Posted by: qmaxim | April 23, 2010

Toyota’s recall crisis –Is the Toyota way irrelevant now?

In the recent past Toyota has been making headline news for all the wrong  reasons. There has been massive recalls of several models new   mainly in U.S. In U.S. alone the Japanese automaker has so far  recalled more than 8 million vehicles to fix various  problems. Nature of problem has  also been varied and not entirely clear. Sudden acceleration in many models was one reason. Toyota initially announced that it was due to stuck  floor mat and then it was announced that it was due to malfunctioning  gas pedals. The gas pedals were made by Indiana based supplier which lead to the thinking that problem were confined to U.S. alone. However, the same problem occurred in Japan made Lexus as well. There has also been issues with brakes of high technology Prius hybrid model as well. It was traced to  software bug. Latest in the list of woes is the recall of  Siena minivan. To add to its woes Consumer reports put out a “don’t buy” warning on the 2010 Lexus GX 460 over rollover concerns. Apart from denting its stellar reputation for quality and safety built over many decades, loosing customer  confidence, top officials were asked to testify at the  U.S. senate &  U.S. National Highway Traffic Safety Administration has fined it record amount over 16 million U.S. dollars.

What are the reasons for sudden change in fortune?

Let us look at some background first. Toyota has flawlessly executed for almost 50 years with many successful milestones along the way. Toyota began with introduction of  high quality fuel efficient models and then gradually moved to higher end of the market. During that period, its much bigger Detroit rivals went through several cycles of sky high profits and near bankruptcy. In the last 15-20 years it developed luxury   Lexus model which overtook rivals such as Mercedes & BMW models in U.S. In the last decade it introduced fuel sipping  environmentally friendly Prius model which really has no competition at present except   from   other Japanese companies. Like the famed Toyota production system (TPS), Toyota has been delivering consistent financial results and steadily growing market share. But in  the last 2-3 years, pace of the growth has accelerated with Toyota becoming the  largest auto company in the world last year.

Toyota has evolved  what is called Toyota way consisting of 14 management  principles. However, some of them are  more important than others which make up  essentially the DNA of Toyota : being close to customer, Toyota production system (TPS) based on Lean,  deliberately surfacing problems by relentless reflection  leading to continuous improvement (Kaizen) & learning, respect for individual  along with elaborate consensus style of decision making, &  growing together with tightly knit supplier group. Due to consistently high rating by JD Power and other agencies such as  Consumer reporting (which rate vehicles based on their quality /  safety etc) vehicles sold themselves without too much effort.

What went wrong?

Reasons are many. Instead of continuing steady expansion like in the past decades , company wanted to  shift gear and grow rapidly to become  number one car company in the world. (Apart form bragging rights what is the real advantage being number one as compared to say  number two I still do not understand). However,  not being able to manage rapid growth was not the only cause of this crisis.  Along with the new focus, number  of guiding principles fell by the roadside.

Instead of consensus decision making which is the part of Toyota way, coterie of select few began taking all the major  decisions including that of rapid expansion. Instead of expanding capacities along with their tightly knit group suppliers, capacities were built in isolated locations . This lead to stretching of supply chain leading to increase in inventory levels and quality complaints. Also, certain level of  overconfidence set in  regarding  quality and people  started not to listen to the problems that customers raised. These kind of things were happening at first sporadically, but then more frequently. Another problem is managing  increasing complexity of cars in general. For example, Prius  hybrids have 3 brake systems namely regenerative, ABS and hydraulic and there was a software problem when switching between these systems. It is not always possible to foresee all problems at the developmental stage itself. Due to shortage of time,  designs during development were not tested thoroughly enough while  in some cases just computer simulation was used to finalize the designs. Finally, when the problems began mounting company was surprised and they did not apologize quickly enough with impression gaining ground that Toyota is running away from problems.

End of the road?

Does it mean that Toyota can’t recover from this abyss?  Is the Toyota way no longer relevant? Famed TPS which hundreds of companies are trying to emulate is it not worth emulating any more?  I hardly think so.

My reasoning is like this.

Toyota changed course much before this crisis, when the quality complaints began mounting. To start with senior executives  who made rapid expansion Toyota strategy at the expense of Toyota way were replaced by new leadership with founder’s grandson Akio Toyoda taking over as the president. The new leadership’s priority was   back to basics and quality first initiatives. Toyota is still the largest car company in the world and is still making healthy profits in most regions. Toyota is recalling millions of vehicles with a view to regain consumer confidence. Hopefully, this will lead to regaining punctured consumer confidence. Toyota president Akio Toyoda has already publicly apologized thereby soothing nerves to some extent. TPS is continued to be followed at the production sites and is not broken at all. Other competitors are not in great shape either with GM just having emerged from bankruptcy, Chrysler is shadow of  its former self and Ford has just started to make profits.

Having said this, road to recovery is   neither going to be easy and nor  will there be a quick  fix to these problems. Meanwhile, Volkswagen has expressed the wish to overtake Toyota to become number one car company in the world. Will it succeed?

Or will it stumble like Toyota did, only time will tell.

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