Toyota Prius: Great Car for Families on a Budget!
- By Kyle James
While automaker General Motors and Ford have been classified as near junk stock status, Toyota has flourished. With a reported stock-market value of $107 billion, Toyota has almost quadrupled both GM and Ford. This success has carried over to their gas-electric hybrid sedan, the Prius. In this case study, I will analyze how the Toyota hybrid category has performed in terms of management accounting, production costs, manufacturing efficiency, and inventory turns. While Toyota has done many things well, there is still much room for improvement in certain areas.
Initially, in 1993, Toyota was able to gain a competitive advantage by keeping the production costs of the Prius relatively low. Toyota engineers kept the assembly line "simple so the cars could be made on the same production lines as mainstream models such as the carmaker's popular Camry." (Dawson 20) Thus, Toyota did not have to sink a lot of money and resources into brand new production facilities and new machinery. High fixed costs and manufacturing overhead often make it very difficult for a company to be profitable. Toyota was also able to quickly get the car to market because it did not need to build new production facilities. The importance of this is often overlooked. If a product like the Prius is determined to be in high demand, consumers want it now and do not want to wait six months for manufacturing facilities to be implemented. Therefore, Toyota was in the admirable position of having a desired product with the ability to get it to market and turn it into sales revenue in a fairly short amount of time.
The real genius behind the early engineering of the Prius in my opinion is seen when analyzing the risk Toyota avoided when building the car. Since Toyota manufactured the Prius on pre-existing lines of production they avoided a lot of risk that other car manufactures take on when building new production facilities. Therefore if the Prius was a flop, Toyota would not be severely hurt financially because they had not built new manufacturing plants to support production.
Even Toyota was surprised and caught off guard with the recent success of the fuel efficient Prius in the United States. The success in my opinion has to do with the high price of gasoline along with the newly re-designed stylish look of the car. With gasoline reaching near $3 a gallon in some locations, consumers were looking for a better way. The Prius was that "better way" in the eyes of many United States consumers and "since October (2004), Toyota has had to increase production of the Prius three times, most dramatically in August (2004) when it announced a 50 percent boost for next year to 15,000 vehicles a month worldwide." (Hastings, Newsweek Online)
The car also looks like a normal car. It is not a curiosity like many of the first hybrids on the road. It is moving out of the "green" niche where many consumers would balk at such a concept. This can be attributed to the new Prius design which was introduced last October. The new model boasts a 50% more powerful electric engine, a much larger interior space, and an external styling that looks more like a sports sedan that a science experiment.
This new design and consequent demand comes with added management accounting issues. The new Toyota Prius cost millions of dollars to design and put into production, and stock analysts are not convinced it will be profitable within the next five years. Toyota on the other hand, claims the Prius line has reached profitability. Lindsay Brooke, an analyst at CSM, is not completely convinced, "I know engineers at rival carmakers who've done total teardowns of the Prius-comprehensive, bolt-by-bolt cost analysis, and Toyota is getting close to breaking even." (Hastings, Newsweek Online)
Therefore, in terms of cost analysis and management, Toyota needs to make decisions in terms of the Prius that are aligned with their overall business strategy and value chain. This value chain needs to extend all the way from the research and development team to production and eventually to the consumer. By analyzing their value chain, Toyota can find issues in activities of production that can be reengineered in such a way as to reduce overall production costs while still meeting or exceeding customer's expectations. A glaring example that comes to mind is the electric motor in the Prius. The effectiveness of the electric motor is directly proportional with technological advances, much more so than the gas engine which has been around for over 100 years. If Toyota can harness the activity cost drivers behind the electric motor and produce it cheaper without losing any function they will really have something special in my opinion.
As it stands right now the Prius costs approximately $3000 more than a comparable sedan. This means that the average driver would need "at least 10 years and 100,000 miles to recoup that much in gas savings." (Hastings, Newsweek Online) If Toyota can get the Prius priced close to the average sedan they will create an overwhelming demand and will be the market leader for years to come in the hybrid category. This will only happen if Toyota can extrapolate and fully understand the activity costs that go into making the Prius. This includes the delivery and setup of raw material, direct labor, and of course fixed and variable manufacturing overhead.
Inventory should be minimized, and this is no different with Toyota and its production of the Prius. Toyota has been labeled by some in recent years as a company that cannot get control of its inventory. In particular, they key metric, "inventory turns". This is calculated by dividing cost of goods sold by the value of inventory. Toyota's inventory turns, which hit their peak in the late 1970s and early 1980s at 60 and above, fell to 11.3 in 2003. Richard Schonberger, long time analyst, author, and expert in production processes, blames "job-hopping managers and engineers who aren't paying attention to the basics, top executives focused on the next deal rather than process excellence, and legacy large-lot machines and factories." (Drickhamer, Industry Week)
In essence, what Schonberger is stating goes back to the missions and goals along the value chain at Toyota. The questions that need to be asked at Toyota include, "Are we getting the most efficient use out of our activity processes?" and I would also ask, "How can we shorten our supply chain to reduce our amount of inventory?" Toyota executives, when asked similar questions, "cited globalization as the primary explanation for the company's decreasing inventory turns, and the impossibility of replicating the tightly integrated supply-chain that Toyota enjoys in Japan." (Drickhamer, Industry Week)
Toyota needs to look at this issue as not a problem but an opportunity. They have a great opportunity to stay ahead of their competition and increase their turns on inventory. They need to put focused energy into shoring up their supply chain and speed up material flow through production facilities located outside of Japan. This is especially important to their hybrid category as the new Camry hybrid is going start production in Georgetown, Kentucky in late 2006.
I strongly feel this focused energy at Toyota should start by analyzing the opportunities that exist outside the factories. Schonberger points out that in terms of synchronizing the supply chain with the customer chain, opportunities inside the factory are "dwarfed by the opportunities outside of the factory." (Drickhamer, Industry Week) For example, the new Camry hybrid that is going to be produced in Kentucky has great "outside the factory" opportunities in my opinion. I would suggest to Toyota that these opportunities include the use of United States suppliers and not Japanese suppliers. This would allow for more frequent deliveries in smaller lots which would enable Toyota to reduce inventory storage costs. Also, if Toyota could reduce the number of suppliers of the electric motor to one company, that would significantly reduce costs and increase value to the final consumer. Let's say Toyota followed my advice and partnered with a single company in Louisville, Kentucky, to produce the electric motor for them. Both companies could then work together and solve problems. This would lead to the best way of modifying the production processes to reduce overall costs and increase shared profits. But most importantly, it would increase value to the consumer while at the same time reducing costs.
In conclusion, Toyota has a great opportunity to increase profits and market share with their already popular Prius hybrid and their other hybrids that are coming down the road in the near future. Unfortunately, it is not all positive for Toyota. As analyzed in this case study, they need to increase their inventory turns so as not to get bogged down with a high cost of goods sold. Even so, Toyota is in a most enviable position when compared to other struggling auto makers in the United States. Especially when it comes to consumers perceived value of their hybrid automobiles. Families are moving away from the big gas-guzzling SUVs and into more fuel efficient cars like the Prius. This is great news for Toyota!
© 2005, Kyle James
