by Richard Reynolds

Translating the 14 principles of the Toyota Way into microfinance

The Toyota way is a book by J Liker that describes the 14 management principles behind the success of Toyota the car maker.  This paper shows how these principles are equally applicable for microfinance institutions and especially VFI. 

• Philosophy: Long term systems thinking

Principles 1. Base your management decisions on long term systems thinking, even at the expense of short-term goals:   MFIs tend to think short term focusing on key financial indicators (OSS, PAR) and comparisons with budgets.  All of this is good, but principle one challenges MFIs to go further

• To focus on their mission and make decisions based on this.

• The two key pillars to build on are continuous improvement and respect for people.  

  • A desire to always seek to improve contrasts with many MFIs who just seek to follow others and copy what they do.  

  • At the same time respect is based on the concept that if systems, processes, procedures etc. are limiting people’s work then respect is always about seeking to fix, remove or improve these so people’s work can be better and more efficient. Respect is very close to valuing people but is a much more active than passive way of thinking.

• The key to understanding is that this approach is also a philosophy or way of working throughout the company.  The Toyota way identifies five components under these two pillars.

  • Challenge: To accept big challenges of making poverty history with a creative spirit

  • Kaizen: change for the good based 

  • Go and see and learn: Deeply understanding the current condition before deciding, observe, put in the hands of the branch and loan officers who are closest to the problem and for managers who are in the field and see what is happening.  Where the action happens 

  • Respect: continually seek to improve because we respect those around us.

  • Teamwork: and individual accountability.  Branch Manager are accountable, but they must work as a team draw on collective talents and listen to their loan officers

• PROCESS PRINCIPLES (2-8): Struggle to flow value to each customer

Principle 2: Connecting people and processes through continuous process flow to bring problems to the surface. 

• Continuous flow is the idea to get the right loan officers who do the value-add work (making the loan) and line them up virtually and flow the process through the loan officer with the appropriate meetings to get the speed, productivity and quality you need.

• Most operations in an MFI are full of waste. 

  • Loans are not disbursed throughout the month (when clients need money all month)

  • Loan repayment days are all at the same period in the month meaning LO’s fail to visit all the groups or are unable to do other work.

  • Loans for approval are batched together so the central hub is overworked for some weeks in the month

  • MFIs don’t track how many clients are rejected (from the first contact). They only if they do track from the point they are entered into the system.

  • Loan officers dealing with multiple products and processes and continually adjusting how they work (e.g. individual and group loans)

• The concept of Takt (German word for Rhythm) and is the measure of customer demand.  So, if a branch disburses 180 loans in a month that’s 9 per day or 0.88 per hour.  Continuous flow is about writing up the process and non-value-added activities that can be reduced or eliminated to create better flow and deliver on this or a better rate.

  • For example, you have approval from the credit supervisor, a branch manager, a credit supervisor and a central hub.  Do you need 4 approvals.  Why not just go from the loan officer to the hub for approval with a check for mistakes (defects in Toyota language).  

• Process flows is primarily not a solution, but a way to find problems

  • For MFIs understanding the process will enable management and staff to see what is going on and what is not working.  This is where the problems are found.  Problems are always viewed as treasures.

  • This then generates the idea that branch staff start to see the problem (why the process is not working) and then understand what the root cause (not the symptom) of this is. For example, a branch was wondering why its Loan officers didn’t want to keep to specific areas (this would improve time spent with clients and reduce transport, which is a waste).  What they discovered as they asked why (the 5 whys).  It was that clients feared losing the best clients, because they did not trust the market assessments being made.  So, if LOs were trained and involved in the market assessments they would be confident they were getting markets they could excel in.

Example of 5 why’s: Delayed Loan Disbursement in a Microfinance Institution

Problem: Loan disbursements are often delayed.

• Why are loan disbursements delayed? → Because loan approvals take longer than expected.

• Why do loan approvals take longer? → Because the credit officers spend too much time verifying documents.

• Why do credit officers take too much time verifying documents? → Because many clients submit incomplete or incorrect documents.

• Why do clients submit incomplete or incorrect documents? → Because they do not fully understand the documentation requirements.

• Why do they not understand the requirements? → Because the institution does not provide clear instructions or a checklist before application.

Root Cause: Lack of clear instructions for clients on required documentation.

Solution: Create a simple checklist and provide training to clients on required documents before application.

Principle 3: use Pull systems to avoid overproduction

• If MFIs are producing loans that are not being disbursed or capital left in the bank, then they have excess inventory.  The pull system challenges the more typical high level forecasting demand and calculation models or the monthly cash flows that an MFI does annually to manage loans. 

  • The Kanban is a simple visual system that Toyota uses to send signals (either visual or electronic) from a customer to a supplier.  It essentially says, “I see I reached the trigger point please send me some more money”. 

  • So, when a loan officer is 75% through a loan process, they could signal to the hub it’s ready soon for approval and a Hub could send a signal to finance when X% of its loans are about to be sent to them.

  • Imagine in a branch where you could identify how many loans there are at different stages (need to be identified) and then through the day (or by the end of the day) see what has changed.  But see that visually as you walk into the office.

  • But the key to this is that by creating all sorts of visible signs you allow front line staff to both visualize the system and to see how they can get the system to be better.