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The Toyota Way in Services: The Case of Lean Product Development.

Article  in  Academy of Management Perspectives · May 2006

DOI: 10.5465/AMP.2006.20591002

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E X C H A N G E

The Toyota Way in Services: The Case of LeanProduct DevelopmentJeffrey K. Liker and James M. Morgan*

Executive OverviewToyota’s Production System (TPS) is based on “lean” principles including a focus on the customer,continual improvement and quality through waste reduction, and tightly integrated upstream and down-stream processes as part of a lean value chain. Most manufacturing companies have adopted some type of“lean initiative,” and the lean movement recently has gone beyond the shop floor to white-collar officesand is even spreading to service industries. Unfortunately, most of these efforts represent limited, piecemealapproaches—quick fixes to reduce lead time and costs and to increase quality—that almost never createa true learning culture. We outline and illustrate the management principles of TPS that can be appliedbeyond manufacturing to any technical or service process. It is a true systems approach that effectivelyintegrates people, processes, and technology—one that must be adopted as a continual, comprehensive,and coordinated effort for change and learning across the organization.

Introduction

These days it is difficult to get through a businessschool curriculum without analyzing case ex-amples of Toyota and Toyota group companies.

Viewed as one of the excellent companies in theworld, most cases and discussions revolve aroundthe famed Toyota Production System (TPS). TPSis the foundation for what has become a globalmovement to “think lean.” Most manufacturingcompanies in the world have adopted some type of“lean initiative,” and this concept is now spread-ing to a diverse range of organizations, includingthe defense department, hospitals, financial insti-tutions, and construction companies. The ToyotaWay (2004) became an international bestsellerbecause it delves more deeply into the underlyingculture and thinking that manifests as the toolsand techniques generally associated with leanmanufacturing.

Many manufacturing companies have learned

the hard way that the isolated application of leantools and techniques does not lead to sustainableimprovement. The broader organizational cultureof the firm separates the short-term improvementsfrom the long-term lean enterprises. And, to beeffective, lean thinking cannot stop at the shopfloor. Management principles must extend beyondthe shop floor, as they do at Toyota, and be foundin the board room, the sales offices, and quiteclearly in the product development process.

The Machine that Changed the World (Womacket al. 1990) introduced the term “lean” and thenessentially described Toyota. While there weremany companies studied, we later learned in LeanThinking (Womack and Jones 1996) that Toyotawas in fact the model for lean. Womack and Joneshave emphasized that the production floor wasjust one chapter in The Machine that Changed theWorld. The book was about a total enterpriseworking together to give customers what they

* Jeffrey K. Liker is Professor of Industrial and Operations Engineering at the University of Michigan. Contact: liker@umich.edu.James M. Morgan, Ph.D. is Director, SBU Engineering, Ford Motor Company. Contact: jmor990@aol.com.

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want while eliminating waste in the value streamand striving for perfection. This was not just amanufacturing book.

Since the 1980s, companies throughout theworld have been looking to Toyota as a model formanufacturing. Now it is almost a given that amanufacturing company needs some sort of “lean”program to be competitive. The traditional big-batch mass production model has been supplantedby a lean production model. However, the move-ment recently has gone beyond the shop floor towhite-collar offices and is even spreading to ser-vice industries. For example, one would be hard-pressed to find a hospital in the United States thatis not aware of lean principles and consideringsome sort of lean program. Applying lean conceptsto technical and service operations, where work ismuch less repetitive than the shop floor and theproduct less tangible, is not straightforward, how-ever.

Clearer lessons for lean services can be foundnot in the manufacturing side but by examiningToyota’s Product Development System, which isthriving on lean principles that were derived sep-arately from the manufacturing operation. Toyotahas taken the same underlying principles of theToyota Way and evolved a product developmentsystem that is second to none. It is lean in thebroadest sense—customer focused, continuallyimproved through waste reduction, and tightlyintegrated with upstream and downstream pro-cesses as part of a lean value chain.

Toyota’s Product Development System has en-abled it to consistently develop higher qualityvehicles faster, for less cost, and at a greater profitthan their competitors. They also manage morenew vehicle launches annually than most of theircompetitors, thus creating a steady flow of high-quality new products to meet consumer demand.This ability has fueled industry-leading profits(reaching a Japanese record of ten billion dollarsby 2004 and exceeding that in 2005) and a marketcapitalization greater than GM, Ford, and DCXcombined with a continuing growth in marketshare targeted to be 15 percent of the globalmarket, which will make Toyota the world’s larg-est auto maker.

One of the important drivers of this perfor-

mance is the quality of new Toyota products.Objective data show that Toyota excels in newproduct quality. The J.D. Powers survey for initialquality in the first 90 days of ownership is anindicator, which Toyota has dominated duringthis decade, with 39 first-place vehicles since2001, including a phenomenal ranking of 10 firstplace vehicles out of 16 categories in 2005. Re-garding speed to market and product freshness,Toyota can consistently bring a new body withcarry-over chassis and powertrain (the most com-mon type of automotive product development)from styling freeze to start of production in just 15months; more basic categories of vehicles, such asCorolla, require only 12 months. This compares tocompetitors who require from 20 to 30 months toaccomplish the same task.

This article outlines and illustrates the man-agement principles of the Toyota product de-velopment system that can be applied to anytechnical or service process (for further infor-mation, see Morgan and Liker, 2006). It pro-vides a different look at how the basic principlesof the Toyota Way can apply to service opera-tions. We argue that it is a true systems ap-proach that effectively integrates people, pro-cesses, and technology. Toyota’s approach toproduct development has evolved as a livingsystem with its own trials and tribulations, but aconsistent trend upward through ongoing learn-ing and continuous improvement supports thevalue in its approach.

Reviewof TPSPrinciples

The Toyota Production System (TPS) is thebest-known example of lean processes in ac-tion. It has become a model for competitive

manufacturing throughout the world. It has beenevolving within Toyota for decades, although acentral tenet of the Toyota way prevented anyonefrom writing it down. The tenet is that seriouslearning only comes from action at the gemba—where the work is done. So drawing pictures andmodels of TPS is not value added.

Eventually, the theory behind TPS was repre-sented as a house. The TPS house has become acultural icon in the manufacturing world. Thesimplest version is shown in Figure 1. It is repre-

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sented in this way because a house is a system andonly as strong as the weakest part of the system.With a weak foundation or a weak pillar, thehouse is not stable, even if other parts are verystrong. The parts work together to create thewhole. The parts are as follows:

Just-in-Time

This aspect of the house is the most well-known. It relates to making material flowthrough processes very fast, getting the rightpart to the right place at the right time. Wemight create a manufacturing cell where rawmaterial moves from operation to operation onepiece at a time without interruption. In somecases, it is necessary to interrupt the flow toconnect separate processes together in someother way. For example, a stamping press mightbuild in batches between changes of dies andcannot be practically put in a cell. So a super-market concept was used, with stamping refill-ing a store up to certain maximum levels ofinventory and then waiting to replenish onlywhat the customer takes away. Instructions fromthe customer, called kanban, trigger replenish-ment of the store. This simple concept of pullthrough replenishing stores can be applied allthe way back to raw material suppliers.

Jidoka

Jidoka is a lesser-known and more complex con-cept. It represents a machine with human intelli-gence. The intelligence is to do one simple task—detect a deviation from a standard and stop itselfwhile waiting for help. This concept has beenextended to manual processes in which operatorspull a cord and stop production when there is anyproblem. When a machine or person stops forproblems, they also need to signal for help. Anandon is the use of lights and sounds to call forhelp. Pull the cord, and an andon lights up, musicplays, and a team leader or group leader is called tocome help—not in the next few hours but in thenext few seconds. By stopping for problems theproblem is contained in an area before it leaks out,possibly even leading to a defect for the customer.Problems are also constantly being surfaced, lead-ing to continuous improvement.

HeijunkaandStable, StandardizedProcesses

The foundation of the house needs to provide theoverall stability on which just-in-time systems canbe built and the system constantly adjusted by stop-ping to fix problems. Heijunka means leveling. Thegoal is to create a leveled stream of orders and a levelwork load. When the work load is leveled, there areopportunities to standardize processes. And levelingthe work load is also necessary to know how much

Figure1TheToyotaProduction SystemHouse

2006 7Liker and Morgan

inventory to hold in the supermarkets. If there canbe a run on the store for a particular product, thesystem will not be able to keep up. Stable, standard-ized processes are necessary, or just-in-time produc-tion will mean no production. Without inventory tocompensate for instability, the system will constantlyshut down. And this will be even worse if someoneis pulling the cord and stopping the line every timethere is a problem.

People Engaged inKaizen

Kaizen has practically become a universal word.But is rarely practiced in most organizations astruecontinuous improvement that spreads through-out the organization. Kaizen is not optional in alean system. Lowering inventory means problemstruly shut down the operation, starving down-stream processes for parts. Jidoka means machinesand people are shutting down the system whenthere is a problem. This surfaces problems and isgreat if people are skilled and motivated enough tosolve the problems very quickly. Otherwise theresult is simply an erosion of production efficiencyand competitiveness.

It should be clear that this really is a system.Toyota uses the analogy of trying to navigatethrough waters while lowering the water level toreveal the rocks. The water level is like inventory.The rocks are problems. When you lower the inven-tory problems are exposed and unless they are solvedthe boat will crash on the rocks. Jidoka also revealsrocks throughout the day. Surfacing problems is onlyvaluable if people working on the process have thetools and are motivated to first contain the problemsand then solve them at the root cause. It is anendless journey of improvement.

Many companies are trying to take TPS prin-ciples beyond the shop floor to service operationsand even to professional operations. But there isconfusion about how to imitate TPS in the serviceenvironment. Should kanban be circulated to ev-erybody so they can order the next small batch ofservices? Should an andon be hung over eachperson’s desk to call for help? Should we set peopleup in cells passing paper or doing a piece ofcomputer work one step at a time? In varyingdegrees and ways, all of these things have beentried with some success in service operations

(Liker 2004). But is there more to it than this? Aswe look at different components of Toyota’s prod-uct-process development system, we see similarprinciples to TPS emerging but applied in a some-what different way.

Toyota’sManagementPrinciples in LeanPPD

Based on over 15 years of research at the Uni-versity of Michigan, more than 20 years ofproduct development experience, and privi-

leged access to Toyota and the patient guidance ofour Toyota Sensei, we developed a model of a LeanProduct-Process Development System. The re-search base began with studies by Liker, Ward,and their students that led to the creation of theset-based concurrent engineering model (Ward etal. 1995; Sobek et al. 1999). Durward Sobek tookthis research a step forward in his dissertationthrough a broad comparison of Toyota’s productdevelopment system to Chrysler’s then emergingplatform organization of product development(Sobek 1997; Sobek et al. 1998).

Building on this stream of research, Jim Mor-gan in his dissertation drew on his decades ofdirect product development experience and con-ducted a two-and-a-half-year, in-depth study ofToyota’s automotive body development, as com-pared to one of the American “Big 3” automakers(Morgan 2002). The scope of Morgan’s study in-cluded body engineering, manufacturing engineer-ing, prototype development, die manufacture, anddie and stamping approval. Data and informationwere gathered through interviews with Toyotaand supplier representatives and site visits. Over1,000 hours of interviews were held with 40 peo-ple at 12 different sites in the U.S. and Japan.Company representatives from executive manage-ment, body engineering, manufacturing or pro-duction engineering, tool manufacture, as well asseveral Chief Engineers participated in the inter-views.

This in-depth study of Toyota’s approach toproduct-process development led to the identifi-cation of a set of 13 management principles thatcan be considered a foundation for lean productdevelopment more generally. We organized these

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into a framework of process, people, and tools-technology, which can be applied to service in-dustries and professional operations. The impor-tant lesson to note is that it is a systems model.What makes it work at Toyota is that all thepieces fit together and support each other. Pull outa piece of the system and it collapses. ToyotaVice-Chairman Fujio Cho explained it this way:

The key to the Toyota Way and what makes Toyotastand out is not any of the individual elements. . . Butwhat is important is integrating all the elementstogether into a system. It must be practiced every dayin a very consistent manner—not in spurts.

Process. When thinking of process improve-ment, we often think of simple repetitive pro-cesses. In manufacturing, we can watch a workerdo a job and time it several times and try to kaizenout seconds of work. This is obviously not the casewith product development. Yet, Toyota viewsproduct development as a process—albeit abroader, more complex, and less precise processthan most short-cycle manufacturing jobs. In sodoing Toyota has been able to standardize theprocess, refine it, eliminate waste, and continuallyreduce both lead time and cost from program toprogram. The process starts with specific stretchobjectives for each program and the teams virtu-ally always achieve the targets.

People. Driving the lean process and rigorousstandardization are people who work hard as ateam to achieve common objectives. They notonly do the work with high levels of skill anddiscipline but also reflect on the process and workto improve it. This activity happens on a continu-ing basis. It is true continuous improvement. Todo this work requires people with “towering tech-nical competence” who learn the specific technol-ogy they are engineering in tremendous depth andalso learn through intense mentoring in the“Toyota Way” of identifying problems, analyzingthem, developing countermeasures, communicat-ing, and improving. The deep technical knowl-edge is the baseline skill, and the Toyota Way isthe higher level meta-improvement method thatis part of the culture of the company.

Tools. Technology to Toyota is a set of toolsto enable the people to execute and improve the

process—no more and no less. As one ToyotaVice President explained: “Computer technologydoes not change the way we work. It simply helpsus do what we do faster.” Doing wasteful worksuch as rework faster is still waste. If you cannot doa good job of defining the project, identifyingproblems, developing appropriate solutions, com-municating effectively to the right people, andmeeting deadlines, then technology will not solveyour problem. It may even mask the problems.Toyota does not subordinate good thinking totechnology.

We describe each of these elements of thesystem in greater detail below. Next, we give ex-amples of how they mutually support each other asa system. Finally, we discuss some of the chal-lenges of learning from Toyota.

TheRightProcessWill Yield theRightResults

We often think of process improvement as a tech-nical issue. Get the right technical methodology(these days, often analogous to business processesfor software use), justify its cost, implement it, andit runs. If it does not run as planned, it is amanagement problem. Identify the offendingmanager who failed to properly execute the busi-ness process, get rid of him or her, find a “goodmanager,” and hopefully the problem is solved.

Toyota has a very different perspective. AtToyota there is a philosophy of having a goodprocess. It is as much a philosophical issue as atechnical issue. There are a set of beliefs aboutwhat makes up a good process. A good process isnot defined by technology but by good processprinciples, and then people create and improvethe process according to these principles.

A summary of the process principles of leanproduct development is provided in Table 1.We will discuss each principle in turn.

Establish Customer-Defined Value

The customer is always the starting point for anyprocess. This is not an unusual statement. Anycompany exposed to Total Quality Management,Baldridge concepts, or any of the myriad articleson quality in the last 20 years has some variationof this approach in their mission statements. Thedifference is talk versus action. Toyota has made

2006 9Liker and Morgan

this value a part of the culture of the company.Culture goes below the surface of artifacts andslogans to the values, beliefs, and taken-for-granted assumptions of employees.

“Customer first” creates alignment out of con-flict. As an example, a common problem in auto-motive development is what seems to be inherentconflict between those who style the car, essen-tially artists, and those who engineer the car.Stylists want looks. Engineers want functionalityand manufacturability. The two do not alwaysmeet. Ask body engineers at Toyota about thisconflict and they are genuinely confused, espe-cially if they did not already work for another autocompany. They see no conflict. “We are bothserving the customer, so why would there be aconflict?”

Second, adding value at Toyota is defined bycustomer value. The famous passion to elimi-nate waste in the Toyota Production Systemalso applies in product development. Waste iswhat costs time and money and resources butdoes not add value from the customer’s perspec-tive. Eliminating waste to focus on adding valueto customers provides a common referencepoint for engineers working to improve theprocess.

Finally, Toyota has created specific tools andmethods such as the Obeya team system (describedlater) to align, execute, track, and deliver custom-er-driven objectives throughout the programteam.

Front-Load the Product Development Process

This is another bit of common wisdom in productdevelopment and part of the quality movement’sphilosophy as well. Do it right the first time toavoid very costly downstream design changes thatintroduce dangerous last-minute variation and de-lay product introductions. At Toyota, preventingthis means deep exploration of a wide range ofpotential problems and alternative solutions earlyin the process.

Toyota’s definition of early is quite early. Inmany automotive companies serious engineeringin body development does not begin until afterclay freeze. This is the point at which the stylistswho create the vehicle appearance throughsketches and clay models are finished and theexecutives have signed off on a single body style.This is then digitized and the surface is transferredto CAD and engineering departments. This oftenrepresents the starting point for body engineering,which has to develop the detailed part designsused to tool up the vehicle. A good deal of bothstructural and manufacturing engineering has tobe done to develop safe, manufacturable bodystructures. Yet for Toyota most of the importantsimultaneous engineering of the product and man-ufacturing process begins much earlier than claymodel freeze, during what they refer to as Kentouor study period. During this time cross-functionalteams generate hundreds of Kentouzu, or studydrawings, as they investigate alternatives for opti-

Table1ProcessPrinciplesof LeanProductDevelopment

Principle Description1. Establish customer-defined value to separate value added from waste. Lean is a never ending journey of waste elimination. Waste is non-value added

defined by first defining customer value.2. Front load the product development process to thoroughly explore

alternative Solutions while there is Maximum Design Space.Defining the wrong problem or premature convergence on the wrong solution

will have costs throughout the product life cycle. Taking time to thoroughlyexplore alternatives and solve anticipated problems at the root cause hasexponential benefits.

3. Create a leveled Product Development Process Flow. Leveling the flow starts with stabilizing the process so it can be predicted andappropriately planned. This allows product planning to reduce wild swings inwork load. Predictable work load swings can be staffed through flexiblelabor pools.

4. Utilize Rigorous Standardization to Reduce Variation, and Create Flexibilityand Predictable Outcomes.

Standardization is the basis for continuous improvement. Standardization of theproduct and process is a foundation for all the other process principles.

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mal solutions (Sobek 1997; Morgan 2002). In thisway they are able to work on system compatibilitybefore individual design completion, eliminatingmost of the late engineering changes. This frontloading process also isolates much of the variabil-ity that is inherent to product development allow-ing for speed and precision during the executionphase of product development.

The late Allen Ward led the development of adesign theory called “set-based concurrent engi-neering” (Ward et al. 1995; Sobek et al. 1999).The concept seemed counterintuitive. Go fasterin the product development process by consider-ing a broader set of alternatives earlier and delay-ing certain decisions. It was referred to as “thesecond Toyota paradox,” the first being Just-In-Time where holding less inventory can make itmore likely you will have the parts you really needwhen you need them. Of course, reducing inven-tory by itself or taking a long time to make deci-sions by itself does not ensure success. The set-based search process must be systematic and wellexecuted.

Create a Leveled Product Development Process Flow

Once you define value and have resolved themajority of engineering and design challenges(i.e., achieved basic design stability), lean productdevelopment requires a waste-free process to speedthe product to market. You can manage and im-prove the PD process much like any other process.Although you may have many specific and uniquedesign challenges, the tasks you must perform andtheir sequences are usually similar across pro-grams. In this sense, a lean product developmentsystem is a knowledge work job shop, and as suchyou can continuously improve it using adaptedforms of tools used in repetitive manufacturingprocesses, such as value stream mapping and queu-ing theory, to eliminate waste and synchronizecross-functional activities. Toyota utilizes thispowerful perspective of a knowledge work jobshop to level workload, create and shorten man-agement event cadence to work to a customer-demand rate and minimize queues, synchronizeprocesses across functional departments and sup-porting technologies, and virtually eliminate re-work.

We do not mean to imply Toyota has directlyapplied the concepts from the Toyota ProductionSystem to product development. But they havedeveloped a specific set of powerful tools andmethods to create leveled flow in their productdevelopment process based on principles quitesimilar to those that underpin the Toyota way inmanufacturing. Consequently, much of what theydo is intuitive within the product developmentprocess itself.

For example, through experience running prod-uct development programs from concept to full-scale production focusing on learning, continuousimprovement, and process standardization,Toyota can predict with great accuracy the engi-neering labor hour requirements at various pointsin the process and reliably predict fluctuations inPD system resource demands. It looks roughly likea bell-shaped curve with few people early onreaching a maximum around the middle whendesigns are finalized and then winds down intoproduction launch. They have stabilized the pro-cess to the point that this plan fits reality quitewell. But they do not want to have all the peopleneeded at the peak of programs on the program forthe entire time, even when they are not needed.So they assign people to programs in a leveledway, peaking at some level and drawing on flexi-ble labor pools for people needed above this levelat the peak of the program. The flexible labor poolincludes a central pool of technicians and engi-neers from outside suppliers. This approach allowsthem to level the schedule of engineers and fullyutilize the time of the engineers.

Utilize Rigorous Standardization to Reduce Variation and to CreateFlexibility and Predictable Outcomes

The challenge in product development is to re-duce variation while preserving the creativity thatis necessary to the creative process. In fact, Toyotacreates higher-level system flexibility by standard-izing lower level tasks. There are three broadcategories of standardization at Toyota.

1. Design Standardization is achieved throughcommon architecture, modularity, reusability,and shared components.

2. Process Standardization is accomplished by de-

2006 11Liker and Morgan

signing products and building foot-printedmanufacturing facilities based on standard leanmanufacturing processes.

3. Standardized Skill Sets for Their Engineersgives flexibility in staffing and program plan-ning and minimizes task variation.

Standardization provides the foundation forToyota to develop elegant solutions to traditionallyhighly cyclic resource demands inherent in most PDsystems. It also allows them to create highly stableand predictable outcomes with both quality andtiming in an unpredictable environment. We recalla young American engineer hired by the ToyotaTechnical Center in Michigan saying: “When Iworked on my first design they gave me the checklistfor that body part. The part practically designeditself. All I had to do was go through the checklist.”

One might expect that this engineer felt ham-strung by the checklist and rigidity of the standards.Yet, the engineer felt highly challenged and in factoverwhelmed by his first Toyota vehicle program.He had first worked for an American auto companyand said he “felt sorry for his friends still there. Theyonly get to work on one piece of the program whereI take my part from start to launch.” He explainedthere are so many well thought out processes at everystep of Toyota’s product development that he alwayshas something new to learn. At the end of oneprogram he had just gone through all this once andhis head was swimming. It would take years of goingthrough the process multiple times to become con-

fident and really begin to innovate with the productitself.

People Systems

People provide the intelligence and energy to anylean system. People Systems includes the recruit-ment and selection of engineers, training and pro-fessional development, leadership styles, organiza-tional structure, institutional learning andmemory, and the elusive thing called organiza-tional culture. Culture refers to shared language,symbols, beliefs, and values. A measure of thestrength of the culture is the degree to which thesethings are truly shared across members of theorganization, and Toyota has a very strong culture.

While many companies are attempting to reducereliance on people to cut costs through methods likeautomation or shipping out engineering work tolow-wage engineering service firms, Toyota’s systemis built around people who are thoroughly immersedin the Toyota Way. It must be part of their DNA,according to Toyota. This reduces the ability toinstantly move work from one country to another inthe virtual world, unless Toyota has made the in-vestment in developing people and deep relation-ships in those other countries. The principles ofpeople systems are all about developing people whochallenge, think, and continuously improve theproduct and process (see Table 2).

Table2PeoplePrinciplesof LeanProductDevelopment

Principle Description5. Develop a “Chief Engineer System” to Integrate Development from start to

finish.The chief engineer is the master architect with final authority and

responsibility for the entire product development process. The chiefengineer is the overarching source of product and process integration.

6. Organize to balance Functional Expertise and Cross-functional Integration. Deep functional expertise combined with superordinate goals and the chiefengineer system provides the balance sought by matrix organization.

7. Develop Towering Technical Competence in all Engineers. Engineers must have deep specialized knowledge of the product andprocess that comes from direct experience at the gemba.

8. Fully Integrate Suppliers into the Product Development System. Suppliers of components must be seamlessly integrated into thedevelopment process with compatible capabilities and culture.

9. Build in Learning and Continuous Improvement. Organizational learning is a necessary condition for continuousimprovement and builds on all of the other principles.

10. Build a Culture to Support Excellence and Relentless Improvement. Excellence and kaizen in the final analysis reflect the organizationalculture.

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Develop a Chief Engineer System to Integrate Development from Start toFinish

In many companies, different functional depart-ments are responsible for different pieces of PD (orother service processes) but nobody is responsible.Try to identify exactly what the status of theproject is or where decisions are made and you getlost in the morass of endless departments. AtToyota the answer is clear. The chief engineer isresponsible and can tell you the exact status of theproject. Any difficult decisions will find their wayto the chief engineer. The chief engineer is notjust a project manager, but a leader and technicalsystems integrator. While many companies havesomeone with the title of chief engineer or pro-gram manager they often play the role of projectmanager, managing people and timing but notserving as a chief technical architect like atToyota. This unique role is the glue that holds thewhole PD system together at Toyota.

The chief engineer is not a manager in thetraditional sense. The chief engineer is an engi-neer in the ideal sense. The chief engineer is thechief architect and systems integrator. Ask engi-neers working on a program how they know whatcustomers want and they say we learn that fromthe chief engineer. Ask them how they maketough technical decisions about tradeoffs in objec-tives and they say we ask the chief engineer.Eventually all roads seem to point back to this oneperson. Ask the chief engineer how he (they areall men so far) knows everything and can make somany tough decisions and he will say somethinglike: “That is what keeps me awake at night.”

Chief engineers are only human. But they areselected and developed over decades to be the bestand brightest engineers and system integrators.They have a remarkable combination of technicaldepth, systems awareness, market savvy, and lead-ership skills. At the end of the day it truly is “theChief Engineer’s car.” Not every service organiza-tion needs a chief engineer, but whatever theproduct or service, who is responsible for taking itfrom start to finish with the deep expertise to seeit is all done effectively with a high degree ofexpertise?

Organize to Balance Functional Expertise and Cross-FunctionalIntegration

One of the more difficult tasks in developing ahigh-performance PD system is striking a balancebetween the essential need for functional excel-lence within specific disciplines, such as BodyEngineering, Electrical Engineering, or Manufac-turing Engineering, while achieving the seamlessintegration of those experts across departmentsrequired for the success of any individual program.While Toyota is fundamentally a functionally-organized company with emphasis on obtainingstrong functional skills and skill-based hierarchy,it has augmented this approach with the unofficialpower of the Chief Engineer, module develop-ment teams, and an Obeya system (“big room”)that enhances cross-functional integration andprovides a PD program focus.

Toyota has never been willing to abandon thebasic functional organization. Engineers report tofunctional managers in their technical area (e.g.,powertrain, body structures, chassis). These func-tional managers at Toyota are selected and grownto be teachers and mentors with deep technicalknowledge. The result is deep technical expertisein every function—they know what they are do-ing down to a very detailed level.

Like many other companies, Toyota has foundthe matrix organization structure is the best bal-ance of functional expertise and product focus. Onthe product side of the matrix are the chief engi-neers. None of the actual engineers designing carsreport to the Chief Engineer. Rather they reportformally up the functional hierarchy. But every-body understands they are there to serve the cus-tomer and the Chief Engineer represents the cus-tomer. So in a sense everybody works for the ChiefEngineer.

Toyota is continuously improving the engi-neering organization. They have found a numberof additional innovations to help build stronghorizontal relationships while maintaining strongfunctional expertise. Module development teamsare cross-functional teams that bring togetherproduct engineers and production engineersaround a certain part of the vehicle.

“Obeya” is an innovation to improve commu-

2006 13Liker and Morgan

nication and decision-making between the ChiefEngineer and the functional managers. The ChiefEngineer meets in the big room with a seniorengineering leader from each functional organiza-tion at least every other day. There are dailymeetings in the Obeya, where the focus is onintegration across parts of the car. Visual manage-ment is used to display on walls trend charts,schedules, problems and countermeasures andother information which displays the status of theproject across all the functional groups.

Develop Towering Technical Competence in All Engineers

Technical excellence in engineering and designresources is fundamental to lean product develop-ment. The modern automobile is a complex sys-tem of highly technical, interdependent compo-nents that demands knowledge of computertechnology, aero and fluid dynamics, mechanics,and electronics, just to name a few disciplines.That is why it is so surprising that many automak-ers pay little more than lip service to truly devel-oping technical superstars, preferring their engi-neers to broaden rather than deepen theirexperience. In fact, much of the “training” en-couraged or available in many types of organiza-tions is often so general as to be of questionablevalue at all.

At Toyota technical excellence is revered,which is partly why Toyota engineers spend a highpercentage of their time on core engineering.Toyota begins with a rigorous hiring process, andthen designs a career path that emphasizes deeptechnical skill acquisition within a specific disci-pline, focusing on mentoring of critical tacticalskills that are required for engineering excellence.The principle of genchi genbutsu (actual part, ac-tual place) at Toyota pushes engineers to get theirhands dirty and go directly to see for themselveshow the work is getting done and what the prob-lems are. In fact in their first year engineers spendmonths working on the production line buildingcars.

Fully Integrate Suppliers into the Product Development System

Suppliers provide more than 50 percent of vehiclecontent for most automakers and over 75 percentin the case of Toyota. It is clear that suppliers

must be a fundamental part of your lean productdevelopment system. Companies should manageand nurture their suppliers in much the same waythey manage and nurture internal manufacturingand engineering resources. At Toyota, suppliersare valued for their technical expertise in additionto their parts-making capability. Pre-sourcing ar-rangements get them on board from the start sothat they are involved from the earliest stages inconcept development. Using methods like havingguest engineers from suppliers work full-time inToyota’s engineering offices cement the intimaterelationship between Toyota and its suppliers. It isalso important to note that while Toyota doesfully integrate suppliers into the process theymaintain valuable commodity knowledge inter-nally and never relinquish vehicle system respon-sibility.

Build in Learning and Continuous Improvement

The ability for a company to learn and improvemay well be the most sustainable competitive ad-vantage it has in its arsenal. At Toyota, learningand continuous improvement are a basic part oftheir day-to-day operations and their faster leadtimes create shorter learning cycles and form thebasis for their continued dominance of theirindustry (Morgan 2002). Toyota is a leader ingathering, diffusing, and applying performance-enhancing information and takes on majorchallenges that primarily benefit learning.Their short development lead times combinedwith their unparalleled ability to learn as anorganization create fast, effective learning cy-cles which accelerate their continuous improve-ment engine. Specific product developmentlearning mechanisms such as the previously dis-cussed mentoring system and learning eventscalled Hansei, or reflection, are built into thebasic development process to create opportuni-ties to learn from every program.

Build a Culture to Support Excellence and Relentless Improvement

The DNA of Toyota is about very strongly heldbeliefs and values that are shared across managersand working-level engineers. These core beliefscompel the organization to work harmoniously to-ward common goals. For example, satisfying custom-

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ers is a core value of all Toyota’s employees andprovides the basis for key decision-making. This isnot the case at some auto companies, where deci-sions seem to be based on individual career enhance-ment. As one engineer who had recently joinedToyota from another auto company told us, “At myold company the focus was on building careers, atToyota we focus on building cars.” At Toyota theculture is the system. Building a culture to supportexcellence is a fundamental part of leadership whobehave in a manner consistent with the core beliefsthey espouse. All of the other principles work be-cause the culture itself makes the principles a livingpart of how Toyota gets things done.

ToolsandTechnology

The third subsystem involves the tools and tech-nologies employed to develop and build the prod-uct. This subsystem not only includes CADsystems, machine technology, and digital manu-facturing and testing technologies, but all the“soft” tools that support the effort of the peopleinvolved in the development project whether itbe for problem solving, learning, or standardizingbest practices (see Table 3).

Adapt Technology to Fit Your People and Processes

Companies err when they believe that technologyalone will provide the silver bullet necessary toachieve high levels of performance in productdevelopment, especially without regard to theways in which this technology will impact currentprocesses or people. Adding technology to a fun-damentally flawed product development systemwill do little to help performance, and may evenretard it, especially for the short term. Toyotarecognizes that technology in and of itself seldom

represents a meaningful competitive advantage. Infact, they see it as the least sustainable competi-tive advantage because it is so easily replicated. Itis much more important to take the time andeffort to ensure that the technology fits and en-hances already optimized and disciplined pro-cesses and highly skilled and organized people.That is why they spend significant time up frontand effort customizing design software and otherdigital simulation tools according to the ToyotaWay before implementing them. It is crucial to getthe process and people systems right first, andthen add technological accelerators that leveragespecific opportunities in your product develop-ment system.

Align your Organization through Simple, Visual Communication

While culture and customer focus is the glue thatholds the organization together, at Toyota simpletools are used to help align the many designers andengineers focusing on their technical specialties.One well-known Japanese management tool ishoshin kanri, also known as policy deployment.This method breaks down high-level corporategoals into meaningful objectives at the workinglevel of the organization. This method is also usedin Toyota to break down vehicle objectives tospecific system objectives for performance, weight,cost, safety, etc. To support this process and thatof solving the many problems that naturally occurwhen things do not go exactly as planned, Toyotauses very simple visual methods for communicat-ing information, often on one side of one sheet ofpaper. This A3 report (named after the A3 papersize) has four minor variations: proposals, problemsolving, status reporting, and competitive analysis.However, the basic concept is the same, and the

Table3ToolsandTechnologyPrinciplesof LeanProductDevelopment

Principle Description11. Adapt Technology to Fit your People and Process. Technology must be customized and always subordinated to the people

and process.12. Align your Organization through Simple, Visual

Communication.Aligned goals must be cascaded down and joint problem solving is enabled

by simple, visual communication.13. Use Powerful Tools for Standardization and Organizational

Learning.Powerful tools can be simple. Their power comes from enabling

standardization which is necessary for organizational learning.

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document communicates only the most pertinentinformation in a simple visual format. This too isused to develop consensus among a group of peo-ple.

Use Powerful Tools for Standardization and Organizational Learning

How can the company learn from program toprogram? A well-known principle of kaizen is thatyou cannot have continuous improvement with-out standardization. Toyota has evolved very pow-erful tools to standardize learning from program toprogram at the macro-level, mapping how thedesign process itself transfers to individual lessonsat the detailed technical component level throughengineering check lists.

The most important thing about these tools isthat they are simple as well as owned and main-tained by the people doing the work. A bumperengineer must own the standards related tobumpers and work to keep them up to date andcommunicated. Turning this over to a corporate“standards” department will make these docu-ments bureaucratic and lifeless.

Putting It All Together to Create a Coherent System

Lean is a system. What does that mean? It meansthe parts interact, overlap, are interdependent,and work together as a coherent whole. This isperhaps the key insight from our research.Changes to one subsystem will always have impli-cations for the others. Think about a simple me-chanical system like an engine. It is quite possibleto have the best piston, the best cylinders, and thebest fuel injectors. But if they do not fit togeth-er—for example, the sizes are all different—youhave a bunch of great engine parts that togetherdo nothing. Product development organizationsare many times more complex because of thecomplexity of human systems, making the needfor a systemic perspective even more critical.

Integrating people, process, and tools and tech-nology into a coherent system requires that thatsubsystems are purposefully designed, aligned,and mutually supportive. After understandingthe value from the customer’s perspective, thefocus shifts to the task to be accomplished andthe development of a waste free workflow orprocess by which to accomplish it. However, a

highly efficient process is of no use if the peoplein the organization do not possess the skillsrequired to carry out the required tasks, or ifthey are not organized such that the right peo-ple are available at the right time. Conse-quently, we must next consider those skills,practices, and organizational characteristicsthat will be required to execute the process.Finally, tools and technologies that do not fitthe process or support the activities of the peo-ple will not achieve their potential and mayeven hinder performance. Tools and technolo-gies must fit the system by supporting the pro-cess and enabling the people.

Globalizing theToyotaWay

This task is recognized by Toyota as their singlebiggest challenge. Toyota old-timers in ToyotaCity often joke that they are “country bump-

kins.” Toyota City was farmland before Toyotabuilt a global powerhouse, and Toyota leadershave the spirit of farmers—e.g., tough, strongwork ethic, solve each problem as it comes, do thebest you can with what you have. But farmers arealso locally oriented rather than cosmopolitan,and one can make a case that Toyota is still a localcompany that has spread out globally.

Toyota’s way includes a deep set of values andprinciples that are taught to all new members overmany years through intense mentorship. Toyota isnot willing to compromise the Toyota Way as itglobalizes, seeing its “DNA” as its main source ofcompetitive strength. This of course raises thechallenge of how to spread this unique blend ofToyota and Japanese culture to different cultureswith engineers who have not grown up in thisculture. There are many ways that Toyota hasbeen doing this quite successfully:

1. Coordinator System. How do you transfer theDNA of your company? Toyota knows onlyone way—through people. So they realizedthey needed to make a major investment inpeople. They have deployed around the worldthousands of “coordinators” whose primary jobis to transfer the DNA. Every manager andabove had a full-time Japanese coordinatorwhen Toyota first opened manufacturing

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plants in the USA and started the ToyotaTechnical Center in Michigan. The coordina-tor was a daily coach teaching Americans dayin and day out for years on how to think, speak,and act in the Toyota Way. Since then thereare fewer Japanese coordinators to go around sothey are developing more efficient methods.

2. Careful Selection. Even with the coordinatorsystem you need the right raw materials.Toyota carefully selects its people in Japan andelsewhere, identifying people who will fit theDNA of the company. They look for smart,dedicated, hard working, committed peoplewho are excited about cars, like to work inteams, have a curiosity about solving problems,and are open to learning. Usually they hirepeople with good grades in school but the beststudents in school are often not well-suited forthe Toyota Way in other respects. And they donot want fast trackers whose focus is climbingtheir way to the top.

3. Trips to Japan. Every visit to the mother shipin Toyota City, Japan, is an opportunity forindoctrination. It is such a different environ-ment that most visitors cannot help but expe-rience cultural shock, which opens them up tolearning. The energy, efficiency, and problem-solving exhibited across the Toyota organiza-tion in Japan is striking, and Toyota overseasemployees are generally quite impressed as wellas humbled by the experience. While in Japanthey are given challenging tasks and learn adifferent level of problem-solving than theyhave experienced.

4. Chief engineer system. The Chief Engineerdoes a lot of teaching and coaching in thecourse of leading product developmentprojects. The Chief Engineer is a charismaticfigure, and American engineers will excit-edly recount stories of their encounters withChief Engineers. It is well known that muchof our learning occurs during significantemotional events and working with the chiefengineer under the pressure of Toyota’shighly compressed product development pro-grams are emotionally charged learning op-portunities.

Along the way Toyota has encountered manyproblems in transferring the culture. In an idealsense the Toyota Way is about taking problems asopportunities to reflect and improve. Below are afew examples.

Transferring Hansei. Hansei is roughly trans-lated as reflection, but it means much more inJapan. Young children know that when they dosomething wrong they will be asked to do thehansei. They are being asked to reflect, come back,and express how deeply sorry they are about theirfailing, and vow to improve and never do it again.The adult version in companies is to take respon-sibility for problems, feel really sorry, and explainwhat you will do to prevent that mistake fromhappening again via a written plan. Toyota lead-ers view hansei as what drives kaizen—the deepdesire for continual improvement with an eyetoward ultimate perfection. So when a Japanesemanager finds a weakness in a project the engineeris expected to take it constructively as an oppor-tunity for improvement.

American Toyota employees did not take itthat way. They started using phrases like “theobligatory negative” that the Japanese managersmust put into every assessment of every project.The Americans wanted praise for all the goodthings they did, not criticism for the few weak-nesses. The Japanese could not see how suchpraise would be beneficial for continuous im-provement.

There were painful experiences in America be-cause of these different perspectives toward hansei.At one point, the Toyota Technical Centerstopped using the phrase entirely. Then about tenyears later, hansei made a comeback, as there wasmore trust between the Americans and Japanesemanagers, and the Japanese had learned how tobalance positive and negative feedback. Thislearning has been important in Japan as well be-cause the younger generation of Japanese engi-neers are more Westernized and expect praisewhile being less willing to accept harsh criticism.

Work-Life Balance. It is well known in Japanthat the company comes before the individual’spersonal or family life. Talk to senior or retiredToyota engineers about their work hours whenthey were young engineers and the story is the

2006 17Liker and Morgan

same. They worked 10 to 14 hours a day either 6or 7 days a week. Men were expected to workthese hours while their wives raised the family.This was especially true during peak periods ofproduct development when the only life prioritywas doing what was necessary for the program.Product development programs are always veryconsuming and engineers typically work longhours during the pressure points of the program.Even though Toyota has squeezed out enoughwaste to make resource demands more constantand leveled the flow of work to help reduce thelevel of peak human resource requirements so thatthey can begin to lessen some of the more difficultdemands on individual engineers, make no mis-take, Toyota engineers in Japan work incrediblyhard.

However, in America and other Western cul-tures there is a higher value placed on personaland family life so Toyota managers were ham-mered over and over again with the issue of “work-life balance.” This is another thing they havegradually been working on first overseas and thento a degree back in Japan. For example, at theToyota Technical Center in Michigan they insti-tuted flex time and younger engineers can setwork hours within some constraints to give themflexibility to be at key family events (e.g., chil-dren’s soccer games). The surprising thing aboutthis is that they actually had to agree there shouldbe a start and a stop time, whereas in Japan itseemed that however early an engineer started theending time was late in the evening or even ap-proaching midnight.

Individual Versus Group Rewards. In Japan,dedication to the company and the team is ex-pected by Toyota. In fact, individuals are usuallyvery embarrassed if they are singled out for praise.Their response will be: “It was the team thataccomplished this, not me personally.” Americansexpect to be singled out for praise when they feelthey have accomplished something significant. SoToyota has had to institute certain individual-based rewards in America. For example, the twiceper year bonus in Japan is strictly based on howthe company performs and not related to perfor-mance of any individual or any specific depart-

ment. In America the bonus includes a compo-nent based on individual performance.

Each of these examples is really part of a seriesof learning experiments for Toyota. As a learningorganization, Toyota tries things, evaluates, re-flects, and selects a further course of action. Dem-ing taught them to Plan, Do, Check, and Act(PDCA). They practice this problem-solving cy-cle at a remarkably high level compared to othercompanies. There is no single solution; this tenetis true for transferring the Toyota Way to othercountries. No one in Toyota would say they havethis problem solved. They would say they areworking on it and have learned a great deal.

Learning fromtheToyotaWay

Many companies throughout the world areseeking to learn from Toyota’s system. Typ-ically they limit their exploration to a few

superficial “lean” tools. Companies that have seensuccess with lean tools in manufacturing plantswant to apply them to their own product devel-opment processes. What they look for are quickfixes to reduce lead time and costs and to increasequality. However, they almost never create a truelearning culture in the factory, while remainingconvinced they had “gone lean” on the shop floor.Then, despite never really getting the conversionin the factory, they move on to the product de-velopment process to attempt to create “lean”offices.

What can other companies learn from theToyota Way? The journey is far more complexthan applying a few tools or holding some classes.It truly is a cultural transformation. It truly is aPDCA learning process. You need to start on thelearning journey and then keep going and neverstop. You need to practice deep reflection andlearn. Toyota is continually learning. They are farfrom perfect—and would become very nervous ifanyone thought they were. What we can takeaway from Toyota is the importance of becominga humble, learning organization.

Toyota has developed a true learning organiza-tion focused on adding value to its associates, thecommunity, and society and as such is a modelother companies can look to for inspiration, ideas,and methodologies. As a complex living system,

18 MayAcademy of Management Perspectives

Toyota’s leaders have consistently guided it tomake the parts of the system work together. Thishas been a self-conscious effort. All of Toyota’sexecutives understand the importance of the over-all system of management and deeper culture ofthe Toyota way. As Vice Chairman KatsuhiroNakagawa put it, “without the Toyota way we arejust like any other automobile company.”

The case of product development should givenew insights into how Toyota’s management prin-ciples can be applied outside the production floor,even in technical service operations. There areservice operations all over the world that arebusily engaged in trying to “become lean.” Theseinclude hospitals such as the famous case of Vir-ginia Mason Hospital in Seattle, information sys-tem services provided by off-shore Indian compa-nies such as Wipro Ltd., and even banks andfinancial institutions that are trying to learn to belean.

When organizations adopt a “lean program,”what are they really doing? What do they reallywant? They start with the Toyota Production Sys-tem and look at the success of Toyota in deliver-ing high quality at low cost. They study the toolsof TPS and try to figure out how to adapt them towhatever their processes are. They see that thefocus of TPS is on reduction of lead time whichthen has benefits in cost, quality, and delivery, sothey look to reduce lead time through waste elim-ination. Mostly the tools apply in an obvious wayto repetitive operations. For example, hospitalscan look at the process of testing blood, or howtools and supplies are stocked and brought to thepoint of use, or how the operating room ischanged over for new patients. These are all anal-ogous operations to what one would see on theshop floor.

When we look through the lens of how Toyotahas applied its principles to product development,we notice that by and large service operations arefocusing narrowly on a few lean tools in the “pro-cess” piece of the integrated system of process,people, and technology. The typical approach:

1. Identify a repetitive process to improve.2. Apply value stream mapping to identify waste

and then a future state map with waste re-

moved (a method to map the process and showthe value added and non-value added steps).

3. Implement the changes.4. Celebrate success.

This is just a start. Once an organization has gonethrough this exercise a number of times one canask a broader set of questions about what has beenaccomplished:

1. Are the changes leading to new standardizedprocesses that are the basis for further wastereduction?

2. Are people throughout the organization en-gaged in continuous improvement and alignedaround a common set of objectives?

3. Are all the soft tools and harder technologiesbeing used to support people improving thedelivery of products and services to customers?

If we take a hard, honest look at most organizationstrying to “implement lean”—or six sigma for thatmatter—the answer to each of these questions is aresounding no! They have not gotten much furtherthan applying a few tools to a few processes.

One of the concerns companies will have aboutapplying the “lean” methodology to service opera-tions is its impact on professional employees. Profes-sionals are not like workers on the shop floor. Theyare educated, well paid, and expect to have auton-omy and be creative in their work. A common imageof a lean shop floor can be quite negative. Imaginethese professionals in their natural work environ-ment being pressured to follow standard proceduresfor everything they do and constantly pull minutesof non-value added activity out of the process lead-ing to more intense and tightly controlled work forall hours of the day and night. Once the work hasbecome standardized the next step is to monitor itcarefully providing rewards and punishments basedon scores on key metrics. It is no wonder we oftensee resistance from professionals when the conceptof lean is discussed.

If you believe the analysis of the Toyota Way inthis article and the work of scholars like Paul Adler,you will agree that Toyota has created a differenttype of standardization and a different type of bu-reaucracy. Paul Adler (1999) talks about the nega-tive view of a machine-like, controlling bureaucracy

2006 19Liker and Morgan

as coercive, and what Toyota has done is create adifferent kind of “enabling bureaucracy.” In Toyota’sversion, standardization is part of continuous im-provement and a tool in the hands of the peopledoing the work. It is in fact liberating rather thanconfining. Indeed, The Toyota Way also provides avery positive view of how Toyota invests in anddevelops its people from the offices to the labs to theshop floor to take on challenges and accomplishremarkable feats. It is enriching and challengingwork in which people grow and become better peo-ple. Which view is correct? Is it a bleak bureaucracyor a colorful and rich learning organization?

As usual the answer is probably somewhere inbetween and also depends on one’s perspective.Certainly Toyota managers and engineers workvery hard. There are pressures to perform. Failureis never an option and creating constant winsmeans working long and late hours and stressingpeople. Many overseas managers and engineersworking for Toyota have admitted that the pres-sures of being so perfect and working whenever itis needed are too much for them to sustain over anentire career. On the other hand, other managersdescribe working for Toyota as “coming home”where they can finally be part of something theycan believe in. They would not want to work forany other company.

Ultimately, a company must envision what itwants to become. It does not need to look exactlylike Toyota. In fact, as a living system that grows andevolves in complex ways in a particular environment

it could not possibly look like Toyota. So the onlyalternative is to try to understand the message ofwhat it means to become a lean learning organiza-tion and the hard work required to start to build sucha culture piece by piece over many years. Maybe theresult will be better than Toyota. The spirit of chal-lenge and always trying to get better is the centralmessage of the Toyota Way.

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Morgan, J.M. & Liker, J.K. 2006. The Toyota product devel-opment system: Integrating people, processes, and technol-ogy. NY: Productivity Press.

Sobek, D.K., II. 1997. Principles that shape product devel-opment systems: A Toyota-Chrysler comparison. AnnArbor, MI: UMI Dissertation Services.

Sobek, D.K., II, Ward, A. & Liker, J. 1999. Principles fromToyota’s set-based concurrent engineering process. SloanManagement Review, 40(2).

Sobek, D.K. II, Liker, J., & Ward A. 1998. Another look athow Toyota integrates product development. HarvardBusiness Review, 76(4): 36–50.

Ward, A., Liker, J., Sobek, D., & Cristiano, J. The secondToyota paradox: How delaying decisions can make bettercars faster. Sloan Management Review, Spring, 1995:43–61.

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