Elon Musk & Tesla are Re-Thinking the Toyota Production System through Digital Transformation
Elon Musk Does It Again
At times, we need to stop and rethink everything. Our entire history is made up of people who were sure they knew the truth yet forgot that the truth has an annoying tendency to change on occasion without us noticing it.
— Yair Lapid, Israeli Politician
Toyota Production System — A production system based on the philosophy of achieving the complete elimination of all waste in pursuit of the most efficient methods.1
Digital transformation is the essential re-thinking of EVERYTHING about a business to find a new level of improved experiences, efficiencies, innovation, and business models while using disruptive technologies to enable this re-thinking.
But wait — aren’t there concepts, playbooks, and systems immune to digital transformation? Can’t some aspects of traditional management science escape the onslaught? There might be, but one of the gold standards appears to be showing its age. The Toyota Production System, admired and used not just in automotive OEMs but universally applied in other sectors, is being re-invented. And guess who is behind it?— The biggest re-inventor of our generation, Elon Musk, and the team at Tesla.
History of The Toyota Production System
The Toyota Production System (TPS) is an integrated socio-technical system, developed by Toyota, that comprises its management philosophy and practices. The TPS is a management system that organizes manufacturing and logistics for the automobile manufacturer, including interaction with suppliers and customers. The system is a major precursor of the more generic "lean manufacturing". Taiichi Ohno and Eiji Toyoda, Japanese industrial engineers, developed the system between 1948 and 1975.
Originally called "just-in-time production", it builds on the approach created by the founder of Toyota, Sakichi Toyoda, his son Kiichiro Toyoda, and the engineer Taiichi Ohno. The principles underlying the TPS are embodied in The Toyota Way.2
Companies from Caterpillar, to Nike to Providence Health Systems use TPS as the playbook for their operating principles. But what are the weaknesses or costs of TPS?
The underlying premise of TPS is to avoid variances to achieve flow, harmony, and efficiency. To achieve this, Toyota freezes car designs and architectures one year in advance of the first production and does not allow for any changes for two years after the first production.
TPS Becomes the “Tesla Production System”??
Tesla hasn’t just been successful at designing great electric car models, a fantastic customer experience across many of the points of the customer journey, innovated a new distribution system (direct to consumer), but it has challenged some of the underlying standards of the Toyota Production System in its pursuit of more efficient operations.
Not Tesla. It doesn’t freeze specs. Just the opposite. It makes design changes on the fly. And it mainly makes those changes – this is a key point – to take cost out of its cars.
Tesla’s electronic architecture is a prime example. The architecture in the Model X worked just fine, but two years after it came out the Model 3 debuted with an entirely new architecture.
Other automakers would never do this. Once they’re done designing a new architecture, they won’t touch it again for a decade. They “know” you can’t make changes like that. But here’s the kicker: According to Caresoft Global’s benchmarking analysis, Tesla chopped out more than $300 in cost with that new electronic architecture. In an industry that fights over fractions of a penny, that’s a staggering cost reduction.
And then only two years later, along comes the Model Y. Just a Model 3 with a new top hat, right? Nope. It has yet a different architecture from the 3 that delivers far more capability.
By designing on the fly, Tesla is taking out cost and adding capability far faster than the establishment.
It’s key to Tesla’s profitability and its ability to dominate the EV segment. Another important point: Tesla validates those design changes using digital models, so they can be implemented right away, not years down the road.3
By challenging long-held beliefs and assumptions and applying software-enabled techniques to model and enable changes, they have put yet another dent in the side of the auto industry.
Some traditional automakers are already “woke” to the new reality. Volkswagen CEO Herbert Diess actually invited Musk to speak to his top management, hoping to light a fire under them to recognize the threat and move more quickly. Ford’s CEO Jim Farley essentially gave the same message to his top executives.4
Operational excellence — cheaper, faster, better quality, more adaptive, lower risks, fewer injuries — is a category of the digital transformation playbook that many companies don’t emphasize but should. OE provides immediate payback and the successes and capabilities built here are transferable to other categories of your digital transformation.
What aspects of your management playbook are showing their age? How do you get to the next level of operational efficiencies by rethinking the constraints, rules, and assumptions and applying digital technologies?
Received a nice shout-out on Twitter from TJ Waldrorf. Thanks!
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