It won’t help much to hurl insults or play suppliers or customers against each other. You can make them mad and squeeze their margins, but these tactics generally do nothing for their costs and lead times because they simply don’t know what to do. And as time goes on, they either find someone else to do business with or underinvest in product development or their distribution channels.
The only alternative is to actually fix their production, product development, and order-taking systems by sending them your lean promotion team. (This is also an excellent way to be alert to broader trends in industry and to keep your lean thinkers sharp by continually exposing them to new situations.) Don’t do this until you’ve fixed your own activities which the supplier or downstream firm links into, but then go as fast as possible and accept no excuses. “We’ve done it quickly. We know you can, too. Here’s how. Let’s get going.”
To make this approach feasible, it’s obvious that you will need to winnow down your upstream and downstream partner list and prepare to work with them for the long term. When you go to help them, don’t charge for your help. Instead, agree up front on how you are going to share the savings. (Porsche and its suppliers decided on a three-way split in which the suppliers kept a third of the cost savings and Porsche got two thirds with Porsche agreeing to pass half of its savings on to the customer in lower prices.) It should be easy to get paid back as well in better quality and shorter lead times for your products.
Point out that there is an extra “win” for your suppliers in this “win-win-win” situation because they will learn how to cut costs and lead times on all of their activities but will probably not need to pass these savings along to their other customers who are still bogged down in short-term, market-based thinking. This is how Toyota and its Japanese suppliers both became fabulously wealthy in the 1970s and 1980s. The suppliers, after learning from Toyota, sold to all of Toyota’s direct competitors except Nissan at higher prices than they sold to Toyota while steadily gaining business from these firms by underpricing batch-and-queue competitors in the supplier community.
Finally, as soon as your suppliers and downstream customers start to improve their in-house performance, insist that they send their newly created process improvement teams to fix their own suppliers or downstream customers. (Remember that your suppliers and downstream partners are typically no more integrated than you are.) Set continually declining target prices and continually increasing quality and reliability goals, which make it impossible for them to relax.
It will help this process to bring your first-tier suppliers together in a supplier association for mutual learning of the type long utilized by Toyota. 5 Your first tiers may then wish to draw up a short list of second-tier suppliers they wish to work with. Then the resources of the first tiers can be concentrated on a much smaller number of second-tier firms. (Chrysler has recently launched an initiative in North America to do just this.) Similarly, the assembler firm near the customer at the end of the physical production stream may need to join forces with other lean-minded assemblers to take on the most intractable “batch-head” raw materials suppliers and show them a better way. (Buying raw materials in large lots at lower prices on behalf of your suppliers will seem like a much easier path, but this approach can only squeeze the margins of the raw materials firms unless someone shows them how to run their businesses in a different way.)
DEVELOP A LEAN GLOBAL STRATEGY
Some firms can exist happily by doing everything in only one place. For example, Porsche can sell a modest volume of exotic cars to the entire world from one design/scheduling/production location in southwest Germany. Ferrari can do the same thing from northern Italy. The mystique in their products protects firms of this type from knockoffs. In addition, volatility in some export markets, due to currency shifts or changes in tastes, can be tolerated if no one market accounts for a large fraction of total sales. The world as a whole will provide a stable enough market.
Other firms may be happy to remain small. Wiremold, for example, sees no prospect or need for significant markets for its products in Europe or Asia while Lantech is happy to take advantage of export opportunities as they arise but to treat them as a windfall rather than a core aspect of the business. There is plenty of growth potential for these firms in their home markets to utilize the resources freed up during the transition. What’s more, expansion into related product lines will be sufficient to absorb resources in the future.
Many other firms, however, like the major automotive, electronics, and aerospace firms and their first-tier suppliers, need a global market and production presence. The adoption of lean thinking will call for a very different strategy from many of those being pursued today.
Many people initially believe that lean techniques are mostly about cost reductions. In fact, they provide the one feasible way to cut costs while also shortening production lead times and time-to-market, improving quality, and providing customers with exactly what they want precisely when they want it. They also make it possible to design, order, produce, and deliver goods at smaller production scales by means of dedicated product teams, without paying a scale or investment-cost penalty.
It follows that for most products with global market potential, the correct global strategy is to develop a complete design, order-taking, and production system within each major market of sale. This makes it much easier to communicate with the customer and also makes it possible to design, produce, and deliver the product very quickly with just the right specifications. “High-tech” mass production at a centralized global location—an example of which we examined in Chapter 10 —and a far-flung design and production system seeking to find the lowest wage cost for every activity along a complex value stream can never achieve these combined objectives. These alternative strategies optimize one course of the value stream at the expense of the whole.
CONVERT FROM TOP -DOWN LEADERSHIP TO BOTTOM -UP INITIATIVES
Initially, the process improvement group will work top-down because the pressing need is to change the way your employees think by directly demonstrating a better way. Over time, however, the process improvement group will focus more on making every line manager a sensei and every employee a proactive process engineer. The function can then tackle only the very toughest problems where line managers still need outside help. This is the present-day assignment of the Operations Management Consulting Division within the Toyota group.
One of the paradoxes of lean thinking is that the ideas themselves are extraordinarily antihierarchical and pro-democractic. Every worker inspects his or her own work, becomes multiskilled, and participates in periodic job redesign through kaizen activities. Layers of management are permanently stripped away. Transparency makes every aspect of the business open for everyone to see. Yet getting the critical mass of employees to change their traditional way of thinking requires stern direction as employees are commanded to try things which seem completely crazy .
So, there is a critical transition as you move your organization through the lean transformation, a point when managers must become coaches rather than tyrants and employees become proactive. This transition is the key to a self-sustaining organization. And please note: If you are the change agent, you may become the biggest problem. We’ve encountered more than one change agent who wanted to continue commanding change from the top when those on the bottom were quite capable of sustaining it on their own. This can easily become a negative sum situation.
One solution is to change your behavior. Another is simply to move on. Many of the best change agents we’ve encountered seem to work best by converting an organization over a period of several years, then turning senior management over to a more collegial personality, and moving on to another firm still full of “concrete heads.”
The Inevitable Results of a Five-Year Commitment
Whenever we encounter a would-be change agent who wants to transform his or her firm, we ask a simple question: Are you willing to work very hard, accept the o
ne step backward which comes with the two steps forward, and stick to your task for five full years? Taking all the steps forward typically takes about this long, as summarized in Table 11.1
While a few firms (for example, Wiremold) can go much faster if the change agent is firmly in command and has done it all before, this extended period is usually needed because a large number of people, including the senior leadership, must be taught to see the difference between value and muda. And a significant period of experimentation by ordinary managers—complete with backward steps—is necessary before everyone begins automatically to apply lean thinking and move the organization ahead from the bottom and the middle ranks. It’s only at this point that the change agent can step in front of the bus without being missed and it’s at this point also that the full financial benefits of lean thinking are apparent. From this point we believe there will be no turning back and the change agent may even want to move on to a new challenge.
There is today an enormous amount of cynicism in the industrial world—cynicism fueled by the latest quick-fix “program,” business process reengineering. However, a growing fraction of managers seem to understand that real change and building a solid foundation simply take time. We believe, based on conversations with many of you, that you’re willing to rise to the challenge if you are sure that something is really there at the end of the rainbow. One of our major objectives in this book has been to show that there is.
If you are really determined to be the change agent and you get a good sensei (or become one yourself), we guarantee you will achieve extraordinary things. The techniques we have described in the earlier chapters have been tested around the world in a wide variety of industries, and they always work.
T ABLE 11.1: T IME F RAME FOR THE L EAN L EAP
Of course, even a brilliantly performing firm can fail for reasons beyond anyone’s control—an unsuspected environmental problem with the product, a drastic shift in consumer tastes, the sudden appearance of a new technology which totally eliminates the need for the old product (for example, the clothespin after the home dryer, the vacuum tube after the transistor). Nevertheless, with a lean tool kit, the chances of succeeding in your chosen activities will soar .
The Next Leap
Just as the introduction of lean thinking forces problems and waste to the surface in all operational areas, new organizational problems will inevitably arise as you apply these ideas. As you shrink your traditional functions, which were formerly the key to career paths in your organization, many employees will start to express anxieties about where they are going and whether they have a “home.” And as you place more employees in development and production activities relentlessly focused on the here-and-now, you may begin to wonder about their hard technical skills. Are your engineers retaining leading-edge capabilities or are they simply applying over and over what they already know?
Perhaps most striking, as you take all of the inventories and waste out of your internal value stream, you will become much more aware of the costs and performance problems of firms above and below you along the stream, including your suppliers’ suppliers and your distributors’ retailers. Offering them technical assistance will be necessary, but it won’t be sufficient. To move farther down the path to leanness it will soon be apparent that you will need to work with all the participants in a value stream in a new way.
We believe that adequately addressing these problems will require a final organizational leap, one not even Toyota has taken. We call it the lean enterprise and we will explain it in Part III .
PART III
LEAN ENTERPRISE
CHAPTER 12:
A Channel for the Stream; a Valley for the Channel *
We’re sometimes asked, What’s new here? What are you saying that we haven’t heard before? This is an excellent question with a simple answer: We are putting the entire value stream for specific products relentlessly in the foreground and rethinking every aspect of jobs, careers, functions, and firms in order to correctly specify value and make it flow continuously along the whole length of the stream as pulled by the customer in pursuit of perfection.
This is an extremely creative and productive thing to do, but it is not natural. Most of the time, the majority of us think first about our jobs and then about our careers. Because our careers often progress through departments and functions, we also look out for the interests of these organization building blocks. Most senior managers are rewarded on the basis of how well their firm does, and specifically by how much money it makes. Note that no one is looking out, first and foremost, for the performance of the whole value stream, the only issue of relevance to the customer.
In previous chapters, a solution to the jobs problem has been proposed: Eliminate at the outset those jobs which can’t be sustained if a firm is to survive and then guarantee those which remain. This is not a perfect solution, because some managements only face reality when it is extremely near at hand, making large job losses unavoidable. But at least the correct approach is simple and understandable. What’s more, as more managers start to embrace lean thinking, corrective actions can be taken before the crisis emerges and most jobs can be safeguarded. Indeed, we are certain that the total number of jobs will grow as lean thinking becomes normal thinking. By contrast, the careers, functions, and firm “problems” are more complex .
The Lean Enterprise
As we thought about these problems it occurred to us that the first step was to create a new mechanism for looking at the whole, a channel for the value stream. We called this the lean enterprise and have briefly alluded to it at several points in the text. Now we need to describe it in detail.
The objectives of the lean enterprise are very simple: Correctly specify value for the customer, avoiding the normal tendency for each firm along the stream to define value differently to favor its own role in providing it (for example: the manufacturer who thinks the physical product itself is the customer’s primary interest, the independent sales and service company that believes responsive customer relations account for most of the value perceived by the customer, etcetera). Then identify all the actions required to bring a product from concept to launch, from order to delivery, and from raw material into the hands of the customer and on through its useful life. Next, remove any actions which do not create value and make those actions which do create value proceed in continuous flow as pulled by the customer. Finally, analyze the results and start the evaluation process over again. 1 Continue this cycle for the life of the product or product family as a normal part, indeed the core activity, of “management.”
The mechanism of the lean enterprise is also very simple: a conference of all the firms along the stream, assisted by technical staff from “lean functions” in the participating firms, to periodically conduct rapid analyses and then to take fast-strike improvement actions. Clearly someone must be the leader, and this is logically the firm bringing all of the designs and components together into a complete product (for example, Doyle Wilson Home-builder, Pratt & Whitney, Porsche, and Showa). However, the participants must treat each other as equals, with muda as the joint enemy.
Ending the Industrial Cold War
As described, the lean enterprise seems so simple and obvious that many readers will think this type of analysis must surely occur routinely in practice, even if not in name. But this is not so. This is partly because most managers lack an understanding for the potential of flow and pull to remove waste when applied to the entire value stream, but there is a more fundamental reason. Jointly analyzing every action needed to develop, order, and produce a good or service makes every firm’s costs transparent. There is no privacy. Thus the question of how much money (profit) each firm along the value stream is going to make on a specific product is unavoidable.
Historically, relations between the firms arrayed along a value stream have been rather like the behavior of the United States and the Soviet Union during the cold war. Some minimum level of cooperation was neces
sary in order to keep from blowing up the world (thus the innovation of the “hot line” and tacit agreements on intelligence gathering on third parties with uncertain intentions such as countries in the nonaligned bloc), but the operative assumption was that both sides would take advantage of each other in any way they could short of mutual annihilation. Value stream participants often behave in a very similar way, cooperating at the minimum level necessary to get a product made at all, but hoping that the other parties’ ignorance of just what they are up to (and what it cost) will permit them to grab a financial jackpot. For example, firms hope for a financial windfall when costs are dramatically reduced inside their own operations through some innovation which the other firms along the stream don’t learn about and therefore never ask to share in.
No one would have suggested that the geopolitical cold war could have been halted if only the two sides had suddenly decided to “trust” each other. Yet one routinely hears that suppliers and their customers along a value stream can somehow end the industrial cold war through generous application of mutual “trust,” a term which seems to have no operational meaning. (Just ask yourself how long “trust” lasts when market conditions change and a formerly profitable product line suddenly falls into loss. The party closest to the customer will immediately start demanding cost reductions from those upstream without much reference to who has eliminated waste and who hasn’t. Thus, the behavior of General Motors and Volkswagen toward their suppliers during their recent crises are bound to be the norm in a situation where there is no mutually agreed upon operational definition of fair behavior.)
We would propose instead that states of war can only be ended when all of the parties willingly negotiate a set of principles to guide their joint behavior in the future and then devise a mechanism for mutual verification that everyone is abiding by the principles. In the context of a lean enterprise, these principles might be something as follows:
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