Gemba Keiei by Taiichi Ohno, Chapter 34: The Pitfall of Cost Calculation

In this chapter Taiichi Ohno talks about the pitfalls of using cost calculation to justify new equipment purchases and also decisions to scrap or replace equipment based on depreciation.

“Whenever we need to make a decision, we end up doing something like cost calculation. Cost calculation is not wrong, but I think top management sometimes makes the wrong judgment because of it.”

Taiichi Ohno explains how equipment purchases are made based on forecasts of production volume over a period of years. When these assumptions are wrong, these can become expensive purchases. He points out how it is easy to make cost calculations say what you want them to, when you have already decided that you want to buy the machine.

Ohno moves on to the discussion of equipment depreciation as part of cost calculation. Equipment depreciation contributes to retained profit. Ohno criticizes production engineers in large, profitable companies who say “That machine is fully depreciated. It is old and wearing out. We can improve productivity by buying a new machine.” Ohno says believing that the money from the retained profit was used to buy the new machine is a misconception.

Ohno wants to see a company continue to use the fully depreciated equipment. The machine is already paid for and can make more profit more quickly than investing in new equipment. Yet accountants want to take advantage of depreciation against taxes.
Ohno is a fan of general purpose machines rather than equipment specialized or optimized for a particular product. Simple, fully depreciated general purpose machines can be easily modified and dedicated for a new part, and this is a key aspect of flexibility for Lean manufacturing.

Ohno says he first began telling people to build what he calls “general purpose dedicated machines” after the first oil shock in 1973. By the late 1980s this had become more common practice and the majority of equipment cost was in the tool and die. At Toyota 60% of the cost of the equipment is the tooling (metal dies), says Ohno.

Putting Ohno’s comments from this chapter in historical context, the Japanese economy grew steadily between 1950 and 1990 and between these years. Ohno likely saw many investment decisions that were based on the assumption of ever higher production volumes, and by definition not all forecasts can be correct. The result being either overproduction to justify the equipment cost (the greatest of the seven types of waste) or an embarrassingly idle new machine.

I’m sure Ohno saw many old but useful machines scrapped and replaced by the new generation of engineers who had never experienced the post-war days of scarcity and had fallen into the pitfall of cost calculation. Today when we walk through the Toyota’s Kamigo engine plant in Japan you will see plenty of “general purpose dedicated machines” and old equipment, thoroughly depreciated but still making money for Toyota.

1 Comment

  1. John Zavacki

    December 15, 2006 - 6:19 am

    I agree completely with this philosophy. The only problem I see is the American idea of a “general purpose” machine. In many companies, this is read as a “do-all” machine which can turn and grind and mill and drill and and and!!!!!