Sunday, March 17, 2013

One More Time: Lean Is Not Just For High-Volume Producers

“If Toyota produced small quantities of specialty products and we produced cars, people would say that lean only applies to producing small quantities of specialty products.”

One of the most common arguments against the adoption of lean is that it applies only to high volume manufacturing operations.  Much of the literature available on the subject, as well as the close association with Toyota has created the misconception that lean is not applicable to organizations that deal with a small number of large projects or highly customized products or services.

There are three basic questions related to the application of lean that demonstrate that it is not dependent on the volume of product or services produced.

1.      How do your processes need to perform (i.e., what it the ideal condition)?
Answering this requires a clear understanding of the needs of the customer and the business.  It is not possible to define how processes must perform – or the ideal condition – without first understanding the value stream and how the individual processes and systems interact to produce the product or service that meets the needs of customers.

Knowing how a process needs to perform has no absolutely no relationship to the size of the organization, the volume produced, or the repetitiveness of the work.  Whether building an offshore platform, painting a house, or producing a pressure gage, every organization can benefit from knowing the ideal. 

2.      How do your processes perform?
Every organization needs to understand how its processes actually perform and the types of problems that interfere with meeting the ideal.  Are there delays?  Are costs higher than expected?  Do quality or safety problems occur?  Was the amount of work completed during the period less than expected?  This can be difficult for some organizations to understand because people become so accustomed to dealing with problems that they not longer recognized as problems.

The feedback regarding performance of a process also needs to be as close as possible to the time the work was actually performed.  Addressing a problem is much more effective when the facts about it are fresh in the minds of the people involved rather than months, weeks, or even days afterwards.  Because of this, the feedback should be provided at least daily so the information can be discussed on a rhythmic basis like a morning or end-of-shift meeting.

3.      How are you going to deal with the gaps between ideal and actual performance?
Whatever the volume of business or degree of customization, it is critical to continually work toward closing the gap between the way processes should operate and how they actually operate.  Doing this effectively requires effective problem-solving, the ability to learn, and standardized processes. 

As noted in question 2, closing the gap requires attacking problems as they happen while the facts are easier to remember.  Addressing problems as they happen can also help keep the number of process issues from building up and becoming overwhelming to the organization.

Improving performance or any type of organization requires continually moving the operation toward the ideal condition.  This can only be done when the ideal is clearly defined (question 1), the actual is understood (question 2), and problems are addressed rapidly and effectively (question 3).

Quantity Doesn’t Matter
Lean is just as applicable for a company constructing an office building, as it is to an automotive manufacturer.  The key is to compare how a process is expected to operate with how it actually operates.  If the plan was to install drywall in eight offices on the third floor today, for example, and the team was only able to complete five offices, understanding the reasons (e.g., missing tools, poor quality drywall, or poorly aligned studs) and taking appropriate actions should help tomorrow’s work flow more smoothly.

Sunday, March 10, 2013

Who is the Customer for a Commodity?

Teaching lean in an organization generally involves discussing activities that do not add value to the company’s products or services - with value being defined as anything for which the customer is willing to pay.  However common this approach is, though, it can be much more meaningful to companies in some industries than others.  For industrial or consumer products industries - a car or medical instrument, for example - people are generally able to think like their customers and comprehend fairly accurately what they would and would not be willing to pay for.
But what if the company’s product is a commodity?  Commodity producers tend to be so far removed from the customer that it is difficult to think in terms of what consumers would consider value.  Also, commodities lack differentiation on the basis of quality and, since prices are directly set by markets, the idea of determining value based on what the customer will pay for does not necessarily make sense.
For products like oil and gas, precious metals, grains, and even some financial instruments, it doesn't theoretically matter how much waste is inherent in the company's processes; when prices rise,  revenues rise and when prices fall; revenues fall.  Products are delivered to a broker, terminal, or market where they are sold without regard to who supplied them.
Market prices have such a dramatic effect on the financial results of commodity producers that when prices are high, little attention is given to waste, and when prices are low, costs are often slashed without regard to improving the processes that produce the product.  Providing clarity around the definition of waste, however, can drive improvement and lower the commodity price point at which the company can remain profitable.  Also, reducing waste in processes, as compared to slashing costs, tends to result in improved safety  and higher levels of production.
ExxonMobil and Chevron are examples of highly successful commodity producers, each consistently reporting net income in the billions of dollars.  The quality of the oil and gas that each produces is much more related to the geographic area than their own processes and they have no control over the price they receive.  It’s a pretty safe bet, however, that like most organizations, both have a significant amount of waste within their operations
At the most basic level, the profitability of Exxon and Chevron are determined by the difference between the market price of oil and the costs to extract it from the ground.  And since they have virtually no control over the price of oil, they must focus on what they can control - the costs to find and produce the oil - and it is here where waste can be found.
So how does a commodity producer define waste?  Since the market is the customer and inherent waste cannot be passed on to the customer, the concept of what the customer will or will not pay for does not really apply.  To clarify the meaning of waste, commodity producers have to look to their purpose and product for a more usable definition.
For example, it is important for people working in a company that mines gold to understand that the operation exists to "mine gold safely, efficiently, and in a socially responsible manner."  When this is clearly understood, waste can then be defined as anything that does not contribute to mining gold in a safe, efficient, and socially responsible manner.  Improvement can begin when people realize that their jobs exist to either mine, transport, and sell gold or support someone else who does.
Basing waste on customer satisfaction can apply to internal customers, but only after there is clarity around why the company exists and what it is trying to do.  Identifying internal customer requirements and measures will be very difficult, if not impossible, without first establishing what constitutes waste for the company's end products.
Lean professionals must understand the company and its processes before attempting to teach or coach people about continual improvement.  Relying on canned approaches like defining waste in terms of what the customer will or won't pay for can confuse people or strengthen the perception that lean is another management fad that doesn't apply to the company's situation.