Conflicted Toyota

By Kevin Meyer

Toyota took the fundamentals of lean from the likes of Ford and Deming and others decades ago, crafted it into TPS in the 60s and 70s which enabled the company to dominate global auto manufacturing, then rapid expansion led Toyota to forget the basics in the early part of this decade, leading to the quality and customer service debacles last year.  So the story goes.  Over the past few months we've told you how Toyota appears to be going back to their core values, but then there are the occasional stories about Toyota following the likes of GM in bashing suppliers.  What gives?

Today's WSJ provides a clue – a description of the internal conflict at Toyota.

One one hand they are battling rising costs in Japan, not the least of which are currency issues coupled with lower demand.

Faced with overcapacity, weak demand and an exchange rate for the yen that makes Japanese-made cars and trucks more expensive around the world, Honda Motor Co. and Nissan Motor Co. are moving more manufacturing overseas, to plants closer to international customers. But Toyota President Akio Toyoda, grandson of the company founder, has long spoken of the company's social responsibility to protect Japanese jobs, as well as a longstanding commitment to annually build at least three million cars in Japan, half for export.

Company executives now acknowledge their allegiance to domestic production is being tested by a strong yen and softening sales in the U.S., still the company's largest market.  Even Mr. Toyoda appears torn between fidelity to Japan and profits.

Sounds familiar – but actually laudable that social responsibility is part of a large company's philosophy.  Well at least more than the lip service we hear from most.  Toyota is looking at moving more production out of Japan – but closer to their customers.  Note that although I often rant against moving production overseas, moving closer to customers is generally ok.

But now the article gets interesting – and describes the efforts Toyota is making to become more efficient in high-cost Japan.  That's the Toyota the lean world has come to love.

Mr. Niimi and other top executives made the case in interviews for streamlining Toyota's domestic production lines, as opposed to uprooting them. They view Japanese manufacturing skills, known as "monozukuri," as an infallible weapon and expect to fully utilize idle capacity once demand recovers.

Until then, said executives, the company would redefine its economies of scale: shrink production without raising costs.

"High speed and high volume output may no longer be such a good fit for us," said Mr. Niimi, who has a degree in aeronautical engineering. "We need to retool for production with simpler, slimmer and more compact equipment."

Yes, while most companies still believe that to increase efficiency you must use larger and larger machines to process larger and larger batches, Toyota does the opposite.  Bill has written about the fallacy of tradtional views of economies of scale many times.

Toyota is going back to the basics.

Starting in the 1960s, Toyota rewrote the book on lean manufacturing with innovative techniques like just-in-time inventory and renowned quality control. Designed to wring out efficiencies, the methods known as the Toyota Way were widely praised and emulated in Japan and overseas.

Some examples.

At the new plant, half-built Corolla compacts and subcompact Yaris sit side by side, rather than bumper to bumper, shrinking the assembly line by 35% and requiring fewer steps by workers. Instead of car chassis dangling from overhead conveyor belts, they are perched on raised platforms—cheaper by half and allowing for dropped ceilings that reduce cooling costs 40%.

One idea en route: carts powered by inexpensive electric bike motors to ferry heavy parts—saving worker backaches, time and more costly machinery.

Company executives say their Japanese workers are uniquely skilled at innovation. Mr. Niimi came up with a way to hasten the installation of tires onto car wheel hubs by rounding off the edges of the hub center, making it conical instead of cylindrical.

It is Mr. Niimi's job to make Toyota plants more efficient. One of his first successful targets was engine production. At the Shimoyama engine plant in Toyota City, he cut average production line capacity in half, to 100,000 engines—without raising the cost per unit. His new goal: 50,000.

Of course the analysts aren't happy.  In their world the only way to make money is to chase cheap labor.

Analysts say the company must do more. "Expansion of overseas parts procurement, relocation of domestic plants abroad, a cut in the number of domestic models, and other genuine reforms to the earnings structure will be needed for profits to improve over the medium to long term," said J.P. Morgan analyst Kohei Takahashi.

Sure thing, Kohei.  But Toyota is once again trying (albeit struggling) to look very, very long term.

"We will be tremendously competitive once the yen comes back to a more balanced level as a result of our production technology innovation," said Mr. Niimi, who sports a mustache grown while working in the U.S.

And Toyota itself is a bit conflicted.

The strategy has drawn hints of internal dissent. In an unusual break with corporate decorum, Toyota's outspoken CFO, Satoshi Ozawa, criticized an over-reliance on domestic production at a news conference in May and questioned whether the company could remain profitable at current exchange rates.

Is the change for real?  Time will tell.  But perhaps the old Toyota is back.