Industry Overview The US automobile market $250 billion. Highly concentrated: top 8 companies account for more than 90% Major drivers of US demand are employment and interest rates Profitability depends on manufacturing efficiency, product quality, and effective marketing US imports have exceeded exports by over $100 billion (NAFTA) The average hourly wage is $30 (75% above US manufacturing) Fringe benefits, including health care and retirement programs average about 45% of the hourly wage Corporate Average Fuel Economy (CAFE) China is the worlds second largest car market, replacing Japan (10% annual demand growth)
A Few Facts about the Car Industry
Operations Process: Highly automated assembly lines Productivity: Annual revenue per employee is about $1.4 million Between 2002 and 2005, the number of US auto production workers decreased 8.5 percent; shipments increased 5 percent
Capacity: A typical plant produces 200,000 vehicles annually Flow Time: Efficient plants require 15 to 25 labor hours per vehicle Product Mix: 45% cars and 55% light trucks (including SUVs) Supply Chain Management: As many as 15,000 parts per vehicle
Manufacturing Costs: Material costs 70% of selling price
Inventory Turns Inventory Performance in the US Auto Industry 100 Days-of-supply 20 95
40
60
80
96
97
98 Chevrolet
99
00 Year
01 Ford
02
03
04
Toyota
Producer
Days of Supply
No. of Dealers
Sales per Dealer
Total Sales
Chevrolet Ford Toyota
73 74 42
4227 3939 1200
627 795 1251
2,652,244 3,129,397 1,501,322
Averages during years 1999-2004
Competitive Advantage The Ford Focus reign as the top-selling Cash for Clunkers vehicle appears to be over at least for now. Several reports have emerged indicating that the Toyota Corolla has taken over as the car attracting the most clunker trade-ins Some of the momentum gained by the Corolla might be due in part to better availability on dealership lots. Many Ford stores reported earlier this week that inventory of Focus models had essentially been depleted by the program. Galpin Ford, the largest Ford dealership in the world, showed no Focus coupes or sedans in stock, while Longo Toyota, the largest Toyota dealer in the U.S., showed more a stock of more than 40 Corollas. Both dealerships are located in the Los Angeles area. LeftLanes.com, August, 6th, 2009
Toyota Victor Araman
Agenda What are the issues with the seat installation? What should Doug Friesen do?
Toyota Production System
Relevance of TPS to business Cultural factors Generalization to other contexts
The Cost of Stopping the Line The Seat Problem: What was really done? Toyota Victor Araman
Case Discussion What is this case about?
What are the issues with the seat installation?
What should Doug Friesen do?
Toyota Victor Araman
Elements of TPS Just-In-Time (JIT) Production Jidoka People Kaizen
Toyota Victor Araman
Elements of TPS: JIT Production
Produce only what is needed, only how much is needed, and only when it is needed.
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JIT Production: Production Control
Jan Feb Mar Apr May
Initial Production Planning Order (PPO) PPO Revised PPO is fixed and is called the Total Vehicle Order (TVO)
Production for the 1st week of May Production Preparation Final parts orders to suppliers and daily production sequence for the 1st week of May are finalized TVO is broken down weekly
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JIT Production: Heijunka
Evening out (balancing) the total order in the daily production sequence Variety in May 1992: 23 sedan and wagon models, 11 exterior colors, 29 interior variations & 30 other options Benefits Level production Less risk of inventory obsolescence Synchronization with sales
Challenges and complexities
Reduce setups to allow frequent changeovers Incorporate production schedule in material and information flows
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JIT Production: Kanban Cards
Every parts container carries a Kanban card including part code #, description, batch size, delivery address,
Card physically travels with the container and then back to the supplier Pull production: only a Kanban triggers the production of parts Information flow is embedded in the process. Inventory control: amount of WIP inventory is closely linked to # of Kanbans Actual daily production sequence is given by Kanban cards, not heijunka. Toyota Victor Araman
Elements of TPS: Jidoka
Make any production problems instantly self-evident and stop producing whenever problems are detected
Build in quality in the production process Any deviation from value addition is a waste Value is defined from the viewpoint of the next station down the line Work chart: cycle time, sequence of tasks, breakup of cycle time into the tasks Colored tape to mark where everything belonged Why detect problems when and where they happen? What are the costs and benefits of pulling the andon cord?
Standardize the process and document standards
Andon cord
Andon board Highlight problems to successively higher levels, e.g., Code 1 status Toyota Victor Araman
Elements of TPS: People
Patiently select and invest in peoples knowledge and skills One-on-one coaching Learn by doing: continuous improvement
Worker: training and discipline to add value and improve processes; solve problems by root cause analysis and countermeasures (Employee Empowerment) Team Leader: most knowledgeable/skilled in work zone; best leader-teacher. Group Leader: Experience as a team leader plus broader system knowledge Assistant Manager: Broader skills and knowledge Role of managers: strategic thinking, not fire-fighting. Toyota Victor Araman
Elements of TPS: Kaizen
changing something for the better Improve the standardized work, equipment, and other processes for carrying out daily production. Eliminate waste in seven categories 1. Overproduction 2. Inessential handling 3. Excess inventory 4. Corrections necessitate by defects 5. Blocking & starvation 6. Non-value adding processes 7. Inefficient Motion
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Quality Control at TMM
Eliminate fear: Separate the people from the problem Root cause analysis: 5 Whys Quality control department Setting quality standards Design quality; Supplier specifications Inspection during final assembly Assembly quality problems Parts quality problems with suppliers Following through on customers experience
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TPS: Cost of Stopping the Line
If the line stops for one cycle (57sec) then the cost would be 1. The value of a car $18,500. 2. The profit margin per car 17% of $18,500 $3,145 3. The variable (labor) cost of a cycle $0.269 per worker
Toyota Victor Araman
TPS: Cost of Stopping the Line
Lost production is made up using overtime (@ 50% extra wage rate). One car is produced every 57 seconds (cycle time). If the line stops for about 1 minute, then the cost of the stoppage is OT required to produce 1 car. Various areas of the plant are buffered from each other with a small inventory; e.g., Final 1 and Final 2 in Assembly by a few cars, Assembly & Paint line by about 30 cars, etc. Implication: Short line stops affect only a part of the plant, but long stops can affect the entire plant.
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TPS: Cost of Stopping the Line
For example, if shut down is for 1 minute in Final 1, then only that segment is shut down # of people in Final 1 = 30. OT / person-min = ($17/60) * 1.5 = $0.425 per minute. Total OT/min = 30 * 0.425 = $12.75 per minute. If stoppage is long enough to affect all of the assembly line, then OT is paid to 769 workers = 769 * 0.425 = $327 per minute (with team and group leaders) = 1019 * 0.425 = $433 / min. Toyota Victor Araman
TPS: Impact of Cord Pulls
Facts: 12 andon pulls per team member with 1 actual stoppage Standard time per shift = 450 minutes Run ratio = 85-95%
Lost production per shift = 5 to 15% of 450 minutes = 22.5 to 67.5 minutes. Consider Final 1 with 30 people # of cord pulls = 30*12 = 360 # of stops per shift (1 in 12) = 360/12 = 30 stops
Avg. downtime per stop = Total downtime / Total stops = [22.5/30, 67.5/30] = [0.75, 2.25] mins per stop. Toyota Victor Araman
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Cost of Not Stopping the Line
Cost of not stopping the line: Need for rework Propagation of defective products through the system Excessive waste Difficult to attach a $ number to this phenomenon
Toyota Philosophy: the risk of snowballing waste is such that stopping the line is preferred to not stopping the line even if the cost of not stopping is not quantifiable.
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TPS & the Andon System
Cost of stoppage easy to compute Short stoppages have very little cost Quick identification of defects Fast feedback Continuous improvement
Benefits are huge but hard to estimate
Buffering between line segments limits impact of stoppage Seat Problem: If problem is diagnosed but not solved yet, then do not stop the line. Instead, collect problem cars in the overflow area and repair them later TPS is pragmatic ! Toyota Victor Araman
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A Quote
The good things I saw [at Tsutsumi] were just common sense and no big deal at all. My eyes werent open back then. - Doug Friesen, Manager of Assembly, Toyota Motor Manufacturing, Georgetown, Kentucky, Plant.
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The Seat Problem
May 1: Managers, including Doug Friesen, have just learned about the seat problem, long after it has become one Implies that TPS has not been applied correctly/completely in this case Two problems: seat defects and the fact that it has not been recognized for a while
No one knows what the real cause of the problem is What must be done: Install new mechanisms for managers to learn about what they need to know Managers should be forced to confront the symptoms as soon as they arise and trace them to root causes (Jidoka)
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Actions Taken after May 1
Seat reorder form was revised
(not in the case)
KFS stationed QC engineers at TMM seat receiving area To discover more about the problem KFS: altered lighting in their final inspection area Friesen guessed that insufficient lighting could have been a problem at KFS inspection area Clearly marked area within the overflow area for seatdefective cars When this space was filled, a mini-May 1 type meeting would be held to give immediate feedback to KFS. Toyota Victor Araman
Actions Taken after May 1
(not in the case)
Bulletin board in the overflow area with 8 slots for different kinds of defects and a copy of the reorder form was placed in these slots What defects are common? How fast are replacements arriving? Number of seat defected cars in the overflow area reaches four Area group leader calls in an asst. manager of assembly and KFS people to review the situation Number of seat defect cars in the overflow area reaches six Area group leader calls in the manager of assembly and KFS people to review the situation. KFS ships replacement in an hour
Jidoka procedure:
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Actions Taken after May 1
(not in the case)
More kaizen training to group and team leaders Training for KFS By the end of May 1992: heightened awareness of seat defects, faster problem-solving cycle Results: weekly defect counts fell by 25 % Continued improvement even after the introduction of several new models in the summer Summary of the seat problem: Managerial Problem stemming from the lack of a system that helped people autonomously improve the status quo Such problems will always occur in a dynamic environment and a relentless pursuit of the cause of the defects and opportunities for improvement is necessary
Toyota Victor Araman
More on Toyota Production System
Toyota: has been intensively researched and documented Practices (kanbans, for example) have been copied in many other companies. Many companies have tried to develop their own versions of the TPS and have failed Reasons are NOT country/continent related Even Nissan and Honda could not TPS has been introduced successfully in Toyota, North America
Why is it so difficult? Decoding the DNA of the Toyota Production System by Steven Spear and Kent Bowen, Harvard Business Review 1999 Toyota Victor Araman
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Why is it so difficult?
WSJ: Sept. 03, 2004
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More on the Toyota Production System
Key Idea: TPS is not just the tools and practices visible to a visitor Key Idea: TPS creates a community of scientists Every new initiative establishes a set of hypothesis which are tested The scientific method is intrinsic to the system Rigorous problem solving approach: Detailed assessment of the current state Detailed plan and documentation for improvement Experimental test of proposed changes
Reliance on such a scientific method stimulates workers and leaders to make Toyota a continuously learning organization Toyota Victor Araman
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Key Learning from TPS
Skilled workers; Invest in training and standardization of processes. Integrate quality into the design and the production process Integrate your suppliers Instant feedback in case of problems. Do not delegate to QC inspectors Do not create waste Continuous Improvement Toyota Victor Araman
