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Stretched by growth, Toyota evolves to Plan B
The new approach: Make more decisions near new factories
Lindsay Chappell
Automotive News
TUPELO, Miss. -- Managers quit because they are overworked. Labor costs grow out of synch with business volume. A major capital project runs over budget by hundreds of millions of dollars.
Does this sound like Toyota Motor Corp.'s vaunted North American manufacturing group?
The automaker that literally wrote the book on manufacturing efficiency and has served as a role model for industrial productivity for 20 years recognizes it has a problem in North America. Toyota, up to its neck in market growth and rapid expansion, is launching a multifront reorganization of its North American manufacturing operations.
Its challenge is twofold: Straighten out an organization that has tripled in size in just 10 years and prepare for still more growth.
"We have to find a way to make this organization capable of managing far more complex and bigger-sized operations in the future," says Ray Tanguay, executive vice president at Toyota Motor Engineering & Manufacturing North America Inc.
Under a new North American plan, Toyota plans to retrain 30,000 North American plant workers in a "back to basics" refresher campaign. It will hire new managers and skilled technical personnel to work in its factories around the continent. They will be empowered to problem-solve with one another at different Toyota factories. And it will begin pushing decision making out of its headquarters in Erlanger, Ky., to regional centers in California and Texas.
Toyota's action plan
To make its North American manufacturing operations more effective, Toyota will:
*Put more engineers and product managers in regional offices to oversee new model launches
*Determine best practices on a department-by-department basis
*Rely less on Erlanger, Ky., manufacturing headquarters
*Retrain all North American workers
*Move administrative staff, such as human resources personnel, away from Erlanger and to where they are needed
Relentless growth
It will be a major undertaking for an automaker that historically has avoided change and upheaval. But times have changed, Tanguay says.
Toyota Motor Engineering & Manufacturing North America, the business organization that oversees North American manufacturing, engineering, purchasing and product development, was born last year. It replaced Toyota Motor Manufacturing North America.
When Toyota created the previous umbrella company a decade ago, it pondered how many people it would need to operate it. "We said, 'Well, 600 should be good enough,' " Tanguay recalls. "We're at about 1,800 now."
The growth has been relentless.
In the past two years, Toyota has committed to expansion projects representing 600,000 units of annual vehicle capacity. It has expanded engine production at three U.S. factories. It has expanded transmission output and called for its major affiliated suppliers to step up their own North American investment to keep pace.
North American expansions are either under way or were recently completed at:
*Electronics supplier Denso International America Inc.
*Transmission component maker Aisin Seiki Corp.
*Engines castings subsidiary Bodine Aluminum
*Affiliated Toyota truck axle maker Hino Motors Ltd.
*The automaker's affiliated interior parts supplier Toyota Boshoku Corp.
U.S. Toyota and Lexus sales last year topped 2.54 million cars and trucks - nearly 300,000 more than one year earlier. Last year's sales ran 676,000 vehicles ahead of Toyota's levels in 2003, the year that it began constructing its recently opened Tundra pickup factory in San Antonio. That plant was to cost $850 million; by the time it opened last November, the cost had swollen to $1.28 billion.
The gap
The growing gap in what Toyota builds here and what it sells here is significant. Toyota acknowledges its North American factory capacity is falling short of its pledge to build 60 percent of the cars and trucks it sells here in local factories.
"Localization" is an urgent issue for Toyota in the United States, the company's president, Katsuaki Watanabe, reiterated last month. Watanabe spoke to U.S. and Japanese reporters at a ribbon-cutting ceremony in Lafayette, Ind., where Toyota has begun producing Camrys inside Fuji Heavy Industries' Subaru assembly plant.
The repercussions of falling short on local production are purely political. As Toyota continues to take share from the Detroit 3, it must mitigate the political fallout by providing U.S. jobs. And the company is aware that its success will be seen by some as a root cause of the U.S. industry's problems, even though the reality is far more complex. The fear of political backlash is complicating Toyota's own internal challenge of straightening out its North American operations, says management guru Jim Womack, a 25-year observer of Toyota.
"The short-term rate of expansion in the States is not being driven by long-term judgment about what is truly best for the business as a business," Womack says. "Rather, it's being driven by an assessment of what is necessary for the company due to short-term politics. Toyota is terrified that it will be blamed for the collapse of Ford and the potential collapse of Chrysler, followed by GM."
Womack says the desire to avoid political trouble has driven Toyota to expedite factory construction, first at the San Antonio project and now at its most recently announced project to build a $1.3 billion Highlander SUV plant near Tupelo, Miss.
"Getting San Antonio open quickly, even with cost overruns, and making the recent announcement on Tupelo, even though they may not have the hands on deck to do it right, is the compromise they have reached between long-term business fundamentals and short-term risks to the business," Womack says.
All hands on deck
That is precisely the issue Tanguay and his North American colleagues now want to address: making sure that all hands are on deck.
Toyota will soon begin a major restructuring, not so much of its top-level decision making but of its ground-level decision making.
Toyota will push more engineering and project management resources out of its Erlanger headquarters and into new regional centers in California and Texas. That is where they are needed, Tanguay explains. And it also will resolve a separate problem Toyota has been quietly coping with in recent years: Too much travel.
"We continue to experience high turnover of experienced members," Seiichi Sudo, COO at Erlanger, said in an internal presentation given last year. Among the reasons, he said: "Excessive overtime and travel."
Tanguay's solution will be to physically relocate Toyota personnel so that they have less traveling to do. In the next two years, managers will work from a regional base with the authority to make decisions locally, instead of traveling back and forth for decisions between Erlanger and an expansion project.
In California, a team will be based at New United Motor Manufacturing Inc., Toyota's 50-50 joint venture with General Motors in Fremont. The team will handle projects in Long Beach, Mexico and British Columbia. That also includes the supply chain that stretches through that region. They will conduct their own new-model launches at NUMMI or in Baja, Mexico. The Texas group will do the same in San Antonio.
"To be close to the process is the most efficient way to understanding and help the operation," Tanguay says. "More and more, we're trying to get close to the operation."
Challenges
The company also hopes it can use the shift to more regional management to cut labor costs. Sudo's 2006 presentation noted worriedly that Toyota's North American labor costs are growing at a faster rate than its growth in profits. The solution, according to Toyota, will be increasing plant productivity and eliminating wasteful shop practices.
New projects like the Tupelo plant will try to adopt improved practices - an effort that will be helped by having project teams work closer to the plant. Continuous improvement is a fundamental piece of the Toyota Production System, the operating system that Womack and his colleagues at the Massachusetts Institute of Technology first heralded in their 1991 book, The Machine That Changed the World.
But implementing improvements takes time and focus - something Toyota has been short of as it expands across the continent. And rising labor costs are bedeviling the entire auto industry with little clear solution.
"The next two years are likely to be quite a bumpy ride for everyone in the auto sector," Womack notes, "even including Toyota."
The new approach: Make more decisions near new factories
Lindsay Chappell
Automotive News
TUPELO, Miss. -- Managers quit because they are overworked. Labor costs grow out of synch with business volume. A major capital project runs over budget by hundreds of millions of dollars.
Does this sound like Toyota Motor Corp.'s vaunted North American manufacturing group?
The automaker that literally wrote the book on manufacturing efficiency and has served as a role model for industrial productivity for 20 years recognizes it has a problem in North America. Toyota, up to its neck in market growth and rapid expansion, is launching a multifront reorganization of its North American manufacturing operations.
Its challenge is twofold: Straighten out an organization that has tripled in size in just 10 years and prepare for still more growth.
"We have to find a way to make this organization capable of managing far more complex and bigger-sized operations in the future," says Ray Tanguay, executive vice president at Toyota Motor Engineering & Manufacturing North America Inc.
Under a new North American plan, Toyota plans to retrain 30,000 North American plant workers in a "back to basics" refresher campaign. It will hire new managers and skilled technical personnel to work in its factories around the continent. They will be empowered to problem-solve with one another at different Toyota factories. And it will begin pushing decision making out of its headquarters in Erlanger, Ky., to regional centers in California and Texas.
Toyota's action plan
To make its North American manufacturing operations more effective, Toyota will:
*Put more engineers and product managers in regional offices to oversee new model launches
*Determine best practices on a department-by-department basis
*Rely less on Erlanger, Ky., manufacturing headquarters
*Retrain all North American workers
*Move administrative staff, such as human resources personnel, away from Erlanger and to where they are needed
Relentless growth
It will be a major undertaking for an automaker that historically has avoided change and upheaval. But times have changed, Tanguay says.
Toyota Motor Engineering & Manufacturing North America, the business organization that oversees North American manufacturing, engineering, purchasing and product development, was born last year. It replaced Toyota Motor Manufacturing North America.
When Toyota created the previous umbrella company a decade ago, it pondered how many people it would need to operate it. "We said, 'Well, 600 should be good enough,' " Tanguay recalls. "We're at about 1,800 now."
The growth has been relentless.
In the past two years, Toyota has committed to expansion projects representing 600,000 units of annual vehicle capacity. It has expanded engine production at three U.S. factories. It has expanded transmission output and called for its major affiliated suppliers to step up their own North American investment to keep pace.
North American expansions are either under way or were recently completed at:
*Electronics supplier Denso International America Inc.
*Transmission component maker Aisin Seiki Corp.
*Engines castings subsidiary Bodine Aluminum
*Affiliated Toyota truck axle maker Hino Motors Ltd.
*The automaker's affiliated interior parts supplier Toyota Boshoku Corp.
U.S. Toyota and Lexus sales last year topped 2.54 million cars and trucks - nearly 300,000 more than one year earlier. Last year's sales ran 676,000 vehicles ahead of Toyota's levels in 2003, the year that it began constructing its recently opened Tundra pickup factory in San Antonio. That plant was to cost $850 million; by the time it opened last November, the cost had swollen to $1.28 billion.
The gap
The growing gap in what Toyota builds here and what it sells here is significant. Toyota acknowledges its North American factory capacity is falling short of its pledge to build 60 percent of the cars and trucks it sells here in local factories.
"Localization" is an urgent issue for Toyota in the United States, the company's president, Katsuaki Watanabe, reiterated last month. Watanabe spoke to U.S. and Japanese reporters at a ribbon-cutting ceremony in Lafayette, Ind., where Toyota has begun producing Camrys inside Fuji Heavy Industries' Subaru assembly plant.
The repercussions of falling short on local production are purely political. As Toyota continues to take share from the Detroit 3, it must mitigate the political fallout by providing U.S. jobs. And the company is aware that its success will be seen by some as a root cause of the U.S. industry's problems, even though the reality is far more complex. The fear of political backlash is complicating Toyota's own internal challenge of straightening out its North American operations, says management guru Jim Womack, a 25-year observer of Toyota.
"The short-term rate of expansion in the States is not being driven by long-term judgment about what is truly best for the business as a business," Womack says. "Rather, it's being driven by an assessment of what is necessary for the company due to short-term politics. Toyota is terrified that it will be blamed for the collapse of Ford and the potential collapse of Chrysler, followed by GM."
Womack says the desire to avoid political trouble has driven Toyota to expedite factory construction, first at the San Antonio project and now at its most recently announced project to build a $1.3 billion Highlander SUV plant near Tupelo, Miss.
"Getting San Antonio open quickly, even with cost overruns, and making the recent announcement on Tupelo, even though they may not have the hands on deck to do it right, is the compromise they have reached between long-term business fundamentals and short-term risks to the business," Womack says.
All hands on deck
That is precisely the issue Tanguay and his North American colleagues now want to address: making sure that all hands are on deck.
Toyota will soon begin a major restructuring, not so much of its top-level decision making but of its ground-level decision making.
Toyota will push more engineering and project management resources out of its Erlanger headquarters and into new regional centers in California and Texas. That is where they are needed, Tanguay explains. And it also will resolve a separate problem Toyota has been quietly coping with in recent years: Too much travel.
"We continue to experience high turnover of experienced members," Seiichi Sudo, COO at Erlanger, said in an internal presentation given last year. Among the reasons, he said: "Excessive overtime and travel."
Tanguay's solution will be to physically relocate Toyota personnel so that they have less traveling to do. In the next two years, managers will work from a regional base with the authority to make decisions locally, instead of traveling back and forth for decisions between Erlanger and an expansion project.
In California, a team will be based at New United Motor Manufacturing Inc., Toyota's 50-50 joint venture with General Motors in Fremont. The team will handle projects in Long Beach, Mexico and British Columbia. That also includes the supply chain that stretches through that region. They will conduct their own new-model launches at NUMMI or in Baja, Mexico. The Texas group will do the same in San Antonio.
"To be close to the process is the most efficient way to understanding and help the operation," Tanguay says. "More and more, we're trying to get close to the operation."
Challenges
The company also hopes it can use the shift to more regional management to cut labor costs. Sudo's 2006 presentation noted worriedly that Toyota's North American labor costs are growing at a faster rate than its growth in profits. The solution, according to Toyota, will be increasing plant productivity and eliminating wasteful shop practices.
New projects like the Tupelo plant will try to adopt improved practices - an effort that will be helped by having project teams work closer to the plant. Continuous improvement is a fundamental piece of the Toyota Production System, the operating system that Womack and his colleagues at the Massachusetts Institute of Technology first heralded in their 1991 book, The Machine That Changed the World.
But implementing improvements takes time and focus - something Toyota has been short of as it expands across the continent. And rising labor costs are bedeviling the entire auto industry with little clear solution.
"The next two years are likely to be quite a bumpy ride for everyone in the auto sector," Womack notes, "even including Toyota."
