How did Toyota beat FORD & GM using its GENIUS Supply Chain Model? - YouTube

Hi everybody. Toyota is one of the most  extraordinary companies in the world.  

And the attribute that makes it  so incredible is the fact that,  

Toyota is a company that literally had every  possible obstacle for failure. First of all,  

Japan being such a small country had very less  natural resources and very less population.  

Therefore, both raw material and labour were  extremely costly. In addition to that, Japan is  

a land of natural disasters where earthquake and  tsunami are frequent, and could destroy your plant  

within a minute. Thirdly, when Toyota was just  two years into business, WorldWar2 happened where  

bombs were dropping from the sky. And during  such a time, let alone business, even survival  

was a very big deal. On top of that, after the  Hiroshima Nagasaki bombing and the World War 2,  

Japan's economy was in complete ruins. And lastly,  with all these odds against them, they were in  

direct competition with the giants of the United  States, like General Motors and Ford motors.  

And yet, in spite of these obstacles, Toyota has  emerged as one of the most successful automobile  

companies in the world. In fact, in 2008, it even  became the largest car manufacturer in the world.  

In 2016, Toyota's market capitalization was more  than Ford, General Motors and Honda combined.  

Now, this begs the question, how did Toyota  become such a successful company amidst such  

terrible market conditions? What exactly was  their business strategy? And more importantly,  

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This is a story that dates back to 1950 Japan,  now it's already been 13 years since Toyota  

has been founded, and Japan was in complete  ruins after the World War 2. During the war,  

Toyota barely survived by pivoting between  making trucks and cars for the military needs.  

The condition of the company was so bad that even  after 13 years of efforts, while Toyota motors  

produced just 11,000 automobiles in the entire  year. On the other side, Ford motors produced  

more than 1 million automobiles in the exact same  year. And this massive disparity in production  

prompted Toyota top manager EG Toyota and several  of his engineers, to visit the Ford rouge plant,  

in an attempt to learn how do they exactly  improve their manufacturing processes.  

But after this visit, they realised, that simply  copying and improving the rouge system would  

not really work in Japan. Why? Because Toyota  was in a very, very poor financial condition.  

On top of that, Japan was just recovering  from the ill effects of the World War,  

which left the country starving for both capital  and foreign exchange. Therefore, Toyota could not  

buy the latest western production that was needed  to improve the production efficiency and to scale  

up the production. So practically speaking,  there was no way Toyota could compete with  

the American companies in two of the most crucial  aspects of manufacturing and that are capital and  

machinery. Now during such a time any ordinary  engineer would give up and declare that there is  

no way he could compete with the Americans. But  EG Toyota was no ordinary engineer. In spite of  

knowing that all odds were against him, he and  his team work day in and day out to understand  

how could they build a competitive system against  the American manufacturers. And that is when they  

realised that, although they could not compete  with the Americans with capital and machinery,  

there was one very crucial aspect that they  could beat the Americans with and that aspect  

was nothing but efficiency. So he came up with the  idea of something called the lean manufacturing  

system. To tell you about it, EG Toyota understood  that the standard method of operation of the US  

manufacturers was that, they first forecasted the  demand up to a certain extent, and then placed  

bulk orders so that they can save up on the  cost of machine parts and raw materials.  

So if there are three colours of cars that needed  to be sold red, black and grey, the company will  

produce 200 red cars, 500 black cars and 300 grey  cars and these cars will be ready to be delivered,  

but will be stored in the inventory until the  order comes up. And as soon as the customer

places the order, they are immediately  moved out and delivered to the customer.  

But in this process, the Toyota team identified  that there is a major problem that in turn led to  

a series of four major inefficiencies. And  the fixing of these inefficiencies is what  

turned Toyota into a billion dollar company.  In fact, it did not just change the way the  

automobile industry worked, it changed the  way the entire world's supply chain worked.  

The question is, what were these inefficiencies  and how did the Toyota team fix it? Number one,  

the Toyota team realised that when the demand  forecasting happened in the United States, the  

production always used to produce cars in surplus  and never in deficit. Therefore, more often than  

not, it lead to excessive resource allocation.  This meant that unnecessary people were hired,  

more equipments were purchased and more materials  and products were stocked up in the inventory. And  

this in turn, led to an increase in the overall  cash costs without adding any value. Secondly,  

the presence of unnecessary people, equipment and  materials automatically lead to overproduction.  

And then overproduction further lead to  the third type of waste, which is excessive  

inventory of the final products. In this case,  if there are 1000 cars that are overproduced,  

that is a huge amount of land that is being  utilised, leading to very high maintenance costs,  

labour costs and transportation cost. And  lastly, when all these ways come together,  

it leads to the fourth type of waste which is  unnecessary capital investment. For example,  

if 1000 crore loan has been taken out,  and if it is utilised in overproduction,  

Do you realise it's going to stack up a crazy  amount of interest cost lead into very high cost  

with zero return on investment. And this further  leads to more administrative costs, depreciation  

cost, etc. Now, on the outset, it looks like  a lot of things need to be changed, right.  

But when the team of Toyota actually understood  the root cause of this problem, it was all about  

just one thing. Forecasting of demand lead to  excessive inventory, which in turn led to a chain  

effect resulting into the four types of waste. So  you know what, Toyota decided to eliminate two of  

the most fundamental elements of the supply chain  and that are inventory and demand forecast. Yes,  

you heard that right. Toyota built a supply chain  where there was no demand forecasting and zero  

inventory. And this is how Ladies and gentlemen,  the world class just-in-time system was born. And  

this system revolutionised not just the automobile  industry, but also became the world standard for  

supply chain management in every field you can  think about, and this is how it worked out.  

Instead of having the cars manufactured and stored  into the inventory, the cars used to be available  

for the customers in the pamphlets, and they used  to be available in the showroom. And only after  

the customer placed the order, Toyota started  manufacturing the car. Now this on the outside  

seems very simple, right? Well, here's what even  an oversimplified process of Toyota's production  

look like. Once the ideation and booking dates  are finalised, the machinery and technology  

are acquired in three months. After that, the  parts and components arrive in seven days of the  

production centre. After the booking starts coming  from several dealers all across the country,  

the production actually starts and the path start  moving to the assembly. Now, when this moment  

happens, based on the demand, the exact same  number of parts are set to arrive every single  

day. So, if 9871 components have been taken to  the assembly, the next day, only 9871 components  

will arrive. And this happened not just for  one component, but the hundreds of components  

that were being used for the assembly, this is  followed by assembly activities and finally,  

the quality check is done. The vehicles that  are assembled arrive at the dispatch zone  

and immediately, immediately they are shipped  to the dealers based on their respective  

orders. And this entire process is set to happen  in five days as for the stated source in 2016.  

Therefore, the entire supply chain of the company  starts functioning on the basis of demand and not  

demand forecast. This is how the just-in-time  production of Toyota works wherein, even a single  

delay can cause the company millions of dollars  in losses. And this insane precision gave Toyota  

three incredible superpowers for the rest of the  competition. Number one, in case of less demand  

or even if an earthquake shatters the plant  Toyota would incur only minimum damage because  

they had less stock of components and close to  zero inventory. Furthermore, Toyota even asked  

its suppliers to follow the just-in-time principle  for their systems, which again reduced the cost of  

the overall supply chain without creating a  bottleneck for the suppliers. Secondly, all  

four types of waste were eliminated resulting into  extreme cost cutting and this cost cutting turned  

out to be is so amazing that even when other  companies applied JIT, they saw a 50% reduction  

in their inventory itself, and a lead time  reduction of more than 80%, eventually resulting  

into massive cost cutting and drastic increase  in profit margins. And lastly, in case of Toyota,  

from 1955 onwards, Toyota's production started  shooting up, they made 22,786 vehicles in 1955,  

46,417 in 1956, 70,856, in 1957 and by 1965, they  achieved a growth of almost 2,000%, producing  

477,643 units in 1965. This is how by striking  a perfect balance between extreme efficiency  

and extreme risk, Toyota and its engineers built  an iconic supply chain that turned them into the  

largest and one of the most profitable automobile  companies in the world. Now, the question is,  

as an entrepreneur, how can you apply the  just-in-time concept to your company? And what are  

the lessons that we need to learn from a legend  like EG Toyota? Number one, adversity is always  

the breeding ground of innovation. So if you  want to learn to build the most efficient system,  

go back in history, and find scenarios where  people did not have the choice of inefficiency.  

Because here's where you will see the most  remarkable innovations taking place that will  

help you beat your competition. In this case, it  was the adversity of the Japanese, which enabled  

Toyota to build a just-in-time system that helped  it beat the likes of Ford and General Motors.  

Lesson number two, whenever you study the systems  of your competitors, or even your ideal companies,  

never ever copy paste the same system to  solve your problems. Always look deeper,  

and try and see how your constraints are different  from their constraints, and then choose every step  

of execution very, very carefully. In this  case, instead of just being fascinated by  

the just-in-time concept, I would urge you to look  deeper into the risk involved with the strategy,  

which will kind of make you rethink if this  strategy is even worth it. And that is when  

you will see that there are three more strategies  of Toyota that helped them survive along with the  

JIT principle. And these principles are the Kanban  system, the Kaizen model and the Jidoka method.  

I'll be addressing them in the upcoming episode.  But until then, please do a study about Toyota's  

risk mitigation strategies during the 1997  Aisin Seiki fire and 2016 Kumamoto earthquake.  

And you will see that Toyota's entire supply chain  got disrupted only because they used just-in-time,  

but the way they reacted to it might have a very  important lesson for you to learn. And lastly,  

to make this entire process easier for you,  I have attached three study materials and two  

book recommendations for you. Number one is  the timeline of all of Toyota's innovations.  

Number two, is a research paper on Toyota system,  which will help you understand the overall picture  

of Toyota's systems. Now, although there are a few  statistical errors over there, I think the concept  

has been covered very well in this paper. And  lastly, you will find a paper that explains the  

flow analysis of the entire Toyota model. I'm also  attaching two book recommendations for you. Number  

one is the Toyota way. And number two is actually  the second part of this bestseller, which will  

actually help you apply the Toyota way to your  processes. So do have a look at them and do let  

me know what you think about them in the comments  section. That's all from my side for today,  

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subscribe to our channel. Thank you so much for  watching. I will see you in the next one. Bye bye.