Toyota's JIT Revolution 1

Toyota's JIT Revolution

The case focuses on the Jusic.in- Time manufacturing system pioneered by Toyota. The casedi:sltJs's(!s~'ili" l1~iaili!:thi"'<{kfHi'bJft'concept", which was one of the principles on whichToyota's JIT was" based. THe Kanban philosophy is compared with the westernmanufactu ' 'losoph e:JITsystemiscompared with non-JIT systems. The caseals~\toucll ~;i1i;'(jf1 s bfJitarid thiijutureof JIT ",' ."

"Toyota's focus on JIT is a continual problem-solving process (not an inventory reduction plan)illustrates why the automaker is a JIT leader not only in its industry but all of industry. "

- www.academic.emporia.edu (1998).A Legendary Production System

In the mid-1990s, more than fifty executives and engineers from major automobile companiesworldwide visited Toyota Motor Company's (Toyota) \ manufacturing complex at Georgetown,US, to study the Toyota Production System (TPS). The visit also included an intensive questionand answer session. Even though the visitors were from competing automakers, including Fordand Chrysler, Toyota did not deny them access to the plant

The TPS aimed to produce world-class, quality automobiles at competitive prices. It was built ontwo main principles, Just-in-Time (JIT) production and Jidoka,z JIT was used not only inmanufacturing but also in product development, supplier relations and distribution. Analystsremarked that despite imitating Toyota's JIT for mimy years, no other automaker in the world hadbeen able to make their production systems and processes as efficient as Toyota had done.

Analysts felt that though other leading automakers like Mercedes-Benz, Honda and DaimlerChrysler excelled in advanced engineering techniques, engine technology and styling, they did notmatch Toyota in efficiency, productivity and quality. Executives of rival companies alsoappreciated Toyota's manufacturing and product development systems. Officials at GMcommented, "Toyota is the benchmark in manufacturing and product development" A topexecutive at Ford said, "Toyota is far ahead in developing markets that the real race is for thesecond place." Some executives at BMW also considered Toyota the best car company in theworld.

The early adoption of JIT principles by Toyota seemed to have helped the company achievesignificant success. It helped the company respond quickly to changing customer needs and offerhigh quality products at low costs, thus increasing customer satisfaction.

Background Note

Toyota's history goes back to 1897, when Sakichi Toyoda (Sakichi) diversified into the handloommachinery business from his family traditional business of carpentry. He founded Toyoda

I Toyota was the world's third largest automobile manufacturer in 2000, after General Motors and Ford.

2 A defect detection system that automatically/manually stops the production operation and/or equipmentwhenever an abnormal or defective condition occurs. Any necessary improvements are made by directingattention to the stopped equipment and the worker who stops the operation. The jidoka system puts faith inthe worker as a thinker and allows all workers the right to stop the line on which they are working.

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Operations Management

Automatic Loom Works (TALW) in 1926 for manufacturing automatic looms. Sakichi invented aloom that stopped automatically when any of the threads snapped. This concept of designingequipment to stop so that defects could be fixed immediately formed the basis of the ToyotaProduction System (TPS) that went on to become a major factor in the company's success.

In 1933, Sakichi established an automobile department within TALW and the first passenger carprototype was developed in 1935. Sakichi's son Kiichiro Toyoda (Kiichiro) convinced him to enterthe automobile business. After this the production of Model AA began and Toyota MotorCorporation was established in 1937. Kiichiro visited the Ford Motor Company in Detroit to studythe US automotive industry. He saw that an average US worker's production was nine times thatof a Japanese worker. He realized that the productivity of the Japanese automobile industry had tobe increased if it were to compete globally. Back in Japan, he customized the Ford productionsystem to suit Japanese market. He also devised a system wherein each process in the assemblyline of production would produce only the number of parts needed at the next step on theproduction line, which made logistics management easier as.material was procured simultaneousto production consumption. This system was referred to as Just-in-Time (JIT) within the ToyotaGroup.

The JIT production was defined as 'producing only necessary units in a necessary quantity at anecessary time resulting in decreased excess inventories and excess workforce, thereby increasingproductivity.' Kiichiro realized that relying solely on the central planning approach would be verydifficult to implement JIT in all the processes for a product' like an automobile. Hence, TPSfollowed the production flow conversely. People working in one process went to the preceding oneto withdraw the necessary units in the necessary quantities at the necessary time. This resulted inthe preceding process producing only quantities of units to replace those that had been withdrawn.

Toyota flourished during the Second World War by selling truc;:ksand buses to the army and thecompany launched its first small car (SA Model) in 1947. After the war, the company faced aseries of financial problems. Consortium of banks offered package with financial support after theintervention of the Bank of Japan helped Toyota tide over its problems. The package consisted of aseries of steps that included downsizing and restructuring the company into separatemanufacturing aDdsales divisions. As per the revival package, The Toyota Motor Sales CompanyLtd. was formed in 1950. In the same year, Kiichiro resigned.

By 1952, Toyota made a turnaround and in 1953, the company appointed distributors in EISalvador and Saudi Arabia and started exports. Meanwhile, Taiichi Ohno (Ohno) took charge ofthe company. In 1957, Toyota entered the US market through its subsidiary, Toyota Motor Sales,USA. In 1959, the company began its first overseas production in Brazil and over the._nextfewyears, developed a vast network of overseas plants. Besides manufacturing, Toyota started a globalnetwork of design and Research and Development facilities covering the three major car marketsof Japan, North America and Europe.

By the early 1970s, Toyota's sales exceeded that of Chrysler and Volkswagen and its productionwas behind that of only General Motors (GM) and Ford. Toyota continued its efforts to make itsproduction system more efficient and also developed flexible manufacturing systems. It also beganto tap the markets in the Middle East and by 1974 the Toyota Corolla, (launched in 1965) becamethe largest selling car in the world. In 1984, Toyota entered into a joint venture with GM andestablished the New United Motor Manufacturing Inc. (NUMMI).

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By the early 1990s, as Toyota expanded its overseas operations, the excessive capital spendingaffected its profit margins. Tatsuro Toyoda (Tatsuro), who took over as-the company President in1992, began to control costs by eliminating all unnecessary expenditure. In 1995, after Tatsuro

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resigned due to health reasons, Hiroshi Okuda (Okuda) became Toyota president. In 1996, Toyotaconsolidated its production in North American production units into the Cincinnati based ToyotaMotor Manufacturing (North America).

In 1999, Okuda replaced chairman Shoichiro Toyoda and Fujio Cho (Cho) became the president.In the same year, Toyota listed its shares on both the New York and London stock exchanges. Bythe end of 2001, the company's.net income had reached $5,447 million and net revenue reached$106,030 million (Refer Exhibit Iror the company's financial performance over the years).

According to analysts, Toyota's Sllccessin both the local and global markets was mainly becauseof its state-of-the-art and.,.well~planned operational strategies. The company had continuouslyfocused on gaining a competitive advantage through implementation of innovative and path-breaking ideas on its production floors. TPS worked on the basic idea of maintaining a continuousflow of products in factories in. order to flexibly adapt to demand,.fpanges. The most importantfeature of TPS was the way it linked all production activities to real dealer demand throughimplementation of Kanban, HT and other quality measures that enabled Toyota to manufacture inlow quantities.

Just-In-Time Production System

Developed by the Japanese, theHT production system was one of the most significant productionmanagement approaches of the post World War II era. The system comprised a set of activitiesaimed at increasing production vcHumethrough the optimum use of inventories of raw materials,work-in-process, and finished goods. In a HT production system, a workstation gets a part just intime, completes its work and the part is moved through the system quickly.

HT was based on the principle of producing only what is needed and nothing more than needed.The Japanese believed that anything produced over the quantity required was a waste. Cho definedwaste as, "Anything other than the minimum amount of equipment, materials, parts and workers(working time) which are absolutely essential to production." HT did not allow any surplus as itbelieved that "effort and material expended for something not needed now cannot be utilizednow." (Refer Table I for requirements and assumptions of HT).

HT could be applied to any manufacturing environment including job shop, batch production orrepetitive production. The ideal lot size as per HT was one. A worker had to complete one task andpass it on to the next workstation for further processing. If workstations were geographically faraway, efforts were made to reduce the transit time.

The advantages of HT included price flexibility, reduction in product variation, quick response tocustomers' demands, high quality products at low cost for consumers, and above all, customersatisfaction. The system also offered the advantages of low inventory investment, shortened leadtimes, and early detection of quality problems.

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Table IJust-In-Time Production S

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Source: Production and Operations Mgmt.: Manufacturing and Services, Chase, Acqui/ano & Jacobs.

JIT in Toyota

In the early 1930s, the technology used by American automobile companies was superior to thatused by Japanese companies. Kiichiro therefore decided to learn new automobile productiontechniques from American manufacturers. He soon realized that to catch up with the Americans,he had to master basic production techniques. He then reorganized the production system inToyota in a unique way. This reorganization eventually led to the development of JIT concept.

In the early 1970s, Taiichi Ohno (OhnO)3implemented JIT in Toyota's manufacturing plants. TheJIT system was aimed at avoiding waste, reducing inventories and increasing production efficiencyin order to maintain Toyota's competitive edge. Ohno also believed that customers should receivehigh quality products in the shortest time~ Initially, JIT was used as a method for reducinginventories in Toyota's shipyards, but later it evolved into a management philosophy including aset of techniques (Refer Exhibit II for a comparison between JIT and non-JIT systems).

Kanban4 was an essential component of Toyota's JIT concept. The Japanese referred to Kanban asa simple parts-movement system that depended on cards and boxes/containers to take parts fromone workstation to another on a production line. Ohno had developed the idea in 1956 from thesuper markets in the US, which had devised an effective system for replenishment of store shelvesbased on the quantities picked by the customers.

Initially, Ohno used pieces of paper contained in rectangular vinyl envelopes to conveyinformation (called Kanban). In a period spanning three decades, Kanban developed into asophisticated information system that ensured production in required quantities at the right time inall manufacturing processe~iwithin the factory.

The essence of the Kanban concept was that a supplier delivered components to the productionline only when required, thus eliminating storage in the production area. Suppliers delivereddesired components when they received a card and an empty container, indicating that more partswere needed for production. In case of line interruption, each supplier produced only enoughcomponents to fill the container and then stopped. Since Kanban was a chain process in whichorders flowed from one process to another, the production or delivery of components was 'pulled'to the production line (Refer Box). In the traditional forecast oriented method, parts were 'pushed'

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3Taiichi Ohno was brought into Toyota in 1956, from the Sakichi family's textile business. He was entrustedwith the responsibility of improving the operations and reducing costs.

4Kanban is made up ofKan, i.e., Card and Ban, i.e., Signal.

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to the line (Refer Exhibit III for a comparison of the Kanban philosophy with the westernphilosophy).

In a pull system:;"':Hi~pfS(Iucti3n:;ior"acertaInpr6dl1Ctstarts':on1Yll-Wh~rt'~"dernandof request is .made by the buyer. The consum~r of the product 'pulls' from the last link of the productionchain. This last linkpulls its preceding link and so on. In western companies, the push systemwas considered to De more cost-effective. Push systems were sc ule~based projections ofwhat demand;;:Y'{~s;,ie~p ased oili9aI,j pon,a Weekly,,ormonthlYbasi~)~~"~drti", proCe~~~ ,'Infd'iilij 'a led s~b-schedule'for buying materials and producing goods. This schedule pushed ,the production in order to

c?mply with the ~xp~cted,dema~f T~edisadva~t~~ush s~stem'~as ~hatpre~ictionsdid not always comcl<i~wlthia~tS: 'This resulted m eIther ex<;esso[jnadeQuate mventones.

At Toyota, two types of Kanban cards were used: one, to move parts from one place to another,known as the Conveyance Kanban card, and the other, to authorize the production of parts, knownas the Production Kanban card. (Refer Figure I). A standard size container was used to store partsand each card was treated like a coupon. (Refer Box).

'suppose a' contaii1~r of item X:is required in work, centre A. Asia first ~tep,'a' productionKanban card is issued to work centre A. The work centre witfidrawS' a container of rawmaterials from its inventory. The container of raw materials also included a conveyanceKanban card. Worhcen the container and~enas ittd;thepro~J~dih icl(:up a contniherof raw materials.

Figure IA Two Card Kanban System: Flow Within a Work Cell

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Three types of information were exchanged using Kanban. Pick up information guided the earlierstages regarding parts to be produced for the succeeding stages. Transfer information indicatedwhen the parts had to be produced for the succeeding stages. Production information wastransmitted from the earlier stages to the later stages to inform the workers about the producLmixand other operational matters.

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Table IIAdvanta2:es of Kanban

To make the Kanban system effective, Ohno framed six rules:

. Later process went to the earlier process to pick up products.The earlier process produced only the amount withdrawn by the later process.Should not pick or produce goods without a Kanban.A Kanban should be attached to the goods.100% defect free parts were required.Reduce the number of Kanbans.

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..The Kanban cards wen~re-circulated and the number qfcards controlled work-in-progress (WIP)in the system. In this way, the activities of final assembly were linked to previous operations by achain system of card ordering that 'pl;Jlled'production through the factory.

Another important component of JIT was Heijunka (production smoothing). JIT's principle ofbuilding only the required number of items helped keep the production costs low. Heijunka helpedin the accomplishment of this principle by creating a consistent production volume. Heijunkaaveraged the highest and lowest variations of the orders. The variations were then removed fromthe production schedule. This ensured that the right quantity of parts was produced with minimumworkforce. Heijunka took care not only of the total volume of items but also the type of itemsproduceq and the other options.

Future of JIT

Although many automobile companies around the world adopted JIT, the system was far fromperfect and difficult to implement. It was based on the.key assumption that sources and channels ofsupply were reliable <J..!Jddependable at all times. Analysts felt that it did not take into account thepossibility of labor strikes at automotive plants. Moreover, JIT involved high set up costs andSpecial training and reorganization of policies and procedures in the company were necessary toiri1plement JIT. The supplier relations of the company also needed to be improved to ensuretimely delivery. In the absence of good supplier relations, JIT increased the risk of inventoryshortage. Organizational culture also seemed to playa crucial role in the implementation of JIT.Many companies outside Japan reported difficulties in theimplementation of the concept.

Another problem seemed to be the difficulty of removing.the 'human element' from the systemsthat generate requirements. An analyst commented, "Computer algorithms, they say, go only sofar. Good people, with lengthy experien.~~at reading the ups and downs of the industry are still amust." Most companies felt that people should be actively involved in the system.

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Toyota's JIT Revolution 1