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Cut Waste, Not Costs

As I read more and more about the Toyota debacle I’m struck by an apparently myopic management drive to cut costs.  In the case of Toyota it appears that cost cutting extended into quality cutting.  A company once known for superb quality had methodically reduced that aspect of their output.  This isn’t just conjecture; it seems that people inside the company had been aware of a decline in quality due to a focus on reducing costs.1 Is there a general lesson to consider?

I believe the failure is one of misplaced focus. The focus when Toyota began cutting costs was to remove waste.  That waste could be found throughout their manufacturing processes.  Wasted materials, productivity, tooling, and equipment were all identified as Toyota’s management and workers struck out on a journey to reduce waste and improve productivity.  They ushered in a set of practices that others would soon adopt.

Head back to the 1950′s and you’ll find Taiichi Ohno2 hard at work addressing myriad manufacturing shortcomings at Toyota.  Mr. Ohno is really the father of lean manufacturing and just-in-time inventory management.  He didn’t name them as such.  He was just trying to remove waste from the entire manufacturing process.  By the late 1990′s these concepts had become standard operating procedure at many firms.

It makes sense that a business would focus on reducing waste.  Although it may require effort to remove waste without reducing productivity, overall one would expect a leaner process to have an overall efficiency gain.  It would also seem that quality does not benefit from waste.  After many years of experience with these principles, companies have found that an approach of using only the resources that are needed when they are needed provides a sound basis for their operations.  So what happened at Toyota?  They apparently went beyond cutting waste.

In 1998 Toyota started an internal program called Construction of Cost Competitiveness for the 21st Century (CCC21).3 This program extended into every crevice of their operations.  Examples abound of apparently trivial design changes made to simplify manufacturing processes and reduce material costs.  In 2005 Toyota’s CEO Katsuaki Watanabe announced that the CCC21 program had realized cost reductions of $2.2 billion a year over its 6 year span.

This morphing of Mr. Ohno’s principles would probably surprise him.  He was truly focused on waste – not cost – as key metric.  The CCC21 program was more about cost.  As soon as the switch was made to measure cost, the ability to discern between feature, quality or waste reduction was lost, at least from management’s purview.

Quality concerns at Toyota began to arise in 2006.  A manufacturing process for molding the liner in the roof of the Camry used heat to shape the materials.  Due to cost cutting a supplier altered the materials which would then periodically catch fire during the molding process.4 In 2007 a parts vendor was carrying out a tear down of a Camry in preparation for bidding on a contract to supply parts.  The vendor was surprised at the reduction in Toyota craftsmanship that had occurred over the years.

To make matters worse, Toyota’s leadership started a new version of the CCC21 program, which they called Value Innovation.  It was all about speeding manufacturing, while reducing costs and time to market.  During this period engineers became more vocal about the impact of the cost cutting focus on quality.5 What is interesting is that during this period Toyota was reporting record growth and profits.  From 2006 to 2008 Toyota had $55 billion in operating income.

So why focus so much on cutting costs when quality concerns are rising and profits are growing?  I think the principle that fueled Toyota’s cost savings progress had been forgotten.  The goal wasn’t really about removing waste anymore.  It was simply to reduce cost.  It was as if Toyota’s leadership believed that there was always an opportunity to reduce costs without removing functionality or quality.  For me this vision is absurd.

Generalizing this principle, one would have to believe that ultimately a product or service can be produced at no cost.  Otherwise, one has to admit that there is a minimum cost that must be borne to produce something with a given feature set and level of quality.  Management needs to review cost cutting opportunities to be sure it is only removing waste.  Without such oversight, what is cut might represent features or quality.

A basic equation for defining an output’s cost is: features + quality + waste = cost.  It isn’t really this simple.  Sometimes waste, particularly when only evaluated from the point of view of a company, actually saves money.  Dumping used oil down the drain is cheaper than recycling it – as long as the company doesn’t get caught.  But that is a topic for a different post.

From this equation, a business decides on what it intends to offer (features and quality) which sets a minimum cost point.  Each of these aspects involves parts and labor.  Vendors can be evaluated and the best prices obtained.  If the features and quality metrics are fixed then the cost cannot continually spiral downward.  I think this is where companies like Toyota can lose their way.

Although I do not currently work in a business that manufactures hardware (I did years ago), I do find many parallels in the production of software.  Beyond what a given software product is supposed to do (core features), its features also include integration, configuration, and tuning options.  Quality shows up with careful design, testing rigor, security focus, and thorough documentation.

If I insist on maintaining the quality of a software solution, meaning it is well designed and documented, secure and effectively tested then there will be costs in terms of person-hours and expertise required.  I cannot reduce those costs without losing some amount of that quality.

Toyota’s experience should serve as a clear reminder that the language we choose when operating a business is vital.  Convincing ourselves that we are reducing cost, as if that can be done without risking core facets of our output, is fraught with peril.  I for one intend to stay away from “cost cutting” as a mission.  I think that reducing waste in processes and improving productivity through the use of tools is a much better way to serve my company and clients.


1: http://articles.latimes.com/2010/mar/08/business/la-fi-toyota-canaries8-2010mar08
: http://en.wikipedia.org/wiki/Taiichi_Ohno
: http://www.businessweek.com/magazine/content/05_08/b3921062.htm
: http://www.bloomberg.com/apps/news?pid=20601109&sid=aF0aX8t0Q6lk
: Ibid, see 1

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