How The Toyota Way Went Astray

by Bill Russo(罗威) and Jeffrey Zhao (赵新智)

Toyota’s U.S. sales in February 2010 totaled 100,027 vehicles, an 8.7% drop from last year. While this result is better than most market predictions, it does not signal an end to the most severe recall crisis in the company’s history. While the root cause of Toyota’s massive accelerator recall problem is still under investigation, the problem is more likely inherent in the design of the overall system which is found in several of Toyota's most popular vehicles. It should also be noted that this is just one of several recent quality spills that Toyota has been addressing, which indicates a much more systemic problem within the Toyota Motor Corporation than just this particular issue. Many have in fact begun to question Toyota’s management processes and supply chain management system.

It is becoming increasingly apparent that the current problems are an outgrowth of a plan to grow the business too quickly at an unsustainable speed, which as a result forced it to compromise its commitment to quality which led to the global auto giant's massive global recall of more than 8 million vehicles. The mandate from Toyota's previous leadership to capture 15 percent of the global market share became the overwhelming priority and forced the company to compromise quality. By chasing market share as a primary goal, Toyota took on too much risk in the development of their products, which allowed quality issues to surface.

Impact On Toyota’s Current And Future Development

This recall impacts eight of Toyota's most popular models that contribute more than half of their U.S. sales. To specify the immediate sales damage, Toyota stands to lose about 300,000 vehicle sales in the U.S. in 2010. Worldwide impact of over a half-million units of lost sales in 2010 is also possible. Of course, Toyota has already suffered a dramatic decline in revenue and lost production, in addition to the cost of the recall itself, estimated to be around 2 billion U.S. dollars.

Perhaps even more significantly, this crisis represents a monumental challenge for Toyota's reputation for quality and reliability. The more significant challenge for Toyota will be to repair the reputation for quality that they have worked for decades to establish. It is often said that trust is earned over a lifetime, but it can be lost in just one event. In this case, Toyota has been hit with a series of increasingly damaging quality problems, and will struggle to restore the image and confidence of consumers around the world. According to a USA Today/Gallup poll published recently, 31 percent of Americans think it is unsafe to be in a Toyota or Lexus product, and 55 percent said that Toyota did not respond promptly to the safety problems.

Once the benchmark of the global auto industry, many of Toyota's "best practices" must now be re-evaluated. For example, Toyota's ability to use common parts across a cross-section of its product portfolio has long been considered a benchmark for the industry - a practice that has apparently magnified the impact of the crisis. In addition, the recall illustrates how complicated it can be to diagnose the cause of failure of electro-mechanical systems, and points to a need for a more efficient process for diagnosing and containing such problems. Toyota’s failure to fix the defects in gas pedal design over the past two years also raises questions regarding their true commitment to product quality and customer value, since the initial reports of the problem with acceleration began as early as 2007.

Toyota’s Response To The Crisis

Toyota must take definitive steps to re-focus its business on what we all know it is capable of: delivering high quality vehicles. Toyota must use this crisis to demonstrate its commitment to customers or risk permanent loss of trust. This applies to the accelerator problem as well as the problem of Toyota's misplaced focus on growth at unsustainable speed.

Toyota's recall presents an opportunity to other automakers that will now gain the consideration of Toyota's once fiercely loyal consumers. The very tangible impact on Toyota's customers will be a potential decline in the residual value of their cars, which has a direct impact on the amount of their monthly lease payment and used car prices. This makes other brands more competitive when consumers compare the cost of ownership, which has always been a core strength for Toyota products. Based on February sales results, several brands operating in US market realized sales gains in February. The largest winners were Ford, up by 46%, Honda by 13% and Hyundai by 11%.

However, crises are defining moments in for a company, because it is in times of crisis that senior leadership has the opportunity to demonstrate the values that a company is willing to hold true. With appropriate action, Toyota can emerge from the crisis without a permanent loss of consumer trust. While there are signs that Toyota was initially slow in waking up to the extent of the problem, they have recently taken steps to contain the impact and it remains to be seen if they will ultimately restore the trust that has become the hallmark of their brand. One very positive step recently taken has been to post full-page advertisements in major US press such as Washington Post, where several times a week Toyota is reporting the progress of the recall and investigation. They have also announced zero-percent financing on most models plus two years of free maintenance to returning customers.

“The Toyota Way” Goes Astray

Toyota‘s supply chain management is a key component of the “4P” model of the Toyota way of doing business, which is a set of guiding principles governing R&D, manufacturing, logistics and procurement. The 4P model involves the following principles and is the backbone of the Toyota ProductionSystem, JIT logistics system, and supplier partnering process:

  1. Continuously solving root problems to drive organizational learning
  2. Adding value to the organization by developing people and partners
  3. Using the right process to produce the right results
  4. Employing a philosophy of long-term thinking

Western auto companies use a variety of management styles, but most of them began as fully integrated vehicle developers and manufacturers covering almost every aspect of component development and production. Over time, they began to outsource component development in order to lower their overall cost of doing business. In the Western model, relationships with component suppliers became mainly based on bidding and price. It is not as close and interactive as Toyota’s historical approach to supplier partnership.

Given the scale of this and other recent recalls, many are now questioning if the problem is rooted in Toyota's supply-chain management system. First of all, Toyota has already clearly taken the responsibility for all the defects behind the recent recalls. Toyota has stated that the problem is rooted in their own design of the acceleration system. Toyota’s inability to quickly diagnose and contain the problem during the development process indicates how complicated electro-mechanical systems have become. Of course, once the cause of such quality problems are known it takes a collaborative effort between Toyota and its global partners to eliminate the problem.

Beyond the problem with the acceleration system, Toyota has been dealing with a series of increasingly serious recalls that suggest a more fundamental problem is occurring. It appears that Toyota’s aggressive business expansion goals have caused them to lose focus on adherence to the principles embodied in the “4P” model. Pursuing global expansion and volume growth at an unsustainable speed placed considerable pressure on the product development and supply resources that were unable to keep pace. This allowed quality risks to enter the system. Toyota President Akio Toyoda has acknowledged this and has reprioritized the main goals of the company, shifting focus away from growth and expansion back towards quality management. While having acknowledged the problem, the challenge is to return the company back to its famous quality management principles.

Another challenge that Toyota must address is to revisit the approach to sharing common components across multiple platforms and products. While this approach has helped Toyota reduce development costs, it has also magnified the risk for exposure to a quality defect across a wide range of their product portfolio.

Retaining Best practices in Supply-Chain Management

Toyota has a long history of building partnerships with different tier-level parts suppliers.

  • Toyota historically has involved their suppliers as partners in an iterative, converging design process — not as commodity bidders to a moving target,
  • The relationship is founded on a win-win effort to reduce product cost, rather than a zero-sum negotiation around product price,
  • This Knowledge-Based approach focuses on ideal performance and drives a continuous learning cycle,
  • The result is higher quality, lower warranty cost, and higher overall value

Starting from building their vehicle assembly facilities in America decades ago, Toyota began development of their local supply base. Throughout the 1990s, they developed about 100 local suppliers in North America and also managed them in a traditional way. Toyota communicated, coached and challenged those suppliers through various supplier councils and training facilities.

Entering the 2000s, Toyota accelerated their global market expansion, and significantly increased the number of suppliers, and spreading their development resources over a much greater number of programs. Faced with fierce cost competition and profit growth objectives, Toyota may have compromised those key principles, which had served them so well in the past.

Conclusions and Lessons Learned

As already noted, Toyota’s crisis can be attributed to their aggressive global expansion which forced them to lose sight of the “4P” way of doing business. Product development and supply resources were faced with an increasing number of programs with targets that were not achievable. These risks ultimately allowed the quality problems to surface.

Many lessons can be learned from Toyota’s experience, but the most important aspect is to keep alert on the systemic risk when pursuing growth at what is apparently an unsustainable pace. Also, organizations must retain a primary focus on what has made them successful. An organization like Toyota must never allow compromise to the quality management principles and consumer trust. Having experienced this problem, emphasis must also be placed on how to repair the reputation through prompt crisis management. Toyota can use this crisis to demonstrate its commitment to customers and its famous ability to identify and eliminate the root cause of the problem.

Pursuit of growth and cost control should never be an excuse for compromising rigorous design and quality validation. Having learned this hard lesson, Toyota has started the process of recovery by taking full responsibility for this recall. They must now review and eliminate the causes that are rooted in their recent business priorities and operation management in order to reestablish “The Toyota Way” of doing business.

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