Art Smalley: Toyota and Capital Investment By Art Smalley, author of Creating Level Pull and co-author of A3 Thinking – Last updated: Sunday, March 20, 2011 – Save & Share – Leave a comment

In the previous post I responded to a question about capital investment and the Ohira plant of Central Motors (a Toyota affiliated company producing the Yaris) that is gaining some attention in the press. There are few specifics known about the facility.  Only snippets of news are leaking out in the press or from site visits. I made a few observations about the reports on the facility but instead of pontificating about a facility I have never even seen in person I will opt to speak more in general terms about Toyota and its capital investment decisions. The following is simply my opinion on the topic based upon my time spent with the company and from observing it over the years. There are many possible angles to probe on this topic but I will stick to the following few points for the sake of brevity. In future Lean Edge posts I’ll discuss this topic in more detail as needed depending upon the question.

Until the mid 1980′s virtually all of Toyota’s heavy capital investment existed in Japan around Toyota City. A few knock down type facilities or lower volume plants existed around the world but Toyota was reluctant to spend vast amounts of capital investment overseas due to its conservative nature and production expertise in Japan. (Note: Here is a link to all Toyota production facilities worldwide – as you can see some such as Brazil, South America, and Australia have quite old roots.) This production approach in reality had worked for decades in terms of mainly producing domestically in Japan and then shipping product for export overseas. Eventually however political pressures and the rising cost of the yen (it dropped from 360 to under 100 yen to the dollar) forced Toyota to start investing more directly and producing product overseas. Full sized plants in North America, Canada, the United Kingdom, France, and many other sites were launched with great success. It took great amounts of coordination and effort but Toyota proved that it was able to open full scale engine, transmission, chassis, and vehicle plants overseas that met its internal standards for safety, quality, cost, and productivity. This strategy was such a success in hindsight that the opening of Central Motor’s Ohira plant in Japan to produce the Yaris produced a stir in the media as the first Toyota affiliated new vehicle plant in Japan in about eighteen years. Think globally and produce locally indeed became a permanent fixture in the strategic investment philosophy of the company.

Toyota is also very structured in its approach to capital investment when it comes to new facilities in Japan or overseas. I see many companies that constantly evaluate what parts to make in-house and what to outsource with very large degrees of freedom. Toyota of course does this type of evaluation as well but with fewer degrees of freedom in my opinion. For example it is normal that in the case of a full sized engine plant Toyota will spend capital and make its own engines, transmissions, and chassis shops. In those plants there are core components that Toyota will make such as the cylinder block, cylinder head, cam shaft, crank shaft, connecting rods, and pistons. The remaining parts will be purchases from the outside. In other words Toyota makes the difficult, expensive, high value added items and leaves the more commodity type of items to the supply base. Of course some purchased parts are very technical and difficult but if you look closely then affiliated companies like Denso, Aishin, or other family companies are involved in production of those items. Toyota does not leave much to chance.

Toyota pursues this investment path since they have a high degree of confidence that they are more efficient than anyone else in producing these difficult and high value added internal components. Also these items are of course tightly linked to product development in terms of performance attributes (e.g. cylinder stroke and bore and horsepower) as well as product quality. So as a matter of basic principle these types of items are kept in-house which drives capital expenditure on equipment decisions at least. Exceptions exist but usually there are practical considerations to the equation. For example when I worked at Kamigo plant in Japan we had our own casting, machining, and engine assembly shops on site. In Georgetown Kentucky it was not feasible to build a casting plant contiguous to the engine plant for a host of cost and environmental reasons. So those raw items were either purchased from Toyota affiliated companies in the U.S. or sent overseas from Japan for several years. Later on Toyota built an aluminum casting plant outside of St. Louis, Missouri. Again exceptions exist to everything I just outlined but the basic pattern is repeated over and over.

Toyota’s capital investment philosophy is consistent not only in engine, transmission, or chassis plants but also on the vehicle side of the equation. Stamping, body weld, paint, plastics, and final assembly are the main shops in the vehicle plants. Toyota works over and over with the same equipment vendors to refine its manufacturing processes and integrate the processes with the production system. Equipment is not just purchased at the lowest cost and then fit into the plant. Suppliers have worked with Toyota for decades in most cases on tooling and equipment. In general the more technical and difficult the shop the few suppliers there are for the process. For example in precision cam shaft or crankshaft grinding we only had one supplier of equipment for this process. In hindsight some shops in Toyota such as assembly departments have done a reasonably good job of finding equipment vendors overseas who can meet Toyota’s standards. In other cases however like machine tools for engine or transmission plants Toyota still struggles and basically brings over virtually all the equipment and tooling from Japan.

Because of this specificity regarding the production process encyclopedias of technical standards known as Toyota Manufacturing Standards (or TMS for short) exist and are the primary documents that specify Toyota’s overall company standards for manufacturing. This has nothing to do with standardized work on the shop floor. In addition to the TMS documents there are more specific production technology standards as well. For example in my world we relied up several thick in-house manuals regarding machine tool specific standards (called MTS for short) when purchasing metal removing equipment for our engine plants. On top of that layer there was a final layer of even more specific “project standards” that spelled out what would be done for a given project. Normally TMS covered half of the content, MTS another quarter or so of the content and the final bit was wrapped up in specific binders full of project standards. For example the engine plant in Kentucky has its own specific set of Toyota Motor Manufacturing of Kentucky (TMMK) project standards for this latter portion. Virtually every overseas plant does have it own detail project standards especially when it comes to electrical and safety related requirements which are different country to country or even state to state.

While Toyota’s philosophy for capital equipment was highly standardized I don’t want to give the impression that it was 100% static or rigid. In fact it was quite practical and adjusted on a case by case basis in accordance with several parameters and local needs. I will outline several items in no particular order that struck me in hindsight. Toyota always considered the difficulty of the capital equipment and the receiving sites proven ability to manage such equipment. Plants might start up with just assembly lines in year one and then graduate to more complex processes such as machining, stamping, or welding in year two. After many years of honing their skill in opening plants Toyota does this plant opening process in a far more bold fashion today. However when opening an overseas engine plant back twenty years ago might take three years to start up considering the full transfer of equipment for assembly, and then major component manufacturing such as the aforementioned pistons, connecting rods, cam shafts, crank shafts, cylinder heads, and cylinder blocks.

In general like most companies lower cost regions of the world received less automation and simpler equipment from Toyota. Higher wage countries like Japan and the United States received the latest automation and higher levels of technology. For simplicity at least in the old days lines or processes were graded as either A, B, C, or D level in terms of automation complexity. In general an A level line or process meant fully automated especially in terms of loading and unloading of processes. It would of course entail CNC controls in machining and PLC controllers and other precision measurement devices. B lines were one step less complex and would have auto loading features but usually required manual unloading of parts. The machines would have PLC controls along with some CNC or hydraulic controls as well. C type lines were less automated and had manual load stations and simple auto eject features to unload the machine. PLC’s exist at this level today but originally these lines were pretty basic in terms of production technology and relied a lot more on hydraulic and pneumatic controls for actuators. The final D level of lines was fully manual in terms of loading and unloading of parts out of fixtures. PLC’s no doubt even exist on these types of lines today but they originally had very limited levels of production technology and were mainly hard wired. Very few of these lines exist any more in Toyota except in isolated instances around the world. You’ll sometimes hear that Toyota aspires to build one type of process or line but that is simply an uninformed viewpoint. Toyota builds a manufacturing line based up standards that fit the cost and capability structure of the facility in question. What works for one country does not always work for another country. Also Toyota has to evaluate the product mix being made in the facility, the volume, future design requirements, and the technical ability to maintain the equipment especially outside of Japan. Each plant and project is a little different especially when you get down to the project level details.

Finally I will comment that Toyota practices Kaizen in capital equipment areas just as it does in production and in product development for that matter. I know of several examples where machines that used to cost tens of millions of dollars not go for one half to one third of that amount today. Unfortunately a lot of the lean world has fallen into the trap that “flow” is all that is needed to describe Toyota’s core principles. Flow is part of the Just-in-Time Pillar of the production system and perhaps the most amazing visual part of the system along with takt time, pull systems, and leveling. However this “flow” is done across capital equipment that has been worked on for decades and operates at very high levels of availability as well as very high levels of process capability. Most organizations are seduced by the topic of flow but have gaping holes in their capital equipment base in terms of philosophy, standards, availability, and process capability. Toyota gets the details of this latter content working well and the result you see on the surface (or tip of the iceberg) is the fancy flow and JIT stuff. Equipment is studied at each purchase point in terms of cost, cycle time performance, safety, quality, reliability and productivity for improvement. Suppliers are asked to jointly work with Toyota and make machines better, cheaper, faster, and safer each generation. New technology creeps in that adds cost and complexity just as other parts are simplified. Then the whole cycle is of course repeated again and again at the appropriate interval.

I could continue to elaborate and provide more specificity in detail but I hope this paints a generic picture of Toyota’s practices on capital investment. Every piece of capital equipment is scrutinized for improvement potential. That is true at the time of purchase as well as during the time that Toyota owns the equipment. There are exceptions to everything I outlined above but they are generally just exceptions and not the rule. And also if you scratch deep enough and ask why there is usually a very valid reason why the deviation from standard was made in the first place. If you want to emulate Toyota’s overall success then I advise organizations to think hard in all the dimensions of product, process, and people. Just implementing some set of “rules” or “tools” in production or attempting improvement “events” won’t get you very far but I agree might work as a good starting point. In the long run to capture success you’ll have to practice systems of improvement in terms of product development, process technology, and people development as well. The common struggle I see is for companies to blindly believe that if they just draw a complete enough value stream map, with a good pull system, and a standardized work chart then they will become “lean”. I am not a believer in that equation. Toyota is a master at taking cost out of the product and process while maintaining quality, developing people, and meeting customer expectations on time. Increasingly Toyota also does this with shorter lead-times for both product development and process development which can of course strain the system at times. Regardless in my opinion the lean movement needs to evolve a step further from where it is today to get past the rules and tools or event based approaches for the shop floor workshops. The movement will need to develop further in order to improve product development or capital investment as it pertains to production equipment. It is not a simple task but one that will pay off tremendously if mastered to the level that Toyota has accomplished.