Toyota is getting up

Since October 2009, several Toyota vehicles sold in the United States have been recalled. The media are scrambling to report on this, and consumers are also deeply shocked. In the first incident, Toyota announced a recall of 3.8 million vehicles sold in the U.S. over a potential problem with improperly installed or misplaced floor mats at the bottom of the driver's seat that could cause uncontrollable acceleration in a range of Toyota models. The recall was prompted by an investigation report into a violent crash in California. In that accident, the accelerator of a Lexus sedan failed, killing the driver. The National Highway Traffic Safety Administration is forcing Toyota to recall more vehicles and models after another report pointed out that a tightening of Toyota's gas pedal could lead to unexpected acceleration.

To car buyers and learners of production excellence, Toyota is no ordinary company. The business is in a class of its own, and its products have long been known for their high quality, even awesomeness. For industry managers who have scrambled to emulate Toyota's production system for decades, claims of quality problems in Toyota's vehicles would cause an uproar. But now all over the world, managers are starting to stop and wonder if they're doing the right thing in imitating Toyota's production model.

Determining where the problem lies

Since the 1960s, Toyota and its suppliers have pioneered several quality improvement methods that provide the basis for Japan's Total Quality Control (TQC) system. And TQC further laid the foundation for Six Sigma. Six Sigma has been adopted by many American companies including General Electric and Boeing. In the 1960s, Toyota's management began to gradually realize the close connection between product quality, customer satisfaction and corporate profits. The importance of these connections is then deeply rooted in Toyota's management philosophy and has become an integral part of the company's employee training and corporate development. Product quality has become the core of Toyota's global strategy and is embedded in the world-renowned Toyota Production System.

Quality problems with Toyota vehicles in the United States began in the second half of 2009, when the first product recall was triggered by a problem with the interior of the car, but the problem didn't stop there. In the four months after the initial recall of 3.8 million vehicles, Toyota recalled a total of 3.4 million vehicles in three separate recalls, bringing the total recall to more than 7 million. The quality issues involved include a tighter accelerator pedal, a sagging pedal, and a software glitch affecting the brakes on some models.

There is no doubt that product recalls have damaged the image of Toyota's quality in the minds of consumers, and the problem has been exacerbated by media coverage. David Champion, senior director of Consumer Reports' automotive testing center, said the quality of Toyota's vehicles has declined significantly in recent years. The magazine commented in 2007 that some Toyota models had declined in craftsmanship, appearance and overall quality.

In 2008, based on previous evaluations, Consumer Reports decided not to give all Toyota models an "automatically recommended" rating. JD Power and Associates, another influential auto evaluation group, also pointed to the recent decline in the quality of Toyota products.

Another factor to watch is the role of car owners' perceptions. In 2009, people tended to buy Toyotas because they believed in their extraordinary quality. They are affected by what market researchers call the "positive halo effect." Under the same conditions, such car owners pay little attention to small quality problems when filling out the questionnaire, or even pay no attention at all. If there is an initial quality problem, car owners in this environment are often accustomed to it.

Seeing through the problem

Toyota's quality problems appear to stem from two fundamental factors. One is that the management is eager for quick success for rapid development, and the other is that the increasing complexity of the company's products causes problems.

Corporate Development Since Hiroshi Okuda became Toyota's new president in 1995, Toyota has entered a mode of rapid growth. Okuda is known for his aggressive efforts to reshape Toyota. He personally created a very radical global development strategy called "Vision 2005". The strategic plan calls for increasing Toyota's global market share from 7.3 percent to 10 percent in the decade after 1995. After achieving a 9.7 percent global market share in 1998, the company has set a new target of 15 percent by 2010. Toyota was on track to achieve this goal (its global market share reached 13% in 2008), but the global financial crisis and the emergence of Toyota's product recalls eventually put this goal in vain.

The turning point came in 2003, according to Akio Toyoda, Toyota's current president and grandson of Toyota's founder. The growth in sales after 2003 caused the business to spiral out of control. He acknowledged that as corporate development became a strategic focus, it affected "Toyota's traditional priorities." In other words, the company's focus on growth surpassed its previous focus on quality.

Toyota's aggressive growth goals are at odds with its traditionally conservative style. Under the leadership of family members, Toyota has been cautious about growth. For example, among the major Japanese auto companies, Toyota is the latest to start producing cars in the United States. Given its huge advantages in cost and quality, Toyota would have been more likely to gain market share in the United States more quickly.

Okuda persuaded company leaders to pursue a plan to rapidly increase sales and profits, while downplaying the pitfalls of the strategy.

The goal of 15% market share means overtaking General Motors to become the world's No. 1 automaker by sales, with production at a new location. This also means hiring a large number of new employees, establishing partnerships with new non-Japanese suppliers, and hiring a large number of contract engineers. Between 2002 and 2008, Toyota's overseas production sites increased from 37 to 53, and global sales increased at an average annual rate of 9%. This expansion has left management with little time to adjust the company's systems and operations to accommodate strong growth. Corporate incentives, especially in informal settings, are beginning to favor growth. Since the clear policy of focusing on quality in the past no longer exists, key decisions from product development, supplier management to specific production have begun to focus on meeting sales targets, delivering on time, cutting costs and making profits. Over time, these changes begin to have a negative effect on quality.

Product Complexity Another root cause of Toyota's quality problems is the increasingly complex technical structure of today's vehicles. It can be said that the car has become a computer on wheels. Of course, not only Toyota, but other automakers are also having to deal with increasingly complex products. The entire industry is under competitive pressure to produce models that are safe, environmentally friendly, fuel efficient and comfortable. But Toyota's challenges are particularly daunting, as it already faces a series of challenges posed by rapid global growth, including rapid capacity expansion and a flood of hybrid and other leading-edge technology models.

The rapid growth and increasingly complex product mix has had a profound impact on Toyota's supplier management system and its overall performance. 70% of the added value in Toyota's lineup comes from parts and sub-production lines produced by its suppliers. As a result, Toyota's growth and product complexity affects every link in its supply chain. First, as Toyota's growth accelerated, the company itself was increasingly understaffed. To meet the expected growth, Toyota had to outsource more design work to contract engineers, and it had to develop new suppliers because in-house engineering resources and existing suppliers could not meet demand.

A Toyota executive publicly admitted in 2011 that Toyota had to hire a slew of new contract engineers to boost its engineering capabilities as it faced internal staffing shortages. He believes this has led to more and more quality problems. Toyota outsources as much as 30 percent of its global R&D workforce.

This meant that overseas engineers had to be hired and led to a new policy on hiring temporary engineers inside Japan, which is against Toyota's usual code of conduct.

Toyota's senior engineers have always been accustomed to communicating with each other and with Japanese suppliers, and engineers and suppliers have also established long-term cooperative relationships, often based on years of tacit understanding. The influx of new mostly non-Japanese-speaking engineers and overseas suppliers has created problems such as poor coordination and communication barriers. These newbies are dispatched to Toyota Global Technical Centers to work with and supervise new overseas suppliers. The new suppliers were also inexperienced with Toyota's operating methods and standards. The result was that both parties were inexperienced, and the core people in between had not been adequately trained in Toyota's standardized way of operating.

Takahiro Fujimoto, a Japanese researcher with deep knowledge of Toyota, reports that facing rapid growth, Toyota is increasingly struggling to properly evaluate and vet parts designed by its overseas suppliers. As a result, the cooperation between Toyota and its suppliers is increasingly lacking in tacit understanding, and the company's special "relationship contract" system is established through the long-term close OEM production relationship with suppliers. A system has also been weakened accordingly.

Recognize the role of centralized management

Since rapid growth and product complexity are the root causes of Toyota's recent quality problems, any in-depth analysis must first recognize the role of the company's centralized management structure. Toyota's messaging and decision-making has always been highly centralized.

As a result, the company's top management in Japan did not pay much attention to the cultural and political system of its overseas markets and the expectations of local regulators, so they were also slow to respond to problems in overseas markets. For example, Toyota recalled some light trucks and off-road vehicles in Japan in October 2004, but did not extend the recall to the US market until September 2005.

It is currently unpredictable when Toyota will address its quality issues. But the company's executives are now clearly trying to understand the seriousness of the situation and take action to resolve it. Several major initiatives in North America and elsewhere demonstrate Toyota's determination to solve problems. For example, there are reports that Toyota is trying to reduce the percentage of its outside engineers to 10%. At the same time, Toyota's Tokyo headquarters has delegated more authority to the company's North American management when it comes to making decisions on product recalls and increasing the independence of its quality management activities.

In addition, Toyota restructured and effectively slowed its product development process by building a quality team of about 1,000 engineers and significantly expanding its global quality contingency team. Although driver error appears to be the main cause of acceleration problems, good design can reduce user error. In today's environment, improving design is a business imperative. In order to improve the design, Toyota redesigned the shape of the accelerator pedal to address the problem of the carpet in its car.

But Toyota's recent quality problems still raise a lingering question: What do these recalls mean for Toyota's storied production system? Now that Toyota itself is struggling with serious design and production problems, should other companies follow Toyota's lead?

The truth is that Toyota's problems were not caused by faulty production systems, but by poor management decisions. In particular, the management of the company failed to actively respond to early quality problems. Toyota's mistakes are a profound reminder that there is no so-called "corporate DNA" in the world, and superior production systems cannot be taken lightly. When new teams take over executive positions, they must realize that the systems and values that have been the cornerstone of the company's past success will be difficult to maintain without sustained attention.

Ensuring the continuation of the tradition requires clear incentives to implement best practices, adherence to necessary processes, especially robust problem-solving processes, while enhancing flexibility, effective interaction between new employees connections, and an enabling corporate culture. In any institution, there are internal and external factors that threaten the foundation of the institution. Opportunities for growth, the temptation to hold off on training, or pressure to reduce costs may all be factors. Therefore, even as they learn how to adapt to new challenges, business leaders must maintain operations and values that support high-quality production systems.

Despite its problems, Toyota's production system still represents state-of-the-art manufacturing and continues to provide important models to companies in multiple industries.

Massachusetts Institute of Technology Registers Copyright. Published by Tribune Media Services. Shen translation. Robert E. Cole is a professor emeritus at the Haas School of Business at the University of California, Berkeley, USA, and a visiting researcher at the Institute of Technology, Enterprise and Competitiveness at Doshisha University in Japan. /