Since the publication of our book The Lean Strategy last month, my co-authors (Michael Balle, Dan Jones, and Jacques Chaize) and I have heard numerous people challenge a core belief of ours. We argue that lean is indeed a strategy, and here’s why.
What is strategy? It’s a word that is used in many fields of endeavor…war, sports, business, etc. When you look at the literature about strategy it is described in various ways. Some common descriptions are:
- A high-level plan to achieve one or more goals under conditions of uncertainty
- Shaping the future by attempting to get to desirable ends with available means
- A system of formulating and implementing a plan to create competitive advantage
With regards to business I prefer to use the third definition. Each business seeks a competitive advantage over its competitors in order to grow and thrive. The way to do this is to differentiate yourself from your competitors in a way that customers believe that you can deliver more “value” to them than your competitors can. If we think of this relationship as a triangle, then the customer is at the apex of, my company is at one end of the base, my competitor is at the other end of the base and the length of the base is determined by the amount of competitive differentiation between us. If there is almost no differentiation (think commodities) then the triangle has a very narrow base and the only thing that I have to compete on is price. On the other hand, if I can do things that my competitors can’t do that create value for the customer, the length of the base grows and although the subject of price doesn’t go away, it but becomes embedded in a larger conversation about value.
When we examine the history of Toyota, we find that when it decided to make cars, the company was strapped for money. In 1950 it nearly went bankrupt. In addition, Toyota was entering an industry that had intense competition led by the American “big three” manufacturers who offered a large variety of choices. Toyota was faced with a tough situation: no money, the need to have variety, and no ability to carry a lot of inventory. Toyota had to find a way to build cars only when it needed to, an approach we now refer to as “just-in-time”. Over time Toyota created systems that continually worked on eliminating all unnecessary work (“non-value adding work” or waste), thereby incurring less total costs, and using capital more productively that its competitors. The common denominator of all of Toyota’s efforts is time. In the Publisher’s Foreword to his book Toyota Production System, Taiichi Ohno is quoted as saying "All we are doing is looking at the time line from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time line by removing the non-value-added wastes."
Over time Toyota created systems that continually worked on eliminating all unnecessary work (“non-value adding work” or waste), thereby incurring less total costs, and using capital more productively that its competitors. The common denominator of all of Toyota’s efforts is time.
While this statement could be interpreted as strictly an inwardly focused operational issue, it helps show how Toyota in fact used time to differentiate itself from competitors. Toyota introduced new models faster and more frequently than its competitors. Toyota used time to minimize capital investments through mixed model lines, quick set up, little inventory, etc. It used it deliver more value to customers and become the most profitable automobile company in the world.
Let’s look at a simple example, paraphrased from “The Lean Turnaround” by Art Byrne:
Assume that Companies A and B are competitors. They buy the same equipment from the same vendors. The only difference is that A takes one hour to change over its machines, whereas B has figured out how to do it in one minute. If they both can afford to dedicate only one hour per day to setup, B will have better customer service based on being able to produce 60 different products per day verse two. If the industry lead-time is six weeks, but B can use its flexibility due to rapid setups to offer a two-day lead time, they can gain market share. And how will A respond? Probably they will build more inventory (incurring more cost) or cut prices, which further erode profits. B, however, can use its greater speed and responsiveness to continue to gain market share without cutting prices. Does it sound strategic now? All B did was cut setup time-something that most people see as a ‘manufacturing thing’- and they realized a huge strategic advantage (i.e. lower costs and better customer service) by dramatically changing the length of time it took to fulfill customer orders.”
This is a good example of how you can use the tools of lean to reduce costs for a short-term operational benefit. This translates into an even deeper strategic benefit when you figure out how to turn that improvement into an advantage for your customers by creating more value for them than your competitors.
At The Wiremold Company, we continuously looked for ways to use time to differentiate ourselves. At one of our OEM supplier companies, we improved our process and were able to give customers both a quote and a prototype before the competition could even generate a quote. In another of our companies we taught our distributor partners how to use our “rapid replenishment system” to reduce the amount of their inventory of our products from months to weeks worth, thereby freeing up their cash to be used more productively. This improved the GMROI (a major metric of capital efficiency for distributors) on our products and when distributors ranked their suppliers on this basis it put us on the top of the list of favored suppliers. A nice competitive position to be in.
Time is the Currency of Lean
Referring back to the definition of strategy as a system of formulating and implementing a plan to create competitive advantage, there is absolutely no doubt in my mind that what Toyota does (that we now call “lean”) is to use time as a strategic weapon. As I like to say “time is the currency of lean”. This definition refers to not only formulating a plan, but also implementing it. And this is where lean truly shines.
In The Lean Strategy we describe the traditional top down strategic approach that companies use. The executives define what strategy they will follow. They then decide how to implement that strategy and drive that decision down through the organization. And because the original decision is often based on incomplete or erroneous information about the company’s capabilities, they, and everyone else, have to deal with the fallout. This is what we call a “people-free” strategy. The people are looked upon as “labor” that only needs to do as they are told.
On the other hand, lean is a “people-centric” strategy. It recognizes that the people doing the work generally understand their problems best and generally have good ideas of how to solve those problems. In a lean company, the executives come to understand that their own role regarding the strategic question is different. The first thing they do is acknowledge the reality that they can’t go from where they are to perfect in one step and need to commit to becoming a learning organization. At the core of this is to form a plan to give every person the education and training they need in order to become problem solvers. The executives also recognize that their role is no longer one of giving answers, but of asking questions. This now puts everyone in position to find problems that are standing in the way of providing customers the best quality products faster than the competition at an acceptable cost. These problems are not found in a meeting in a conference room. They are found where the work is being performed…at the gemba. It’s only then that they can face the reality of the situation and create meaningful operating, non-financial metrics to capture both the current state and improvements as they happen. At this point, the executive needs to frame the issues in terms of improvement directions (stretch goals) that everyone can understand and they must be able to articulate the business, and personal case for them.
In a lean company, the executives come to understand that their own role regarding the strategic question is different.
Part of this discussion has been around the question of “go fast” or “go slow”. The “go slow” argument is based on the “principle” that we have all heard many times: “people are afraid of change and will resist it”. I have come to believe that this is not true. Whenever this subject comes up in a workshop that I am teaching, I ask the question “Who has gone on vacation to a place that you have never been to before?” Naturally, all hands go up. I then ask “Why did you do that? Why did you risk your limited vacation time and money to go somewhere different? Why didn’t you go back to a place that you knew you liked?” The reason is that someone, or something, convinced them that they would like it when they got there. People are not afraid of change, they have anxiety about the unknown…and as leaders we are not very good at describing why they will like the changes that lean will bring. We introduce change without explanation and our people are anxious about whether it will require them to work harder (most think that’s what productivity is all about) or whether they will have a job tomorrow (LEAN means Less Employees Are Needed). At Wiremold we spend a lot of time talking about this…the work will be easier and safer, you will not lose your job, your profit sharing will go up, etc. We used this approach in all 21 acquisitions that we made and based on that experience I can attest to the fact that most workers understand this message quickly when they see positive results quickly.
In a recently published Lean Post that contained a discussion between Art Byrne and Dan Markovitz about lean strategy, Art made the observation that in his opinion “about 95 percent of all lean conversions fail”. One of the commenters on that article used this statement to argue that a failure rate that high that is evidence that lean has limited applicability and is not a strategy. I would argue that the failure rate is that high because about 95 percent of the companies that say they are “doing” lean don’t approach it as a strategy but only as an operations tactic.
When a company decides on the strategy it wants to follow, be it lean or something else, everything that the company does needs to support the strategy. However, when lean is thought of as an operations tactic, everyone else in the company has permission to continue operating the way they always have. Thus:
- Sales policies continue to encourage batch buying (e.g. quantity discounts): We discontinued those policies.
- Purchasing policies continue to encourage buying base on lowest piece price only: We chose suppliers based on quality, delivery and cost.
- Accounting continues to use standard cost accounting systems that hide both problems and improvements: We moved to Lean Accounting.
- Engineering continues to be bogged down in too many projects resulting in very long new product lead times: We adopted QFD to reduce our new product cycle from years to months.
- IT continues to purchase “best practice” solutions that impose traditional thinking on the company’s processes: We eliminated IT systems in areas where they caused more harm than good (e.g. MRP), and allowed the systems we did use to evolve based on our continuous improvement efforts.
Human Resources continue to hire people based on skills only: We used skills as a base requirement and then selected people that were comfortable with continuous change.
When a company allows the support functions to continue to operate using traditional thinking rather than lean thinking it is eventually faced with internal conflicts. For example, let’s say that the sales manager’s bonus is based on increasing sales and she decides that offering extended payment terms is a good way to do that. But the accounting manager’s bonus is based on improving working capital turns and he is working to reduce accounts receivable days outstanding. Under that scenario both cannot earn their bonus…only one of them. You can image the arguments that will occur between them. Everyone and everything must support the chosen strategy.
In conclusion…is lean a strategy? Absolutely YES. Strategy is about deciding how to win. Lean is about how to win with a focus on both creating more value for your customers and doing so with the best utilization of the resources at hand, i.e. with the least amount of waste. The concepts, principles, practices and tools of lean are universal. Whether your organization is “for profit”, “non-profit”, NGO, government or any other form of organization, the lean strategy can be used to “win” at whatever your mission is. In addition, lean uses a people-centric approach to strategy that respects people by continuously challenging them to become the best that they can be and finding ways to create more value for customers. What's better than that?
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