Financial Discipline

When discussing the concept of “Just In Time” (JIT), we should first examine a key moment in Toyota’s history.

In 1950, Toyota was reorganized into two main entities: a Sales company and a Manufacturing company.

Let’s take a closer look.

1️⃣ Impact on manufacturing

The separation was sparked by Toyota's financial crisis. One issue was the rollout of monthly installment sales. As Japan shifted to a market economy after WWII, automobiles became a free-market commodity. Toyota adopted the monthly installment sale but quickly faced difficulties. They ran out of cash, and Toyota needed support from financial institutions. The bank understood the importance of monthly installment sales and cash flow. However, they also worried that the cash could be lost in production. Therefore, they recommended separating the sales and manufacturing divisions.

This proposal includes the statement, “Toyota only produces what the sales company sells.”

The agreement between the sales and manufacturing companies states that the sales company purchases the product from the manufacturer at the factory. Payment will be made by cash or bill of exchange.

In the above proposal, it states that the production volume is ‘converted’ to 900 BM trucks. It’s unclear what this means, as earlier pages mention 600 BM trucks plus 500 SB trucks. (BM trucks were larger.) However, we can infer that some overproduction was happening. Not only the volume but also the mix suggests that Toyota was overproducing BM trucks.

This agreement positively influenced the implementation of “Just In Time.” For the sales company, which was struggling with cash flow, why did they need to pay cash or an equivalent for overproduced products? Additionally, overproduced products would sit at the factory without being paid for, further straining their cash flow. Yes, it is an extra transaction, but it creates an ideal situation for implementing Just-In-Time.

By the way, the manufacturing company established a rebuilding committee after this agreement, with Eiji Toyoda serving as chairperson. One of the seven members was Taiichi Ohno, the plant manager of machining.

2️⃣ Impact of sales.

There is an agreement between sales and manufacturing regarding ordering.

“Every quarter, fifteen days before the start, the sales team submits the order. Within 10 days, the manufacturer confirms receipt of the order. The delivery date will be set for the 20th of the previous month.”

This agreement clearly evolves over time. In manufacturing, knowing demand for a quarter only 15 days in advance makes it impossible to respond effectively. For sales, the only opportunity to place an order is once a quarter, which is unfeasible. Nevertheless, this agreement laid the foundation for future planning, such as a three-month outlook and monthly order confirmations.

This also lays the foundation for discipline. Manufacturing must meet the delivery schedule. Additionally, sales need to place reliable orders. It is unclear whether rush orders or changes were allowed, but it has probably become more difficult or systematic. At the very least, sales departments that submit irresponsible forecasts and change orders daily now face more pressure than before.

3️⃣ Business discipline

So, what is “Just In Time”?

The idea was already established. For Toyota, the company entered a phase where strict financial discipline became essential. This, in turn, required stronger operational discipline and more rigorous sales management. On the production side, teams needed to consistently meet daily targets for both output volume and product mix, ensuring manufacturing was closely aligned with business goals. Inventory won’t decrease unless the business is cash-sensitive. On the sales side, the organization had to develop accurate forecasts, manage customer credit carefully, and maintain tight control over receivables to support overall financial health.

Toyota achieved this by separating into Sales and Manufacturing. It's not the only option to accomplish this, but it did help them for sure. How do you accomplish financial discipline?

Reference;

トヨタ自動車工業株式会社社史編集委員会 編(1967). トヨタ自動車30年史. トヨタ自動車工業.