The Machine that Changed the World

Womack, James, Jones, Roos

Based on Taiichi Ohno, Eiji Toyoda

Covers the 5 year study of the auto industry, identifying what made Toyota (lean) a superior automotive manufacturer over all other (traditional mass production) companies.

Suppliers p59
Product Development & Engineering p63
Most Important Organizational Features of a Lean Plant p99
Running the Factory p79
Design p105
Starting Off in Lean Production p129
Coordinating the Supply Chain p146
Establishing Prices and Jointly Analyzing Costs p148
Dealing with Customers p169
Managing the Lean Enterprise
Proposed Multiregional Motors p220
Diffusing Lean Production p225
Completing the Transition p257
Outdated Thinking about the World Economy p260
End Notes p289

Mass production:
– almost anyone could drive & repair the car
- key to the assembly line: the complete & consistent interchange ability of parts & the simplicity of attaching them to each other.

Because the new techniques were easy to master & production workers were idle during the die changes, Ohno let the production workers perform the die changes as well, removing the need for die change specialists. Endless experimentation led to time reduction for die changes decreased from 1 day to 3 minutes, where he discovered it cost less per part to make small batches of stampings than to run off enormous lots (due to reduced inventory carrying costs, and stamping mistakes show up immediately).

If workers failed to anticipate problems before they occurred & didn’t take the initiative to devise solutions, the work of the whole factory could easily come to a halt. Holding back knowledge & effort – repeatedly noted by industrial sociologists as a salient feature of all mass production systems – would swiftly lead to disaster in Ohno’s factory.

Toyota – pay was steeply graded by seniority rather than by specific job function and tied to company profitability through bonus payments (rights of workers went far beyond what most unions had been able to negotiate for mass production workers in the west)
- employees also agreed to be flexible in work assignments and active in promoting interests of the company by initiating improvements rather than merely responding to problems. A.k.a ‘if we are going to take you on for life, you have to do your part by doing the jobs that need doing’

- in mass production, none of the specialists beyond the assembly worker was actually adding any value to the car. The assembly workers could probably do most of the functions of the specialists and do them much better because of their direct acquaintance with conditions on the line.
- Ohno experimented by grouping workers into teams with a team leader, teams were given a set of assembly steps, their piece of the line, and told to work together on how best to perform the necessary operations. The team leader would do assembly tasks as well as coordinate the team, and would fill in for any absent worker.
- The team’s next job was housekeeping, minor tool repair, and quality checking. After teams were running smoothly, he set time aside periodically for the team to suggest ways collectively to improve the process (known here as quality circles)
- This continuous, incremental improvement process (Kaizen in Japanese) took place in collaboration with industrial engineers
- Workers should think any error they allow to continue down the line will be cause for disciplinary action, as this error will compound as it moves down the line, causing enormous rectification work, or possibly not detected at all. Also, because of late detection, a large number of similarly defective vehicles would be built before the problem was solved
- In the case an error is detected, the whole line is stopped immediately and the whole team come together to work on the problem.
- The 5 Why’s; production workers are taught to trace systematically every error back to its ultimate cause (by asking why as each layer of the problem is uncovered), then devise a fix so it will never occur again
- Initially the line stopped constantly and workers became discouraged; however with experience identifying and tracing problems to their ultimate cause, number of errors dropped dramatically, resulting to yields approaching 100%
- Rework before shipment fell continually, and quality of shipped cars steadily improved because:
o Quality inspection, no matter how diligent, simply cannot detect all the defects that can be assembled into today’s complex vehicles
- Today, Toyota plants have practically no rework areas & perform almost no rework (mass prod plants devote 20% of plant area & 25% of total hours to effort fixing mistakes), and delivered cars have the lowest number of defects of any in the world, comparable to the very best of German luxury car producers


under Mass Production,

o suppliers have little opportunity of incentive to suggest improvements in the production design based on their own manufacturing experience;
o they have no practical way of optimizing their parts for the buyer because they are given practically no information about the rest of the vehicle
o the focus on short term cost pits suppliers against one another, blocking the flow of information horizontally between suppliers, particularly on advances in manufacturing techniques; preventing them from steadily decreasing the cost of their production through improved organization & produces innovations;
o the buyer, knowing little about a supplier’s manufacturing techniques, has no way of improving quality except by establishing a max acceptable level of defects. As long as most firms produce to about the same level of quality, it is difficult to raise this level.
- Regarding co-coordinating the flow of parts within the supply system on a day to day basis: inflexibility of tools in supplier plants (comparable to the inflexibility of stamping presses in assembler plants) and the erratic nature of orders from assemblers responding to shifting market demand, caused mass production within supplier plants which results in high inventory costs and routine production of thousands of parts later found to be defective when installed at the assembly plant

Lean approach to components supply

- Organize suppliers into functional tiers; 1st tier suppliers were responsible for working as an integral part of the product development team in developing a new product, which would work in harmony with other systems
- 1st they’re given a performance specification (ex. Design a set of brakes that can stop a 2200lb car from 60 mph in 200 ft 10x in succession without fading. Brakes should fit into a space 6” x 8” x 10” at the end of each axle and be delivered to the assembly line for $40 a set.
- Suppliers are told to deliver a prototype for testing; if the prototype worked, they got a production order.
- ***Toyota did not specify what the brakes were made of or how they were to work; these were engineering decisions for the supplier to make
- 1st tier suppliers were encouraged to talk among themselves about ways to improve the design process
- Because each supplier (for the most part) specialized in one type of component and did not compete in that respect with other suppliers in the group, sharing this information was comfortable & mutually beneficial
- Each 1st tier supplier formed a 2nd tier of suppliers under itself. Companies in the 2nd tier were assigned the job of fabricating individual parts. These suppliers were manufacturing specialists, usually without much expertise in product engineering but with strong backgrounds in process engineering and plant operations
- Because 2nd tier suppliers were all specialists in manufacturing processes & not competitors in a specific type of component, it is easy to group them into supplier associations so that they to can exchange information on advances in manufacturing techniques
- Toyota spun its in-house supply operations were quasi-independent 1st tier supplier companies where Toyota retained a fraction of the equity and developed similar relationships with other suppliers who had been completely independent. As the process proceeded, 1st tier suppliers acquired much of the rest of the equity in each other (12 – 22% in each on average)
- Toyota also acts as banker for its supplier group, providing loans to finance the process machinery required for a new product
- Toyota also shared personnel with supplier group firms
o By lending them personnel to deal with workload surges,
o and transferring senior managers not in line for top positions at Toyota to senior positions in supplier firms
- Toyota encouraged suppliers to perform considerable work for other assemblers and for firms in other industries, because outside business almost always generated higher profit margins (ex. A 1st tier firm Nippondenso does 60% of its business with Toyota, who holds 22% of it’s equity; 30% of its equity is held in the Toyota supplier group; 6% by a German components group, totaling 58%. Remaining 42% traded publicly)
- Just in time is Kanban in Japanese, making close proximity important to reduce transportation costs
- It eliminates practically all inventories, so if one small part of the production system fails, the whole system comes to a stop – removing the safety net - necessary to focus every member of the vast process on anticipating problems before they become serious enough to stop everything

Lean Product Development & Engineering

- In mass production, an engineer who spends his whole career designing auto door locks is not an expert on how to make door locks (a door lock manufacturing engineers job). He only knows how he thinks they should look and work if made correctly.
- Divided labour systems have many weaknesses. Ohno & Toyoda decided product engineering encompassed both process & industrial engineering.
- They formed teams with strong leader that contained all the relevant expertise. Career paths were structured so that rewards went to strong team players rather than to those displaying genius in a single area of product, process or industrial engineering, but without regard to their function as a team, resulting in a dramatic leap in productivity, product quality and responsiveness to changing consumer demand
- As Toyota could deliver superior reliability (which consumers wanted) they found they no longer had to match exactly the price of competing mass production products.
- Their flexible production system & its ability to reduce production engineering costs let the company supply the product variety buyers wanted with little cost penalty. A lean producer needs half the time a mass producer does to design a new product, so they can offer twice as many products with the same development budget.
- Japanese companies initially minimized distribution costs by focusing on 1 or 2 product categories in each export market.
- The traditional North American system is a system marked by a lack of long term commitment on either side, which maximizes feelings of mistrust. In order to maximize bargaining position, everyone holds back info, the dealer about the product, the consumer about his true desires, and everyone loses in the long term.
- Toyota’s strategy was to develop a long term, or life long relation between the assembler, dealer and buyer by building the dealer into the production system and the buyer into the product development process. The dealer became part of the production system as Toyota gradually stopped building cars in advance for unknown buyers and converted to a build to order system in which the dealer was the first step in the kanban system, sending orders for pre-sold cars to the factory for delivery to specific customers in 2 to 3 weeks.
- Dealers worked with the factory to sequence orders in a way the factory could accommodate. The lean system could not deal with large surges or troughs in total demand or abrupt shifts in demand between products that could not be built with the same tools. Sequencing orders was possible because sales staff did not wait in the showroom for orders, they went directly to customers by making house calls. When demand began to dip they worked more hours, and when demand shifted they concentrated on households they knew were likely to want the type of car the factory could build.
o This was possible because of a second feature of aggressive selling – massive database on households and their buying preferences Toyota gradually built up on every household ever showing interest in a Toyota product. Using this information sales staff could target their efforts to the most likely buyers.
- Toyota focused relentlessly on repeat buyers; they were determined never to lose a former buyer & could minimize the chance of this happening using data in the consumer data base to predict what buyers would want next as their incomes, family size, driving patterns, and tastes changed. Toyota went to its existing customers in planning new products.

Running the Factory

Lean believes in having as little space as possible so that face to face communication among workers is easier, and there is no room to store inventories
o When a worker found a defective part, he tagged it and sent it to the quality control area in order to obtain a replacement part. Once in quality control, the part is subjected to the 5 why’s to trace the defect to its ultimate cause so it will not recur
o Lean organization must come before high tech process automation if a company is to gain the full benefit. Some GM plants had a higher level of automation than others which were more productive; so automation is not a factor in explaining the productivity gap.
o The first production models of any new car are unlikely to reach consumers. Instead, competitors buy them, immediately tearing them apart for competitive assessment
o Very few car companies conducted systematic benchmarking studies of their competitors.
o Manufacturability is conducive to high performance in the factory
o GM noted 41% of the productivity gap could be traced to the manufacturability of the 2 designs (GM’s and Ford’s). The other major cause of the productivity gap was plant organizational practices.
o Ease of manufacture is one of the most important results of a lean design process.
o There was no correlation at all between the number of models and body styles being run down a production line and either productivity or product quality.
o To those who think a focused factory is the solution to their competitive problems: plants in the survey with the highest under the skin complexity also had the highest productivity and quality

Most Important Organizational Features of a Lean Plant

2 key features:

1) It transfers the maximum number or tasks and responsibilities to those workers actually adding value to the car on the line, and

2) it has in place a system for detecting defects that quickly traces every problem, once discovered, to its ultimate cause.

o Teamwork among workers and a simple comprehensive information display system makes it possible for everyone in the plant to respond quickly to problems and understand the plants overall situation. All information, daily production targets, current production, equipment breakdowns, personnel shortages, overtime required, etc. are displayed on boards (electronic displays) visible from every work station. Every time anything goes wrong anywhere in the plant, any employee who knows how to help runs to lend a hand.
o In the end a dynamic work team emerges as the heart of the lean factory. Workers are taught a wide variety of skills so all jobs in their work group can be rotated and workers can fill in for each other. Workers then need to acquire many additional skills: simple machine repair, quality checking, housekeeping, materials ordering. Then they need encouragement to think actively, proactively, so they can devise solutions before problems become serious.
o Plants trying to adopt lean production reveal workers respond only when there exists some sense of reciprocal obligation, a sense management actually values skilled workers, will make sacrifices to retain them, and is willing to delegate responsibility to the team.
o Merely changing the organization chart to show “teams” and introducing quality circles to find ways to improve production processes are unlikely to make much difference
o Workers should have confidence in the operating management, who works hard to understand lean principles, and believe that if all employees worked together to get the job done in the best way the company could protect their jobs.
- Lean production offers a creative tension where workers have many ways to address challenges. This is what separates manual factory work from professional think work in mass production
- For this system to work, management must offer its full support to the factory work force and, when the market slumps, make sacrifices to ensure job security that has historically been offered only to valued professionals.
- If management fails to lead and the work force feels no reciprocal obligations are in force, it is quite predictable lean production will revert to mass production.


Most automotive companies develop some sort of matrix in which every employee involved in developing a product reports both to a functional department and to a development program. The leadership challenge is managing the matrix to satisfy the needs of both the functional department and the product development program.

At Honda, 1 person is appointed Large Project Leader (shusa). Each project member is on loan from a functional department. Appropriate people are borrowed from the relevant departments and transferred to the project for its life. The Large Project Leader’s task is to manage, and he able to move the project along rapidly because all necessary resources are under his direct control.

- the magnitude of the performance difference between lean and mass production: nearly a 2:1 difference in engineering effort and a saving of 1/3 in development time.
- Innovations are most useful when they are available to everyone.
- There are 4 differences in design methods employed by mass and lean producers:
o leadership,
o teamwork,
o communication
o simultaneous development.
Together these make is possible to do a better job faster with less effort.

o Shusa is needed, the leader of the team whose job it is to design and engineer a new product and get it fully into production. The position of shusa carries great power and may be the most coveted in the company
o Position of directing a process requiring far too many skills for any one person to master.
o We will always need craftsmen to exist, but we are in an era when the skills involved are not so much technical as social and organizational

o Employees selected for the team retain ties to their functional department, but for the life of the program they are clearly under the control of the shusa. How they perform in the team, as judged by the shusa, will control their next assignment, whish will probably be another development team.
 The problem with short term loan in mass production facilities is the peoples focus:
• the members’ success depends on moving up through their functional specialty, and they work hard in the team to advance the interest of their department.
o Japanese companies are able to use fewer people partly because efficient organization requires fewer bodies, but also because there is so little turnover.

o Many western development efforts fail to resolve critical design trade offs until very late in the project; one reason is US team members show great reluctance to confront conflicts directly. They make vague commitments to a set of design decisions – agreeing to try to do something as long as no reason crops up not to;
o In Japan team members sign formal pledges to do exactly what everyone has agreed upon as a group. Conflicts about resources and priorities occur at the beginning rather than at the end of the process. Another reason is a design process that is sequential, going from one department to the next rather than being kept at team headquarters, makes communication to solve problems very difficult in any case.
o In Japanese lean projects, numbers of people involved are highest at the outset. All relevant specialties are present, and the shusa’s job is to force the group to confront all difficult trade offs they’ll have to make to agree on the project.

Simultaneous Development
o Die production begins at the same time as body design, because body designers and die designers are in direct, face to face contact and probably have worked together in previous product development teams.
o Die designers know the approximate size and number of panels for the new car, so they begin making rough cuts in the steel, so it’s ready to move to final cutting as soon as the final panel designs are released (requires understanding of panel design process & anticipation of designers final solution)
o Die cutters have special quick change cutting tools, allowing one machine to handle many different types of cuts, so the dies being cut spend much less time in queues.
o Suppliers have up to 51% share in engineering the assemblers product

It is necessary to build up the plant’s production rate slowly, stopping as necessary to get each step tight rather than rushing ahead and going back later to rework errors not just in the cars but in the entire production organization.

Starting off in Lean production

- University trained mechanical, electrical & materials engineers start off assembling cars. At Honda all entry level engineers spend their first 3 months working on the assembly line. They’re then rotated to the marketing department for 3 months. They spend the next year rotating through the engineering departments: drive train, body, chassis, and process machinery. After they have been exposed to the entire range of activities involved in designing and making a car, they are ready for an assignment to an engineering specialty like engine department
- Initially they will likely be assigned to a new product development team. There they will do very routine work, largely adapting established designs to the precise needs of the new model. This task continues for up to 4 years.
- After successfully working on a new development project, the young engineer is likely to be transferred back to the engine department to do more fundamental work, perhaps on the design of a new engine (an engine development program, like a new model development program, requires 3 – 4 yrs between initial concept and actual production.
- After finishing this work on a 2nd type of development team, some of the most promising are selected for additional academic training and then set to work on longer term & more advanced projects; (an engineer might study how to incorporate fiber reinforcements into highly stressed metal parts). In working on these projects, the engineers consult closely with academic experts on retainer to the company. These longer term development projects have a very specific objective: to remedy some weakness in the company’s products identified by the product or major component development teams – so they are tied tightly to the needs & timetable of specific development projects. The work is conducted by engineers who thoroughly understand the practicalities of product development and production. To ensure engineers maintain their sensitivity, all are assigned to spend a month each year working in 1 of the other functional areas of the company (selling, factory operations, supply coordination, etc.)
- Engineering, even the most advanced sort, must be tied into the key market driven activities of the company

- When Japanese planned around rising energy prices and smaller engines, things went the opposite direction and consumers demanded larger more powerful cars. So the product development teams turned to the advanced engineering groups, which suggested introducing every available technical feature to boost the performance for the basic 4-cyl engines.
- These features were conceptually simple: fuel injection rather than carburetors, 4 valves per cylinder instead of 2, balanced shafts in the bottom of the engine, turbochargers and superchargers, a 2nd set of overhead cams, and an additional set of cams for use at higher speeds.
- Engineers worked hard on refinement: paying attention to the smallest details of an engine design so the finished engine runs smoothly & without complaint at all speeds in all driving conditions, imitating the performance of a much larger engine, imitating the performance of a larger engine.
- Because engineers paid endless attention to manufacturability; because they were going against one good engineering practice (adding parts & complexity to an already complex device), they had to work extra hard at manufacturability so the complex engines would work properly every time & entail only the minimum of extra production expense

Coordinating the Supply Chain

1/3 to 1/8 as many suppliers are involved compared to mass production, because lean producers assign a whole component to a ‘first tier supplier’ who is in charge of delivering the complete component to the assembly plant. This allows the suppliers to collaborate in producing parts that function in harmony with each other

- the 1st tier supplier typically has a team of 2nd tier suppliers (independent companies who are manufacturing specialists. These companies may engage helpers in a 3rd or 4th tier of the supply pyramid. The latter companies make individual parts according to drawings supplied by the 2nd tier firm.
- 1st tier suppliers assign staff members (resident design engineers) to the development team shortly after the planning process starts and 2 to 3 yrs prior to production. As product planning is completed, with continuous input from the suppliers’ engineers, different areas for the car (suspension, electrical system, lighting, climate control, seating, steering etc.) are turned over to that area’s supplier specialist to engineer in detail. So it is that 1st tier suppliers have full responsibility for designing and making component systems that perform to the agreed upon performance specification in the finished car. The supplier’s development team, with its own shusa and with the help of resident design engineers from the assembler company and the 2nd tier suppliers, then conducts detailed development and engineering.

Almost all relationships between supplier and assembler are conducted within the context of the basic contract, which is on one hand, an expression of the assemblers & suppliers long term commitment to work together. It also establishes ground rules for determining prices as well as quality assurance, ordering & deliver, proprietary rights & materials supply a.k.a.: a cooperative relationship.

Establishing Prices and Jointly Analyzing Costs

- first the lean assembler establishes a target price for the car of truck and then, with suppliers, works backwards, figuring how the vehicle can be made for this price while allowing for a reasonable profit for both the assembler and the suppliers.
- It is a ‘market price minus’ system as opposed to the western ‘supplier cost plus’ system
- To achieve target cost, both assembler & supplier use value engineering techniques to break down the costs of each stage of production, identifying each factor that could lower the cost of each part. Once this is completed, the 1st tier supplier designated to design and make each component enters into mutual bargaining with the assembler, not on the price, but on how to reach the target and still allow a reasonable profit for the supplier. (This is the opposite process of price determination in the West)
- Once the part is in production, a technique called value analysis is used to achieve further cost reductions. Value analysis, which continues the entire time the part is being produced, is a technique for analyzing the costs of each production step in detail, so that cost critical steps can be identified and targeted for further work to reduce costs still further.
- These savings may be achieved by incremental improvements, or kaizen, the introduction of new tooling, or the redesign of the part.
- Machine operators can collect the data in many cases, making it possible to do a complete cost analysis several times a year and monitor progress in cutting costs accurately
- For the lean approach to work, the supplier must share a substantial part of its proprietary information about costs and production techniques; both go over every detail in the supplier’s production process looking for ways to cut costs & improve quality; in return the assembler respects the supplier’s need to make a reasonable profit.
- Agreements between the 2 on sharing profits gives suppliers the incentive to improve the production process, because it guarantees the supplier keeps all the profits derived from its own cost saving innovations and kaizen activities.
- By agreeing to share the profits from joint activities and letting suppliers keep the profits from additional activities they undertake, the assembler relinquishes the right to monopolize the benefits of the suppliers’ ideas.
- Once a component is designed and production begins, lean production has few running changes because the new product tends to work the way it is supposed to.

- It is almost universal components are delivered direct to the assembly line, several times a day, with no inspection of incoming parts. To make just in time work, the system has a signal sent from the assembler back to the supplier indicating to make more parts.
- In Japanese lean, employees are considered a fixed cost because they are there for life. In western firms, labour is considered a variable cost as employees are hired and laid off as needed. Due to employees being a fixed cost, Japanese lean works hard at heijunka (production smoothing).
- During market slumps, the aggressive selling system has made it possible to cut prices in order to keep production volume steady.
- Another motive for practising heijunka: to ensure a steady volume of business for suppliers. Suppliers are given advanced notice of changes in volume. If changes persist, assemblers work with suppliers to find other business. Assemblers do not pull activities in house so it can keep its own staff working. There is a commitment to share the bad times as well as the good. Suppliers are to a degree, considered a fixed cost like employees.

- Suppliers know as long as they make a good faith effort to perform as they should, the assembler will ensure they make a reasonable return on their investment. Sharing with other group members means the performance of the whole group will improve and every member will benefit. Active participation in mutual problem solving through the supplier group is an act of self interest
- To ensure everyone tries hard continually, the assemblers usually divide their parts order between 2 or more members of their supplier group, to prevent anyone letting down on quality or delivery reliability [Remember prices have already been set].
- When a supplier falls short on quality or reliability, the assembler does not dismiss the company; instead, they shift a fraction of the business from that supplier to its other source for that part for a given period of time as a penalty. Since costs & profit margins have been carefully calculated on an assumed standard volume, shifting part of the volume can have a devastating effect on the profitability of an uncooperative supplier. This form of punishment is highly effective in keeping everyone on their toes, while sustaining the long term relationship essential to the system.
- Suppliers are never kept in the dark about their performance. There are simple supplier grading systems, and suppliers receive scores based primarily on:
o the number of defective parts found on the assembly line,
o % of on time deliveries in the proper quantity and sequence, and
o performance in reducing costs

- Suppliers regularly compare their scores with those of their competitors, discuss the findings, and highlight problem areas for attention, often with the help of engineers loaned from the assembler. It assesses the supplier’s attitude and willingness to improve. Only if there is no sign of improvement will the supplier, in the end, be fired.
- “We will stick with any supplier as long as we believe they are making an earnest effort to improve. It’s only when we think they have given up we bring the relationship to an end.”
- Mutual interdependence


Ways Assemblers can reduce the number of suppliers
o Assigning whole components to a 1st tier supplier. Assembler’s admin cost for coordinating supply plummets
o Reducing the parts count in components.
- In the Toyota system, suppliers should never commit themselves to delivering at unrealistic prices but must be prepared instead to lower their price continually over the life of the model.
- For parts that are competitive on price but not quality, one strategy is to station a resident engineer at the supplier fulltime, so the quality problems can be attacked immediately

Most reforms in the West have involved pushing the traditional mass-supply system to its limits under pressure, instead of fundamentally changing the way the system works.

Western assemblers damage themselves through their unwillingness to give up the power based bargaining they have relied on for so long.
Japanese operate in a framework that channels the efforts of both parties toward mutually beneficial ends with a minimum of wasted effort.
They abandon power based bargaining and substitute an agreed upon rational structure for jointly analyzing costs, determining prices, and sharing profits – resulting in adversarial relationships giving way to cooperative ones.

Japanese suppliers face constant pressure to improve their performance, through constant comparison with other suppliers and contracts based on falling costs.

In lean production, suppliers can get on with the job of improving their own operations – with the knowledge they will be fairly rewarded for doing so.

Dealing with Customers

The link between the customer and production is the logical place to start in understanding any market driven manufacturing process. The success of mass production is geared to the needs of the manufacturing and design processes, with the customer coming last.

Ford demanded full payment from his dealers at the shipping dock but bought his parts and raw materials on consignment.

Since Japanese exporters could not accept special orders due to the distances involved in supply, they concentrated on adding a variety of options as standard equipment on the cars they export.

It is taken as a given a high level of service entails high distribution costs and this can only be justified on luxury makes with high gross margins. Cheaper items can logically only be sold through dealers offering the minimum of assistance to the consumer.

After visiting showrooms, they were amazed at just how little salespeople do know about their products.

Dealers (Channels) in Japan have different labels and model manes for their cars, but the main thing that differentiates them is their appeal to different groups of customers. During the entire period new cars destined for sale through the channel are being developed, staff members from the channel are on loan to development teams. Channels provide training to staff. They also provide staff and a full range of services for those dealerships where it does not own the facilities. Employees, many who are college grads, are hired right after graduation each spring and experience intensive training at Corolla ‘university’ which offers 60 courses, mostly related to marketing. Once fully trained - formal training continues every year for employees – they’re assigned to specific dealerships & begin selling cars.

Sales staff in each dealership is organized into teams of 7 or 8 (similar to teams in Toyota assembly plants). These teams are multi-skilled; all members are trained in al aspects of sales: product information, order taking, financing, insurance, and data collection, as well as to systematically solve owners’ problems as they arise.

Each team begins and ends the day with a team meeting. During the bulk of the day, team members disperse to sell cars door to door, with exception of one team that staffs the information desk in the dealership. Each month, the entire team takes a day to solve systematically any problem that have cropped up, using the 5 why’s and other problem solving techniques. These meetings are the equivalent of the quality circle in the factory.

Selling cars door to door; team members draw up a profile on every household within the geographic area around the dealership, they periodically visit each one, after first calling to make an appointment. During their visits they update the household profile: How many cars of what age does each family have? What is the make and specifications? How much parking space is available? How many children in the household and what use does the family make of its cars? When does the family think it will need to replace its cars? This information is fed back to the development teams.
Based on the info and a knowledge of the corolla product range, the sales representative suggests the most appropriate specification for a new vehicle to meet this particular customer’s needs (even if the family has doubts about what to buy or if it’s really in the market for a car, so the sales rep may bring a demonstration vehicle on the next visit. Once a household is ready to buy, it places a special order through the rep.

The vehicle order also typically includes a complete financing package, trade in on the old car, and insurance, because the sales agent is trained to provide one stop service for the buyer.
Factory execs try to make an educated guess about the demand for different versions, colors and so forth. Based on this forecast, they establish the plant’s build schedule, which is also given to components suppliers so they know what to make. Accuracy of these forecasts depends on how frequently the build schedule is revised (usually every 10 day). Once orders come in, the assembler adjusts the build schedule to make the specific cars the customer wants. The market research provides the basis for a more accurate build schedule

Because the customer is buying a car tailored to his needs, the haggling is almost eliminated. The salesperson doesn’t need to discount the product in order to get rid of a car that the customer would rather not have. The prime objective of the dealer is to keep the customer feeling he is part of the dealer’s family; customers should think they’ve been treated well and paid a fair price.

This is to be one of many transactions the customer does with this salesperson, who probably has already sold the customer a car in the past, taken care of the formalities of registering it an disposing of the traded car, arranged to have the car serviced, and seen it through the rigorous government inspections. Quite possibly the salesperson will have battled with the insurance company for an accident claim on the customer’s behalf & lent him a car while the customer’s own car was being repaired. The Japanese system aims to maximize the stream of income from a customer over the long term. It is clearly understood the dealer will fix any problems the owner encounters with the car even after the end of the formal warranty. Ordered cars are ready in 10 – 14 days and personally delivered by the sales representative. The new car buyer need never go near a dealership.

Lean dealerships have few cars on premise other than 3 – 4 demonstrator models. Stock of cars in the Japanese system averages 21 days. Sales teams are paid on a group commission, so they have no incentive to grab the customer before the next salesperson does or suggest he can provide a better deal. Instead members of the team all join in the discussion once the customer approached them to ask a specific question.
The heart of any Japanese dealership is its service area, whose primary purpose is to prepare vehicles for the Ministry of Transport inspections (a task providing a major source of revenue).

Retired cars: dealer resells 1/3 in the local market, 1/3 is shipped to other countries for sale, 1/3 is scrapped because repair costs the dealer would incur. Dealers repair anything that goes wrong, so they don’t want to take the risk of taking on high future costs or tarnishing their reputation.

The key objective of every distribution channel in Japan is to build and nurture lifetime channel loyalty. Once a new car is delivered, the owner becomes part of the Corolla family. This means frequent calls from the person selling the car – who henceforth becomes the owner’s personal sales agent. The rep will ensure the car is working properly and ferret out and problems the owner may be having, to relay back to the factory. The rep also sends the owner a birthday card or condolence card, and will call to ask if sons and daughters will need a car as they leave for college or 1st jobs. The channel is obsessed with market share and tries never to lose a single owner; relatively short term warranties are ignored. The channel will generally continue to fix defective cars at no cost to the owner throughout the vehicles normal life, provided the owners have not abused them (this implicit warranty does not apply to routine wear, such as replacing brake and clutch linings).

When sales lag, the sales force puts in more hours, and when sales lag to the point the factory no longer has enough orders to sustain full output, production personnel can be transferred into the sales system.

The buyer is treated as an integral part of the production process. The whole distribution system contains 3 weeks supply of finished units, most of which are already sold. In the same way lean producers only have a limited number of suppliers, they only work with a limited number of dealers, who all form an integrated part of their lean production system.

Japanese companies are aware of the costs of their system – they analyze the costs of every step in production down to the last yen.

The periodic surveys of practically all consumers in the Japanese market is the 1st step in the product development system. It avoids the need for the time consuming, expensive & frequently inaccurate market assessment surveys in the west.

When a consumer enters a Corolla dealership they are greeted with an elaborate computer display. Each owner in the Corolla family has a membership card that can be inserted in the display, which shows all the system’s information on that buyer’s household and asks if anything has changed. If so the machine invites the owner to enter new information. The system then makes a suggestion about he models most appropriate to the households needs, including current prices. A sample of each model is usually on display in the showroom immediately adjacent to the computer display. If interested the buyer can approach the sales desk. Cars sold in this manner are about 20% and rising steadily. Companies are planning to make the same information available at every owner’s home on a computer. The customer has access to other data bases too – on obtaining financing and insurance, parking permits, and information on 2nd hand cars (service & inspection history).
By keeping current customers happy, the company can focus on new customers.

Managing the Lean Enterprise

– had holding company at the top

– consisting of about 20 major companies, one in each industrial sector, no holding company.
– They’re held together by cross locking equity structures – each company owns a portion of every other company’s equity in a circular pattern – and a sense of reciprocal obligation.
– Among the key companies in every group are a bank, an insurance company, and a trading company.
– Each has substantial cash resources that can be made available to the members of the group.
– Their key purpose is to help each other raise investment funds – compared to the western stock market system for raising funds where stocks/loans are dropped at the 1st sign of trouble, and owners a.k.a. shareholders usually fail to confront the problem of clear slippage in competitive position until very late in the game.

By contrast, the Japanese group system is patient and extremely long term in orientation – but very well informed and highly critical of inadequate performance. Groups can afford to invest heavily to finance corporate turnarounds, because their considerable knowledge reduces the risks of failure.

The best lean producers believe the point of production is where value is truly added, not through indirect managerial activities, and all employees need to understand this fact as soon as they enter the company. Those who stay in the factory grow increasingly able to solve problems. Management stresses that problem solving is the most important part of any job.
Management’s objective is to give employees increasingly challenging problems to solve in order to continually test their skills, even when no promotion up a ladder to section head or factory manager is possible.

Higher pay comes largely on the basis of seniority, with performance bonuses as well. Lean companies try to make employees understand that their capacity to solve increasingly difficult problems is the most meaningful type of advancement they can achieve, even if their titles don’t change.

For those with a specialized skill (mechanical engineering is most common), the lean producer attempts to harness the skill to a team process where it will be of maximum use. Team members are shifted to subsequent teams and how they may be asked to learn entirely new skills as they move through their careers.

Decision making and problem solving are pushed far down the ladder, reducing the need for layers of middle & senior managers to send orders down and transfer information up.
Key functions for managers are to tie the supplier organizations to the assembler organization and to tie together geographically dispersed units of the company. Typically, the company sends mangers at the mid career level to high level positions in the supplier companies in the assembler’s group and rotates mid and senior level mangers between the company’s operations, particularly the foreign operations.

The practices create a complex network of interpersonal relations, so the assembler and suppliers and those in the company’s international operation know each other through personal contacts. They are also the conduit through which the company’s culture is spread into the supplier system and to new regions.

Lean production achieves its highest efficiency, quality and flexibility when all activities from design to assembly occur in the same place. – “we wish we could design, engineer, fabricate and assemble the entire car in one large room, so everyone involved could be in face to face contact with everyone else”

Supplier plants are mostly located nearby so parts can be shipped from supplier to assembler in less than a day’s drive. In North America, companies have located in the Ohio and Detroit area because they want to be close to the headquarters of U.S. suppliers and be able to recruit engineers easily.

Doing it all near the point of sale (operating in each of the 3 major regions: Europe, N.A. Asian):

- provides protection from trade barriers & currency shifts.
- A multiregional, top to bottom production system has the advantage of rich product diversity.
- Lean production can gain most economies of scale at much lower volume per individual product compared with mass production
o Achieving this goal presumes the variety of products can be assembled in sequence on one large production line using several sizes of engine and transmission from a large engine plant and a large transmission plant. So companies with higher production volumes for all their products combined still have a competitive advantage.
o Consumers in different regions continue to demand different types of products and ***attach different images to the same product***
 German luxury cars are sold as taxis in Germany to create a volume base for the manufacturer, but are sold in N.A. & Japan at much lower volumes and much higher prices as luxury goods. Or Honda offering a car made in the US to Japan as a limited edition, more luxurious & expensive model.
 Honda plans to develop a set of products unique to each region, to serve volume segments in that region. Then they will export these products to other regions to fill market niches, hoping their limited volume and exclusivity will permit charging higher prices. Nissan Skyline could also have taken advantage of this in N.A.
- A multiregional producer can achieve higher levels of sophistication in its managers, who gain exposure to many different environments. Managers gain extra perspective trying to manufacture products in different environments – by moving personnel back and forth between its different international operating units.
o Since managers have been exposed to radically different ways of solving problems, they also have the flexibility to think more creatively about strategic issues facing the company.
- Protection against the regional cyclicality of the market. Sales in every country tend to be more volatile than the general economy, but the world major markets don’t go up and down at the exactly the same time. A company with a presence in all major markets has more protection against cyclicality.
o This makes it easier to plow through the next recession, where they will cut prices if necessary to sustain smooth production at transplant facilities.
- Denies competitors from defending markets from which to skim profits to use in competitive battles elsewhere in the world.
o When told they could only sell a fraction of the cars they had sold previously, the Japanese raised their prices until sales fell to the required level. They then used these profits to wage a market share war in Japan, probably selling below cost in many cases and reducing start ups or foreign competition.
o They also used profits in Japan to underwrite massive investments in production facilities in N.A. and the development of new products.

It is often the case, the company taking the boldest leap in the world market is the one in the weakest position at home. [this would make sense, as it is looking to gain a stronghold somewhere and at home hasn’t worked yet]
Honda is an example, acquiring strong devoted consumers in N.A. while being considered scrappy in Japan.
Its vulnerability to currency shifts and trade barriers was simply too great if it didn’t spread its manufacturing base.
Honda obtains a wide range of components from traditional Honda suppliers from Japan who have opened American transplants nearby and from established American owned suppliers.

The management challenge:
devise a form of enterprise that functions smoothly on a multiregional basis and gains the advantage of close contact with local markets and the presence as an insider in each of the major regions. At the same time, it must benefit from access to systems for global production, supply, product development, technology acquisition, finance, and distribution.

Centralization generates intense resentment because the most important decisions are reserved for headquarters.
Extreme decentralization into regional subsidiaries in isolation ignores the advantages of cross regional integration, and creates gilded cages for highly paid national executives unable to rise ay farther in their organization.
Strategic alliances with independent partner firms from each region; a variant on the last extreme decentralization approach, leave the central question of coordination and overall management unanswered.

Proposed Multiregional Motors

- an integrated, global personnel system that promotes personnel from any country in the company as if nationality did not exist. Requires learning languages and socialization and a willingness to work much of ones career outside the home country.
- A set of mechanisms for continuous, horizontal information flow among manufacturing, supply systems, product development, technology acquisition and distribution. Develop strong shusa led teams for product development, bringing skills together with a clear objective.
o The strongest Japanese companies believe if you aren’t working directly on a product actually heading for the market, you aren’t adding value. So involving as many employees as possible in development work and production is vital. Companies should keep their eyes on the product the customer will buy.
o Teams should stay together for the life of the product, and team members would then be rotated to other product development team, quite possibly in other regions and even in different specialties (for ex. Product planning, supplier coordination, marketing). In this was the key mechanism of information flow would be employees themselves as they travel among technical specialties and across the regions of the company. Everyone would stay fresh and a broad network of horizontal information channels would develop across the company.
o Assigning new projects in new regions is a way to create a global flow of horizontal knowledge and gives every employee a sophisticated understanding of the world.

- A mechanism for coordinating the development of new products in each region and facilitating their sale as niche products in other regions – without producing lowest common denominator products. Logically this is to develop a full set of products for its regional market. Other regions may order these products for cross shipment as niche products wherever demand warrants.
o By shipping products in roughly equal volumes among its regional markets, currency shifts can be not be as significant as losses in one area are offset by higher profits in another

- Internationalizing corporate equity so funds are raised in each region in rough correspondence with sales volume and manufacturing investment would largely eliminate this concern. Dividends could be paid in the currency of the region to insulate the firm from currency shifts between regions.

Diffusing Lean Production

Lean production is a superior way for humans to make things. It provides better products in wider variety at lower cost. It also provides more challenging and fulfilling work for employees at every level, from the factory to headquarters.

Confusion About Diffusion

Reason for lack of resistance with mass prod
- done in the same city as craft production it was replacing, so all skilled workers could find jobs.

Challenge for the progress of lean – companies and workers using older production techniques find it hard to adopt new ways pioneered in other countries (nationalistic reaction), resulting in delays of decades in adopting the new production methods.

Ford supplied his factories despite the strike because he could supply parts from somewhere else. It was more costly for Ford, but the strikers exhausted their savings and gave in.

As lean production replaces mass production but the same number of vehicles are built, many jobs will disappear. ***however this will be necessary in the coming labour shortage***

A severe crisis at Ford, which threatened the survival of the company, was breaking the logjam of old thinking and entrenched interests. Employees at all levels were ready to stop thinking about how to advance their careers or the interests of their department and start thinking about how to save the company. This situation is the very definition of a creative crisis, allowing Ford to implement many elements of lean production and the results showed in the market place.

Regarding a French plant, since they had not faced a challenge from lean producer, they were unable to initiate the change in mind set needed to implement lean production.

Once 1 company was firmly committed offshore – and as it became apparent that shifting currencies and persistent trade barriers made foreign investment inevitable – all the Japanese companies rushed to follow Honda’s lead to N.A.

Managers, not fully understanding and committed to the company’s production system, may not be able to introduce or sustain lean production in a new milieu. High performing company (not stated)’s approach has been to send a large number or experienced managers from Japan to run its US plant, and is getting superlative results, exactly comparable, in fact, to the company’s performance in Japan.
The difference is not the Japanese people, but the managers collectively possess many years of experience and know how in making lean production work consistently in assembly plants. “we believe our production system, with its many nuances, can be learned by anyone… but it takes 10 years of practice under expert guidance”

Lean in the sea of cyclicality
- workers share a fate with their employer, suppliers share a fate with the assembler, in a system of reciprocal obligation. There is a willingness to participate actively and to initiate the continuous improvements that are at the very heart of leanness.
- Instead of mass prod which lays people and suppliers off, supporting a lack of commitment from both
- Lean companies have been able to survive slumps by cutting margins
- Most employees at all levels in Japanese companies receive a large part of their compensation [up to 1/3] in the form of bonuses directly tied to the profitability of the company. When the market drops, the companies operating costs (labour costs) are lower and production can be restored to a prior (lower) level.

Western Careers vs. Japanese Careers
- workers in lean companies are reluctant to leave for better opportunities in other companies other industries because practically all hiring in lean companies is from the bottom only and compensation within is based largely on seniority. Leaving would often be pointless because the employee would almost always be worse off starting off at the bottom elsewhere rather than waiting for the situation to improve with the current employer.
- In the West, high value is placed on having a portable skill, a concept tied to Western education systems that stress discrete competences and certify students to prove the skills have been attained. This concern about skills is very similar to the mind set of the skilled craftsman, who was – and is – obsessed with maintaining his portable skills, although professional workers in the West rarely see the parallel.
- For lean production systems to succeed, it needs dedicated generalists willing to learn many skills and apply them in a team setting. The problem is brilliant team play qualifies workers for more and better play on the same team but makes it progressively harder to leave. So a danger exists that employees who feel trapped in lean organizations will hold back their knowledge or even actively sabotage the system.

It is a matter of understanding the internal logic of lean production. It is a system based fundamentally on doing as much manufacturing as possible at the point of final assembly, including product development.

Completing the Transition

- mass producers need lean competitors located across the road, as they tend to change only when they see a concrete nearby example to strip away all other explanations why the other manufacturer is succeeding.
- Western producers need a better system of industrial finance, one which demands they do better while supplying large funds that will be needed to turn these large companies around
- Mass producers will need a crisis to move those trying to advance their own careers and wages/benefits divorced from productivity gains to a new sense of purpose and team spirit – so they face the reality their whole approach to production is doomed, and organizational changes that are Thought of as difficult are suddenly easy.

One of the most important tenets of the Toyota Production System is never to vary the work pace. Therefore, as efficiencies are introduced in the factory or design shop, or as the rate of production falls, it is vital to remove unneeded workers from the system so that the same intensity of work is maintained. Otherwise the challenge of continual improvement will be lost. The same is true of mass production companies converting to lean production. Excess workers must be removed completely and quickly from the production system if improvement efforts are not to falter.
- retraining workers for positions outside the company will be necessary; this is opposed by governments who do not want to support the costs, and by unions who lose strength as workers leave their companies (even if it’s in the best interests of the workers)

Outdated Thinking about the World Economy

- Lean production dramatically raises the threshold of acceptable quality to a level that mass production, particularly in low wage countries, cannot easily match.
- Lean offers ever expanding product variety and rapid response to changing consumer tastes, something low wage mass production finds hard to counter except through ever lower prices. Continually dropping prices is unlikely to work, because
- Lean dramatically lowers the amount of high wage effort needed to produce a given description, and it keeps reducing it through continuous incremental improvement.
- Lean can fully utilize automation in ways mass production cannot, further reducing the advantage of low wages.

Introduction of lean production can dramatically reduce production costs to spur the stagnant domestic market, where only the upper middle class can now afford the output of the inefficient mass produced products

Beware the risk of extra-regional export strategies in a world of fluctuating currencies.

The plants moving to Lean which perform best are those with a strong lean management presence in the early years of operations, and those that have moved slowly and methodically to build up their domestic supply base.

Companies should consider building a truly global personnel system where new workers from all regions where a company has design, engineering and production facilities are hired in at an early age and given the skills, including language skills and exposure to management in different regions, needed to become full citizens of these companies. This will mean an equal opportunity to head the company someday.
- supplier groups in each region need to operate by exchanging shares in supplier firms and offering full citizenship. They will need to regionalize their equity base and borrowings so that shifting currencies will not hinder the most appropriate deployment of production in each region. The keiretsu will need to include foreign companies.
- Western companies will need to embrace the concept of reciprocal obligation, making a long term commitment to the company of group. Japanese companies will need to abandon their narrow national perspective and quickly learn to treat foreigners who accept the obligations involved as full citizens.

End Notes

In Japan, government and industry exhibit a remarkable ability for restructuring and rationalization through the mechanism of the ‘recession cartel’ in which excess capacity is retired in an orderly manner and the financial pain is shared equally among industry participants. Typically, rather than permanent pay cuts, capacity is retired and excess workers are transferred to growing companies within the keiretsu.

Notes from revised version (20 yrs later)

Standardization – creating a precise and commonly understood way to conduct every essential step in every process.

Managers are taught from the beginning of their career how to identify a problem in the area they are managing; determine the aspects of the process that are currently causing the problem and envision a better process that should be able o solve the problem. Then develop an implementation plan, measures the results, and adjusts the process as necessary (Plan-Do-Check-Act)

Toyota is more functional than originally thought.
Professionals work through their careers in one specialty; the difference is in the horizontal connectivity across the different functions

They thought employees were assigned for the life of the project & he controlled their career path.
Actually, they follow him because he leads, and they take responsibility for product development & production as supported by the bullet proof design & production processes developed within the functions.
Functions can be very effective in cooperating cross functionally with team leaders when the needs of the product are accurately stated, processes are adhered to, everything goes as it should and the project or process leader can get the attention of higher management if it doesn’t.
The key is the behaviour of the project leader, and of the function leaders as they jointly solve problems.

Emphasis on minimizing throughput time for the whole sequence of production steps while maximizing machine capability and availability (Toyota calls this ‘stability’) as opposed to machine utilization.

While robots are flexible and reprogrammable in theory, well trained production associates are more flexible and reprogrammable in pro-active, so Toyota never automates unless necessary.

No system of capital allocation makes much difference if the fundamental processes of a business are not being managed properly, and financiers are unlikely to understand these processes outside of their own business (if there).

The main difference between Toyota & Nissan’s results in managing suppliers is Toyota’s relentless oversight of every design, production and logistics process by asking hard questions about performance every day. Nissan, by contrast seems to have created a comfortable club where poor performance was forgiven to maintain group harmony.
What we lack as lean production diffuses across the world is a stable way for firms and independent suppliers sharing product value steams to work together to rigorously optimize the performance of the whole, not just the parts.

Kanban signals are paper or electronic, not actual bins as described on p154

Toyota has standard inventory, proportional to the volatility of orders from the customer and to the stability of the upstream process steps delivering what is needed.
The question is not whether to reduce inventories over time but how. Simply eliminating most inventories in advance of reduced order volatility or enhanced upstream stability leads to pain without gain.

Machine utilization – a key metric in standard cost accounting systems, which fails to account for the hidden costs of extra inventory, long lags in catching quality problems & long lead times

The lean approach would be to produce parts in the sequence ABABAB so that no waves of orders are sent back upstream (I think this means steady flow), production is much closer to actual customer requirements, and inventories are minimized.
Some batching is often still required due to the nature of technology, but a lean producer wants to steadily reduce batch sizes whenever possible to make small amounts of each item frequently in proportion to customer demand.