Managing Information in Toyota Motor Corporation - Research Paper Example

Managing Information in Toyota Motor Corporation Introduction: Managing information is an extremely important element in a competitive business environment. Increasing globalisation and opening up of new markets around the world have made the market highly competitive for all sorts of businesses, whether they are in the manufacturing or services sector. Companies in the present context have to deal with excessive information and they are faced with the difficult task of making sense of all the data available at their disposal. For information to be useful, it needs to fulfil criteria like: relevance, accuracy, timeliness, completeness and simplicity. Finally, in order to be effective, information should become useful. Information should be used. If the fire alarm is ringing, the floor is getting hot and there’s a burning smell, it is probably not a good idea to hang around.” (Managing Information - A Practical Guide: Elements of Information 2005). The objective of this paper is managing information in the area of cost control with reference to Toyota Motor Corporation, one of the most successful and widely respected business organisations in the world. The company is respected not only because of the quality of its products, but also for their efficiency in achieving optimum cost control Task 1: The objective here is to achieve optimum cost control so that it will reflect positively on the bottom - line of the company’s profits and give maximum returns to the stakeholders of the company. Efforts at cost control, without compromising on quality, are an everyday effort within the company Cost control can be defined as “Application of (1) investigative procedures to detect variance of actual costs from budgeted costs, (2) diagnostic procedures to ascertain the cause(s) of variance, and (3) corrective procedures to effect realignment between actual and budgeted costs.” (Cost control: Definition). The type of information that is required to achieve cost control is wide ranging and has to be acquired from a variety of sources. The types of cost that are incurred in a typical manufacturing concern include direct costs, indirect costs, hidden costs, future liability costs, intangible costs, external costs etc. a. Direct costs: Direct cost are costs that can be readily identified as those directly incurred in the manufacturing process. It includes raw materials, wages depreciation etc. b. Indirect costs: Costs, which cannot be attributed directly to production, are termed as indirect costs. These include salaries, rent, marketing expenses etc. c. Hidden costs: Such costs are not obvious and usually unexpected. An example would be where customers are not satisfied with the product which results in a fall in sales. “Some examples of hidden quality costs are customer dissatisfaction with a product or defects in a product that causes a loss in sales. These hidden quality costs can be the major factor in the total cost of quality for a product.” (Kim and Liao 1994). d. Future Liability Costs: These can be discerned as costs that may arise due to legal issues like non-compliance of laws, loss due to personal injury, damage of property etc. Intangible Costs: In addition to the tangible costs as explained above a company also bears some intangible costs. These include “difficult to measure cost entities, including consumer acceptance, customer loyalty, worker morale, worker wellness, union relations, corporate image, community relations and estimates of avoided costs – fines, capital, etc.” (Total Cost Assessment Methodology: Range of Costs. 2000). e. External costs: These are costs borne by a company as a result of any fault on its part which negatively affects the society and entails compensation. The faults could include environment damage, damage costs by pollutants etc. Task 2: Being a manufacturing company, Toyota has to have information from the areas like: manufacturing, purchase, inventory, advertising and marketing, logistics, and administration. a. Manufacturing: Manufacturing is the core of Toyota’s business operations and a major portion of product costs is incurred by this department. Factors that affect manufacturing costs include level of automation, productivity of labour, costs of labour, availability of raw materials and parts. High level of automation will improve the costs of production in any given scenario. Productivity of labour, which is directly linked to levels of automation, is also a key factor, which affects cost. Even in areas where automation is low or non-existent, a well-trained and motivated labour force will go a long way in reducing costs. Timely availability of raw materials is another crucial element that helps in controlling costs. Production schedules will be held up unless raw materials and spares are not made readily available. b. Purchasing: Many components that go into manufacturing of automobiles are sourced from approved vendors. The pricing of such components will reflect in the unit cost of the company and care has to be taken to see that quality products are priced optimally. c. Inventory: High level of inventory will result in idle capital, which in turn will have a negative impact in controlling costs. Care should also be taken to see that only optimum levels of inventory are stored. A fine balance has to be achieved between over stocking and availability of materials for production. The Just-in-Time system followed by the company has helped substantially in controlling the costs of production. d. Advertising and Marketing: Marketing costs are inevitable, but such costs should justify the results by improved sales. Advertising costs are also unavoidable especially since the product falls in the category of consumer durables. Effective strategies have to be evolved and implemented in order to keep costs under control e. Logistics: Since the products of the company are shipped worldwide, they need to maintain a very efficient system of logistics. Toyota has plants in many parts of the world and shipments can be made to markets that are close to its manufacturing base. Similarly, sourcing of components from other markets should also be planned accordingly. f. Administrative: A lean and efficient administrative department will help in bringing down indirect costs incurred by the company. Since administrative expenses are indirect in nature, it would be difficult to assess an optimal level of expenditure. Task 3: Information for cost control can be obtained many ways. As mentioned earlier, what is important is how the information is used for decision-making that is important. Some of the most effective and popular techniques of information gathering are discussed below: these are the ways in which information for cost control is obtained in Toyota Motor Corporation. Company Records: There will be detailed records of all activities in the company that are available for inspection and gathering of information. Such records will be available for all departments in the company. Information that can be available from such sources includes actual expenditure, projections, forecasts, variances etc. In a company like Toyota, computerised records would be available. Financial and cost accounting records are examples of sources. Interviews: Interviews with employees and management of different departments can be conducted to gather relevant information. The advantage of interviews is that clarifications and more details if necessary can be facilitated when compared with information obtained from records. The most effective and time-consuming method of interview would be one-on-one where each employee is interviewed individually. Besides, in such situations, questions can be tailor-made to suit each individual, type of job or department thereby facilitating specific and most relevant information. Group interviews are more practical in cases where time is a constraint. “These interviews have a similar purpose to the one-on-one interview, but they require more preparation and more formality to get the information you want from all the participants.” (Mochal 2001). An advantage over one-on-one interview is that a group can give a much wider picture as compared to individuals. However, in this model, one needs to pay attention to make sure that group focus is not distracted. Facilitated sessions: This is a more detailed and time consuming technique of obtaining information. All stakeholders to a particular issue will be involved and the session will continue until the objective is achieved. Questionnaires: Another effective method is using questionnaires. Even though not as effective as the foregoing techniques, participants can save time by answering the questions in their spare time. They also have the luxury of time to think out before providing answers. Observation: Direct observation of the working environment is also effective in gathering information. The person requiring the information can directly see for himself the requirements for cost control. Task 4: In the context of Toyota Motor Company, it is perceived that the cost control could be seen in terms of increasing the benefits derived from costs, reduction in major areas of cost usage, particularly inventories and stores management and efficient practice of strategic supply chain management services in order to achieve economies of large-scale production and cost efficiencies. How does Toyota control costs? The success story of Toyota lies in its use of scientific systems and procedures for car making with Kaisen, which entails efficiency and optimum work effort, and is designed, for improving efficiency and reducing costs. The practice of Lean Management, which is based on the concept of developing managers into expert problem solvers and serving customers by attaining heightened level of performance, has contributed in improving their overall efficiency. Lean Management is a total holistic concept, which is designed to attain effectiveness in all spheres of car making, by efficient waste elimination. “Lean production techniques are lowering the cost of making small cars and making it more efficient for car companies to change models quickly, in response to changing consumer taste.” (Schifferes: 2007). The basic theme of Toyota Production System (TPS) is to achieve operational excellence, instil an organisational culture that values and respects people, and fosters their creative abilities. The fact remains that prohibitive costs of fossil fuels and stringent pollution norms have become a severe cost deterrent for automakers. It has, therefore, become essential to seek ways and means for finding out cheaper and clean, fuel-efficient alternatives. To address these problems, Toyota could rightly claim to have established brand leadership in hybrid cars and has surged ahead of other giant American automakers. The different ways in which Toyota could achieve cost controls and efficiencies are discussed below: Levels of Accuracy: In the context of auto making, it is seen that 0% defects and 100% accuracy are necessary, since once automobile body has been placed on the automobile line, it needs to be assembled and final product made. The Toyota automakers use the just-in-time system of delivering parts to the assembly line in a continuous flow, rather than stockpiling large volumes at the plant. Under this method, the shop floor would have only the barest minimum requirements of inventory for production, and upon its exhaustion, they would be reordered from the suppliers or their warehouses. (Globalisation: The Car Industry). Thus, Toyota ensures that no extra inventory carrying costs are entailed. Through this process, Toyota is able to affect good savings, which reflected in their profits and bottom-lines. The advantages of JIT is that it creates a stronger and strategic business relationships with the vendors, the setting up time for the products are reduced and the transportation of goods from the warehouses to the shop floor are also reduced. Further, the different types of skills of the workmen can also be utilized in the sense, that they can be used for a variety of jobs at the shop floor. Moreover, the shop floor supervisors become enabled to manage the scheduling of stocks in a better manner. Consistency Aspects: The second point deals with consistency aspects, and it is seen that this could be achieved through the process of continuous improvement and by analysing problems and solving them on a day-to-day basis. Relevance: It is seen that in the context of cost controls, wastages of materials and production losses can impair profits and burden costs. Thus, it is necessary that personal responsibility be fixed and each worker on a production line is given accountability for each process he carries out. This ensures that sufficient relevance is created for cost controls and developing efficiencies. Sufficiency: The reporting for Management information is based on actual going ones in the shop floor. This in turn is dependent upon the actual operations at the shop floor, and the speed, efficiency and competence of its various operational aspects. In the context of Toyota, it is seen that they seek measures in reducing wastes, emissions and energy and water consumption through the company, as well as improving the fuel consumption of Toyota vehicles. (Sinn 2005). It is through high level techniques using cost control measures that sufficient technological innovations permitting the production of several different models on the same assembly line are achieved. Reliability: It is seen that cost control and cost effectiveness breed efficiency and better management systems The cost controls could be rendered more effective by systematic reporting of MIS and better systems management. It is also needed to envisage robust systems audit in order to ensure that control programs are being used according to prior plans and objectives. The reliability of any cost reduction systems would depend upon its effective deployment and the benefits that accrue to the business over a period of time. Its reliability could be seen in terms of its cost benefits and ready acceptance by the work-force as well as subsequent use over a certain period of time. Toyota’s production assembly lines are so designed that it is possible to detect the faults at that level itself. The Toyota team at the shop floor inspects the product as it moves along the assembly line and taken corrective measures wherever necessary. Thus, what goes to the final customer would be the 100% tested and approved products, after through checking, which ensures that the end users receive satisfaction. Task 5: The various components of costs would be in terms of Srl # Type of costs Examples of such costs 1. Fixed Costs Rent of premises, Salaries to covenanted officers, Directors’ fees, Royalties, interests on loans and borrowings, etc 2. Semi-variable costs Plant lighting and heating, Plant overheads, Machines maintenance etc 3. Variable costs Insurance, Depreciation (reducing balance method) Staff welfare, Transport and freight costs, Since the nature of costs is different, it is necessary to have different levels of controls. The aspects that impinge upon costs are regularity, quantum, incidence, directly attributable to production /marketing /finance, etc. It is also necessary to have budgetary controls over costs in order to effectively contain and reduce costs and their impact on profits. Budgets on costs: Cost Code Number Nature of Costs Frequency Whether Fixed, variable or Semi-variable budget allocation monthly Actual Costs Variance with analysis Task 6: The main people who would be using the cost systems would be: 1. The directors and management team of the company. 2. The supply chain management links including suppliers, vendors and outside agencies 3. Professionals engaged in the accounting aspects of the company including statutory cost auditors, financial consultants and software experts who are responsible for upkeep of operational aspects of the cost and financial data of the company. In the context of Toyota, it is seen that they have an excellent management structure and smooth flow of information from top to bottom and also upwards to higher echelons of management. The cost control systems need to be communicated through internet communications and high-speed data communications systems so as to reach the concerned persons and achieve the desired objectives of cost arrests and controls in order to increase profits and profitability in later years. It needs to be seen that the acquisition, dissemination and actual deployment of cost controls have to be rooted to be in sync with company accepted policies and ethical practices, easy to implement and need to involve all the participants. For this reasons, it is also necessary to have Budget Committees, having budget officers, whose primary responsibilities are to address budget meetings and effectively control costs and reduce its impacts on business. Bibliography Managing Information - A Practical Guide: Elements of Information (2005). [online]. D M Griffiths 2005. Last accessed 17 June 2008 at: http://www.managing-information.org.uk/elements.htm Cost control: Definition. [online]. BusinessDictionary.com. Last accessed 17 June 2008 at: http://www.businessdictionary.com/definition/cost-control.html KIM, M. W. and LIAO, W. M (1994). Management and Accounting Web. [online]. MAAW. Last accessed 17 June 2008 at: http://www.maaw.info/ArticleSummaries/ArtSumKimLiao94.htm Total Cost Assessment Methodology: Range of Costs. (2000). [online]. Centre for Waste Reduction Technologies. AIChE. Last accessed 17 June 2008 at: http://www.earthshift.com/Total%20Cost%20Assessment%20Methodology.pdf MOCHAL, Tom (2001). 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