How did Toyota beat FORD & GM using its GENIUS Supply Chain Model?
Summary
TLDRThis script tells the story of Toyota's rise to success despite numerous challenges, including scarce resources, natural disasters, and fierce competition. It highlights Toyota's innovative approach to manufacturing, known as the 'just-in-time' system, which revolutionized supply chain management by eliminating waste and streamlining production. The script also offers insights for entrepreneurs on how to apply Toyota's principles of efficiency and risk management to their own businesses.
Takeaways
- 🌟 Toyota's success is remarkable given the numerous obstacles it faced, including limited natural resources, a small population, frequent natural disasters, and post-WWII economic devastation.
- 🏭 Despite the challenges, Toyota became the world's largest car manufacturer in 2008 and had a market capitalization in 2016 that surpassed Ford, General Motors, and Honda combined.
- 🚀 The key to Toyota's success was its innovative business strategy, particularly the development of the lean manufacturing system, which focused on efficiency.
- 🔍 Toyota identified four major inefficiencies in the traditional manufacturing process: overproduction, excessive inventory, unnecessary capital investment, and wasteful resource allocation.
- 🛠️ The company revolutionized supply chain management by introducing the just-in-time (JIT) system, which eliminated the need for demand forecasting and inventory.
- ⏱️ JIT production allowed Toyota to respond quickly to customer orders, reducing waste and lead times, and increasing profit margins significantly.
- 🌐 The JIT system not only transformed the automobile industry but also became a global standard for supply chain management across various fields.
- 📈 Toyota's growth was exponential, with a 2,000% increase in production from 1955 to 1965, demonstrating the effectiveness of their supply chain strategy.
- 💡 Entrepreneurs can learn from Toyota's approach by understanding that adversity can drive innovation and that copying competitors' systems is not always the best strategy.
- 📚 For deeper insights, the speaker recommends studying Toyota's risk mitigation strategies during crises and exploring additional Toyota principles like Kanban, Kaizen, and Jidoka.
Q & A
What were the significant challenges Toyota faced in its early years?
-Toyota faced numerous challenges in its early years, including being based in a small country with limited natural resources and a high cost of raw materials and labor. Japan's susceptibility to natural disasters like earthquakes and tsunamis also posed a threat. Additionally, the company had to navigate the aftermath of World War II, which left Japan's economy in ruins, and compete with established American automotive giants like General Motors and Ford.
How did Toyota's financial situation impact its ability to compete with American manufacturers?
-Toyota was in a very poor financial condition, which prevented it from purchasing the latest Western production machinery needed to improve production efficiency and scale up. This financial constraint, coupled with Japan's post-war capital and foreign exchange scarcity, made it impossible for Toyota to compete with American companies on the basis of capital and machinery.
What was the key aspect in which Toyota believed it could outperform American manufacturers?
-Despite the financial and machinery disadvantages, Toyota identified efficiency as the key aspect in which it could outperform American manufacturers. This led to the development of the lean manufacturing system, which focused on eliminating waste and optimizing production processes.
What is the lean manufacturing system and how did it help Toyota?
-The lean manufacturing system is a method that focuses on minimizing waste within a manufacturing system without sacrificing productivity. It helped Toyota by allowing it to compete with larger, more capital-intensive manufacturers by optimizing its production processes, reducing waste, and increasing efficiency.
How did Toyota's visit to the Ford Rouge plant influence its approach to manufacturing?
-After visiting the Ford Rouge plant, Toyota's top managers realized that simply copying and improving the Rouge system would not work for them due to financial constraints and the need for a system that could be implemented with limited resources. This led to the development of the lean manufacturing system.
What were the four major inefficiencies identified by the Toyota team in the traditional manufacturing process?
-The four major inefficiencies identified were: 1) Excessive resource allocation due to inaccurate demand forecasting, leading to unnecessary hiring, equipment purchases, and inventory stockpiling. 2) Overproduction, which wasted resources and increased costs. 3) Excessive inventory of final products, leading to high maintenance, labor, and transportation costs. 4) Unnecessary capital investment, which resulted in high interest costs and other administrative expenses without any return on investment.
How did Toyota's just-in-time (JIT) system revolutionize supply chain management?
-Toyota's just-in-time system revolutionized supply chain management by eliminating the need for demand forecasting and inventory. It focused on producing goods only as they were needed, which reduced waste, minimized storage costs, and increased efficiency across the entire supply chain.
What were the three superpowers that Toyota gained from implementing the just-in-time production system?
-The three superpowers gained from JIT were: 1) Minimal damage from reduced demand or disruptions due to lower component stock and near-zero inventory. 2) Elimination of waste, leading to extreme cost-cutting and increased profit margins. 3) Rapid production growth, with Toyota experiencing a significant increase in the number of vehicles produced over the years.
What lessons can entrepreneurs learn from Toyota's approach to innovation and efficiency?
-Entrepreneurs can learn that adversity often breeds innovation, the importance of not simply copying competitors' systems but adapting them to their own constraints, and the value of developing strategies that mitigate risk and enhance efficiency.
What additional strategies did Toyota employ alongside the JIT principle to ensure success?
-Besides the JIT principle, Toyota also employed the Kanban system for inventory control, the Kaizen model for continuous improvement, and the Jidoka method for automation with a human touch. These strategies, along with JIT, contributed to Toyota's resilience and success.
How did Toyota's response to the 1997 Aisin Seiki fire and the 2016 Kumamoto earthquake demonstrate its risk mitigation strategies?
-Toyota's response to these events showcased its ability to quickly adapt and recover from supply chain disruptions. The company's just-in-time approach, though initially causing some disruption, was complemented by other risk mitigation strategies that allowed it to minimize long-term impacts and maintain operations.
Outlines
🌟 The Rise of Toyota Against All Odds
The paragraph introduces Toyota as an extraordinary company that overcame numerous challenges to become a global success. Despite Japan's limited natural resources, high costs of raw materials and labor, frequent natural disasters, and the devastation of World War II, Toyota managed to thrive. The company's initial struggles are highlighted by comparing its production of 11,000 vehicles in a year to Ford's over 1 million. This sets the stage for exploring Toyota's innovative business strategies that led to its remarkable turnaround.
🔧 The Inefficiencies of Traditional Manufacturing and Toyota's Solution
This paragraph delves into the inefficiencies of traditional manufacturing methods used by American companies, which led to overproduction and waste. Toyota identified four major types of waste: excessive resource allocation, overproduction, excessive inventory, and unnecessary capital investment. The company's innovative approach was to eliminate demand forecasting and inventory, pioneering the just-in-time (JIT) system. This system revolutionized supply chain management by producing goods only after receiving customer orders, thus reducing waste and increasing efficiency.
🚀 Toyota's Just-In-Time System and Its Impact on the Industry
The final paragraph discusses the implementation and impact of Toyota's just-in-time system. It details how Toyota's production process was finely tuned to start only after customer orders were received, leading to a significant reduction in waste and inventory. The paragraph also outlines the benefits of JIT, such as cost reduction, increased profit margins, and the ability to withstand market fluctuations and disasters with minimal damage. The narrative concludes with lessons for entrepreneurs on innovation in the face of adversity, the importance of not blindly copying competitors' systems, and the need to understand and mitigate risks associated with business strategies.
Mindmap
Keywords
💡Toyota
💡Lean Manufacturing
💡Just-in-Time (JIT)
💡World War 2
💡Market Capitalization
💡Supply Chain Management
💡Kanban System
💡Kaizen
💡Jidoka
💡Risk Mitigation
💡Adaptability
Highlights
Toyota's success despite numerous obstacles including limited resources, high costs, natural disasters, and post-WW2 economic ruin.
Toyota's emergence as the world's largest car manufacturer in 2008.
In 2016, Toyota's market capitalization exceeded that of Ford, General Motors, and Honda combined.
The question of Toyota's business strategy and what can be learned from its success.
Introduction to Duolingo, a language learning app that gamifies the learning process.
The significant disparity in production between Toyota and Ford in the early years.
Toyota's visit to the Ford Rouge plant to learn manufacturing processes.
Realization that Toyota could not simply copy Ford's system due to financial constraints and post-war recovery.
The concept of lean manufacturing system developed by EG Toyota.
Identification of four major inefficiencies in the traditional manufacturing process.
The revolutionary just-in-time (JIT) system that eliminated inventory and demand forecasting.
How JIT production works in Toyota, with a focus on customer orders driving manufacturing.
The three superpowers JIT gave Toyota: minimal damage in crises, cost reduction, and rapid production growth.
Lessons for entrepreneurs from EG Toyota: innovation in adversity, not copying competitors' systems, and understanding risks.
Recommendations for further study on Toyota's risk mitigation strategies during crises.
Study materials and book recommendations for deeper understanding of Toyota's systems and innovations.
Transcripts
Hi everybody. Toyota is one of the most extraordinary companies in the world.
And the attribute that makes it so incredible is the fact that,
Toyota is a company that literally had every possible obstacle for failure. First of all,
Japan being such a small country had very less natural resources and very less population.
Therefore, both raw material and labour were extremely costly. In addition to that, Japan is
a land of natural disasters where earthquake and tsunami are frequent, and could destroy your plant
within a minute. Thirdly, when Toyota was just two years into business, WorldWar2 happened where
bombs were dropping from the sky. And during such a time, let alone business, even survival
was a very big deal. On top of that, after the Hiroshima Nagasaki bombing and the World War 2,
Japan's economy was in complete ruins. And lastly, with all these odds against them, they were in
direct competition with the giants of the United States, like General Motors and Ford motors.
And yet, in spite of these obstacles, Toyota has emerged as one of the most successful automobile
companies in the world. In fact, in 2008, it even became the largest car manufacturer in the world.
In 2016, Toyota's market capitalization was more than Ford, General Motors and Honda combined.
Now, this begs the question, how did Toyota become such a successful company amidst such
terrible market conditions? What exactly was their business strategy? And more importantly,
what can we learn from this incredible case study? Before we move on, I want to introduce
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10 free learning app in the Play Store. Duolingo is extremely popular because they have gamified
the entire process of learning any language. For example, while making this video, I was kind of
fidgeting around the application to see if I could learn some Japanese words. And trust me guys,
it's surprisingly fun and surprisingly easy. So if you're someone who wants to learn a foreign
language like German or Japanese for university purposes, or even for your professional agenda,
I would highly recommend you to use this application because it's both fun and free. So
if you want to learn a foreign language, download the application from the link in the description,
and let me know how is your experience being with learning a foreign language.
This is a story that dates back to 1950 Japan, now it's already been 13 years since Toyota
has been founded, and Japan was in complete ruins after the World War 2. During the war,
Toyota barely survived by pivoting between making trucks and cars for the military needs.
The condition of the company was so bad that even after 13 years of efforts, while Toyota motors
produced just 11,000 automobiles in the entire year. On the other side, Ford motors produced
more than 1 million automobiles in the exact same year. And this massive disparity in production
prompted Toyota top manager EG Toyota and several of his engineers, to visit the Ford rouge plant,
in an attempt to learn how do they exactly improve their manufacturing processes.
But after this visit, they realised, that simply copying and improving the rouge system would
not really work in Japan. Why? Because Toyota was in a very, very poor financial condition.
On top of that, Japan was just recovering from the ill effects of the World War,
which left the country starving for both capital and foreign exchange. Therefore, Toyota could not
buy the latest western production that was needed to improve the production efficiency and to scale
up the production. So practically speaking, there was no way Toyota could compete with
the American companies in two of the most crucial aspects of manufacturing and that are capital and
machinery. Now during such a time any ordinary engineer would give up and declare that there is
no way he could compete with the Americans. But EG Toyota was no ordinary engineer. In spite of
knowing that all odds were against him, he and his team work day in and day out to understand
how could they build a competitive system against the American manufacturers. And that is when they
realised that, although they could not compete with the Americans with capital and machinery,
there was one very crucial aspect that they could beat the Americans with and that aspect
was nothing but efficiency. So he came up with the idea of something called the lean manufacturing
system. To tell you about it, EG Toyota understood that the standard method of operation of the US
manufacturers was that, they first forecasted the demand up to a certain extent, and then placed
bulk orders so that they can save up on the cost of machine parts and raw materials.
So if there are three colours of cars that needed to be sold red, black and grey, the company will
produce 200 red cars, 500 black cars and 300 grey cars and these cars will be ready to be delivered,
but will be stored in the inventory until the order comes up. And as soon as the customer
places the order, they are immediately moved out and delivered to the customer.
But in this process, the Toyota team identified that there is a major problem that in turn led to
a series of four major inefficiencies. And the fixing of these inefficiencies is what
turned Toyota into a billion dollar company. In fact, it did not just change the way the
automobile industry worked, it changed the way the entire world's supply chain worked.
The question is, what were these inefficiencies and how did the Toyota team fix it? Number one,
the Toyota team realised that when the demand forecasting happened in the United States, the
production always used to produce cars in surplus and never in deficit. Therefore, more often than
not, it lead to excessive resource allocation. This meant that unnecessary people were hired,
more equipments were purchased and more materials and products were stocked up in the inventory. And
this in turn, led to an increase in the overall cash costs without adding any value. Secondly,
the presence of unnecessary people, equipment and materials automatically lead to overproduction.
And then overproduction further lead to the third type of waste, which is excessive
inventory of the final products. In this case, if there are 1000 cars that are overproduced,
that is a huge amount of land that is being utilised, leading to very high maintenance costs,
labour costs and transportation cost. And lastly, when all these ways come together,
it leads to the fourth type of waste which is unnecessary capital investment. For example,
if 1000 crore loan has been taken out, and if it is utilised in overproduction,
Do you realise it's going to stack up a crazy amount of interest cost lead into very high cost
with zero return on investment. And this further leads to more administrative costs, depreciation
cost, etc. Now, on the outset, it looks like a lot of things need to be changed, right.
But when the team of Toyota actually understood the root cause of this problem, it was all about
just one thing. Forecasting of demand lead to excessive inventory, which in turn led to a chain
effect resulting into the four types of waste. So you know what, Toyota decided to eliminate two of
the most fundamental elements of the supply chain and that are inventory and demand forecast. Yes,
you heard that right. Toyota built a supply chain where there was no demand forecasting and zero
inventory. And this is how Ladies and gentlemen, the world class just-in-time system was born. And
this system revolutionised not just the automobile industry, but also became the world standard for
supply chain management in every field you can think about, and this is how it worked out.
Instead of having the cars manufactured and stored into the inventory, the cars used to be available
for the customers in the pamphlets, and they used to be available in the showroom. And only after
the customer placed the order, Toyota started manufacturing the car. Now this on the outside
seems very simple, right? Well, here's what even an oversimplified process of Toyota's production
look like. Once the ideation and booking dates are finalised, the machinery and technology
are acquired in three months. After that, the parts and components arrive in seven days of the
production centre. After the booking starts coming from several dealers all across the country,
the production actually starts and the path start moving to the assembly. Now, when this moment
happens, based on the demand, the exact same number of parts are set to arrive every single
day. So, if 9871 components have been taken to the assembly, the next day, only 9871 components
will arrive. And this happened not just for one component, but the hundreds of components
that were being used for the assembly, this is followed by assembly activities and finally,
the quality check is done. The vehicles that are assembled arrive at the dispatch zone
and immediately, immediately they are shipped to the dealers based on their respective
orders. And this entire process is set to happen in five days as for the stated source in 2016.
Therefore, the entire supply chain of the company starts functioning on the basis of demand and not
demand forecast. This is how the just-in-time production of Toyota works wherein, even a single
delay can cause the company millions of dollars in losses. And this insane precision gave Toyota
three incredible superpowers for the rest of the competition. Number one, in case of less demand
or even if an earthquake shatters the plant Toyota would incur only minimum damage because
they had less stock of components and close to zero inventory. Furthermore, Toyota even asked
its suppliers to follow the just-in-time principle for their systems, which again reduced the cost of
the overall supply chain without creating a bottleneck for the suppliers. Secondly, all
four types of waste were eliminated resulting into extreme cost cutting and this cost cutting turned
out to be is so amazing that even when other companies applied JIT, they saw a 50% reduction
in their inventory itself, and a lead time reduction of more than 80%, eventually resulting
into massive cost cutting and drastic increase in profit margins. And lastly, in case of Toyota,
from 1955 onwards, Toyota's production started shooting up, they made 22,786 vehicles in 1955,
46,417 in 1956, 70,856, in 1957 and by 1965, they achieved a growth of almost 2,000%, producing
477,643 units in 1965. This is how by striking a perfect balance between extreme efficiency
and extreme risk, Toyota and its engineers built an iconic supply chain that turned them into the
largest and one of the most profitable automobile companies in the world. Now, the question is,
as an entrepreneur, how can you apply the just-in-time concept to your company? And what are
the lessons that we need to learn from a legend like EG Toyota? Number one, adversity is always
the breeding ground of innovation. So if you want to learn to build the most efficient system,
go back in history, and find scenarios where people did not have the choice of inefficiency.
Because here's where you will see the most remarkable innovations taking place that will
help you beat your competition. In this case, it was the adversity of the Japanese, which enabled
Toyota to build a just-in-time system that helped it beat the likes of Ford and General Motors.
Lesson number two, whenever you study the systems of your competitors, or even your ideal companies,
never ever copy paste the same system to solve your problems. Always look deeper,
and try and see how your constraints are different from their constraints, and then choose every step
of execution very, very carefully. In this case, instead of just being fascinated by
the just-in-time concept, I would urge you to look deeper into the risk involved with the strategy,
which will kind of make you rethink if this strategy is even worth it. And that is when
you will see that there are three more strategies of Toyota that helped them survive along with the
JIT principle. And these principles are the Kanban system, the Kaizen model and the Jidoka method.
I'll be addressing them in the upcoming episode. But until then, please do a study about Toyota's
risk mitigation strategies during the 1997 Aisin Seiki fire and 2016 Kumamoto earthquake.
And you will see that Toyota's entire supply chain got disrupted only because they used just-in-time,
but the way they reacted to it might have a very important lesson for you to learn. And lastly,
to make this entire process easier for you, I have attached three study materials and two
book recommendations for you. Number one is the timeline of all of Toyota's innovations.
Number two, is a research paper on Toyota system, which will help you understand the overall picture
of Toyota's systems. Now, although there are a few statistical errors over there, I think the concept
has been covered very well in this paper. And lastly, you will find a paper that explains the
flow analysis of the entire Toyota model. I'm also attaching two book recommendations for you. Number
one is the Toyota way. And number two is actually the second part of this bestseller, which will
actually help you apply the Toyota way to your processes. So do have a look at them and do let
me know what you think about them in the comments section. That's all from my side for today,
Guys. If you learn something valuable, please make sure to hit the like button in order to make
YouTube Baba happy. And for more such insightful business and political case studies, please
subscribe to our channel. Thank you so much for watching. I will see you in the next one. Bye bye.
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