Systems thinking in business

And the rise of Toyota Motor Corporation

“1942 Pontiac on Assembly Line” by aldenjewell is licensed under CC BY 2.0

By the early 1980s, the world had realized there was something special about Japanese management practices, particularly in manufacturing. Their products lasted longer and required much less maintenance. Japanese manufacturers were able to produce more at better quality while remaining cost competitive to their counterparts across the Pacific.

At that time, the torchbearer of Japanese excellence was Toyota Motor Corporation. Toyota had maintained operational efficiency while staying ahead of the competition and avoiding obsolescence.

Toyota’s revival post World War 2 was centered around the idea of lean production, a new approach to operations introduced by Taiichi Ohno, Toyota’s chief production engineer. Before the war, Toyota had barely built a few prototype cars with craft methods. At that time Ohno had set out to achieve productivity that was equivalent to mass producers like Ford, under low volume and high variety conditions in which Toyota operated at that time. His philosophy emphasized agility and waste reduction. It had emerged as a consequence of a war-ravaged Japanese economy with a small but protected domestic market for motor vehicles.

Toyota undertook radical initiatives like kaizen (continuous improvement), lifetime employment, and treating vendors as strategic partners. This new approach to management was applied not just to production but to every aspect of the organization, from human resources and supply chain to product development and customer relationship management.

Toyota’s approach might have seemed harmless to its competitors at first, but what set it apart was that it modeled the organization as a system.

What is a System?

A system is a set of elements, interconnected to fulfill a particular purpose. For example, sports teams, universities, firms, etc. A random agglomeration without a purpose is not a system. For example, a pile of sand, a pack of cards, etc.

The elements of a system may be independent systems by themselves i.e systems nested within systems. Thus, individual elements can also have their own local interconnections and purposes. And these may be in conflict with each other, producing an overall behavior that no one wants.

A simple system with stock(green), flows(blue), and delays(black)

A system can be visualized as comprising of stocks, flows, feedback loops, and delays. Stocks are accumulation of material over time as a result of inflows and outflows. Stocks act as buffers in the system enabling inflows and outflows to be independent of each other. Feedbacks are information flows that might reinforce or balance a stock. Through feedback loops, a system can cause its own behavior. Delays enable a system model to resemble a real-world situation.

System characteristics

1. Resilience — The ability of a system to survive in a variable environment. It arises as a result of well-structured feedback loops.
2. Self-organization — The capacity of a system to learn from itself and grow. It arises as a result of a clear purpose.
3. Hierarchies — The ability of a system to possess systems within systems. It arises as a result of well-designed information links between elements.

System model

Any model tries to figure relationships between an event that causes a certain behavior, as a result of an underlying structure. For example, raising the temperature (event) causes water to boil (behavior) because of its molecular composition (structure).

Most analysis centers around events while most models try to understand the corresponding behavior over time. They try to figure out statistical links between events and behaviors. This might help in reducing uncertainty (while being suspect to myriad assumptions) but does not give us the ability to control the system or to bring a permanent change. For that, we need to understand the underlying structure.

System models rarely have real boundaries. The world is a continuum. There are only artificial, mental model boundaries incorporated for ease of comprehension.

Within system boundaries, the system is most responsive to the limiting factor, which holds back the system despite major improvements in other factors. Since information flows in a system are subject to delays, it is important to operate with foresight around potential limiting factors.

In addition to conspicuous delays, most systems are subject to the concept of ‘Bounded rationality’, which is the inherent irrationality in seemingly rational decisions due to imperfect information. System participants must try to escape such a tendency by enabling availability of complete information.

System levers

How can we cause systems to change:

1. Shifting paradigms: Paradigms are unstated assumptions developed over time. These arise from shared agreements on the nature of reality. Paradigms can be changed by pointing at the anomalies in old paradigms and inserting people aligned with the new paradigm in positions of visibility and power.
2. Rules: Rewriting rules of incentives and punishments can cause certain flows to change and new feedback loops to emerge.
3. Information flows: Recalibrating information to flow to places where it wasn’t going before can reduce effects of bounded rationality and avoid situations where missing information causes entire systems to fail.

Back to Toyota

The rise of Toyota as an automotive major was a perfect example of systems thinking. In the spring of 1950 when the world was swimming in paradigms set by Alfred Sloan at GM and Henry Ford at Ford, a young Japanese engineer, Eiji Toyoda, set out on a three-month pilgrimage to Ford’s Rouge plant in Detroit. After returning home, he along with his production engineer Taiichi Ohno figured out the underlying structure of American manufacturing. A war battered Japan provided them with a fertile ground to challenge it’s unsaid assumptions:

• Soon after the war, they perfected the technique of small batch production rather than large lot size production. Other producers feared this might reduce economies of scale. But it enabled early defect discovery and lowered inventory, reducing costs more than benefits of scale. (Manipulating stocks)
• Toyota instituted lifetime employment and housing facilities for its employees. Other producers feared this might cause the workforce to become complacent. However, the workers invested more time in training and adoption of new technologies, while actively suggesting ways to improve the system. (Shifting paradigms)
• Toyota also empowered the worker to stop the entire assembly line upon discovery of a defect which he could not resolve. Other producers feared this might reduce productivity. However, this resulted in reduced effort during rework, root cause discovery, and team building. Eventually, this resulted in better quality products at higher productivity. (Manipulating flows)
• Producers of the time tried to vertically integrate in order to have supply reliability and control on quality. Toyota instead thought of converting its vast array of suppliers into one machine, allowing them to serve other manufacturers. Toyota made equity investments in its suppliers and organized them functionally, encouraging collaboration instead of competition. This enabled Toyota to implement the famous kanban system, reducing inventory and increasing responsiveness to changing market demand. (Manipulating the underlying structure)
• Traditionally, car retailing was a build to stock system marked by mistrust with dealers and customers holding back information making everyone to lose in the long term. Toyota introduced build to order system with dealers becoming an integral part of the production system. Customers were treated as members of the Toyota family as the company made all efforts to never loose a former buyer. (Manipulating feedback loops)

By March 2003, Toyota’s annual profit was $8.13 billion, larger than the combined earnings of GM, Chrysler, and Ford.

Many good American companies have respect for individuals and practice kaizen and other Toyota Production System tools. But what is important is having all the elements together as a system. It must be practiced every day in a very consistent manner.

Fujio Cho, President, Toyota Motor Corporation