Executive Summary
The effectiveness of the production systems of the Toyota Company is founded on the fact that the company merges both practice and theory in a coherent manner. Investigations of the operations management for Toyota reveal terms such as kaizen, lean manufacturing, just-in-time manufacturing, and Kanban approaches. These approaches have seen the company cut down its production costs tremendously. Consequently, the company has been increasing its output capacity to the extent of powering most of the world’s major automakers.
The company adopted the just-in-time (JIT) approach as a manufacturing philosophy in the 1970s. The focus of the philosophy is to eliminate waste while at the same time reducing inventory levels. The central mechanism for the just-in-time operation is based on Kanban, a Japanese term that means a card. The JIT embraces quality control, waste minimization, reduction of production complexities, and transparency.
It also ensures that production is done in small lots or batches. Increasing the competitive advantage of the Toyota Company through the JIT rests on the need to satisfy its customers. This goal is realized by fulfilling customers’ demands in the most prompt and efficient manner via evidence-based strategies that link marketplace demand and production processes. Ideally, the JIT plan is dependent on finely tuned processes in a manner that an assembly sequence uses materials, which are only required in terms of their quality and quantity.
Through the employment of various cost reduction techniques, the Toyota Company has managed to secure an immense market share for its brand coupled with other associated brands. However, the organization still faces competition from US-based brands such as Ford and General Motors, among other competitors. Consequently, it is appropriate for Toyota to consider appropriate mechanisms for increasing its competitive advantage in some key areas that influence its business in both domestic and international operations. This paper recommends such key areas.
The rest of the paper is divided into six major sections. The first section presents the overall background of the organization in terms of its domestic and international operations. The goal is to ensure that the organization’s officers have a thorough understanding of the current operations from a transnational perspective. The second section recommends cost reduction strategies using the concepts of economies of scale.
Although economies of scale advocate production in high volumes to minimize the manufacturing cost of every unit of Toyota vehicle, such a policy should be considered with due causation. The goal is to eliminate any possibility of creating hidden wastes that are unjustified by Toyota’s production approaches that involve lean manufacturing, JIT production, and the need for continuous reduction of the number of production platforms.
The third section recommends that Japan needs to look for mechanisms for shielding its manufacturing firms from effects of currency fluctuation in international operations by considering the possibility of pegging the Yen on the US dollar and developing derivatives such as interest swaps that favor the international operations of its domestically constituted firms with international business, including Toyota.
The fourth section recommends Toyota to harmonize its wages and labor policies in all operational centers to mitigate conflicts that arise from legal confrontations between the organization and employees. The strategy has the effect of the poor depiction of the company’s brand image. The fifth section shows how globalization has affected Toyota’s international business operations, while the sixth section discusses the possibilities of enhancing the company’s comparative advantage and its gains from trade.
Introduction
Toyota Motor Corporation, a multinational organization, manufactures trucks, robots, and cars. Its main offices are in Japan. The company takes the second position in terms of production capacity while it is the largest producer in the Asian market. In its domestic market, the company competes with Honda and Nissan. It sells its vehicles under the Lexus Toyota and Scion brand names. According to Toyota (2015), the company owns a major stake in Hino and Daihatsu.
It controls 8.7% stake in Fuji Heavy Industries (Toyota, 2015). In terms of the international market, the company competes with automobile mass-producers such as Ford and General Motors. It has a significant market share in the United States, Europe, Africa, and Australia. Indeed, it is the leading brand in Australia. In 2015, it produced 10.084 million units across the globe (Toyota, 2015).
The company owns manufacturing plants and distribution centers in its major international market hubs, including France, the UK, Argentina, Venezuela, Malaysia, India, and South Africa, among other regions. In these regions, the company is keen on ensuring consistency of product quality and client-product experience. In fact, its success in both domestic and international markets stems from its consistent emphasis on product excellence (Toyota, 2013).
The company operates on the philosophy that nothing delivers utility in the best way possible to the extent that it cannot be improved. Hence, the success of the company in the Japanese and international domain stems from its emphasis on continuous improvement.
One of the most important findings is that to enhance the success of an organization, an investment in a credible business and corporate strategy is crucial (Johnson, Scholes, & Whittington, 2005; Barney, 2009). Toyota’s business strategy revolves around five main operational facets. The facets include the development of a production system that is unique to it, investment in re-engineering, high emphasis on quality and superior technology, the production of hybrid vehicles, high concern on employee welfare, and the building of a motivated workforce through the adoption of various employee satisfaction strategies (Slack & Lewis, 2008).
Although the above facets are incredible in ensuring long-term success, Toyota recognizes that a production system can affect the overall direct cost of production in a manner that the final products may be offered to the market at exorbitant prices. This situation influences the company’s sales volume. Hence, its profitability is negatively impaired. This reason reveals why Toyota has invested in technologically aware production systems with the aim of cutting its cost of production in domestic and international operations. These systems include lean manufacturing, JIT, Kaizen, Jokoda, Andan, Kanban, and the pull system.
Despite the fact that the strategies have been pivotal in ensuring the unrelenting success of the company in its domestic and international markets, effectiveness can be achieved by considering cost reduction through economies of scale, analysis of the impact of currency fluctuations on international operations, and the resolution of domestic and international issues, for instance, labor and wages. To maintain the global reach of its products, Toyota also needs to consider how globalization has affected its international business operations in a bid to evaluate its comparative advantage and any gains from trade. The purpose of this paper is to provide appropriate recommendations in these five key areas with the view of enhancing the company’s success in both domestic and international markets.
Toyota – Economies of Scale
Many enterprises struggle to acquire the economies of scale or cost savings that are in line with their size. The concept of economies of scale maintains that big firms can produce many units of products at much lower costs compared to those that produce few units. The cost for each unit decreases with an increase in production volumes (Shalev & Asbjornsen, 2010). However, in the manufacturing industry, this assertion is traded with the concerns of hidden costs (due to wastes) that are associated with attempts to achieve the economies scale. Hence, Toyota should continue to explore its lean manufacturing strategies while at the same time attempting to expand its global reach in the course of operating flexible operation systems.
The goal of Toyota is to satisfy customers’ needs and preferences while utilizing minimal resources. However, where economies of scale are achieved through mass production, the situation introduces the inflexibility of production platforms. This outcome is not recommended for Toyota. Through Toyota’s practical experiences, a reduction of lead times via maintaining the flexibility of production platforms leads to high quality, which increases the degree of customers’ responsiveness, and higher productivity.
An attempt to increase the economies of scale by investing in bigger equipment with the aim of reducing costs through volume purchases leads to inventory accumulation (Toyota, 2012). This situation poses the demerit of introducing hidden costs, which lower a company’s profitability. Hence, Toyota should achieve the economies of scale through increased focus on reducing platforms that are necessary for producing each part of its vehicles. The company should also continue to invest in ways that guarantee the interchangeability of spare parts for its different models.
Toyota Global Operations and Currency Fluctuations
The Toyota Company faces the challenge of the exposure of Japanese Yen to fluctuations while exchanging it with the US dollar, Euro, Canadian dollar, British pound, and/or Australian dollar. Wikinvest (2009) reveals the significance of this challenge for the company since most of its international business operations are based in the US, Australia, Europe, the UK, and other nations that buy Toyota vehicles in currencies, which are used in these countries. The challenge is even amplified by the financial reporting of Toyota Company’s global operation in terms of the Japanese Yen. Therefore, translation, coupled with transaction risks remain major impediments in the company’s international market operations.
In the effort to overcome the challenges of exchange rate variations for the Japanese Yen, Japan should consider developing policies for stabilizing its currency. Such a challenge impairs the results of Toyota Company’s global operations. Indeed, Wikinvest (2009) asserts that in case “Japanese yen further rapidly appreciates against other currencies, including the US dollar, Toyota’s financial condition and results of operations may be adversely affected” (para.1).
This issue may be resolved through strategies such as the development of more effective derivative instruments, for instance, interest rate swaps. It is also necessary to increase production localization to help in maintaining a good reputation, which is necessary for the continued positive reception of its brand image. In the effort to ensure that the Japanese manufacturing industry continues to blossom, it is also important for Japan to consider pegging its Yen against the US dollar. Even today, the American currency remains a major reserve legal tender for many nations. If Japan needs to peg its currency against the US dollar, it needs to have a foreign-exchange reserve.
Labor and Wages Issues
The Toyota Company needs to harmonize its policies for managing issues that relate to labor and wage conflicts to reduce legal suits by labor unions. This recommendation stems from the company’s experiences in labor conflicts. For example, in 2006, the US highest court ruled in favor of Toyota’s employees in Kentucky operations that the company needed to compensate employees for the time utilized when changing protective gear and/or donning, including moving from one work station to another (Mattera, 2016).
The company incurred a cost of $4.5 million in settlement of the case. In 2009, it paid an excess of $862,000 when the department of labor for the United States found out that it had not included overtime pays when computing the annual bonuses (Mattera, 2016). Such a case compromised the reputation of the company in terms of its compliance with international regulations on labor and wages.
Hence, there is a need for Toyota’s management to conduct compliance surveillance to the acceptable domestic and international labor laws and wages in all its operations. This recommendation is necessary considering that Toyota became a center of controversy in the 2006 international campaign that sought to challenge the company’s approach to labor and wage policies in the Philippines. Indeed, later, in 2008, the committee for national labor reported that Toyota was pursuing policies that could lead to overworking people in its foreign and domestic operations (Mattera, 2016).
In 2012, a labor militancy in South Africa targeted Toyota, a situation that attracted a 3-day strike (Mattera, 2016). To this extent, the company should harmonize its operations while at the same time complying with the labor and wage rights of its employees.
Impact of Globalization on Toyota Global Operations
Many large companies, including Toyota, have adopted the idea of globalization with the vision of increasing their competitive advantage. The idea refers to the elimination of any state-enforced restriction on all exchanges across borders because of the increasingly integrated and complex global production system. Globalization also refers to the phasing out of the nation-state, increasing people’s international relationships, homogenization of culture, the reduction of barriers between nations, and the universal distribution of the production of goods. Although Toyota has been influenced by globalization, it is, in itself, an agent of globalization.
This situation can be observed from its business operational philosophies or business operation frameworks such as the JIT, lean manufacturing, and Kaizen, which have now been benchmarked by other companies across the globe.
Toyota’s business operations have been affected by globalization to the extent that with technological advancements, it does not have territorial borders in its effort to reach overseas markets. For example, through the B-2-C plan, online marketing, and other technology-enabled strategies for ensuring real-time communications with customers have now been integrated into the company’s business operations. Therefore, for Toyota to have real global reach and appeal, it should continue to integrate the emerging innovative technologies that are associated with globalization, especially those that are vital in improving the company’s competitive advantage in the global platforms.
For instance, the company’s workforce should research on the prevailing client demands and financial potential. This strategy will ensure that the company produces items that do not take long before being bought by customers. In fact, globalization will continue to shape the manner in which organizations conduct their global operations. Corporations that will respond positively to such influences are likely to gain long-term competitive advantage.
Comparative Advantage and the Gains from Trade
Price is an important factor that enhances the competitive advantage of an organization. It is crucial to note that offering goods and services at a low price implies the capacity to produce commodities at a discounted cost. An organization that has the capacity to place goods in the global market at low prices has a comparative advantage in terms of the production of the goods in comparison with other businesses (Deardorff, 2005).
Gaining optimally from trade-in Toyota business operations requires the organization to consider cost differentials in different nations. To gain a comparative advantage, this strategy should be accompanied by the localization of production of most labor-intensive automotive parts in manufacturing zones that are located in nations that enjoy lower labor costs. Supposing hypothetically that the Japanese Toyota plant can manufacture engine block at the rate of 200 units per hour and a five-speed gearbox at 125 units per hour. Assuming also that China has the power to produce similar engine blocks at the rate of 150 units per hour and a similar gearbox at the rate of 300 units per hour, Table 1 below shows the opportunity costs in these two nations when they decide to produce Toyota car parts that they are well positioned to generate efficiently. From the table, it is evident that if the cost of importation is lower when compared to the efficiency of low production, the two production facilities can gain from trading with one another.
Table 1: Opportunity Cost and the Concept of Comparative Advantage for different Toyota Production Facilities.
Conclusion
The paper has confirmed that the success of Toyota’s domestic and international operations relates to the fact that the company is able to link its theoretical approaches to practice to increase its productivity. For instance, although it was developed in the 1970s, many automobile industry analysts saw the concept of JIT production technique as a mere theoretical approach to enhancing the operations of Toyota. However, the concept turned out to be an incredible mechanism for enhancing the company’s competitive advantage. The JIT production helps to minimize inventory levels. It also enhances customer satisfaction once their (clients) demands are met in time and at the right quality.
Toyota needs to consider integrating the concept of economies of scale in its production approaches with the objective of reducing its operations expenses. However, it is equally important to ensure that such an approach does not re-establish wastes in the production platforms that have been successfully eliminated through JIT and lean manufacturing approaches in the past.
This case leaves the issue of expanding Toyota’s output capacity of its production platforms for each model as the only possibility for taking advantage of the economies of scale. Such expansion should be accomplished simultaneously with the extension of other supporting processes and resources to ensure that materials in the processing course do not accumulate. It should also guarantee full capacity utilization of all process and sub-processes.
As earlier mentioned, the Toyota Company is a global maker and supplier of trucks, cars, and their spare parts. In these massive international business operations, fluctuation of Japanese currency is a major detriment to reporting consistent results. Therefore, there is a need to consider policies such as interest swaps, localization of production, and the pegging of Japanese Yen on the Dollar. However, care should be taken to ensure that such policies do not disadvantage Japanese manufacturing firms in the international business. This recommendation is made in full awareness that the policies involved can only be developed by the government of Japan since Toyota company does not have the mandate to develop or even implement them.
The Toyota Company has heavily invested in smart production systems that involve the use of robots in the production processes. Nevertheless, such systems have not eliminated the necessity for human labor. Consequently, amicable handling of wages and labor conflicts with employees remains a key pillar in ensuring positive brand image for the company in its international business operations. A recommended standard strategy for realizing this goal is the harmonization of wages and labor policies in both domestic and international operations.
Globalization has increased the reach of Toyota’s business operations. One of its implications on the company’s business operation is the duplication of its production philosophies by other manufacturing organizations in the effort to cut down their operational costs. Such duplication increases the capability of competitors to offer their products at lower prices, hence increasing the degree of rivalry in the automobile markets.
However, through comparative advantage, the Toyota Company has the opportunity for evaluating cost differentials associated with manufacturing operations in different locations of its production facilities. If the company can produce one part at a lower cost in one facility and given that shipment expenses do not erode all the saved costs, the company should consider localizing the production of different automobile parts in different facilities depending on their efficiency to produce each part.
Reference List
Barney, J. (2009). Firm resources and sustained competitive advantage. Journal of Management, 17(6), 99–120.
Deardorff, A. (2005). How Robust is Comparative Advantage. Review of International Economics, 13(5), 1004–1016.
Johnson, G., Scholes, K., & Whittington, R. (2005). Exploring corporate strategy. Harlow, England: Prentice Hall.
Mattera, P. (2016). Toyota: Corporate Rap Sheet. Web.
Shalev, M., & Asbjornsen, S. (2010). Electronic Reverse Auctions and the Public Sector–Factors of Success. Journal of Public Procurement, 10(3), 428–452.
Slack, N., & Lewis, M. (2008). Operations strategy. Harlow, England: Pearson Education.
Toyota. (2012). Toyota material handling. Web.
Toyota. (2013). Investors: 2012 financial results. Web.
Toyota. (2015). Company background. Web.
Wikinvest. (2009). Toyota Operations are subject to Currency and Interest Rate Fluctuations. Web.