MASTER OF BUSINESS ADMINISTRATION AWARDED BY NOTTINGHAM TRENT UNIVERSITY

ASSIGNMENT SUBMISSION FORM

Note: Students must attach this page to the front of the assignment before uploading to WECSERF. For uploading instructions please see the help file online Name of Student: TONG CHENG BEOY Student Registration Number: PP461

Module Name: Managing Operations Strategically Module Number: WEC-MBA-06-805 Assignment Title: The Humbling of Toyota Submission Due Date: 12 Dec 2010 Students Electronic Signature: TONG CHENG BEOY

Plagiarism is to be treated seriously. Students caught plagiarizing, can be expelled from the programme

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Table of Content
Executive Summary............................................................................................................ 3 1.0 2.0 3.0 3.1 3.2 3.3 3.4 4.0 4.1 4.2 4.3 4.4 4.5 5.0 6.0 Introduction............................................................................................................. 4 Toyota recall catastrophe ........................................................................................ 6 Evaluation from the strategically and tactical viewpoint........................................ 8 Maintaining Market Leader Status...................................................................... 8 Cost Reduction Strategy ..................................................................................... 9 Poor Quality of Parts from Overseas ................................................................ 10 Slow response to problem................................................................................. 11 New strategic supply chain and quality management system............................... 12 Back to basics ................................................................................................... 12 Commitment to customer.................................................................................. 13 Cost Reduction Strategy ................................................................................... 13 Improve Supply Chain Visibility and Collaboration ........................................ 14 Quality Management......................................................................................... 15 Conclusion ............................................................................................................ 17 References............................................................................................................. 18

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Executive Summary In todays globalized environment, manufacturers from industrialized countries adopted global production systems in order to capture advantages such as stronger price competitiveness and adaptability to local markets and, at the same time, avoid trade barriers and foreign-exchange losses. US and Japanese companies expanded overseas production by relocating operations throughout the world.

Toyotas manufacturing footprint and supply base are spread over the world, and many of their largest component suppliers are serving many other global clients. Toyota is facing both the commercial and cultural challenges of implementing their quality management process with a more diverse set of global suppliers. However, the increasingly popular global production model has revealed weaknesses (Russo & Zhao 2010). In its quest to become the biggest automaker, Toyota wandered off the path of building the highest quality and most dependable cars. Its reputation for quality and dependability and status as a respected leader in the auto industry were zapped. There was a safety recall of over eight million automobiles and over 60 class action lawsuits filed against the company.

Pursuit of growth and cost control should never be an excuse for compromising rigorous design and quality validation. Toyota has a tough challenge on their hands to maintain their position of not only being the worlds largest car manufacturer but producer of high quality and innovative vehicles. Toyota must take full responsibility for this recall. They must now review and eliminate the causes that are rooted in their recent business priorities and operation management.

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1.0

Introduction

Automotive Industry is usually called as the industry of industries. This is due to the impact of that industry to the economy of a nation. Automotive industry creates an enormous activity to the nation, the peoples and financial sector. Today the industry is dominated by cars made in Japan, American, Germany, Korea and others. The new player coming to the international car market lately is the Chinese.

Total motor vehicle produced globally was 60 million in 2009. China was the biggest motor vehicle producing country which produced 13 million of motor vehicles, followed by Japan (7.9 million) and USA (5.7 million). While Toyota was the biggest total motor vehicles manufacturing companies globally, producing 7.2 million motor vehicles in 2009. General Motors was the second biggest globally produced 6.5 million of motor vehicles (Wikipedia). For almost a century, the US was proud of its three largest automobile companies General Motors(GM), Ford and Chrysler (collectively called the Big Three). However, the Big Three's demesne was gradually invaded by foreign competition, especially from Japan. Initially establishing a base by exporting to the US, the Japanese carmakers gradually setup their own production facilities (Kalyani, 2010).

Manufacturers from industrialized countries led the adoption of global production systems in the 1980s. They hoped to capture advantages such as stronger price competitiveness and adaptability to local markets and avoid trade barriers and foreignexchange losses. They expanded overseas production by relocating operations throughout the world (Kang, 2010). Toyota opened New United Motor Manufacturing Inc (NUMMI), the first joint venture plant with GM in USA in 1984. GM saw the joint venture as an opportunity to learn about lean manufacturing from the Japanese company, while Toyota gained its first manufacturing base in North America and Toyota surpassed GM to become the worlds largest car manufacturer in 2008 (Wikipedia). However, the father of lean manufacturing, Toyota is facing a critical issue in 2010. Toyota Motor Corporation has announced a recall of eight models across the world.

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Toyota has issued safety recalls of more than 8 million vehicles, including top-sellers such as the Camry, Corolla and the Prius hybrid. The production and sales of its eleven top-selling cars have been halted for critical reasons like sticking accelerating pedal, floormat pedal entrapment and the problem in anti lock brake system (ABS), which has taken a hit in its brand image of synonym for top quality production (Eliza, 2010).

What are actually the problems? Its reputation for quality and dependability and status as a respected leader in the auto industry were zapped. Replacing those accolades were a recall of over eight million automobiles, over 60 class action lawsuits filed against the company (Edward 2010). Many people have begun to question Toyotas management processes and supply chain management system.

The objective of this paper is to critically evaluate Toyotas approach to manage supply chain and quality management system from a strategic and tactical viewpoint. Also develop and justify a new strategic supply chain and quality management system to overcome the problems at Toyota.

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2.0

Toyota recall catastrophe

Toyota is a model company with an innovative manufacturing process and impeccable reputation for quality. Toyota factories were famous for implementing lean manufacturing techniques and just-in-time production methods that keep part inventories lower than those of their American counterparts. Toyota also initiated a process of quality control that allowed any member of the assembly team to stop the production line if they noticed a problem. The so-called Toyota Way gave all company employees ownership of the products and a desire to pursue kaizen for continuous improvement (Morgan 2010). Toyotas supply chain management is a key component of the 4P model of the Toyota way of doing business, which is set of guiding principles governing R&D, manufacturing, logistics and procurement. The 4P model involves the following principles and is the backbone of the Toyota Production System (TPS), logistics system, and supplier partnering process (Russo & Zhao , 2010):i. ii. iii. iv. Continuously solving root problems to drive organizational learning Adding value to the organization by developing people and partners Using the right process to produce the right results Employing a philosophy of long-term thinking

Toyota has a long history of building partnerships with different tier-level parts suppliers. Toyota involved their suppliers as partners in an iterative, converging design process, not as commodity bidders to a moving target. The relationship is founded on a win-win effort to reduce product cost, rather than a zero-sum negotiation around product price. The knowledge-based approach focuses on ideal performance and drives a continuous learning cycle. So the result is higher quality, lower warranty cost and higher overall value. Toyota revolutionized automotive supply-chain management by anointing certain suppliers as the sole source of particular components, leading to intimate collaboration with long-term partners and a sense of mutual benefit. The quality Toyota and its suppliers achieved made possible the just in time approach to delivering components to the assembly plant (Economist Feb 24, 2010)

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When Toyota started building their vehicle assembly facilities in America decades ago, Toyota began development of their local supply base. They have developed about 100 local suppliers in North America throughout 1990s and Toyota managed them in a traditional way. Toyota communicated, coached and challenged those suppliers through various supplier councils and training facilities. However, when Toyota accelerated their global market expansion in 2000s, they have significantly increased the number of suppliers, and spreading their development resources over a much greater number of programs. However facing with fierce cost competition and profit growth objectives, Toyota may have compromised those key principles, which had served them so well in the past (Russo & Zhao 2010).

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3.0

Evaluation from the strategic and tactical viewpoint

I shall discuss and evaluate the Toyota recall problem from the strategic and tactical viewpoint as below:3.1 Maintaining Market Leader Status

Toyotas desire to supplant General Motors as the worlds number-one car-maker pushed it to the outer limits of quality control. According to Ingrassia (2010), Toyota had recalled more than the entire number of vehicles they had sold. Toyota was expanding too much and too quickly that Toyota was not being able to manage the risk with the aggressive growth and hence must have been compromising and ignoring the quality of their cars. In testimony delivered to the House oversight committee on February 24th 2010, Mr Akio Toyoda, Toyotas President, acknowledged that in its pursuit of growth, Toyota stretched its lean philosophy close to breaking point. The pace at which they have grown may have been too quick. Their priorities became confused, and they were not able to stop, think and make improvements as much as they were able to before. They pursued growth over the speed at which they were able to develop their people and the organization (Ohnsman, Green & Inoue 2010)

Toyotas previous leadership to capture 15% of the global market share had become the overwhelming priority and forced the company to compromise quality. By chasing market share as a primary goal, Toyota took on too much risk in the development of their products, which allowed quality issues to surface (Russo B. & Zhao J. 2010).

Toyota changed strategy in 2002 when it set out to be the largest automobile sales company. To achieve that goal quickly, it had to open new plants globally, hire many new employees, expand its outsourcing suppliers, and design its products for faster, cheaper production (Edward 2010).

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As production base expands overseas and supply lines become more diverse, it is difficult to transplant tacit knowledge in overseas production sites and to secure efficiency in inventory and quality control. At overseas plants, which have physical, cultural and linguistic gaps with headquarters, it is difficult to find and nurture a skilled workforce and implant a company's complete system of quality control, especially when overseas production expands rapidly. Toyota's production system was not completely transmitted to overseas plants, which later manifested itself in quality control problems and Toyota's massive recalls (Kang 2010).

There was an almost 50-percent increase of resources to support the sales strong growth (Stewart 2010). As new resources are added to keep up with the growth, the companys capacity to train and develop these additional resources to support continuous improvement and process excellence is no longer sufficient to keep up with the increased growth. As a result the quality is affected (Anderson 2010).

3.2

Cost Reduction Strategy

Along with the swift increases in overseas production, Toyota's extreme pursuit of cost reduction exacerbated quality control problems. In 2000, Toyota launched a radical costcutting program known as Construction of Cost Competitiveness 21. Its aim was to cut costs of the entire Toyota group by 30 percent (Kang 2010). Some of the programs are:-

i.

using common parts and designs across multiple product lines and reducing the number of suppliers in order to procure parts in greater scale

(SupplierBusiness.com) ii. making the entire development process cheaper and faster, further trimming parts, production costs and time to market, time it took to bring models into production is slashed to about 12 months, compared with an industry average of between 24 and 36 months. iii. more changes were made it into the backside of parts such as the headliner, or areas not seen by customers. In some cases those changes were not listed in official engineering documents.

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Standardizing parts and consolidating suppliers are becoming more common strategies to cut costs and boost efficiencies to make up for sales declines (All 2010). However it also introduces risk. Cars have become increasingly complex and the number of failure opportunities has grown dramatically, especially at the interface between electronics. There were a recall of 4.5 million Ford vehicles which caused by a common component used across different models.

The extreme cost reduction programs were a steroid shot to Toyotas trademark kaizen approach of steady, gradual cost reduction. The process was accelerated too much that there often not enough time for engineers to fully review the process before a new toll to build a part had to be delivered (All 2010). They may have inadvertently triggered quality glitches. The rapid expansion of oversea production and excessive efforts to cut costs had hindered Toyota in thoroughly implanting the Toyota Production System in overseas plants and led to the massive recalls (Kang 2010).

3.3

Poor Quality of Parts from Overseas

Toyota also became increasingly dependent on suppliers outside Japan with whom it did not have decades of working experience. Nor did Toyota have enough senior engineers to keep an eye on how new suppliers were shaping up. Somebody has failed to ensure quality was there throughout the process. They assumed it was there. They assumed that because it was a Toyota-engineered product, the specs were right and nothing would go wrong. Yet Toyota not only continued to trust in its sole-sourcing approach, it went even further, gaining unprecedented economies of scale by using single suppliers for entire ranges of its cars across multiple markets. (Economist Feb 24, 2010)

When parts are outsourced to overseas manufacturers, continuous quality improvement is difficult to achieve due to the absence of close partnerships that is usually attained with domestic suppliers. There is also a risk of quality deterioration since it is difficult to track down the cause of problems at overseas production sites. When pressures are applied on

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parts suppliers to lower prices, it further increases the possibility of quality deterioration (Kang 2010).

3.4

Slow response to problem

Toyotas world renowned Toyota Production System (TPS) kept quality at the forefront. Although the recalls were relatively small, Toyota took the time to contact its customers directly, instructing them to bring in their vehicles for inspection and repair. This is the focus that bred loyalty between Toyota and its customers. It helped the automaker to build trust with its suppliers. It was also a major reason why Toyota became one of the worlds biggest automobile manufacturers (Steven 2010).

In 2007, there were as many as 400 complaints in the US about floor mats wedging the accelerator pedals in many Toyota car models which lead to unwanted acceleration. However, these were treated as minor complaints (Solomon, 2010). At first it tried to hide the problem from customers and the government. It didnt take immediate action when the problems were first reported and this allowed the problem to persist.

Toyota is confident of its quality. Some of the middle managers may have started to deviate from the Toyota Way by being arrogant, being overconfident and not listen to the problems raised by customers. The loyal customers of Toyota had started to lose confident on Toyotas commitment to quality and reliability.

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4.0

New strategic supply chain and quality management system

The recall impacts eight of Toyotas most popular models that contribute more than half of their U.S. sales. The crisis also represented a monumental challenge for Toyotas reputation for quality and reliability. The most significant challenge for Toyota will be to repair the reputation for quality that they have worked for decades to establish. Trust is earned over a lifetime, but it can be lost in just one event. Toyota will have to struggle to restore the image and confidence of consumers around the world (Russo & Zhao 2010) 4.1 Back to basics

Toyotas past performance shows that its supply chain works, but the challenges of incrementally improving their global market share were likely a distraction from their core competencies. Toyota was in an environment of change that their business processes was not able to accommodate. Toyota has to manage the change right. Toyota must plan and grow carefully.

Biggest is not always better. It can create serious business risks that if not properly managed can dilute a companys brand and destroy its value (Edward 2010) The short term growth always stress culture, controls, processes, and people, eventually destroying value and even leading the company to grow and die. All organizations must retain a primary focus on what has made them successful. An organization like Toyota must never allow compromise to the quality management principles and consumer trust.

Toyota President Akio Toyoda has reprioritized in the main goals of the company, shifting focus away from growth and expansion back towards quality management. Toyotas priority has traditionally been the following: first: safety, second: quality, and third: volume. The way forward for Toyota will involve reconnecting with its original purpose and ensuring that it can support its overall strategy with the required operational capabilities fully enabled by developing its people. Toyota has to improve the companys ability to increase the carrying capacity of its human resource base to support and contribute to continuous improvement, problem solving, and learning. In the short term,

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growth may have to be de-emphasized as the company catches up. Toyota also has to begin to close the development and learning gap (Anderson 2010).

4.2

Commitment to customer

Companies with high customer credibility are vulnerable to especially serious damage so they need to adopt follow-up measures to prevent customers from leaving. Toyota needs to work on restoring its reputation and the trust of consumers who are increasingly developing the impression that the company is slow to respond to safety issues and willing to mislead investigators if necessary (Morgan 2010). Toyota must take definitive steps to re-focus its business on delivering high quality vehicles. Toyota must use this crisis to demonstrate its commitment to customers or risk permanent loss of trust. It has to re-establish the belief among customers that quality is the most important for the company.

The Toyota Way or the Toyota Production System is a good way to handle customers needs quickly and accurately. So far all of the problems picked up in the Toyota recalls are design quality problem rather than manufacturing quality problems. Toyota had spent too long trying to assign blame rather than dealing with the problem. The company should take upon itself the responsibilities it should take and have to get to the bottom of these issues to truly resolve its crisis. Also it is a good time to correct the arrogant attitude of the employees and go back to the basics of the Toyota system.

4.3

Cost Reduction Strategy

Toyota needs to go back to the drawing board according to my suggestion. Cost of manufacturing must be broken into sub-areas such manufacturing, assembly, delivery, customer services and agency cost. Any cost reduction cannot be ambitious!! It has to be done in a gradual manner or stage by stage.

Like in any manufacturing of food business, any cost reduction we will revisit the formulation and the ingredients use. We can reduce the cost by looking into the ingredients supply, changing some of the non-functional ingredients and use compatible

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low cost ingredients. The taste can be improved by using flavours or simulators. In the Toyota case, the manufacturing cost reduction must not be at the expanse of the moving parts, the electronic control systems and the engine performance areas especially concern to safety and performance of the vehicles.

Sharing of common parts and same design is a good lean manufacturing practice that could reduce the cost and waste. Toyota should emphasize good design and adequate testing to minimize quality control problems resulting from widely used parts. Toyota should incorporate risk management into their long term strategies (All 2010). As for cost reduction, the common parts used in each models must not be related to the engine performance and safety issues for example the brake system, engine and transmission. The common parts can be applied across on non safety related features or parts, for example car seat, sound system accessories.

Toyota must work closely with the suppliers to continuously solving root problems in order to drive the overall organizational learning. Toyota should not pressure too much on parts suppliers to reduce price but add value to the supply chain by developing the partners. No shortcut to the development and manufacturing process of motor vehicles. Toyota and his suppliers must use the right process to produce the right results

4.4

Improve Supply Chain Visibility and Collaboration

In todays globalized environment, Toyota is facing both the commercial and cultural challenges of converging their quality management process with a more diverse set of global suppliers. Therefore, Toyotas current management must develop a result-oriented and feasible approach to deal with their suppliers, while retaining their core values of supply-chain management. From the case of Toyota recall, there is a need to understand that supply chain can be your strongest as well as your weakest point so there is a need to continuously monitor the supply chain. Toyota must put more effort to improve supply chain visibility and monitoring to support their global business (Connor, 2010).

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Toyota should choose their partners carefully. It is important to get the right domestic supplier rather than the right quality. The suppliers must be able to work the Toyota Way. Toyota must extend its link in supply chain to suppliers who have the same dedication to quality as Toyota (Busch 2010). Companies pay the most attention to tier-one suppliers, but relationships with tier-two or tier-three suppliers also extremely critical (Kevin 2010). Toyota should made frequent site visits to ensure they had the right quality processes in place as what Toyota and Denso had practiced. The company needs to realize the critical matters that may arise when you have to depend upon third party for their resources. Toyota and its suppliers should become more vigorous in monitoring all the channels in its supply chain, including improving the collaboration with its suppliers and dealer networks to help identify these potential problems earlier and spot potential trends before the problems gets out of hand (Morleym 2010). They also need a seamless integration between the two to make sure that all relevant information ( parts design, forecast or any other) is transferred to other party seamlessly and their must be adequate check point to create alerts in the event of any deviation from the set procedure. When there is any issue raised, Toyota and the parts suppliers must work together to solve the problem and not blaming each other like Toyota and American automotive parts supplier CTS Corporation blamed each other, citing different causes. 4.5 Quality Management

As areas covering production networks widen geographically, quality control is becoming more difficult. Toyota should overhaul their existing quality systems completely and ensure the current system is adequate. It may not have completed a proper failure mode and effects analysis.

It needs to get back to qualitys roots: do it right the first time, every time. It must streamline the process of conveying customer input directly to its quality and product development groups. It needs to find out what will get it back on its feet. They must find out what the gap is between the old and new TPS. Toyota must institute a rapid-response process to all problem areas. Toyota should conduct and implemented audits on all the overseas manufacturing plants and all the parts suppliers. This is to ensure that the

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overseas manufacturing plant and the suppliers are conforming to specification set by Toyota (Steven 2010).

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5.0

Conclusion

In a competitive marketplace especially in the US automotive industry customer satisfaction should be the number one objective of the company especially in Toyota where the conglomerate has built such a long reputation of a car manufacturer with premium affordable quality.

Toyota's mass recalls demonstrate that no company is immune to possible quality deterioration in overseas production. On the back of technological innovation, today's products are increasingly complex, underscoring the importance of quality management. Therefore, while reaping the benefits of a global production system, it also is necessary to thoroughly prepare for the related risks and to swiftly resolve the situation at an early stage when a problem does occur (Kang 2010)

Toyotas crisis can be attributed to their aggressive global expansion which forced them to lose sight of the 4P way of doing business. Product development and supply resources were faced with an increasing number of programs with targets that were not achievable. These risks ultimately allowed the quality problems to surface. Additionally, an increased pressure of cost containment and globalization makes it more difficult to maintain the principles of the traditional management approach (Russo & Zhao, 2010).

Having experienced this problem, Toyotas emphasis must be placed on how to repair the reputation through prompt crisis management. Toyota can use this crisis to demonstrate its commitment to customers and its famous ability to identify and eliminate the root cause of the problem. Toyota also should implement comprehensive risk management oversight. Company need to manage the risks associated with uncertainty. Companies need to have contingent plans to implement when such situation arises to get the facts quickly and respond accordingly (Connor 2010).

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