Operations Management

Paper details:
Read the article ‘The kindergarten that will change the world’ (Resource Item 9.3) from The Economist of 4th March 1995 (This article is a part update on activities at Toyota which were described in the book The Machine that Changed the World). List the methods that Toyota is employing to remain competitive in the face of the rising value of the yen.

Resource 9.3
The kindergarten that will change the world
Toyota’s Japanese plants may be fighting a losing battle against the rising yen, but its new manufacturing techniques ¬ this time based around workers as much as machines ¬ will change the car industry yet again.
The first thing you notice is the silence. There is neither the hiss of swooping robots nor the anvil chorus that greets you at every other modern car factory from Wolfsburg to Detroit. Indeed, there are no robots to be seen ¬ no machines heaving engines, banging rivets or clamping doors. Then there is the light: the factory is as bright as a kindergarten, with vividly painted walls. One worker, sitting on a suspended swing like chair, grabs a dashboard suspended from another hook, lowers it into a vehicle and secures it with a few quiet clicks.
The world ‘s first post-modern car factory is making a new four-wheel-drive vehicle called the RAV4 at Toyota City, a manufacturing centre south-west of Tokyo that makes as many cars as the whole French motor industry. The rest of Toyota is watching the RAV4 line, and the rest of the world’s car industry is watching Toyota ¬ for 25 years the international benchmark against which every other company measures itself. The company’s legendary Toyota Production System (TPS) was the basis of the lean-production revolution (everything from just-in-time delivery through total quality management to continuous improvement). The TPS was dubbed `the machine that changed the world Now, under pressure not only from rivals who have copied its techniques but also from the high yen (which has risen by 64% against the dollar since its low point in 1990), Toyota is pushing ahead again ¬ towards a system which, rather than replacing workers with machines, tries more clearly than ever to restrict the machines to doing only those things that make life easier for the workers.
The RAV4 workers at Toyota City still work around a conventional assembly chain, with car bodies coming along on an overhead conveyor. But the line is subdivided into five parts with buffer zones in between to make the work less stressful; three or four cars at a time enter a given sub-section of the line. Further cars can

come in only when the workers there are ready for them. Workers stand on their own little rubber conveyor belts that follow the car they are working on as it moves through their area. The only other signs of automation are simple rolling devices to move engines and gearboxes in position, so that they can be fitted in without stopping the line
No one is sweating, yet 428 finished cars roll off the line every day. Toyota does not give out precise productivity figures, but the man-hours per vehicle could be as low as ten ¬ over twice as efficient as conventional American assembly plants. The production rate of 9,000 cars a month is more than four times the break-even point, which is so low because investment has been minimal. Rather than being a greenfield site, the plant is a revamped 36year-old factory. Compared with a normal assembly line, automation has been cut back by 66%.
To switch from machines to people looks a strange strategy ¬ particularly given Japan’s astronomical labour costs. Barely two years ago, Toyota, alongside other Japanese car makers, was opening huge new car plants on Japans southern island, Kyushu, that were the last word in automation. But the promised economies proved to be false ones. Toyota, for instance, found that although automation reduced the number of line workers at its new factory, the number of maintenance personnel rose dramatically. Since they alone really understood the robots, there was little scope for kaizen, or continuous improvement. On the new, less automated RAV4 line, the number of defects has fallen to barely 12% of its previous level, and productivity has risen by one-fifth.
The RAV4 is not only built in a novel way; it was designed in one too. It took barely 43 months to get the off-road vehicle from design to production. Designers, engineers, manufacturing and purchasing people all worked as a team. Toyota has copied `value engineering techniques from American manufacturers such as Chrysler and Ford: these minimise the number of parts in a new model. Nearly half the parts in the RAV4 were already knocking around in other Toyota models.
The aim now is to have each new Toyota model 70% built from parts common to its predecessor. Simplifying parts such as cooling-system pipes, indicators and bumper assemblies has cut costs of those parts by 20¬30%. `Across the whole company value engineering has saved Toyota ¥ 50 billion ($500m) so far. Hiroshi Okuda, an executive vice-president in charge of purchasing, says he is looking for savings of 15% from suppliers over the next two years alone. Part of this can be achieved by getting the suppliers more closely involved in the design and engineering of whole sub-assemblies of cars, rather than just supplying parts to order
Coming your way soon
Toyota has already shaved ¥ 220 billion off its annual production costs since it started to overhaul itself nearly two years ago in an effort to live with the strong yen. In its half year results to the end of December, its operating profit – ie. before allowing for either tax or interest income – rose from a paltry ¥ 9.3 billion (on sales of nearly ¥ 4 trillion) to ¥ 87 billion (on sales just 2.1% higher). Of the profit rise, some ¥ 20 billion is through factory improvements such as those on the RAV4 line at Toyota City.
However, there is a limit to how much Toyota can cut. Its president, Tatsuro Toyoda, denies that the firm’s aim is to make itself competitive at ¥ 80 to the dollar. `That level would be unthinkable, he says. Similarly, Mr Okuda concedes that Toyotas future cost-cutting is unlikely to wring us out as many savings as that over the past two years. Toyota ‘s operating profit is only 2.1% of sales, a far cry from the 8% margin the Japanese company enjoyed in its glory days. `The aim now is to move back to a more modest level of 4% next year.
What American and European competitors have to fear is not just today `s improvements in performance in Japan, where the high yen will constrain Toyota’s competitiveness; it is tomorrows efficiency transferred to the company’s car factories in Kentucky or Derbyshire. Ominously from Detroits point of view, Mikio Kitano, the manager who has presided over the RAV4 line has been promoted to run Toyota’s factory in Kentucky.
At present, Toyota makes about 4m vehicles a year in its home base, and around 1.2m abroad, mostly in America. Within five years, says Mr Toyoda, the company will be making 6m cars a year – with all the growth coming offshore. Toyota either owns or has stakes in three factories in Europe, six in North America, three in Latin America and 14 around Asia and Australasia. Outside North America and Europe, these operations mostly just assemble imported car kits. But new plants are being started up in Australia and Turkey, and expansion is planned for Taiwan and Thailand.
In the past, vehicles made overseas have mostly just been sold in that country. ` But we are moving to a different, more global pattern now, ‘ Mr Toyoda explains, `where we make cars and parts abroad to serve a whole region. The company’s chief concern is Europe, where, like other Japanese companies, Toyota has seen its sales fall even as the market has recovered in the past 15 months.
There has been a debate within the company over whether to increase production at its loss-making Derbyshire factory in Britain; and whether to expand production of its Carina-E model or add the Corolla, a cheaper volume car, as a second model. The Corolla seems to have been chosen: on March 16th, Toyota will make its long-delayed announcement about moving to the second phase of its British investment. But, according to Mr Okuda, it could be up to two years before the cars roll off the line.
One reason why Toyota has decided to flag the expansion now, so far ahead of it coming into production, is that it wants to send a clear signal that it is committed to selling more in the European market. With Japanese factories in Europe set to increase production towards 1M vehicles a year, Toyotas managers fret about renewed trade friction. They would rather the argument is over before they go into full production.
`Now that the machine that changed the world is speeding up again, perhaps Toyota managers are right to fear that increased revolutions inevitably mean more friction.