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OCR for page 90
6
The Sources of Competitive Advantage:
Cost and Quality Comparisons
Almost 30 percent of all new cars sold in the United States in the
spring and summer of 1980 were manufactured outside North
America. The recent surge in imported products was influenced
by a series of special factors that caused a rapid shift in consumer
preferences. Yet the level of import penetration has been growing
since the late 1960s. It seems that the long-term success of the
Japanese and European producers may be the result of name
fundamental factors than the recent shift in preferences or the
absence of domestic small-car capacity. We noted in Chapter 4
that domestic producers have had little incentive to excel in
small-car production and that at least until the early 1970s the
foreign producers typically enjoyed a cost advantage. The
evidence also suggests that the most successful foreign producers
[e.g., Volkswagen (VW), Toyota, Nissan] have combined lower rote
with an emphasis on quality.
achieved at the low-price end of the market, but the imports
sought to add more performance and quality to the product than
the low price itself might have suggested. Rather than pass their
cost advantage on to the consumer in the form of an even lower
price for an average-quality product, the imports used part of
their cost advantage to develop a more competitively viable
advantage in product performance and quality.
The success of the import strategy provides useful insight into
the nature of competition and consumer demand in the market for
smaller cars. (The analysis may also apply to other segments, but
our focus is on the markets in which domestic and foreign products
compete.) The trend in import penetration suggests that the
market is sensitive to the price-quality package and that product
quality is becoming an increasingly important dimension of
competition. It also seems clear that production cost and product
quality are closely related and that both must be examined in
assessing competitive advantage. Comparison of the relative
competitive position of domestic and foreign products is
~ nus, initial penetration was
90
OCR for page 91
91
in essence a comparison of systems of production. The success of
the imports has underscored the obvious point that a production
system must be judged in terms of the cost and the quality of its
output.
The twin issues of cost and quality are central to the future of
the domestic auto industry. An assessment of the continued
viability of domestic production requires an evaluation of current
competitive positions and some analysis of trends in the under-
lying determinants.
_ . . . . . .. .
We first consider the costs of production.
our approach Is to draw on publicly available information as well
as on data from industry sources to arrive at estimates of the cost
of producing a comparable vehicle in both the United States and
Japan. We then examine evidence on product quality from a
variety of sources. Several dimensions of quality are identified,
and an attempt is made to assess the relative position of domestic
and foreign products on each. The chapter concludes with an
assessment of the sources of U.S.-Japanese differences.
It should be noted that we do not attempt to assess the com-
parative advantage of U.S. producers in the sense of classical
economic trade theory, which depends on relative
.. . ..
costs of
production at home and abroad (e.g., ratio of costs in autos to
costs in other goods, versus the same ratio in other countries).
Our analysis is focused on the competitive position of U.S.
automobile producers relative to their major competitors within
the automobile industry. The approach we use here places priority
on understanding the characteristics of intraindustry competition,
including the role of costs, product quality, and technological
innovations. While an analysis of domestic relative costs (i.e.,
autos versus others in the United States) and relative costs in
Japan or Europe would be a potentially useful element in an
assessment of trade patterns, such an analysis in the context of
differentiated products, economies of scale, and oligopolistic
markets is likely to be complicated and is beyond the scope of this
study.
COMPARATIVE COSTS OF PRODUCTION
Over the last several years, information on foreign and domestic
productivity and factor prices has been developed that implies a
slight advantage for Japanese products and a disadvantage for
producers in West Germany and the United Kingdom. These com-
parisons are for vehicles available for sale in the United States
and thus include the costs of ocean freight and applicable tariffs
for imported products.
One of the most careful studies of relative costs was conducted
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92
by Eric Toder and his colleagues at Charles River Associates.2
Using data for 1974, Toder found a Japanese disadvantage of 3
percent. If Toder's analysis were revised to reflect more realistic
transportation costs, the data would imply a Japanese advantage
of about 7 percent.
In 1978, additional U.S.-Japanese cost comparisons were pub-
lished by Ford in a white paper entitled State of the U.S. Automo-
tive Industry. Ford estimated the net Japanese cost advantage per
vehicle to be $525 on a subcompact-size car landed in the United
States. Although methods and sources were not identified, higher
U.S. costs were largely due to higher wage rates, a result
generally consistent with the analysis of Toder. The difference in
the two analyses could be explained by differences in time period,
intervening inflation, and changes in productivity.
The notion that the landed-cost differential between U.S. and
Japanese products is $500-$600 recently found its way into con-
gressional testimony. Speaking before the Subcommittee on Trade
of the House Ways and Means Committee. Abraham Kelp
_ _ ~ ~ ,
~ ~ ~ _ ~ ~ ~ ~ . . ~
Assistant secretary ot Commerce for International Economic
Policy, summarized what appears to be a concensus view:
Average hourly compensation (including fringe
benefits) in the Japanese auto industry in 1979 was
$6.85--half of the 313.72 hourly compensation in the U.S.
auto industry. Present indications are that productivity in
the U.S. and Japanese auto industries may be roughly
equal. On this basis Japanese producers appear to have
had an $860 labor cost advantage per car in 1979. Other
differential costs (principally the higher cost of steel in
the United States) may have added $100 per car to the
U.S. cost. As freight and insurance on Japanese cars
averages ii400, the apparent cost advantage to Japanese
producers may have been $560 per car in 1979. The actual
advantage may have been considerably less, for the above
calculations do not take into account energy costs, capital
costs, and the costs of other production factors--some of
which are cheaper in the United States than in Japan.3
It is our view that the estimates presented by Katz and his
suggestion that actual differences might be even lower constitute
an understatement of the current cost advantage of the Japanese.
Not Shiv clip the Him;—c fail try rmfI^~1 Ran rip ^c of —^rr~r~~r~_
~ ~ ~ _ ~ & ~ _ 1 ~ — ~ ~ ~ ~— V ~ a_ V ! ~ · !J ~ ! 1
. . . . . . .
sallon nut they also tail to capture important differences in
production processes that result in higher productivity in Japan.
Estimates that reflect these differences have been developed
using a variety of methods. We have estimated the productivity
and cost differential using both a macro, economy-wide approach
OCR for page 93
93
and a "bottom up" approach with microdata. We have taken an
industry-wide perspective, using publicly available sources, and we
have analyzed annual reports. Comparisons of this sort involve
several difficulties. The automobile manufacturers of the United
States and Japan produce a different mix of products and have
organized production in different ways, particularly in terms of
vertical integration. - ~
Productivity comparisons are also signet ~-
cantly affected by differences in capacity utilization that have
been substantial in recent years. While attempts have been made
to correct for these factors, even the most careful comparison
requires judgements and assumptions that affect the results. A
detailed description of the various kinds of analysis used is
presented in Appendix A.
Evidence from Alternative Perspectives
Table 6.1 outlines the various perspectives taken and summarizes
the basic results. The analysis suggests that the Japanese enjoy a
landed-cost advantage of between $700 and $1500 per small
vehicle. These estimates are larger than those used in congres-
sional hearings during 1980. Furthermore, the immediate sources
of the Japanese advantage may be quite different. Those analyses
that focused on the auto sector found sizeable differences in labor
hours per vehicle (a measure of productivity) along with differ-
ences in employee costs and other prices. The industry level
analysis (which includes suppliers) found a 20-25 percent Japanese
advantage in productivity, while examination of specific plants
and processes revealed an even larger productivity gap.
The wide disparity in estimates of the Japanese productivity
advantage underscores the difficulty of making precise calcula-
tions, particularly in this context, where the industry structure is
different and hard data are relatively scarce. Indeed, precise
order of magnitude and the confidence which industry panel
members place in the estimated cost difference (i.e., $1200-$1500)
comes much more from internal studies, using confidential and
proprietary data, than from the relatively rough analysis presented
in Appendix A. Some of the calculations in Appendix A are
consistent with the internal evidence, and all of them point to a
sizeable U.S. cost disadvantage that appears to reflect differ-
ences in both prices and productivity.4
ASPECTS OF PRODUCT QUALITY
When VW first made significant penetration into the U.S. market,
its strategy established a formula for success that has been refined
OCR for page 94
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95
and extended by the Japanese. A critical element in that strategy
was the production of a vehicle that the market perceived to be of
high quality. Beginning with the VW Beetle in the late 1950s~ the
.
word used most often to describe the character of imported
products has been "workmanship," which connotes attention to
detail and care in production and quality appearance. The view is
now widespread that quality defined in these terms has been a
significant factor in the recent success of the Japanese. It seems
clear from recent statements of industry executives that an
improvement in quality will be an important aspect of any
improvement in the U.S. competitive position. In this chapter we
identify dimensions of quality that appear to be significant and
present evidence about the relative U.S. position.
1 ~
Definitions
Any attempt to define and evaluate the quality of a complex
product such as the automobile must deal with the supposed
distinction between perception and reality. It has been argued
that the Japanese and European advantage in quality is not "real"
in an objective sense but is only a perceived advantage. The
implication is that through advertising and other forms of public
persuasion the importers have created an image of quality that
colors consumer perception. This argument misses the point. In
the marketplace, perception is reality. The competitively impor-
tant dimensions of the product are not those established by
experts, nor are the key differences between manufacturers those
determined by an objective evaluation. Competitive advantage
accrues to those whose products are perceived by the buyers to be
of higher quality.
v — hi,
Seen in these terms, quality is simply whatever the market
defines it to be. A manufacturer can go to great lengths to offer
a car with clearly superior rustproofing, but if corrosion protec-
tion is not an element of the market's definition of quality, little
competitive advantage will be obtained. There appear to be three
dimensions of quality that the market regards as significant. We
propose to define each dimension and present some evidence on
the relative U.S. position.
Assembly Quality
This category harks back to the notion of "workmanship" identi-
fied earlier. It has been described as the "fits and finishes"
dimension and includes such things as body finish, squeaks and
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96
r attles, the alignment of doors and hoods, and paint quality.
Within the industry, assembly quality is usually defined in terms of
"building to spec," that is, making the vehicle as specified in the
design. This definition focuses attention on the work performed
on the assembly line and on the extent to which components and
materials meet specifications. But it is clear that the design and
thus the specifications themselves are also a significant factor in
determining assembly quality. Not only does the design affect the
ability of the manufacturing organization to achieve high-quality
assembly, but the standards established in the specifications may
not be as exacting as those of competitors.
Available information suggests that U.S. producers' assembly
quality falls short of the implicit market standard set by the
imports. Table 6.2 presents ratings of the condition of selected
vehicles at delivery and the number of defects after one month of
service. Imports have a clear advantage in both measures,
although the gap is largest in defects after one month. These data
suggest that consumer perceptions are consistent with actual
experience with purchased vehicles.
Reliability
The automobile is a collection of complex mechanical and
electrical systems that are subjected to enormous stress--wide
variance in temperatures, short bursts of heavy use followed by
long periods of inaction, and so forth. To be even minimally
competitive, cars must achieve a very high degree of reliability--
that is, the ability to function as designed on demand. In these
terms, reliability applies both to individual components and to
entire vehicle systems. Failure to function as designed makes the
,
vehicle less useful (at times unuseable), and repairing a malfunc-
tion is often a time-consuming hassle. Reliability is thus a critical
dimension of overall quality.
To measure reliability we have used the repair incidence data
published by Consumer's Union. These data were not drawn from a
random sample of all owners but rather from the subscribers to
Consumer Reports. They may not be representative of experience
generally. ~l~he basic data cover repair frequency of mechanical
systems and components and the body (structure, finish). Ratings
are given in five categories average, below average, far below
average, above average, and far above average. Beginning with a
score of O for far below average, we have assigned values of 5, 10,
15, and 20 to the other categories. A total score for each vehicle
was obtained by summing the scores on individual body and
mechanical systems. The results are reported in Table 6.3 for
selected makes.
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97
It is apparent that imported products have achieved repair
records that exceed those of the domestic manufacturers, in some
cases by substantial margins. While the imports have an advan-
tage in both body and mechanical systems, the superiority of the
foreign products is most pronounced in the body category. This is
consistent with earlier evidence on assembly quality. In mechani-
cal systems, reliability of some of the domestic and imported
products is actually quite close. Given the nature of the data and
size of the differences, strong conclusions about an overall import
advantage in mechanical system reliability does not seem
warranted.
TABLE 6.2 Rating of Assembly Quality: U.S. Versus the Imports, 1979
Condition of Car at Delivery Condition of Car after One
(scale of 1-10; 10 is Month of Service (number of
Vehicle Category excellent) defects per vehicle shipped)
Aggregates Domestic Imports
Subcompact 6.4 7.9
Compact 6.2 7.7
Midsize 6.6 8.1
Standard 6.8
Specific Models
Omni 7.4 4.10
Corolla 7.8 0.71b
Chevette 7.2 3.00
Pinto 6.5 3.70
Rabbit (U.S.)a 7.8 2.13
Fiesta 7.9 N/A
Civic 8.0 1.23C
Horizon 7.5 N/A
Colt 7.8 N/A
a European Rabbit averaged 1.42 defects per vehicle shipped.
b Toyota average.
c Honda average.
SOURCE: Aggregates: Rogers National Research, Buyer Profiles, 1979; Models: Industry
Sources.
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98
TABLE 6.3 Ratings of Body and Mechanical
Repair Frequency, 1979
(10 = average; 20 = best; 0 = worst)
Make
Body Mechanical
Domestic
Buick 10 10
Chevrolet 4
Dodge 8 8
Ford 9 7
Lincoln 10 10
Oldsmobile 11 9
Volkswagen 14 11
Imports
Datsun 14 11
Honda 16 12
Mazda 18 13
Toyota 17 12
Volkswagen N/A N/A
Volvo 1 6 1 1
NOTE: The data cover repair frequency of mechanical
systems, components, and body (structure and finish).
Ratings are given in five categories: average, below
average, far below average, above average, and far above
average. Beginriing with a score of 0 for those that are far
below average, we have assigned values of 5, 1˘, 15, and
20 to the other categories. A total score for each vehicle
was obtained by summing the scores of individual body
and mechanical systems.
SOURCE: Consumer Reports, April 1979.
Durability
There is little evidence about the long-term durability of Japanese
products and thus little basis for comparison. It does appear that
U.S. products have superior corrosion protection and that basic
components and systems may be more durable.
Customer Loyalty
Perhaps the most significant test of quality production an d
customer satisfaction is loyalty, the willingness of buyers to
purchase the same car again. The data presented in Table 6.4
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99
TABLE 6.4 Customer Loyalty: Would Buy Same
Make/Model Again (percentage)
Domestic Imported Total
Subcompact 77.2 91.6 81.2
Compact 74.2 91.4 72.4
Midsize 75.3 94.5 76.9
Standard 81.8
Luxury 86.6 94.6 87.2
Total 78.7 91.8
SOURCE: Rogers National Research, Buyer Profiles, 1979.
generally confirm the evidence on assembly quality and reli-
ability. The fraction of owners willing to buy the same make
again is much higher in the import group. Since the Japanese
dominate the import category, these results underscore their
f ormidable competitive advantage. Not only are their costs
significantly lower, but the quality of their products is higher
EXPLANATION A N D PROG NOSIS
.
It has become almost commonplace to cite the superior quality of
Japanese cars as a rationale for their competitive success. With
the evidence on productivity and costs, it appears that the
Japanese competitive position is buttressed by a significant cost
advantage as well as by higher-quality production. On both counts
the gap between the United States and Japan is significant. While
there is little evidence of a serious attempt to exploit the cost
differential through aggressive pricing, it is clear that Japanese
manufacturers can absorb very large increases in costs without
raising prices and still obtain higher margins than their U.S.
competitors.5 And it is equally clear that a sufficient margin
exists for even more costly improvements in performance and
quality. Japanese quality levels, however, are already perceived
to be a cut above domestic production. With their emphasis on
quality and performance the major Japanese firms have acquired a
kind of "reputation capital" that enhances an already formidable
competitive position.
Popular accounts of the emergence of Japanese producers as
first-rate, worldwide competitors tend to emphasize the impact of
new automation technology (e.g., robotics), strong support of the
central government (i.e., "Japan, Inc."), and influence of Japanese
culture (i.e., a dedicated work force). There is no doubt that these
factors have played some role. Yet, it is our view that the
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100
sources of the Japanese advantage are not to be found in such
factors. Rather, they are rooted in a commitment to manufac-
turing excellence and a strategy that uses manufacturing as a
competitive weapon.
It may seem odd to think of manufacturing as anything other
than a competitive weapon. After all, "manufacturing" refers to
the production and distribution of the product--essential features
of competition. Yet the history of the automobile market in the
United States suggests that by the late 1950s manufacturing had
become a competitively neutral factor. This is not to imply that
it was not important; indeed, the Big 3 expended great resources in
improving technology and productivity. The point is that none of
the major producers sought to achieve a competitive advantage
through superior manufacturing performance. Except perhaps for
economies of scale, which are affected by manufacturing
aec~slons, the basis of competition was located outside
manufacturing--in marketing, styling, and the dealerships.
But the Japanese advantage originates precisely in manufac-
turing operations. Productivity and quality are determined in the
very heart of the operation, in the interaction of Deoole.
m aterials, and equipment. It is in the management of these
elements that the Japanese have excelled. And it is the dictates
of strategy that have provided the impetus for that excellence.6
The strategy of the Japanese producers was first and foremost
an entry strategy. The fact that they started from the ground up
in the U.S. market influenced their choices in all dimensions of
competition. When the Japanese sought to penetrate the U.S.
m arket it would have been foolish to try to compete with the
domestic firms on their terms. Just as General Motors (G M)
avoided head-on competition with Ford in the 1 920s, so the
Japanese approach avoided status quo competitive behavior in the
1960s. The domestic market was dominated by the large car, the
annual model change, and the "boulevard ride." The new entrants
had neither the experience, the production systems, nor the
resources to compete on those terms. As with other imports, the
J apanese sought out a niche in the small-car segment. Having
learned from their early failures (the first attempt at penetration
failed on the strength of a low-performance, low-quality product)
and the success of VW, both Toyota and Nissan concentrated on
establishing a dealer network and on producing a high-quality,
solid-performance small car. It was essential that the level of
quality and performance be noticeably superior. Otherwise the
new product lines were destined to be lost in the competitive
shuffle. Moreover, reputation for quality and performance was
essential for success over the longer term when entry into
higher-margin niches (sports cars, high-performance sedans) was
. .
envlslonec ,.
~ . .
r——rid—~
OCR for page 101
101
Explaining the Performance Gap
If competitive strategy provides the broad driving force for
excellence in manufacturing, what explains observed U.S.-
J apanese differences in performance? What aspects of the
production process should be singled out for particular notice? To
cast some light on these issues, we have identified several char-
acteristics of the production process that may be important in
explaining differences in productivity.
The productivity of an operating system--in this case the
n umber of employee hours required per vehicle produced--is
determined by the state of technology (both product and process
by the amount and quality of inputs; and by the way in which the
resources are combined, organized, and managed. At its most
basic level the productivity of an existing operation and tech-
nology can be improved either by improving the quality of
r esource (e.g., hiring more highly skilled workers, using better
materials, and so forth) or by more effectively utilizing the
existing set. The latter may involve things like changes in
supervision, changes in the procedures used to control materials,
or a host of other management and organizational factors.
Productivity can also be enhanced by introducing advanced
technology--new equipment, new products, or new processes and
technologies.
These basic determinants--technology, resources, and manage-
ment systems--can be used to compare and contrast production
operations. Our analysis of the U.S.-Japanese productivity gap in
auto production is organized around seven factors that have been
grouped into three categories: process systems (process yield,
quality systems), technology (process automation, product design),
and workforce management (absenteeism, job structure, work
pace). Any attempt of this sort runs the risk of arbitrary categor-
ization. While useful in clarifying determinants, it should be
recognized that many of these are closely related.
Table 6.5 provides definitions of the factors affecting the
productivity differential, along with a brief statement of
comparative practice in the United States and Japan. The
selection of the factors, their definition, and the comparisons are
based on discussions with a panel of industry experts. We also
asked the panel to rank the factors in order of their importance;
some members of the panel provided a percentage allocation. The
rankings are presented in Table 6.6.
Perhaps the most striking finding in the panel's assessment is
the relative unimportance of the factors connected with tech-
nology. Neither automation nor product design is accorded a large
measure of explanatory power. Despite the publicity devoted to
r obotics and advanced assembly plants, such as N issan's Zama
OCR for page 102
102
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facility, U.S. firms appear to have maintained comparable levels
of advanced process technique and equipment.
The panel's assessment is buttressed by evidence presented in
Appendix A that suggests that the Japanese producers may use
less capital per vehicle than their U.S. counterparts. While it is
true that capital-labor ratios are higher in Japan, the large labor
productivity gap cannot be explained by simple capital-labor
substitution.
T ~ ~ ~
one comparison thus makes clear that an explanation of the
productivity gap must be found in the quality of resources and
m anagement systems. The panel was unanimous in giving top
billing to a factor we have labeled "process yield" but that is
really an amalgam of several management practices and systems
related to production planning and control. The "yield" category
captures Japanese superiority in operating their processes at a
high level of good output over extended periods of time. Although
engineering (i.e., machine cycles, plant layouts) is of some
importance, the key to Japan's lead in this category appears to be
the interaction of the material control system, maintenance
practices, and employee involvement.
Figure 6.1 graphically portrays the determinants of annual
output of good parts (from a representative production process)
and indicates some of the management practices and systems that
lead to superior performance in Japan. The key to the material
control system is the concept of "just in time" production.7 Often
called "Kanban" (after the production cards or tickets used to
trigger production), the system is designed so that materials,
parts, and components used at a given step in production are
produced or delivered just before they are needed. Thus, stages in
the process (including suppliers) are tightly coupled, with very
little work in-process inventory. Suppliers must therefore make
frequent deliveries of parts, and lot sizes must be small to accom-
modate product variety. It is the Japanese view that reduction of
decoupling inventory exposes "the real problems"--waste of time
and materials, imbalance in operations, defective parts, equip-
m ent operating improperly, and so forth. (Table 6.7 provides
comparative data on inventory levels. These data show that
dramatically less inventory is used by Japanese firms in the
production of automobiles. This is true whether one looks at the
process as a whole or at specific plants.) With small buffer stocks
the production system will simply not work if there are frequent
or lengthy breakdowns. Thus, the just-in-time approach exposes
opportunities for reducing waste and solving problems, while at
the same time creating pressure for maximizing uptime and
minimizing defects. Maintenance programs, preventive and
scheduled, are therefore pursued vigorously. Plants operate with
only two shifts, and equipment is maintained during nonproduction
. . _
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DETERMINANTS
Process
Yield
rated machine
speed (total X
parts per hour)
. 1-defect rate
up lime X good par s/
(hours per year: total parts)
]
annual output
(good parts
per year)
annual outpu
(good parts
per year)
Japanese U.S.-Japan dif- Maintenance: Materials: Results:
Management ferences are · Preventive/ · Supplier linked · Significantly
Systems not extensive operator to final assembly higher yields
involvement schedule—press for processes/
· Shifts scheduled for zero defects equipment
to allow frequent
maintenance
Materials: Line Stops:
· Just in time · Worker control
production—min over qual ity
Wl P inventory on I ine
· Expose and attack · Expose problems
problems
FIGURE 6.1 Japanese management systems and the determinants
of process yield.
time. The result is a much lower rate of machine failure and
breakdown.
Pressure for defect elimination is reflected in relationships
with suppliers and in-work practices on the line. "Just in time"
production does not allow for extensive inspection of incoming
parts. Suppliers must, therefore, achieve highly demanding quality
levels, consistently and reliably. The major Japanese manu-
facturers work closely with outside vendors to make sure that
responsibility for quality is felt and acted upon at the source of
product. This same approach--quality control at the source--is
used in production on the line, where workers have the authority
to stop the operation if they spot defects or other production
problems. Worker-initiated line stops are central to the concept
of Jidoka: making problems visable to everyone's eye and stopping
the line if trouble occurs all that. meth~ric ;`nH talc to vail
stops are Jidoka.
O , ·— ——, ~
The basic thrust of the Kanban system and the concept of
Jidoka are to eliminate waste, expose problems, and conserve
resources. This is not simply a different technique of controlling
production, but a very different way of managing the production
process. It is clear that these systems interact with other factors
in our list of productivity determinants. Separating their effects
f rom the effects of quality systems and job structure, for
example, is somewhat arbitrary. The Kanban-Jidoka system uses
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TABLE 6.7 Inventory Comparisons United States and Japan
LeveVProcess
Japan United States
1. Plant and Process Inventories
Assembly plant component inventories
(equivalent units of production)
heaters
radiators
brace drums
bumpers
Front-wheel-drive transfer case in process parts
storage by operation (number of parts)
mill
drill
ream and chamfer
drill
mill, washer, test
assemble
finish
Total
2. Company Inventories
Work in process inventories per vehicle
1979
1980
Work in process turnsa
1979
1980
1 hour
2 hours
1.5 hours
1 hour
11
13
24
10
6
7
79
$80.2
$74.2
40.0
46.1
5 days
5 days
3 days
240
200
196
205
40
96
87
1064
$536.5
$584.3
12.1
13.4
a Defined as cost of goods sold divided by work in process inventories.
SOURCES: 1. Industry sources (data provided by panel members); 2. Annual reports
for representative producers.
fewer inspectors, and its success requires broader and deeper
jobs. Seen in this light, the panel's high ranking of "process yield"
and the relatively lower importance attached to job structure and
quality systems may reflect the difficulty of separating the three
factors and a tendency to ascribe to "process yield" some of the
i mpact of the other two.
Indeed, it appears that job structure plays an important role in
explaining observed productivity differentials. We have already
noted two features of the Japanese system (maintenance prac-
tices and Jidoka) in which jobs are designed to involve workers in a
variety of tasks. The effects of structure, and the differences in
management style and practices that go with it (fewer layers of
management, more managing from the bottom up), extend to other
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107
aspects of production. Quality circles or "small group involve-
ment activities" deal with such questions as layout, process
methods, and automation. Such involvement appears to be an
important factor in obtaining relatively high levels of commit-
O ~ , O ~
ment and motivation.
The nature of worker-management relations in Japan is further
suggested by much lower levels of unexcused absence than that
f ound in the United States. The panel accorded absenteeism
second billing in its rankings, primarily due to the need to carry
redundant workers in order to cover for unexpected absence.
Appendix B provides an analysis of this effect. In general, absen-
teeism influences costs, not only through redundant labor but also
through fringe costs of the absent group as well as indirect effects
such as scrap, reduced learning, and so forth. It appears that
absenteeism may actually account for as much as 10-12 percent of
the cost gap.
G iven the impact of absenteeism and the effects of job
structure and the workforce influence in "process yield," it is clear
that workforce management must be a significant factor in
explaining the Japanese cost advantage. Likewise, an attempt to
explain quality adherences would certainly accord a major influ-
ence to the work force and its management. It seems evident.
therefore, that in concert with different systems of production
management and control, the work force plays a central role in
the Japanese competitive advantage.
Much has been made recently of the enormous capital expen-
diture programs of the U.S. manufacturers. Indeed, the fact that
we have identified the Japanese advantage as a "software" rather
than a "hardware" problem in no way implies that new technology
could not be effective in raising relative U.S. productivity. Yet it
is unlikely that a substantially improved competitive position for
U.S. production will be secured only through new bricks and mortar
and new machines; comparable processes and machines are avail-
able around the world. At least as far as advances in productivity
and quality are concerned, new "software" (new approaches to the
management of people, materials, and processes) seems essential.
The next chapter examines industry experience and prospects in
one of these dimensions--workforce management.
~ `, ~ . _ _ _ . . ~ ~ .. ~ . .
N OTES
.
1. The classical economic theory of international trade posits
a world in which trade based on differences in national factor
endowments takes place in a competitive world economy. This
type of analysis focuses on the long-run equilibrium properties of
trade and is essentially static in nature. Recent developments
. . . · . .
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108
in the theory of international trade have taken a more dynamic
perspective and have introduced innovation, product differen-
tiation, economies of scale, and oligopolistic competition as
important elements in determining the pattern of trade. See the
papers by Krugman (1980) and Lancaster (1980~. The more recent
work has focused on explaining intraindustry trade and has incor-
porated direct foreign investment. Once the assumptions of
perfect competition and homogeneous products are abandoned, the
notion of comparative advantage becomes more complex. Instead
o f simple, static comparisons of relative costs of production,
which are determined by national differences in factor endow-
ments, the characteristics that determine comparative advantage
in the more complex models include differentiation of products,
innovative capability, and the nature of domestic competition, in
addition to production costs. These characteristics may change
over time and may be endogenous. The point is not that relative
costs of production are irrelevant, but rather that they are but one
element in the determination of a broader notion of comparative
advantage and that a full-scale analysis of that broader notion is
likely to be complicated. Taken in isolation, relative costs in the
foreign country could give misleading indications about trade
patterns. Nonetheless, the absence of a comparative cost analysis
makes the study less conclusive about the trade pattern than it
would be if such analysis had been carried out. Furthermore, a
study of comparative costs may put the policy issues in a
difference light and would therefore be a useful area for further
research. For a recent review of these issues, see Whitman (1981~.
2. See Toder (1978~.
3. See Katz(1980~.
4. Given the differences in estimates of the productivity gap,
it is difficult to divide the overall cost difference into a wage
portion and a productivity portion. In Appendix A, for example,
the industry-level analysis attributes about 20 percent of the cost
gap to productivity, while the OEM-1 evel analysis estimates
productivity's share to be 38 percent. (These are derived using
standard cost-accounting techniques for assigning variances.) In
any case, it is clear that both wage and productivity differences
are important.
5. There is little evidence that aggressive pricing has been
practiced by the Japanese in the U.S. market in Europe; however,
the Japanese have priced their products somewhat below
comparable domestic vehicles.
6. While the emphasis here is on entry strategies, it should be
noted that competition in the Japanese domestic market also had
a strong influence on the development of manufacturing capability.
7. For a review of the "just in time" production system, see
Monden (1981~.
Representative terms from entire chapter:
competitive advantage
