Page 64 - Toyota Under Fire

THE OIL CRISIS AND THE GREA T RECESSION

company’s operating costs. Toyota has historically aimed for its
plants to operate profitably at 80 percent capacity (most manufac-
turing companies require a run rate of 85 to 90 percent capacity to
achieve profitability). The 80 percent target was based on histori-
cal patterns of demand fluctuation; the company uses temporary
labor and overtime to produce at 100 percent capacity during peak
periods. The Great Recession showed EPIC and the board of di-
rectors that a 20 percent cushion was not enough; demand could
swing more wildly than they had planned for. EPIC decided that a
new target was necessary: profitability at 70 percent capacity. The
figure was based on the company’s most efficient plant worldwide,
which could operate profitably at just over 70 percent capacity.
Getting to profitability at 70 percent capacity meant cut-
ting fixed operating costs both in the plants and in all support
functions. As any factory manager can tell you, cutting operating
costs by even a few percentage points is difficult. Cutting operat-
ing costs by 12.5 percent would be a multiyear project. Cutting
operating costs by 12.5 percent in the most efficient and produc-
tive factories in the world in less than two years strains credibility.
Yet that’s the goal the committee set.
There is one obvious way to cut operating costs dramati-
cally, which is the path that most companies around the world
took: laying off workers. A quick survey of news stories from
2009 indicates that 65 percent of the Fortune 100 announced
significant layoffs. Toyota could have trimmed its workforce of
permanent team members to reach the profitability goal and
relied on more temporary workers and overtime in the future.
But as we indicated in Chapter 1, Toyota views its people with
experience in TPS and TBP as an appreciating asset. With that
perspective, it makes no sense to lay off employees to solve a
short-term problem. And Toyota hasn’t. As of March 2011, no

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