Toyota, for so long lauded as the standard-bearer for quality in production, is in the midst of an unprecedented crisis with both its reputation and stock price reeling from the effects of recalling over 10 million of its vehicles worldwide.

The latest recall refers to its flagship hybrid model, the Prius, with 436,000 being recalled worldwide due to a brake problem. This follows the recall late last year of over 8 million vehicles due to a problem with floor mats, before accelerator pedal problems resulted in another 2 million cars being sent back to the manufacturer in January this year.

Whilst recalls are not uncommon within the car industry, the sheer volume involved has resulted in substantial damage to the car maker’s previously enviable reputation for quality and reliability. In addition, Toyota’s decision on January 26th to temporarily halt production and sales in the United States of eight of its most popular models has resulted in a 16% drop in sales last month compared to a year earlier, while it’s competitors have seen healthy increases. 

But how has this been allowed to happen in a company whose production methods – the basis for Lean – are held by the Operational Excellence (OE) community as best practice throughout manufacturing, and have even been transferred to the service sector? Can Toyota’s reputation recover? And how will this effect OE and Continuous Improvement programmes that are based upon these methods and aspire to the car maker’s philosophy and standing?

“A moments of crisis”

Toyota president Akio Toyoda has apologised for the recalls and admitted that Toyota faces “a moment of crisis”. The carmaker has estimated that the recall and suspension of production could cost it up to $2billion in lost output and sales.

Toyota’s troubles could have a negative effect for OE and CI professionals trying to improve the profile of their programmes. Getting engagement from leadership is much easier when an improvement programme is based on the principles of a company that has become the biggest of its kind – as Toyota did in 2008 – particularly when those principles were lauded as in integral part of that success. Now though, those very production methods have been seriously called into question.

The halting of production, which on the face of it would seem disastrous, is conversely an indication that Toyota is sticking to – perhaps even re-invigorating – those principles. One of the two main pillars of the Toyota Production System is Jidoka, the highlighting and visualisation of problems, which involves stopping any machine involved in the production process as soon as a malfunction is discovered, and stopping work until the fault is repaired. By halting production and suspending sales, Toyota are simply adhering to Jidoka, albeit on a massive scale.

This confirms Akio Toyoda’s statement in January that the car maker “will redouble our commitment to quality as a lifeline of our company, with myself taking the lead, and by keeping to the ‘genchi genbutsu’ principle all of us at Toyota will tackle the issue in close cooperation with dealers and suppliers together. We will do everything in our power to regain the confidence of our customers”.

Genchi genbutsu, which involves going to the source of any problem and clarifying with one’s own eyes, is also a part of Jidoka, and intrinsic to Lean methods based upon the Toyota Production System. Taiichi Ohno, who pioneered the system in the 1950s, constantly emphasised the importance of genchi genbutsu, famously saying: “data is of course important in manufacturing, but I place greater emphasis on facts.”

Growth above quality

Many believe that in recent years, the leaders at Toyota became too fixated on growth instead of maintaining quality and reliability as their primary concern. Writing in the Harvard Business Review, Steven Spear, a senior lecturer at MIT in the US, makes the point that Toyota’s very success has caused it’s own downfall. “The flush of catching up to Ford and General Motors, coupled with a boom in demand, led Toyota’s leaders to put sales growth above quality. Senior leaders became focused on becoming first in sales with a 15% share of global sales. This meant that new products had to be introduced more quickly, new plants had to be opened more rapidly, and supply networks had to be expanded more aggressively. We’re now seeing the consequences of those decisions.”

When Akio Toyoda took over as president in March 2009, he made the promise to restore Toyota’s commitment to quality. At the time, the statement seemed unnecessary, paranoid even, as the company’s reputation for quality appeared – from the outside at least – steadfast. The evidence now would suggest that Toyoda had known that the focus of the company had slipped, and he has since said that its problems have arisen from “the undisciplined pursuit of more”.

But there is a belief that its current woes may not be entirely of its own making.

Concerns have been raised that, following last year’s government bailouts of General Motors and Chrysler, which resulted in the car companies being 60% and 10% (respectively) owned by the US government, the Japanese manufacturer is also feeling the effects of US protectionism.

Kazutaka Oshima, president of Rakuten Investment Management, believes as much. “For the Obama administration, which is worrying about its falling support rates, the best way of letting off steam about the jobless situation is to target Toyota, which has overtaken the Big Three.” There is no suggestion that the quality problems have been caused by anyone other than Toyota, but there are concerns that Toyota’s relative success and near-death experiences of US carmakers could see a return to the friction of the mid-1990s, when Japan had a huge trade surplus and consequently suffered unfavourable policy from US officials.

Michael Auslin, of the American Enterprise Institute in Washington, doesn’t believe this is true. “There is no evidence that the U.S. government would be so reckless as to try to intentionally harm Toyota to benefit the car company it now owns, GM,” he said.

Return to quality

It is clear that Toyota is facing perhaps its biggest predicament since the financial crisis it suffered in 1950. The company survived those difficult times by focusing on quality, and consequently invented the Toyota Production System that became a revolution.

It intends to do the same now. By reaffirming Toyota’s commitment to the principles that form the basis of Lean, and many OE and CI programmes around the world, Akio Toyoda believes the car maker will turn its fortunes – and its profits – round.

“For us at Toyota, this episode is an occasion for redoubling our commitment to quality as our most fundamental principle—indeed, as the very life of our company,” says Toyoda. “I will take charge personally of a coordinated effort by everyone at Toyota, at our dealers, and at our suppliers to regain the confidence of our customers. And I assure you we will devote ourselves—heart and soul—to that effort.”