Toyota’s Car Recall: Risk Management

Introduction

Any activity is accompanied by risks since there is always the possibility of financial losses and strategic failures. It is impossible to prevent or anticipate all the risks; still, the companies can study the unfavorable factors that can negatively affect the success of the enterprise to reveal such factors and learn to manage them. As stated by Kiseleva, I. A. et al. (2018), “risk is a subjectively objective economic category of a probabilistic nature and describes the uncertainty of the final result of the activity” (p. 3). Risk management is a critical system of risk management and financial relations arising in the process of product production and distribution, which includes strategy and management tactics.

In 2010, Toyota Motor Corporation announced a worldwide recall of more than six million vehicles of 27 models, including the RAV4, Land Cruiser Prado, Highlander, and Urban Cruiser crossovers, Corolla, Matrix, Hilux pickups, and Yaris mini-trucks, of which 825,000 cars were recalled in Europe (Chikudate, 2019). The evidence shows that this failure is critical since the company continued to find errors and recall its products, focusing on the cars released from 2004 to 2013. The issue is about five identified defects in 6.76 million cars (Risk management 2019). As some models fall under several review campaigns at once, it becomes evident that the problem should be analyzed in terms of risk management and incident literature.

Identifying the Failure and Discussing Alternatives

Toyota is one of the most prominent and demanding companies in the global automotive market. The incident that occurred with its vehicles demonstrates that a company is vulnerable to a range of risks, such as sales volume decrease, decreased trust of consumers, intensified competition, et cetera. In the chosen case, one of the defects was found in the starter, which caused two fires. Other defects, according to Chikudate (2019), were problems with mounting guide seats (2.32 million cars) and steering column, with cushioning cables (3.5 million cars) and wipers. Toyota emphasized that the identified shortcomings did not cause any accidents or injuries to customers (Risk management 2019). Nevertheless, the existence of the mentioned problems created threats to customers’ safety, and the recall of vehicles can be justified in terms of business ethics and corporate responsibility.

As a result of the scandals and debates in the media, Toyota has promised to change its priorities to provide greater security. It was decided to provide more independence to regional units in terms of conducting extensive review campaigns and bug fixes. Akio Toyoda, the president and CEO of the corporation, chaired his company’s international group on automotive quality (Risk management 2019). These measures were expected to protect the business from facing similar incidents in the future. However, to remain competitive, the company needs to launch new products since the product development is highly capitalized in the automotive industry. Therefore, Toyota should have been standardizing the key products, thus designing a platform for further improvements (Governance 2020). In other words, it was necessary to create and adopt a philosophy, in which the development process might be minimally prone to errors and risks.

Considering that the identified company employs elaborate risk management strategies and still encounters incidents, it seems to be important to understand its basic points. One of the variants of the dynamic management model can be considered as the principle of a Toyota Production System (TPS) that was developed and implemented at the Toyota plants (Kehr and Proctor, 2017). Unlike the American model of the conveyor, where production was equated to the state of emergency, at the Toyota plants, the suspension of the conveyor due to the identification of non-marriage is not only encouraged, but put as corporate philosophy (Kehr and Proctor, 2017). In other words, at the very beginning level of product manufacturing, special attention is given to error reporting.

The essence of this system is that the effective functioning of all the divisions of the company is not in the prevention of operational errors, but in the analysis of their occurrence and the development of measures to prevent their manifestations in the future. On the one hand, such an approach can be regarded as appropriate and evidence-based, which can be considered a competitive advantage of the company compared to its competitors (Mohammed and Knapkova, 2016). On the other hand, little attention is paid to risk prevention issues. In many cases, it is better to anticipate risks and initiate a campaign on their prevention.

The incident with car recalling might be less damaging to the business, if the company had a special committee for risk reviewing and risk managers who could be responsible for monitoring potential failures (Callahan and Soileau, 2017; Kehr and Proctor, 2017). A lack of a comprehensive approach to risk management could also be overcome using timely checks at regional levels to ensure that business activities were safe and secure for customers.

The analysis of the company’s performance in the automotive field reveals successful projects that can be used as examples of effective incident management. For example, with the introduction of the Toyota Prius project, the first hybrid car for a wide audience was created. The risks of this product were estimated at $ 2 billion, and the chances of success – by 5%, but it was put into practice by several plants (Chikudate, 2019).

First, a system in the form of virtual space and an electronic list was created to detect and solve problems on the spot, in which employees reported all the problems they faced. The positive results show that this allowed the team to quickly review and resolve them. When the model was ready for production, the engineers were sent to the factories to monitor the problems (Maslen and Hayes, 2016). Such an approach allows for revealing the so-called black swans using timely and accurate reporting.

Second, Toyota has applied the practice of creating several prototypes that differ in design and options. As part of the Prius project, 20 engine variants were tested, 8 of which were selected, and, finally, one remained the most suitable. The comparison and selection among the different options, which many companies would seem to be superfluous, allowed to increase the probability of project success by 20% (Chikudate, 2019). To reduce business-related risks, it is critical to make sure that all the participants are realistically evaluating the chances of success. As rationally mentioned by Choi and Lee (2018), “crisis plans should be quickly modified when the need to do so arises. Above all, it is necessary to predict the worst possible scenarios and prepare for them accordingly” (p. 4). This will help in avoiding excessive waste and utilizing on-site detection and troubleshooting techniques to create multiple prototypes.

The analysis of the reasons that led to the identified failure shows that it was great reliance on lean management instead of a balanced consideration of potential flaws. Speaking of the alternatives to Toyota’s risk management that led to the recall, it is possible to note a risk mitigation strategy is the most common, and it can be applied to any risk as it implies a decrease in the likelihood or impact of risk on the project.

According to Yoon et al. (2018), if there is any way to reduce the likelihood that the risk can be addressed, it should be done. It seems that if the company brings the collection of requirements to a separate project or stage of the project, professional business analysts should be assigned to monitor this work. For example, persons who will be responsible for approving the requirements should be clarified in advance, which could drastically reduce the probability that some important requirements could be skipped (Shad et al., 2019; Sreedevi and Saranga, 2017). Nevertheless, it is essential to understand that these measures will only reduce the probability of risk, yet not eliminate it.

Considering that Toyota produced a range of car models, and many of them were recalled, the probability of risk associated with changes in requirements could be decreased by developing and implementing a special procedure for working with changes (Carvalho and Ishikawa, 2016). It should clarify and help in understanding how change requests are handled. The procedure could make people who would like to make changes to the requirements think about how difficult it will be. In addition, the potential breakage in the supply chain should be noted as one of the reasons that can damage the process of production (Carvalho and Ishikawa, 2016; Yoon et al., 2018). As for the process of the product distribution and further exploitation by customers,

In addition, attention could be paid to considering the technology of strategic planning in the simplest form. Firstly, the organization’s strategy could be determined for a specific period; secondly, the strategy needed to be specified (Sadgrove, 2016). When it is clear where to move, a company needs to determine the time and means that will be required to go this way and achieve clear, measurable goals year by year. Thus, it can be recommended to formulate the goals that need to be achieved for the strategy has be implemented. Achieving a goal involves some actions: for example, it may be needed to modify the product, research a new market, open a branch, et cetera – all in a single direction of the implementation of the strategy (Oner and Oner, 2018). As a result, we get a set of actions that must be completed to consistently achieve the goals and implement the strategy.

If more attention was paid to the given incident by stakeholders, they might prevent by implementing the necessary changes promptly, before selling cars. At the leadership and management level, the failure was associated with a lack of proper checks and probably insufficient coordination of employees. At an employee level, low attention to detail and the number of checks could be noted among the reasons that deteriorated the situation. In combination, a holistic approach to implementing risk management is likely to improve the corporate image of the company (Gatzert, 2015). To ensure that the future models would be safe, it is necessary to initiate staff training that should explain the importance of their contribution and its role to the whole corporation.

Information support for the functioning of risk management should consist of various types of relevant data, such as statistical, financial, and so on. This information should lead to the awareness of the likelihood of a particular event, the availability and magnitude of demand for goods, financial stability and solvency of its customers, partners, competitors, and tariffs, including for the services of insurers, about insurance conditions, dividends and interest (Sadgrove, 2016). Any decision should be based on trustworthy information analysis and related conclusions. The quality of the information is significant: the vaguer the information, the more uncertain the decision outcomes will be. The quality of information should be evaluated upon receipt, and not upon transmission; since it becomes outdated rapidly, it should be used promptly.

Conclusion

To conclude, Toyota’s recall of cars in the period between 2010 and 2019 requires the reconsideration of its risk management approaches. The analysis of this incident shows that risk management was not elaborated at that period, which led to significant losses. However, the company’s TPS system was regarded as a valuable way to ensure that the process of production is safe, which distinguishes it from competitors. It was suggested that this incident could be prevented if more attention was given to risk mitigation strategies, staff education, and assigning risk managers in regions so that they can provide appropriate and timely error reporting.

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