Corporate profile: the Toyota Production System

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Next year, Toyota is expected to overtake General Motors as the world’s
biggest vehicle manufacturer.

In the year to March 2006, Toyota sold almost eight million vehicles around
the world, and has set itself the target of selling 10.3 million by 2010. By
that date, production in Europe is due to increase to 1.2 million vehicles.
However, the Japanese carmaker is expanding production dramatically around the
world, building factories in China, Russia, the US and south-east Asia.

The latest financial results highlight Toyota’s success. For the year ending
March 2006, Toyota achieved record sales of ¥21,037bn (£94.6bn). The carmaker’s
full-year operating income increased 12% to ¥1,878bn. Its recorded net income of
¥1,372bn represents an increase of 17% – the fourth consecutive annual increase.

However, net income is not expected to rise next year, due to a stronger yen
and higher raw materials costs. Nevertheless, when announcing the company’s
annual results, Katsuaki Watanabe, Toyota’s president, said the company would
aim to maintain an operating profit-to-sales ratio of around 9%, having achieved
an operating margin of 8.9% in the year to March 2006.

Research pays
Part of Toyota’s success stems from its high levels of research and development
investment and its commitment to launching new vehicles that meet the mood of
the times. The car maker has announced, for example, that it is planning to sell
ethanol-powered vehicles in the US by 2008. Its fuel-efficient hybrid
petrol-electric systems are already well established.

Toyota’s recent history has not been problem-free, however. Last autumn, it
had to recall almost 1.3 million cars, such as the Corolla and Vitz, because of
a defective headlight switch design. During 2005, it recalled 1.88 million
vehicles. This July alone, Toyota recalled more than 380,000 Lexus and Toyota
Highlander vehicles globally.

Meanwhile, a criminal investigation is underway following suspicions that
managers delayed one particular safety recall report for eight years. Akio
Toyoda, the founder’s grandson, has been put in charge of a ‘back-to-basics’
campaign intended to re-reemphasise the importance of quality over cost-cutting
or pure design.

Despite these hitches, Toyota’s reputation for producing quality cars remains
strong. A key reason behind this and the carmaker’s financial success, is its
Toyota Production System (TPS). This has as its central philosophy the aim of
‘the complete elimination of all waste’, whether that waste is in the form of
excess stock, an unnecessary process step or defective products.

The TPS is based on a number of key principles (see below), such as ‘kaizen’,
which can be translated as continuous improvement to eliminate waste. Whenever
Toyota has set up production in locations outside Japan it has sought to ensure
the TPS approach is incorporated in the new facility.

However, with Toyota soon to be the largest car producer in the world,
questions are being4 asked about how the company can keep generating improved
results. The TPS has already been extended up the supply chain, to bring in
external suppliers under its philosophical and operational umbrella.

Now, attention is being turned to Toyota’s retail operations to see whether
dealerships could improve customers’ buying experience and hence not only
immediate sales figures, but also repeat business. “Toyota is trying to transfer
these TPS values into the retail sector,” says Gary Reed, director of research
at the Centre for Automotive Management at Loughborough University Business
School. “They are looking at what aspects can be taken from TPS to try and
improve the customer experience.”

Holistic approach
In theory, the TPS approach could also be applied to all functions within a
business, including the finance function. “Any department could find there are
better and more efficient ways of working,” says Reed. “It is essentially about
giving people the information and services they require. With finance, for
example, you could think about management information. People in dealerships
often have a printout on their desk, but they never look at it. It doesn’t mean
anything to them. So it’s about thinking about what people really need.”

Within Toyota itself, non-production personnel support the TPS approach. “We
very much value the Toyota way,” says David Betteley, managing director of
Toyota Financial Services (UK) and vice president operations for Europe and
Africa. “The key values of the Toyota way are teamwork, respect, challenge,
kaizen and genchi genbutsu.

“You produce a new product and it can be replicated by a competitor almost
immediately, so you have to be always innovating. We are very dealer focused. We
have to provide not only a competitive service pricewise to dealers, but also be
competitive in terms of the length of time it takes to deal with things. We have
to be moving and changing all the time and never sit still.”

Applying the TPS to non-production areas of the business isn’t easy, of
course. “It’s a challenge converting these best practices in Toyota that have
been developed for production and moving them down into sales and marketing,
which is what we do,” says Betteley.

“Moving the good ideas from production to sales and marketing is a challenge,
but a challenge we have taken on. Our mission is to attract customers for life.
We don’t just want to finance one car, but many cars. Our ambition is to become
the most admired sales finance company for all stakeholders.”

There are no plans to make finance the most important part of the Toyota
group, however. The finance arm currently represents about 10% of Toyota’s
income – a far smaller percentage than that contributed by the finance divisions
of competitors such as Ford or General Motors.

“Toyota realises the importance of its financing arm to support dealers,
distribution and its retail customers, but we don’t want to grow the finance
operations to be more than 10% to 15% of Toyota’s total revenues,” says

Dealer support
Supporting dealers is a core part of the work of Toyota’s financing arm.
“Selling through dealers is fundamental to Toyota,” says Betteley. “We have no
plans to go direct. It’s important for dealers to know we will be with them for
the long haul.”

Income from finance packages and insurance is essential for dealers’
businesses, Betteley stresses. “Perhaps 50% or 75% of dealers’ income is from
finance and insurance,” he says. “Without that they don’t survive.”

The UK market for finance and insurance is highly competitive, however. “The
key issue in our business is margin,” Betteley says. “We have got a reducing
margin in most markets and that’s driven by competition. We have very heavy
competition from traditional banks, but also new entrants like supermarkets.
Customers are more savvy. They want to take control of their financial life and
the use of the Internet is more relevant too.

Customers are now taking decisions about how to buy the car when they start
thinking about what to buy. We have to find a way to convert more customers to
use us and not go somewhere else. So we need to get better at contacting
customers in the sale process. We have to work with the dealers to reach
customers at the start of the sales process, and that might mean by making an
attractive offer on the website – an offer that’s attractive enough for the
customer, but so that the dealer can make some income from it as well.”

At the same time, Toyota Financial Services is considering expanding its
service offering. As part of its customers for life strategy, it is looking at
introducing new products in some regions, including credit cards, insurance and
investment products. “In that way we can be a one-stop shop for customers’
financial requirements,” says Betteley.

The Toyota Production System is based on a number of key principles:

? Just in time: The production process delivers what is needed for the next
process when it is needed, rather than simply aiming formass production to
achieve economies of scale.
? Jidoka : Embodies the idea that machines will stop production as soon as any
problem or defect is identified.
? Kaizen: Continuous improvement to eliminate waste, improve efficiency and
product quality.
? Genchi genbutsu: If a problem arises, assessing the problem directly is more
effective than hearing about it through a third party.
? Challenge: Challenge the status quo. For example, to try and improve service
levels or create more efficient budgets.
? Teamwork: The causes of problems can arise in areas beyond an individual’s
domain. Multi-skilling enables personnel to help colleagues in other teams at
busy periods.
? Respect: TPS recognises the intelligence and ability of all staff and gives
them responsibility. Respect also extends to the external environment in which
the company operates.

The Centre for Automotive Management at Loughborough University
Business School has been invited by Toyota to act as the primary researchers
monitoring the progress of attempts to see how TPS principles can be applied
from production, by dealerships, through the development of a Toyota Retail

A working paper produced by the Loughborough research team notes that
adopting four key practices of kaizen, genchi genbutsu, teamwork and respect
ought to result in a culture that reflects the goals and values of TPS.

“In the automotive retailer, kaizen can reduce waste through addressing
inefficiencies in the provision of customer service.” the paper says.

“Workers can generate solutions to problems, which they encounter in their
own work processes, such as poorly designed showrooms, which may restrict, for
example, disabled customers from assessing the vehicles they are interested in.”

Similarly, it considers the application of genchi genbutsu in car retailers,
in terms of really understanding the sales process and the needs of customers:
“Understanding the customer perspective enhances customer service since it
allows sales staff to adapt their selling approach to establish each customer’s

On teamwork the paper notes: “Multi-skilling means that staff teams become
adaptable and can help each other at busy times, leading to improved customer

On respect: “TPS develops respect for employees and customers. For employees,
respect through empowerment gives staff autonomy to make decisions, for example,
in negotiating trade-in prices without referring to senior staff. By reducing
the communications chain the purchase experience for customers is improved.
Respect for customers is shown by the ‘pull’ focus of TPS in providing what
customers want, rather than persuading customers to buy a car which is
available, but would not necessarily choose to buy.”

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