Lean Thinking

by Daniel T Jones

  F IGURE 8.6: P RATT & W HITNEY O RGANIZATION , 1994

  F IGURE 8.7: P RATT & W HITNEY O RGANIZATION , 1996

  The Module Centers will essentially be stand-alone businesses with vice president/general managers responsible for current production and for supporting the development of new products. Each Module Center will be able to completely engineer and fabricate one of the seven modules making up a jet engine: fans with their cases, low-pressure compressors, high-pressure compressors, combustors, high-pressure turbines, low-pressure turbines and nozzles, and nacelles and externals. These will be delivered at precisely the right time to the Assembly, Test, and Delivery Module, which will snap the engine together almost instantly and deal with the final customer.

  At the same time this change is taking place (and there will no doubt be problems initially, just as there were in physical production), Pratt is rethinking sales and service. As product development lead times fall to perhaps two years and physical development times fall below the current target of four months, it will be necessary to eliminate the waves of sales, followed by droughts, which make it impossible to run Pratt on a level schedule even though end-user demand—that is, airline passenger miles—is very stable .

  Lessons and Next Steps

  What are the lessons of the Pratt experience for American managers who want to create lean organizations? The most obvious is to begin with what you do right now. Don’t think about what your workforce doesn’t know, their lack of education, or their age. Don’t think about the past obstructions of your union or the need for good quarterly “numbers.” These barriers exist mainly in your own head.

  Instead, line up your value-creating activities in a continuous flow to improve quality while taking out large blocks of cost. This can be accomplished quickly if you have the knowledge—it has taken three years in the massive Pratt production system, which provides the toughest possible test—and it never requires significant sums for new equipment or plant. As costs fall, freeing up resources for new initiatives, it is much easier to see what to do next, including up-skilling your workforce. 39 Indeed, a fundamentally different cost structure for existing operations will often suggest a very different strategy from what would have been pursued if the old cost structure had been taken as a given. (Pratt, for example, could never have dreamed of competing in the engine overhaul business with its pre-1992 cost structure.)

  For Pratt, of course, the effort to convert to lean principles is still only part of the way along. Physical operations have been dramatically transformed but product development is only now being revamped and the marketing and sales system are still to be made lean.

  Even when this is done, strategic issues will remain of whether the aircraft engine business itself is viable and how the company will need to deploy its activities around the world to better correspond with its markets of sale. 40 One promising path is to rethink whether Pratt is in a product or service business, and the dramatic reduction in costs plus lean thinking may make it possible for Pratt to take the engine overhaul and maintenance business away from independent repair firms and from the hard-pressed airlines as well. For example, can flow thinking make it possible to perform a complete engine overhaul overnight at a Pratt facility so that planes never need to be out of service and airlines do not need to keep large stocks of spare parts plus a considerable number of spare engines?

  In any case, by starting with what it does now, Pratt has dramatically reduced its costs while pleasing its customers. As a result, operating results rebounded from losses of $283 million in 1992 and $262 million in 1993 to profits of $380 million in 1994 and $530 million in 1995, even as sales continued to sag. Pratt has bought the time needed to complete the introduction of lean principles across the business and given itself considerable latitude in deciding what to do next.

  What About Lean Thinking in Alternative Industrial Traditions?

  We’ve now looked very carefully at American firms, through a progression of age, size, and complexity, from Lantech, with simple process technologies, a 20-year history, 400 employees, and $70 million in sales, to Pratt, with complex technologies, a 140-year history, 29,000 employees, and $5.8 billion in business. The same principles were applied in each case and they have produced remarkable and sustainable results.

  But what of the other great industrial traditions? Our previous book found a large audience in Germany but also met with great skepticism among German managers and workers. Because we had no examples of lean practice to point to in Germany at that time, it was possible to contend, at least in theory, that lean thinking simply could not work, that some other approach was needed for revitalizing German industry. We now turn to an example in Germany which proves this theory dead wrong.

  CHAPTER 9

  Lean Thinking versus German Technik

  On July 27, 1994, something remarkable happened in the assembly hall of the Porsche company in Stuttgart, Germany. A Porsche Carrera rolled off the line with nothing wrong with it. The army of blue-coated craftsmen waiting in the vast rectification area could pause for a moment because, for the first time in forty-four years, they had nothing to do. This was the first defect-free car ever to roll off a Porsche assembly line or to emerge from the earlier system of bench assembly. 1

  This first perfect Porsche—and there have been many more since—was a small but highly visible milestone in the efforts of Chairman Wendelin Wiedeking and his associates to introduce lean thinking into a veritable industrial institution—indeed, into one of the great symbols of the German industrial tradition. This struggle has not been easy and some aspects of a totally lean system remain to be implemented, but it is now also apparent that it can be done. What’s more, there’s already evidence that when lean concepts are married to the strengths of the German tradition, embodied in the concept of superior technology, or technik, a remarkably competitive hybrid form can emerge.

  Modest Success to Rags to Riches

  The Porsche company was founded in 1930 by Ferdinand Porsche, the legendary Austrian engineer who subsequently designed the Volkswagen Beetle. 2 Porsche had been the technical director of Daimler (up until the time of the merger creating Daimler-Benz) but found it better to work on his own, so he established the first independent automotive engineering consultancy in Germany.

  Through the 1930s and during the war, Porsche was a small engineering firm but one of a very high order, often called on to tackle the toughest problems and to propose dramatically different solutions. The Beetle design was the most famous, but there were many others.

  At the end of the war, young Ferry Porsche took over from his father in extremely difficult economic conditions. The large firms Porsche had consulted to were in ruins and demand for automobiles was severely depressed by postwar economic chaos. Nevertheless, the younger Porsche not only made plans to continue the engineering consultancy but was also determined to begin manufacture of cars carrying the Porsche name. He soon set up a small workshop in the village of Gmünd, Austria, near the family’s ancestral estate, and the first copy of the first Porsche, called the Model 356, was produced there by hand in 1948. Forty-six additional cars were built over the next three years by craftsmen, mainly using hand tools.

  It was soon clear that if Porsche wished to become a “real” car company it needed to relocate back to Stuttgart to be near suppliers, and for the engineering consultancy to be near its most likely clients. The first Porsche 356 from the company’s new location in Zuffenhausen, a Stuttgart suburb, was completed in the spring of 1950 and the current Porsche company was truly launched.

  The company was initially very simple, consisting of an Engineering Department and a Production Department. The latter had a small machine shop which fabricated and assembled parts to modify the basic VW engine used in the 356. The bodies for the car were constructed and painted by Reutter, a traditional coach builder located nearby. They were then dropped onto a chassis assembled largely from Volkswagen Beetle parts at stationary assembly stands i
n Porsche’s small assembly hall. Finally, they were inspected, test-driven, adjusted and repaired as appropriate, and shipped.

  Soon a racing team was added, which hand-built one-of-a-kind race cars, sometimes in the week between races, and the engineering consultancy expanded dramatically, working mostly for Volkswagen but for other car companies as well. Therefore, the product engineers continued to be the dominant voices in the firm even as the Porsche car manufacturing business became profitable and grew dramatically.

  By the early 1960s, Porsche had gradually substituted parts of its own design for the original VW parts and engines. However, the 356 design was getting old and it was hard to explain to the public that the car was no longer merely a VW with a different body and refined suspension. So in 1964, the 356 was replaced by a completely new car, the 911. 3

  The new car was entirely a Porsche in terms of its engine and body components, and the building of the body was taken over from Reutter. Porsche was therefore becoming a much more integrated and complex company. This was even more the case when it was decided in 1969 to launch a lower-priced car line in collaboration with Volkswagen. The 914 model was succeeded in 1976 by the 924, assembled at the Audi plant at Neckarsulm, using many Audi mechanical components including an engine reworked by Porsche.

  A second up-range car, the 928, was added in 1977, along with a new moving assembly track in the Zuffenhausen assembly hall. This eventually handled the entire model range when the 968 successor model to the 924 and 944 models was moved there from Neckarsulm in 1991.

  The Porsche company therefore grew steadily as a specialist automobile manufacturer. By the mid-1980s, it had become spectacularly profitable as its products became an essential possession of young entrepreneurs and investment bankers making large sums in the worldwide economic boom of the Reagan era and the Japanese Bubble Economy. In 1987, its 8,300 employees produced 22,000 911s and 928s at Zuffenhausen, joined by 26,000 944s from the Audi plant. Sales of cars and engineering services combined totaled $2 billion.

  Porsche as a Classic German Firm

  A snapshot of the Porsche company in the years up to the late 1980s shows a classic German model of successful industrial capitalism, especially of a successful Mittelstand, the mid-sized engineering firms which have been the great strength of the German economy. First, control of the company was continued firmly in family hands into the third generation through the creation of a series of holding companies. As Ferry Porsche remarked in his memoirs, “If it had been my intention to set up a company for the purposes of speculation, I would have given it a fancy name from the beginning, because I refuse to sell my own name.” 4

  Management passed into professional hands in 1972 when Ferry Porsche decided that no one in the next generation of Porsches and Piechs (his sister’s married name) should succeed him as managing director. However, the Porsche and Piech families continued to look after the firm just like their ancestral estate at Zell am See in Austria, as a sort of perpetual enterprise of which they are the stewards. The accounts of the firm were replete with reserves for the future which subtracted from short-term profits but built a cushion to safeguard the firm’s independence in times of trouble.

  A second feature marking Porsche as a classic German firm was the intense focus on the product itself, its superior performance being the firm’s most important concern. American firms were typically run by executives with a financial background who were comfortable dealing with public equity markets, and Japanese senior executives tended to have had experience in a variety of functional areas within their firms, but the senior managers of Porsche, as is typical in Germany, were brilliant product engineers who believed strongly that the firm with the best product, designed by the best engineers, would win in long-term competition. Indeed, even the legal name of the firm seemed to express this sentiment: Dr. Ing. h.c. F. Porsche AG.

  In 1969, the product engineers were moved from Zuffenhausen to a new facility at Weissach, twenty-three kilometers out in the countryside from the Stuttgart-Zuffenhausen factory. Here they conducted all of Porsche’s engineering consultancy work, designed new Porsche models, and built prototypes both for new Porsche models and for outside firms. The major investment in Weissach and the distance it created between the product engineers and the production staff in the plant were both symbolic of what was most important at Porsche.

  Yet a third feature of Porsche marking its German pedigree was an organization chart which was entirely departmental and steeply hierarchical. Each major activity was conducted inside its own organizational unit and every important decision was referred upward through layers of management. Careers moved up the departmental hierarchies as well.

  Activities needing the input of many departments typically proceeded by passing the work—a design, an order, a physical product—from one department or function to the next, usually with delays due to the batch-and-queue nature of the system.

  A special feature of Porsche’s organizational structure introducing a rigidity beyond the German norm was the consequence of its second business as an engineering consultancy. Auto companies and large-parts makers often wanted help on narrow technical problems. The knowledge base to address these problems—suspension dynamics, engine vibrations, or minimum-weight body structures, for example—required deep depositories of knowhow in each department, ready for sale to outside organizations. However, this meant that Weissach experts could often ignore the need for cross-department cooperation on Porsche’s own car designs while making handsome profits for Porsche on outside sales of engineering services.

  The Porsche supply base was yet another typical feature of German industry. By the late 1980s, the firm had 950 suppliers even though Porsche—like most Mittelstand companies—made many of its parts itself. This meant one supplier for every nine employees and a vast Purchasing Department to manage them. Relationships were typically very long term, dating in many cases to the start of production in Stuttgart in 1950. They were also very cooperative, so much so that Porsche would sometimes become involved in bailing out small suppliers on the edge of bankruptcy.

  Looked at another way, supplier relations were in-grown and reactive. Porsche was primarily interested in the contribution of purchased parts to the performance of the car, not in their cost, the frequency and reliability of deliveries, or the percentage of defective parts. It was taken as a given that Porsche would perform 100 percent inspection on incoming goods and maintain a vast warehouse to guard against supply disruptions. In any case, Porsche lacked the technical skills to help its suppliers improve their production operations and the firm accounted for only a tiny fraction of the sales of its larger suppliers. In addition, the long-term relations between individual purchasing agents and supplier sales representatives had created a “don’t rock the boat” culture in which change was very difficult.

  Perhaps the most striking feature of Porsche in the late 1980s was its craft culture, which went far beyond the norms of Mercedes and the other big German engineering-based industrial firms. From the early days Porsche had stressed its craftsmanship, and many workers with craft skills migrated to Porsche from the larger firms in reaction to the introduction of deskilled high-speed, mass-production operations with short work cycles. As a result, the skill level on the floor was truly extraordinary and Porsche, unlike the other big German engineering firms, had almost no recent immigrants on its payroll. In the late 1980s, nearly 80 percent of Porsche’s employees in the engine shop and 54 percent of the workers in the assembly hall had completed the rigorous three-year German apprentice program, meaning that the ability of the workforce to rectify technical problems was probably unmatched anywhere in the world. These workers had deep knowledge of materials and individual operations: what methods to use to fabricate aluminum, what type of machine to use to cut steel, at what speeds to run machines, and at what rate to feed parts into machines. 5

  Its craftsmen were organized in hierarchical layers, just like the rest of the organization. Pri
mary workers reported to gruppen meisters (work group leaders), who reported to meisters (foremen), who reported to ober meisters (group foremen) in each work area. As Ferry Porsche noted with approval in his memoirs, by 1960, one employee in five in production activities was involved in supervisory tasks. 6 The hierarchical nature of the craft skills within the workshop also meant that Porsche was very late in adopting the German version of teamwork, often called autonomous group work. These ideas were first tried only in 1991 after Porsche had entered a deep crisis.

  Porsche management stressed long work cycles (typically twelve to fifteen minutes) and workers could take pleasure in seeing much of a product come together. In the early years it was even possible for one worker to assemble a whole engine and sign it. This practice, while not the norm, continued to be the ideal for most Porsche workers.

  Unfortunately, much of this craft work was muda. For a start, the factory was not closely involved in designing the product, so Porsche designs were high on performance but very low on manufacturability. Far from protesting, the skilled workers resolutely shouldered the burden of making unmakable designs, often by means of lengthy adjustments and fitting of parts.

  Similarly, it was accepted that many parts from suppliers would be defective, would arrive late, and might even be the wrong part altogether. In the late 1980s, 20 percent of all parts arrived more than three days late, 30 percent of deliveries contained the wrong number of parts, and ten thousand parts in every million were defective and unusable. By contrast, as shown in Table 10.1 in the next chapter, Toyota’s first-tier suppliers in Japan deliver about five defective parts per million and make 99.96 percent of deliveries exactly on time with exactly the right number of parts. It was the job of the Porsche purchasing staff to find the defects with the help of one hundred inspectors and to somehow get hold of missing parts with a legion of expediters.