How the VW scandal will change the industry

Volkswagen's Chief Executive Matthias Mueller would do well to learn from one of the great innovations of the Toyota Way — the Andon cord — as he works to overcome a costly scandal over manipulations of emissions readings in diesel cars made by the German automaker.

During the 1980s and 90s, the Japanese company was highly respected for its Toyota Production System, also known as lean manufacturing, aimed at reducing waste and increasing efficiency. Among Toyota's innovations was the Andon cord — a rope draped along the entire assembly line like Christmas tinsel. The idea was simple; any worker could pull the cord to seek help or even stop the assembly line immediately in the event of a problem. Production would only resume once the issue was resolved.

The Andon cord embodied the principle of Jidoka, meaning automation with a human touch. It managed quality control by following four steps in the event of a problem — find the defect, stop, fix the issue and, finally, investigate the root cause and install a countermeasure.

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The cord empowered all employees with responsibility for quality. It bestowed trust upon every worker and was an acknowledgement that it was better to fix a small problem immediately than have to tackle a larger problem later. These days the Andon cord has been modernized in some factories to include wireless buttons, texts and voice messages. But while many of the actual cords have disappeared, the concept has had a fabled impact on the industry. These days, stopping production to manage an error is embedded into the psyche of the entire auto industry.

As the Volkswagen emissions scandal unfolds, I am reminded of the Andon cord. Investigators are trying to figure out how the German car maker sold 11 million diesel vehicles with emissions-cheating software that allowed cars to produce fewer emissions when being tested by regulators. But over so many years, it seems unlikely it was a single engineer or executive that cheated the system. Such problems over time typically reflect a broader cultural problem.

German newspapers report that privately held Robert Bosch GmbH, which made parts of the emissions systems for the Volkswagen diesel cars, told Volkswagen in a 2007 letter that the use of Bosch's software to manipulate emissions was illegal. That makes me wonder: Why didn't anyone pull the Andon cord?

How could an industry so versed in the lessons of Japanese lean manufacturing have missed a problem of this magnitude? It's a scandal that is now a bigger risk to the German economy than the Greek debt crisis. If Bosch did indeed identify the problem eight years ago, why wasn't the issue resolved? How could this have stayed secret for so long?

Mueller told the German newspaper Frankfurter Allgemeine Zeitung that he believed only a few employees were involved in the diesel emissions rigging and has dismissed the notion that his predecessor, Martin Winterkorn, was aware of it. But German investigators have now reportedly raided the Volkswagen offices to learn just how far the knowledge spread. Beyond this short term crisis, surely the bigger issue for Mueller is to understand what's broken in the corporate culture at Volkswagen.

To be sure, both automakers and auto suppliers have endured difficult times in recent years. But tough times can never be an excuse for abandoning principles.

More than anything else, the Volkswagen scandal is a reminder that culture matters. Corporate culture is not just platitudes in an annual report but something with a significant business impact. In Volkswagen's case, Credit Suisse estimates that fixing the emissions problems, reimbursing owners and settling court cases could cost the company $87 billion.

This isn't the first auto industry scandal prompted by a corporate culture problem. Remember the General Motors recall in 2014 of 2.6 million cars for a defect in its ignitions? At least one GM engineer apparently knew about the problem as far back as 2002 but the organization covered up the issue for more than a decade even as the death toll mounted. As a result, GM CEO Mary Barra has vowed to change the culture.

As GM tries to put its scandal behind it and Volkswagen grapples to understand the extent and cost of its issues, now is a good time for car makers and auto suppliers to seriously re-evaluate their corporate cultures. In doing so, they should ask some tough questions: Is the pressure so great that cheating seems OK? Does your corporate culture make it impossible for employees to speak up about a problem without getting fired? Is the industry so competitive that you need to cut corners?

And, most importantly: Is everyone empowered to pull the Andon cord?

Commentary by Daron Gifford, the partner leading automotive industry strategy at accounting firm and consultancy Plante Moran in Detroit. Follow him on Twitter @darongifford.