Gemba Keiei Chapter 23: Producing at the Lowest Possible Cost

Taiichi Ohno starts the chapter by telling the story of when the President of Toyota, Mr. Ishida, was summoned to the National Diet and scolded by politicians for building passenger cars that were too expensive. Back then even the head of the Bank of Japan said that cars should not be built in Japan but they should be imported at a lower cost from the United States, according to Ohno. The most important thing in those days was to produce cars at the lowest possible cost.

Taiichi Ohno says it was common sense in Japan in the 1940s and 1950s that Japan could not be competitive making cars. It was not their core competency, and should be outsourced, in today’s language. How ironic.

The focus was on improving productivity tenfold so that labor cost would be at the same level as automobiles built in the United States.

Toyota could not take the high volume production path to profitability. Indeed, Toyota tried this and nearly went bankrupt in 1949-1950, says Ohno. Toyota built 1,000 cars per month but could not sell them. Their turnaround plan was to be profitable building 900 cars per month, but the Korean War came along and rescued Toyota with military orders.

When President Kamiya of Toyota Motor sales gave the challenge of selling to the United States market in the mid-1950s, this required a production volume of thousands. At the time Ohno wondered “How will we do it?” but then reflects “today we build a thousand cars in a matter of minutes.”

At the beginning the Toyota Production System was very effective. During the years with the rapid increase in production volumes, the Toyota Production System was unknown to the world. Only after the oil shock and the news that Toyota was still profitable did people take notice of the Toyota Production System. This was in 1973-1974.

“Without those challenging years, the Toyota Production System may have been much more like the American system based on monthly volumes in the tens of thousands and model changes every 3 years, and plenty of reason to make capital investment.”

Ohno then tells a story of a trainee from Daihatsu working at Toyota. He taught the trainee “You must only produce what you need.”

The trainee replied “But I have spare time. And we have more materials. Isn’t it better to make as many as possible?”

“No. We make only what is needed. If we only need 100, but you make 120 just because we have the materials, this is a loss to the company.” said Ohno.

The workers were taught to be multi-process handlers so that they could be responsible for many operations, completing a total of 100 pieces even if it took them all shift.
Ohno says “Once during the war, we finished our daily requirements by noon so I sent everyone home. I got into big trouble that time.” Presumably the army procurement officers did not share Ohno’s views on overproduction.

Taiichi Ohno says the key is to produce what you need at the lowest possible cost. This means giving people a full work load through multi-process handling, rather than building more work in process and using up materials just because you have time. This is the key to producing at the lowest possible cost.

One of the fundamentals of the Toyota Production System is to produce “what is needed, in the right amount, when it is needed”. But people often forget to add “at the lowest possible cost”.

Taiichi Ohno admits that this last part is not written down. Many people think it just means that when you’re done with the day’s work you go home. “The Toyota Production System is producing what you need, in the right amount, when you need it at the lowest possible cost” says Ohno.

Taiichi Ohno warns against reversing the order and putting “producing at the lowest possible cost” first, before “”what is needed, in the right amount, when it is needed”. He says there are many ways to produce at a low cost, but if you don’t put Just in Time first, supposedly low cost production actually costs more.

Producing just what you need at the lowest possible cost is the most difficult part of the Toyota Production System and the reason people need to study Just in Time carefully, says Ohno.

If you place “producing at the lowest possible cost” first, you may overproduce or not make enough, or not produce at the right time. If you chase the lowest cost there is no end. Combining work most effectively to minimize wasted time is the way to avoid high costs. Taiichi Ohno emphasizes that this thinking comes from reduced volume production and if you attempt to lower cost through increased volumes you are going against the grain of the Toyota Production System.