The Essential Ingredients of the Toyota Way

The ingredients of the Toyota Way are unique and effective. To sequence their description, this chapter’s layout follows Liker’s approach. Examples specific to how Toyota applies these principles to managing its supply chain are drawn from previous chapters in this book. The trade-offs that are implicit in making these decisions are also illustrated.

Long-Term Philosophy

We believe that our fundamental mission is to contribute to the economy and society through creating value, mainly by manufacturing high-quality products and providing related services.

—Toyota Way document

The long-term philosophy of the Toyota Way is to create value for customers, suppliers, and the society.6 That view is consistent with the idea of maximizing supply chain surplus. For example, we often hear that a firm should buy from a low-cost supplier and not from one whose price is low. A supplier who drops the price to gain business may not necessarily increase supply chain value. But, a lowcost supplier is always likely to increase supply chain value if demand is sufficiently inelastic. Managing Suppliers revealed that instead of simply opting for a low-cost supplier, Toyota views value creation as a joint effort toward increasing supplier capabilities and reducing costs. Interviews with current Toyota managers David Burbidge, Gene Tabor, and Jamey Lykins reinforce the notion that Toyota’s collaborative approach aims to solve problems and reduce costs and, thereby, prices. In Production Scheduling and Operations, we saw that great emphasis is placed on heijunka. That chapter examined how Toyota keeps demand stable by using the 80/20 rule; these efforts help in the identification of problems and create value for all participants in the supply chain.

Likewise, we have heard and read about the pros and cons of price promotions. The famous case of Campbell’s promoting chicken soup during the winter has made the rounds of every college and boardroom. By promoting demand just when it is high, the supply chain experiences a double dose of spike in demand: one due to natural factors and the other due to forward buys that are made to take advantage of the drop in price. Keeping prices steady certainly improves planning and efficiency. Data show that Toyota’s promotion cost for cars is under $700 versus over $2,000 for other domestic manufacturers. Stable prices also permit a focus on increasing value as a way to sell the product. That idea is at the core of Toyota’s philosophy, which goes beyond the average presentday corporation’s goal of maximizing “short-term” profit (or the net present value at a steeply discounted rate). Instead of forswearing price promotions, Toyota attempts to increase value at the same price, thus forestalling competitive moves to grab market share. The trade-off is obvious once it is articulated. A low-cost strategy does not necessarily provide competitive edge into the future. However, accompanied by value-creating activities that are made possible by a stable system, the strategy continuously pushes the technology frontier out and keeps competition at bay.

Long-term philosophy goes beyond making profit. Value creation might provide the right focus. Supply chain planners need to consider how customer values might change over the next 10 to 15 years. The focus of Toyota on the development of hybrid vehicles and on green manufacturing is an example of long-term philosophy described in this book and elsewhere that at first glance seems to contradict the goal of profit maximization. The Toyota Way document states: “current trends are assessed in light of a long-range vision of as much as ten years.”

Managers might wonder how to formulate such a problem in the profit maximization framework and how to make choices regarding the timeline of planning and what method to use for accumulating and comparing cash flows. What are the discount factors? How to evaluate the risk-return trade-offs? In an interview, Katsuaki Watanabe, Toyota’s president, provides a rare insight into making the trade-offs.7 Watanabe mentions the three keys to long-term health: improve product quality, keep reducing costs, and develop human resources. He explicitly mentions that “we have to create a stronger foundation at every stage of the supply chain.”

Readers might pause and reflect that these principles are probably easy to focus upon in isolation but not in combination. Watanabe goes on to say that the focus of current investments in new products, new technology, and human resources is improving quality. Thus, an explicit prioritization is made. We have seen that in previous chapters too: customers first, dealers second, and the plant third. (As early as 1937, Kiichiro Toyoda, the founder of auto making at Toyota, set the price to dealers based on market price rather than cost. The Toyota Way document quotes: “The price for the dealer is to be 2,400 yen regardless of cost.”) What does that prioritization do? Basically, Toyota makes the trade-offs obvious. If a firm’s focus is on only one idea of self-interest, such as growth, that firm can neglect its supply chain obligations. Every Toyota manager realizes that the obligations do not go away; instead, they are ranked as subordinate goals. By specifying that Toyota’s products will be among the top three products considered by every customer while making a purchasing decision, the planner is constrained to make choices that fit the long-term goal of creating value. The Toyota Way document includes this statement: “Prioritization: Priorities are established and resources concentrated for the greatest possible outcomes.” It also urges decision making to focus on continuous improvement and optimization as a whole company overcoming barriers among functions and organizations.

As a final example of this thinking, we quote: “Toyota now stands at the threshold of unprecedented transition in the race for survival in the 21st century. We must be careful not to become complacent through our past achievements, but unite and take on the challenges of the new world.”

Right Process

The Toyota Way emphasizes having a good knowledge of the process before attempting to improve it. It insists on standardizing work. To many people, standardizing work in order to improve it often seems to be a contradiction, until one takes the teachings of W. Edwards Deming and Joseph M. Juran9 into account. What is the purpose of standardization if the intent is to change the way work is done?

The statistical process control theory proposed by Juran states that every process has natural variations. It is impossible to try to control natural (i.e., truly random) variation, whereas it is important to look for variation that is systematic. Thus, a standard process is one that is in control, stable, and, if it has to be satisfactory, also capable of meeting the customer’s requirements. Moreover, in order to determine whether improvements should be aimed at reducing the natural variation or the systematic causes, it is necessary to isolate the two sources of variation: random and systematic. The techniques and solutions required for dealing with each source of variation, random and systematic, are different. In the section on learning, we shall see that one of the pitfalls of fast learning is associating incorrect causes to effects because it leads to superstitious learning—that is, falsely associating success to irrelevant causes, such as touching one’s nose before entering an office will lead to a good day at work.

Indeed, even the journey of feedback regarding this book from Toyota was transformed into a process by Nancy Banks, our liaison at Toyota. The first step that was necessary was for us to get a signed contract from the publisher so that Toyota could be sure we were serious about the book and had a detailed plan. Next, we shared drafts of the overall details with potential managers before we met them. A visit to the plant was included in our trip so as to ground the academic authors of the book into plant realities. All interviews were exchanged with appropriate managers to ensure that their perspectives were reflected accurately. Finally, after style edits, the final copy was sent to Toyota for review. This process was designed to guarantee flow only if necessary, and managers contacted had specific roles that were directly related to chapter descriptions. In other words, the designed process had a goal of being efficient while maximizing our value creation writing this book.

The Toyota Way goes one step further. It proposes to design, plan, and execute processes so that variations and scope for improvement become evident. To this end, the definition of the right process is enlarged to include steps that we interpret using our v4L framework.