Managing the Lean Enterprise

November, 2011
Managing the Lean Enterprise
Bill Waddell
There is an old manufacturing joke that goes like this: A company had a very expensive,
intricate machine that began acting up. Exhausting their skills to trouble shoot the problem they
called in an expert. He shoed up and, after alking all around the machine several times and
listening to it very carefully, he finally ent to his tool box, carefully selected just the right
hammer and then taking a moment to select just the right spot, gave the machine a mighty
hack. !nstantly the machine began performing correctly.
"hile management as grateful for the result they ere somehat shocked to receive the
invoice for his visit. #$,%&& for ten minutes and simply hitting the machine ith a hammer
seemed a bit much. They asked him to please itemi'e hat they sa as an exorbitant bill and he
agreed to do so. (oon they received a ne invoice, this one ith to line items: Hitting the
machine ith the hammer ) #*&+ ,noing here to hit the machine ith the hammer+ #$,-.&.
The moral of the story, of course, is that simply using a tool is not that difficult.
,noing hat tool to use and ho to use it in a particular situation is the tricky part. That basic
point as played out over the last fifteen years or so ith the rise, decline and resurrection of
Toyota. After steadily and impressively taking control of the auto industry in the *./&0s and
1.&0s they seemed to lose some of their mojo in the early $&&&0s, but no seem to be back on
track.
The tools Toyota developed in their heady groth days 2 kanban, andon lights, value
stream mapping and the like 2 did not go from being effective, to being ineffective, then back to
being effective. They are simply tools 2 helpful or not depending on hen and ho they are
used. Toyota0s path as determined not by mojo or the effectiveness of their tools but by their
management decisions.
The fundamental difference beteen tools and management as described in a book by
Hayes, "heelright and 3lark called Dynamic Manufacturing: Creating the Learning
Organization that came out back in *.//. They pointed out that manufacturing is comprised of
both structure and infrastructure. (tructure, they said, as the physical part of the business 2 the
bricks and mortar of the buildings, machines, e4uipment, computers and so forth. !nfrastructure
is the invisible part 2 culture and management 2 the ay information and people are organi'ed
and ho decisions are made.
The real insight as that nobody ever gained a competitive advantage from superior
structure. !t can all be bought 2 hatever one company can buy so can another. 3ompetitive
advantage comes entirely from a superior infrastructure 2 superior management. !nfrastructure is
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Managing the Lean Enterprise
November, 2011
the product of the combined knoledge, isdom, values and experience of the people in the
business. !t is the uni4ue fingerprint of the company and ho it is combined to create the
processes hereby accounting, measuring, planning and scheduling, managing 4uality, dealing
ith people and organi'ing the business determines hich businesses succeed and hich do not.
!t is management versus tools again.
The validity of their isdom as clearly demonstrated hen 5oger (mith led 6eneral
7otors to spend some #8& billion on robots and factory automation in the *./&0s to counter the
Toyota juggernaut. !t didn0t make a dent. Toyota as outperforming 67 as a result of superior
management and culture. !f robots ere the key to success Toyota could have bought them just
as easily as 67.
9ikeise, the tools of lean are not the key to success either. 67 has used most of the
lean tools for decades. !n fact, it is rare to find a manufacturer not using at least some of them 2
kanbans, %(, or (7E:. 7ost, hoever, are not applying them as an extension of the sort of
management infrastructure needed to have those tools be particularly effective.
Lean Management
!t is ironic that, hile the authors of :ynamic 7anufacturing came from the academic
community, academia makes up the poerful force undermining the book0s fundamental
message. ;usiness schools and their faculty research, teach and promote 1one best ay0 to
manage. They constantly refine and teach a universal approach and advance the idea that a
professional manager can apply that one best ay to any business 2 the polar opposite of the
notion that the management of a business should be a uni4ue reflection of the thinking of its
managers to the business0 uni4ue circumstances.
The elements of the 1one best ay0 approach include management and cost accounting
that flos from and is a simple derivative of 6AA< =6enerally Accepted Accounting <rinciples>,
a functional organi'ational structure, forecast based production and inventory planning and
control, capital investments based on 5?! =5eturn on !nvestment> logic, and policies that treat
people ho are paid by the hour in a fundamentally different manner than those ho are paid a
salary. This 1one best ay0 is often institutionali'ed in a pervasive E5< system that often ends
up taking control over management of the business 2 ho the business is run is not determined
by its leadership, but by a system designer at (A< or 7icrosoft ho decided ho information
should be gathered, processed and presented for decision making.
The companies that emerge from the pack as truly lean organi'ations posting a steady
stream of previously unimagined improvements in sales, profits, inventory turns and every other
important measure do so largely because they reject all of the 1one best ay0 thinking. They
have the isdom and ability to look at their business ith no preconceived notions 2 to start ith
a clean sheet of paper 2 and construct an organi'ation and processes for collecting information
and making decisions based on isdom, common sense and a clear sense of hat they are trying
to accomplish.
@ust as there is no 1one best ay0 in traditional management there is no universal road
map for managing the lean enterprise. @ust about every one of the thousands of managers ! have
met and spoken to has said, ABut were differentB, and of course they are. Each company is
uni4ue collection of people, location, heritage, competitive challenge and culture. That hardly
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Managing the Lean Enterprise
November, 2011
means the principles of lean do not apply to them, hoever, and that they should stick to old
school thinking. 5ather, it means that each company must take the fundamental principles of
lean and determine the best ay to apply them to the uni4ue circumstances of their business for
maximum effect.
"hile the ay lean management plays out ill be different for each company, there are
underlying principles common to every business, and the adoption of these principles is the basic
difference beteen lean management and the traditional approach preached by the business
schools =note that, hile ! describe the ;)schools as universally promoting the traditional 1one
best ay0 approach a groing number of them are dabbling ith lean management principles,
especially lean accounting.>
A Difference in Basic Principles
9ean management is based on four basic principles that are radically different from the
core principles that have traditionally driven management thinking: Cocus on value in the eyes
of customers+ Clo is central to profitability+ Diches of one+ and Holistic perpetual management.
Value in the Eyes of Customers
"hile traditional management thinking focuses on the idea that loer prices are the
biggest driver of sales, and loer prices are possible from loer costs, lean is driven by the
principle that value in the eyes of customers is the critical driver of success. Ealue basically
consists of 4uality, utility and reliability+ and customers buy or not based on the price relative to
their perception of the product0s value. The price may or may not be loer than a competitor0s
price, but customers are very illing to pay a higher price hen they believe the value of the
product justifies it =!f they believe they are 1getting their money0s orth0.>
The truth of this principle is evident all around us. !f lo cost and lo price ere all that
mattered, "almart ould only carry one type of each item. !n fact they carry a range of
selections in each item type at different price points, each representing different value
propositions. The lo costFlo price approach results in nothing more than a race to the bottom.
9ean companies do not seek to be the loest price competitor. 5ather they seek to be the highest
value competitor.
As a result of this approach, management in the lean enterprise focuses primarily on
identifying and eliminating all costs that do not add value, as opposed to traditional management
that looks to cut costs everyhere regardless of the contribution of the expense to the value
proposition.
The Importance of Flow
Taiichi ?hno, the head of production at Toyota hen their vaunted production system
as developed once said, GAll we are doing is looking at the time line from the moment the
customer gi!es us an order to the "oint when we collect the cash# And we are reducing that time
line $y remo!ing the non%!alue added wastes.B
(imilarly, hen (ix (igma as first developed at 7otorola, the driving principle as that
the shortest cycle time producer is alays the best cost producer. 9ikeise, the Theory of
3onstraints =read &he 'oal by Eli 6oldratt if you are not familiar ith it> is all about flo.
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Managing the Lean Enterprise
November, 2011
6oldratt rote that an improvement at the constraint is an improvement for the overall system,
hile an improvement anyhere else is a mirage. !t basically means that overall flo is
optimi'ed only hen flo through the bottleneck in the process is improved. And, of course,
Henry Cord revolutioni'ed manufacturing hen he turbo)charged factory flo ith the assembly
line.
Every significant improvement in manufacturing has centered on improving flo 2 the
time it takes for material to go from the receiving dock to the shipping dock. !n most companies,
this receiving to shipping time is measured in eeks, or even months, hile the amount of time
the material is actually transformed 2 value is added to it 2 is measured in hours, or even
minutes.
The reasons for poor flo include 4uality and machine reliability problems, poor factory
layout, poorly conceived supply chains and material handling methods, and so forth. That poor
flo is manifest in excess inventories. Dot only do the underlying problems 2 4uality and
reliability issues, for instance 2 drive non)value adding costs, but the resulting inventories drive
aste, as ell. !nventory handling, storage, tracking and control expenses are often substantial.
A focus on flo forces the company to identify and eliminate these underlying problems,
rather than cover them up ith inventory, and then save both the cost of the problem and the cost
of the inventory.
iches of !ne
Traditional management thinking has been that there are 1mass markets0 to be served by
1mass production0 and 1mass marketing0. !t is the idea that there is a huge core market for one
good item, surrounded by small, insignificant niche markets for usually higher cost variations.
This idea, combined ith a lo cost focus, leads manufacturers to produce in places like 3hina
here huge volumes of one item can be made at lo cost. 9ean rejects this notion.
!nstead, each customer has uni4ue re4uirements, if not in the product itself then in the
delivery and service package that comes ith it. <erhaps the most important factory floor
breakthrough lean manufacturing introduced as (ingle 7inute Exchange of :ies =(7E:>,
hich is a ay of thinking and a set of techni4ues to enable production to very 4uickly change
over from making one item to another. !t empoers the factory to make a ider range of items
ithout halting flo and driving up inventory and associated costs. !t also empoers the factory
to make items that serve a ider range of uni4ue customer re4uirements.
The lean management infrastructure must be constructed to take advantage of this
capability, including product development, sales, marketing and pricing. "hile traditional
management defines sales and marketing0s central role to be convincing customers of the value
of the narro range of products the company produces, the lean company defines their role as
first and foremost to learn and communicate back to the company the uni4ue re4uirements and
value definition of each customer. The company then uses that knoledge to design and make
products that fit each customer0s needs.
"olistic Perpetual Management
Traditionally, companies have been organi'ed and managed as a set of functional silos.
Each set of skills has its on department 2 engineering, production, supply chain, sales,
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Managing the Lean Enterprise
November, 2011
marketing, H5, accounting and !T. There are even sub)functional groups ithin the function:
<roduction has a machining department, a elding department, an assembly department+
Accounting is broken don into accounts payable, accounts receivable, payroll, etcH Each
department has its on objectives, budget and performance metrics.
<erformance is broken don into calendar 1chunks0. Annual plans, budgets and goals are
broken don into 4uarters, months and sometimes eeks. The idea is that, if each department
meets its goals in each calendar period than, collectively, the company ill meet its broader
goals for the year.
!t seldom orks out very ell. The problem is that customer experiences 2 ?hno0s time
line from receiving a customer order to collecting the cash 2 cut across functions and convenient
calendar chunks. ?ptimi'ing individual functional targets ithin a specific time frame rarely
adds up to optimi'ing the customers0 needs ith a minimum of delay and aste.
9ean management is based on managing by value streams in an ongoing manner. A
value stream is the set of cross)functional tasks it takes to move a customer interaction from start
to finish. The objective is to optimi'e the performance of the entire value stream, rather than any
individual activity or set of activities ithin the value stream. ?ften the value stream is
optimi'ed by sub)optimi'ing one task in order to gain more than off)setting improvements
elsehere 2 spending an extra dollar in engineering to save to dollars in production, for
example.
!t also vies the business as an ongoing entity that must be continually re)planned and
optimi'ed. 7eeting budgets and goals set a year ago is foolish in light of the ever)changing
nature of both customer re4uirements and the company0s capabilities. !n the lean organi'ation
the primary management mechanism is the (?C< =(ales and ?perations Cinancial <lanning>
process 2 a monthly session in hich the cross)functional management of each value stream
looks at the holistic performance of the value stream and plans the integrated activities of the
value stream for the upcoming fe months. The objective is to assure that everyone is pulling
together in a manner that best serves customers ith a minimum of non)value adding effort and
expense.
!t is a continual process of adjusting, improving and assuring optimal execution of the
business in light of the continually evolving business environment. 9onger range strategic
planning is also ongoing and not necessarily tied to calendar years.
The application of these principles to each area of management is basically described in
the table on the next page. The details, of course, vary by company but the essential point is that
every aspect of management is affected. !n the early days, lean as assumed to be primarily a
factory floor and supply chain issue, hile the bulk of management rolled on unchanged. !t is
no painfully clear that this is not the case.
The Management Challenge
The harsh lesson manufacturing has learned about lean over the last tenty or so years is
that the heavy lifting, the fundamental gut)renching change needed for success is not on the
shop floor. !t is in management. The shop floor tools and techni4ues are not all that complicated
or difficult to put into place. The problem is that they ere developed to support a completely
different approach to running the business. <utting lean tools in place on the factory floor in
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Managing the Lean Enterprise
November, 2011
support of old school management thinking is, for the most part, a colossal aste of money and
effort. As an extension of lean management, hoever, they can be very poerful eapons.
3onverting to a lean management approach is painful and difficult 2 not technically,
mind you, but emotionally. The tools and techni4ues of lean management are not tough+ in most
ays they represent a simpler approach than the data and computer heavy methods that have
evolved over the years to compensate for the glaring shortcomings of traditional management. !t
is the psychological aversion to change that stops most managers from leading their companies
to the promised land of lean.
<eople ho are a bit gray around the temples might remember the days hen (it'erland
dominated the atch making industry, and a (iss atch as the paragon of excellence 2a real
status symbol and the paragon of mechanical perfection. The (iss lost that leading position
hen they failed to recogni'e that 4uart' crystal represented an innovation that enabled atches
to be not only lighter and cheaper, but more accurate. 5efusing to abandon their old ays, even
in the face of overhelming evidence of the superiority of this ne technology, they lost it all.
"hat most people do not kno is that the developers of the 4uart' crystal atch ere a
couple of young guys from 3entre Electroni4ue Horloger, a (iss technical organi'ation. The
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Managing the Lean Enterprise
November, 2011
reluctance of their on countrymen to embrace the ne technology resulted in (eiko and other
@apanese firms running ith it and taking over the atch market.
This is often cited as the best example of a paradigm shift 2 a fundamental change is our
understanding of the rules for ho things are and must be done. The reason the (iss
atchmakers ere reluctant to change had nothing to do ith a reasoned assessment of 4uart'
crystal technology versus mechanical atches. !t as purely psychological. "hen the paradigm
shifts, the knoledge base is set back to 'ero. !f they adopted 4uart' crystal, years of mechanical
atch making knoledge and experience ould be suddenly orthless 2 the neest employee
ould kno as much as the most i'ened atch maker about making atches. !t is not easy to
thro aay years of experience and success to embrace a ne approach.
The same is true ith managers 2 especially senior managers. To embrace the
management principles re4uired for lean success they have to abandon many of the approaches
that have served them ell 2 made them into senior executives. !n converting to lean
accounting, the kid right out of school ill kno as much =or as little> as the company controller
about the financial management reports, systems and processes. That is asking a lot and is not
easy to do. !t takes considerable self)confidence for a senior manager to assume that, because he
or she mastered the old principles, the ne ones ill be mastered, as ell.
9ean management also means a loss of poer and control. Empoered, cross functional
value streams are the polar opposite of the old hierarchical, command and control organi'ations.
6iving up the poer to have people ask 1ho high0 hen the senior manager says 1jump0 is not
at all easy for some managers.
This is the lean battleground. The company gets hat it manages 2 manage to old
principles and get the same old results+ manage to lean principles and separate yourself from the
pack, putting the company on an entirely ne trajectory. The bad nes is that it is an 1all or
none0 proposition. The 3C? or the E< of 7arketing cannot opt and take his function out of the
lean effort out and have the company succeed. 9ean is a company ide strategy 2 no exceptions.
The good nes is that it ill be as much evolutionary as revolutionary. !t on0t be transformed
all at once. !t normally takes companies years 2 anyhere from three to seven of them 2 to
completely transform. !t is a journey, and not an easy one, but as all journeys go, it starts ith
the first step, and by reading this article, you just took that first step.
J
Bill Waddell is a manufacturing leadership
teacher, author and consultant with a global
practice based in the Chicago area. To learn
more about lean management, for more
information about Bill, or to contact him, visit
www.bill-waddell.com