Identifying Internal Control System within Toyota - Case Study Example

MANAGEMENT Submitted By Introduction 3 An Infrastructure for Quality Assurance 3 Internal Control System 4 The Internal ControlSystem and Quality Management of Toyota 5 Toyota’s Management System 6 Essentials of Quality Management 7 Tools and Techniques of Total Quality Management 8 Conclusion 10 References 12 Introduction A formal internal control system provides the framework for total quality insurance (TQM). A TQM process if done properly with the support of the internal control system helps everyone in the responsible position. It is beneficial for the company, clients and even the employees. TQM is a vast topic originally built for measuring and reporting quality results. TQM is a whole process which cannot be made in vacuum. It requires precise techniques and methods such as bench marking and knowledge management along with the control system. This research paper aims at studying and identifying internal control system within Toyota as well as interpreting the criteria for developing and evaluating the control system and its impact on the total quality management. Thesis statement: Internal control and total quality management should not be limited to minimizing cost, improving quality and increasing return on investment but should also emphasize on improving human capital. An Infrastructure for Quality Assurance Total quality function and internal control work side by side for organizational success. Quality assurance provides the basic infrastructure for measuring and reporting quality. Quality assurance program begins with the policy statement by the board which recognizes the need of total quality while minimizing cost. It includes designing of rigorous quality control procedures and development of quality control standards. Internal control serves as the vector of information on quality. Successful companies not only realize the importance of existence of quality assurance methods but also try to do better than the industry average. The impact of good management is usually gauged in the three dimensional framework which consist of high quality, low cost and steadily improved return on investment. In the wake of globalization and accelerating pace of change many organizations now also include quality human capital as the fourth dimension, quality in selecting, hiring, training and evaluating promotion of human capital. Overall quality cannot be achieved without motivating and developing human capital. Motivated employees are not only willing to undertake challenging tasks but it also improves their perception of self worth. Hence the new concept of quality is not just limited to product quality but total quality in every department and process of the company. Every employee should work for the total quality management. It is a virtuous cycle which begins with product quality, cost minimization, fast time to market, business reputation, high performance work environment and eventually leads to improved job performance and personal satisfaction of the employees. Internal control measures job performance and report it to the senior management (Chorafas, 2001). Internal Control System Internal control is the vector of information that provides information to the senior management for decision making. Internal control plays a fundamental role in any business and should be used in integration with strategic control and management control for its maximum benefit. Internal control is based upon gathering information so it has various inputs from different departments and processes of the organizations. It receives information from customers, workers, suppliers and information about other events and condition. This transaction of information is bilateral or two way. Internal control then passes on this information to the higher management who makes plans, authorizations and takes decisions accordingly. Internal controls also provide feedback or follow up of those plans, procedures and decisions. Managements’ ability to fulfill their responsibility and adequate decision making is dependent on the quality of information received by the internal control. Incomplete, incorrect or manipulated information can mislead the organization in the wrong direction. Internal control system can be described as the formal mechanism of checks and balances which includes all the formal information-based routine procedures and methods utilized by managers to maintain or change organizational activities. Internal control also provide the basic information for strategic control which has the external focus and management control which has the internal focus. The quality of both depends on the quality of information provided by internal control. The internal control system is not without its own set of deficiencies. Firstly it is subjective because it is based on people who can make omissions, errors or even fraud in gathering information. Secondly the cost of designing and implementing an internal control system should not exceed its benefit. Developing and designing an well planned control system is costly. If the cost of developing and implementing the internal control system is less than the decision error cost, asset lost and residual risk only then the internal control system is viable (Pfister, 2009). The Internal Control System and Quality Management of Toyota The effectiveness of any internal control system can be gauged by the success of the various tools such as balanced score card, key performance indicators and customer satisfaction surveys in helping managers achieving organizational targets. All these tools are based on the information provided by the internal control system. Internal control system at TOYOTA is adjudged through the operational effectiveness and efficiency. If the company is managing to achieve its total quality management targets it indicates the success of the internal control system of the company. Toyota is known for its operational efficiency and effectiveness which is based on the lean production system called the Toyota production system (TPS). Toyota is the pioneer of total quality management. For some people total quality management is synonymous with Toyota. Total quality management is an organization wise effort to inculcate quality in all activities of the organizations through continuous improvement. Toyota incorporated Kaizen, TQM not only in its TPS but in the whole management of Toyota. TQM philosophy fundamentally revolves around the concept of team work, maximizing customer satisfaction and minimizing cost. It is basically decentralization of control methods which encourage employees to collaborate, integrate and cooperate with each other across departments and functions as well as with suppliers and customers for continuous improvement of all activities and functions of the organizations (Daft, 2008).TQM cannot be implemented without a proper internal control system. At Toyota it is believed that the internal control system has two major roles to play. It includes firstly providing accurate and timely information to the management to make their plans and decisions and secondly to ensure proper implementation of those plans and providing feedback to the management. Internal control system also ensures the reliability of the published financial data and the compliance of applicable laws and regulations. Toyota’s Management System Toyota’s management system which is called the “Toyota Way has four basic principles. Customer first, improvement on the job and challenge, respect for human resource and growth with harmonization of society.” Toyota has a history of concern for its stakeholders especially employees and the community. Toyota values its human capital very much. It follows the policy of forward feedback and hence invests a lot on the training and development of its employees. Motivation and self cultivation is the main aim of most of the on job training programs. However Toyota’s internal control system is somewhat weak. It is based on the seniority system, assuming and encouraging relationship of trust and cooperation between employees and managers. Career concerns should be coordinated with organizational objectives. The main feature of Toyota’s governance system is team work and peer pressure among employees. Toyota has the system of internal promotion for its board of directors and executive officers which provides a weak mechanism for internal control. Some outside disciplining should be involved along with the internal control system to increase its efficiency as well as credibility. Although Toyota’s new governance system encourages sharing of information between executives and directors, better harmony with market mechanism, corporate auditors have more independence and IR activities are more openly shared with outside world to increase accountability but still there is room for improvement. Toyota’s corporate governance is still considered closed by the investors (Mallin, 2006). Perhaps this weak internal control system was one of the contributing factors in the recent fiasco of the company. Toyota had to suffer from a great lapse in quality assurance when it had to call back a number of its cars because of the engineering fault. It costed company millions of dollars. Essentials of Quality Management The essentials of total quality management include the following activities. Customer focus Reducing development cycle time Just in time/ demand flow manufacturing Team improvement Minimizing cost Improving administrative systems training Although all the above activities are considered the essentials of total quality management but at the core of it is customer focus (Bissonndoyal, 2004). TQM process is built on the concept that by developing an understanding of the process we can not only reduce development cycle time but also minimize cost by reducing the frequency of occurrence of error. This can be achieved through development of quality human capital through training and keeping employees motivated to work in teams to satisfy customer. Every employee in his/ her role is responsible for quality assurance. All these essentials of total quality management are present in the TQM and internal control system of Toyota which is ensuring exemplary quality management at the company. Tools and Techniques of Total Quality Management Many statistical tools are utilized for total quality management. It includes Control charts Pareto charts Fishbone diagram Run charts or trend charts Histogram or bar charts Scatter diagram Control chart is a statistical control measure which defines the upper and lower limit within which the company must operate. Pareto charts is used to display defects so that 20% of the problems can be identified which cause 80% of the problem. Fish bone diagram identifies the cause and effect of a problem. Trend chart is a measurement tool which measures quantity over a period of time such as turnover etc. Histogram chart measures quantity in a certain category. Scatter diagram identifies how one variable is related to another (Nicholas Morgan, 2002). In addition to these statistical tools other techniques are also use by organizations for total quality management such as Bench marking Knowledge management Six sigma Bench marking is process of quality management which can be used alongside other quality control measures. Benchmarking focuses on comparison of performance of an organization with other or within the organization in different departments in order to seek continuous improvement. Toyota known for its famous TPS and JIT was also able to develop this system based on the concept of benchmarking (Watson, 2007). Toyota professionals when visited FORD they realized the factory was characterized by wastage of scarce resources. They used it as bench mark in developing their lean production system minimizing on waste. Toyota even today uses benchmarking with other organizations to keep its market focus as well as benchmarking within the different departments of the organization. This helps in keeping the employees motivated and competitive in achieving continuous improvement. Toyota’s reward system for appreciating outstanding performance and intense training program for employee development has also played a strong role in keeping the employees motivated and maximizing their job performance. Bench marking technique can only be successful if employees are trained enough and motivated enough to strive to achieve those targets. Knowledge is an important source of continuous improvement and assurance of quality. Toyota is a learning organization which not only ensures but encourages the principal of perpetual learning. One of the reasons of Toyota’s success is their exemplary human resource management. At Toyota the culture is that every employee learns from each other independent of their degrees. The employees trust each other and the company. Toyota provides a stable employment, improved working conditions which promotes employee participation and team work. The working philosophy of Toyota is called “Sakichi Toyoda” which is based on the principle of continual advancement and learning by doing. It requires every employee to contribute for the development and welfare of the country (Jost, 2008). It requires endless creativity and continuous improvement to be ahead of their time and practicality, in addition to generosity and kindness for creating homelike environment and showing gratitude for small things. This has been the recipe of success for Toyota. Conclusion Restatement of thesis statement: Total quality management and internal control cannot be achieved without extensive and well defined human capital development program. I would conclude my paper based on the literature reviewed and the research conducted with respect to Toyota that total quality management and effective internal control are not just procedures which ensure success for the organization. It has various aspects attached to it which are not limited to financial and engineering process but it requires a well defined human resource management. Only the well trained, equipped and motivated employees in a learning organization can achieve the total quality standards which require continuous improvement. References Bissonndoyal, U. (2004). Total Quality Management: A Practical Approach. New Delhi: New Age International Limited. Chorafas, D. N. (2001). Implementing and auditing the internal control system. New York: Palgrave McMillan. Daft, R. L. (2008). Management. USA: Thompson Higher Education. Jost, I. (2008). The Different Kinds of Knowledge Management and their Goals and Hindrances at Toyota. Germany: Grin-Verlag. Mallin, C. A. (2006). International Corporate Governance: A case study approach. Massachusetts: Edward Elger Publishing. Nicholas Morgan, E. S. (2002). Contemporary Issues in Strategic Management. Capetown: Pearson. Pfister, J. A. (2009). Managing Organizational Culture for Effective Internal Control. London: Springer Dordrecht Heidelberg. Watson, G. H. (2007). Strategic benchmarking reloaded with six sigma . New Jersey: John Wiley & Sons. Read More