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The Toyota lesson, risk management and your business plan

Guest post by: Michiel Jonker

Article Overview: Small business owners need to pay attention to the disastrous decision of Toyota to ask its suppliers to cut cost by 30% over the next three years. Most probably this is the reason for the acceleration nightmare issue surrounding many Toyota vehicles right now. Small entrepreneurs should learn from this and make a decision on their business ethics and management principles while writing or re-visiting their business plans. What is your standpoint on cost cutting – especially essential expenses? Be careful, as your attitude towards this important issue might result in great success or huge losses… or even failure!

The Toyota lesson, risk management and your business plan

Since 2008 Business Around The Globe.Com has warned against aggressive cost cutting. We now rest our case. You CANNOT cut essential expenses! You should rather include the principle of profit protection planning in your business plan - i.e. you need to cultivate the culture of risk management in your business and NOT the cutting of essential expenses! When the recession hit in 2008, we immediately warned our customers not to cut essential expenses. "During the recession, it isn't easy to... cut essential expenses in order to make up for lost profits or to maximize profit..." and "...you still have to make a financial outlay in order to operate, pursue your business opportunities, and generate sales."

The Toyota case is an excellent example of aggressive cost cutting - to such an extent that additional risks were introduced to the company. What happens when you pressure suppliers to cut cost? Well, you can figure it out yourself...

What should Toyota have done in the first instance to defend itself against the recession? A robust risk management program should have been implemented (though this should be part of your company culture and NOT a once-off exercise). Yes, if they were in the habit to reduce all business risks in the company, they most probably would have identified several weak points in the Toyota corporate culture, processes, procedures AND management style.

The current management style requires that the Toyota Top decides about everything. For example, a customer complaint will "travel" between different executives, taking weeks or months to be sorted out by different departments. This is a RISK/WEAK POINT in the company. During a risk identification (profit protection planning) session this might have been identified and corrective actions could have been taken...

If Toyota had sorted out their risks, instead of pressing for more cost cutting (which introduced more risks AND profit erosion... and I hope you won't argue with me on the profit erosion issue...), they could have sorted out the processes to handle customer complaints... and just perhaps the "accelerator nightmare" would have been a storm in a tea cup.

What is the result of not implementing risk management (profit protection planning) in your company and business plan? A negative financial impact on your company is the end result. In Toyota's case, this means a bad public image (the entire word have doubts about the quality of Toyota's car products right now), a huge loss in potential sales and a huge financial loss due to returned cars and compulsory repairs.

Many times the cost of controls (risk management) is less than the negative financial impact of a risk. In Toyota's case this is absolutely the case. Of course, you need to calculate the cost of your controls - otherwise the cost of controls can become your biggest risk! For this reason we are advocates for years now to implement deliberate profit protection planning in your business. As small business owner, you also need to address this issue in your business plan.

For more information on profit protection planning, you may visit our web site: http://www.business-around-the-globe.com/

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Article Tags: Business Ethics, Business Plan, Management Principles, Profit, Risk Management, Small Business Owners, Toyota, Toyota Vehicles



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