system Multivariate analysis, 128, 129
marketing theory, 177-78 Muse Associates, 66
new product planning, 181 “Must-have quality,” 252-53, 264
production technology development,
178-80 Nader, Ralph, 130
product policies, 173-77 Nakagawa, Fukio, 101
product research, 178-80 Nanzan University, 19
Market items, 277 National Aeronautics and Space
Marketplace defects, 232-33 Administration (NASA), 26, 214
Market quality information, 125-27 National Meeting on Standardization,
Maslow, Abraham, 67 297
Mass production, 80, 130, 213 National Personnel Authority, 151
Matrix organization. See Shusa system Negative effects of bureaucracy, 39-40
Matsushita, Konosuke, 85-86 Nemoto, Masao, 95, 96, 151-52
Matsushita Electric Industrial Company, New Basic Car (NBC) platform, 286
DROS New Development System Concept, 76,
Matsuura, Takashi, 276 ilk
Maxcy, G., 80 New Product Council, 109, 178
Maxcy-Silberston curve, 82, 84, 135, 195, New product planning, 181
203 “New Way, The,” 125-27
Mazda, 58, 177, 200, 290, 296 Nihon Keizai Sangyo Shimbunsha, 265
MD. See Modular design Nihon Monozukuri Kiko, 305-6
“Mikawa Monroe Doctrine? 307 Nikkan Kogyo Shimbun, 268
Ministry of Economy, Trade, and Nikkei BP, 254, 271
Industry (METI), 295 Nikkei Business, 289
Ministry of International Trade and Nikkei Sangyo Shimbun, 291, 292, 294
Industry (MITI), 57, 295 Nippon Denso, 235, 296-98. See also
Minokamo TEC, 302 Denso
MITI. (Ministry of International Trade Nippon Oil Seal, 59
and Industry),57, 295 Nishida, Kozo, 63
Mitsubishi Motors, 33, 58, 194, 200, 215 Nissan Motor
Index 321

board member education, 146-47 “cassette system,” 299

FF or FR cars, 195 corporate morality, 62
founder, 27 on financial management, 146
hansei (reflection) and, 89 on hereditary succession, 269-70
keiretsu system, 229 on information network, 68
MITI national car concept, 57 on lifetime employment, 154
modular production, 295 president of Toyota, 267
parts commonization, 205 quotations, 67, 154, 177, 267, 280-81,
product function information, 167 301
quality control at, 104 “second founding” of Toyota, 273,
standardizing component locations, 280-81
193 “sense of crisis,” 74-75
Toyota lead over, 16, 58, 74 working style, 86
vehicle models/engine types, 199, 200 Onishi, Toshimi, 191, 195
Noguchi, Masaaki, 85 On-the-Job Training (OJT), 148-50
Nonaka, Ikujiro, 162 Operating rate, 21
NOW (New Office Working) 21 “Opportunity profits,’ 133
Campaign, 75, 157 Organizational clustering. See
NTT DoCoMo, 265 iClusteringi
Organizational culture. See Culture
Office of Consumer Affairs, 249 Organizational flattening, 25, 63, 75
Office work management system Organizational reform, 24-25. See also
business standard management, Development Center system; Toyota
162-63 Management Study Group
document management, 159-62 Outsourcing, 277
office work efficiency, 154-59 design, 233-35, 278
Official company history, 71-72 manufacturing, 278
Off-the-job training, 150-51 marketplace defects, 232-33
Ohno, Taiichi parts, 235-36
asking ‘Why?’ five times, 20-21 single supplier, 236
automation with human element, 22
handoffs, 22—23 Packard’s Law, 98
inventory awareness, 21—22 Paradigm
on muda (waste), 73, 241 changing with times, 50
production management, 85 concepts, 49
quotations, 21-22, 73 environmental protection, 55, 270
TPS establishment, 6, 131, 239 leadership-by-example, 120
unconventional thinking, 20-21 proposal for new, 63
work and movement, 80 shift, 67, 273, 281
“Ohno Production System,” 20 Parmetric Technology, 300
Ohta, Kazuhiro, 297 Parts
Oil crises, 50, 52, 82, 143, 205 common, 292
OJT (On-the-Job Training), 148-50 redundant, 276
Okamoto, Kazuo, 227 See also “Approved drawing,”
Okubo, Nobuo, 295 Outsourcing
Okuda, Hiroshi, 177, 301 Parts commonization, 204-8
ambitions of, 268, 270-73 ratios, 207
“building people,” 67 three methods, 204—5
322 Index

Parts Commonization Committee, 87-88 Product Engineering Development

Parts standardization, 209. See also System, 180
Standardization Product information, 300
PDM. See Product Data Management Production Engineering Structural
People Requirements Form, 198-99, 214
approaches to developing, 67-68 Production function system, 95-96, 174
baby boomers, 308 Production technology, 221-26
building, 67-68, 280-83 Production Technology Planning Office,
job composition, 160 132
motivation of, 68, 146—48, 240, 281, Product planning, 185-86
282 Product power
perspectives on, 65-67 assembly plant awards, 256-57
respect for, 282 Consumer Reports ratings, 262-63
See also Labor management indexes, 247-48, 254-56, 257-61
Personnel system, 153-54. See also Labor third party ratings, 248-50
management; People Toyota’s initiative, 250-54
Personnel Systems Study Group, 63 Product Research Management System,
Planning Council, 116 179
Planning target checklist, 188 Pro/Engineer, 300
Plant “Project G, 74
Hirose, 124 Project management, 210-14
Motomachi, 16, 74, 91, 93 Protocols, 36-37
Tahara,191, 224, 225 Prototype, 189, 189-90
Takaoka, 93, 225 PSA Peugeot Citroen Group, 231
Platform Committee, 287 “Psychological Toyota,’ 68, 183, 207
Platform consolidation, 285-88 “Pull” system, 20, 210
Policy deployment. See Hoshin kanri Purchasing
Policy Deployment System, 100 design outsourcing methods, 233-35
Porter, M. E., 167, 177 growing together, 228-29
Potential run rate, 21 ketretsu, 229-31
Press technology, 224 new polices, 237-39
Principles for Social Contribution parts outsourcing policy, 235-36
Activities, 56 Toyota suppliers’ association, 237
Problem recurrence prevention, 127 two faces of Toyota, 231-33
Problem-solving plan, 70-71 Purchasing Rules (1939), 236
Process capability (Cp), 225-27 “Push” system, 20, 210
Product Data Management (PDM),
163-67, 169, 300 QC circle, 108, 115, 151-52
Product development Quality assurance, 101, 126-27
development cycle shortening, 287-91 Quality Assurance Rules, 103, 122
Fujimoto Method, 288-89 Quality assurance system map, 122, 123
lead-time shortening, 287-91 Quality Control Committee, 100
platform consolidation, 285-88 Quality Control Department, 100
reform, 284-85 Quality Control Rules, 101
systems, 181-90 Quality Control Symposium, 35-36, 83,
twenty-first century reform, 284-85 114
V-comm, 289-91 Quality control system
claim handling, 125-27
Index 323

information gathering, 125-27 Risk taking, 92-94

ISO 9000/QS 9000, 124-25 Robust design. See Taguchi method
quality assurance, 121-24 Round bolt holes, 223, 224
responses to quality issues, 130 Rules for New Product Development, 209
statistical methods, 127—29
Quality deployment flow, 187 Saito, Kingo, 86
“Quality engineering,’ 128 Saito, Shoichi, 16, 106, 154
Quality Engineering Society, 128 “Salaryman” culture, 66—67
Quality First, 99 Sales, 108, 201—2, 242-44, 274. See also
Quality improvement, 6-7, 127 Toyota Motor Sales
Quality Management Symposium, 243 Sales Satisfaction Index (SSI), 248, 260,
Quotations 261
Cho, Fujio, 267, 275 Sanzuki campaign, 63, 75
Eaton, Robert, 240 Saruta, Masaki, 65
Ishida, Taizo, 14-16, 145-46 Sato, Yoshinobu, 28, 237
Isomura, Iwao, 25, 92 Scania, 292, 293, 299
Kamiya, Shotaro, 12, 13 Scientific sales promotion, 177
Matsuura, Takashi, 276 “Scorched earth” purchasing, 230
Miyake, Shigemitu, 18 “Second founding” of Toyota, 270, 272,
Ohno, Taiichi, 21-22, 73 280-81
Okuda, Hiroshi, 67, 154, 177, 267, Secretariat, 120
280-81, 301 Seiko Epson, 302
Toyoda, Eiji, 18, 19, 67, 73, 84, 92, 93, Senge, Peter M., 88
107, 111, 131, 146, 148 “Sense of crisis,’ 67, 74, 75, 242, 280-82,
Toyoda, Kiichiro, 6, 17, 46 283
Toyoda, Sakichi, 3-4, 6, 14, 93 Seventh Annual Quality Month, 105
Toyoda, Shoichiro, 35, 235 Shibata, Masharu, 240
Tsuji, Yoshifumi, 205 Shimokawa, Koichi, 93
Wada, Akihiro, 84 Shingo, Shigeo, 49
Watanabe, Katsuaki, 298 Shiramizu, Kousuke, 222—23, 289-90
Shusa system, 49-50, 181-83, 185, 210,
Radiator, 296-98 221
Rationalization activities, 143, 159 Silberston, A., 80
Real production, 122 Six Sigma activities, 65
Recordkeeping, 71 Skill development, 148-54
Recurrence prevention, 127 Sloan, Alfred, 63, 82, 174-77, 202, 204
Reengineering, 80 Slogan, 16, 282
Reflection. See Hansei Small-lot production, 131
Regulations. See Kitet SMS and TIS, 164, 169-70
Reliability Committee, 220 Snow Brand Milk Products, 33
Research Institute of Economy, Trade, Society of Automotive Engineers in
and Industry (RIETI), 295 Japan, The (JSAE), 134, 164
Research and Development (R&D), Sokatsushitsu, 120
178-80 Sony, 27, 264-65
“Resident engineer,’ 23 Sony EMCS, 302
Resident Engineer (RE), 124 Sorimachi, Takashi, 170
Review of Automotive Engineering, 134 SR radiator, 296—98
Reworking parts, 22 SSI. See Sales Satisfaction Index
324 Index

Staff department, 120-21 “Team management,’ 83

Standardization, 87 Teardowns, 224
business protocols, 167-68 Technical Assistance Research Program
carryover and, 211 (TARP), 249
four objects, 36 Technical reports, 161-62
management assessment indexes, Technology Management Department, 49
302-5 Temperament. See Leadership
product and component structures, Theory of Constraints, 167
191-99 Theory of Knowledge Creation, 162
Statistical methods, 127-29 Thinking
Stockdale, General James, 45 conventional, 20
Stockdale Paradox, 45 foresight perspective, 72, 74-78
“Stop cord,’ 22, 240 habits of, 79-82
Strange bucket, 8-9, 228 muda elimination perspective, 72-74
Strategy formation, 175, 279-80 patterns of, 72-78
Suggestion (tezan) system, 151-52 “Three C’s’, 25
Sugiyama, Tadaaki, 85 Three stamp campaign, 63
Supplier. See Kyohokai Tianjin Toyota Motor Company, Ltd.,
Supplier-dependent model, 277 274-75
Supplier Guide, 236, 237-39 Tire industry, 235-36
“Supplier recovery system,” 233 TIS and SMS, 164, 169-70
Supply Chain Management (SCM), 79, TMC. See Toyota Motor Company
167-69, 237, 279-80 TMM (Toyota Motor Manufacturing),
Surveys, 248 284
Suzue, Toshio, 207 TMS. See Toyota Motor Sales
Suzuki, Ichiro, 227 TNS (Total Network System), 167-68
Swedish truck and bus manufacturer. See Toda, Koichiro, 229-30
Scania Tokai Research and Consulting Company,
Synchronization, 240 91
Synchronized simultaneous engineering, Tokuoka, Koichiro, 89-90
79 Tokyo Imperial University, 17
“Systemization, 296 Tokyo International Automotive
Systems thinking, 79 Conference, 254, 271, 295, 309
Tokyo University of Science, 252
Tacit knowledge, 28, 29, 30, 74, 96, 159. Total Network System (TNS), 167-68. See
See also DNA also Computer system management
Taguchi, Dr Genichi, 128 Total Quality Control Prize, 106
Taguchi method, 127-29, 227 Total Quality Control (TQC)
Tahara Plant, 191, 224, 225 company-wide, 51-52
Takahashi, Akio, 207 effects of introducing, 102-4
Takahashi, Akira, 305, 307 essence of, 97
Takaoka Plant, 93, 225 interdepartmental cooperation, 19
Tanaka, Koichi, 134-42 introduction, 40, 58, 90, 95-97, 97-100
Tanaka, Kyube, 85 prize, 89
Tanaka, Michikazu, 240 promotion of, 98-99, 100
TARP (Technical Assistance Research Promotion Office, 129
Program), 249 stabilization of, 101-2
Taylorism, 220, 241 three stages, 99-102
Index 325

Total Quality Management (TQM), 108 Toyoda Precepts, 2-3, 51

Toyoda, Akio, 244, 269, 270 Toyoda, Shoichiro, 307
Toyoda, Eiji after Deming Prize, 104
“building people,” 67 on documentation, 35
cars for ordinary people, 57 executive positions, 107, 305
on cost reduction, 131 family treasure, maxim, 26-27
on defects and waste, 18, 73 foresight, 78
distinctiveness of, 20 fusing Toyota Motor/Toyota Motor
dream, 17-18 Sales, 23-24
executive positions, 64, 85 hereditary sucession, 269
on failure, 72, 92 Inspection Department head, 120
hereditary succession, 269 management, 83-84, 107
interview, 93 on parts outsourcing, 235
linking departments, 18-19 on policy deployment, 114
on management skills, 107 quotations, 35, 235
manufacturing philosophy, 19, 84 “mae CASAS:
on motivation, 148 Toyota brand, 264
quotations, 18, 19, 67, 73, 84, 92, 93, Toyota Motor Corporation, 24—25
107, 111, 131, 145, 147 TQC effort, 102
‘rationalization’ champion, 26 twenty-first century, transition to,
“reading the times,” 19-20 25-27, 53-54
“sense of crisis,” 75 Toyoda, Shuhei, 270
TQGC, 90, 97-98, 111 Toyoda Automatic Loom, 2, 7, 14, 17, 276
USS. visit, 16, 155-56 Toyoda Boshoku, 20
Toyoda, Kiichiro, 4—5, 6-7, 14 Toyoda Precepts, 2-3, 51, 52, 54, 56
Audit Improvement Office, 122 Toyopet Maintenance Company, 12
cars for ordinary people, 57 Toyota Action Plan for Global
character features, 43, 46 Environment. See Toyota Global
documentary record, 10, 11, 36 Earth Charter
documentation culture, 31, 42 Toyota Auto Body, 3
founder of Toyota, 125, 130-31 Toyota Basic Principles, 54, 282
inexperienced managers, 21 Toyota Commemorative Museum of
information gathering, 126 Industry and Technology, 86
job descriptions, 86-87 Toyota Dealers’ QC Promotion Prize, 108
just-in-time, 79 Toyota Development Center System, 26
management innovations, 9-10 Toyota Environmental Action Plan, 54
prominent career themes, 28 “Toyota first” attitude, 53
quotations, 6, 17, 46 Toyota Global Earth Charter, 25-27, 54.
on risk taking, 93 See also Earth’s environment
Toyoda Precepts, 51 Toyota Gosei, 276
Toyoda, Risaburo, 51 Toyota Group, 59, 237, 267, 275, 278, 296
Toyoda, Sakichi, 14 Toyota Industries Corporation, 3
descendants of, 269 Toyota Management, 60-62, 64, 80, 87, 91
life-span, 1—2 Toyota Management
“plodding” expression, 88 outside activities, 301—2
on quality improvement, 6 standardization and transmission of,
quotations, 3-4, 6, 14, 93 302-5
on risk taking, 93 working groups, 306-7
326 ~=Index

Toyota Management Reading Group, 60 Toyota Standard Development Schedule,

Toyota Management Study Group, 60-64, 210
64, 152, 159 Toyota Technical Review, 64
Toyota Management System, 247. See also Toyota Technology, 64
Management Toyota Technology Group, 60, 61, 64, 152
Toyota Management System Scheme, 37, Toyota Way 2001, 282-83
38 TPS. See Toyota Production System
Toyota Motor Company (TMC), 20 TQC. See Total Quality Control
founding, 9 TQM. (Total Quality Management), 108
histories, 72 Training, 148-54
merger, 23-24, 52, 62, 107-8 TS31GESiGubie)! Card, 279
Toyota Motor Corporation Tsuji, Yoshifumi, 205
evolutionary capability, 28 Tsuru, Shogo, 59
informal information network, 69 Twenty-first century management
organizational reform, 24-25 becoming a leading company, 270-83
rapid recovery, 143 building people, 280-83
“second founding,” 270 CCC21, 291-94
“sense of crisis,’ 242, 280-82, 283 innovation in product development,
two faces of, 231 284-300
vision for 2005, 271, 273 lead-time shortening, 287-91
Toyota Motor Manufacturing (TMM), management standards, 301-11
284 modular production/design, 294-300
Toyota Motor Sales (TMS), 242 Okuda/Cho system, 267-70
culture, 24 radical change strategies, 273-80
history, 72 “second founding; 270, 272
merger, 23-24, 52, 62 2007 Problem, 308
Toyota Museum, 130
Toyota Network System (TNS), 167-68 Ultimate Development Department, 63
Toyota paradigm Umeda, Mochio, 66
background, 49-50 Union of Japanese Scientists and
forms of behavior, 83-94 Engineers (JUSE), 83, 97, 106, 114,
patterns of thinking, 72-82 115; 125; 2159243
values, 50-72 Unisia JECS, 229-30
Toyota Production System (TPS), 58, United Nations Environmental Program
240-44 (UNEP), 309-10
in development of science, 307 University of Pennsylvania, 275
establishment of, 6, 20 University of Tokyo, 28, 35, 107, 124,
flexibility of, 65 146-47, 308
key factors, 229 Upstream process, 79, 214
“lean production system,” 309 Uranishi, Tokuichi, 154
production function system, 96 U.S. automakers, 256
removing motion from processes, 80 U.S. Commerce Department, 249
sales, 241-44
in the ‘sixties, 81 Value Analysis (VA), 132, 134-42
“way of seeing,” 240-41 Value chain, 167, 279-80
Toyota Rubber, 276 Value Engineering (VE), 131, 134-35, 195
Toyota Sales, 242 VA/VE suggestion system, 232
Toyota’s Basic Principles, 26
Index 327

V-comm (Visual and Virtual Watanabe, Akiyoshi, 290, 291, 292

Communications), 289-91 Watanabe, Katsuaki, 298-99
VDI. (Vehicle Dependability Index), 248, Weber, Max, 39—40
257-58 Website, 237, 238, 244
VE analysis, 297 Welch, Jack, 43, 65-66
Vehicle base. See Platform consolidation Western culture, 231
Vehicle Dependability Index (VDI), 248, Wharton School, 151, 275
257-58 “White paper,” 213
Vehicle models and engine types, 199-200 “Wide variation” strategy, 82
Vertical departments, 117 Wisdom. See Quotations
Vibration, 192-93 “Word-of-mouth effect,’ 249
Virtual development system, 289-91 Work-out, 65
Visteon, 278, 279 Work perspectives
Visual and Virtual Communications (V- attitudes towards work, 59-64
comm), 289-91 business goals/sense, 56-57
Visual management, 240 competitors and allies, 57-59
Volker, Paul, 275 Work standards. See Documentation
Volkswagen (VW), 276, 291 World War II, 242
baby boomers, 308
Wada, Akihiro, 84, 182-83, 202-3, 207-8, postwar period, 4-5, 31, 49, 51-53, 131,
284 145, 156, 159, 229
Wakamatsu, Yoshihito, 58, 65, 240 years prior to, 12
Wakayama, Fujio, 85
Wal-Mart’s data warehouse, 128 Yamada, Katsuyoshi, 122, 215-20
Warranty period, 126 Yamamoto, Masao, 61
Waste Yamashita, Toshihiko, 85
ability to see, 18, 241 Yokoten, 89-91, 196, 209, 286
elimination, 85, 275 Yoshino, Hiroyuki, 283
of energy, 309 par Yamashita, Toshihiko, 85
wasteful work, 65, 282 Yokoten, 89-91, 196, 209, 286
See also Muda Yoshino, Hiroyuki, 283
About the Author

Born in 1945, Satoshi Hino earned a degree in engineering at Tohoku

University and joined a major Japanese automotive manufacturer in
1968. He worked in research and development of engines until 1987. In
1988, he transferred to the administrative (staff) section of the R&D
Department to take charge of activities focused on improving product
development and management systems.
In 2001, Hino founded Integrated Management Intelligence Institute
(IMAGINE). He authored the paper “Modular Design Approach for
Wide Variation Products and Narrow Variation Parts,’ which received
the Excellent Paper Award in 2001 sponsored by All Japan Management
Efficiency Federation.
In 2004, Hino became a professor at Hiroshima University, in the
Graduate School of Social Sciences, Department of Management Studies.
The author has spent more than 20 years researching the subject of:
this book.
“The data Hino has collected is amazingly rich. For anyone interested in understanding
Toyota’s functions and capabilities as a total system, this book is a must read.”
. : Takahiro Fujimoto, Professor
University of Tokyo
“The most thorough explanation of the unique learn
Ne Le LM aN OA EOL
ker, President
estments, LLC
“Readers ofHino’s book will understand how Toyota | Cae
BNL ROLL LE ML La A
CL LLNS ROL WOR LLL RO TTA ae
asuhiro Monden. Ph.D.
Professor-Emeritus, Tsukuba University:
Professor, Dean, School of Business Administration,
Mejiro University, Tokyo

ISBN 1-56327-300-4

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