Lean Thinking

by Daniel T Jones

  A far more promising approach is to devise a growth strategy which absorbs resources at the rate they are being freed up. Precisely what to do will depend on a firm’s situation, but the arrows in the lean firm’s quiver are easy to list. Some may wish to pass cost savings directly through to gain volume. (This has been Freudenberg-NOK’s prime strategy to get started. Total sales have tripled in only five years while headcount has been held constant.) And some may wish to speed up development of projects in the pipeline to spur sales and increase market share. (Wiremold did this.) Others may focus on shortening production lead times, delivering exactly on schedule, and making exactly the configuration of product the customer wants, again to boost sales of conventional products. (Lantech.) Still others may try to convert their product from a good to a service and add downstream distribution and service activities to their traditional production tasks. (A path Pratt has just entered into.) And some firms may integrate backwards upstream to consolidate previously scattered production activities into single-piece flow. (The example we cited in Chapter 3 on the glass industry.) Ultimately, most lean firms may want to do all of these things for their existing product lines.

  However, this may still not be enough. You may need an additional strategy, but it’s best to devise it after you’ve changed the way you think and run your business rather than making a desperation lunge at your problems beforehand. Once you’ve seen what lean techniques can do in your firm and reviewed the map of the entire value stream for every product family, you are ready to figure out what to do.

  The lean firms we have examined usually find that they can capture adequate growth and profits by sticking to what they know, often by acquiring related lines of business. (Showa was the one exception.) What’s more, they find that they can largely finance their acquisitions with the cash they free up in the inventories of the batch-and-queue firms they acquire.

  Those firms which need to branch out into unfamiliar activities can do so by establishing product teams for each new product family and continually evaluating their performance against expectations. The virtue of this approach is that product families can be added or dropped without changing the fundamental structure of the firm.

  REMOVE THE ANCHOR -DRAGGERS

  In every organization we’ve looked at there was a small group of managers, generally less than 10 percent, who simply could not accept new ideas. Hierarchical personalities needing a clear chain of command and something to control were particular problems.

  And in every successful transition we’ve examined, change agents, in looking back over their experience, wish they had acted faster to remove managers who would not cooperate. This sounds harsh, of course, but it is the simple lesson of experience. A small percent of managers will move quickly to accept lean ideas—the “early adopters” in marketing parlance—but the great mass will be undecided. The problem is with the few percent who will never go along, because they send an opposite message from the early adopters and take special pleasure in highlighting all the mistakes made along the path to leanness. The result paralyzes the great mass in the middle and jeopardizes success.

  To repeat: As you begin the process, most managers and employees will not understand what you are doing but will be neutral to positive if you make employment guarantees. Take action quickly to remove those managers who won’t give new ideas a fair trial.

  WHEN YOU’VE FIXED SOMETHING , FIX IT AGAIN

  At the end of the first improvement initiative on an activity, tell the line management and the work team that in three months it will be time to fix it again. It’s critical to get your employees to understand at the outset that no level of performance is ever good enough, and that there is always room for improvement. This will usually mean moving every machine and changing every job.

  In the early years of the lean transition, the lean promotion function will have to take the lead in planning successive improvement campaigns. Increasingly over time, however, improvement becomes the most critical job of the product team leader and the primary workforce. You must instill the idea that management is no longer about running activities in a steady state and avoiding variances. Instead, it’s about eliminating the root causes of variances (so they permanently disappear and managers can stop fighting fires) while improving performance in periodic leaps that never end. How much did you improve performance? must become the critical question in evaluating managers.

  “TWO STEPS FORWARD AND ONE STEP BACKWARD IS O.K.; NO STEPS FORWARD IS NOT O.K.”

  A critical moment in the lean transition at Pratt & Whitney occurred when the energetic general manager of the turbine blade plant took on a task which was correct in principle but too ambitious in practice. When Mark Coran reassigned this manager and his direct reports to other jobs in Pratt instead of firing them (the usual step taken in this situation in the past), he sent a critically important message that mistakes in pursuit of the right goal are not a failure.

  When Coran at the same time terminated the general manager of another Component Center for anchor-dragging on the lean conversion (in an operation that was performing no worse than it had historically), he sent the complementary message that it’s not acceptable to do nothing to improve your operation on the grounds that the risk of failure is too high. Getting these twin messages across is a critical task of the change agent.

  Install Business Systems to Encourage Lean Thinking

  Once you’ve got momentum (in the first six months of the transition) and have rethought your organization (over perhaps the next year), you’re a long ways toward your goal of a lean transformation. However, additional steps are important to make the new approach self-sustaining. Once you’ve overcome the initial inertia, the number of proposals for improvement will snowball and you’ll need a mechanism for deciding what’s most important to do now and what can wait until resources are available. You will also need to create a new way to keep score and to reward your people so they will continue to do the right things, and you’ll need to make everything in your organization transparent so everyone can see what to do and how to improve. In addition, you will need a systematic method for teaching lean thinking to every employee (including your customers’ and suppliers’ employees along your value streams). Finally, you’ll need to systematically rethink your tools, ranging from monster machines in the factory to computer systems for scheduling, with the objective of devising right-sized technologies which can be inserted directly into the value stream for individual product families.

  UTILIZE POLICY DEPLOYMENT

  We’ve tried to emphasize that to get started in a brownfield you need to “just do it.” Get started and show some striking results. However, Lantech’s experience of taking on too many lean initiatives once the ball was rolling is the norm rather than the exception. Therefore, it’s vital to use the tools of policy deployment to reach agreement across your whole organization on the three or four lean tasks your firm can hope to complete each year. An example for year three might be: Reorganize by product families, introduce a Lean Accounting System, kaizen every major production activity four times, and kaikaku order-taking and scheduling.

  An even more important task for your annual policy deployment exercise will be to identify the tasks you can’t hope to succeed at just yet but which some parts of the organization will badly want to tackle right now. You’ll need to publicly acknowledge that these are important but they will need to be “deselected” until the next year or the year after, when resources are available.

  CREATE A LEAN ACCOUNTING SYSTEM

  Many firms today still run standard cost accounting systems, although many more have made some move toward Activity Based Costing. The latter is a great advance, but you can go even further. What you really need is value-stream/product-based costing including product development and selling as well as production and supplier costs so that all participants in a value stream can see clearly whether their collective efforts are adding more cost than value or the reverse.


  Once you reorganize by product family and shrink your traditional functions with their allocated overheads, it becomes a lot easier to assign rather than allocate costs to products so that product team leaders and their team members can see where they stand. Your own accounting group should be able to figure out how to do this—you don’t need a consultant—but we strongly recommend that you start with the chief financial officer and involve him or her in several weeks of hands-on improvement activities to get started. Then ask the simple question: What kind of management accounting system would cause our product team leaders to always do the right (lean) thing?

  You will still need a financial accounting system for your profit-and-loss statement, which does strange things like value potentially obsolete inventories as assets, but you won’t need or want to show it to your product team leaders. What’s more, you will need to make a gradual transition from your current system to the new lean approach over a year or so to avoid chaos.

  PAY YOUR PEOPLE IN RELATION TO THE PERFORMANCE OF YOUR FIRM

  The ideal compensation scheme would pay each employee in exact proportion to the value they add, as value is determined by the customer. However, actually doing this would present insurmountable technical problems and could in any case only be achieved with enormous, non-value-adding effort.

  We have found that in a lean firm the simplest and cheapest method of calculating compensation is generally the best. This means paying a market wage to employees based on their general qualifications—for example, whatever assembly workers or entry-level product engineers receive on average in the area of a facility—along with a bonus tied directly to the profit-ability of the firm. Because a lean firm should be substantially more profitable than average, the bonus should be a significant fraction of total compensation. (For example, Wiremold has set a target for its bonus of about 20 percent of base pay, on the presumption that Wiremold should be at least this much more profitable than the “average” manufacturing firm in the Hartford area and in its industry.)

  As you consider bonus schemes, it will quickly become apparent that the total amounts on offer, while substantial, will not be enormous. This underlines the reality that the primary incentive for working in a lean system is that the work itself provides positive feedback and a psychological sense of flow.

  We are often asked about incentive pay for employees in the manufacturing area and about adjusting compensation by product family. There is something to be said for both of these ideas, but on balance, we don’t support them. Incentive pay is really a carry-over from the old days of piecework and is sometimes used today to deal with the perception that work pace is harder in lean systems. In fact, the pace of minute-to-minute exertion is the same. The difference is that lean systems identify and eliminate practically all of the nonproductive slack time for employees at every level. Therefore, it initially feels as if the work is harder, but after a period of acclimation, when a lack of muda begins to seem normal, people often report that the pace is actually much easier than before. In any case, trying to buy the allegiance of your workforce to a lean system with cash is approaching the problem from the wrong direction. Instead, stress the positive aspects of the new work environment.

  With regard to separate bonuses for members of each product family, lean accounting makes them technically feasible, but we think they’re also a bad idea. In a lean system, work tasks are evaluated very carefully by the work team itself to achieve an even pace with no wasted time. Looking across a firm, the pace of work inside each product family should be very similar. What’s more, it will frequently be necessary to reassign employees from one product family to another, sometimes after an interlude in the lean promotion function, as the needs of the business change. Reassignments will generate continuous conflict if bonuses vary from product family to product family because of varying competitive conditions in the marketplace.

  MAKE EVERYTHING TRANSPARENT

  Benchmarking others usually wastes time you could better spend doing the right thing. However, benchmarking your internal performance, especially your rate of improvement, is critical. In addition, it’s vital to create a “scoreboard” which shows everyone involved in a value stream exactly what’s happening in real time. These don’t need to be complicated or require significant investment. We’re always amazed in touring lean firms (like Porsche) at how much about the status and improvement trajectory of an operation can be shown with simple diagrams and process status boards. Many of these require little in the way of language or math skills to understand yet give a clear sense of what’s happening.

  TEACH LEAN THINKING AND SKILLS TO EVERYONE

  It has become conventional wisdom that higher levels of management should learn to listen to the primary work team since they know the most about how to get the job done. Unfortunately, this bit of common sense is only half right. Your primary workforce probably does know the most about the hard technical aspects of getting isolated jobs done (including all the deviations from poorly maintained official procedures which are necessary in order to get products made at all). But what primary workers and front-line managers typically don’t understand is how to think horizontally about the total flow of value and how to pull it. Nor do they typically understand the methods of root cause analysis to eliminate the need for fire fighting. Therefore, if you ask your primary workforce to implement lean techniques or permanently solve problems today, you are likely to get a rush of suggestions followed by general disillusionment when they fail to work properly.

  To gain the critical lean skills, your workforce needs training, but of a special type. One of us (Jones) has recently worked with the Unipart Group in the U.K. to totally rethink skills acquisition and to create a “Unipart University” immediately adjacent to the value stream. While many firms have created corporate “universities” in campus settings in recent years (of which Motorola University is probably the best known), these mostly utilize dedicated faculty and off-line learning activities. At Unipart, the faculty are entirely line managers (which means they must learn operational skills themselves, skills rarely mastered by senior managers in Western firms) and the skills being taught are precisely those needed immediately for the next phase in the lean transition.

  Thus lean learning and policy deployment can be carefully synchronized so that knowledge is supplied just-in-time and in a way that reinforces the commitment of managers and all employees to doing the right thing. Everyone learns the same approach to problem solving and everyone experiences the direct benefits of continuous learning, even though they may have left formal education many years ago. Over time, the investment in training can also be directly connected to the resulting improvements in the business .

  RIGHT -SIZE YOUR TOOLS

  By tools we don’t mean just production equipment but also information management systems, test equipment, prototyping systems, and even organizational groupings. For example, think of a department devoted to a specific activity—let’s say accounts receivable—as a type of tool.

  You can begin to rethink your tools from your very first kaikaku. However, your major monuments will present a major challenge and one which can’t be solved immediately. First, you will need to counter the ancient bias of your managers that large, fast, elaborate, dedicated, and centralized tools are more efficient. This, of course, is the cornerstone of batch-and-queue thinking. Instead, for every activity you should ask them to work backwards by asking, What kind of tools would permit products in a given family to flow smoothly through the system with no delays and no back loops? And, What types of tools would permit us to switch over instantly between products so there would be no need to make batches?

  As you think about this, you will be surprised to learn that many of your existing “monuments” can be made much more flexible with a bit of creative thinking. You will be further surprised to discover that two small machines with only the features needed generally cost much less in total than one big one with all the bells and whist
les. Finally, you will be surprised to discover how much of your new tooling can be built inside your firm using excess materials at very low cost by excess people freed up by lean techniques. (Consider throwing away your industrial equipment catalogues and getting directions to your local junkyard!)

  The more you think, the more you will realize that you can provide most value streams with their own dedicated equipment to completely cut out bottlenecks at monuments and stoppages due to changeovers. Then, when the value stream shifts its course, you can quickly redeploy your right-sized tools to serve new needs. However, tackling your major monuments and completely replacing them with right-sized apparatus will probably only get into full swing after several years of making the best of what you have already.

  Completing the Transformation

  When you’re moving ahead at full speed, have your organization reconfigured, and have the appropriate business systems in place (probably after three to four years of strenuous effort), you’re well on your way to a complete transformation. The final steps needed are to make sure that your suppliers and distributors are following your lead, that you are creating value as close to your customer as possible, and that you are making lean thinking automatic and bottom-up, rather than merely top-down.

  CONVINCE YOUR SUPPLIERS AND CUSTOMERS TO TAKE THE STEPS JUST DESCRIBED

  It’s a rare firm today whose internal activities account for more than a third of the total cost and lead time needed to get its product to market. The de-integration Toyota started in 1949, which eventually decreased its in-house “cost added” from 75 percent to less than 25 percent of total costs, has become the norm for firms across the world. Therefore, you will get only so far along the path to leanness—one quarter to one third of the way in most cases—unless you get your suppliers and customer firms to take the steps just described.