5.1 Moving Up the Value Chain: Mexico and South Africa
The 1990s and 2000s
witnessed
an explosion
of complex value chains spanning the globe. Labor costs drove many decisions about the location of production, but today only 18 percent of goods trade involves labor-cost arbitrage
—defined as exports from countries with GDP
per capita one-fifth or less than that of the importing country.
8 Lead companies in global
value chains, however, still require suppliers to deliver high-quality inputs at competitive prices. Productivity and quality depend in turn on the knowledge possessed by the individuals who make up the firm.
Kaizen’s goal is to help enterprises make higher quality products, reduce costs, and achieve timely delivery through continuous collaboration between managers and workers. Two of our country studies assess the effectiveness of
Kaizen in helping domestic suppliers integrate into the automotive value chains of Mexico and South Africa.
Since the ratification of the North America Free Trade Area (NAFTA
), Mexico has attracted major global carmakers, which use it as a base for export to the US
market. In Chap.
8, Keiji Katai examines the effectiveness of a
Kaizen training
program designed to increase the integration of domestic Mexican suppliers into the automotive value chain. From 2012 until 2015, JICA
supported supply chain development between Japanese automakers and domestic Mexican parts supplying firms.
Kaizen experts with experience in the automotive industry conducted diagnoses of each firm, set targets for improvement in collaboration with buyer firms, and supported implementation for one year. Typical
Kaizen interventions were 5S
, reducing defective product ratios, improving job throughput, and reducing down time and inventory.
Twenty-seven domestic firms engaged in or wishing to enter the value chain received training. Katai examines the impact of the training on changes in the position of seventeen firms in the GVC and attempts to relate these changes to changes in their production capabilities. He defines the stages of participation in the value chain as ranging from the non-supplier stage (stage 1) to the level of global partner supplier (stage 6). Movement from stages 1 to 6 represents progress by domestic firms in upgrading their position in the value chain. Lead automotive firms rank suppliers based on quality, cost, and delivery (QCD). Higher level suppliers (stages 5 and 6) develop new products in collaboration with the buyer or collaborate with the Original Equipment Manufacturer (OEM) to supply and develop products for global markets.
Using information from both supplier firms and purchasing firms, Katai attempts to associate changes in lead firm’s evaluations of suppliers before and after Kaizen training with measures of productivity and quality. He measures quality by changes in defective product ratios and productivity by reductions in mold-changing times. In the automotive industry, quality is assessed by the number of defective parts per million (PPM). After the intervention, the defect rate in firms receiving training declined substantially. Of fifteen firms, twelve firms reduced their defect rates to less than 100 PPM, lower than the average for domestic automotive parts makers in Mexico. He also finds that low defect rates are positively associated with lead firm’s evaluations of quality.
Reduced mold-changing time enables firms to produce products with minimum machine stoppage and improve productivity. Each auto uses about 30,000 parts, and manufacturers carefully control assembly of each model to minimize inventory. Parts makers are therefore required to adjust production volumes of individual parts weekly. This creates frequent changes of molds, and each change can consume hours. The JICA project attempted to reduce mold-changing times. Katai does not find a clear and direct relationship between improved productivity, as measured by reduced mold-changing times, and buyer firms’ evaluations of cost.
He does, however, find some evidence of a positive relationship between lead firms’ evaluations of QCD levels after Kaizen training and the supplier firms’ position in the GVC. Of seventeen supplier firms, eight (47 percent) improved their position in the supply chain, five (29 percent) maintained their position, and four (24 percent) experienced a deterioration. Further, there is a positive relationship between supplier firm positions in the GVC and business volumes. However, Katai’s data are restricted to the treated group of firms and their corresponding lead firms. As he notes, without information on a control group or on the overall Mexican automotive parts industry, it is difficult infer a causal relationship.
In Chap.
9, Keiji Ishigame attempts to measure the impact of
Kaizen—popularly known as the Toyota Production System (TPS
) in South Africa—on the competitiveness of automotive suppliers. In doing so, he asks an important supplementary question: does the effectiveness of
Kaizen differ among suppliers, and what factors contribute to these differences? In 2015, JICA
launched an Automotive Industry Human Resource Development
Project in South Africa. The purpose of the project was to enhance the capacity
of human resources in the automotive industry
and to improve the productivity and quality of domestic suppliers. The automotive industry is the largest manufacturing sector in South Africa. It is composed of six major vehicle assemblers, thirteen assemblers of heavy and medium commercial vehicles, and approximately 360 component manufacturers.
Under the project, two Japanese experts working with the South African Automotive Industry Development Center (AIDC) trained AIDC trainers and jointly with the AIDC trainers provided technical advice to local suppliers. Eight supplier firms were selected to receive Kaizen training. Because one of the goals of the project was to increase the capacity for Kaizen training in South Africa, Japanese experts visited the selected supplier firms five to ten days per year jointly with AIDC trainers. In addition, the AIDC trainers independently visited suppliers every two weeks on average. The training program itself consisted of a number of Kaizen tools associated with the Toyota Production System. The first stage taught suppliers to implement 5S.
An innovation of the project was that, contrary to normal practice, 5S was used in the initial stages of implementation, to create a foundation for other Kaizen activities. In the second stage, trainers and the supplier firms prepared a diagnostic to identify problems in the flow of information and materials. The third stage consisted of JICA experts, AIDC trainers, and the supplying firms jointly developing Kaizen activities to improve quality and productivity. The Japanese experts advised not only on 5S but also on the diagnosis of quality and productivity problems.
Ishigame presents three company case studies of impact. In the first case, a layout change significantly improved quality and productivity, with corresponding increases in sales and profits. The firm moved large machinery into correct positions and implemented one-piece flow, thereby shortening lead times. It achieved increases in quality by moving from batch production to one-piece flow, allowing operators to identify defects in the course of production. In the second case, a company producing textile-based automotive acoustic and trim components introduced gradual improvements to workflow and production processes, based on 5S. Over two years productivity and quality improved, costs were reduced by about US$1.6 million, and revenue increased by 25 percent with the same labor force. In the third case—a company making plastic injection molding parts—the introduction of a one-piece flow system produced improvements in quality and productivity and reduced production lead-time from 24 hours to 1 hour. With only a limited number of participating companies and no control group, however, there is insufficient evidence to determine whether the project made a meaningful change in the productivity and quality of supplying firms.
The results of the Mexico and South Africa studies are suggestive, but hardly definitive. Small sample size, lack of a control group, and the absence of benchmark data on the automotive sector make it impossible to answer the question of whether Kaizen increased the integration of domestic suppliers into complex global value chains. Some qualitative results provide grounds for optimism. One common thread among the successful cases was the level of commitment of senior management and engineering staff to Kaizen. Where managers were committed, implementation of such Kaizen tools as 5S and continuous flow led to substantial improvements in quality and productivity, and because Kaizen engages all members of the firm, it contributed to learning. The Mexico results further suggest that these are key elements enabling domestic firms to break into and move up the value chain.
5.2 Shortening the “Left-Hand Tail” in Brazil
Empirical microeconomic
studies
repeatedly find that there are large productivity differences among enterprises in quite narrowly defined industries. Even in rich countries, the magnitudes involved are striking. In the US
manufacturing, on average a plant in the 90th percentile of the productivity distribution produces about twice as much output of the same product as a plant in the 10th percentile, using the same measured inputs (Syverson
2011).
9 While poorer countries have some firms that achieve world-class productivity levels, there is also a long “left-hand tail” of poorly performing firms.
In Chap.
10, De Sousa, Canêdo-Pinheiro, Cabral and de Sousa Ferreira evaluate whether
Kaizen has improved firm-level performance in Brazil, using both quantitative and qualitative evidence. Put differently, they ask if
Kaizen can shorten the “left-hand tail.” They draw firm-level data from two sources—The Brazilian Innovation Survey (PINTEC
) and the Annual Manufacturing Survey (PIA
) and construct an unbalanced panel of firms. PIA
surveys all manufacturing firms over thirty employees, on average around 30,000 firms annually. In PINTEC
, the size threshold is much higher, 500 employees.
The researchers confront the considerable challenge of identifying Kaizen adoption. Neither data set includes questions on whether a firm has implemented Kaizen. However, the authors use the innovation survey to identify firms that have adopted management practices based on Kaizen principles. Examples of management practices using Kaizen tools are re-engineering, knowledge management, total quality control, training, and enterprise resource planning. The innovation survey also asks if the firm has introduced new methods to delegate responsibilities and decision-making to workers. Because in Kaizen participation by workers is central, the response to this question reflects a second Kaizen characteristic. A third strand of Kaizen is continuous improvement, which the authors argue should be reflected in continuous changes in management practice. Thus, they classify a firm answering all three questions affirmatively in repeated years as using a Kaizen approach. Using these criteria, the authors select a sample of 2541 firms of which some 63 percent are identified as having implemented Kaizen. As a counterfactual they choose firms that do not carry out innovations in management practices.
The authors use a number of econometric approaches to assess the impact of Kaizen on firm-level productivity, growth, and innovation. They find that Kaizen does not improve firm-level productivity, whether measured by labor productivity or total factor productivity (TFP). They do, however, find a robust positive relationship between Kaizen and the growth of the firm. Of greater interest is the finding of a positive impact on process innovation. To reduce potential selection bias, they perform a propensity score matching to restrict the group of untreated firms to only those similar to treated firms. Results using only matched firms in the control group indicate that the relationship between Kaizen and process innovation remains robustly positive. Comparing similar firms, Kaizen increases innovation in Brazilian manufacturing. Interpreting their results as a whole, the authors conclude that the channel in Brazil by which Kaizen raises productivity may be through its impact on innovation. Because Kaizen is an incremental approach, they further conclude, it is possible that the time period between observations in the data is too short to observe this indirect effect.
5.3 Summing Up
The results of these studies of the impact of Kaizen on larger firms may disappoint its advocates. Small sample sizes and lack of counterfactual evidence limit what we can conclude from the Mexico and South Africa case studies. Clearly, Kaizen interventions were perceived by sponsoring managers and engineers as successful. There is also limited evidence of Kaizen contributing directly to improvements in quality and productivity. In both countries, the firms that persisted in the implementation of Kaizen appear to have moved up the value chain in the automotive sector.
Using a broader sample of firms, research in Brazil leads to similar ambiguity. It fails to find a significant relationship between the introduction of Kaizen and subsequent improvements in either labor productivity or total factor productivity (TFP). The authors speculate that this may be the result of observing the firm over too short a time period. More encouragingly, they find a strong relationship between Kaizen and process innovation. The firms that practice Kaizen in Brazil innovate more than similar firms.
Productivity is not the sole determinant of competitiveness, however. In fact, low wages can in some cases compensate for low productivity, but they cannot compensate for inferior quality. The Brazil surveys fail to tell us anything about quality. In the Mexico and South Africa cases, there is some evidence that quality was the capability most directly impacted by Kaizen methods.