Risk Management in Toyota - Essay Example

?Risk management in Toyota Executive Summary Toyota is the leading automobile manufacturer in the world. When Toyota poses threat to the supremacy ofUS automobile industry, the US retaliated by imposing import tariffs to protect the turf for the local manufacturers like General Motors, Ford and Chrysler. In fact the Chicken Tax imposed in 1964 by the US paved way for reorienting the strategies of the Japanese car manufacturers like Toyota, Nissan and Honda to set up manufacturing facilities in the US. In a way it was a welcome measure to the US in view of foreign direct investment and consequent employment generation. The quality of the Toyota cars, introduction of premium brands like Lexus in tune with the tastes and fashions prevailing in the American markets, its collaboration with the leading player General Motors subsequently, entrenched the brand ‘Toyota’ firmly into the USA. The success story of Toyota could be summed up from one of its slogans in the 1980s “Who could ask for anything more”. The product profile of the company has undergone changes to include larger and luxurious vehicles. The corruption charges leveled against the UJF Bank, one of the largest shareholders of Toyota with Toyota’s Chairman as a director was a setback to the company’s diversification strategy into financial services. Also, the over concentration in the already developed American and European markets over the period of time could strategically affect its leadership position in the global market in future. The financial risk is related predominantly to the issue of capital structure and leverage, but the business risk largely dependent upon the economic conditions, and the study of risk management in relation to a company like Toyota needs to focus on the macro economic factors. This paper seeks to analyze risk management perspective of the company in relation to the prevailing global economic conditions, its strategic outlook to changes in the environmental factors globally and other internal factors related to risk management. Currents status and evaluation of risk management The international economy has undergone drastic changes in the recent years consequent upon the stupendous growth of emerging economies, especially the BRIC (Brazil, Russia, China and India) countries and the credit squeeze in the aftermath of subprime crises in the developed nations. However, it is pertinent to note that the emerging economies have not been affected by the subprime crisis, as these countries have been insulated from the world economy by virtue of the continuing regulations in these countries, especially in the financial services sectors, and their exposure to international banking system has been very limited. A cursory glance of US Vehicle Sales from 1984 to 2010 from Penton Media (2011), as given in Appendix I and II, which more or less coincides with Toyota’s establishment in the USA reveals the growth (or lack of growth) over the period of time. Competition The market for Toyota is very competitive. For example, Toyota’s competitors Suzuki of Japan and Hyundai of South Korea have well established facilities for manufacturing, marketing and servicing in India. The local manufacturer Tata Motors has aggressively priced its small car Nano around INR 100,000 which works out to just US$ 2400 approximately. Volume is going to be the name of the game in the emerging economies like India, China and Brazil. Jie, R. (2010) reports: “China has overtaken the United States and Japan to become the world's largest car manufacturing country in 2009.” While Toyota was concentrating more and more on developed markets, its competitors have made inroads into the emerging markets, where Toyota is lagging behind the local as well as the international players. Realizing the potential in the small car segment in India, Chevrolet has introduced the model ‘Spark’ at INR 279,000 which works out to US$ 6200 approximately since ‘value for money’ or pricing is a crucial factor in influencing the consumers’ decisions. Indian Cars Bikes (2010) states “General Motors India have retained the 3 years, zero maintenance charge guarantee on the Chevrolet Spark, thus making the Spark a great value buy even after the price hike [of INR 20,000]”. Also, Toyota’s competitor General Motors was bailed out by the US government under attractive terms considering the critical position of the company and JLR (Jaguar and Land Rover) has been taken over by Tatas of India who turned it around, which is expected to give stiff competition in Europe. Production planning The company website states “Toyota Motor Corporation's vehicle production system is a way of "making things" that is sometimes referred to as a "lean manufacturing system" or a "Just-in-Time (JIT) system," and has come to be well known and studied worldwide”. In the manufacturing side, the massive earth quake-Tsunami has brought into lime light the flaws in Just-In-Time production system adopted by the company. Carey, N., Randewich, N & Krolicki, K. (2011) state “In a globalized economy where manufacturers have moved ever more toward lean inventories and “just-in-time” production — keeping ultra-low quantities of parts on hand to avoid holding expensive stocks of parts — a speedy response was vital because a disruption to the global supply chain would spread quickly, shuttering plants employing legions of workers around the world”. It has been pointed out that Toyota Motor reported stoppage of production, with the revival of production of Prius under question. Prius is produced only in Japan and popular with environmentally conscious consumers due to high-mileage performance. Taleb, N. N., Goldstein, D. G. & Spitznagel, M. W. (2009) state “Low-probability, high-impact events that are almost impossible to forecast—we call them Black Swan events—are increasingly dominating the environment”. When the software companies worldwide have been planning for disaster recovery as a part of the risk management process anticipating disruption in production in the event of disasters, the situation reflects lack of risk management on the part of the world’s leading car manufacturer. Role of HRM Vehicle recalls by Toyota have been attributed to the risks associated with the lean manufacturing. Wakabayashit, D. (2010) states “Toyota's recent problems highlight how certain elements of this approach—eliminating overlap by using common parts and designs across multiple product lines, and reducing the number of suppliers to procure parts in greater scale—can backfire when quality-control issues arise”. According to Meyer, a former group leader at Toyota's factory in Kentucky "The cost may be decreased in the short term, but the risk is increased." The HR policies and practices are closely related to the risk management processes and it plays significant role in strategic management. The poor handling of the recall issues has affected the company’s brand image. According to Sullivan, J. (2010), “If the root cause of the problems Toyota is facing are failure by employees to make good decisions, confront negative news, and make a convincing business case for immediate action, then the HR processes that may have influenced those decisions must be examined”. Risk Management There are risks in highly capital intensive process of product development. In the automobile industry this process involves lengthy time schedules with the attendant risks. Ramaswamy, S. (2009, p.9) states, “In 1965, Toyota formally established a product planning division to organize and support sushas. The structure used by Toyota was essentially a matrix, with functional specialists reporting both to a functional manager and the susha. The matrix structure helped Toyota to combine the best features of both functional and divisional organizations. At that time, there were 10 sushas and 5 to 6 staff members under each susha. Except for replacing the name susha by 'chief engineer' in 1989, the company did not change the structure of its product planning division till the early 1990s”. The risks involved in a multinational company Toyota are multifarious. Apart from fluctuations in demands for various vehicles, there are discounts in various names and forms at the time of recession, interest costs involved, customer grievances, warranty claims, capacity considerations, intense competition, R&D expenses, fluctuating exchange rates and other supply chain issues. The regulatory issues and taxation in different countries are many a time unpredictable. The relentless increase in the prices of petrol or gasoline and diesel are forcing the customers to change their preferences due to cost considerations. Paradigm shift in outsourcing consequent upon liberalization and globalization in the countries pushed the companies towards the low cost manufacturers around the world which has also increased the quality and supply chain risks considerably. Under the changed environment with the developments in technology and telecommunications, the expectations as well as the awareness of the customers about the products, their rights and the responsibilities of the manufacturers have increased. Therefore, Toyota needs to reorient its strategies in line with the developments in the risk management practices. Bosman, R. (2006, p. 9) cited: “Deloitte, in its risk management study, Disarming the Value Killers, found that many of the greatest market capitalization losses in the world were attributable to events that were considered extremely unlikely – and for which those companies seemingly failed to plan”. The company as a risk mitigating strategy now plans to focus on the emerging markets. Ohnsman, A., Kitamura, M. & Horie, M. (2011) report “The company plans to get half its global auto sales from emerging markets, compared with 40 percent in 2010. Toyota is aiming to get 15 percent of its sales from China, the world’s largest car market, where it lags behind General Motors Co. As part of its focus on emerging markets, Toyota added the Etios compact in India in December and is readying the small car for sale in China, Thailand and Brazil”. Risk Management Strategy Overview The policy with reference to risk is governed by the propensity to take risk or the level of risk a management is willing to accept in respect of its various business activities. The ability to take risk is based on the strengths, weaknesses, opportunities and threats considering the internal factors and the external environment. At Toyota, the CSR Committee deliberates on and makes decisions concerning new CSR related plans, corporate ethics, legal compliance, risk management, social contribution activities, and environmental management policies. (Toyota’s Sustainability Report, 2009, p. 12) However, in order to lend focus to risk management a separate unit with the experts in the field needs to be formed. Risk Responsibilities The responsibilities need to be aligned with the authority at various levels in risk identification, risk assessment and risk mitigation. Risk is a shared responsibility, and for the decision making to be effective the risks are needed to be defined, resources required quantified, control procedures evolved and the reporting processes established. The monitoring and control procedures should aim to discern the root causes after careful analysis to enable risk assessment and risk mitigation effectively. The authorities responsible for review and monitoring need to coordinate with the team responsible for assessment and mitigation. Sometimes, separate department or various departments involved in the risk situation may be responsible for risk mitigation. In this scenario, coordination and interaction among various teams is prerequisite for effective risk management. Risk Identification In any business the opportunities are associated with risks, and sometimes failure to identify an opportunity or failure to assess properly and react to the developments in the external environment is translated into a business risk later. Also, the evaluation of the opportunities in the case of expansion or diversification, involves identification of risk in the process. Toyota failed to identify or properly assess the potential in the emerging economies, especially the BRIC countries. The economic development in these countries in the recent years has been consistent. The population of India and China holds lot of promise for future growth. Already, the international players and competitors have been aggressive in these markets. However, it can be stated that it is only the beginning, because it is limited to only cities. The infrastructural developments are underway in these countries and when the small towns and villages are connected to the highways, the growth will be accelerated further. In these countries there is scope for marketing in every segment, and the entry of BMW with its brands including Mini is an example. Therefore, Toyota with wide product portfolio would be greatly benefited in expansion into these countries. However, to enjoy the benefits fully, the company needs to expand its existing facilities in manufacturing, sales and service, because exports to these countries would not be competitive due to tariffs. In the production side, lean manufacturing system may have to be reoriented in these countries in view of the inherent risks in supply chain and the labor policies should be in line with the countries’ cultural background and the social values. On an overall basis, identification of the source of risks and its relationship with the various internal and external environments is essential to plug the loopholes in the system and arrest the occurrences. Toyota continued to implement the Dealer Environmental Risk Audit Program (DERAP), which audits the environmental risks of overseas dealers (Sustainability Report 2009, p.39), which might give insights into identifying the risks in distribution. Risk Assessment Internal risks are identified in the process of monitoring, statistical analysis, variance analysis in relation to standards or budgets. PESTLE (Political, Economical, Social, Technological, Legal and Environment) analysis may be useful in the identifying the opportunities (and risks) as well as the assessment or evaluation of the risks in the macro environment. For instance, the liberalization of the economic policies relating to foreign direct investment and investment threshold, availability of cheap labor, potential for demand and growth on account of economic development in the countries and statutory restrictions on the negative side are some of the important factors in the assessment process. For example, Hero Honda, an Indian Company in collaboration with Honda Motor Company of Japan, (2009) states “In 2001, the company achieved the coveted position of being the largest two-wheeler manufacturing company in India and the ‘World No.1’ two-wheeler company in terms of unit volume sales in a calendar year by a single company. Hero Honda has retained that coveted position till date”.  This is because the environment was conducive for the growth and development. The risks may be imminent or very remote, and its impact indeterminate. Marketing research for Qualitative analysis through questionnaire survey in the new markets covering various aspects such as the income level, profession, family size, customer preferences and availability of finance to buy cars would enable the company to assess the broad features and potential of the markets. “TMC is implementing measures to address environmental risk management at locations other than production bases. Particular emphasis will be placed on reinforcing risk assessment relating to construction and other non-ordinary activities”. (Sustainability Report 2009, p. 18) The proper assessment of risks keeps the company in full preparedness since the consequences are reasonably mapped out so that the management is in a position to decide about its acceptability as business decisions carries risk in varied proportions. Risk Response Toyota’s response to the continuing slackness and deterioration of car sales in the US markets over the period of time (5,635,433 in 2010 against 10,323,695 in 1984) has been found to be muted. The company’s position (Appendix –I) during the period reflects the overall market condition (Appendix – II). The performance of the emerging economies during the period especially in the recent years has failed to make any impact on Toyota’s strategy in a big way. Risk response is dependent on the company’s policy in respect of acceptability of the risks involved. The management may choose to avoid a risk if it is inconsistent with the company’s objectives or values. When avoidance is not possible or counterproductive, it seeks to reduce the impact of the consequences. Transfer of risk is an option mostly considered in the insurance perspective. In all the risk situations, cost-benefit analysis forms the basis for strategies of risk response. However, in the case of work in progress, it is complicated and various factors such as security, safety and health of the resources/people are taken into account. “Toyota’s Basic Philosophy for Safety and Health, which expresses the fervent belief that no employee/team member should be put at risk of suffering a work-related accident”. (Sustainability Report 2009, p. 58) Risk Mitigation Risk prevention is aimed through monitoring as well as maintenance for reducing the chances of risks materializing, whereas risk reduction is a conscious decision taken to reduce the impact of the risks on the performance or business. In this case, after identification and assessment of the risks, procedure for monitoring and reporting of the progress has to be evolved. It is stated “Toyota analyzed all cases of environmental non-compliance, complaints and “near-miss” accidents that occurred to determine why the environmental risk could not be detected at an earlier stage; and then introduced preventive measures throughout the entire company.” (Sustainability Report 2009, p.41) However, established procedure for constant review and feedback is necessary in view of change in the models, employees and production processes. Risk reduction programs call for coordination among various stakeholders on real-time basis with contingency plans and back-up facilities to meet the unforeseen developments in the process. Time management in the risk mitigation process is very important since various processes are dependent on or interrelated to the mitigation process under progress. Risk Monitoring and Reporting The monitoring process is mainly intended for signaling out the risks in advance based on the observations or regular analysis. The information to and from monitoring needs to be concise, clear and to the point without any ambiguity, so that the people involved in risk management can effectively discharge their duties. Therefore, the activities or risks need to be classified as Extreme, High, Medium or Low and 1%, 10% or “0 - meaning imminent” based on the chances or probability of occurrence. Monitoring process needs to be strengthened by review of the processes on regular basis and audit. Sullivan, J. (2010) states “HR needs to periodically test or audit each of the processes that could allow this type of billion-dollar error [vehicles recall] to occur”. The reporting system needs to ensure that right information is passed on to the right person at the right time. The access to information should also be restricted, on need to know basis, to avoid unnecessary circulation of the information. The documentation at all levels should be standardized to avoid clumsiness or misinterpretation or lack of important details. The proper classification of the risks on the above lines will prioritize the activities in risk management. However, the risk management in respect of medium or low category in the case of secondary risks in the company cannot be ignored, because it may eventually affect the efficiency in the long run. Conclusion Risk management in an organization is a continuous process and interrelated to the welfare of all the stakeholders which include employees, shareholders, suppliers, customers, distributors and dealers as well as the community. The changing industrial environment imposes several Corporate Social Responsibility (CSR) obligations on companies in various fronts such as environmental protection and human rights. Therefore, comprehensive risk management strategies need to reflect seeks to fulfill the expectations of the various stakeholders for sustainable development in the long run. Word count: 3171 (excl. references and topic) References Bosman, R. (2006), The New Supply Chain Challenge: Risk Management in a Global Economy, FM Global, http://www.fmglobal.com/pdfs/ChainSupply.pdf Carey, N., Randewich, N & Krolicki, K. (2011), Japanese Earhquake-Tsunami Show Flaws in Just-In-Time Production, 21 March 2011, MSNBC, NHNE Pulse, http://nhne-pulse.org/flaws-in-just-in-time-production/ Hero Honda (2009), Corporate Profile, Company website, http://www.herohonda.com/co_corporate_profile.htm Indian Cars Bikes (2010), General Motors India ups the Chevrolet Spark 1.0’s price by cutting discount by INR 20,000, http://www.indiancarsbikes.in/cars/general-motors-india-ups-cherolet-spark-10s-price-cutting-discounts-inr-20000-2535/ Jie, R. (2010), China is now world champion in car production, China Daily, 3 February, 2010, http://www.chinadaily.com.cn/business/2010-02/03/content_9420521.htm Ohnsman, A., Kitamura, M. & Horie, M. (2011), Toyota Pushes U.S. Image Boost, Emerging-Market Gains, Bloomberg, 10 March 2011, http://www.bloomberg.com/news/2011-03-09/toyota-aims-to-get-half-of-profit-from-emerging-markets.html Penton Media (2011), U.S. Car and Truck Sales, 1931-2010, http://wardsauto.com/keydata/historical/UsaSa01summary/ Penton Media (2011), U.S. Vehicle Sales Market Share by Company, 1961-2010, http://wardsauto.com/keydata/historical/UsaSa28summary/ Ramaswamy, S. (2009), Case Study-When Things Go Wrong (Eyes of Ball at Mercedes Benz, Case Report, Birla Institute of Technology and Science, Pilani, http://www.scribd.com/doc/43792257/MS Sullivan, J. (2010), How a Mistake Crashed Toyota, Career Journal, 11 March 2010, http://www.career-journal.com/en/leadership/228.html?infoView=25187 Taleb, N. N., Goldstein, D. G. & Spitznagel, M. W. (2009), The Six Mistakes Executives Make in Risk Management, October 2009, Harvard Business Review, http://hbr.org/2009/10/the-six-mistakes-executives-make-in-risk-management/ar/1 Toyota (2011), Toyota Production System, http://www.toyota-global.com/company/vision_philosophy/toyota_production_system/ Toyota Motor Corporation (2009), Sustainability Report 2009, http://www.toyota.de/Images/TMC_Sustainability_Report_2009_tcm281-929037.pdf Wakabayashi, D. (2010), How Lean Manufacturing Can Backfire, The Wall Street Journal, 30 January 2010, https://groups.cob.ohio-state.edu/boms/files/Toyota-Recall-Shows-How-Lean-Manufacuring-Can-Backfire.pdf Appendices Appendix –I U.S. Vehicle Sales Year Cars Trucks Total 2010 5,635,433 6,136,787 11,772,220 2009 5,400,890 5,200,478 10,601,368 2008 6,769,107 6,724,058 13,493,165 2007 7,562,334 8,897,981 16,460,315 2006 7,761,592 9,287,389 17,048,981 2005 7,659,983 9,784,346 17,444,329 2004 7,482,555 9,816,018 17,298,573 2003 7,555,551 9,411,891 16,967,442 2002 8,042,255 9,096,397 17,138,652 2001 8,352,000 9,120,378 17,472,378 2000 8,777,723 9,033,950 17,811,673 1999 8,637,708 8,777,020 17,414,728 1998 8,084,989 7,882,298 15,967,287 1997 8,217,480 7,280,380 15,497,860 1996 8,478,545 6,977,567 15,456,112 1995 8,620,159 6,496,166 15,116,325 1994 8,990,517 6,420,857 15,411,374 1993 8,517,859 5,680,995 14,198,854 1992 8,213,113 4,904,331 13,117,444 1991 8,184,979 4,364,544 12,549,523 1990 9,303,215 4,846,163 14,149,378 1989 9,778,517 5,066,744 14,845,261 1988 10,546,808 5,244,736 15,791,544 1987 10,191,877 5,001,069 15,192,946 1986 11,404,239 4,918,782 16,323,021 1985 10,979,187 4,746,104 15,725,291 1984 10,323,695 4,159,446 14,483,141 Source: Penton Media (2011), U.S. Car and Truck Sales, 1931-2010. Appendex – II U.S. Vehicle Sales – Market Share Company 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 BMW 2.26 2.28 2.25 2.04 1.84 1.76 1.71 1.63 1.50 1.22 Chrysler 9.22 8.79 10.77 12.62 12.57 13.21 12.75 12.54 12.87 13.01 Daimler 2.48 2.43 2.41 2.14 2.37 2.16 2.04 1.90 1.79 1.76 Ford 16.44 15.29 14.19 14.59 16.04 17.01 17.99 19.19 19.90 21.60 GM 18.81 19.58 21.93 23.24 23.89 25.59 26.90 27.67 28.27 28.04 Honda 10.45 10.86 10.59 9.43 8.85 8.38 8.06 7.96 7.28 6.91 Hyundai 4.57 4.10 2.98 2.84 2.67 2.61 2.42 2.36 2.19 1.98 International 0.50 0.50 0.50 0.42 0.68 0.58 0.52 0.41 0.40 0.43 Isuzu 0.07 0.05 0.10 0.13 0.14 0.16 0.25 0.26 0.39 0.56 Jaguar 0.11 0.11 0.11 0.10 0.12 0.17 0.27 0.32 0.36 0.25 Kia 3.03 2.83 2.03 1.86 1.73 1.58 1.56 1.40 1.38 1.28 Land Rover 0.27 0.25 0.22 0.30 0.28 0.26 0.21 0.23 0.24 0.16 Mazda 1.95 1.96 1.96 1.80 1.58 1.48 1.53 1.53 1.51 1.54 Mitsubishi 0.47 0.51 0.72 0.78 0.70 0.71 0.93 1.51 2.01 1.85 Nissan 7.72 7.26 7.05 6.49 5.98 6.17 5.70 4.68 4.31 4.03 Opel -- -- -- -- -- -- -- -- -- -- PACCAR 0.25 0.28 0.30 0.29 0.48 0.38 0.34 0.23 0.23 0.18 Peugeot -- -- -- -- -- -- -- -- -- -- Porsche 0.22 0.19 0.19 0.21 0.20 0.18 0.18 0.17 0.12 0.13 Renault -- -- -- -- -- -- -- -- -- -- Saab 0.05 0.08 0.16 0.20 0.21 0.22 0.22 0.28 0.22 0.21 Studebaker -- -- -- -- -- -- -- -- -- -- Subaru 2.24 2.04 1.39 1.14 1.18 1.12 1.08 1.10 1.05 1.06 Suzuki 0.20 0.36 0.63 0.62 0.59 0.47 0.43 0.34 0.40 0.37 Toyota 15.01 16.73 16.47 15.96 14.95 12.98 11.92 11.01 10.26 9.97 Triumph -- -- -- -- -- -- -- -- -- -- Volkswagen 3.04 2.79 2.30 1.97 1.91 1.76 1.93 2.29 2.47 2.51 Volvo 0.46 0.58 0.54 0.65 0.68 0.71 0.80 0.79 0.65 0.72 Volvo Truck 0.17 0.15 0.19 0.19 0.37 0.32 0.25 0.19 0.19 0.21 Other -- -- -- 0.01 0.01 -- -- -- -- -- Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Source: Penton Media (2011), U.S. Vehicle Sales Market Share by Company, 1961-2010. 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