Why Toyota Won & What Happens Next

1. Project Lean Enterprise Paris May 10, 2006 Why Toyota Won & What Happens Next James P. Womack Chairman, Lean Enterprise Institute

2. By the End of 2006… • Toyota will pass GM to become the highest volume motor vehicle manufacturer and the world’s largest manufacturing firm by sales. • GM with its mass production system -- praised by Peter Drucker, described in detail by its inventor Alfred Sloan, and operated with remarkable continuity for more than eighty years since its completion in the 1920s – will have been deposed by Toyota with its lean production system. • Exactly why did Toyota win?

3. Common Wisdom GM had: • Excessive wage costs for its unionized workers. • Pension crisis with salaried and unionized retirees. • Uncompetitive factories with low-quality products. Toyota had: • Lower compensation costs due to young work force. • A weak currency in Japan. • A lucky break from high oil prices in recent years. As a result: • Toyota won.

4. Why Toyota Actually Won A complete business system, previously the world’s best, has been beaten by a better business system, which is the new world best practice. Toyota’s method for: • Listening to the customer and engineering products • Managing and developing suppliers • Dealing with customers (Japan only) • Running production operations • Managing policy to achieve and sharpen alignment Created overwhelming competitive advantage. (And production operations may well be the least important of these!)

5. Some Evidence • Toyota’s selling prices are much higher than GM’s due to refinement, delivered quality, and durability. • Toyota is able to get new designs to market vastly faster than GM as market conditions change, • Toyota needs fewer hours of engineering and less capital to launch products with a given capacity. • Toyota’s suppliers have higher margins and lower selling prices, better quality & fresher technology. • GM’s steady decline in its home market has created a pension crisis that confuses cause with effect. • As a result of weak policy management, GM has been very slow to change.

6. Prognosis • GM (and Ford) will shortly undergo profound transformations, with new managements, and remake themselves in the image of smaller Toyotas (just as Ford remade itself in the image of a smaller GM when Henry Ford died.) • Toyota will work hard at managing the political aspects of the transition and obsess – quite appropriately – about “big company disease”. • Remember that GM reached its peak in 1955, the year Sloan retired. Toyota will shortly see a generational shift as Eiji Toyoda and Fujio Cho disappear from the scene. Is this Toyota’s zenith?

7. What Happens Next? • Chinese and Indian companies emerge as the “next Toyotas”? Possible, but not soon and there is no evidence of a new Chinese or Indian business system – only high energy and low factor costs. • Losers like Nissan continue to merge, creating a stable global oligopoly? Possible but difficult – mergers usually fail in the auto industry and there will be a steady stream of new entrants. • The focus of this industry shifts from selling brilliant objects to solving mobility problems? My and Dan Jones’s belief.

8. The Age of Brilliant Objects • Most striking achievement of lean production has been introduction of truly superlative objects, with few defects, high refinement & great durability. • But is this all consumers want today? • As we look ahead we can see that the consumer’s most precious asset is not money but time. • Today’s brilliant objects often squander consumer time because consumption – better called problem solving -- is a complex process of searching for, obtaining, installing, maintaining, repairing, upgrading & recycling brilliant objects. • No current-day auto company (possibly excepting Toyota in Japan) addresses this problem.

9. The Age of Lean Solutions • If consumption is a problem-solving process, it follows that there should be principles of lean solutions similar to the principles of lean thinking (value, value stream, flow, pull and perfection.) • Dan Jones and I propose the following: • Solve my problem completely • Don’t waste my time • Provide exactly what I want • Exactly where I want • Exactly when I want • Continually reduce my total cost (time, money and hassle) to solve my problem.

10. How Would This Work in Auto Industry? The simple problem of auto repair: • In a typical repair sequence the consumer takes many time-consuming steps through a complex process simply to schedule and complete a repair. • In Europe the chances that the repair will be done correctly and completed at the time promised are only about 60%. (That’s 400,000 ppm defective in quality terms.) • Yet this is simply a process, with consumer and provider components, like any process in manufacturing. • It can be mapped and dramatically improved!

11. The Problem of Auto Repair Dan Jones recently worked with a large car dealer in Portugal to test our hypotheses: • For typical repairs: • Consumer time expended cut in half. • Fraction of jobs done wrong and late halved. • Total cost of a repair to the dealer cut by 30%. • Job satisfaction in the dealership much higher. Win-win-win for consumer, provider & employees simply by mapping the process and applying lean principles!

12. But This Is Only Part of Total Problem Consumers must also: • Search for the vehicles needed. • Obtain (lease or buy) them. • Arrange delivery. • Register, insure, and inspect them. • Repair them in the event of mishap. • Upgrade them as necessary. • Recycle them. This is time consuming and often frustrating.

13. A Mobility Solution A mobility provider: • Obtains the vehicles you need – any type from any manufacturer • Brings them to you. • Registers, insures and inspects them. • Maintains them. • Repairs them. • Upgrades them. • Recycles them. For considerably lower total cost (to you and the provider) than current “mass consumption” methods.

14. The Challenge for Existing Car Makers • Most of us want access to the complete range of brands, not just Toyotas for example. • Car companies tend to be very “assets backwards”, determined to “move the metal”, specifically their own metal. • Mobility providers are likely to be a new type of retailer rather than a new type of car company. • Even Toyota may face a challenge to its role in the consumer’s life.

15. Lean Solutions • Can be devised for any problem – healthcare, shelter (i.e., housing), long-distance mobility (i.e., air travel), personal financial management, personal logistics (i.e., shopping.) • Reduce total cost to consumer and provider while lessening everyone’s hassle. • A simple matter of creating brilliant processes to solve every problem, by better specifying true value and taking out waste! • Turning consumers and providers from antagonistic strangers into long-term partners. • The logical next step in lean thinking in the age of brilliant solutions!