Global Insight Perspective | |
Significance | The VI programme will enhance the efficiency of Toyota to deliver an operating profit margin of 10%. |
Implications | Toyota is demonstrating that good profit margins are still possible in a mature industry, and even necessary if future developments are to be funded. |
Outlook | Although the VI programme represents the ultimate refinement of the current industry paradigm, the next step could take the company into an entirely new industrial approach. |
Interviewed by the Reuters news agency, Toyota Motor President Katsuaki Watanabe set out an ambitious corporate cost saving strategy. The new plan, known as VI for Value Innovation, is designed to deliver annual savings of up to ¥300 billion (US$2.7 billion) and will build on the previous plan, CCC21 (Construction of Cost Competitiveness in the 21st Century) which was targeted at the component level. The difference shown by VI is that it refocuses the company on the continuing pursuit of cost elimination in the production processes and product design. It will therefore deliver progressively better results as new models are released and old plants are reconstructed. VI is expected to reach fruition by 2010 when it should have raised the operating profit margin from 9.3% to 10%. Even then, Watanabe intends to push the company into the next strategy which will reform the fundamental product structures through the use of new materials and bring about substantial weight saving.
The CCC21 plan was launched in July 2000 and was focused on the 170 major components that comprise 90% of purchasing costs. At its core was the Simultaneous Engineering (SE) form of organisational structure that brought together teams of engineers from both the supplying firms and Toyota itself with the explicit purpose of eliminating unnecessary costs. In one case, a team investigated a horn made by a Japanese supplier and was able to reduce the number of parts from 28 to 22, resulting in a 40% cost saving. In another case, the total number of interior hand grips used across the complete Toyota range was reduced from 35 to three basic types. After five years the CCC21 scheme delivered total cost savings in excess of US$9 billion, an average of US$1.8 billion a year.
The VI plan succeeded CCC21 in April 2005 and has been progressively exploring the potential to further increase profitability. By concentrating on reduction in raw material costs the company has had to re-evaluate the vehicle design stage and so the first product to benefit will be next year's new Crown. It will take several years for this to work its way through the full model range but the main benefits should be apparent by 2010. With successive model programmes the VI techniques will be further developed until the approach is fully embedded by around 2012. The approach will encompass reforms in production which will aim to raise quality levels, an area where Toyota's reputation has suffered recently, with the result that costs will be further reduced.
Once the VI system becomes self-perpetuating around 2010, Watanabe plans to use the increased revenues to invest in research for new vehicle structures. Although he was reluctant to give details, Watanabe stated that the recently exhibited 1/X concept vehicle contained hints on the likely developments. This vehicle uses new materials to reduce its weight to one-third of the Prius hybrid while halving its fuel consumption.
Outlook and Implications
The successive strategies being implemented by Toyota show that it will be setting the agenda in the industry for years to come. While GM is on a recovery trajectory, and the Chinese manufacturers are racing to catch up with the current industry standards, Toyota is already stepping forward into the next generation. The company has always been famous for advocating lean production methods and the CCC21 programme took this to its logical limit.
The VI programme takes this a step further and showed that Toyota's giant size was no impediment to making fundamental strategic changes when necessary. Since this programme goes to the root of the design process it is strongly predicated upon human resource improvements, this tending to be a firm specific advantage and difficult for rivals to replicate. If it is successful then it could come to represent the perfection of the current industry paradigm. The next step, briefly sketched out by Katsuaki Watanabe, suggests that the company is looking at taking a quantum leap forward with new materials, propulsion systems and, by implication, new production processes. As part of this, the company is in the process of completely renewing its production facilities in Japan. If this strategy is as comprehensive as Watanabe suggests, then it could herald a paradigm shift for the global industry.