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12/21/2008
Partnering – Part 4 Toyota: Partnering Exemplified

In part 1 in this series, John Seddon introduced a model for partnering, but stressed that ATTITUDE was the key. In part 2 he used a case study from the IT services sector to explore aspects of partnering in practice and in part three, he assessed the state of partnering in the food sector. In this, the last of the series, he charts the development of partnering in the Toyota Production System, and explores how attitude developed alongside method.

Making an automobile involves engineering and fabricating more than 10,000 parts, assembling these into something of the order of 100 components and then assembling these into a car. It is a tall order. Ford and Toyota went about solving this problem in different ways. In order to compare the two I shall first chart how Henry Ford tackled the problem. This should not be read as a commentary on how Ford is working with these issues today, although regular readers will know of my antipathy to standards, and Ford is today committing all of it’s suppliers to QS 9000 as a condition of doing business. Coercion does not foster learning.

Early in the twentieth century, Henry Ford pursued vertical integration – doing everything in-house – partly because he had perfected mass production techniques before his suppliers had and could achieve substantial cost savings by doing everything himself. It is also said that he did this for another reason – he profoundly distrusted everyone but himself. Perhaps this follows being ahead. However, his most important reason for bringing everything in-house was the fact that he needed parts with tighter specifications and shorter lead times. Relying on arms-length purchases in the open market would create difficulties. By doing everything in-house, Ford was able to gain greater predictability in his operations – a prerequisite to improving performance and something that pre-occupied Taiichi Ohno, the creator of the Toyota Production System, too.

Management writers observe that Henry Ford’s strategy was effectively controlling the market in as much as it controlled business-to-business relationships. It was a challenge, they observed, to the economist Adam Smith’s ‘invisible hand’ theory – if everyone pursues his or her own self-interest, the free market would of itself produce the best outcome for society as a whole. Vertical integration disturbed this idea.

Alfred Chandler, a professor at the Harvard Business School, coined the term ‘visible hand’, defending the large organizations which, like Ford, chose to vertically integrate. ‘Visible hand’ simply meant obtaining supplies from internal operating divisions, co-coordinated by management. What Taiichi Ohno observed was to management this meant buying supplies from people with whom there was no genuine relationship – no focus on ‘how the work works’ – and thus transactions would be based on price, delivery and quality, with price being the main concern.

Managers of such relationships might have, as they do today, used the word ‘partnership’ when describing the relationship with suppliers; it was anything but. Price ruled; the focus was short-term and bureaucratic. Ford’s vertical integration caused massive problems of bureaucracy, with no obvious solutions. The same is occurring today. The bureaucracy of purchasing organizations is undermining their ability to create value for their organization, as we saw in the last two parts of this series. These people, like their counterparts in quality standards do what they do because that is their job – the system dictates their behavior.

Taiichi Ohno, when creating the Toyota Production System, took a different point of view. The ‘make or buy’ debate going on in American manufacturers struck Ohno as irrelevant. The real question, he thought, was how the suppliers and assemblers could work together; if they could work in a smooth, co-operative way costs would reduce and quality would improve. His approach was that the parties should not ‘trade on cost but should instead work together on ‘the causes of cost’. He saw that in the American car plants, central functions designed the parts and sent these as specifications to the suppliers. The lowest bidder, whether in-house or not, got the job. The American carmakers often switched business between suppliers at short notice. As we have seen in this series, the same is happening in many market sectors today.

Ohno recognized that working to a specification gave little opportunity for the supplier to be involved in improving the product design, based on their own knowledge. They were, in effect, told to ‘keep their heads down and deliver on time, to specification and to price’. The previous parts of this series gave examples where such behaviors were stifling the ability of the parties to reduce each others costs. The consequence is everybody loses.

In Toyota, suppliers were given information about the rest of the components. In Ford this had been treated as proprietary, suppliers had no way of working on whether they could make useful contributions above what they were being asked to supply.

Taiichi Ohno realized that organizing suppliers in vertical chains and playing them off against each other in search of lowest cost blocked the flow of information horizontally between suppliers, particularly on advances in techniques and materials. While the assembler might be guaranteed the lowest costs in the short term, there was no method for reducing the total costs of production in the long term.

Toyota organized suppliers into functional tiers. First tier suppliers were told to work as members of the production team for current products and as members of the product development team for future products. These suppliers were also encouraged to talk amongst each other about ways to improve the design and manufacturing processes.

Subsequently, each first-tier supplier formed the same working relationship amongst second-tier suppliers. Toyota did not want to build a large bureaucracy around its suppliers. It built instead a co-operative relationship, sharing risk and reward, sharing people and technology.

Finally, and this is the measure of the commitment by all parties, Ohno developed a way to manage the flow of goods within the supply system on a day-to-day basis. It is the famous ‘just-in-time’ system, where parts are made and delivered according to the needs of the next step in the process. A simple idea that has been enormously difficult to implement – Toyota are still improving it – but one that binds all parties to a common fate. It is the epitome of partnering, removing the safety net and focusing all players on anticipating and removing problems before they become serious enough to stop everything.

In summary, Taiichi Ohno led the development of the exemplary partnering system. Its principles are the four principles I offered at the start of this series:

The four principles of partnering

Mutuality: A common purpose with mutual benefit.

Commitment: Parties are prepared to commit resources to the mutual endeavor.

Clarity: Each party is clear about who is doing what.

Openness: Both parties are prepared to raise issues concerning the quality of the working relationship.

The consequence has been economic gain for all, everybody won and everybody still wins. But if you look back at what Taiichi Ohno did, more than anything else, he had attitude; he had an unshakeable belief that the parties could together achieve more than they could if they worked apart. He also saw how the organization’s systems inadvertently caused people to behave more apart than together and so designed a system that would facilitate people working together.

Taiichi Ohno’s contribution to management and partnering was method – he developed a set of ideas about how to manage flow rather than function. He understood the weaknesses of the mass production system and stuck firmly to alternative principles that he knew would prevail. En route he taught his partners.

The partners in the Toyota system could not have foreseen or planned for the earthquake that stopped production a few years ago. Commentators were critical of Toyota‘s apparent ‘foolishness’ at planning in their own vulnerability. However, needless to say, the stoppage was short-lived and had no discernible long-term impact on the system’s performance. It is a lesson to us all.

Articles were written by John Seddon (Managing Director) and Vanguard Consulting Ltd.  He is an occupational psychologist, author and consultant.  John describes his work as a combination of systems thinking – how the work works, with intervention theory – how to change it.  This article has been edited by the people of Bryce Harrison Inc. (USA).  The Bryce Harrison website is www.newsystemsthinking.com.