Lessons in Management 03: Operational Excellence By Toyota and Dr. Eliyahu Goldratt
A collection of notes on reducing waste, improving quality, continuous improvement, and other timeless lessons in management and operational processes from Toyota and Dr. Eliyahu Goldratt.
This article will discuss some of the fundamental concepts behind the decisions made by Taiichi Ohno and Dr. Goldratt and some of the specific frameworks and processes they are famous for. It will also elaborate on a deeper business philosophy that drives Toyota and Dr. Goldratt. One centered on a deep understanding of people and excellence.
Additionally, it will cover some of the tools, techniques, and methods used by Toyota & Dr. Eliyahu Goldratt to achieve a competitive advantage through operational excellence.
These principles should prove valuable to anyone keen on understanding and improving processes, the cultivation of leadership, teams, and culture, devising strategy, building supplier relationships, and maintaining a learning organization.
Note: This article represents my notes compiled from the books: ‘The Toyota Way’ by Jeffery M. Liker, ‘The Goal’ by Eli Goldratt and ‘Beyond the Goal’ by Eli Goldratt.
1.0 Introduction
“We strive to decide our own fate. We act with self-reliance, trusting in our own abilities. We accept responsibility for our conduct and for maintaining and improving the skills that enable us to produce added value.” — Toyota’s own internal ‘Toyota Way’ document
Why study Toyota and Dr. Goldratt?
The ‘Toyota Way’ and ‘The Goal’ changed the way the world looked at manufacturing forever. The idea of flow, the invention of lean production (also known as the Toyota Production System or TPS), and the ‘Theory of Constraints’ triggered a global transformation in virtually every industry.
Here’s a brief on how each of them contributed to the transformation of manufacturing.
Toyota dominates the world & changed manufacturing forever
Toyota started from extremely humble origins. Toyota’s history with vehicle manufacturing begins in 1930 when the Toyoda family negotiated the sale of its popular mistake-proof power looms. In 1930 they used that capital to start building the Toyota Motor Corporation. The company began by manufacturing trucks and small passenger vehicles.
By the 1980s, the world started to pay attention to Toyota as it became clear that Japanese cars and technology had superior quality and efficiency. Toyota by then had built over 1 million cars, which lasted longer than American cars and required much less repair. A significant milestone at the time.
However, Toyota did more than just build small transportation vehicles, brands such as Lexus and the Prius dominated their market niches. Toyota is now the largest manufacturer and the most profitable auto company in the world.
Toyota’s way of doing things and the incredible consistency of Toyota’s performance are a direct result of operational excellence. Toyota turned operational excellence into a competitive advantage. This advantage was key to making Toyota one of the most successful manufacturers in the world.
Dr. Eli Goldratt changed the way America did business
Dr. Goldratt wrote a number of popular books that provided deep insights and thought-provoking explanations of business fundamentals.
His books like ‘The Goal’ provided a rethinking of the way manufacturing conventionally operated. The book has been a staple of wisdom to thousands of managers (eg. Jeff Bezos at Amazon) who have used its principles to drive continuous improvement, increase sales, create less waste, drive down inventory, improve lead times, and more.
Dr. Goldratt built on the wisdom of Henry Ford and Taiichi Ono, providing a number of analytical frameworks that helps managers rethink operations in order to create more profitable enterprises that are consistently improving.
2.0 Understanding the fundamental concepts of manufacturing: flow and waste
“All we are doing is looking at the time line from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time line by removing the non-value-added wastes.” — Taiichi Ono, 1988
a). The concept of ‘flow’
All manufacturing has been shaped by 2 titans of industry, Henry Ford and Taiichi Ohno. Each man placed the primary objective of his/her manufacturing plant as improving flow — that is decreasing the lead time from the moment an order for a car is received to the point it is delivered to the customer.
Henry Ford introduces the flow line
Henry Ford revolutionized mass production by introducing the flow line. Inspired by the continuous flow production methods of flour mills and breweries, Ford created the assembly line for the mass production of an entire automobile in 1913. His innovation reduced the time it took to build a car from more than 12 hours to one hour and 33 minutes.
Decades later, Ford’s method was not only in almost all vehicle assemblies but also in very different industries like beverages and ammunition. Later, it became widely accepted that flow lines can and must be implemented only in environments where large required quantities justify the dedication of equipment to a single product line without much variability (batch production).
Taiichi Ono from Toyota changed all of this.
Taiichi Ohno takes Ford’s creation to the next level with TPS
“Data is of course important in manufacturing, but I place the greatest emphasis on facts.” — Taiichi Ohno
Taiichi Ohno was faced with a very different market in Japan. Unlike America, the market demand in Japan was for small quantities of a variety of cars. Ohno could not dedicate long lines at Toyota and Toyota did not have the warehouse and factor space and financial resources to buy raw materials in bulk and hold large inventories. It needed inventory and works in progress to turn into cash, fast.
Taiichi Ohno went on to revolutionize manufacturing forever with the creation of the Toyota Production System. Introducing systems, tools, and processes like the Kanban system, just-in-time, kaizen (continuous learning), one-piece-flow, jidoka (stop during a quality problem) and heijunka (level the workload).
Taiichi Ohno formulated all of these systems, tools, and processes from the following 4 fundamental concepts
- Improving flow (lead time) is the primary objective of operations
- This primary objective needs to be translated into a practical mechanism that guides operations to prevent overproduction. Ford used space, Ohno used inventory
- Local inventories must be abolished, the system must be looked at holistically
- A focusing process to balance the flow must be in place. Ford used direct observation of the shop flow, while Ohno used inventory
b). Taiichi Ohno expands on the definition of waste
“Shortening lead time by eliminating waste in each step of a process leads to best quality and lowest cost, while improving safety and morale.”
— The Machine That Changed the World
In order to run a truly lean manufacturing operation, Taiichi Ohno correctly identified seven major types of non-value-adding waste in business or manufacturing processes. This explanation expanded on the conventional belief of ‘waste’.
1.Overproduction: Producing items for which there are no orders
2. Waiting (time on hand): Workers having to stand around waiting for the next processing step, tool, supply, part, etc.
3. Unnecessary transport or conveyance: Carrying work in process (WIP) over long distances
4. Overprocessing or incorrect processing. Taking unneeded steps to process the parts.
5. Excess inventory. Excess raw material, WIP, or finished goods causing longer lead times.
6. Unnecessary movement. Any wasted motion employees have to perform during the course of their work
7. Defects. Production of defective parts or correction.
8. Unused employee creativity. Losing time, ideas, skills, improvements, and learning opportunities by not engaging or listening to your employees.
Ohno considered the fundamental waste to be overproduction since it causes most of the other wastes. Producing more than the customer wants by any operation in the manufacturing process necessarily leads to a build-up of inventory somewhere downstream: the material is just sitting around waiting to be processed in the next operation.
3.0 Learning from Toyota
“Lean is about developing principles that are right for your organization and diligently practicing them to achieve high performance that continues to add value to customers and society. This, of course, means being competitive and profitable. Toyota’s principles are a great starting point.”
— Taiichi Ohno, internal Toyota document
a). The Toyota Production System (TPS)
The Toyota Production System is Toyota’s unique approach to manufacturing. It is the basis for the lean production system and is based on the philosophy of achieving the complete elimination of all waste in pursuit of the most efficient methods. I will not go into all processes, tools, and methods used by the TPS and instead summarize some key lessons.
To be a lean manufacturer requires a way of thinking that focuses on the following:
- Breaking down each process and clearly defining what value is created for the customer in each process
- Defining the value stream, focusing on cutting down on non-value-added tasks
- Making the product flow through value-adding processes without interruption (one-piece flow)
- Creating a pull system that cascades back from customer demand by replenishing only what the next operation takes away at short intervals
- Creating a culture in which everyone is striving continuously to improve
b). ‘The Toyota Way’
In order to really understand the Toyota production system (TPS) and the reasons behind the operational excellence at Toyota, we have to understand the ‘Toyota Way’ of doing business.
So what is The Toyota Way?
‘The Toyota Way’ are the foundational principles of the Toyota culture that enable the unique production system to operate. The principles can be divided into 4 main groups, with about 14 principles distributed among them.
Here are the principles that drive the techniques, tools, and management at Toyota (source: Liker, 2004).
a.) Thinking About The Long Term: A Long-Term Oriented Philosophy
“The most important factors for success are patience, a focus on long-term rather than short-term results, reinvestment in people, product, and plant, and an unforgiving commitment to quality.”
— Robert B. McCurry, former Executive V.P., Toyota Motor Sales
Toyota is a company that thinks long-term, enabled by leadership at the very top. A successful company that over the long term thinks beyond just profits by how it can add value to its customers and the societies or communities in which it operates. This long-term focus enables Toyota to make the right investments in building a learning organization that tries to adapt to survive.
b). Live In The Process: The Right Process Will Produce the Right Results.
“Many good American companies have respect for individuals, and practice kaizen and other TPS tools. But what is important is having all the elements together as a system. It must be practiced every day in a very consistent manner not in spurts in a concrete way on the shop floor.”
— Fujio Cho, President, Toyota Motor Corporation
Toyota is a process-oriented company. They have learned through experience what processes work, beginning with the ideal of one-piece flow. As explained above ‘flow’ guides the manufacturing operation. At Toyota, this process focus is built into the company s DNA, and managers believe in their hearts that using the right process will lead to the results they desire.
c). People and Partners: Add Value to the Organization by Developing Your People and Partners.
“Until senior management gets their egos out of the way and goes to the whole team and leads them all together … senior management will continue to miss out on the brain power and extraordinary capabilities of all their employees.”
— Alex Warren, former Senior VP Toyota Motor Manufacturing, Kentucky
The Toyota Way includes a set of tools that are designed to support people in continuously improving and continuously developing. For example, one-piece flow is a very demanding process that quickly surfaces problems that demand fast solutions or production will stop. This suits Toyota’s employee development goals perfectly because it gives people the sense of urgency needed to confront business problems.
The view of management at Toyota is that they build people, not just cars.
d). Continous Improvement: Continuously Solving Root Problems Drives Organizational Learning.
“Observe the production floor without preconceptions and with a blank mind. Repeat why five times to every matter.”
— Taiichi Ohno
The highest level of the Toyota Way is organizational learning. Identifying the root causes of problems and preventing them from occurring is the focus of Toyota s continuous learning system. Tough analysis, reflection, and communication of lessons learned are central to improvement as is the discipline to standardize the best-known practices.
4.0 Putting it all together with Dr. Eliyahu Goldratt
“Every action that brings a company closer to its goal (making money) is productive. Every action that does not bring a company closer to its goal is not productive.”
— Dr. Goldratt, The Goal
Eliyahu Goldratt was an Israeli physicist turned management guru. An acclaimed author, educator, and business philosopher, he challenged underlying assumptions in business to discover new breakthroughs.
What is the goal of any company?
In the book ‘The Goal’, Dr. Goldratt goes on to show how operational managers are distracted & influenced by conventional management accounting metrics to poor performance. Over time they can tend to forget that the goal of the entire company is to make money.
A focus on management accounting metrics causes a manager’s time and energy to be wasted trying to ‘improve local efficiency’ even when it clearly does not impact overall or long-term profits.
a). The Theory of Constraints
The Theory of Constraints asserts that the goal of a company is to make money and that a manufacturing operation can use just three metrics to measure if they are really making money.
- Throughput: the rate at which the system generates money through sales net of variable costs. This corresponds to the value added by the system.
- Inventory: “all the money that the system has invested in purchasing things which it intends to sell.” This was later expanded to include all investments such as plant, property, equipment, etc.
- Operating Expense: “all the money the system spends in order to turn inventory into throughput.” These fixed costs like rent and salaries are incurred whether or not throughput increases or decreases.
Dr. Goldratt realized that the first option of increasing Throughput is generally far more powerful (and sustainable) than reducing Inventory or Operating Expenses.
To help organizations increase Throughput, he created the Five Focusing Steps (also known as the Process of On-Going Improvement).
The Process of On-Going Improvement
The slowest operation in a system always determines the maximum speed at which products can be produced by the entire system and therefore also the rate at which throughput can be realized.
This slowest machine or process is called the Bottleneck or Constraint. A lost production hour on this bottleneck tends to be very costly because the entire operation is slowed down by it.
Dr. Goldratt outlined a guide to managing constraints (Theory of Constraints) by asking the following questions:
- Identify the system’s constraint(s)
- Decide how to exploit the system’s constraint(s)
- Subordinate everything else to exploit the constraint(s)
- Elevate the system’s constraint(s)
- If in the previous steps a constraint has been broken, go back to step 1, but do not allow inertia to cause a system’s constraint.
These five steps follow a specific sequence. In other words, you should exploit the constraint before elevating it, because adding capacity requires capital investment. Also note that the bottleneck may be internal or external, such as customer demand.
b). Key Takeaways for Managers: How to Drive Continuous Improvement
Like Toyota, Dr. Goldratt lays down some principles that should be embodied by the workplace culture to enable continuous improvement.
1). Measurements Drive Behavior: any misalignment in measurements causes a wide range of destructive tendencies. It is your responsibility to identify The Goal of your organization. Be sure that your metrics align completely with this Goal.
2). Seek Answers: Be active in your quest for knowledge. The answers are out there, you just have to discover them. Sometimes the answers can be found in unlikely places, such as Jonah, an old physics professor.
3). Teamwork: Teams are very important to driving change and improvement. The more heads on the job the better. People have different opinions and outlooks; someone else may think differently than you ever would have.
4). Never Give Up: There is always a chance to recover as long as your organization is still running. Don’t be afraid to challenge the status quo. The battle is not lost until the moment you give up and stop trying.
5). Work Smarter, Not Harder: Oftentimes our greatest efforts are ineffective and sometimes even counter-productive. But by focusing on the right areas we can achieve breakthrough results
6). Improve the Overall System, Not Just the Individual Parts: Effective coordination between Operations and Marketing/Sales is critical to achieving the Goal, not just optimizing a single link in the value chain.
Conclusion
Dr. Goldratt’s frameworks are highly valuable because the wisdom of lean or the Toyota Production System can not be copied from Toyota to suit every other operation.
The implementation of lean or TOC is dependent upon careful observation of the operation at hand and also a deep understanding of the philosophy behind Toyota and Dr. Goldratt’s success. It is worth an in-depth study because the benefits of operational excellence go far beyond just the bottom line.
If you enjoyed what you read, be sure to check out my other article on the management philosophy of Capital Cities here or my article on hiring great people, doing big things in business, and sustaining a culture of meritocratic ownership by 3G Capital here.
You can find me on LinkedIn or contact me at https://www.chrisquyn.com/contact/
References
- Liker, Jeffrey K. (2004) The Toyota Way: 14 Management Principles from the World’s Greatest Manufacturer. Available at: link
- Goldratt, Eliyahu M. (2004) The Goal: A Process of Ongoing Improvement. Available at: link
- Takahiro Fujimoto: The Evolution of a Manufacturing System at Toyota
- Dr. Eli Goldratt: Standing on the shoulders of giants (link)
- https://www.tocinstitute.org/the-goal-summary.html
- https://www.history.com/this-day-in-history/fords-assembly-line-starts-rolling
Appendix
Expanding on Taiichi Ohno’s seven major types of non-value-adding waste in business or manufacturing processes.
- 1. Overproduction. Producing items for which there are no orders, generates such wastes as overstaffing and storage and transportation costs because of excess inventory.
- 2. Waiting (time on hand). Workers merely serving to watch an automated machine or having to stand around waiting for the next processing step, tool, supply, part, etc., or just plain having no work because of stockouts, lot processing delays, equipment downtime, and capacity bottlenecks.
- 3. Unnecessary transport or conveyance.Carrying work in process (WIP) long distances, creating inefficient transport, or moving materials, parts, or finished goods into or out of storage or between processes
- 4. Overprocessing or incorrect processing. Taking unneeded steps to process the parts. Inefficiently processing due to poor tool and product design, causing unnecessary motion and producing defects. Waste is generated when providing higher-quality products than is necessary.
- 5. Excess inventory. Excess raw material, WIP, or finished goods causing longer lead times, obsolescence, damaged goods, transportation and storage costs, and delay. Also, extra inventory hides problems such as production imbalances, late deliveries from suppliers, defects, equipment downtime, and long setup times.
- 6. Unnecessary movement. Any wasted motion employees have to perform during the course of their work, such as looking for, reaching for, or stacking parts, tools, etc. Also, walking is a waste.
- 7. Defects. Production of defective parts or correction. Repair or rework, scrap, replacement production, and inspection mean wasteful handling, time, and effort.
- 8. Unused employee creativity. Losing time, ideas, skills, improvements, and learning opportunities by not engaging or listening to your employees.
