Changing the Guard at Toyota — Cost Cutting Back to Profitability

Earlier today, Toyota's departing President Katsuaki Watanabe told a group of shareholders at the annual meeting that the company "would revive its earnings performance by cutting production costs," according to a Wall Street Journal reporter covering the news. It's no surprise Toyota will focus more on the bottom line given that last month it reported its "first net loss in 59 years for the fiscal year ended March 2009". The goals for this program are large, representing a targeted Y800 billion (US $8.3 billion) in cost reduction in the current fiscal year. Given that it's not been in Toyota's management blood to resort to layoffs in the past, I suspect much of the cost cutting will come from creative production, supplier management and development related initiatives.

Last week, I spent some time with a former North American CPO from a major Japanese OEM and he reiterated to me the Japanese cost reduction philosophy of not only working closely with suppliers to jointly take cost out of the supply chain in creative ways, but knowing what the cost structure of purchased items should be. In other words, Toyota and Honda category procurement managers pride themselves on knowing exactly what price they should pay for a given part or assembly (versus having to rely on competitive bids from suppliers to determine the market price). This is in marked contrast to North American OEMs who, in the past, have stereotypically taken a gavel to much of their spend, forcing suppliers to aggressively compete in a price vacuum against each other.

So given this knowledge of what cost should be, how will Toyota reduce costs further? I suspect they're embarking on a number of procurement, production and supplier development driven initiatives. First, I have no doubt that they are parachuting supplier development teams into their suppliers, looking for ways to aggressively and quickly take out further costs in their supply base through lean, Six Sigma and other related development activities (and probably planning to capture additional savings for themselves than usual in these efforts, so rather than a 50/50 or 60/40 savings split, I suspect they're going after a 70/30 or 80/20 split). Second, I suspect they are beginning to shift spend -- in part because of rising supply risk in the supply chain -- amongst their supply partners, asking for savings in return for greater consolidation. And third, you can be sure that they're looking to optimize production and model scheduling -- something the Japanese excel at -- by quickly shifting lines to produce cars that are selling (and tying targeted promotions to inventory levels). For example, the Camry recently had strong financing-based incentives, while the Avalon did not.

Jason Busch

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