Sustaining Costs

Masaya Hanai, the fourth chairman of Toyota, delivered a speech on cost reduction. The speech was published in the September 1978 issue of Kansai Keikyou magazine. In it, he emphasizes the importance of sustaining costs (not the cost of sustaining).

Hanai highlights four pillars of cost reduction.

Target costing

Investment planning for equipment

Sustaining cost

Kaizen of cost

Of the four, Hanai states that maintaining costs at the current level is the basis for all other activities. It is not obvious or clear, but it is important. Without such a system, he doubts that cost reduction will work.

In this sustaining cost, he states the following is important;

Standardization

Quantity control based on the base unit

Exception control

Unfortunately, his speech moves on from this topic. But based on the before-and-after, we can gain more insight.

First, standardization. He states that this is an important responsibility of frontline managers. At the same time, he emphasizes the importance of labor and management working together. Therefore, this is not a pushed standard.

The second is quantity control based on the base unit. The base unit he is talking about is management. It's about the frequency of management’s action. Today, the focus is on management’s daily meeting. This means the action is taken daily. This is much better than taking action based on annual or monthly data. There are places that take action only after such long periods. That said, if that is the only frequency in a factory, it is too infrequent. The team leader and group leaders take action on every takt time. That is the lowest and most frequent level of management. There is also action taken on an hourly level. The evidence is from Hanai’s argument with Taiichi Ohno. The important fact is that Hanai, an accounting or finance guy, is talking (arguing) with Ohno at Genba after one hour of downtime. This means that the news of the line stoppage is escalated to his level within an hour. Of course, having an accounting or finance guy on the production shop floor might not help, but it sends a powerful message that the management cycle is working every hour.

Third is about exception control or abnormality management. Hanai talks about the quick response. Accounting-wise, we will have a gap between the allowed cost and the target. If we act before the actual cost exceeds the limit, we can hit the target. The sad story is that this is an ‘if’ story. In most places, we don’t take action until the actual cost exceeds the allowed cost. Most financial reviews focus on the reasons for exceeding but do not address how to respond faster.

Hanai’s speech on costs is a powerful reminder.

First, Hanai stated that he and Ohno never reached an agreement. However, when it comes to cost, there are many similarities. The common element is the foundation, which requires more attention. Both have a strong focus on cost and Genba. They talk about standardization and the development of frontline managers who can manage and improve those. They also talk about frequency management and quick response. These are the foundations of the Toyota Production System.

Another aspect is that people like to talk about cost reduction and Kaizen. Both Hanai and Ohno emphasize the importance of standardization and sustaining it. Without the capability to sustain cost reductions, what is the point of setting and designing cost targets? Such target costing will become expensive paperwork if we don’t have the capability to sustain it. Kaizen is important, but why do we see things breaking down and not sustaining them? Sustaining is not just the responsibility of production. Hanai’s attitude, from a finance or accounting perspective, supports sustainability. Before we pay attention to something fancy, we need to establish something ‘dull’ but important.

And, what is the difference between Hanai and Ohno? Hanai was known for aggressive investment. He was known for investment without debt. Both Hanai and Ohno were known to bring the breakeven point down. But Hanai still wanted to invest.

Reference: Masaya Hanai (1978, September). トヨタ自動車における経営の考え方と実践ーームダの徹底的排除をめざす. 関西経協 32(8).