Looked at this way, the current “product” is certainly suboptimal. Buying and selling cars, registering, insuring and repairing them, and taking care of operational details from fueling to cleaning are mostly a time-consuming hassle conducted with a welter of different firms pursuing their own interests. Special needs calling for a taxi, a limo, or a rental vehicle with special capabilities (for example, for hauling personal goods) are another hassle requiring another set of relationships.
Meanwhile, the conventional auto industry has been focusing (and with considerable success) on applying lean thinking, but only to the design and manufacture of the vehicle itself. It has done little or nothing to rethink the total product—personal mobility—which many of us want. This is why many people find today’s “post-Japanese” auto industry a very dull place and why customers frequently ask how the industry can be getting more efficient while the cost and ease of buying and operating vehicles has hardly budged. 3 A major reason is that the manufacturing activities are only a fraction of the value stream for the total product, and the cost and inconvenience of the other aspects of the value stream have been rising. How might lean thinking help?
Just as long-distance travel needs a team leader to help the participating firms look at the whole, short-range personal mobility needs some type of mobility provider to see the complete product. This might be a rental car company, a public utility, one of the new “mega-dealer” car retailing organizations, or even a reconstituted automobile company. The idea would be to work with the customer to supply precisely the vehicles and services needed with zero hassle and a lower cost. How could this work?
The mobility provider and the customer would work out the type of vehicles and services needed both now and in the future (including taxi, limo, transit, and specialty vehicles for spot use) and the mobility provider would “put them in the driveway.” Insurance, registration, routine service, and repairs would become the responsibility of the provider. (The phone in the vehicle could routinely call the provider and report the status of the vehicle.) The provider would also take care of replacing the vehicle as appropriate to maintain a constant level of service for the user and would bill the user periodically for the services rendered. The relationship would be long term, indeed open ended, so the search costs of finding the right company to provide each part of this total product would be avoided. Going even further, if the mobility provider provided “open-book” cost information (a real leap in the motor industry to be sure), the user would not feel the need to shop constantly for a better “deal” and could comfortably stick with a provider for years or decades. The hassle of personal mobility would largely go away.
This is certain to cost a fortune, right? Wrong. It should cost less for a multitude of reasons. First, the provider can work with the supplier of vehicles to get a steady flow of vehicles manufactured to the precise specification needed because long-term user needs have been assessed. The current sea of new cars no one has ordered which choke car dealer parking lots goes away. So does the car dealership itself with many of its costs. Then the manufacturer can size its production capacity for a steady stream of vehicles because the mobility provider can counteract the business cycle by replacing aging vehicles at a steady rate. (Remember that the demand for travel changes by only a small percent during the business cycle while the sale of new cars in North America, Europe, and now Japan rises and falls by 20 to 40 percent. This requires the industry to maintain large amounts of excess capacity on average.) As demand stabilizes, the supply base can be tightened up and the total lead time for building vehicles can be compressed with dramatic savings in inventories, space, and effort. 4
As a final benefit, the system could be a closed loop. If the mobility provider retains control over the vehicles and recycles them at the most economic time, and if the new vehicle maker can share the mobility provider’s data base on user needs in order to develop vehicles which meet these needs, vehicles should cost less to operate over their lifetimes and last longer. (Just ask yourself how long maintenance intervals for cars will be if the mobility provider does all the maintenance and has a direct say in product designs.) The mobility provider is in a position to obtain the lowest lifetime costs possible because it is in control of the whole cycle.
Would this approach be easy to introduce? Obviously not, and it seems unlikely that the conventional car companies will lead the way. But what is the alternative? Once the introduction of lean techniques in the design and manufacturing portions of the motor vehicle value stream is completed over the next decade, customers will gain a major price benefit, but then the auto industry will be stuck. Lean thinking provides a way to revitalize a highly mature “product” by converting it from a hassle-laden good to a hassle-free service .
The Power of Dreams
These are all dreams. No one has performed any of these industrial transformations. Indeed, there are hardly any lean enterprises, even in the most advanced industries, in our sense of the term where value creation is smoothly linked all the way from concept to launch, order to delivery, and raw material into the arms of the customer and on through the life cycle of the good or service. But these transformations can be achieved and with current know-how. All that’s needed is for someone to turn dreams into actions in pursuit of perfection.
The Prize We Can Grasp Right Now
We’re now at the end of our inquiry into lean thinking. A series of simple but counterintuitive ideas with humble origins in the factory turn out to apply to a whole range of economic activities. They require few new technologies—although the “right-sizing” of many existing technologies is needed to insert them directly into the value stream—and they can be implemented very quickly. It requires only a few years to totally transform even a gigantic firm and somewhat longer to apply them to an entire value stream.
Lean thinking can dramatically boost productivity—doubling to quadrupling it, depending on the activity—while dramatically reducing errors, inventories, on-the-job accidents, space requirements, time-to-market for new products, production lead times, the cost of extra product variety, and costs in general. At the same time, these simple ideas can make work more satisfying by introducing immediate feedback and facilitating total concentration, and they can damp the business cycle, itself the cause of an enormous waste of resources. They require little capital and they will create rather than destroy jobs as managers learn to use them properly. Finally, they provide a bridge to the next great technological leaps by pulling the economies of the developed countries out of their current stagnation and providing resources for research.
All that remains is for enough investors, managers, and employees, like the change agent heroes of these pages and—we hope—you the reader, to create a vast movement, in North America, Europe, Japan, and every other region, which relentlessly applies lean thinking to create value and banish muda.
PART IV
EPILOGUE (2003)
CHAPTER 14
The Steady Advance of Lean Thinking
In July of 2000, Art Byrne and his management team at the Wiremold Company reached a somber conclusion. They decided they should accept the $770 million buyout offer from Legrand S.A. of France and bring three generations of Murphy family ownership to an end.
Viewed in one way, this was a sad event driven by the need of the five members of the Murphy family, all in their 80s or 90s, to pay inheritance taxes on the extraordinary appreciation in the value of their company since Art’s team took over in 1991. But viewed another way, the sale marked a triumph of lean thinking. A firm near bankruptcy in 1991, with an assessed value of only $30 million, was turned into an engine of wealth creation over the course of a decade. Even better, the newly created wealth—a 2500 percent increase on the level of 1991—was shared widely with Wiremold’s employees who collectively owned the largest block of Wiremold stock. In our view, Wiremold’s steady advance through an entire decade could have been duplicated by most companies in the 1990s. All they need
ed to do was follow Wiremold in steadily eliminating waste and pay ever more attention to the voice of the customer in order to create a win-win-win-win for customers, owners, employees, and suppliers. 1 And, as we will see in the pages ahead, Wiremold’s continuing success up to the present was duplicated in varying degrees by many firms, including those whose lean transformations we chronicled in the first edition of Lean Thinking. By contrast, many other firms in the 1990s flew a ballistic trajectory. They zoomed upward in sales and stock valuations on the basis of new business models and optimistic earnings projections before going over the inflection point and heading back to their starting point, if not into bankruptcy.
As managers and investors survey the wreckage of the bubble economy and search for sustainable approaches to wealth creation in the future, a fresh look at the steady advance of lean thinking firms is instructive. The obvious place to begin is with Toyota, the firm that pioneered lean thinking many years ago.
The Steady Advance of Toyota
In the summer of 2002 Toyota allowed itself to do something it almost never does. It talked out loud about its plans for becoming the market share leader in the global motor vehicle industry. A remarkable company document titled “2010 Global Vision” 2 projected a future in which Toyota’s global market share would continue its steady growth from 11 percent in 2002 to reach 15 percent by about 2010. By contrast, General Motors, the current market share leader, had about 14 percent of the global market in 2002, and its share has been trending downward for decades, as shown in Figure 14.1 . Toyota doesn’t say so explicitly—this is definitely not the company’s style—but everyone in the industry understands that the “2010 Global Vision” is a statement by Toyota that it plans to be number one within a few years.
(Toyota’s vision is given credibility by the success of its Global 10 initiative launched in the mid-1990s to gain 10 percent of the global motor vehicle market by 2000. In 2000, Toyota’s global share was 10.01 percent.)
F IGURE 14.1: G LOBAL M ARKET S HARE : T OYOTA V ERSUS GM
Data includes cars and commercial vehicles. GM includes Saab, Opel, and Holden. Toyota includes Daihatsu and Hino. © Copyright 2003, Ward’s Communications .
F IGURE 14.2: U.S. M OTOR V EHICLE M ARKET S HARES BY C OMPANY
Note: Chrysler Corp. does not include Mercedes; Ford does not include Jaguar, Land Rover, or Volvo; and GM does not include Saab. Source: Ward’s AutoInfoBank
Looking at the U.S. market, we note the same trend of steady share gains by Toyota, compared with the declining shares of the traditional Big Three. On current trend, Toyota will pass both Chrysler and Ford in the U.S. market by the time it achieves its global share target (see Figure 14.2 ).
It’s important to note that Toyota’s steady share gains are not being bought at the cost of low margins. Toyota reported growing profits through the 1990s and record profits in 2002. Indeed, its return on sales in fiscal 2002 was the highest in the global auto industry, excepting one company we will discuss in a moment.
It’s also important to understand that the company marches steadily ahead without needing to be a dramatic innovator in the vehicle market. With the exception of the Prius hybrid, the RX300 “crossover” SUV, and the recently announced Scion line to attract young buyers, Toyota has been a plodding follower in the new market segments with highest growth: pickups, minivans, SUVs. 3
This strategy has worked and continues to work because Toyota is the most brilliant manager of core processes in the history of industry. Its product development process delivers new products on time with very few defects, products that are more refined and cheaper to make than similar offerings from competitors. And its production and supplier management processes, as described in Chapter 10 , deliver higher quality at lower cost with higher selling prices within each segment of the market.
In addition, Toyota relentlessly manages and improves every process in its business. Even something seemingly minor, like the spare parts distribution process described in Chapter 4 , is continually pushed ahead. When we visited this process in 1996, Toyota was just introducing its Daily Ordering System and showing its suppliers how to make and ship replacement parts every day. Its competitors, by contrast, were ordering parts monthly and their suppliers shipped large batches of parts infrequently according to traditional auto industry practice. By the end of 2002, 60 percent of Toyota’s spare parts suppliers were making and shipping parts every day in response to deliveries by Toyota to its dealers the previous day. These parts were shipped via a central cross-docking center in Kentucky to the eleven Regional Parts Distribution Centers. Toyota has also made steady progress in improving processes in its dealerships, halving dealer inventories of spare parts while increasing the productive area for vehicle service (freed up from former parts storage space) by 20 percent.
The brilliance of Toyota’s processes mean that Toyota does not need to gamble on daring product designs within an established segment of the market or to pioneer new segments. Its situation is remarkably similar to that of General Motors in its golden period from the early 1920s into the 1960s, when Alfred Sloan decreed that gambles on product technology were unnecessary as long as the company could quickly match any successful innovation by more daring competitors. 4 Toyota can quickly copy the products others pioneer and win decisively because it continues to pioneer brilliant processes its competitors have taken halting steps to copy.
We emphasize this observation because it is truly good news for companies embracing lean thinking: you usually don’t need to play brilliant hunches or score dramatic product breakthroughs to be successful. You can get there with brilliant process management instead, which is within the grasp of any firm with an enduring commitment.
Lean Processes Plus Brilliant Products at Porsche
We told in Chapter 9 of the revitalization of Porsche in the mid-1990s, but noted that its new products set for launch just as the book was published—the Boxster and the new 911—really did need to be brilliant and required perfect placement in a crowded market. Porsche could not afford a major product error and needed both brilliant processes and brilliant products to garner the high prices necessary to survive as the lone midget in an industry of giants. 5
Fortunately, the new Porsches were brilliant, and not by accident—Porsche completely overhauled its traditional functional development process, as we explained in Chapter 9 . In addition, Porsche continued to make steady progress in its manufacturing operations 6 in two directions.
First, it was able to offer customers a huge and growing range of options for their vehicles, while steadily reducing the number of hours it took to assemble each car.
Second, by improving quality, both in assembly and in purchased parts (by sending its lean promotion team to work closely with suppliers), Porsche was able to close the Pre-Delivery Inspection Centers in its main markets like the USA, where engineers used to go through each car with a fine-tooth comb to maintain Porsche’s leading position in consumer quality rankings. These were simply not needed anymore because the quality at the end of the assembly lines was now truly excellent.
As a result, Porsche is not only the world’s smallest independent car company by a large margin, it is also by far the most profitable. Even using the conservative accounting of a family-controlled German firm (where large amounts of revenues are routinely held back as reserves), Porsche reported a 17 percent return on sales in 2002, twice the rate of Toyota, the next most profitable car company.
F IGURE 14.3: P ORSCHE G LOBAL V EHICLE S ALES
Source: Porsche AG Annual Reports
In Chapter 9 we conjectured that combining German engineering brilliance with Toyota-style process management might produce an industrial hybrid better than either alone, one suited to a low- volume, high-variety business. Our surmise seems to be borne out at Porsche in the years since Lean Thinking was launched.
F IGURE 14.4: P ORSCHE R ETURN ON S ALES
Source: Porsche AG Annual Reports
No
te: “Return on Sales” is net profits before taxes divided by sales
It’s great to be brilliant like Porsche, and you may be even more successful than a Toyota, if you tend first to your core processes.
Lean Thinking in Capital Goods: Lantech
On November 4, 2002, we stood in the great hall at McCormick Place, the gargantuan exhibition center on the shore of Lake Michigan in Chicago. We were there to inspect a remarkable range of new products launched by Lantech at the annual Packaging Industry Expo to answer the question we asked at the end of Chapter 6 . What is the future for a “lean” company making products in single-piece flow when these products are designed to wrap large batches for mass producers?
We received a special demonstration of the new devices from founder Pat Lancaster, who has pioneered a whole range of new wrapping equipment designed to stretch and shrink-wrap small amounts of goods at the rate of each cell or assembly line in a manufacturing company. This is in contrast to the usual practice of wrapping large amounts of goods at high speeds in a dedicated shipping department .
For example, Lantech launched a new integrated palletizer/stretch wrapper at the Chicago show that runs at one-third the rate of previous palletizers, requires one-fourth the footprint on the factory floor, and employs practically no complex electronics to sense where the pallet is, when to start, and when to stop. What makes it a breakthrough into truly continuous-flow manufacturing, with wrapping at the end of the process rather than in a separate department, is that Pat’s new invention costs less than one-fifth the amount of any previous palletizer. Thus the cost per pallet wrapped is lower than for large machines even before the economies in handling are added.
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