95% Cost Reduction: That’s Kaikaku

According to a June 17, 2005 article in the Financial Times, Toyota plans to cut the cost of hydrogen powered fuel cell vehicles by from $1,000,000 to $50,000 by 2015. That is a 95% cost reduction, in 10 years.

The Lean manufacturing efforts of most companies would be considered successful with an annual 10% cost reduction each year over 10 years. Yet over 10 years 34% of the original cost still remains. Considering factors like inflation, price erosion, and competitors with very different cost structures this may not be enough to survive.

As the number (cost) that is getting reduced is smaller, the percentage of reduction must be bigger to cut it by 50%, not to mention 95%. Toyota would have to cut the cost by more than 26% each year in order to achieve 95% in 10 years (100 > 74 > 54 > 40 > 30 > 22 > 16 > 12 > 9 > 6.6 > 5). Of course reducing cost of the hydrogen fuel cell car is different from doing continuous kaizen on a mature product, but it demonstrates how challenging this is.

Toyota and several other Japanese firms have long had a “cost half” strategy. This is often the part of the Lean manufacturing thinking that most Western companies are missing. While Toyota is great at relentlessly doing kaizen to take out waste, this can take a long time especially when you are fairly Lean already (as Toyota certainly is).

The “cost half” idea is that you must have a goal of zero inventory, zero defects, zero breakdowns, and double the output in the existing space, etc. in order to cut costs by 50%. This type of thinking also forces you to go beyond the Gemba and the direct costs found in the factory and consider the end-to-end costs. These can include variable costs such as purchased parts cost, vendor operations cost, energy cost, logistics cost, and also fixed costs such as overhead and depreciation.

Each of these areas will require a series of Lean tools and Lean behaviors to make them possible, and this will help focus the kaizen activity in order to achieve “cost half”. The key point is that it forces you to reconsider everything. You have to look at the forest, then the trees, then down to the roots.

At a post-conference dinner several years ago in Seattle Dr. Jim Womack told the story of when he first visited Boeing with the late Yoshiki Iwata, then President of Shingijutsu Co. Ltd. They were sitting in a board room with a group of Boeing executives in the early stages of discussion about starting Lean at Boeing. The interpreter had to leave for a few minutes.

Unable to converse without an interpreter, the room was quiet until Mr. Iwata broke the silence by pounding the table and saying “Cost half! Space half! Inventory half!” That was of course a bit of theater, but underlying is a genuine sentiment that Mr. Iwata felt Boeing needed radical improvement (Kaikaku).

Cost half is actually easier than 10% cost reduction. It is another one of those counter-intuitive things about Lean. If the goal is bigger, there are fewer ‘sacred cows’. You have more management attention and support for achieving the goal. I can’t say whether 95% reduction is easier than cost half. Let痴 see in 10 years.

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