While the point of this chapter is clear (see the title) it is not as well illustrated by examples as some of the previous chapters. The message here supports the message of the following chapter on limited volume production.
Taiichi Ohno starts by talking about the difficulty of doing production preparation when sales volumes are not known. Forecasts are always wrong. If we had the skills to forecast sales accurately we might as well try our luck at the tracks instead, he says. Even with small run production and market testing it is hard to know what will strike the fancy of consumers.
Taiichi Ohno explains the two types of losses using the example of how the pre and post oil shock Japan perceived them. Prior to the 1973 oil shock, Japan was on a steep growth curve and manufacturers could sell whatever they could produce. If you didn’t have the people or the equipment, you lost the sale and this was “opportunity loss”.
Ohno calls this a misconception that should not be confused with “actual losses”.
Taiichi Ohno uses the expression “The fish that got away looks bigger” to explain how people can confuse actual losses with opportunity losses. People fear the missed opportunity of not being able to sell more products because the sales forecasts were wrong and the production preparation was not done to enable higher production volume.
Flexibility and scalability are two very important characteristics of the Lean manufacturing approach to designing equipment and ramping up through the Production Preparation Process (3P). While traditional manufacturers will buy equipment from a catalog or work with integrators to set up production lines that are capable of the highest volumes forecast, this comes at a higher cost and is driven in part by the fear of “opportunity loss”.
The Lean manufacturing approach is to build a small, low-cost, scalable model that can be rapidly expanded or shrunk depending on actual sales. This is one of the reasons why smaller one piece flow cells for machining, assembly, etc. are preferred to large high speed lines. The opportunity loss is different from the actual losses incurred when designing, purchasing, and running equipment that is less effective than needed or has excess capacity. Equipment that avoids opportunity loss often creates the actual losses of overproduction in an effort to absorb investment costs.
Taiichi Ohno writes as though this was not the way things were done in the days when he was trying to convince people not to fear opportunity losses. Although it is not stated in the chapter, Toyota’s scalable and flexible approach to production preparation is a relatively new development in TPS, possibly even after Ohno’s time.
The last paragraph of the chapter is one long awkward sentence. There’s no evidence of an editor’s touch here. It took several readings for it to make sense, and in fact it only makes sense in the context of the following chapter which talks more about limited volume production. Ohno’s concluding thought (edited and abridged) is that “We (Toyota) are persistently thinking about cost reduction but this single mindedness about cost reduction can lead to misconceptions when the market growth is slow or stopped.” He is saying that the thinking of how to kaizen the cost in low and limited volume production must be different from the mass production approach.
Today Toyota spends a lot of money on market intelligence and even then they admit that their forecasts are always wrong, practically speaking. Do you know anyone on a waiting list for a Prius? The forecasts were wrong. Or perhaps Toyota is not afraid of opportunity losses, preferring to under-produce and catch up later rather than fill dealer lots with vehicles that don;t sell and then having to sell using large incentives and ’employee pricing’.