If Lean Is So Great, Why Is Toyota Struggling?

Balaji, a reader of LSS Academy, recently sent me the following question/comment via email:

Toyota, GM, and Ford are experts in state of the art assembly technology and in implementing Lean and Six Sigma process improvement methods and so on. Then why have GM & Ford failed? Even Toyota closed its branch production units in Japan? Though I’m also one Lean Six Sigma Black Belt I too lost the confidence that Six Sigma or Lean or TPS can’t do anything in this recession period.

Regards,
Balaji.

Correcting Misconceptions

Before getting started, let me first say that I’ve done some research and don’t believe Toyota has closed any production units in Japan. If I am wrong here feel free to comment below with a correction.

Also, before the lean purists get too excited Toyota does not practice “six sigma” the same way companies like GE and Allied Signal do.

With all of this said, Toyota is still struggling these days just like many other companies.

The company is still deep in the red, logging a net loss of 77.82 billion yen (US$817 million) for the April-June quarter.

How can this be?

So the million dollar question is how did this happen? How could the mighty Toyota, the company that “changed the world” with their production and management system, lose money like this?

The Reality of Running a Business

Well, here’s my take on it.

No matter how amazing your production or management systems are or how well you respect people or how conscious you are of the environment… if no one is buying your product or service problems are coming.

You don’t need to be a CPA to figure this out… if your expenses are greater than your sales you’re in for some trouble.

And it goes without saying that people haven’t been buying many automobiles the past few quarters and no one, including Toyota, saw it coming. Perhaps they should have… but they didn’t.

Now, to be fair, Toyota has weathered this storm about as well as any automotive company SINCE they have an amazing production and management system… but they are not infallible. Far from it.

Rise Up Continuous Improvement Practitioners!

So does this mean lean and six sigma practitioners like Balaji (or you and me) should pack up ship and run for the hills until the orders start flooding in again?

Of course not.

Your company needs you now more than ever. Specifically, they need you to:

  • Attack the waste that is sucking operating income down the drain.
  • Find better ways to manage the inventory that is tying up much needed cash.
  • Reduce lead-times that will make you more competitive.
  • Partner with your sales and marketing team to see how you can apply lean and six sigma principles.
  • Stay positive while working to make things better EACH AND EVERY day even though you might feel like your boss is more focused on other things (like how to make payroll this week).

A “W” Recovery?

This market will eventually turn around. However, I’ve heard some economists claim that we might follow a “W” recovery pattern instead of the more common “V” recovery pattern we often see after recessions.

In other words, things could look better (like they seem to be now?) only to tank once more before the final recovery takes place.

But no matter how things recover one thing is for sure… the companies that work to become stronger during this recession by investing in continuous improvement will be the new winners of the post recession period. This I’m sure of.

What do you think?

Do you agree with me? Do you have any other thoughts on why lean exemplars like Toyota are losing money? Do you agree that investing in continuous improvement is more important than ever in these tough economic times?

17 Comments

  1. A.J. Shipley

    August 9, 2009 - 8:18 pm

    long time reader, first time to comment but this article has really resonated with me as I too am frustrated. but like you said, now is the time to step up and make things happen. thanks for reminding me. I needed it.

  2. Harish

    August 10, 2009 - 5:47 am

    This might sum it up.

    http://seattletimes.nwsource.com/html/businesstechnology/2009419335_toyota05.html?FORM=ZZNR2

    Or in better words: (Kung fu Tv Show)

    Caine: Is it good to seek the past, Master Po? Does it not rob the present?
    Master Po: If a man dwells on the past, then he robs the present. But if a man ignores the past, he may rob the future. The seeds of our destiny are nurtured by the roots of our past.

    Go back to basics – Toyota Production System.

    -Harish

  3. Ron Jacques

    August 10, 2009 - 7:04 am

    Toyota lost its way when it decided that it wanted to be the biggest car company and overtake GM. At that point it made the anti-Lean management decision to abandon the demand flow principles that make Lean work.

    Also, how many salary/professional employees in a normal business contribute more than 7x to 10x of their compensation like direct labor employees. Why businesses choose to shed direct employees and Lean practitioners in tough times when they are actually the most productive at generating cash flow astounds me. I realize that they feel that it may be easier to replace them but why would you want to get rid of someone who made you $10 dollars for every dollar you spent. Why not consider the folks who only give you break even return or worse, are a negative asset.

  4. David McGan

    August 10, 2009 - 7:24 am

    My experience with GM, Ford and Chrysler are that, yes, they may be “experts” in the “tools of Lean,” but Lean is much more than tools. There is significant circumstantial evidence, in my opinion, that the former Big 3 never really progressed beyond the use of the tools into a true Lean culture with regard to the importance of people involvement — not nearly to the degree that Toyota has. Big 3 — shut down plants, lay off everybody. Toyota — stop production, but keep people working to learn more, improve more.

  5. Sophie Breslin

    August 10, 2009 - 8:15 am

    I know not alot about the happenings in Toyota, but totally agree with your higher level response Ron. No amount of Lean or other process engineering can replace the fact you have a dimished orderbook. I thought the whole idea was ‘pull’ – if customers aren’t creating pull, you’ve just got a lot of overhead haven’t you? Rise up Black Belts, get excited, go after the overhead reduction projects.

  6. Tim Stewart

    August 10, 2009 - 11:37 am

    The Seattle article another person posted above sums things up well but I find the tone quite finger pointing in nature which is disappointing. I do think Toyota grew too fast and perhaps got a bit careless. But this economy is a killer and I can’t think of anyone that hasn’t been impacted. Maybe toilet paper manufacturing companies are immune to the recession?

  7. Peter

    August 10, 2009 - 4:14 pm

    I like your comment Tim. You have to remember that Lean and Six Sigma tools help us to manage and organize production. For sales of products takes responsibility different methods and departments. And of course costomers have to need our product. In current situation we may be compared to well trained athlete who is ready for long-distance races but he can’t make his best because competition were canceled.

  8. Robert Anderson

    August 11, 2009 - 8:26 am

    The big enough Tsunami can swamp the largest of ships. The question is not being engulfed by the Tsunami, but whose production system enables it to right itself the quickest to stop the bleeding….

  9. Endrio Di Nardo

    August 11, 2009 - 9:59 am

    The Lean overture helps the companies to improve the entire process and causes people to reduce waste, to make things happen, to change ancestral thinking and, especially, to think positive and to be creative.
    Ink rivers had explained the reason of the actual worldwide crisis. Toyota or others companies would be overwhelmed anyway because of the expense (adapt indirect labour and, especially, fixed costs to the current turnover is not simply). Probabily, the lean companies where processes are lean, fixed costs under control and wastes reduced, the crisis will fly away sooner.
    The last but not the least: I think is useful to rediscuss the paste choices who caused the race to produce in low cost country just for to increase the contribution margin (containing the cost). In this way many companies stopped to organizes process, to plan improvement, to study methods and times, and any others.

  10. Andrea Pinnola

    August 19, 2009 - 11:23 am

    Being true that a big enough storm can sink any boat, I have two points. The first is that in the last years Toyota goal shifted from being the customer choice for quality and good price in being number one and gain market share; quality and good price are much more important for a customer than buying from the number one, infact for years Toyota customers were buying from not-the-number-one-or-two-or-three. Toyota is now trying to regain this focus (see Chairman Akio Toyoda Message of june 2009). I think that expecially in pricing they were a bit “arrogant” in the last years, too much sure that they were selling at any price. In this period lower prices would have smoothed the shock.
    Infact, second point, in doing so Toyota forgot Taichi Ohno lesson that anyone is able to gain when market goes up, but only a few are able to gain when market goes down (see Taichi Ohno book of Workplace Management). Toyota became famous during the oil crisis of 197x because was still positive and was very quick to regain market positions after the recession.
    Toyota Management missed its own early lessons and focus but I bet that if there is a company that will have a strong recovery in the next year this will be Toyota.

  11. Bhognath

    August 19, 2009 - 10:15 pm

    Well put Ron. I fully agree with you. When there is no transaction in the market no amount of Lean / Sig Sigma can help. I believe Toyota and other practitioners of Lean or Six Sigma will bounce back learning from the mistakes. And that is what Lean is all about learning and growing. Those that can withstand the present downturn will survive and go to the next level if they learn lessons from it.

  12. Cyrus Karanja

    August 20, 2009 - 10:14 am

    Hi Ron,
    I too was pertubed when i heard that Toyota were so hard hit that for the first time ever they would be shutting down some of their plants in the U.S & elsewhere. But it’s important to put things in proper perspective like you’ve done; the world economy is going through what is perhaps it’s worst contraction since the great depression in the 1930’s and it would be unrealistic to expect any company however lean to do well in these times.
    Lean companies may not make profits, they will face terribly difficult times but they will most certainly survive. After all,survival has always suited the fittest!

  13. Nuri Abukhshim

    August 21, 2009 - 5:35 pm

    Thank you for this interesting article Ron. I’ve been reading about lean and applying its principles over the last couple of years, and I am impressed with the manufacturing philosophy. Thinking practically, the areas where I have seen the most benefit in applying lean manufacturing principles to different industries are those processes that are high-volume, resource intensive and repetitive. Lean focuses on eliminating manufacturing waste, with the objective of making manufacturers more responsive to customer demand and market changes, if there is a demand and a market. Therefore, what is happening for Toyota now dose not surprise me, as the demand had significantly decreased. However, we need to keep in mind that lean companies are ‘ideally’ highly efficient and they can offer lower prices which can help grow sales even in the current global recession. Lean is more about thriving as it is about surviving. Lean can significantly improve sales and help in this recession.
    With sales sagging, companies have turned to the cost side of their budgets to find savings and keep profits up. Ford, for example, recently reported a head-scratching $2.3 billion net profit. But this has been attributed mainly to the lower interest payments and $1.8 billion in cost-cutting that included less spending on manufacturing, engineering and advertising. The question that should receive great deal of attention now is: (Is this what all companies should do? Does this help to get out of the recession? I think the answer is NO.
    I fully agree with you Ron, in this time companies should focus on continuous improvement attacking waste, improving manufacturing methods and reducing lead times. Tough times end. Be honest about now and hopeful about then.

  14. Anonymous

    August 24, 2009 - 11:22 am

    You all are forgetting Toyota is not just a car company. They have a finance arm that is the major culprit in their huge losses. Read a newspaper for goodness sake before throwing lean under a bus.

  15. Gary Browning

    December 30, 2009 - 5:13 am

    Hi Ron you are most likely right with the W recovery or the double dip as some call it, we are seeing in industrial manufacture some slight growth in the 4th qtr 2009 but we are also anticipating only around 7 or 8% for 2010.
    Of course the impact of a double dip could certainly have additional impact so its even more prudent now to focus on waste and variation reduction projects. Improve productivity without adding additional labour or variable cost is key.
    Still now even in this current economic climate I see businesses with past due shipments, the supply pipeline has been emptied and capacity has been removed or mothballed.
    Customers are leaving it to the last moment to commit to orders then are expediting them with suppliers as fast as possible, much of the time inside the product lead-time.
    This in itself is putting huge strain on the supply base & internal processes, which were developed for only a small majority of the volume, are now being swamped by the increase.
    Ideal time to map, improve and reduce those process lead-times otherwise we will drown in the workload even in a recession…..

  16. David McGan

    December 30, 2009 - 8:20 am

    I predicted Gary’s scenario some time back in a white paper on my website:
    http://mcgangroup.com/preparing.pdf

    I’m seeing examples of what Gary describes in some companies in my area.