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The automotive industry is highly capital-intensive and is one of the driving factors behind cost-effective business strategies. The Toyota Production System (TPS) and the Just-in-Time method strive to eliminate all waste. JIT is used to make only what is needed when it is needed and only the amount needed. Using JIT Toyota produces its vehicles based on the orders it receives with supply chain working together to provide parts as orders are filled to minimize the inventory of vehicle parts (Toyota Motor Corporation, 2017). Toyota has been successful in strong relationships with suppliers to grow together instead of simply switching to the supplier that is offering the lowest cost of goods. Domestic and international issues related to labor and wages
PERFORMANCE PROFITABILITY 10Operating in a global marketplace allow businesses to manufacture in countries with a comparative advantage on wages, or in areas with labor laws in favor of business owners over employees. Arguments have been made that liberalizing labor laws will enhance labor market flexibility and boost job creation (Deakin, Malmberg, & Sarkar, 2014). Labor laws typically are thought of as a means to ensure a just and fair labor market. A concern with these laws is that a mandatory wage floor artificially raises workers’ reservation wage, leading to depressed demand on employers and reduced employment. Any fairness coming from these laws through wage protection of some workers is offset by the loss of jobs for others (Deakin, Malmberg, & Sarkar, 2014). Toyota has operations in Japan and the United States who each have varying protection for workers. Japan has a lower score on the protection of agency workers and fixed-term employees than other countries reflecting the absence of a right to equal treatment for these groups and the flexibility employers enjoy in respect in dismissing fixed-term employees (Deakin, Malmberg, & Sarkar, 2014). The United States is an outlier with employment law dominated by the principle of employment at will. While there is still debate on the benefits of labor laws, studies have shown that labor laws are compatible with improved efficiency at the firm level and enhanced macroeconomic performance (Deakin, Malmberg, & Sarkar, 2014). Wages play a large role in where automakers decide to build a factory. Along with many other industries, manufacturing has shifted to countries who pay their workers less. This has been seen in the movement of manufacturing plants to Mexico after other “cheap-labor” countries such as China have raised their labor costs in recent years. Most workers at the Audi factory in Puebla make $2.25 an hour to produce a product that is sold for over $40,000 in the United States (Richter, 2017). Toyota reports it will scale back investment in a planned plant in Guanajuato, Mexico by 30% to $700 million, and will cut planned production in half to 100,000
PERFORMANCE PROFITABILITY 11vehicles per year after announcing its plans to build a $1 billion plant in Mexico in 2015 (Richter, 2017).