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“Toyota’s focus on JIT is a continual problem-solving process (not an inventory reduction plan) illustrates why the automaker is a JIT leader not only in its industry but all of industry.” - www.academic.emporia.edu (1998).
A LEGENDARY PRODUCTION SYSTEM
In the mid-1990s, more than fifty executives and engineers from major automobile companies worldwide visited Toyota Motor Company’s (Toyota)1 manufacturing complex at Georgetown, US, to study the Toyota Production System (TPS). The visit also included an intensive question and answer session. Even though the visitors were from competing automakers, including Ford and Chrysler, Toyota did not deny them access to the plant. The TPS aimed to produce world-class, quality automobiles at competitive prices. It was built on two main principles, Just-in-Time (JIT) production and Jidoka.2 JIT was used not only in manufacturing but also in product development, supplier relations and distribution. Analysts remarked that despite imitating Toyota’s JIT for many years, no other automaker in the world had been able to make their production systems and processes as efficient as Toyota had done. Analysts felt that though other leading automakers like Mercedes-Benz, Honda and DaimlerChrysler excelled in advanced engineering techniques, engine technology and styling, they did not match Toyota in efficiency, productivity and quality. Executives of rival companies also appreciated Toyota’s manufacturing and product development systems. Officials at GM commented, “Toyota is the benchmark in manufacturing and product development.” A top executive at Ford said, “Toyota is far ahead in developing markets that the real race is for the second place.” Some executives at BMW also considered Toyota the best car company in the world.
Toyota was the world’s third largest automobile manufacturer in 2000, after General Motors and Ford.
A defect detection system that automatically/manually stops the production operation and/or equipment whenever an abnormal or defective condition occurs. Any necessary improvements are made by directing attention to the stopped equipment and the worker who stops the operation. The Jidoka system puts faith in the worker as a thinker and allows all workers the right to stop the line on which they are working.
The early adoption of JIT principles by Toyota seemed to have helped the company achieve significant success. It helped the company respond quickly to changing customer needs and offer high quality products at low costs, thus increasing customer satisfaction.
Toyota’s history goes back to 1897, when Sakichi Toyoda (Sakichi) diversified into the handloom machinery business from his family traditional business of carpentry. He founded Toyoda Automatic Loom Works (TALW) in 1926 for manufacturing automatic looms. Sakichi invented a loom that stopped automatically when any of the threads snapped. This concept of designing equipment to stop so that defects could be fixed immediately formed the basis of the Toyota Production System (TPS) that went on to become a major factor in the company’s success. In 1933, Sakichi established an automobile department within TALW and the first passenger car prototype was developed in 1935. Sakichi’s son Kiichiro Toyoda (Kiichiro) convinced him to enter the automobile business. After this the production of Model AA began and Toyota Motor Corporation was established in 1937. Kiichiro visited the Ford Motor Company in Detroit to study the US automotive industry. He saw that an average US worker’s production was nine times that of a Japanese worker. He realized that the productivity of the Japanese automobile industry had to be increased if it were to compete globally. Back in Japan, he customized the Ford production system to suit Japanese market. He also devised a system wherein each process in the assembly line of production would produce only the number of parts needed at the next step on the production line, which made logistics management easier as material was procured according to consumption. This system was referred to as Just-in-Time (JIT) within the Toyota Group. The JIT production was defined as ‘producing only necessary units in a necessary quantity at a necessary time resulting in decreased excess inventories and excess workforce, thereby increasing productivity.’ Kiichiro realized that by relying solely on the central planning approach, it would be very difficult to implement JIT in all the processes for an automobile. Hence, TPS followed the production flow conversely. People working in one process went to the preceding one to withdraw the necessary units in the necessary quantities at the necessary time. This resulted in the preceding process producing only quantities of units to replace those that had been withdrawn. Toyota flourished during the Second World War by selling trucks and buses to the army and the company launched its first small car (SA Model) in 1947. After the war, the company faced a series of financial problems. A financial support package from a consortium of banks (after the intervention of the Bank of Japan) helped Toyota tide over its problems. The package consisted of a series of steps that included downsizing and restructuring the company into separate manufacturing and sales divisions. As per the revival package, The Toyota Motor Sales Company Ltd. was formed in 1950. In the same year, Kiichiro resigned. By 1952, Toyota made a turnaround and in 1953, the company appointed distributors in El Salvador and Saudi Arabia and started exports. Meanwhile, Taiichi Ohno (Ohno) took charge of the company. In 1957, Toyota entered the US market through its subsidiary, Toyota Motor Sales, USA. In 1959, the company began its first overseas production in Brazil and over the next few years, developed a vast network of overseas plants. Besides manufacturing, Toyota started a global network of design and Research and Development facilities covering the three major car markets of Japan, North America and Europe. By the early 1970s, Toyota’s sales exceeded that of Chrysler and Volkswagen and its production was behind that of only General Motors (GM) and Ford. Toyota continued its efforts to make its
production system more efficient and also developed flexible manufacturing systems. It also began to tap the markets in the Middle East and by 1974 the Toyota Corolla, (launched in 1965) became the largest selling car in the world. In 1984, Toyota entered into a joint venture with GM and established the New United Motor Manufacturing Inc. (NUMMI). By the early 1990s, as Toyota expanded its overseas operations, the excessive capital spending affected its profit margins. Tatsuro Toyoda (Tatsuro), who took over as the company President in 1992, began to control costs by eliminating all unnecessary expenditure. In 1995, after Tatsuro resigned due to health reasons, Hiroshi Okuda (Okuda) became Toyota president. In 1996, Toyota consolidated its production in North American production units into the Cincinnati based Toyota Motor Manufacturing (North America). In 1999, Okuda replaced chairman Shoichiro Toyoda and Fujio Cho (Cho) became the president. In the same year, Toyota listed its shares on both the New York and London stock exchanges. By the end of 2001, the company’s net income had reached $5,447 million and net revenue reached $106,030 million (Refer Exhibit I for the company’s financial performance over the years). According to analysts, Toyota’s success in both the local and global markets was mainly because of its state-of-the-art and well-planned operational strategies. The company had continuously focused on gaining a competitive advantage through implementation of innovative and pathbreaking ideas on its production floors. TPS worked on the basic idea of maintaining a continuous flow of products in factories in order to flexibly adapt to demand changes. The most important feature of TPS was the way it linked all production activities to real dealer demand through implementation of Kanban, JIT and other quality measures that enabled Toyota to manufacture in low quantities.
JUST-IN-TIME PRODUCTION SYSTEM
Developed by the Japanese, the JIT production system was one of the most significant production management approaches of the post World War II era. The system comprised a set of activities aimed at increasing production volume through the optimum use of inventories of raw materials, work-in-process, and finished goods. In a JIT production system, a workstation gets a part just in time, completes its work and the part is moved through the system quickly. JIT was based on the principle of producing only what is needed and nothing more than needed. The Japanese believed that anything produced over the quantity required was a waste. Cho defined waste as, “Anything other than the minimum amount of equipment, materials, parts and workers (working time) which are absolutely essential to production.” JIT did not allow any surplus as it believed that “effort and material expended for something not needed now cannot be utilized now.” (Refer Table I for requirements and assumptions of JIT).
JUST-IN-TIME PRODUCTION SYSTEM
What it is • Management philosophy • ‘Pull’ System through the plant What it requires • Employee participation • Industrial engineering/basics • Continuing improvement • Total quality control • Small lot sizes What it does • Attacks waste (time, inventory, scrap) • Exposes problems and bottlenecks • Achieves streamlined production What it assumes • Stable environment
Source: Production and Operations Mgmt.: Manufacturing and Services, Chase, Acquilano & Jacobs.
JIT could be applied to any manufacturing environment including job shop, batch production or repetitive production. The ideal lot size as per JIT was one. A worker had to complete one task and pass it on to the next workstation for further processing. If workstations were geographically far away, efforts were made to reduce the transit time. The advantages of JIT included price flexibility, reduction in product variation, quick response to customers' demands, high quality products at low cost for consumers, and above all, customer satisfaction. The system also offered the advantages of low inventory investment, shortened lead times, and early detection of quality problems.
JIT IN TOYOTA
In the early 1930s, the technology used by American automobile companies was superior to that used by Japanese companies. Kiichiro therefore decided to learn new automobile production techniques from American manufacturers. He soon realized that to catch up with the Americans, he had to master basic production techniques. He then reorganized the production system in Toyota in a unique way. This reorganization eventually led to the development of JIT concept. In the early 1970s, Taiichi Ohno (Ohno)3 implemented JIT in Toyota’s manufacturing plants. The JIT system was aimed at avoiding waste, reducing inventories and increasing production efficiency in order to maintain Toyota’s competitive edge. Ohno also believed that customers should receive high quality products in the shortest time. Initially, JIT was used as a method for reducing inventories in Toyota’s shipyards, but later it evolved into a management philosophy including a set of techniques (Refer Exhibit II for a comparison between JIT and non-JIT systems). Kanban4 was an essential component of Toyota’s JIT concept. The Japanese referred to Kanban as a simple parts-movement system that depended on cards and boxes/containers to take parts from one workstation to another on a production line. Ohno had developed the idea in 1956 from the super markets in the US, which had devised an effective system for replenishment of store shelves based on the quantities picked by the customers. Initially, Ohno used pieces of paper contained in rectangular vinyl envelopes to convey information (called Kanban). In a period
Taiichi Ohno was brought into Toyota in 1956, from the Sakichi family’s textile business. He was entrusted with the responsibility of improving the operations and reducing costs. Kanban is made up of Kan, i.e., Card and Ban, i.e., Signal.
spanning three decades, Kanban developed into a sophisticated information system that ensured production in required quantities at the right time in all manufacturing processes within the factory. The essence of the Kanban concept was that a supplier delivered components to the production line only when required, thus eliminating storage in the production area. Suppliers delivered desired components when they received a card and an empty container, indicating that more parts were needed for production. In case of line interruption, each supplier produced only enough components to fill the container and then stopped. Since Kanban was a chain process in which orders flowed from one process to another, the production or delivery of components was ‘pulled’ to the production line (Refer Box).
In a pull system, the production of a certain product starts only when a demand or request is made by the buyer. The consumer of the product ‘pulls’ from the last link of the production chain. This last link pulls its preceding link and so on. In western companies, the push system was considered to be more cost-effective. Push systems were schedulebased projections of what demand was expected to be. Based on historical information (updated on a weekly or monthly basis), a computer program processed the information giving a detailed sub-schedule for buying materials and producing goods. This schedule pushed the production in order to comply with the expected demand. The disadvantage of the push system was that predictions did not always coincide with facts. This resulted in either excess or inadequate inventories. In the traditional forecast oriented method, parts were ‘pushed’ to the line (Refer Exhibit III for a comparison of the Kanban philosophy with the western philosophy). At Toyota, two types of Kanban cards were used: one, to move parts from one place to another, known as the Conveyance Kanban card, and the other, to authorize the production of parts, known as the Production Kanban card. (Refer Figure I). A standard size container was used to store parts and each card was treated like a coupon. (Refer Box). Suppose a container of item X is required in work centre A. As a first step, a production Kanban card is issued to work centre A. The work centre withdraws a container of raw materials from its inventory. The container of raw materials also included a conveyance Kanban card. Work centre A removes the conveyance Kanban card from the container and sends it to the proceeding work centre where it serves as an authorization to pick up a container of raw materials.
A TWO CARD KANBAN SYSTEM: FLOW WITHIN A WORK CELL
Conveyance ProductionRETURNED CONTAINERS
Three types of information were Kamban exchanged Kanban Kanban.(empty) up information guided the earlier using Pick EMPTY CONTAINERS stages regarding returnedto be produced for the succeeding stages. Transfer information indicated parts (to be when the parts had to be produced for the succeeding stages. Production information was transmitted from the earlier stages to the later stages to inform the workers about the product mix and other operational matters. To make the Kanban system effective and reap maximum benefits (Refer Table II) from it, Ohno framed six rules: INPUT BUFFER (full containers from TRANSPORT TO • Later process wentstagethe earlier processOUTPUT BUFFER (full containers to pick up products. previous to awating transport NEXT STAGE • The earlier process produced only the amount withdrawn by the later process. Dashed Arrows = Kanbans Solid Arrows • Should not pick or produce goodsContainers a Kanban. = without • A Kanban should be attached to the goods. • 100% defect free parts were required. • Reduce the number of Kanbans.
1. 2. 3. 4. 5. 6. 7. 8. 9. ADVANTAGES OF KANBAN A simple and understandable process Provides quick and precise information Low costs associated with the transfer of information Provides quick response to changes Limit of over-capacity in process Avoids overproduction Minimizes waste Control can be maintained Delegates’ responsibility to workers
The Kanban cards were re-circulated and the number of cards controlled work-in-progress (WIP) in the system. In this way, the activities of final assembly were linked to previous operations by a chain system of card ordering that ‘pulled’ production through the factory.
Another important component of JIT was Heijunka (production smoothing). JIT’s principle of building only the required number of items helped keep the production costs low. Heijunka helped in the accomplishment of this principle by creating a consistent production volume. Heijunka averaged the highest and lowest variations of the orders. The variations were then removed from the production schedule. This ensured that the right quantity of parts was produced with minimum workforce. Heijunka took care not only of the total volume of items but also the type of items produced and the other options.
FUTURE OF JIT
Although many automobile companies around the world adopted JIT, the system was far from perfect and difficult to implement. It was based on the key assumption that sources and channels of supply were reliable and dependable at all times. Analysts felt that it did not take into account the possibility of labor strikes at automotive plants. Moreover, JIT involved high set up costs and Special training and reorganization of policies and procedures in the company were necessary to implement JIT. The supplier relations of the company also needed to be improved to ensure timely delivery. In the absence of good supplier relations, JIT increased the risk of inventory shortage. Organizational culture also seemed to play a crucial role in the implementation of JIT. Many companies outside Japan reported difficulties in the implementation of the concept. Another problem seemed to be the difficulty of removing the ‘human element’ from the systems that generate requirements. An analyst commented, “Computer algorithms, they say, go only so far. Good people, with lengthy experience at reading the ups and downs of the industry are still a must.” Most companies felt that people should be actively involved in the system. Moreover, there could be many barriers to the successful implementation of JIT. For JIT to be successful, companies had to ensure that they did not make frequent changes in production planning and that their forecasting procedures were reliable and did not result in under or over forecasting of demand. Other barriers could be equipment failure and employee absenteeism. Analysts felt that Toyota’s JIT was a complicated process and that its success inside a plant depended mainly on highly experienced, highly motivated managers. Outside the plant, JIT’s success depended on a network of capable suppliers that operated in sync with Toyota’s production processes. In fact, according to some analysts, Toyota was not able to replicate the JIT production system in an efficient way in any of its operations outside Japan. John Paul MacDuffie5 said, “Toyota hasn’t developed a single facility that is as efficient as the ones it has in Japan.” Although Toyota’s JIT had some drawbacks, it offered several advantages over other manufacturing processes. Because of the early adoption of JIT, Toyota benefited more from the system than other automobile companies (Refer Exhibits IV & V). By 2000, JIT was adopted by many Japanese companies, as well as some US car companies. Analysts felt that JIT was not only a process that could be applied to manufacturing, but also a philosophy that governed the attitude of a successful business. According to one analyst, 6 “Using JIT, Taiichi Ohno had revolutionized production. The market clearly reflects the success
Professor at Wharton School, doing research in the international automobile industry for 10 years (Fortune, December 8, 1997).
Andres Aviles’ Final Draft, www.list.gatech.edu.
of JIT. The concept has made Japanese products affordable and reliable in quality. Quality is no longer a privilege - it is a standard accompanied by low cost.”
QUESTIONS FOR DISCUSSION:
1. The JIT production system was one of the most significant production management approaches of the post World War II era. Discuss in detail, the concept of JIT and its advantages. 2. ‘Kanban was an important component of Toyota’s JIT system’. Explain the concept of Kanban used in Toyota. What are the advantages of ‘Kanban’ over the western manufacturing system? 3. Using JIT, Taiichi Ohno revolutionized the production system at Toyota. However, some analysts pointed out that JIT had many drawbacks. Briefly explain the disadvantages of JIT. How can they be solved?
TOYOTA - BUSINESS RESULTS (CONSOLIDATED, US GAAP)
(1 = ¥1 million) Year ended March 31, Net sales Income before income tax Net income Net income per share (Basic) Net income per share (Diluted) 1998 11,566,368 873,065 436,935 144.86 144.26 1999 12,687,421 875,674 451,646 119.47 119.47 2000 12,649,777 880,680 481,936 128.27 128.27 2001 13,137,070 1,107,289 674,898 180.65 180.65
Note: For further information, please go to:http://www.toyota.co.jp/ir.
TOYOTA – BUSINESS RESULTS (CONSOLIDATED, JAPAN GAAP)
1996 Net Revenue Income before income tax Net Income Vehicle Production (units) Vehicle Sales (units) Employee Capital Investment* Depreciation* R&D spending 10,718,740 420,801 256,977 3,849,817 4,148,641 146,855 471,300 405,881 N.A. 1997 12,243,835 708,299 385,916 4,293,682 4,559,515 150,736 664,400 446,796 450,700 1998 11,678,397 884,516 454,350 4,233,371 4,456,344 159,035 788,742 508,380 444,400 1999 12,749,009 771,885 356,180 4,458,406 4,695,147 183,879 973,479 606,134 487,300 (1 = ¥1 million) 2000 2001 12,879,561 750,501 406,798 5,002,731 5,182,774 210,709 871,329 689,435 453,300 13,424,423 864,129 471,295 5,275,213 5,526,863 215,648 860,821 672,567 479,900
*: Not including vehicles for leasing. Source: www.toyota.com
EXHIBIT II COMPARISON BETWEEN JIT AND NON-JIT SYSTEMS CHARACTERISTICS Labor division Setting standards Inventories Discipline Production runs Planning flow Set up times Operating control Interdependence
JIT SYSTEM Flexible work teams Standardization of methods Low inventories Self-discipline of workers Small batch sizes Last stage first Frequent Decentralized Increased
NON-JIT SYSTEM Rigid work segments Standardization of methods High inventories Discipline imposed through strict hierarchical organization Long runs First stage last Infrequent Centralized Lowered
TOYOTA’S KANBAN PHILOSOPHY VS WESTERN MANUFACTURING PHILOSOPHY
Factors Inventory Lot Sizes Toyota’s Kanban Philosophy A liability. Every effort must be extended to do away with it Immediate needs only. A replenishment quantity is desired for both manufactured and purchased parts. Make them insignificant. This requires either extremely rapid changeover to minimize the impact on production, or the availability of extra machines already set up. Fast changeover permits small lot sizes to be practical, and allows a wide variety of parts to be made frequently. Eliminate them. When problems occur, identify and correct them. The correction process is aided when queues are small. If queues are small, it surfaces the need to identify and fix the cause. Western Philosophy An asset. It protects against forecast errors, machine problems, late vendor deliveries. More inventory is safer. Formulas. Always revising the optimum lot size with some formula based on the tradeoff between the cost of inventories and cost of setup. Low priority. Maximum output is the usual goal. Rarely does similar thought and effort go into achieving quick changeover.
Quality Equipment Maintenance Lead Times
Co-workers. They’re part of the team. Multiple deliveries for all active items are expected daily. The vendor takes care of the needs of the customer, and the customer treats the vendor as an extension of his factory. Zero defects. If quality is not 100%, production is in jeopardy. Constant and effective. Machine breakdown must be minimal. Keep them short. This simplifies the job of marketing, purchasing, and manufacturing as it reduces the need for expediting. Management by consensus. Changes are not made until consensus is reached, whether or not a bit of arm-twisting is involved. The vital ingredient of ‘ownership’ is achieved.
Necessary investment. Queues permit succeeding operations to continue in the event of a problem with the feeding operation. Also, by providing a selection of jobs, the factory management has greater opportunity to match varying operator skills and machine capabilities., combine set ups and thus contribute to the efficiency of the operation. Adversaries. Multiple sources are the rule, and it’s typical to play them off against each other.
Tolerate some scrap. Usually track what the actual scrap has been and develop formulae for predicting it. As required. But not critical because queues are available. The longer, the better. Most foremen and purchasing agents want more lead-time, not less. Management by edict. New systems are installed in spite of the workers. Concentrate on measurements to determine whether or not they are doing it.
PLANT PRODUCTIVITY Measure / Company Toyota A(USA) B(Sweden) C(W.Germany) Set up time (hours) 0.2 6 4 4 Set ups per day 3 1 0.5 Strokes per hour 500+ 300 Lot / Batch size 1 day* 10 days 1 month *For products low in demand, one batch = 7 days use. Source: www.88honeylane.freeserve.co.uk/just-in-time
PRODUCTIVITY COMPARISION OF DIFFERENT AUTO MANUFACTURERS Takaoka Toyota A plant (USA) No of employees 4,300 3,800 No of vehicles produced per day 2,700 1,000 Man hours for completion of vehicle 1.6 3.8 Measure / company
B (Sweden) 4,700 1,000 4.7
C (W.Germany) 9,200 3,400 2.7
ADDITIONAL READINGS & REFERENCES: 1. Taylor III Alex, How Toyota Defies Gravity, Fortune, December 8, 1997. 2. Bowen Knet and Spear Steven, Decoding the DNA of Toyota Production System, Harvard
Business Review, September-October 1999.
3. Kanban – an integrated JIT system, www.geocities.com.
4. 5. 6. 7. www.academic.emporia.edu. www.crunch.ivey.uwo.ca. www.88honeylane.freeserver.co.uk/just-in-time/Toyota. www.omni.bus.ed.ac.uk.
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