CASE 8

Nissan and Kobe Steel loses ISO Certification

Lecturer
Nofie Iman Vidya Kemal, S.E., M.Sc., Ph.D.

Prepared by
Al Ridho Wisata Putra
Elsa Astuti
Prima Esti Retnani

FACULTY OF ECONOMICS AND BUSINESS

GADJAH MADA UNIVERSITY
JAKARTA CAMPUS
2019

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 TABLE OF CONTENTS

CHAPTER 1 : INTRODUCTION …………………………………………………… 1

1.1 Background ……………………….………………………………….… 1
CHAPTER 2: LITERATURE REVIEW ……………………………………………... 3
CHAPTER 3: PROBLEM STATEMENT ……………………………………..…..…6
CHAPTER 4: ANALYSIS ……………………...…...…………………….………...… 7
REFERENCES …………………………………………..……..……...…..………… 11

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 CHAPTER 1

INTRODUCTION

1.1 Background

Kobe data falsification scandal

Kobe Steel is Japan’s third-biggest steelmaker and also makes aluminium and
copper products. The 112-year-old conglomerate has divisions making welding and
industrial machinery. It also offers engineering services, construction equipment such as
cranes and excavators and power generation.

The company has a real estate development arm. At the beginning of October 2017
Kobe Steel had a market capitalisation of ¥500bn ($4.5bn) but has lost more than a third
of its value during the past two sessions after it admitted to falsifying data related to its
metal products.

On October 8, Kobe Steel admitted falsifying inspection data on about 20,000

tonnes of metals shipped to more than 200 customers in the year to August 2017 and
warned that the problems could stretch back a decade.

The company sold aluminium, copper and steel powder products that did not
match the quality or strength level specified by its customers. However, officials at
Japan’s Ministry of Economy, Trade and Industry said Kobe Steel’s products did not fall
below industry minimum standards. It said this was an issue between the company and its
customers because it had not met specifications that they had demanded. The affected
copper and aluminium represent about 4 per cent of annual sales for that division and
some analysts estimate the immediate impact on earnings will be limited. On Wednesday,
the company added steel to the list of affected metals, confirming that the steel powder
product sent to one customer did not meet the required specifications. However, there are
bigger questions as to whether Kobe Steel will need to compensate customers and whether
the reputational damage could result in the loss of clients over the longer term.

Kobe Steel says the issue came to light after its aluminium and copper division
reviewed its recent contracts and shipments in August. The company had been following
up on a pledge to increase internal oversight after a subsidiary had been found falsifying
certification results for official industrial standards tests in 2016. During the August
audits, officials found irregularities in certificates for products shipped during the past
year at four of its plants. The division reported the fraud to the chief executive and the
board at the end of August.

Nissan improper final inspection

Having presence in various countries including India, Japan, US, Italy and
Germany, Japanese automaker Nissan bagged the leading position in the world’s top car
manufacturers list this year through its alliance with Renault and Mitsubishi. Everything
was going evenly for the manufacturer until a wrongdoing was discovered by Japanese

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transport ministry officials at the brand’s manufacturing plants in Japan. Ultimately, the
ISO certification of the company had to be withdrawn in October 31, 2017..
ISO, or International Organisation of Standardization, is a governing body which
is responsible for standardization of production quality and product standards. ISO
certification is provided to organisations which comply with the norms and is seen as an
assurance of the quality of products. In Nissan’s case, it was discovered that unauthorized
technicians were using stamps of authorized personnel in the process of final inspection
of the vehicles produced in factories
Consequently, production came to a halt at the brand’s six factories located in
Japan. Company officials state that only those cars which are sold in Japan are affected
by the wrongdoing and steps are underway to recall them for conducting final inspection
again which includes steering, acceleration and braking tests. Since Nissan is a popular
brand in the domestic market, the number of vehicles to be recalled is expected to be over
than 150.000 units, and the brand is said to undergo over 222 million dollars in expenses
for the same.

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 CHAPTER 2

LITERATURE REVIEW

2.1 Lean Manufacturing

Lean operations, including JIT and TPS, focuses on con- tinuous improvement to
eliminate waste. Because waste is found in anything that does not add value, organizations
that implement these techniques are adding value more efficiently than other firms. The
expectation of lean firms is that empowered employees work with committed management
to build systems that respond to customers with ever- increasing efficiency and higher
quality.

Lean producers set their sights on perfection: no bad parts, no inventory, only
value-added activities, and no waste. Any activity that does not add value in the eyes of
the customer is a waste. The customer defines product value. If the customer does not
want to pay for it, it is a waste. Taiichi Ohno, noted for his work on the Toyota Production
System, identified seven categories of waste. These categories have become popular in
Lean organizations and cover many of the ways organizations waste or lose money.
Ohno’s seven wastes are:

◆ Overproduction: Producing more than the customer orders or producing early (before
it is demanded) is waste.
◆ Queues: Idle time, storage, and waiting are wastes (they add no value).

◆ Transportation: Moving material between plants or between work centers and

handling it more than once is waste.
◆ Inventory: Unnecessary raw material, work-in-process (WIP), finished goods, and
excess operating supplies add no value and are wastes.
◆ Motion: Movement of equipment or people that adds no value is waste.

◆ Over processing: Work performed on the product that adds no value is waste.
◆ Defective product: Returns, warranty claims, rework, and scrap are wastes.
A broader perspective—one that goes beyond immediate production—suggests that other
resources, such as energy, water, and air, are often wasted but should not be. Efficient,
sustain- able production minimizes inputs and maximizes outputs, wasting nothing.
(Operation Management, 675)

2.2 Managing Quality and Quality Standard

Quality, or the lack of quality, affects the entire organization from supplier to
customer and from product design to maintenance. Perhaps more important, building an
organization that can achieve quality is a demanding task. Figure below lays out the flow
of activities for an organization to use to achieve total quality management (TQM). A
successful quality strategy begins with an organizational culture that fosters quality,
followed by an understanding of the principles of quality, and then engaging employees
in the necessary activities to implement quality. When these things are done well, the
organization typically satisfies its customers and obtains a competitive advantage. The

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 ultimate goal is to win customers. Because quality causes so many other good things to
happen, it is a great place to start.

ISO 9000 International Quality Standards

The move toward global supply chains has placed so much emphasis on quality
that the world has united around a single quality standard, ISO 9000. ISO 9000 is the
quality standard with international recognition. Its focus is to enhance success through
eight quality management principles:

(1) top management leadership,

(2) customer satisfaction,
(3) continual improvement,
(4) involvement of people,
(5) process analysis,
(6) use of data-driven decision making,
(7) a systems approach to management,
(8) mutually beneficial supplier relationships.

The ISO standard encourages establishment of quality management procedures,

detailed documentation, work instructions, and recordkeeping. Like the Baldrige
Awards, the assess- ment includes self-appraisal and problem identification. Unlike the
Baldrige, ISO certified organizations must be reaudited every three years.
The latest modification of the standard, ISO 9001: 2015, follows a structure that
makes it more compatible with other management systems. This version gives greater
emphasis to risk- based thinking, attempting to prevent undesirable outcomes.
Over one million certifications have been awarded to firms in 206 countries,
including about 30,000 in the U.S. To do business globally, it is critical for a firm to be
certified and listed in the ISO directory.

2.3 Ethics and Quality Management

For operations managers, one of the most important jobs is to deliver healthy, safe,
and quality products and services to customers. The development of poor-quality
products, because of inadequate design and production processes, not only results in
higher production costs but also leads to injuries, lawsuits, and increased government
regulation.
If a firm believes that it has introduced a questionable product, ethical conduct
must dictate the responsible action. This may be a worldwide recall, as conducted by both

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 Nissan and Kobe Steel when the authority found a wrongdoing final inspection process
for Nissan car manufacturing process for Domestic market, and data falsification scandal
in Kobe steel. A manufacturer must accept responsibility for any poor-quality product
released to the public.
There are many stakeholders involved in the production and marketing of poor-
quality products, including stockholders, employees, customers, suppliers, distributors,
and creditors. As a matter of ethics, management must ask if any of these stakeholders are
being wronged. Every company needs to develop core values that become day-to-day
guidelines for everyone from the CEO to production-line employees.

2.4 Maintenance and Reliability

Maintenance is the activities involved in keeping a system’s equipment in working

order, while the reliability is the probability that a machine part or product will function
properly for a specified time under stated conditions. The objective of maintenance and
reliability is to maintain the capability of the system. Good maintenance removes
variability. Systems must be designed and maintained to reach expected performance and
quality standards.

Figure. 2 Good Maintenance and Reliability Management Requires Employee

Involvement and Good Procedures

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 CHAPTER 3

PROBLEM STATEMENT

1. What causes Kobe Steel (Kobelco) and Nissan lost their ISO certification?

2. Japanese players are always known for their lean manufacturing and quality
control. This news, however, showed that they are totally coming down from one
scandal to the other – and facing a downward spiral that is quite strange for a
culture that stood as the epitome of hard work and quality. What is really
happening to the Japanese?

3. Is there anything that Kobe Steel (Kobelco) and Nissan can do to improve their
maintenance and reliability of their production systems in the future?

4. For Kobe Steel (Kobelco) or Nissan, It is relatively easy to pinpoint the

responsibility for maintenance and reliability, but what about project that are not
owned by a single party or distributed across different countries? In those cases,
how should we assign the responsibility of maintenance and reliability?

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 CHAPTER 4

ANALYSIS

4.1 What causes Kobe Steel (Kobelco) and Nissan lost their ISO certification?

The scandal begins with the quality of the products being made. Kobe performed
safety checks overlooking the data on Copper and Aluminium strength as well as
durability for cars, aircrafts, and rockets. In turn some of the employees of Kobe were
skipping the safety checks and falsifying the data. The data was released to the companies,
and shipped to customers. This poses safety threats because they are producing products
for transportation companies. These products could fail, create fatalities, accidents, and
create even more of a scandal.

In a company in Tokyo, a power plant had improperly certified copper piping

made by Kobe. This is a very serious company at stake because if something went wrong
with the power plant, it could cause an explosion, gas leak, and not only threaten the
company but civilians, and people around the company. And Kobe is responsible because
their company is supposed to ensure safety checks and guarantees. An internal
investigation is currently going on for Kobe Steel to find out exactly why the proper
certifications and tests weren't being performed. The company is facing a great loss
already. Their stocks have dropped forty percent since the start of the falsified data
scandal.

In released statement letter Kobe stated in firm that the root cause of the problems
are :

1. Management propensity to overemphasize profitability and the insular

organizational culture,
2. Imbalanced operation of manufacturing facilities,
3. Inadequate quality control processes that permitted improper conducts,
4. Reduced awareness for the need to strictly comply with contractual
specifications,
5. Inadequate organizational system

Nissan, Japan’s second largest automaker, said the breach of inspection standards
was similar to a case last year, when the firm admitted that for decades uncertified
inspectors had signed off on final checks for cars sold in Japan. “As a company -
executives, managers to plant supervisors - Nissan had extremely low awareness of the
gravity of violating (final vehicle inspection) standards and rules,” Nissan said in a
statement. It blamed the misconduct on a shortage of final inspectors and a lack of
oversight by plant managers, the automaker said, adding it also needed to do more
training.

Nissan said there were improper inspections during sample testing of 1,205
vehicles, more than the 1,171 units the company had initially reported. Other tests for horn
volume, external vehicle noise and the aim of headlights were also conducted improperly,
Nissan said. The testing was for vehicles destined for the Japanese market and did not

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affect units exported overseas, the automaker has said. Nissan said its sample tests would
now be overseen by supervisors and managers. It also planned to boost the number of
inspectors and revamp the computer software used to measure vehicle emissions.

The scandals might be driven by unethical action. Both Nissan Kobe Steel did not
act in an ethical way because the CEOs did not know that the data was being falsified, or
the final check was done by the unskilled personnel. The employees in both company not
performing safety and data checks for the products their product. By acting in this immoral
way and lying about the performance all of the companies stakeholders are being affected
negatively. Kant's advice would have had more supervision in the safety checks, for the
CEOs to add a more complex, in depth data check, and to keep an eye on the most
important part of the business. This could be done by developing or buying a software that
tracks, and modifies safety checks automatically through a computer system. It would
have all the data in one part, and the software would forbid employees to write their own
safety checks. By running this program it can eliminate the lack of work these employees
have been putting in. If the employees acted in a more ethical way, the company would
not be suffering in this scandal as they are now.

Kobe Steel was simply "lazy" with the performance checks which made the
employees feel good for not doing as much work, but still getting paid for it, and the
outcome was that over 500 firms were affected negatively by this, making this not achieve
maximum happiness because more people felt bad than good. They don't have proper
working skills, and work ethic, and have no motivation to succeed because they brought
their company to a massive scandal that has negatively affected many people.

4.2 Japanese players are always known for their lean manufacturing and quality
control. This news, however, showed that they are totally coming down from one
scandal to the other – and facing a downward spiral that is quite strange for a culture
that stood as the epitome of hard work and quality. What is really happening to the
Japanese?

According to Parissa Haghirian in her article wrote at CNN. Japanese corporate

structures offer some explanations for the events.

No Specialist

In most Western companies, employees are hired with a detailed work contract,
and only do what's agreed on in the contract. In Japan, employees are hired with no job
description, and can be assigned any task. Since there is no work division in most
Japanese companies, all employees can be transferred within a day to a new department,
or even location. Companies usually have employees change departments every two years.
This job rotation allows company members to know the basic job functions in every part
of the firm, so by the time they become top managers, they truly know the company inside-
out.

However, this often means that many Japanese firms lack specialists since most
managers had a short time to learn about particular business processes. And they're often

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not up to date when it comes to emerging business topics, such as compliance, diversity
management or digitization.

Lifetime Employment

Japanese companies provide lifetime employment, and they expect employees to

stay with them until retirement. In fact, many Japanese are hired by their companies right
after graduation and stay in their companies for their entire work lives. But a lifetime in
the same company with the same colleagues makes it difficult to raise concerns and
question existing processes. Even on company boards, we find mainly Japanese managers
know only one company and have spent decades working there. Often, new international
standards are recognized very late or not at all. What's more, new hires are trained in each
department by older members, or sempai, who are role models and informal leaders at the
same time. This creates a strong bond between employees, but having such close-knit
units and strict hierarchies makes it difficult for new ideas to flourish.

Labour laws

Japanese labour law makes it difficult to fire full-time employees. They can stay
in the same company until retirement and enjoy full protection by the law as long as they
dedicate themselves fully to the firm and rotate throughout the company for the first 10
years of their career. Many Japanese employees do not question internal processes
because they cannot compare to processes in former work places or other companies. The
one-company-per-lifetime system creates a strong bond between employee and firm and
makes it difficult for employees to question or criticize internal processes, even if they
perceive them as wrong or unethical.

4.3 Is there anything that Kobe Steel (Kobelco) and Nissan can do to improve their
maintenance and reliability of their production systems in the future?

Although the findings in the audit for that both company were mostly in business
process of quality control. Maintenance and system reliability concept played the big role
in this case. Good maintenance and reliability management requires employee
involvement and good procedures to make sure the facilities well maintained and avoid
the variability which can drive more product failure rate. To improve the employee
awareness in maintenance and reliability both Kobe and Nissan can provide more training
times to its employees in objective to shift their mindset to the better one, the companies
can provide the reward and punishment system, empowered their employee, and keep do
the continuous improvement. In term of maintenance and reliability procedures companies
can look back their standard operating procedures and provide a firm governance policy
on it.

4.4 For Kobe Steel (Kobelco) or Nissan, It is relatively easy to pinpoint the
responsibility for maintenance and reliability, but what about project that are
not owned by a single party or distributed across different countries? In those
cases, how should we assign the responsibility of maintenance and reliability?

A project is temporary in that it has a defined beginning and end in time, and
therefore defined scope and resources, and a project is unique in that it is not a routine

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operation, but a specific set of operations designed to accomplish a singular goal. So a
project team often includes people who don’t usually work together – sometimes from
different organizations and across multiple geographies.
The development of software for an improved business process, the construction
of a building or bridge, the relief effort after a natural disaster, the expansion of sales into
a new geographic market they all are some example of the projects, and all must be
expertly managed to deliver the on-time, on-budget results, learning and integration that
organizations need.
Maintenance and reliability are a continually task which doesn’t have the limit in
term of time. The term usually use in the operational condition, actually in the day to day
activities the project characteristics was also repetitive but it’s limited by such a timeline
to produce the result of project which will be a product for the operational team to use. In
this condition we recommend to create a general maintenance and reliability team to hold
for all maintenance and reliability initiatives and activities during the project.

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 REFERENCES

https://www.courthousenews.com/wp-content/uploads/2018/03/Toyota.Class.pdf

https://www.kobelco.co.jp/english/releases/files/20171110report_en.pdf

https://www.japantimes.co.jp/news/2017/10/26/business/corporate-business/kobe-steel-
looses-jis-quality-certification-copper-products/#.XRbP4C2B2fV

Heizer Jay, Barrry Render, Chuck Munson. 2017. Operation Management

(Sustainability and Supply Chain Management). Harlow: Pearson Education Limited.

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