Tag Archives: Toyota

It’s time to make the hard decision

Toyota, as you’ve probably heard, is shutting down operations in Australia. This has triggered the expected wave of commentary claiming that this is the end of manufacturing in Australia and that unless the government does something about this industrial relations problem then the entire car manufacturing supply chain (i.e. everything from final assembly back) will collapse with disastrous consequences for the Australian economy.

This point of view is both disingenuous and unhelpful as it ignores the fact that the viability of car manufacturing in Australia is strongly influenced by both economic trends outside our borders and by systemic challenges within the car industry itself. Australia might be an island, but that does not mean that events outside our borders will not affect us. Industrial relations might be part of the challenge, but it’s not the whole story.

Pouring more money into the domestic car manufacturing supply chain may provide short term relief, but it does not address the root cause of the problem.

We need to make the hard decision.

If car manufacturing is to be part of our industrial mix in the longer term then we need to transform the domestic industry, creating a new operating model that enables a stable manufacturing industry in Australia within the global context.

If we cannot create a sustainable car manufacturing industry in Australia, then we should immediately start to transition the resources (people and assets) to new industries that do have a future here.

Simply propping up an industry who time has come will only ever be a short term solution, and one which is a disservice to the generation just entering the workforce.

Capital has won over labour

The global car industry is in trouble. There’s too many factories and not enough people buying cars.

Similar situations are not uncommon in other capital intensive industries. Decades spent automating and streamlining processes has transferred costs from labour to capital. This has been great for customers as it lowers the unit cost of the goods manufactured. The manufacturers, on the other hand, find that their business, or even their entire industry, can all too easily be pushed into a never ending cycle of boom-and-bust. We only need to look to containerisation and the development of the global container network to see these forces in action.

Containerisation transformed the old, manual, approach to shipping into a highly automated and efficient global logistics network. Goods were packed into large metal containers and craned onto and off ships, rather than relying on stevedores to manhandle individual barrels. This resulted in a dramatic reduction in shipping costs and time (somewhere between 60% and 80%), since the majority of the work was in the manual loading and unloading.

However, building a container network required a huge investment. New ships were commissioned, larger ships with complex racks to hold the containers. Fleets of containers were required to carry the goods. Docks also need to be changed from the fingers sticking out of a bank that was suitable for manual loading, to the large container terminals that host huge cranes.

These investments allow shipping companies to slash the cost of shipping. It also made these businesses very inflexible. Previously shipping companies could trim costs when demand dropped off, parking ships and laying off their crews. Now, with huge investments in container infrastructure, the shipping companies were forced to keep the boats moving during the down turn, as the revenue was needed to service loans or pay dividends to investors.

Times were good when demand was high, with the low shipping rates helping to drive volume up. When times were bad when demand was low, as the boats needed to keep moving even if it meant that they were losing money.

Car Manufacturing in Australia

Australia finds itself wanting to protect its traditional car manufacturing industry when the dynamics of the global car industry and economy conspire against us.

Car manufacturers need to improve factory utilisation if they are to remain profitable. Shutting factories down for a few weeks is not enough, nor is trimming labour rates, as the majority of their costs are in the plant and equipment contained within these factories, and not in the labour required to operate and management.

With too many (expensive) factories and not enough people buying cars, car companies are looking to consolidate their operations. Ideally the final resting place for these factories will be adjacent to major markets in a comparatively low cost geography. (Despite the balance of costs being in equipment, moving from a high to a low cost geography can still shave 10% off the total cost of manufacturing.)

Similarly, reducing the time from final assembly to delivery to the customer by placing the factory as close as practical to the customer, helps to reduce costs by reducing the time it takes for product to flow through the supply chain. This cuts the amount of working capital required as well as cutting the time required to push product updates through the supply chain.

Ideally, given current manufacturing technology, one of these manufacturing centres will be right in the middle of South-East Asia, enabling quick and convenient access to the the fastest growing car markets in the world. Thailand looks good. Another would be somewhere in the centre of the Americas, allowing it to service both North and South America. Perhaps Mexico or the southern states of the US? Eastern Europe might get a look in for a third manufacturing hub, but then it might just be easier to service Europe out of S.E. Asia or the Americas. (Note that niche plays such as BMW are the exception to this rule, as they are not selling into the mass market.)

So what does this mean for car manufacturing in Australia? Australia fairs rather badly on both the dimensions we just considered.

As a high cost country we can expect cars manufactured domestically to cost roughly 10% more than those manufactured in a low-cost hub. Unfortunately wage bargaining will be little help unless we’re willing to slash wages to the same levels as Mexico and Thailand, which is something that the Australian public is unlikely to find palatable.

Our position below S.E. Asia and a long way from the US and Europe also puts us at a disadvantage. While shipping a car from Australia to S.E. Asia, the Americas or Europe will not significantly affect the final price, the delay pushes up working capital requirements while the longer supply chain is more challenging to manage.

We can’t expect our domestic car industry to export its way out of this problem. Nor is the domestic market large enough to sustain it when cheaper imports are flowing in from overseas manufacturing hubs. The car industry is, after all, a global industry.

Pouring money into the industry might support it in the short term, but at what cost? If it cannot complete globally then it will eventually succumb to the pressure. And given the perilous state of the global and domestic car industries, that time will probably be sooner than later.

In the mean time we’re encouraging a generation of eager and talented young adults to build their lives around a career and an industry that we know will no be able to support them. They deserve better.

Can technology save us?

One solution to our dilemma is to find a model for the industry that can work for Australia.

Consider, for a moment, the replicator from Star Trek. Or, if you’re less inclined to science fiction, the recent explosion of 3D printing and the maker movement.

If we can slash the investment required to manufacture cars by slashing the investment required to build a factory, then the decision on where to locate that factory might tip in our favour. If a rather large 3D printer costing AU$10,000 could print a car, then every dealer would have one. Why ship a finished car from one of the manufacturing hubs when you can pick the model and options you want, have it printed, and pick it up in a day or two.

3D printing might be some way off, but there are people out there looking at this problem. iStream, for example, is the result of looking at the manufacturing process to see if there is a better, faster and cheaper way to manufacture cars. The result is a manufacturing plant that is 20% the size of a conventional factory, and which reduces the typical capital investment by up to 80%.

If we can use technology such as iStream, or one of its descendants, to reduce the factory footprint then we might be able to arrive a solution that can be sustained by our domestic market.

Taking this path would require an investment at the national level. The major car manufacturers are struggling with their older, more capital intensive, operating model and have no interest in a new approach. If we are to take this route then we cannot rely on the existing brands.

Should we cut out losses?

If technology cannot save us, if the consensus is that it is not possible to build a sustainable, mass market, car industry in Australia, then we need to consider our options.

Should we copy a page from Germany’s playbook, and invest in building a high-value, niche industry? An Australian equivalent to BMW or Mercedes?

Or are there other manufacturing industries that can absorb the work force? Should we, for example, invest in becoming the leading manufacture of pre-build housing? (We already have some form in this area.) What industries can we excel in? As others have pointed out, ending car production is not the end of the world.

It’s time to make the hard decision

Pointing out the key role the car industry has historically played in our economy, and focusing on how we might keep the industry alive, is ignoring that fact that the domestic troubles are part of a larger global trend, a trend that we can do little about.

Regardless of the path we each, as individuals, prefer, the debate we need to having is on how will we choose between the the options available too us.

People don’t like change. (Or do they?)

I seem to be having a lot of conversations at the moment around whether people (you, me and everyone else) like and embrace change, or whether they resist it. The same question arises for companies. Like a lot of these questions, I think it depends. As individuals we don’t mind change, given appropriate circumstances. Organisations also want to change (and in today’s business environment it seems to be a question of changing or becoming irrelevant). However, people in organisations are usually strongly incentivised to dislike change, especially if they want to make that next repayment on their new mortgage. Fixing this, and creating a culture that embraces change, means changing the way we think about and structure our organisations and our careers. It means rethinking the rules of enterprise IT.

Every time a conversation comes around to the topic of change, I’m always reminded of a visit I made to a Toyota factory something like a decade ago. It’s so long ago now that I can’t even remember the reason for the visit, but that’s not the point of this missive.

Toyota, like most businesses, loves change. (Many large companies reorganise so often that change seems to be the only constant.) Change, embodied in the development of the Toyota Production System, was what took Toyota from the bottom of the global car industry to the top. Change is also why many of us have moved companies, following jobs as our employers reorganise their operations. For some of us, change is an opportunity. For many though, change is the tool of the man as he tries to disrupt our lives. Change means unwanted relocations, pay cuts, career stalls, or the need to shift jobs when we don’t want to. Change is something to be resisted.

What was interesting about my visit to Toyota though, was the attitude of the workers on the shop floor had to change. They didn’t hate it. They didn’t even resist it. They actually arrived at work each day eager to see how work practices had been changed since the end of their last shift.

A Toyota assembly line circa 2000.
A Toyota assembly line circa 2000

The concrete example I saw of this was the pre-sorting of seatbelt parts into coloured tubs. Apparently only a few weeks earlier the parts had been arranged on a wall. All hooks and dangling parts, like your Dad’s tools in the shed. When a car came down the assembly line a worker would select the parts appropriate for the car model, and then attach them to the car. Each seat belt had roughly four parts, so that meant there was three unnecessary decisions. Unnecessary decisions usually mean mistakes, mistakes waste time and money, and there were a number of mistakes made.

One day a member of the shop floor team had had the bright idea of pre-sorting the seat belts to avoid these mistakes. Some coloured tubs were sourced (some of the shop floor team drove to the local Walmart with a little petty cash), parts were sorted into tubs, and they gave the idea a trial run. Selecting seatbelt parts for a car now only required one decision: which tub?

The idea was a huge success; error rates went down dramatically. I hear that it was even taken global, and implemented in most Toyota factories around the world. (Though being around ten years ago, and with today’s rapid pace of change, I expect that the tubs have been superseded by now.)

What’s interesting about this story is that the change originated on the shop floor, from the assembly line worker who were actively looking to improve operations, rather than from head office as part of a reorganisation. Some of the improvements I heard about even resulted in the elimination of jobs, with the workers redeployed elsewhere in the factory. Workers weren’t just changing how they did something, they were also changing what they did. Change was what made the work interesting and engaging for the workers, rather than being seen as an oppressive tool used by the man.

I think we can safely set aside the idea that works don’t like change, as this story is not an isolated incident. Why then, do so many people resist change? Why, for every Toyota factory, there is a story like the UK newspaper industry, where workers (and unions) resisted change for decades, until Rupert Murdoch came along.

Rupert Murdoch, destroyer of unions, and good Melbourne boy
Rupert Murdoch, destroyer of unions, and good Melbourne boy

The problem is not people or organisations, but people in organisations.

People are funny things; they tend to do what you incentivise them to do. There’s an excellent article over at the NY Times, The no-stars all-star, which talks about measurement and incentives in basketball. We often talk about “what gets measured determines what gets done” from an employee incentive point of view, but this article puts some real meat on the bones of that argument.

Shane Battier, the no-stars all-star
Shane Battier, the no-stars all-star

As the article says (on page two):

There is a tension, peculiar to basketball, between the interests of the team and the interests of the individual. The game continually tempts the people who play it to do things that are not in the interest of the group.

A little later it goes on to mention (on page three):

A point guard might selfishly give up an open shot for an assist. You can see it happen every night, when he’s racing down court for an open layup, and instead of taking it, he passes it back to a trailing teammate. The teammate usually finishes with some sensational dunk, but the likelihood of scoring nevertheless declined. “The marginal assist is worth more money to the point guard than the marginal point,” Morey says.

The point guard’s career is defined by the number of assists he makes (among other metrics), and he’ll try and increase the number of assets even if it’s not in the best interest of the team. After all, teams come and go, while he has a career to maintain.

Once you place a person into a role you have put them on a career path which will determine their attitude to change.

Usually we take an operational approach to defining roles, rewarding people for the volume of work they are responsible for. Career progression then means increasing the amount of work they are responsible for, regardless of what this means for the company.

Measuring a project manager in terms of head count or revenue under management will give them a strong preference for creating ever bigger projects. It doesn’t matter if the right thing to do is create more, smaller projects, rather than run a programme of a few major projects as we have in the past. Your project manager’s career path is to increase their head count and revenue under management. And they do have those private school fees due soon.

Just like the point guard, change that will prevent career progression will be resisted (remember those kids in private school), even if it is counter to the company’s best interests. Which makes the current transformation we’re seeing in IT all the more important, because if we set the wrong incentives in place then we just might be our own worst enemies.

We can’t force a square peg into a round hole; nor can we force our existing employees to take their current roles and careers into a new organisational model. They just don’t fit. Take IT for example. We can’t expect many modern IT departments to spontaneously modernise themselves, transforming into agile business-technology engines under their own volition. It’s not that the departments don’t want to change: they do. Nor are most of the employees, as individuals, opposed (remember the Toyota example). But the combination of people and organisation will repel all but the most destructive boarders.

It’s interesting how other games, games other than basketball that is, have structural solutions to this problem. One solution is the line-up in baseball. From the NY Times article (page two, again):

“There is no way to selfishly get across home plate,” as Morey puts it. “If instead of there being a lineup, I could muscle my way to the plate and hit every single time and damage the efficiency of the team — that would be the analogy.”

Solving this problem in IT means rethinking the rules of IT.

The game of IT has, for the last few decades, been determined by the need to deliver large, enterprise applications into the IT estate. Keep the lights on, don’t lose orders, and automate anything that hasn’t yet been automated. Oh — and I’d like my reports accurate and on time. IT as the game of operational engineering. It was these rules that drove the creation of most of the roles we have in enterprise IT today.

However, this has changed. Decisions are now more important than data, and the global credit crunch is driving us to reconsider the roles we need in IT. We’re trying to reinvent our IT departments for the modern era – I even posted about how this was driving the need the need to manage technology, and not applications – but we haven’t changed the rules to suit.

If we want out people to embrace change, as the people on the shop floor at Toyota did, then we need to provide them with roles and careers that support them in the new normal. And this means changing the rules. Out with the more – more applications, larger projects, more people – and in with the new.

So what are the new rules for IT?

Innovation [2009-10-18]

Another week and another collection of interesting ideas from around the internet.

As always, thoughts and/or comments are greatly appreciated.

Are we wasting our time searching for the next brilliant idea? That idea that’s going to drive a disruptive innovation. The race for the new-new thing. The innovation silver bullet. Or is innovation the result of combining many small, commoditised ideas? With the real challenge being the identification of interesting problems and synthesis of a new solution from the sea of good ideas we’re swimming in, in today’s hyper-connected world.

  • The good enough revolution: when cheap and simple is just fine [Wired]
    Jonathan Kaplan and Ariel Braunstein made a cheap, feature poor video camera, the Flip. Two years later, the Flip Ultra and its revisions are the best-selling video cameras in the US, commanding 17 percent of the camcorder market. Sony and Canon are now scrambling to catch up.
  • Cheap IVF offers hope to childless millions [New Scientist]
    By leveraging good enough, low tech tools and techniques, the Low Cost IVF Foundation (LCIF) has transformed IVF from a luxury of the rich western countries, into a tool for alleviating the public ridicule, accusations of witchcraft, loss of financial support, abandonment and divorce, not to speak of their own shame and depression associated with being childless in the third world. “If you are not able to conceive, you are not [considered] normal,” says gynaecologist Abdelrahim Obaid Fadl Allah of the University of Khartoum clinic.
  • Forget lawn mowers, bring in the goats [TreeHugger]
    Sometimes the old school solution is the best solution. They chose the goats because they’re a non-polluting alternative that’ll eat up just about anything. “They [goats] can clear vegetation from hard-to-reach places, and they’ll eat the seeds that pesticides and mowing leave behind, preventing vegetation from coming back next year.”
  • Conservative innovation [Nicholas G Carr]
    Many of the of the innovations which drive the corporate world forward are the result small, incremental steps and not large, bold strides based on brilliant, game changing ideas. Toyota’s hybrid is a good example of this incremental, conservative approach.

Accelerate along the road to happiness

Our ability to effectively manage time is central to success in today’s hype-competitive business environment. The streamlined and high velocity value-chains we’ve created are designed to invest as little time (and money) as possible in unproductive business activities. However, being fast, being good at optimizing our day-to-day operations, is no longer enough. We’ve reached a point where managing the acceleration of our business—the ability to change direction, redeploy resources to meet new opportunities more rapidly than our competition—is the driver for best in category performance. If we can react faster than our competition then we can capitalize on a business opportunity (or disruption, as they are often the same) and harvest any value the opportunity created.

Time is our overarching business driver at the moment. We hope to be the first to approve a mortgage, capturing the customer before our competitors have even responded to the original application. We strive to be first to market with a new portable music device (Walkman or iPod), establishing early mover advantage and taking the dominant position in the market. Or we might simply want to quickly restore essential services—power, gas or water—to our customers, as they have become intensely dependent upon them. Globalization has leveled the playing field, as we’re all working from the same play book and leveraging the same resources. The most significant factor for success in this environment is the ability to execute faster than our competition—harvesting the value in an opportunity before they can.

This focus on time is a recent phenomena. Not long ago, no further back than the early nineties, we were more concerned with mass. The challenge was too get the job done. Keep the wheels turning in the factories. Keep the workers busy in their cubicles. Time is money, so we’re told, and we need to ensure that we don’t waste money by laying idle. Mass was the key to success—ensuring that we had enough work to do, enough raw materials to work on, to keep our business busy and productive.

When mass is the focus, then bigger is better. This is a world where global conglomerates rule, as size is the driver for success. Supply chains were designed so that enough stuff was available right next to the factory, where supply can be ensured, that the factory would never run out of raw materials and grind to a halt. Whether shuffling paperwork or shifting widgets, the ability to move more stuff around the business was always seen as an improvement.

This is also the world that created a pile of shipping containers too behold in the Persian Gulf, during the Gulf War in the early nineties. With no known destination, some containers couldn’t be delivered. Without a clear understanding of where they came from, others couldn’t be returned. A few of these orphaned containers were opened in an attempt to determine their destination or origin; however the sweltering Arabian sun was not kind to their contents, which included items such as raw poultry, so a stop was soon put to that. The containers just kept piling up. 22,000 of 50,000 containers simply became invisible, collecting in a pile that went by the jaunty name of Iron Mountain.

Iron Mountain: 22,000 containers that became invisible
Iron Mountain: 22,000 containers that became invisible

Our answer was to stop focusing on mass, on having enough stuff on hand to keep the wheels of industry turning. We have to admit that Iron Mountain proves that we could move sufficient mass. The next challenge was to ensure that materials arrived at just the right time for them to be consumed by the business. We moved from worrying about mass, to managing velocity.

Total quality management and process improvement efforts finally found their niche. LEAN and Six Sigma rolled through the business landscape ripping cost out businesses where-ever they went. Equipped with books on Toyota’s Production System and kanban cards, we ripped excess material from the supply chain. Raw materials arrive just-in-time, and we avoid the costs associated with storing and handling vast warehouses of material, as well as the working capital tied up in the stored material itself. Quality went up, process cycle times shrunk, and the pace of business accelerated. Much like the tea clippers from China in the 1800s, with the annual race to get the first crop back to London for the maximum profit (with skipper paid a profit share as an incentive along with their salary), we’re focused on cranking the handle of business as fast as possible.

Zara, a fashion retailer, is the poster child for this generation of business. The fashion industry is built around a value-chain that tries to push out regular product updates, beating up demand via runway shows and media coverage to support a seasonal marketing cycle. Zara takes a different approach, tracking customer preferences and trends as they happen in the stores and trying to deliver an appropriate design as rapidly as possible, allowing customer demand to pull fashion. By focusing on responding to customer demand, wherever it is, Zara has built an organization designed too minimize time from design to marketed product. For example, onshore, high-tech, agile production is preferred to low-tech but low cost, offshore production which involves long production delays. Zara takes two weeks to take a product to market, where the industry average is six months; the lifetime of Zara’s products is measured in weeks, rather than months; and the products offered in each store are tailored to the interests of the community it serves rather than a long term marketing plan.

The change in product life-cycle has created a material change to customer buying habits. Traditionally customers’ will visit a fashion store a few times a year to see what a new season brings. There is no real pressure to buy in any particular visit, as they know they can return to buy the same garment later. Zara, however, with it’s dramatically shortened product cycles, drives different behavior. Customer visit more often, as they can expect to see a new range each visit. They are also more likely too buy, as they know that there is little chance of the same garment being available the next time. This approach has made Zara the most profitable arm of Inditex, a holding company of eight retail brands, and one of the biggest success stories in Spanish business.

The dirty secret of high velocity, lean businesses is that they are fragile: small disturbances can create massive knock-on effects. As we’ve ripped fat from the value chain, we’ve also weakened its ability to react to, and resolve, disruptions. A stockout can now flow all the way back along the supply chain to the literal coal face, stalling the entire business value-chain. Restoring an essential service is delayed while we scramble to procure the vital missing part. Mortgage approvals are deferred while we try reallocate the work load of a valuer dealing with a personal emergency. Or our carefully synchronized product launch falls apart for what seems like a trivial reason somewhere on the other side of the globe.

Our most powerful tools in creating todays high velocity businesses—tools like straight-through processing, LEAN and Six Sigma—worked by removing variation from business processes to increase throughput. The same tools prevent us from effectively responding to these disruptions.

Opportunities today are more frequent, but disruptive and fleeting. An open air festival in the country might represent an opportunity for a tolling operator to manage parking in an adjacent field, if the solution can be deployed as sufficient scale rapidly enough. Or the current trend for pop-up retail stores (if new products rapidly come and go, then why not stores) could be moved from an exceptional, special occasion marketing tool, into the mainstream as a means to optimize sales day-by-day. Responding to these opportunities implies reconfiguring our business on the fly—rapidly integrating business exceptions into the core of our business. This might range from reconfiguring our carefully designed global supply chain, through changing core mortgage approval criteria and processes to modifying category management strategies in (near) real time.

Sam: Waiting while his bank sorts itself out
Sam: Waiting while his bank sorts itself out

We’re entering a time when our ability to change direction, adapting to and leveraging changes in the commercial environment as they occur, will drive our success. If we can react faster than the competition then we can capitalize on a business opportunity and harvest any value the opportunity creates. Our focus will become acceleration: working too build businesses with the flexibility and spare energy required to turn and respond rapidly. These businesses will be the F1 cars of business, providing a massive step in performance over more conventional organizations. And, just like F1, they will also require a new level of performance from our knowledge workers. If acceleration is our focus, then our biggest challenge will be creating time and space required by our knowledge workers to identify these opportunities, turn the steering wheel and leverage them as they occur.

Update: A friend of mine just pointed out that the logical progression of mass → velocity → acceleration naturally leads to jerk, which is an informal unit of measurement for the third derivative.

Innovation [2008-11-17]

Another week and another collection of interesting ideas from around the Internet.

As always, thoughts and/or comments are greatly appreciated.

This issue: