So much chatter these days about “Respect for People,” developing people, learning, worker appreciation, and so on. All good stuff, but do people correctly understand the context? Yes, perhaps, but only superficially, in my view. Mr. Taiichi Ohno was a senior executive of a large corporation — not just an “operations guy” focused on process improvement. He had a lot to say about the business of making money which most people don’t think too much about. Rather than gloss over this, it is vitally important to understand his view of business, the corporation, money, the marketplace, and people to better contextualize devotees’ understanding of Toyota’s management system, Lean management, “Respect for People,” developing people, learning, and worker appreciation.
Mr. Ohno’s books contain important information about his views of business and money-making. What follows are some key extracts from each these three books followed by my analysis.
Toyota Production System: Beyond Large Scale Production
The world has already changed from a time when industry could sell everything it produced…We are now unable to sell our products unless we think ourselves into the very hearts of our customers, each of whom has different concepts and tastes… We discovered that industry has to accept orders from each customer and make products that differ according to individual requirements… Manufacturers and workplaces can no longer base production on… push[ing] their products onto the market (p. xiv)
Ohno-san is saying that in the automobile industry (and most other industries), markets shifted from sellers’ markets, which favor the company’s interests and thus allows for wasteful production systems such as batch-and-queue, to buyers’ markets which favor customer’s interests and thus requires a different, less wasteful, production system based on market demand (pull). Why is this important? One of the biggest nightmares a business leader can experience is overproduction. Ohno-san said:
There is no waste in business more terrible than overproduction. (p. 14)
Overproduction means a flooding of the market. It means both higher costs and selling at a discount which wipes away profit. Its converse, underproduction is also generally undesirable because it means losing sales and thus losing profit (but if demand exists, it could also mean shortages that can result in higher prices and higher profits at some points in the supply chain). Profit is very difficult to obtain in competitive buyers’ markets, hence:
The most important objective of the Toyota system has been to increase production efficiency by consistently and thoroughly eliminating waste. (p. xiii)
Production efficiency is a result of the combination of low costs resulting from quantity control, quality control, short lead-times, and cost reduction that is achieved via kaizen (problem-solving based on human creativity) based on customer pull. So, Toyota’s Production System evolved, step by step, as a method for helping the business survive in competitive buyers’ markets and obtain profit to grow and to continue to serve individual customers’ needs.
Thanks to financial engineering (which began more than a century ago but became much more “innovative” in the last 40 years), most business leaders can ignore the change in marketplace from sellers’ to buyers’ and continue to overproduce (and underproduce) and still survive (so-called “zombie companies” — some 20 percent of the 3000 largest companies in the United States). That is one reason why most business leaders are not attracted to Toyota’s system or Lean management. Were financial engineering somehow disallowed, business leaders would be more compelled to follow Toyota’s example. Ohno-san said:
[Eliminating overproduction] requires a what I call a revolution in consciousness, a change of attitude and viewpoint by business people. (p. 15)
I wanted to illustrate how [Toyota production system] reduces costs by improving productivity with human effort and innovation… not by increasing quantities. (p. 119)
As you know, this “revolution in consciousness” has been experienced by only a handful of CEOs — surely less than one percent. The other ninety-nine percent of CEOs remain committed to “increasing quantities” (scale) as the preferred path for reducing costs and financial engineering for survival.
As [Henry] Ford pointed out, people follow tradition. This might be acceptable in private life, but in industry, outdated customs must be eliminated… Progress cannot be generated when we are satisfied with existing situations. (p. 107)
Yet, most business leaders do follow tradition and are very satisfied with existing situations and especially the associated privileges. Learn why.
The Toyota production system can be summed up in a single phrase — “Make only what you need, in the quantities you need, when you need it.” This makes perfect sense when you think about it. What makes the goal so hard to attain is old habits and methods prevent us from changing our thinking and behavior. (p. ix)
Remarkably, “Make only what you need, in the quantities you need, when you need it” changes everything. Not just in operations, but in accounting, finance, information technology, engineering, sales and marketing, human resources, etc., and external relationships with suppliers, distributors, and customers. The impact on the business and on the business leaders is total. As a result, most business leaders summarily disallow it. In doing so, low costs resulting from quantity control, quality control, short lead-times, and cost reduction that is achieved via kaizen (problem-solving based on human creativity) are likewise disallowed. It seems wrong to call them “business leaders” when they misunderstand business (and the market) and follow tradition instead of leading change.
[In private companies] we have to make a profit… the way to make profits is to strive to improve performance by lowering costs. This does not mean making a profit by driving workers like slaves or underpaying them. We need to lower costs by in a truly rational, scientific way by eliminating waste. (p. 57)
Of course, the actions taken by business leaders in recent decades is to drive workers (same or worse processes operated by fewer people), underpay them, and outsource or offshore work. In doing so, they use these and other finance and accounting tricks to improve profits, but also they demean and impoverish people — their customers — and degrade authority and weaken society’s moorings. In his writings, Ohno-san speaks much about the interconnectedness of business, people, and society, and the positive role that business must have in assuring that progress is in step with the times.
It is hardly desirable to have to pay 10 percent interest to a bank [for work-in-process inventories] and only be able to pay 5 percent to shareholders on money that, if handled wisely, could just as well be paid out in dividends. (p. 143)
This and the previous quote speak not only to how money is diverted and wasted (even if interest rates are two percent), but also how employees are underchallenged in their work and, generally, how available resources are misunderstood and misused — which business can ill afford. Yet, business leaders avoid “truly rational, scientific way[s]” and instead resort to the numerous workarounds they can deploy to cover up for their misunderstandings and misuse of resources. At the same time, they often lament how difficult is is to find the needed “talent,” not realizing that they sabotage their own business interests on this point and many others. People enthusiastically refer to Toyota’s management system as the “Thinking Management System,” yet fail to grasp the extent and effectiveness of tradition as a near-total replacement for thinking among business leaders. As such, Lean promoters operate under an illusion, not realizing their efforts to promote change are bound by conventional wisdom and thus remain committed to current methods.
[People’s] work is driven by certain assumptions — they may think each other’s current methods are best, or they may not, but they see no other way of doing things. (p. 17)
Ohno-san said people suffer from “illusions that lurk within conventional wisdom,”
Unless we make drastic changes in the way we think, our mental processes will be limited to a linear extension of what we have done in the past… It is hard to give up the illusion that it is more efficient and probably cheaper to process items in batches than one at a time. Where costs are involved, “numbers-pushers” rush in and talk about costs in a way that creates the illusion that once a press setup is complete, it is cheaper to run 10,000 rather than 1000 pieces. This illusion, backed up by calculations, is always acknowledged as truth. (Chapter 5, p. 18)
Calculations are powerful in their ability to confirm the illusions within conventional wisdom, convincing people of a truth that does not actually exist. For business people to be leaders, they must instead subscribe to “postconventional wisdom” in order to move forward and “blaze new trails.” For Ohno-san, these are the basics that business people must master.
Just-in-Time for Today and Tomorrow
In the business world, a trinity is formed by the market, the factory, and the company as a whole. The market tingles as its pulse points with the immediate Now! needs of its many unique customers… The company’s management strategy fine tunes the factory with the marketplace, grasping precisely the Now! needs of the market and reacting instantly. In the factory this means nothing less than producing goods one at a time in rhythm with the Now! information coming from the marketplace.. Advancing toward a high-information society the Toyota production system demonstrates it value by seizing and giving life to the Now! in the company as a management system. (p. xiii)
In other words, companies must have a management system that is responsive to the needs of customers, rather than a management system that is responsive to its own needs. The latter system is “old-fashioned and no longer applies” because information coming from the marketplace is now so easily available, current, and accurate. Therefore, the management system must change to so that it is immediately responsive to the information.
For a manager… there is nothing better than having a mechanism or shock absorber for dealing with changes in the external environment beyond his or her control. That is the fundamental aim of the Toyota production system… The Toyota production system allows managers to feel the competition in the marketplace and the pains of market changes.” (pp. 49, 50)
If managers are tradition-bound, they are unresponsive or slow to respond to changes in the marketplace. Business leaders talk frequently about about the need to be responsive to change, but here again they sabotage their own business interests — i.e., being profitable as market conditions change, especially when conditions change suddenly. While their stated point of reference is the marketplace, the actual point of reference is the company and management’s interests.
These little scraps of paper [kanban cards]… check overproduction. Furthermore, they prevent producing defective goods, concealing problems, and help control inventory… However, in facing the information age, we must realize that even a scrap of paper [kanban card] is superior to a computer if the computer is not used intelligently. The scrap of paper is, in fact, information and mental software. (p. 61 and 62)
Information systems cost a lot of money and the information contained therein is often used incorrectly, resulting in the perpetuation of overproduction, producing defective goods, and concealing problems, thus increasing costs and reducing profits.
…the production plant is at once a free and generous creature and an insidious and mischievous nuisance. Those who work there are fascinated by the challenge of discovering ways to deal with this entity… people must use their intelligence and imagination to improve their work environment… (p. 88)
In recent decades, business people, especially those who lead large companies, have come to view the production plant as an “insidious and mischievous nuisance” to get rid of, rather than a “free and generous creature” where people are free to use their “intelligence and imagination to improve their work environment” to improve responsiveness to changing market conditions. Viewing production this way leads to extended supply chains, reduced responsiveness, and increased financial risk.
But corporations that emphasized increased production felt that increased sales, rather than innovative methods to eliminate waste, reflected success. This was the trap. Wastes are direct obstacles to profit. No matter how high the sales, valuable profits can dissipate in the form of waste. (p. 93)
Most business leaders prefer to focus on new and innovative methods for increasing sales and ignore new and innovative methods for improving production. As a result, the company is mired in waste that perpetually eats away profits. The basic solution is always the same: lay people off, close facilities, squeeze suppliers.
The reason I continue to mention the switch from a production to a [overall] management system is because it implies cost-down for management. Thus, cost-down does not refer to just cost reductions in the production plant, but to overall management checks and the search for and total elimination of waste. (p. 105)
Business people talk incessantly about costs and forever complain about high costs, yet the management system that they insist on using — classical management — assures that costs will always be high. Their total acceptance of waste means a total rejection of Toyota’s management system. It has no value to them. There is nothing useful to learn from it.
In an interview in the book NPS: New Production System, JIT Crossing Industry Boundaries (Isao Shinohara, Productivity Press, 1988), Ohno-san said:
I am not saying that you have to discard all traditional ideas; I am only saying that you must not accept them as limitations. Most people either do not understand this or refuse to believe it. They are afraid of doing the exact opposite of what their predecessors have done and taught them to do… There are many things in this world you can’t understand until you try them. With many things, you find the result is the exact opposite of what you expected. (pp. 142, 144)
Leaders commonly accept limitations on themselves but not on workers, yet they place restrictions on workers that force them to accept limitations and refrain from trying things out. To Mr. Ohno, the businessman, that is bad business.
These days, people too often talk about “Respect for People,” developing people, learning, and worker appreciation in ways that are directly or indirectly divorced from the profit-making requirement of private enterprise. The implication is there, but not the hard reality. Mr. Ohno makes clear in his books, and through people like Chihiro Nakao, that the philosophy and benevolence of Toyota’s management system is inseparable from the daily task of management and the work that workers do to satisfy customer wants and needs in ways that generate profit for the company. It is important to never lose sight of the context in which this innovative system of management was developed and continues to evolve.