The ongoing product recall and quality perception crisis regarding Toyota Motor Corp. took on some positive movement in the past few days.  Last week Toyota announced chief quality officer executive appointments within each major geography. 

Steve St. Angelo, executive vice president of Toyota’s U.S. manufacturing operations in Erlanger, Ky., was named the company’s chief quality officer in North America. St. Angelo will represent North America on the corporate quality review committee that will meet regularly with Toyota President Akio Toyoda.  St. Angelo’s new team will bring together top U.S. executives at Toyota and come up with plans to boost quality assurance and customer research. Other geography teams will similarly focus on specific quality needs in the respective region.

The special corporate-wide committee on quality consisting of 70 members held its first meeting on Tuesday of this week.  Several different press reports indicate that the initial output of that meeting was to authorize the forming of dedicated technology offices within each major region.  Technology offices will be increased from current one to seven within North America.  New technology offices will also be established in Europe, China and other regions. Toyota noted that the quality committee will issue its first report in June and will meet regularly to exchange insight and tackle safety issues.

According to a New York Times Featured Business article, under this new quality management structure, each region’s chief quality officer will co-participate with Toyota headquarters in Japan on consensus-driven action plans to address quality issues, including the need for recalls. Toyota also plans to have third party experts evaluate measures to improve quality and review steps adopted by the special committee.  The next special committee meeting is planned for September.

Meanwhile, U.S. Transportation Secretary Ray LaHood announced two major investigations designed to answer questions surrounding the issue of unintended vehicle acceleration. The U.S. government is calling on scientists from NASA and the National Academy of Sciences to further investigate potential causes of SUA in Toyota vehicles.

Time and events will tell if these new geographic regional quality teams will really have the corporate power to take proactive action on any future quality issues involving Toyota vehicles, but for now, these organizational and other product actions are a step in the right direction.

Bob Ferrari

The following posting can also be viewed and commented upon on the Kinaxis Supply Chain Expert Community web site.

Readers of the Supply Chain Matters blog often know how often we have been highlighting incidents of supply chain risk related to product recalls originating from contamination or bogus materials.  The incidents have been far-reaching, ranging from the ongoing massive recall incident involving multiple models of Toyota vehicles to numerous incidents of contaminated or bogus products entering various industry supply chains.  One common aspect of many of these incidents is when certain products originating from specific suppliers are the source of the contamination and the effects rapidly cascade to other multiple product-related supply chains.  Past incidents include peanut products, pistachios, drug compounds and more recently cracked pepper that coated certain salami products.

The most recent real-time incident involves the suspected contamination of hydrolyzed vegetable protein (HVP), which is an ingredient incorporated in many food products.  On March 4th, the New York Times reported that thousands of processed foods, from soups to hot dogs, contain this flavoring ingredient that is suspected of being contaminated with salmonella.  The specific supplier named was Basic Food Flavors of Las Vegas Nevada, and the original discovery was made by a customer upstream in the food processing supply chain. The U.S. Food and Drug Administration (FDA) inspected the Basic Foods plant in February and uncovered salmonella in the company’s processing equipment, which led the company to voluntarily recall all of its HVP product produced since September 17, 2009, over five months worth of production.

The article notes that most affected products are safe because cooking, either before or after sale, eliminates the risk.  But that in no way eliminates the risk if your particular product does not completely meet that cooked criteria, or erring more on the side of caution prevails in terms of risk to the consumer.  As even more real-time evidence to this situation, yesterday Procter and Gamble voluntarily recalled two specific flavors of its very popular Pringles potato chip product because they contained this same suspect HVP ingredient. I have no doubt that there may be other recall announcements coming.

Once again, the important take-away reinforced by these ongoing incidents is the critical importance that both supply chain traceability and risk mitigation have become as required process capabilities, and how important technology helps in supporting such capabilities.  An overdependence of regulatory agencies to discover and track the actual sourcing of contamination often implies that the supply chain has already been impacted by an incident.  This mandates the need to be able to quickly and efficiently trace where certain products were manufactured, and to which customers or retail outlets they were distributed.  It also implies the ability to be able to quantify the overall risk involved and the ability to quickly quantify, assess and implement risk mitigation plans.  Having a supply chain planning system that can perform what-if analysis and quickly re-plan for alternative ingredients is rather fundamental, as well.

Our community often looks to P&G as the benchmark in world class supply chain capability.  It should therefore be no surprise that within days of the original announcement, P&G was able to trace what specific end-products were or were not at risk, what lot numbers were involved, and was able to transmit important information to consumers on a dedicated web site. 

Successful risk mitigation occurs when proper planning, process, and information technology enablement are in place.  Too often, the negative effects come when they are not in place.

 Bob Ferrari

Needless to say, Toyota has managed to capture the complete interest of its customers, and the stakes are extremely high for the company, and potentially its supply chain partners.  I refer to the ongoing unintended acceleration problem relative to certain Toyota vehicles.

Existing Toyota owners are justifiably concerned about their safety in driving such vehicles, and very typical of these types of incidents, clear answers are not yet evident. If one attempts to sort through all of the information that may be related to the specific problem at hand, it becomes rather confusing.  Initially, this alleged problem was attributed to floor mats that were jamming the accelerator pedal.  Now it seems that the root-cause investigation has widened to other potential causes.

My commentary is going to focus on the global supply chain risk implications stemming from this ongoing incident.  In my view, what makes this particular situation so difficult is that Toyota is dealing with a problem that seems to have a lack of clarity in terms of root-cause, and significant implications if not managed smartly. 

Supply Chain Matters has not been alone in making observations over these past months on perceptions that Toyota may have stretched its resources a bit too thin, and that quality was slipping. In my commentary in early December I observed that a multitude of major product recall incidents have tarnished the company’s previous stellar reputation as a producer of reliable vehicles.  The effects of nearly two years of global recession, coupled with some business missteps, has also had a severe impact on Toyota’s sales growth and lack of profitability. Since that time, I, along with other Toyota owners have become increasingly concerned about the reported incidents of unintended sudden acceleration of select Toyota models.

On Monday evening, when I received email alerts related to the announcement that Toyota had suspended all new vehicle U.S. sales of models subject to the ongoing latest recalls, I immediately knew that this event was going to be unprecedented in terms of scope.  As I pen this post it seems that the entire Internet and international media are running with all sorts of articles, reports and commentaries.  Vehicles subject to recall have now been extended to Europe and China.

The clearest explanations as to the potential causes I’ve found thus far come from an AP story published on msnbc.com.  This article notes that Toyota is telling governmental agencies that it thinks that a friction problem in its accelerator pedal mechanisms may be to blame.  CTS Corporation of Elkhart Indiana, the supplier that produces the accelerator assemblies for Toyota states in a press release issued on its web site that the friction problem accounts for just a few cases of stuck accelerators. The vendor notes that its products are not implicated by the November 2009 Toyota recall, but further states “that CTS has been actively working with Toyota for awhile to develop a new pedal to meet tougher specifications from Toyota.” 

Other experts express other various opinions ranging from complicated electronic sensors to a multiplicity of different factors.  Separately, Ford Motor Company has halted production of its full-sized commercial vehicles manufactured by its joint partner in China, Jiangling Motors Co., after discovering that the accelerator pedals it uses came from CTS Corporation.  Ford CEO Alan Mullaly noted in an interview on CNBC that while Ford had not noted any incidents of unintended acceleration, it was erring on the side of caution.

CTS supplies similar accelerator parts for Honda, Nissan and Mitsubishi Motors, but it appears that these three other automakers have received no complaints about the operation of accelerator pedals.

All of these issues should have been mitigated long before visibility reached global proportions. Why haven’t Toyota engineers been able to definitively correlate repair, warranty and customer feedback incidents for so any months? Why is CTS actively working on a tougher specification if the accelerator problem is termed limited in nature?  Without definitive explanations of root-cause or solid action plans, customers are left with massive doubt and lingering negative perceptions. 

In short, Toyota ‘s dilemma spanning dimensions of quality, safety, profitability, supplier loyalty and risk mitigation all rolled together in one very visible looking glass.

If there were any doubts about how important supply chain risk has become, stay tuned to this evolving story involving an icon of quality and dependability.

Bob Ferrari

Last week was not a good one for Johnson and Johnson in the light of public persona.  On Friday, the company’s McNeil Consumer Healthcare division announced the voluntary recall of several hundred batches, roughly 50 million bottles, of well-recognized over-the-counter medicines including Benadryl, Motrin, St. Joseph’s Aspirin and Tylenol.  The recall is motivated by consumer complaints of a musty-smell in bottles of Tylenol product, which could involve other products. A few people have reported digestive problems from taking the subject medicines.  This latest recall is in addition to previous recall conducted in November and December.  The company has set-up a special web site to provide consumer information on this recall. 

There are many news article circulating throughout the Internet but the most interesting article was published today in the New York Times business section.  The Times article, In Recall, a Role Model Stumbles,  makes reference to the Harvard Business School Model which, according to the article, teaches executives to “communicate clearly with the public about a crisis, cooperate with government officials, swiftly begin its own investigation of a problem and, if necessary, quickly institute a product recall.”  The concept was developed based on the 1982 incident involving J&J’s exemplary and responsive conduct when several people died after taking alleged tainted Tylenol pills.  The article also takes note of the fact that U.S. government regulators stated that the company should have acted far more quickly after reports of the moldy smell were first evident as far back as 2008.  To make matters even worse in relation to the J&J brand, simultaneously, the weekend edition of the Wall Street Journal ran two articles, J&J Accused of Kickbacks to Omnicare, and FDA Chastises J&J Over Tylenol Recall, (subscription may be required) which both did not present an entirely positive persona for this manufacturer of consumer healthcare products. 

What should make this all the more interesting for our community is that the suspected cause of the problem is noted as appearing further down in the supply chain.  In the actual FDA inspection report referenced in the Times article, the moldy smell is indeed acknowledged in 2008, occurring within certain lots of Tylenol Arthritis Relief Caplets.  That report notes that it was not until August of 2009 before McNeil had acknowledged a potential quality control problem. The FDA noted that a field alert was not initiated by McNeil until September of 2009, and the December recall was initiated at the time of the FDA’s follow-up inspection.

A McNeil report in December concluded that the most probable cause was “the proximity of chemically treated wood from pallets and empty bottles transported from the bottle manufacturer to the product packager.” The FDA report however notes that McNeil did not extend its investigation to other products that may have received the same packaging containers.  The FDA report goes on to cite McNeil Healthcare for not proactively following-up on its quality control procedures related to root cause of the smelly complaints in a timely period, as well not following written procedures for the cleaning and maintenance of equipment used in the manufacture and processing of drug products.

Industry observers are noting that McNeil has underreacted to a limited problem, which is quickly turning into a public relations and potential brand identity problem.  More important, however, is that this an industry and a company that prides itself on superior quality, and the data in the FDA report does not seem to reflect a six-sigma oriented quality process response.  If the root-cause of the problem is actually the bottle manufacturer, then the obvious question is why haven’t corrective actions been taken in all these months to resolve the trace chemical problem in pallets? Other questions that comes to mind is whether the supplier or a Logistics provider was utilizing cheaper wooden pallets as a lower cost alternative, or whether this problem just exists for McNeil vs. other manufacturers?   Instead, McNeil has invoked the ire of the FDA in perceived “foot dragging” and placed its brand in a negative light.

The latest McNeil press statement notes that the company has determined that the moldy smell was caused by trace amounts of the chemical TBA in wooden pallets, and that the company has now ceased delivery of products on the suspected pallets and ordered “shippers” to discontinue their use.  Could this action have been accomplished much sooner in this overall saga?

Somehow, McNeil’s quality processes did not respond in a timely manner, and the FDA has called the company to action in an embarrassing fashion. As I pen this post, while the J&J consumer blog a first in the pharmaceutical industry, has today acknowledged the announcement of this recall, there are still no personal management comments indicating what supply chain actions are being taken to insure ongoing consumer safety.  A fundamental tenet of supply chain risk management is that when a problem is deemed to be significant, than acknowledge that problem and initiate timely mitigation. Selective use of social media such as blogs and Facebook may have helped in reinforcing McNeil’s commitment.  The again, the lawyers may be saying something otherwise.

J&J is a stellar and well run company, and it’s a shame that an incident of packaging material and manufacturing processes has percolated for such an extended period. J&J has 15 days to respond back to the FDA.  It’s responses in the coming days and weeks to this current situation of a limited problem blossoming to a larger problem will determine if we have yet another case study on how perceived limited product quality risk can blossom to a much broader scope.

 Bob Ferrari

A Wall Street Journal article last week (subscription may be required) noted that Toyota has accelerated its cost-cutting efforts.  The world’s leading auto producer by volume has requested the help of its key suppliers to meet a goal of reducing the cost of component parts by 30% in the next three years.

Toyota has been garnering considerable negative perceptions in the U.S. market of late.  First, a multitude of major product recall incidents has tarnished the company’s previous stellar reputation as a producer of reliable vehicles.  Second, the effects of near two years of global recession coupled with some business missteps has had a severe impact on Toyota’s sales growth and lack of profitability.  The company expects to suffer its second straight year of loses, and has lost some market share in the critical U.S. market.

This latest initiative, despite the need for the company to repair its balance sheet, is rather untimely and fraught with more risk. Toyota owners already have building concerns about the company’s building lapses in vehicle quality and reliability 

I like others have been a loyal Toyota owner, having purchased multiple vehicles over the last ten years.  I must admit that I too have noticed a noticeable deterioration in reliability.  Our 2004 Avalon has experienced three major part failures this year, which is very worrisome, and I suspect that our experience may not be an isolated one.  We, along with other Toyota owners, wonder aloud whether the so-called “sticking accelerator” problem reported among a group of sedans is limited to just a certain few vehicles or is more widespread.

It seems that ever since the bulk of vehicle production was shifted outside of Japan, quality seems to have slipped over time.  My evidence point is that our 1999 Toyota SUV, which was built and exported from Japan, continues to perform in the traditional Toyota manner. 

Pushing suppliers even harder to achieve significant further component part cost reductions without a context to the root-causes of eroding quality and reliability is risking even more damage to the Toyota brand.  A look back in history when major U.S. OEM’s such as Chrysler and GM embarked on similar initiatives with their suppliers would indicate a disastrous impact on the reliability of vehicles. 

Toyota should know better than to embark on an accelerated road toward destroying its brand and owner loyalty.  Let’s hope that they do due diligence to both business and reliability needs.

What’s your view?  Does Toyota have other options besides extracting more cost reductions in parts?

 Bob Ferrari

Over on the Evolving Excellence blog, Bill Waddell had a recent entry, Cash Is Right On The Money, that once again reminds us that many of today’s Lean process concepts alone, will not make any company into a world class performer without a corporate culture and management performance reward system that supports structural efficiency change. 

The posting references Cash Powell, a mentor of Mr. Waddell, who back in 2005, reflected on the then profitability challenges of General Motors, and how GM booked revenue based on production completion vs. retail sale, and thus finished goods inventory was not considered a measure of overall supply-chain or production efficiency.  Waddell goes on to point out: GM has done as much or more Lean stuff in their factories as anyone, and you all know the results.  Without a fundamental change in accounting, along with the management processes accounting drives such as performance metrics…, no company can be truly lean.”

This posting provided me another reminder that Lean-focused initiatives do not stand as the end-state goal. I’m also amazed in reading so many middle-management job postings that call for intimate knowledge or certification in lean methodologies, but hardly mention change management skills. Few senior management job descriptions call for a basic understanding of Lean methods and their applicability toward facilitating structural change.

An end-state goal is a vision and supporting operating objectives, embraced by the entire organization, seeking a positive change.  Lean methods are one of many tools that can be deployed to support a process.. As elegantly stated by Bill Waddell, no company is going to get long term Toyota-like results without the willingness to change overall thinking, or challenge the current way works gets done. Even Toyota, who is now challenged with suffering its first operating loss in corporate history knows enough to take a pause and re-examine strategic intent.

Bob Ferrari