The Goal of TPS

Now, let's understand TPS in more detail. The philosophy of TPS is simple. It considers only the below three factors.

i) Lowest Cost

ii) Highest Quality

iii) Least Time

to manufacture and deliver a part or service to customer.

Any activity carried out should be directed at achieving any of the above 3 without compromising on the other. This is the golden rule of TPS.

What is the goal of any organization?

Of course making profit is the primary goal of any organization.

Others include:

* Carrying out a social mission

* Providing job opportunities and improve employee's living conditions etc

I would like to share the same example I often use in my training.

Consider a pen manufacturing industry. The company has no competitors. The cost to manufacture a pen is 10 Rs. He WANTS a profit of 10 Rs, so he sells the pen at 20 Rs.

After a few years, a new manufacturer started selling the pens at 18 Rs maintaining the same quality (People don’t mind spending very little more for higher quality but not every time).

 The price war started and finally both the manufacturers were selling the pens at 15 Rs but only one of them was making profit. How?

He reduced the manufacturing cost of the pen.

Manufacturer A:

Input cost: 10 Rs

Selling price: 15 Rs

Profit: 5 Rs

Manufacturer B:

Input cost: 8 Rs

Selling price: 15 Rs

Profit: 7 Rs

 This is the secret of TPS. TPS is a profit making IE (Industrial Engineering).

When Toyota had to make profit without increasing the selling price of the cars, they had no other option but to reduce the manufacturing cost by utilizing optimum resources (Man, machine, material etc), reducing rejections and many other activities which we will learn in the subsequent posts.

Increasing the sales also increases the profit of an organization. If you reduce the input cost and then increase sales, it will give more benefits.

“With good sales technique and skillful advertising, one might be able to deceive the buyer for a while but it would not last long”

-          Kiichiro Toyoda

I would like to quote one more example to give a better perspective of TPS.

Curious case of a vegetable seller:

In a small town, there lived a vegetable seller. He used to go to the nearby village everyday and buy vegetables from the farmers. He sold these vegetables in the town. He was making good profit.

After a few months the demand for the vegetables was more. He started buying more and more vegetables from the farmers and was selling them. The shelf life of the vegetables was two days. He used to bring two days stock of vegetables and went to buy on the alternate days.

On a particular day, only a few vegetables were sold. The next day was no better. Same problem arose and by third day the remaining vegetables got rotten. The money invested was a waste. Now, he decided to buy a refrigerator so that he can keep vegetables fresh for a long time. He invested in a refrigerator and had to pay for the power and other overheads. He started buying vegetables required for one week and kept them in the refrigerator.

He had to spend more money now to buy a week’s stock but had to wait for another week or longer to get back the invested money. The profit was coming down because of the other overheads involved.

After a while, he recruited one person to bring the vegetables from the refrigerator to his shop. This again ate away a portion of his profit. Within a few days, the demand fell again. This time he had to cut down on the price and incurred losses.

This is a typical case in most industries.

If you can observe, the problem started only when he started keeping more stock. History tells us that demand is always fluctuating and not increasing or decreasing. More stock or over production is the biggest waste in any company and includes other hidden wastes (Read 7 types of wastes (Muda) online). Now, let’s see the same case in TPS way.

1)      When the demand increases, we should not buy/keep excess inventory. Always smaller the lot, the better it is. Instead of buying excess vegetables, he could have gone more number times to fetch the vegetables rather than buy more. Cost of a commodity will most of the times be more than transportation cost by a huge factor. So, we should follow small lot- high frequency principle.

2)      By following small lot-high frequency, he could have saved the investment on the refrigerator and additional charges incurred because of it. He can avoid the number of times (reduce transportation cost) going to village if the demand is less and increase the frequency when the demand is more. Irrespective of the demand, cost incurred by refrigerator (fixed assets/ auto machines in a firm) is constant.

3)      If the cost of vegetables per day was 1000 Rs, he was selling the vegetables the next day and getting back the invested money within a day.  

After buying the refrigerator, to buy 7 days stock he had to spend 7000 Rs and had to wait for 7 days to completely recover it, if the market situation changes during that time, then he will lose part of the investment or most of it. The goal of the organization should be to reduce the lead time as much as possible to avoid the factors not in our control.

People feel this is just common sense and not TPS. The funny part is TPS is just common sense. Do anything but follow the golden rule of TPS to achieve profit.

COST REDUCTION should be the goal of any organization to make profit.

(Actually Productivity Improvement should be the goal of a company but I link all the factors of productivity to cost and so I have mentioned COST REDUCTION. Many people confuse Productivity improvement to be increasing the production numbers which is not so. I will talk about this later when I clear the air between productivity improvement Vs efficiency improvement in one of the future posts)

Let's discuss about the house of TOYOTA WAY  in my next post.