Lean Thinking

by Daniel T Jones

  • Value must be defined jointly for each product family along with a target cost based on the customer’s perception of value.

  • All firms along the value stream must make an adequate return on their investments related to the value stream.

  • The firms must work together to identify and eliminate muda to the point where the overall target cost and return-on-investment targets of each firm are met.

  • When cost targets are met the firms along the stream will immediately conduct new analyses to identify remaining muda and set new targets.

  • Every participating firm has the right to examine every activity in every firm relevant to the value stream as part of the joint search for waste .

  The lean enterprise is itself the verification mechanism and would continue for the life of the product. This could be a very short period—for example, a two-year movie production exercise in the rapidly changing entertainment industry—or it could continue for decades—a Chrysler-led automotive “platform” team periodically offering a new minivan of very similar description to the old product with parts from most of the same suppliers.

  We’ve only recently tried to create lean enterprises ourselves, working with several of the firms mentioned in this book to identify every action along lengthy value streams, and we know it will not be easy even when every firm is strongly committed. (A simple example of a problem to be overcome is the need for a firm far up the stream to invest in new technology to produce in small lots rather than large batches. Because most of the benefit is gained by downstream firms but all of the costs are borne by the upstream firm, some means must be developed for the former to compensate the latter.) But we also know the rewards can be very large for the enterprise collectively as well as the customer at the end of the stream, and we’re confident that this mechanism can be perfected.

  Alternating Careers

  A brief look at the lean organization chart in Chapter 11 (Figure 11.1 ) indicates that as lean enterprises are created to channel the flow of value, a larger and larger fraction of employees in firms along the stream are directly involved in value-creating tasks at stream side. Much of the indirect effort formerly required simply disappears, along with most of the headcount of the departments organizing this effort.

  This is a disconcerting development for many people because the typical method of constructing a career—that is, the sequence of jobs requiring higher levels of skill and broader discretion, which lead to higher compensation—has been upward through these “functional” activities such as engineering, sales, purchasing, scheduling, quality auditing, centralized information systems, and accounting.

  If, for the most part, employees are assigned to a particular product team to apply their skills to the value stream, they may begin to wonder if they are “going anywhere” and get confused about “who I am.” (“I trained as an electrical engineer but I seem to spend most of my time on integrative tasks which don’t utilize all of my training.”) While the actual work is likely to be much more rewarding than in the previously disconnected world of departmentalized batches and queues, the lack of perceived progression and the loss of a commanding skill may be dispiriting.

  What’s more, it may be bad for the enterprise if employees gradually lose their edge and simply spend all their time applying what they already know to standard problems. The Japanese call this the “generalist engineer” problem and see it quite correctly as a potential weakness in competing over the long term with a German firm like Porsche, which has extremely strong technical functions.

  This suggests that a new form of career must be devised, an “alternating career” in which employees go back and forth between applying what they know in a team context and taking time out to learn new skills in a functional setting. The basic idea would be to assign employees to product teams for the life of a development exercise or during a product’s production life, but to send them back to their “home functions” when a project is completed or they are no longer needed. In the home function, they could receive training on new skills, or work on advanced projects which apply existing skills to the limit, or analyze the flow of engineering, order-taking, and production activities as a technical adviser to a lean enterprise seeking to identify and eliminate muda.

  The conventional idea of a career progressing up a ladder toward general management, with more and more direct reports, now needs replacement because the value stream doesn’t benefit. However, a new concept of a career in which more and more skills are gained and applied to more and more difficult problems is both good for the employee and good for value flow. What’s more, gaining the agreement of employees that this is the path to the future is the key to self-perpetuating lean enterprises. The experience of the reengineering movement, which has also sought to remove many indirect workers and to attack the very legitimacy of many functions and departments, argues strongly that when employees are rudely shoved out of the way with no new self-image provided, their natural response is to restore the old system as soon as the reengineers are gone. With some resort to sabotage, this is generally possible, and we find it hard to blame employees trying to set the clock back. The real problem is the lack of creative thought in redefining conventional careers.

  Functions for the Future

  Just as we need to rethink careers, we need to rethink departments and functions. As lean enterprises are created to channel the value stream, it becomes apparent that the traditional functions should not perform most of their traditional tasks. Engineering should not engineer, in the sense of performing routine engineering on a product. Purchasing should not purchase, in the sense of making individual purchase decisions and holding the hand of the supplier in getting products to launch. Operations should not direct employees in day-to-day production activities. Quality should not conduct detailed audits of products or conduct fire-fighting exercises to eliminate problems with a specific product. These are all tasks for the dedicated product teams, dealing with the issues of the present.

  What functions should do is think about the future. Product engineering should work on new technologies that will permit products to do new things for the user and develop new materials and methods which make it possible to eliminate fabrications steps and reduce costs. Tool engineering should work on “right-sized” devices—from computers to production hardware—which make it possible for product teams to create value in continuous flow and rapidly shift over between product variants. Purchasing should identify the set of suppliers a firm will work with in the long term and develop a plan for each supplier to ensure they will have the technologies plus the design and production capabilities to assure the highest-quality performance. Quality should develop a standard set of methods which the product teams can apply to ensure that every product is right every time with no backflows and no “escapes” of bad products to the customer. Indeed, as we noted in Chapter 11 , the traditional quality function should be combined with a productivity (or “lean”) function to create an “improvement function” able to eliminate muda of all sorts.

  Every function would provide a “home” to employees with given technical specializations (including production workers who must become operations specialists able to detect and eliminate muda ). A primary job would be to systematize current knowledge and procedures and teach these to function members as needed (ideally “Just-in-Time” for application because most knowledge is quickly lost if not immediately applied). The function’s other job would be to search for new knowledge and summarize it in a form which can be taught when needed.

  The Role of the Firm

  We can now think of functions as the hills and mountains forming the valley for the value stream. Their knowledge washes down toward those working alongside the stream to create value and speed its flow. However, this thought leads to one last bit of mental rearrangement: If functions create a valley for the stream flowing past and through many firms, what purpose does the firm itself serve? The fundamental building block of
traditional thinking about economic organization suddenly seems to lack a purpose except to “make money.” And when there are cold war relationships between firms along a value stream, this can often be done by off-loading costs and diverting profits but without making much contribution to actually creating value. 2

  Our answer is that firms provide the link between streams. They are the means of crossing from one valley to the next in order to make maximum use of the technologies and capabilities accumulated by each firm’s technical functions. They also provide the means of shifting resources—people, space, and tools—from value streams which no longer need them to other streams which do. From this it follows that most firms will want to participate in multiple value streams, often with different upstream and downstream partners, as shown in Figure 12.1 .

  F IGURE 12.1: F IRMS VERSUS V ALUE S TREAMS

  Lean Enterprise in Three Industrial Traditions

  Is it actually possible to apply these ideas everywhere? After all, the American, German, and Japanese industrial traditions described in the preceding chapters are very different. Taiichi Ohno could develop the “general case” for flow and pull thinking by applying Ford’s “special case” ideas to all types of economic activity, and we can now see that the ideas themselves work everywhere, but is it really reasonable to propose “universal” organizational rules for creating value by means of lean thinking?

  We think it is and that it’s essential to try. The desire by the customer for the best product of exactly the right specification supplied in the least time at the lowest cost is universal, and much easier to satisfy now that most trade and investment barriers have fallen. So it is hard to understand how national approaches to value creation which are suboptimal can endure in the long term. However, as we’ve seen in the examples of lean transition, the transitional problems will be different in different places.

  THE AMERICAN CHALLENGE

  The great challenge for Americans is to overcome their “every firm for itself” individualism in which each organization along the value stream optimizes its own stretch while suboptimizing the whole. Perhaps the most striking recent example is Wal-Mart, which became every financial analyst’s favorite firm by streamlining its own internal operations, drastically reducing its number of suppliers, asking them to deliver the precise amount needed daily (in some cases, such as with Procter & Gamble, by allowing suppliers to look directly into Wal-Mart’s electronic inventory system), and then bargaining hard to drive supplier margins down (by offering access to massive sales volumes to only one firm in each supplier category). What Wal-Mart has not done (but which it will need to think about soon) is how to analyze entire value streams to drive total costs down. This tendency of American management is exacerbated by the industrial finance system, which asks each firm to optimize its short-term performance but ignores the performance of the whole because no shares of a whole value stream are traded in any market.

  The solution, we believe, lies with management rather than with the financial system. If senior managers begin to realize that it’s extremely hard to truly optimize their stretch of the stream for any extended period without seeking to optimize the whole, ways can be found to work together with other firms on the basis of clear principles and to deal with the demands of the investment community.

  What’s more, we believe this is happening as leaders of industry after industry—aerospace, computers, motor vehicles, construction, health care, air travel, retailing—realize that cost is the great challenge for the next decade, pending breakthroughs in new technologies (which may or may not materialize), and that costs can only be attacked through collective analysis and action. Once this reality is acknowledged, the natural capacity of Americans for pragmatism and teamwork will provide a real advantage in pursuing perfection.

  THE GERMAN CHALLENGE

  The German challenge is in many ways the reverse of the American. The idea of cooperation between assembler and supplier firms along value streams is well established and the industrial finance system understands and encourages this need as well. (This financial system has been under stress in recent years, but primarily because German firms have had such poor fundamental productivity.) However, workers in German firms show a clear discomfort with horizontal teamwork of the sort needed to operate lean enterprises.

  In the 1980s, in response to the perception that Computer Aided Manufacturing (or what we have called “high tech mass production”) would soon eliminate millions of jobs and de-skill those workers who survived, the German union movement promoted the concept of shorter working hours and “autonomous work groups” to hive off portions of the production system under the management of “self-directed” work teams.

  As we have seen, the threat of CIM was largely a mirage and the real risk to German jobs has come from the inefficiency of German organizations. However, autonomous group working is still an approach which appeals to many German workers. The problem as we see it is that self-directed group work can at best create islands of superior practice in a disconnected process. By design, no one can see and optimize the whole. Even worse, autonomous group working, as commonly pursued, is hostile to standard work, visual control, and continuous improvement for fear these lean techniques will dilute “craft” skills and lead to further job losses. So the prospect for superior performance even within each work group is not high.

  Given this background, it’s not surprising that in our visits to German firms trying to make a lean leap we are often struck by the disorientation of workers on the shop floor caused by the introduction of lean working methods and organization. These supplant the traditional meister hierarchy of command and transfer highly skilled workers (including product and tool engineers) into product teams where they need to take on broader responsibilities and assume a broader outlook.

  German firms therefore face a particular adjustment challenge in addressing the jobs problem at the outset and in creating a system of alternating careers for all workers. Doing this is critical in retaining each employee’s loyalty and sense of possessing special skills (which are themselves extremely valuable) while reducing the reluctance of the shop floor worker, meister, and engineer to participate in cross-skill problem solving. If this can be done, the greatest strength of most German firms, the superlative operations skills of most employees and their strong identification with the product, can be fully utilized for the first time.

  THE JAPANESE CHALLENGE

  The Japanese challenge is quite different. Collective analysis of costs along the value stream, although never extended all the way upstream to raw materials and all the way downstream into retailing, is clearly accepted and practiced, as is the notion that employees should go wherever they are needed without much regard to functional career paths. (Ask an NEC employee who he or she “is” and the answer will always be “an NEC employee”; ask an AEG or a Microsoft employee who he or she is and the first answer will usually be “a mechanical engineer” or “a software engineer” or some other functional skill.)

  What’s more problematic is the role of vertical functions—which accumulate knowledge, teach it, and push it ahead—in a society based on horizontal leveling. What’s also problematic is the appropriate relocation of production near to the customer in a society which very much wants to stay at home.

  While the German firm needs to accustom employees to working in horizontal teams, the typical Japanese firm needs to accustom employees to the idea that skills must be continually upgraded and carried to the cutting edge through periodic in-function assignments which overcome the generalist employee problem. At the same time, many Japanese firms need to acknowledge that the fundamental logic of lean thinking requires production to be conducted near the customer and that many tasks long conducted in Japan simply do not make sense there. The horizontal keiretsu, rather than individual firms or the vertical [supply group] keiretsu, are the essential mechanism for redeploying people from one valley to another in this situation because most individ
ual firms have stuck to a very narrow range of products and cannot easily shift people within their own operations, all of which face the same problems.

  Curiously, the Japanese challenge is perhaps the greatest among the three great industrial traditions because of a widespread conviction that lean thinking has already been universally applied in Japan (when, in fact, it has never been applied to a substantial fraction of production operations and hardly at all in distribution and services) and that there is nothing Japanese firms can profitably do at home except conduct high-volume, export-oriented manufacturing. The idea that low-volume, build-to-order, domestically oriented Showa rather than high-volume, export-oriented Toyota is the future will require some getting used to.

  Nevertheless, Japan pioneered the general case for lean thinking and Japanese society has repeatedly shown resilience in adapting to new conditions. Thus the prospects are bright for recasting the Japanese economy once more, this time in full accord with lean principles.

  The Distance Still to Go

  As we’ve seen from the examples in Part II , lean thinking works and can be applied to both simple and complex firms in the three major industrial traditions. But what we could not show was the application of lean thinking to entire value streams, in real lean enterprises which have properly specified value from the perspective of the customer, identified the value stream, and squeezed out most muda by applying flow and pull. The reason is simply that no one has yet done this. We’ll therefore conclude this study in the final chapter with a bit of practical dreaming, by asking what some major economic activities will look like once value stream thinking is universally applied.

  CHAPTER 13

  Dreaming About Perfection