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Waste-Free Capitalism

by Michael Ballé
July 24, 2013

Waste-Free Capitalism

by Michael Ballé
July 24, 2013 | Comments (0)

Capitalism, which to date appears to be the only viable way to enrich and develop human well-being en masse, is wasteful. It works, but there are costs to pay.

What kinds of wastes? The most obvious are the costs of what economists label “externalities”—better understood as the unfortunate side effects of business as usual. For example, even if most people get richer and better off, some people get poorer and poorer and the costs of someone else’s poverty isn’t taken into account. Nor do large economic models factor in environmental degradation or depletion.

There’s no denying that waste is a byproduct of most successful companies—that creative destruction is a key engine for the constant search for new goods, services, and solutions that support human well-being. Companies compete for customers and markets reward better offers. At an operational level, most companies don’t merely tolerate but in fact weigh the costs of waste against other metrics: the marginal virtue of eliminating all waste would be too costly for its benefits. There is always some amount of “acceptable” attrition. You can’t expect to please all people all the time, so you tolerate losing some customers. You can’t solve every technical problem, so some scrap is acceptable. As long as firms operate profitably, local waste is to be endured as the price of doing business.

And yet one company has proved that capitalism need not be wasteful: Toyota, whose approach is the basis for what is today known as “lean.” Toyota is not a company of wide-eyed eco-enthusiasts either. It’s a hardnosed, large, industrial business focused on making a profit – responsibly, but profitably.

How can this model, which is still mistakenly viewed by many as a manufacturing system only, reinvent capitalism? By revealing the power of waste-free capitalism, pure and simple. This sounds extreme—and it is. But all the elements are there for a new perspective on competition-driven, bottom-line focused capitalism that can still minimize wastefulness because it’s bad for business.

Let’s start with the company level. Making money is essentially about growing the top line through developing new markets or taking customers away from competitors, and then improving the bottom-line. This business model can be summarized as Customers, Costs, Capital Expenditure, and Cash. Toyota doesn’t always succeed, but it has come up with a way to consistently work on each of these four aspects of running its business.

Customer satisfaction drives sales. From the lean perspective, this could be rephrased as “customer satisfaction comes first—we mean it.” While most businesses assume that a certain percentage of unsatisfied customers is to be expected, the lean approach is to to resolve all complaints and unmet needs. Toyota understands that a difference in customer satisfaction between 99.6 and 99.1 percent can have a disproportionate impact on actual sales volume. So they strive to solve all accidental customer problems – and then work to stop the situation from occurring again.

Cost reduction by eliminating waste. The key is convincing every employee that waste matters –that they should be thinking of ways to improve their own processes (with management’s help and support). This is a radical departure from expecting a certain amount of offal from any activity and shrugging shoulders. By involving every one every day in seeing waste and eliminating it, costs not only go down, but the origin of costs in products goes down as well. As a result, products are produced more in ways which are hard to replicate by competitors.

Cost reduction by limiting capex. This approach is essentially a more careful use of capital expenditure. New capital is reserved for new processes or products – never for existing ones. Existing processes need to perform at the level of new ones (“unavoidable” wear and tear of time is not accepted) by being continuously improved through ideas and suggestions – without further investment. This has the advantage of teaching engineers how to come up with low-cost, right-sized, low-defects solutions for new projects as well.

Cash reduction by flexibility. A fourth dimension of cost limitation is a relentless drive to improve process flexibility in order to avoid inventories and their cash drains – cash better used elsewhere, such as investing in new technologies or products. This ends up coming down to human creativity as most equipment has been conceived for economies of scale – long batches of producing parts as quickly as possible, then storing them until they’re sold. The upshot of this is that most machines are hard to change over, and companies tend to stick to long batches and inventories. This is doubly wasteful, first because a lot of cost is invested in making products which can’t be sold immediately. Second, because many of these items find themselves to be obsolete or misplaced and, well, wasted.

How can a lean approach to Customers, Costs, Capex and Cash have an impact on our more global problems? Global policies and decisions are made by people and reflect their worldview. Worldviews are mostly about what is a problem and what is not, what is an acceptable solution and what are practical steps to get there. Worldviews develop from personal experience over time working on specific issues with one’s colleagues and within one’s corporate culture. Not surprisingly, the same executives who have pursued waste-free manufacturing have also marketed the Prius, thereby opening the door to lower consumption, lower emission hybrid cars. Toyota also has the highest ratio of zero landfill plants: factories that recycle their entire wastage.

On one hand, the environmental movement expects solutions to our global problems by government doing what it takes. On the other, lean practitioners struggle to eliminate waste from their processes, teaching one person at a time. Both tend to be ignored by self-styled hard-nosed financial managers who are interested in share price, top line and bottom line, and little else. The opportunity now is to realize that none of these three approaches are exclusive. Indeed, they are three elements of the same puzzle: how can we prosper today, while leaving a world for our children to prosper in as well? Lean practice is the key to waste free capitalism.

The views expressed in this post do not necessarily represent the views or policies of The Lean Enterprise Institute.
Keywords:  global,  lean leadership
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