Toyota is all over the news this weekend – especially in Detroit. As usual, everything about them is impressive, and as usual, few people, if any, even try to connect the dots to understand why they are slapping Ford and GM around at will.
The least important story is one from the Detroit Free Press, in which the locals speculate on what they see as a good chance that Toyota will build an assembly plant in Michigan. They are out of their minds. As Toyota acknowledges their difficulty in finding people who can understand and operate their production and business systems, it is absurd to even dream that they would go into the belly of the beast – the state where everyone from janitors to CEO’s cannot conceive of manufacturing to be anything other than a never ending, Marxian war between capital and labor. Alfred Sloan and Walter Reuther are the two great architects of GM’s demise; and the culture of Detroit is still built around the notion that everyone must bow down in worship to one of them, and despise the other.
The State of Michigan has fewer manufacturing jobs remaining than greater Los Angeles. It is careening toward irrelevance in the American economy, but the people there think a few tax incentives, a bit of federal regulation on the evil Asians, and a whiz bang new car model will change all that – send things back to the glory days of the 50’s and 60’s.
Remarkable for the lack of attention it has received is word from Toyota that they have launched what they call CCC21 (Construction of Cost Competitiveness for the 21st Century). They plan to cut the cost of their cars by 15% by essentially looking at everything they make from a systems standpoint with a clean sheet of paper. Instead of looking at individual components and manufacturing steps to find opportunities for improvement, they will look at systems. For instance, they are going to take a step back and evaluate the entire braking system from a value engineering approach, looking for components to eliminate, rather than improve.
Two bits of information tell the story of just how different their business model is from Detroit’s and just how it is that they succeed. In a story that originated in The Washington Post, a pretty good overview of the reasons for Toyota’s success is laid out, including the line, "Toyota has avoided layoffs or major labor disputes." The American business mind still cannot wrap itself around the notion that Toyota did not "avoid" layoffs. They planned it that way – it was by decision, by design – it is a fundamental part of their business model.
Connect that statement with a planned 15% cost reduction. Under the Alfred Sloan theory of business, the financial minds in charge of Ford and GM would immediately convert a 15% production cost reduction to equivalent plant closings and headcount reductions. Upon hearing the announcement of a 15% cost reduction, the warriors at the UAW’s Solidarity Hall would immediately gear up for battle.
But the Toyota CCC21 strategy is not aimed at headcount reduction. "Toyota expects reduced costs to lower retail prices, which will improve cost competitiveness while boosting profitability." That is what Toyota always does with cost reductions. Price reductions mean more volume, and more volume means more work. This is not a complicated idea, even for Detroit – it is the way Henry Ford got rich. Cut the cost, cut the price, increase the volume, keep the workforce in place – or even increase it – and watch profits increase. But 70 years of Sloan’s thinking have put too much distance between Henry Ford and today. Ford is written off as a nut case, and a poor manager. Toyota is accused of ‘buying market share’. The policies of Japan and the U.S. will be blamed for enabling Toyota to cut prices, increase market share, and ratchet profits up even further.
The Cargo Cult mentality of our lean community is just as much to blame. We dismiss the fundamentally different management scheme and infrastructure of Toyota as something unique to Japanese culture, or something that can be overcome by ‘leadership’, and charge right into the factories convinced that if we can make them look like some mythical image of Toyota factories, then we will get results like Toyota. CFO’s, HR Directors, IT Managers and everyone else in the office is sent off to conduct business as usual while lean is implemented on the shop floor.
Toyota’s goal is to have the 15% start falling out of the bottom in two years – by 2008. It will be the fatal blow to American auto makers if they are still operating by Sloan’s rules. If they don’t pull the plug sooner, look for that to be the year of GM’s bankruptcy.