The other night, I was out at dinner with an old friend who works for General Motors in Detroit. We drove to dinner in his father’s Toyota Corolla. Since my student days in 1989, Corolla has been a best seller in the U.S. markets and gaining market share in the India market since a low profile and late entry. Wanted his take on why Toyota makes more money, real money in net profits than the big three, GM, Ford and Chrysler put together. A key point he noted was length of experience on small details of the car. For eg: the wiper designer will have 17+ years experience in designing wipers, more likely his first and only job. This way all the mistakes are accounted for, never repeated, designs continously improved. Unlike American companies somebody new is moved in the job every two years, so the experience starts from zero and mistakes repeated every time. The best expert management systems do not capture experience in the most perfect way or transfer it with minimal loss. The Toyota Corolla is not only an owners charm but also a mechanic’s dream car to repair. I remember a car mechanic in the U.S. telling me how much easier it was, to pull apart a Toyota and fix it, compared to Honda or any German or American Car.
When you compare Toyota with the Big Three automakers in the U.S. there’s a fundamental difference in the way they deal with their suppliers. The Big Three basically negotiate to the last penny. In particular, if a supplier succeeds in a process improvement that lowers costs, he knows darn well in one negotiation round that General Motors will come back and demand a price concession taking away that benefit. That gives that supplier a very powerful incentive not to share with anybody, least of all General Motors, what that process improvement was.
Toyota has a different philosophy. The company allows its suppliers to keep the benefits of their innovation, but it insists that that process improvement in technology is shared not just with Toyota but also with all the other component suppliers. As a result, you see among that population of 60 or 70 companies a rate of sharing ideas beyond what you see in the U.S. It has a cumulative effect over time of driving up productivity in the whole Toyota supply chain. Over a 30-year period, its productivity has gone up six times as much as in the U.S. system. I think that’s entirely because of the difference in philosophies. At a time when 50% of the cost of a car comes from outside components, and your suppliers are 600% more productive, that buys you one hell of an advantage — even if you give some of it back to them in price concessions.
When Toyota starts new plants it does copy exact of their plants. They also go to the extent of replicating verbatim organization structures with every new plant. So that a machine operator or any function has his or her equivalent in the plant that is being copied. This enables transfer of knowledge, experience sharing, or consultation on a person to person basis. Intel also does copy exact of their factories worldwide, but this Toyota practice sounded really simple but innovative. Finally, not a suprise that Toyota makes better cars but also more profits than most put togther. I have always believed good does not happen automatically.
On perfection someone commented, small things make perfection but perfection is no small thing.