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Toyota Paper

Toyota Chairman: Hiroshi Okuda Founded: By Kiichiro Sakichi in 1933 within Toyoda Automatic Loom, “independent” as
Hiroshi Okuda
By Kiichiro Sakichi in 1933 within Toyoda Automatic Loom,
“independent” as of 1937
Toyota City, Japan (US HQ in Torrance, CA)
Belief in “Mono-zukuri” (Making good products); Just-in-time => Lean Management
Principle of “Customer first”; Customer Satisfaction No.1, Quality No.1
“The Toyota
Respect for People (employees); “Mono-zukuri” is “Hito-zukuri” (Making good product is
equal to making good people); Mutual trust of management and employees


Daihatsu Motor


the Lexus line of luxury cars





Co., Ltd.


New United Motor


Prius (hybrid-powered [gas


Manufacturing, Inc.

and electric] sedan) Cars, pickups, minivans, and


Toyota Motor Credit



SUVs including:


Toyota Motor Sales, U.S.A., Inc.


Toyota Motor

o Corolla


Thailand Company Limited










And, as of 1984:

Toyoda Automatic


Land Cruiser





Aichi Steel



Toyoda Machine

V-8 Tundra pickup truck


Industrial vehicles


Toyota Auto Body

Aisin Seiki

Cellular phones

Nippon Denso

Financial services

Toyota Gosei

Kanto Auto Works

Koito Works

Aisan Industries


Japan (15 plants), Rest of East Asia (17), North America (8), Latin America (5), Europe (4), Middle East & Southwest Asia (4), Africa (2), Oceania (1)



Japan (1 HQ, 1 tech center, 1 proving ground), USA (1 engineering, 1 design),


Belgium (1 engineering, 1 design), France (1 design)


Financial Data – Millions $ (FY ends 12/31)








Net Income



A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Employees: World



Employees: World 214,631 183,917 Toyota Paper A Fyke, G Mi, C A Palumbo, Y Wada, G

Toyota Paper

Employees: World 214,631 183,917 Toyota Paper A Fyke, G Mi, C A Palumbo, Y Wada, G

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Toyota Paper

Toyota Paper Site Background: Toyota’s Tsutsumi factory is located in Toyota City, close to the worldwide

Site Background:

Toyota’s Tsutsumi factory is located in Toyota City, close to the worldwide headquarters of Toyota Motor company. In and around this site in Aichi Prefecture are situated a total of 12 Toyota plants.

This factory was opened in 1970 and employed 5,700 workers by 1999. This makes it the third largest Toyota plant in Japan, by workforce.

The factory occupies an area of 600,000m 2 on a site nearly twice as large.

As of March 1999, according to our data, the main products being produced here were the Camry, Caldina, Corona, Mark II, Vista, Windom (ES300). However, we’ve been told to expect to see the production of Lexus luxury vehicles at the plant so either there have been some changes to the plant’s lines or some of our information is wrong.

Toyota Paper Site Background: Toyota’s Tsutsumi factory is located in Toyota City, close to the worldwide

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Toyota Paper

Toyota Paper: Introduction

Welcome to the MIT Sloan 2001 Japan/Korea Trip Toyota Team Paper

In this paper we aim to present some information essential to understanding Toyota and its place in the Japanese economy and the global auto industry, to prepare for our visit to the company and its production facilities on Monday 26 th March 2001.

We have designed the paper as easily-digestible chapters which can be read stand-alone in spare moments while in transit around airports and on buses, to suit the specialized needs of Trip participants.

To cut down the overhead in reading this paper we have as much as possible removed “filling” sections such as transitions from chapter to chapter, and kept introductory remarks extremely brief.

The chapters are as follows:


State of the global auto industry

The main trends in automobile production and marketing today


Characteristics of the Japanese auto industry

What’s special about the way this industry developed?


History of Toyota

A straightforward account of the timeline from 1937 to 2001


Current company facts

Financials and production figures; stated strategy and direction


Toyota Production System

A primer, with glossary of terms, to this famous system


Toyota’s relationships

How Toyota deals with its employees, suppliers and customers

If you have any further questions, please contact one of us:

Aaron Fyke

Gary Mi

Tony Palumbo

Yukihiro Wada

Grace Webber

March 19 th , 2001

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Toyota Paper

ONE: State of the Global Auto Industry

In 2001, there are four major trends impacting the global auto industry:

Overcapacity, mergers and alliances

With overcapacity estimated at around 30% (Economist Feb 11 th 1999) or the capacity to produce 23 million more cars per year than the market will take (Robert Eaton of Chrysler, quoted in the Economist), this is an industry in trouble. We have seen mergers and alliances, for instance Daimler-Benz with Chrysler. There is speculation (Jac Nassar of Ford) that there is only room for six volume car makers in the future: two in Japan, two in Europe and two in the US. Smaller manufacturers without the highest production expertise and economies of scale will simply disappear.

Economic downturn

Over the last couple of years, demand for new vehicles has slowed, putting pressure on automakers all round the world to slim down their operations, close unproductive plants and focus on core strategic activities.

Toyota Paper ONE: State of the Global Auto Industry In 2001, there are four major trends

Shifting consumer demands

Led by the US, consumers are no longer satisfied with mid-sized family cars. Increasingly they are demanding more specialized vehicles such as SUVs, minivans and light trucks.

The adjacent graph from the Economist shows the dramatic shift in sales from cars to light trucks.

Increasing variety in demand is causing a growing emphasis on flexible manufacturing systems to enable rapid response to market variations, and “mass-customized” product to be ordered for the customer straight off the production line.

Removal of European trade barriers

Toyota Paper ONE: State of the Global Auto Industry In 2001, there are four major trends

Until 2000, Europe had strict quota limits on the import of Japanese cars. This had encouraged investment by Japanese car firms in manufacturing plants within European borders and had also protected the domestic markets of the smaller European manufacturers. With the removal of these trade barriers, the European market is being opened up to more competition. However, it remains to be seen how far governments will go in removing the safety net from their domestic auto industries. Industry consolidation would lead to plant closures, with large-scale job losses, which are difficult for many European governments to swallow, and the calls for intervention and subsidy introduction could be too loud to be ignored.

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Toyota Paper

TWO: Characteristics of the Japanese Auto Industry *

From followers to leaders

For many years, Japanese companies struggled to produce automobiles up to the standards of the US and Europe. They were producing much lower volumes, which hindered them from achieving scale economies. They also lacked learning, technology and the ability to produce quality that the US companies had. Many of the products developed by the Japanese car companies in the first half of the 20 th century were manufactured from kits supplied by, or based on designs reverse-engineered from, foreign competitors. The up-and-coming leaders of the Japanese automotive industry spent their time touring production facilities in the US, learning manufacturing techniques and automobile engineering from (it seems) proud and willing tutors at Ford and GM.

During the 1960s and 1970s the Japanese automobile industry continued to work on process improvements to increase their quality and production efficiency, and on their own designs of smaller, more-affordable cars to suit their domestic market more appropriately. They developed their supplier networks of subsidiaries and partly-owned companies to provide them with the high- quality components they needed.

“Suddenly” from the 1970s/1980s, Japanese cars had become well-made and inexpensive. In manufacturing systems the Japanese had leapt ahead of the west they had so diligently studied earlier in the century. In the coming years, car manufacturers from all over the world would be studying Japanese automakers (especially Toyota) to learn their production techniques. Indeed these firms had become the new most-admired engineering organizations in the world.

From domestic market to exporters

At the dawn of the Japanese car industry, there were many manufacturers vying principally for domestic business. Large volumes of imports were arriving from overseas on Japanese shores, since Japanese consumers preferred the more reliable imports.

Capital available to the Japanese firms was fairly limited and they concentrated on developing their production to compete in their domestic market. Yet, as improvements in efficiency and quality came through, and excess capacity grew as home market growth slowed, Japan’s auto exports grew rapidly. By 1974, Japan had displaced West Germany as the world’s largest automobile exporter, and by 1976 most of Japan’s auto output was exported.

History of government intervention, direction and regulation

From 1936 onwards, successive Japanese governments had protectionist policies and levied huge import taxes (e.g. 40%) on foreign automobiles. Support for domestic manufacturing was seen as a way of preventing the foreign currency drain of imports.

The Ministry of Commerce & Industry (MCI), after 1949 the Ministry of International Trade & Industry (MITI), set tariff policies. MITI also provided low-interest loans with tax privileges for investment, tried to reduce competition in an overcrowded industry, and urged the industry to focus on particularly promising market segments.

When Japanese products had achieved a quality leadership position and well-recognized brands in their home market, MITI removed the now-redundant import tariffs.

* most data for this page is taken from Michael Cusumano’s 1991 book, “The Japanese Automobile Industry”

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Toyota Paper

THREE: History of Toyota

Toyota started in 1937, growing out of Toyoda Automatic Loom Works, headed by Sakichi Toyoda. Toyota Motor Company was founded by Kiichiro Toyoda, Sakichi's son. Due to the fact that “Toyoda” had a meaning in Japanese, it was decided, after a large contest, that the company name would be changed to Toyota, which held no meaning in Japanese.

In 1950 the company experienced its one and only strike. This strike proved to be a major turning point in the history of Toyota as Toyota’s labor policies and management style emerged from this stoppage. Both sides were firmly committed to establish the principles of mutual trust amongst its members, a corporate philosophy that still guides Toyota’s growth today.

Due to the lack of resources in post war Japan, a production system that concentrated on improving efficiency and eliminating waste emerged. Taiichi Ohno, the systems founder, based TPS on the principles of continuous improvement, and “Just-in-time” manufacturing. Lean production, as it later became known is a major factor in the reduction of inventories and defects in the plants of Toyota and its suppliers, and it underpins all the operations across the World.

Toyota launched its first car in 1947 and production of vehicles outside Japan began in 1959. The first expansion overseas for Toyota was in a small plant in Brazil. Toyota claims to believe in locating its operations locally to provide customers with the products they need where they need them. Whether this is actually the case, or only really true when mandated by government policy is another story. Nevertheless, in addition to their manufacturing facilities, Toyota has design and R&D facilities located throughout the world, servicing the three major car markets of Japan, North America and Europe.

Toyota Production Volumes

1960 1935 1940 1972 1982 1980 1996 1957 1988 1936 1937 Total Production 1999 Yearly Production
Total Production
Yearly Production (millions of vehicles)
Domestic Production


Source, Toyota Motor Company

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

FOUR: Current Facts

  • 1. Business Segments


Toyota Paper

The “automotive” business involves the design, manufacturing and sale of passenger cars, recreational vehicles, sport utility vehicles, minivans, trucks and related parts. Automobiles are manufactured mainly by Toyota and Daihatsu Motor Co. Automobile parts are manufactured by Toyota and their suppliers, such as companies like Denso Corporation.

These products are sold through Tokyo Toyo-Pet Motor Sales Co., Ltd. and other dealers. Some sales, to certain large customers, are made directly by Toyota in Japan, bypassing the dealership network. Overseas, sales are made through Toyota Motor Sales, U.S.A., Inc. and other distributors and dealers. Volkswagen and Audi vehicles are also sold through the Toyota dealership network in Japan.

Financial Services:

This business involves providing loans and leases to customers and loans to dealers. The Toyota Finance Corporation handles this business in Japan, whereas Toyota Motor Credit Corporation and others provide sales financing of Toyota’s products and the products of its affiliates, overseas.

All other:

Other businesses include the manufacturing and sale of industrial vehicles such as forklifts and logistics systems, and the design, manufacturing and sale of prefabricated housing, telecommunications and other business. Industrial vehicles are manufactured by Toyoda Automatic Loom Works, Ltd. and sold through dealers in Japan and distributors and dealers overseas. Housing is manufactured by TMC and sold through domestic housing dealers. In the telecommunication business, IDO Corporation provides domestic telephone services. Toyoda Tsusho Corporation engages in the purchase and sale as well as import and export of various products.

  • 2. Business results (fiscal year) (million yen)






April 1995 - March 1996

April 1996 - March 1997

April 1997 - March 1998

Consolidated accounts

Net Sales





Income before income tax





Net income





Vehicle production (units)





Vehicle sales (units)









Unconsolidated accounts Net sales





Income before income tax





Net income





Vehicle production (units)





Vehicle sales (units)




  • 1. Consolidated subsidiaries (261 companies): domestic consolidated subsidiaries (152 companies), overseas consolidated subsidiaries (109 companies)

  • 2. Affiliates accounted for under the equity method (60 companies): domestic affiliates (44 companies), overseas affiliates (16 companies)

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

3. Outlook and Strategy

Mid-term and long-term management strategy

Toyota Paper

Toyota plans to enhance its competitiveness in the global market through advanced technology, and improvements in production efficiency and sales.

In technological development, Toyota aims to lead other automakers in the field of environmental technologies. These include targets such as reduced emissions, improved fuel efficiency, and higher vehicle recoverability rate. To meet these criteria, Toyota is investing to develop technology in hybrid electric vehicles, fuel cell vehicles and other next-generation automobiles with the aim of commercializing them as quickly as possible.

3. Outlook and Strategy Mid-term and long-term management strategy Toyota Paper Toyota plans to enhance its

“Prius” hybrid vehicle from Toyota, available in Europe (image source:

Toyota plans to continue promoting cost reduction efforts such as the common use of vehicle platforms, reductions in component types and the streamlining of production lines.


In order to respond to the customer’s overall needs, which are bound to expand from automobiles to include other related areas, Toyota intends to develop its business strategically by effectively allocating management and other resources to its finance, information and communication businesses.

Product Diversification

Toyota traditionally has regarded customers principally as buyers of automobiles and of a very limited range of closely related products, such as financing and replacement parts. Now, Toyota is deepening its relationships with automobile customers through new products and services, such as innovative packages that combine financing and insurance. And it is diversifying into markets where it develops customer relationships through products unrelated-or indirectly related-to automobiles, such as cellular telephones and credit cards.

Finance business

Much of the increased value that Toyota plans to cultivate downstream in its value chains is in financial services. As Toyota expands its activity in the financial sector, it needs to manage risk systematically and manage operations efficiently. Therefore Toyota placed all the financial services operations under a newly-established financial management company in July 2000.

Information technology development

Toyota intends to get onto the cyberspace map through multimedia ventures supporting value-added functions in automobiles, such as navigation. Toyota’s GAZOO website, which began as an automobile information service, is being developed into a provider of diverse services. Its most developed functions provide price estimates and brochureware for Toyota vehicles and the nearest located dealers, and it also hosts a growing array of virtual shops for Internet shopping, including access to music downloading sites.

3. Outlook and Strategy Mid-term and long-term management strategy Toyota Paper Toyota plans to enhance its

Toyota is the second-largest shareholder of KDDI Corporation (with 13% of shares), formed in 2000 through the merger of Toyota’s IDO subsidiary and KDD corporation. KDDI Corporation is a leading provider of international and cellular telephone services in Japan’s highly competitive telecommunications industry.

Development of Environmental Technology

Creating automobiles with low environmental impact is no longer "just an option" for Toyota - it has become a crucial part of corporate strategy. The development of technology to reduce environmental impact enables Toyota to sit in the driving seat setting new global standards, so gaining competitive advantage in exploiting them. The “Prius” hybrid vehicle was launched to critical acclaim and much positive PR. In addition, leading Toyota’s sales growth in Japan is its small car, the “Vitz,” and its derivative models, which are very popular for their high fuel efficiency.

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Toyota Paper

FIVE: The Toyota Production System

Toyota is known for quality vehicles, produced the world over. However, what Toyota has done exceptionally well, is implement a manufacturing system so successful it has influenced not just auto making, but manufacturing standards across many other products all over the world. Through the Toyota Production System (TPS) Toyota has managed to cut costs, reduce time to market, and dramatically improve quality. This allows Toyota to be one of the few companies able to compete simultaneously as a premium and as a low cost producer.

There are several important aspects to TPS. These relate to either cost reduction, or quality improvement, or both. The underlying philosophy of TPS is a relentless desire to continually find and remove waste – wasted time, wasted money, wasted material. This attitude results in continual improvement of quality and efficiency. Some of the mechanisms for this improvement are listed below:

JIT (Just in Time) – Just in time inventory control reduces the amount of inventory in a system to its bare minimum. Material is only provided when needed. This is opposed to having large amounts of inventory being piled up waiting to be processed (WIP – work in progress). JIT has many advantages over conventional systems. Eliminating WIP inventories results in reduced holding costs. JIT also improves quality as it allows for quick detection of quality problems. Because units are only produced on an “as needed” base, there will not be the situation in which large amounts of defecting WIP needs to be reworked. JIT also tightens the relationship between the producer and supplier, allowing for better linking of engineering, product development and quality control as it becomes in the supplier’s best interest to reduce variability in their production line.

5 Whys Quality Control – For lack of a better name, this is an example of the thinking in the Toyota plants. Errors are not vehicles for blame. Instead, they are symptoms of root causes which must be investigated. Therefore, if an error is detected, two things will occur. The first is that the production line will be stopped to ensure the error is fixed and will not happen on subsequent vehicles. Second, an investigation is launched to identify the root cause of the error (so called the 5 Whys because the question “why?” is asked five times to tunnel to the source of the error).

SMED (Single Minute Exchange of Dies) – A die is the shaped surface of a metal stamping press which determines the final shape of the produced part. The dies of a manufacturing press need to be aligned to extremely tight tolerances to avoid damage to the equipment. Due to the lengthy process of exchanging dies and the high cost of stopping the production line, many manufacturing companies would produce thousands of similar parts before changing dies. This led to high batch quantities and large inventories. JIT required the flexibility to be able to reduce setup time for dies to a matter of minutes. This allowed for individual parts to be made on an as- needed basis, reducing large inventories, improving quality, and balancing throughput.

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Pull System Manufacturing

Toyota Paper

Central to the idea of lean manufacturing and JIT inventory controls is a “pull” system of manufacturing. This is contrasted from the other manufacturing system, which is a “push” system. There are situations when either situation is optimal; however, Toyota has made great progress by using a predominantly “pull” approach.

A “push” system is one wherein demand for the customer is forecast and then the required number of units is produced. These units are sold on the market. Stockouts result in lost revenue and excess production must be deeply discounted to be sold. A “pull” system however is one where no product is made until it is requested. Therefore, as parts are needed for production, and not before, they are produced and integrated into the assembly. Use of a “kanban”, or marker, card, or tag, is done to indicate that more parts are needed and should be produced. This limits the amount of inventory in the system and reduces the factory’s vulnerability to fluctuating demand.

History of the Toyota Production System

The Toyota production system was not devised to revolutionize the manufacturing world. Indeed, it took several decades of improvement to do that. Rather, it was born out of necessity. Many of the best innovations and changes in the auto industry have been done, not because the company wanted to, but because the company had to, and Toyota was no exception.

In post war Japan, resources were scarce and the auto industry faced a number of problems. The domestic market was tiny and demanded a wide range of vehicles, the Japanese work force was not willing to be treated as a variable cost or as interchangeable parts, the Japanese economy was starved for capital and foreign exchange, and the outside world was full of huge motor-vehicle producers, ready to defend their markets. Mass production was roaringly successful and Eiji Toyoda (Toyota’s founding family) and Taiichi Ohno (designer of TPS) determined that mass production would never work in Japan. (By 1950, the cumulative production of Toyota, after 13 years of operation, was 2685 automobiles, as compared to the 7000 vehicles Ford’s Rouge plant was putting out per day.)

Toyota needed a system that could be flexible and scalable. They could not afford to have one production line dedicated to a single line of cars – they only had a few lines in total. So, because they could not afford multiple production lines with dedicated stamping presses, they began looking for ways in making the whole system more flexible. Hence was born the notion of single minute exchange of dies, and Heijunka (described below) – a means of producing several vehicles on one line in accordance with the demand mix. Toyota began developing the JIT system because they could not afford to purchase large amounts of inventory. Their resource constraints forced them to adopt the lean manufacturing approach out of sheer necessity to keep the whole production moving.

Given that Toyota was walking such a precarious line with their production, they had absolutely no tolerance for quality errors – they couldn’t afford to. From this, and from the supplier relationships forged while establishing JIT, Toyota developed the fanatical quality control system that they are now famous for today. Each of the TPS initiatives of lean manufacturing, waste reduction, and quality improvement were born out of the necessity to produce in the demanding environment of post-war Japan.

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Glossary of Terms *

Toyota Paper

Andon – Andon, a Japanese word for lantern, describes the notice board used for quality control. The board hangs over the aisle between production lines and alerts supervisors to any problem. In assembly, the board normally indicates the line name in green at the top. When a team member pulls a cord on the line, the board lights up a number corresponding to the troubled station in yellow, which then changes to red when the line actually comes to a halt. The board also shows whether the line stop is temporary or not, and whether the line is starved (body short), blocked (body full), or stopped by internal problems. This device quickly informs a supervisor of only what he or she needs to know to take immediate actions and thereby allows a small number of supervisors to control a large area; it also prompts supervisors to develop countermeasures for recurring problems in the longer term.

Heijunka This is Toyota’s terminology describing the idea of distributing volume and different specifications evenly over the span of production such as a day, a week, and a month. Under this practice, the plant’s output should correspond to the diverse mix of model variations that the dealers sell every hour.

Kaizen Kaizen literally means “changing something for the better.” The object of change usually includes the standardized work, equipment, and other procedures for carrying out daily production. The purpose is to eliminate waste in seven categories: (1) overproduction, (2) waiting imposed by an inefficient work sequence, (3) handling inessential to a smooth work flow, (4) processing that does not add value, (5) inventory in excess of immediate needs, (6) motion that does not contribute to work, and (7) correction necessitated by defects. Kaizen requires that a process be first standardized and documented so that ideas for improvement can be evaluated objectively.

Kanban – Kanban means “signboard” in Japanese. The one used for a part supplied by an outside supplier indicates the name of the supplier, the receiving area at Toyota, the use-point inside the Toyota plant, the part number, the part name, and the quantity for one container. A bar code is used to issue an invoice based on actual part usage.

* these definitions are taken from HBS case 9-693-019, “Toyota Motor Manufacturing, U.S.A., Inc.” © 1992 the President and Fellows of Harvard College

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Toyota Paper

SIX: Toyota’s Relationships

The Toyota Motor Company has developed a unique relationship network with its employees, suppliers, dealers and customers. Toyota's most powerful change agent, Mr. Taiichi Ohno, instituted most of the relationship network. Mr. Ohno achieved many gains for his company while developing Toyota from a small automotive company into the world’s third largest automotive company in just four decades. Ohno had a very demanding personality and tremendous persistence. Many inside Toyota, including the top brass, disliked Ohno. In the end, those whom Mr. Ohno alienated retired from Toyota while Ohno was forced out of Toyota to finish his working life in a supplier company. This transition was not necessarily unusual as Toyota and its suppliers often shared employees such as engineers and managers. This practice was seen as valuable in sharing information between company networks for improving product quality. Even though the Japanese take pride in their flexible supplier employee relationships, a strict hierarchy remains with the assembler, Toyota, at the top. Therefore, Taiichi Ohno, after contributing so much to Toyota, was shunned in the end.

Toyota’s relationships with its Employees

Toyota employees treat each other like family. Their culture fosters the utmost respect for one another inside and outside the plant. Toyota current employment structure allows employees to expect lifetime employment. Toyota's guarantees are the result of a strike in 1946. At this time, with sales depressed, Kiichiro Toyoda of the founding family fired twenty-five percent of the work force. The union was outraged and staged a sit-in strike at the factory. To resolve the strike, Kiichiro Toyoda had to resign and accept responsibility for mismanagement. The union accepted the twenty-five percent termination, in exchange for concessions that revolutionized Toyota's management-union relations. One concession was lifetime employment, the other was pay tied to seniority and profitability through bonus payments. In return, Toyota expected employees to remain loyal for life. Toyota and many Japanese companies instituted an increasing pay scale linked to employee seniority. This Japanese thread discourages people from migrating from one company to the next, because an employee's pay is directly linked to company service years and independent of the employee’s age. For example, a forty-five year old with five years’ service makes the same as a twenty-five year old with five years’ service, regardless of the task they perform. This gives incentives for employees, in this system, to stay with one company for life.

With the 1946 strike agreement of employment for life, workers became fixed costs, more permanent even than capital equipment and production machinery. Out of this situation Toyota developed a relationship of education and continuous improvement – since employees were fixed costs great investments could be made into improving their value. Other initiatives, such as quality circles developed, wherein teams of factory workers are expected to develop quality and cost improvements. Continuous improvements are incremental, a reflection of the Japanese conservative culture.

Further improvements came. Following on the notion that the employee is a valuable asset, team leader positions were established for every seven or eight assemblers. The team leader’s role is to ensure that the team members have the resources they need to continue working productively. Part of this philosophy is evident with regards to stopping an assembly line. If an assembler cannot perform his/her task in the designated time or work area, the assembler is expected to stop the line and address the issue. With the team leader in close proximity and quick to respond, line stops are brief. This link between organizational excellence and product quality is just one of the benefits of the team environment fostered. Teams working together on the assembly floor in quality circles resolve issues quickly. Assemblers are expected to generate solutions to problems, not just identify problems and call management for a solution. This can be contrasted with the more “employee/supervisor” hierarchical relationship sometimes experienced in the non-team environments in the West.

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Toyota’s relationships with its Suppliers

Toyota Paper

Toyota has a much tighter relationship with its suppliers than seen at a Western assembly plant. A Japanese assembly plant has only 300 suppliers while typical Western assemblers have anywhere from 1000 to 2500 suppliers. The supplier pecking order is designated in tiers. First tier suppliers are highly involved in the manufacturing and design of the vehicle early in the process. Typically, first tier suppliers are working on vehicles three years ahead of production. In addition, their responsibilities are much broader than a Western supplier’s. For example, Western assemblers design the whole car and deliver prints to the suppliers. Suppliers bid on the exact specifications drawn up, and the assembler awards contracts based primarily on the lowest bid. Western suppliers rely on most of their profit to come from design changes. This gives Western assemblers a very strong disincentive to make design changes, even if it would improve the quality of the product. However, Japanese assemblers specify whole systems: for example, a braking system must fit within certain space dimensions and be able to stop the car within a certain distance. With such liberty in specifications, designers can design in low cost, instead of the Western method of cost cutting to win the bid. Since Toyota has their suppliers perform most of the design, Toyota's design and engineering staff is smaller than a Western manufacturer’s. Even though the suppliers are incurring design and engineering costs in their parts, Japanese suppliers are lower cost than Western suppliers, since Japanese suppliers can leverage their design cost savings on new model releases.

After production begins, continuous improvement initiatives focus on quality and costs. The assembler and supplier will work together to improve the supplier's performance. In this sense it is very much a collaborative relationship. For example, Toyota will incur the cost of sending TPS experts to the supplier. Toyota funds these efforts through shared gains. Toyota and its suppliers work together to divide the cost savings so that both companies benefit. The rewards are aligned with the desired behavior.

Western automotive manufacturers maintain relationships with several suppliers to avoid subjecting themselves to the power of any one supplier. Toyota follows this practice as well. Toyota will maintain contracts, where financial beneficial to do so, with a primary supplier, and a secondary supplier. Both will produce a certain quantity of parts for Toyota’s line. However, if either supplier starts performing poorly in terms of cost or quality, Toyota can then shift the proportions of parts purchased from one supplier to the other. This shifting of purchases is enough to send a signal that Toyota is looking for improvements, without the need of cutting off the supplier completely.

To motivate their suppliers to reduce inventory costs and improve incoming quality, Toyota requires frequent deliveries to its factory and has their suppliers carry the inventory necessary to support this. This is discussed in the previous section under JIT. If a quality defect occurs and rework becomes required, the supplier rework will be equal to the inventory; hence the supplier will be motivated to keep inventory at a minimum. Again the rewards are aligned with the desired behavior.

The Japanese model establishes lean production in their value chain to analysis cost and continuous improvement. The assembler and supplier work together to maximize efficiency. The mind set is supplier cost plus profit, instead of the Western mind set market price minus discount. Incrementally cost savings are shared and mutually respected.

Toyota’s relationships with its Customers and Dealerships

In Japan the Toyota Dealership network consists of five channels – Toyota, Toyopet, Auto, Vista and Corolla. The dealerships are named Toyota Vista, Toyota Corolla, etc. Each channel sells a portion of the total Toyota product range. For example, one channel may sell less expensive models, another sportier ones, and so forth. This enables Toyota to market to different groups of customers. Every channel clearly identifies the Toyota brand name to establish a link from manufacturer to customer. Unlike the American and European dealerships, Toyota owns all the dealerships in the supply chain.

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Toyota Paper

Each channel is directly tied into the product development process. During the entire development period for a new car model, staff members from the channel are on loan to development teams. This helps bring the voice of the customer into the design phase of the process. A Toyota employee knows exactly what the customer wants. Often, Western engineers can be surprised when they learn what their customers truly desire. The Toyota dealership sales force is well-educated, being comprised typically of college graduates, who have undergone an intensive training program at the “Toyota University”, studying sixty courses mostly related to marketing. Once the students graduate the “Toyota University” they begin selling cars. Toyota salespeople also have a tremendous knowledge of the engineering attributes of the vehicles they sell, in contrast to Western salespeople who are more commonly professional negotiators with very little engineering or marketing knowledge.

The Japanese salespeople are assigned to dealerships in teams of seven or eight, similar to the teams discussed at the assembly site. Within the dealerships, the focus of the group’s work is to solve their customers' problems. The dealerships keep open communication channels with the manufacturer continuously exchanging information. Employees in the dealerships take as equal an ownership in Toyota vehicles as the assemblers that build Toyotas in distant factories. The amount of ideas and customer feedback that is captured at the dealerships are typically lost at Western dealerships. This is an important channel for determining improvements to the vehicle’s quality and performance.

Outside of the dealerships, Toyota salespeople sell door-to-door. The Toyota salesperson can then know as much about their customer's family as the family physician and stock broker combined, for example, age of parents, age of children, the number of vehicles, age of the vehicles, the amount of available parking space, etc. The salesperson utilizes the data and optimizes their sales calls to be most effective. Also, the salesperson uses their knowledge of their customers to suggest the most appropriate product. Most automobile orders are placed directly onto the factory, as opposed to buying off the lot. In keeping with Toyota’s lean inventory system, Toyota dealerships in Japan have very little inventory, while Western dealerships have on average sixty days of inventory.

For the Western manufacturers, forecasting to demand is critical and often wrong. Occasionally, vehicles sit on the dealer lot for many months, because they have an undesirable color or

options. The customers ultimately pay for this excessive inventory. The associated inventory holding cost adds no value to the vehicle and is simply a loss. However, by being able to respond, through flexible manufacturing, to a customer’s order within six weeks, Toyota is able to

encourage more orders directly from the factory.

Since the Toyota sales force communicates

directly with the factories, the manufacturer knows exactly what the customer demand is at any one time. This assures Toyota the ability to optimize the factories and the right mix and quantity of vehicles. Western factories need to depend on the less effective communication link with the independent dealerships, who themselves have their own objectives for inventory. This causes excess inventory holding costs, adding to the cost of the vehicle.

All of Toyota, from assembler to the salesperson, respect each other like family. They all work for the same company and their profit sharing and job security depend on each other. Salespeople usually stay at their assigned dealership for long periods of time as they have good incentives to stay. In addition, the Toyota family is extended to the customer. Salespeople sell vehicles with the intention of their 'family' to be repeat customers. Also, since Toyota salespeople share commission from the team's performance there is less unproductive competition between salespeople for commissions to detract from the customer experience. The Toyota sales team, much like the approach taken between assembler and supplier, works together to improve each other's abilities, raising all members' commission.

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber

Toyota Paper

Sources/Further Reading

General sites of interest:






Specific articles:

FT.com: HIROSHI OKUDA: Toyota's man of vision, by Alexandra Harney

Japanauto.com: Hiroshi Okuda, Toyota Chairman, Elected to Lead Japan Automobile Manufacturers Association

APEC 1999: Keynote Speech by Hiroshi Okuda, APEC Symposium on the Asian Economy, Tokyo, Japan, July 23, 1999

Preview NetClipping http://www.fiepr.com.br/netclip/2000/1505wsj.htm: Founding Clan Vies With Outsider For a Place at the Top of Toyota – May 15, 2000

PeopleSoft.com: ERP Implementation at Toyota

www.economist.com: Wave goodbye to the family car Jan 11, 2001

HBS Case 9-693-019: Toyota Motor Manufacturing, U.S.A., Inc. by Professor Kazuhiro Mishina and Kazunori Takeda, copyright © 1992 by the President and Fellows of Harvard College.


The Machine That Change The World, 1990, James P. Womack, Daniel T. Jones, and Daniel Ross, Rawson Associates - New York, Publisher – Simon & Schuster – New York

The Japanese Automobile Industry, Technology & Management at Nissan & Toyota, 1985 (reprinted 1991), Michael Cusumano, Harvard East Asian Monographs 122

A Fyke, G Mi, C A Palumbo, Y Wada, G Webber