Lean Lessons for 2006

This is the year when Toyota will almost certainly overtake General Motors to become number one in the global car industry, eclipsing what was once the largest industrial enterprise in the world. Fifteen years ago we predicted this would happen in The Machine that Changed the World. Five years later in Lean Thinking we described what it would take to respond to this challenge. A decade later Western car makers have struggled to build on their first wave of lean improvements. We will also see whether GM and Ford can throw off the shackles of unsustainably high wage rates and huge pension burdens.

The fundamental reason for Toyota’s success is a superior lean business model in which senior managers focus on turning every process into a brilliant process rather than making the numbers and keeping the assets busy in their area. And in which every manager and employee takes responsibility for solving problems to further improve these processes. A problem solving, process focus drives the efforts of the whole company.

Toyota’s triumph will have a huge demonstration effect on every industry across the world. It will accelerate the growing interest in lean, triggered earlier this year by the endorsement from GE that lean is the way forward for them. The auto industry will continue to be a lean reference model for design, production and the coordination of the upstream supply chain. However I expect we will see other industries becoming role models for lean in the near future.

I am now convinced that the consumer goods industry has reached a tipping point. Production lead times are beginning to be dramatically compressed, rapid replenishment pioneered by Tesco is improving availability at lower cost and new retail formats and home delivery are demonstrating that convenience does not need to cost more. The era of the focused factory, big automated warehouses and mega stores is coming to an end. As more and more products, from pharmaceuticals to electrical goods, are sucked down this pipeline this will transform these industries too. Rapid lean replenishment will become a way of life for all.

I am also convinced that leading capital good producers like Rolls Royce aero engines are beginning to see the significant benefits from selling the use of their equipment rather making their money on repair and overhaul. “Power by the hour” transforms the way you design and maintain this kind of equipment – leading to win-win gains for producers and users.

The lean revolution is also beginning to transform service delivery systems from call centres to installation and repair operations. There is a lot we can learn from them about building intelligent feedback loops from customer facing staff and turning every customer interaction into a Kaizen opportunity.

But perhaps the most dramatic lessons will come from applying lean in healthcare. We are beginning to see good examples of how lean can improve the flow of patients through existing hospital processes. This is just the start of a much bigger redesign of complete healthcare systems, combining lean system design with new enabling technologies for diagnosis and treatment. It is here that we will see the fastest progress from process improvement through process redesign to rethinking the whole business model using lean principles.

My hunch is that the discussion at the Frontiers of lean thinking will move sharply towards the customer in 2006. More and more companies will track the frustrations of their customers in accessing and using their products and strive to realise the win-win gains from improving the poor fulfilment of their delivery systems, as we described in Lean Solutions.

A second topic will be how to improve the process for designing new products and the processes to make and deliver them, particularly in the light of lessons from the first round of lean. This includes the whole spectrum from designing complex products with huge teams of engineers to much simpler but smarter ways for smaller firms to introduce new products.

A third topic which lean thinkers are waking up to is what process management really entails, how value stream managers work with functional managers and how to create the problem solving capability in every employee that is bedrock of lean process management. This will be an important topic for research, discussion and experimentation in the lean movement in the year ahead.

I hope you have a good break and return fired up to continue your lean journey. I look forward to meeting many of you again next year.

Yours sincerely
Professor Daniel T Jones

Process Leadership

I first heard the term Kaikaku over ten years ago when travelling with a Toyota Sensei around Japan, while researching our Lean Thinking book. As we visited several showpiece suppliers to Toyota we kept asking when they made the switch from batch logic to flow: when they installed their Heijunka boards, pull systems etc.

Each time the answer was in the early 1970s, just after Taiichi Ohno’s team began spreading lean to Toyota’s key suppliers. While they were continuing to do lots of Kaizen, the fundamental layout and logic was set in place at that time. Kaikaku came first, before Kaizen. That is when they made the fundamental shift that set them off in the right direction.

I worry that not enough organisations in the west trying to follow their example have grasped the difference between Kaikaku and Kaizen. Kaikaku for me is the embodiment of a different logic in the flow of orders and in the flow of products through the business: a commitment to levelling orders, to pull rather than push and to a rapid flow from door to door. Made in such a way that there is no possibility of reverting to old batch and push ways of thinking.

If the logic in the heads of management has not changed along with the physical operations then things will easily slide backwards and no amount of Kaizen will get you out of that hole. Bottom up lean transformations keep bumping up against the problem of bringing the rest of the organisation with them on their journey to lean.

What is missing is process leadership at the top. Top management focuses on strategic thinking and financial thinking but not on processes thinking. Chief Executives spend much of their time asking what customers can be served profitably from the firm’s existing assets, knowledge base and geography, and buying and selling assets accordingly. Chief Financial Officers and department heads ask how the firm’s resources can best be deployed within its business units, functions and departments. But there is no such thing as a Chief Process Officer!

The reason this is important is not just to support Kaikaku and Kaizen in operations and logistics. Kaikaku needs to be taken up a level and applied to the redesign of each value stream. Competing against low cost imports from China and elsewhere and achieving much higher levels of availability at the point of sale means creating lean, responsive value streams across several organisations. Serving time poor customers means rethinking distribution channels and how to support customers using their products.

The redesign of the core value creating processes is too important to delegate. As we describe in Lean Solutions, the most promising approach is to create a small team, led by a high potential executive, operating initially outside the normal departmental structure and reporting to the top. They must be free to challenge the conventional wisdom, the firm’s current assets and relationships. Their job is to evaluate the core value creating processes of the organisation from the standpoint of the customer, and to work out how to flow value to the customer smoothly and with minimum effort.

A member of this team then becomes the Value Stream Manager for each value stream, leading the operational design and its roll out across the business. Working out the operational detail means involving staff who will run this new value stream in defining customer value and drawing the future state map, so they can see the whole process, understand the logic behind it and the need for change and see the virtue of the new process.

Over time this Office of Value Stream Managers or Process Office (as distinct from the lean improvement group supporting Kaizen activities) will become the way to articulate the needs of each process to the functions across the business. Most staff will continue to work in their functions. But the core design, production and support value streams become the customers for their work. Now resolving conflicting demands for resources from the functions will be based on value stream plans and not just the result of a power struggle for budgets, of chimney costing within each function or measures of asset utilisation.

The whole organisation can then unite around the core objective of creating value for customers profitably. Who are the process leaders in your organisation? What does your organisation look like from a process perspective?

Yours sincerely
Professor Daniel T Jones

Competing with China

There are two sea changes going on in the world economy. The first is the rise of the “low cost” producers in China and the second is the lean revolution which is now gaining momentum. Although the lean revolution began long before the recent rise of China, they go hand in hand. Lean is as essential to Chinese firms seeking to become global as it is to western firms responding to their challenge. All of us will be better off as a result.

No country has ever built a sustainable competitive advantage based on low wages. Inevitably wages and other costs begin to rise, as they are now doing in China. This is a good thing and the whole point of development. But it means Chinese firms wanting to export more sophisticated products to the west will have to learn that quality comes from good design and capable lean processes from which all unnecessary touch labour has been removed. The good news for them is that lean processes do not necessarily require high tech equipment or expensive IT systems.

There is also no doubt that successful Chinese firms will also establish manufacturing operations in other regions. Indeed they have begun buying companies in Europe and America. This will pose a major challenge to Chinese managers, just as it did to Japanese and Korean firms moving abroad for the first time. It takes time to build a significant cadre of managers with experience of managing operations abroad and to integrate foreign managers into the senior ranks of the company back home. Toyota’s unique advantage was its ability to spread lean through its global operations. Korean, and now Chinese firms have to learn lean as well as how to run their global operations.

The initial reaction of western firms and policy makers to the Chinese threat is to increase spending on technology and innovation. Nothing wrong with that - but it can’t be the whole answer. Just consider the huge number of engineers being educated in China and now being employed to reverse engineer all the machines they are buying from the west. Also remember what has happened to firms that have pursued a pure technology strategy – like the premium car makers in Germany. They made formidable products that were too complex and unreliable for their customers. Technology alone is not enough. 

This points to the one competitive advantage western manufacturers do have – they are closer to their relatively affluent customers – that is you and me! They ought to better understand their needs and ought to be better at developing just the right new products and services to solve their problems – managing their health, coping with congestion, seamlessly communicating etc. They also ought to be able to get these products and related services into the hands of these customers far more quickly than producers located half way round the globe. 

This is our comparative advantage – yet we don’t recognise it - and we are not really exploiting it very well! Manufacturers are far too removed or even insulated from their customers. They seldom interact with the end users of their products and their distributors, whose main role is getting the best price for products already made to forecast, have in many cases lost contact with customers as they outsourced customer service.

Focus groups and market research are no substitute for knowing exactly who their most important end customers are and building intelligent feedback loops from them on how to help them use their products to solve their problems. This means feeding back to a highly responsive product development process that can get the next generation product to market in months rather than years. Toyota recently announced a target of 12 months from design freeze to launch for every new car. How long does it take you to develop new products and how many of your new products really succeed?

When it comes to responding to their needs more rapidly we also fail. My rule of thumb is that if it takes less than an hour of value creating time to make the product it should take no more than a day to go through the factory. Likewise if it needs an hour ’s work by engineers and procurement to draw up a quote this should take no more than a day. Every step in each organisation through which the value stream flows should likewise take a day and not much more than a few days to flow between organisations. And it should not take more than a few days to reach end customers within the region of sale, across Europe. The responsiveness of the end-to-end value stream ought to be measured in days and not months.

Most manufacturers are still struggling with a throughput time of weeks and a distribution pipeline of many months. They have also saddled themselves with a supply chain that stretches right across the world, with the same delays as their Chinese competitors. This is not going to be sustainable in the future and all that wasted time and effort costs far too much and undermines the competitive advantage from being more responsive to local customers. The benchmark is an equivalent product made in China, shipped through several distribution points and flown to the UK in an Airbus A380. Why can’t you beat that?

Meeting this challenge – getting closer to customers and responding to their needs very rapidly – goes beyond continuous improvement. It entails fundamentally rethinking your business strategy, designing responsive and capable processes and restructuring the organisation and the supply chains to support them. Those with more responsive lean processes will win this global competition.

Yours sincerely

Professor Daniel T Jones

Broken Business Models

When the CEO of the mighty Wal-Mart asks the UK government for protection from competition from Tesco, one fifth its size, it is clear something significant is going on. The rise of Tesco is not because it is better at dominating its home market than Wal-Mart is in the markets it serves in the US. Both benefit from enormous scale and purchasing power.

The difference is that Tesco has developed a superior lean business model that is exposing the cracks in the Wal-Mart business model. Through its loyalty cards it knows exactly who its customers are and what they want – Wal-Mart does not - they have opened a range of formats to mirror customer circumstances – which Wal-Mart is just thinking about – and they have developed a rapid, reflexive replenishment supply chain to serve all these formats, including home shopping. 

I described a walk through their supply chain in my last letter. Quite simply Tesco is getting more of its customers exactly what they want, and where and when they want it at lower costs. The good news is that none of this is a secret; competitors can follow their example. It is not an exaggeration to call Tesco the Toyota of the grocery business. They are by no means perfect and, like Toyota, they have not lost the drive to keep improving all of their processes. 

Another crack in a very successful business model was also exposed last week. BMW, the proud technology-driven premium carmaker, decided it could not develop hybrid engines alone (even though Honda is doing so). For years Daimler Benz and BMW dismissed hybrids as the future, claiming that diesels and hydrogen were the way forward and that they had all the answers. In the face of the huge expansion of third-generation hybrid car production by Toyota, BMW has joined forces with rival Daimler and General Motors to develop hybrids in a bid to catch up. Toyota’s path to develop a new premium position is more in tune with consumer values than product proliferation and stuffing cars full of technology most of us never want to use. 

In every industry the business models of the mass production and mass consumption era are broken or creaking. The “hub and spoke” airlines dependant on feeding traffic through big hub airports are struggling to compete with “point-to-point” airlines. Banks and telecoms firms losing customers as they outsource customer support. Retailers and manufacturers are beginning to question the “low cost” sourcing of cheap products in China, as responsiveness become more critical to compete in clothing and footwear. And maturing computer technology is even undermining the ability of Dell’s “build to order” model to compete with picking up an equivalent product in the local computer store the same day.

The list could go on – add in our own experiences of waiting in queues for diagnosis and treatment in large general hospitals and in car dealers waiting to get your car fixed. Changing times mean it is time to rethink these broken business models. In each case there are examples of firms that have begun to rethink their business models. They are beginning to demonstrate the huge potential of lean not only as an approach for streamlining processes, but as a strategy for turning the tables on your competitors and providing a better deal for consumers and their employees at the same time. 

In rethinking the business models most organisations naturally start by asking what products they should make in the future, what assets they will need to make them and where they should be located. Lean thinkers on the other hand begin by asking who the customers are, what problems they are trying to solve using these products and services and how best to organise to serve them.  

It is not the computer, but the combination of the hardware, the software and the knowledge of how to use them that allow us to process documents and send them to others. And obtaining, installing, upgrading and replacing all these is a process involving the consumer’s time and patience, just like production. 

Following this consumption process reveals that many of the interfaces with the provider’s process which mirrors it are broken and frustrating. Moreover they have often been outsourced so direct contact with the consumer is lost and there is no feedback loop to help redesign the product or the processes of obtaining and using it. 

In our Lean Solutions book we show how mapping these processes back from the consumer through several layers of distributors to production and all the way back to raw materials reveals really staggering opportunities for removing layers of cost for all parties, including the consumer. It really can be a win-win-win for all concerned. Better customer service as well as greater convenience turn out to be as free as quality in a lean system. 

The ability to think back from the consumer and to design provision systems that can solve their problems by getting them exactly what they want, where and when they want it at minimum cost will be critical to success in the future.

The key question will not be who makes the products but who coordinates the provision of all the elements on an ongoing basis to the consumer.  In the end survival in this challenging environment will depend on the ability and speed with which firms can rethink the business models for their value streams and write off and replace old assets that stand in the way of progress. Firms that are too slow to change will almost certainly be replaced by lean entrepreneurs who figure out how to make lean, consumer-focused business models work. Will you join them or be swept aside?

Yours sincerely

Professor Daniel T Jones

Supply Chain Walks

One of the most interesting things I do is to take a walk through a complete supply chain. I did this twice last week. The first was from a vegetable grower through a consolidation warehouse to a Distribution Centre and then to a Tesco store. The second was a virtual walk through the supply chains of a large aerospace manufacturer. While the products are about as different as you can get, it is surprising how similar the issues and the learning points are.

The Tesco walk was impressive. You can see that they have learnt many of the most important lean supply chain lessons. The grower is using sophisticated software to measure and control the sowing, planting out and harvesting of their crops in line with trend profiles of demand. They begin picking the crop each day based on plans agreed once a week with Tesco. Top up orders to adjust the exact quantities required each day are fed directly to the picking unit in the field in real time. Products are picked, packed and dispatched from the field through two cross docking operations (one to aggregate loads and one to disaggregate loads) to the store, where they are on sale the next day. 

The first very important lesson Tesco learnt is that it is up to them to identify and remove the noise in the orders sent to suppliers. This is one of the most significant causes of excess capacity, inventories and waste in every supply chain. It took them a while to acknowledge this fact and to recognise that this is the biggest win-win gain they can offer their suppliers, who in turn can then begin to synchronise their production with real demand and not the Chinese whispers that come out of most forecasting systems. Key to making this work is to separate and manage base load demand differently from top up variable demand. 

Once you see this then you also see the huge opportunities that arise from also taking responsibility for managing inbound logistics from suppliers, rather than waiting for suppliers to deliver full trucks to you when they have enough to ship. Tesco has led the industry in taking this step. They are reaping the gains from much better consolidation and timing of loads throughout the supply chain, from much higher load utilisation through improved backhauling to and from suppliers and stores and from higher availability in store through more frequent deliveries of exact quantities.

The aerospace supply chain is still focused on taking waste out of production in their own plants and on helping their suppliers to do the same. This is all well and good. However they are not yet convinced of the need to take the next big step by taking responsibility for redesigning their whole supply chain. This is the way to reap the next set of gains from leaning the supply chain. The best way to realise the scale of these opportunities is by taking a walk, rather than listening to a software supplier wanting to better optimise the existing far from efficient supply chain.

Taking responsibility means deciding on the right place to trigger the supply chain, in this case final assembly of the product. It means analysing and removing all the causes of noise in the signal sent to suppliers. This should be easy to do in a product assembled two to four years after the order is placed, but is in practice hugely variable for individual components. It also means managing all the logistics flows through the supply chain to speed up the frequency of delivery. 

It may also mean choosing suppliers located closer to the point of assembly for next generation products. It will certainly mean building a very different relationship with key suppliers to conduct joint value stream analysis around target cost rather than cost plus objectives. The way to do this is to work with clubs of suppliers who share similar supply chain challenges, who can cross learn from each other and share the improvement experts between them. This is exactly what Toyota did with their suppliers over thirty years ago. Have you taken a value stream walk yet?

Yours sincerely
Professor Daniel T Jones

Frontiers of Lean

It is eighteen years since the first western firm, Danaher in the USA, began its lean journey guided by disciples of Taiichi Ohno, the architect of lean at Toyota. Ten yeas ago Jim and I brought this crowd of early pioneers together at the first Lean Summit in Boston. It was an amazing event bursting with energy and infectious enthusiasm that well and truly launched the lean movement.

We have undoubtedly learned a great deal since then. Lean has become a household word in manufacturing and as we saw at the Lean Service Summit last June, people are now realising the huge potential for lean in administration, maintenance, services, healthcare and the public sector.

However we still have a lot to learn about implementing lean. Why, when the benefits of lean are so demonstrably significant, are more firms not making faster progress with lean? What have we learnt over the last eighteen years about what works and what does not?

I think the time has come for the lean movement to begin a big debate on what we still have to do to roll lean out across the world much faster. This is one of the two frontier issues we will begin to debate at the Frontiers of Lean Summit in Stratford-upon-Avon on 31 October to 2 November this year. The full Summit programme is now posted on our web site www.leanuk.org.

The second frontier we will discuss are the new opportunities for fundamentally redesigning the way companies organise and deliver value to solve consumer problems. Jim and I have been thinking about this next step for lean for several years and the Summit will be the global launch of our new book Lean Solutions: How Companies and Consumers Can Create Value and Wealth Together. More on this theme in my next e- letter.

I meet passionate and experienced advocates every day who have devoted their lives to implementing lean, but who are also deeply frustrated as many of their efforts disappear into the sand. And consultants who have made a good living out of lean, who see much of their experience wasted as managers leaving their training sessions revert to old behaviour when they get back to their departments.

On the other hand I am encouraged by increasing numbers of top managers asking how to roll lean out across their operations. It is initially a bit of a shock for them to realise that you can not just hire someone to do it for you – it involves a lot more hard work and leadership on their part to make it happen. It means drawing on the right kind of outside help to get started and to develop new capabilities in the organisation, and it involves challenging many sacred cows inside the organisation as well as building quite different relationships with suppliers and distributors. I often say that lean is like an infection – with no antidote! Once bitten it is impossible to shake off. You see opportunities everywhere – even in the home – though health warnings apply here!

For example, take a simple everyday product that takes in total less than an hour to make through simple series of process steps. Why should it take any more than one day to go through the plant – rather than 130 days? And why should it then spend several weeks being repacked, stored and shipped to the retailer? Why not within a couple of days? Just like fresh produce. The usual answer is because it is more efficient and cheaper! And customer demand varies so much! Really? What planet do they live on? Where is the data to support this?

Seeing the possibilities opened up by lean is one thing – making it happen is another. We spent our childhood and early professional lives configuring and wiring our brains as our thinking was reinforced by our experiences. It is not surprising that it is hard to unlearn routines and behaviours – it takes time to reconfigure those pathways in our brains. And it is much harder if this new logic is not reinforced by people around us. But once a trigger point has been reached and the light goes on it can liberate new energies that can achieve what was thought to be impossible.

Just listen carefully to all the reasons put forward for why you can’t flow at least your high volume products through the plant and out to customers in a day. They reveal the many problems that are blocking progress to lean, that have to be addressed. The drag of existing assets is a problem, so are investments in big systems that would no longer be needed if we produced to demand and not to forecasts. So are conflicting metrics and chimney costing systems in each department. It is the responsibility of top management to solve these problems, not just operations.

While management may be great at strategic thinking and financial thinking about allocating and controlling the use of resources across departments, there is a complete lack of process thinking. No one is responsible for understanding the needs of the end-to-end process to design and make each product family – the product has no voice! So the order and the product have to meander their way through departments as best they can – slowly.

All of you have your own experiences in implementing lean and there is of course no one best way to do it. However there are many lessons we can share and address together rather than in isolation. In preparation for our debate in Stratford, I would welcome any short summaries (up to say 1500 words) of what you have learnt and the questions you still have. We will post some of these on our web site (anonymously if you wish) and we will summarise the common points and circulate them to participants ahead of the Summit.

We have invited some of the leading lean practitioners in the world to lead this debate and to respond to these points and we will follow this by facilitated round-table discussions for each type industry. These will provide the very best opportunity for your senior managers to prepare your organisation for its lean journey.

Please take a look at the Summit programme on the web site www.leanuk.org  and think about who should attend from your organisation, from your suppliers, clients and customers. We would welcome any help you can give us and are happy to send personal invitations to any people you think should know about this. We hope this will be a very rich and thought provoking conference and a landmark even for the lean movement. I look forward to seeing many of you there.

Yours sincerely

Professor Daniel T Jones

Taking Responsibility for Pull

I am always surprised how little companies know about the further reaches of their supply chains, and how few take real responsibility for designing them. They seem to have evolved over time as different purchasing directors have come and gone. This is not just about who makes what, at what price and where. But much more significantly it is about how all the replenishment loops upstream of the pacemaker process for the whole value stream are coordinated across many different suppliers. It is probably true that you get the suppliers that you deserve!

So where is the pacemaker process for your end-to-end value stream? In car making the whole system is obviously triggered at the assembly plant. However for many consumer goods the value stream is or should be triggered by customers pulling products from the shelves in the retail store. Wherever it is, in my view the lead firm has the responsibility to determine and coordinate the way the whole value stream is configured. It is also their responsibility to establish the framework for how all the suppliers and sub suppliers work together to continually reduce costs over time and across product generations. 

And it is the responsibility of every firm to pull all the components they need from their immediate suppliers, by picking them up as frequently as possible, rather than waiting for suppliers to fill a truck and deliver to them. This helps to compress time and improve responsiveness across the value stream and is the most effective way of eliminating noise and created demand amplification in the order signals passed upstream. Noise creates the most insidious waste of all – excess stocks and excess capacity to deal with the peaks and troughs of orders – for which everyone denies responsibility!

I was reminded of this in reading a remarkable article in the New York Times on 12 May 2005 (Heavy Load by Norihiko Shirouzu and Jathon Sapsford) describing how Toyota has designed a completely new production system for its low cost van and pick up for developing countries. This IMV project, as Toyota calls it, bypasses their traditional production sources in Japan and is made up of a network of plants and suppliers stretching from Argentina to India, Indonesia, Thailand and South Africa. Their objective is to produce a series of rugged vehicles for developing countries that cost 25% less than previous models. The first of these vehicles has just gone on sale in Thailand. 

In addition to normal target cost down exercises on every component, Toyota also went to great lengths to correctly configure the entire supply base for this family of vehicles. “Toyota set up a war room for IMV  production at its office in Bangkok. On the wall is a long line of coded numbers, each representing a component, from wipers to heat sensors to nuts and bolts. Red lines fan out from each component to its subcomponents, which in turn have more red lines going further out to further subcomponents. In some cases, the components are traced back to 12 levels of suppliers.” It took time to map those supply chains. But once they did they discovered all kinds of places where subcomponents were going back and forth between suppliers, needlessly raising costs. 

This investment in designing a completely new production system is obviously a big undertaking. However it gives them am extremely effective base from which to triple their sales in developing countries. How many companies going to China or India have done this level of analysis or shown this kind of strategic thinking? 

Closer to home the most significant example of a firm pulling products from its suppliers is Tesco. Their move to factory gate pricing and organising inbound distribution is being followed by other supermarkets. The implications of this move will be felt across the economy as almost all consumer goods are now being sold through supermarkets. As others follow, Tesco are well placed to take the next step and actively reconfigure their supply base to eliminate wasted trips and time and to encourage their suppliers to pull products in turn from their suppliers, and so on right back to raw materials. Have you thought of following in Toyota and Tesco’s footsteps to pull products from your suppliers?

Yours sincerely

Professor Daniel T Jones

Serving Consumers

In my previous e-letters I discussed the importance of rapid, reflexive replenishment in compressing the distribution pipeline and in producing exactly in line with consumer demand. This means rethinking the way the pull signal is transmitted upstream and the way products are made and shipped all the way back to the consumer. The ability to respond quickly and exactly to demand is going to be critical for every manufacturer. If they can also eliminate many layers of costs in getting products to consumers, then it may be possible to continue to make these products in high wage countries. 

However while speed and accuracy may be necessary conditions for survival, they may not be sufficient. Being closer to sophisticated consumers should give local manufacturers an edge in understanding their current and future needs. But much of the attention is focused on speeding up product development time and adding new features to products. All well and good. However this misses an increasingly important piece of the story – how consumers access and use these products. At the same time many companies are losing direct touch with consumers as they outsource customer support and help lines, as well as production. 

What is needed is a simple method for defining value from the consumers’ perspective. This is the first principle of Lean Thinking. Jim Womack and I have been thinking a lot about what lean consumption might look like as a complement to lean production and lean supply chains. The key is to recognise that purchasing a product is not an isolated transaction but a series of steps just like production – a consumption process. And the purpose of this consumption process is not the product itself, but the use of the product, together with the relevant services and knowledge, to solve a consumer’s problem. 

On a personal level this may be getting a medical condition diagnosed and treated, colleting the ingredients for the family meal or getting your home office and communications equipment and hardware to work together so you can communicate with friends. But it is just the same in our professional lives, where we are both consumers of products and services from others and providers of products and services to our customers. 

In each case there is a consumption process, mirrored by a provision process, mediated by a series of interactions between them – telephone calls, exchange of information, delivery of products etc. As with production we can list the consumption steps and record the time they all take, carefully differentiating the few steps that help consumers solve their problems from the rest. We can also note how helpful or frustrating the interactions with the provider were and whether they were necessary or not. 

Learning to see the consumption processes of the different types of consumers that use your products is going to be a key skill in the years ahead. To recognise how badly designed and dysfunctional both these processes are just reflect on your recent experiences as a consumer (whether consuming on your own behalf or in paid time on behalf of your business). Here is a very typical example. 

On the busiest day in the year in our little three person office our printer and fax machine broke. It was just over one year old. A quick call to Stephen, our technical expert, confirmed our diagnosis. The next call to PC World revealed it would be too expensive to send someone to fix it, but that if we rang another number we would get vouchers to buy another machine. However these came from a different firm altogether and it took three more calls to find out how much we would get back and that we could not directly use these to buy another machine. They would follow a week later by post! 

So at the end of the day I get in my car and go to PC World to get a replacement machine. But of course they do not have this machine any more, only an inferior replacement that is far less robust. But it will have to do for now. 

Next morning the new printer refused to talk to our PCs. After reloading the software several times we were still stumped. Three calls later we get hold of someone at Hewlett Packard who after much discussion concludes the disc with the software must be faulty and we should download the software from their web site. After more frustration our expert finally gets it all to work. 

Total working time from last good print to the next good print was six hours! The total cost of our time and travel and Stephen’s time was considerably more than the cost of the printer! Add in the cost of the folks answering the eight calls to their “help lines” and you begin to see how much time and cost was wasted because of a broken process. True enough the vouchers arrived a week later and we will have to think of something else to spend them on. However this kind of service, or lack of it, makes you mad. Shame on PC World, their warranty provider and Hewlett Packard! 

It may be a trivial example, but this kind of thing happens all the time. In fact it is repeated day after day in both our private and business lives. But we have learnt the art of shrugging our shoulders and forgetting precisely what happened, in the vain hope that it will not happen the next time. But of course it does! 

The real problem is that no one had thought to define value from the consumer’s perspective – as a continuing ability to print. And none of these firms are using the information on the problems we rang them about to eliminate the root causes of the problems and redesign the process – and to eliminate the need to make any of these calls in the first place.

It would not take a rocket scientist to redesign this provision process to save time and cost for both providers and consumers. It would however be a brilliant place to start thinking about new ways of solving consumer problems.

Yours sincerely
Professor Daniel T Jones

Lean from the Top?

Flying to and from Australia gave me time to reflect on what appears to be a significant increase in interest in lean. Maybe, just maybe, we might be on the brink of a new era for the spread of lean. 

In recent months we have been approached by a number of large companies about planning their lean transformations. However what is different this time is that the impetus is coming right from the CEO. In each case the new CEO has declared that one of their key corporate objectives is to deploy lean throughout their organisation and across the world. It may not be a coincidence that GE recently declared their future was going to be Lean as well as Six Sigma. Where GE goes today many others will most likely follow. 

This is good news for all those already struggling with lean in the trenches. For too long frustrated staff in operations, engineering, planning and logistics have wanted to do the right lean things, only to be frustrated by the lack of real interest or understanding from top management. Too often they have given up and sought a position in a more lean friendly environment elsewhere. 

However just as this top management commitment is welcome, it needs the right kind of response to bear fruit. It is important to lead top management to an understanding that there is a lot more to lean than meets the eye. A good way to begin is by asking a series of key questions and opening up the discussion from there. Out of our recent discussions my colleagues Ian Glenday and Dave Brunt came up with five questions. You might try answering them yourself before asking them of your top management. 

Is the prime focus of lean in your company waste reduction? Almost certainly the answer will be yes. This is a start, but by no means the end of lean. The really big gains from lean come from fundamentally redesigning all the key value creating and support processes to enable the product to flow quickly through your organisation to the customer. And to go through several redesign cycles as you learn to see the obstacles to flow.

Do you ever change plans and schedules after they are issued? Again most likely the answer is yes. The organisation is still driven by a perceived need to be flexible and to optimise asset utilisation by separately scheduling every activity. Paradoxically the ability to respond quickly comes from discovering how to eliminate unnecessary noise in the order signal and learning where you can create stable flow, while reserving some capacity for last minute demand. There is a stable core demand in every organisation, if only you can see it and build upon it.  

Have you drawn current state maps but no future state maps? Again the usual answer is yes. We recently observed that even seasoned Six Sigma black belts struggle in designing future state maps. They are more comfortable coming up with lists of topics for future projects than creating value streams that flow. But they also relish the challenge of learning how to build a value stream in which every step is interdependent and much more resilient to disruptions and backsliding. 

Is the prime focus of your performance measures on the results achieved? Almost certainly yes. As you understand that current performance comes from the way key processes are designed and operated it will be necessary to track key measures of value stream performance in real time.

Finally do you really know what key attributes the consumers of your products really value, and those they don’t? The answer is usually no. Many organisations sell to end customers through layers of distributors, who aggregate different kinds of orders and whose main task is to get rid of the products already made to forecast. Dig deeper and you will realise you have several different types of customer with very different demands. 

Cascading a lean process redesign activity throughout an organisation starts with a dialogue around these kinds of questions. It does not start by deploying lean tools or running a 5S programme. It starts with hands-on training of a core group in lean system design. Their task is then to cascade this knowledge to every plant and office. 

I wish you a happy Easter.

Yours sincerely
Professor Daniel T Jones

Beyond Squeezing Margins

Over the years I have been invited to speak at many supplier days. The best ones share the stories of the lean progress made by the hosts to encourage their suppliers to follow suit, to mutual advantage. However there is always some tension lurking in the background as both sides size up whether this is a genuine step towards win-win cooperation or merely the same old margin squeezing dressed up in a new guise. The truth usually turns out to be a bit of both.

However it is becoming apparent to me that simply squeezing supplier margins is reaching the end of the road. Without any fundamental changes to the way the shared process works, there is a limit to how much margin there is left to squeeze. More seriously, I am now seeing growing evidence that successive raids on margins are now beginning to have a seriously damaging and even perverse effect on supplier performance. Ignore this at your peril.

This was brought home when visiting a supplier making a basket of different components, which they deliver to a customer for assembly into a complete piece of equipment, made in a variety of different configurations. At the moment the market for this product is buoyant and suppliers are having a hard time keeping up. This is a well intentioned supplier, taking action to respond to pressure from its customers to reduce its prices. However these actions have not always had the intended consequences, for them and their customers.

First, they decided to upgrade their machining plant by buying a completely new set of machines. After a struggle to get all the machines installed and running they are still struggling to get this equipment to work more than 30% of the time! Instead of solving their capacity problems, it made them worse than ever. It turns out the machinery was just not capable of running with these products, to the required tolerances and at the planned volumes. Sure the supplier is making some progress in reducing changeover times and breakdowns, but not nearly enough. This is not just a maintenance problem. More worrying, they were not able to specify the design conditions for what Toyota calls basic stability when choosing the equipment in the first place. It turns out their customer is suffering from the same problem with its new equipment, even though they have been going lean for some years. This is a very expensive lesson for all concerned. Not surprisingly it is a common problem that people do not want to talk much about!

Second, this supplier centralised each of its processes in different “focused factories” across Europe. This was supposed to reduce production costs. But instead most of their products now travel through three or more of their plants before being marshalled for delivery to the customer in their central warehouse. Total lead time through this supplier has gone up and not down, and the probability of having the exact basket of parts ready when the customer wants them has fallen. As a result they are constantly chasing “missing parts”, and their overtime and excess freight bill is enormous.

Third, in order to manage this complex routing through their plants they bought an ERP scheduling system. This turned out to be a disaster. They are still struggling to win the un-winnable war between data that is constantly being undermined by the expediters, trying to end-run schedules based on forecasts that always differ from what the customer actually wants. Schedules to their suppliers jump up and down all the time and not surprisingly on time deliveries from them have fallen.

Fourth, like many they have sourced several key components to low cost sub-contractors in China. Quite apart from all the start up and logistics nightmares, prices in China are beginning to rise. Their sub-contractor is more interested in fulfilling booming domestic demand than their orders, which gyrate far more than planned. They will soon have to find another sub-contractor further inland in China or look for a supplier closer to them in say Romania or Turkey.

This is not an isolated case. Indeed by conventional wisdom they did all the right things. However they were undermined by a lack of real knowledge of the equipment needed to produce their products and by focusing on point economies rather than the cost of the product travelling through the entire supply chain. Every supply chain contains many such stories. Rather than walking away, there are several positive steps that should be on the agenda for the next supplier day.

First, establish an expert working group to pool and upgrade the collective knowledge about specifying right-sized equipment that is fully capable and available. This is a strategic foundation underpinning the shared enterprise.

Second, the customer should, like Toyota, begin to assume responsibility for organising inbound logistics, picking up products from suppliers using frequent milk-rounds. This is brings the heartbeat of the supply chain to the supplier’s door.

Third, by creating level schedules for high volume products and separately scheduling capacity for low volume make-to-order products the customer can create the conditions where suppliers can follow suit. This inevitably leads to freeing up previously hidden capacity and achieving and sustaining record levels of output, while also freeing up the time of many of the planners and expediters to focus on improving the process.

Fourth, suppliers and customers should jointly map their value streams back to raw materials, as we described in Seeing the Whole, over time compressing them by regrouping as many value creating steps as possible in one location, either close to the customer or within trucking distance.

The path beyond margin squeezing is no less relenting. But it needs leadership from the customer to reshape its supplier base and to build a deeper relationship with fewer suppliers, each with a deeper knowledge to solve bigger problems with you on a continuing basis?

Yours sincerely

Professor Daniel T Jones

Rapid, Reflexive, Replenishment

Maybe a good New Year’s resolution for us all is to begin to take responsibility for leaning and compressing our entire supply chains. Ultimately the success of every business is determined by the success of the supply chains of which they are a part, just as a supply chain is only as strong as the links in the chain. Whether we like it or not a supply chain, or more accurately an extended value stream for each product family, is a shared process between all the parties, and needs to be managed as such. 

But where does your value stream begin and end? Probably back to the raw material processing for your longest lead item. At the other end I would argue it does not just end with the consumer purchase of your product – but through the life of the product to its replacement or disposal. Even if we just count back from the point of purchase, how long is your supply chain? Longer than the 319 days to make a cola can or double that to make a pharmaceutical pill? This is something every business should know. 

The second fact everyone should know, but few really do, is how well does this value stream really serve the needs of its end customers? The results will probably shock you. Grocery retailers setting up to supply orders placed on the Internet discovered they could only fulfil about two thirds of the items customers actually ordered, even though the availability of individual items was close to 98%. As a consequence many customers are dissatisfied with the substitutions made on their behalf. Think about how often you found the shoe size you wanted in the style you chose – and then remember that at least one third of the shoes in stock, which you did not want, will be remaindered at the end of the selling season. In other words, how do you disappoint your customers? And how much effort and hassle is required on their part to get what they want from you, if it does not go right first time? 

The true performance of your value streams can only be understood by taking a walk. I was recently reminded of the first value stream walks we did with a combined management team from Tesco and its key suppliers back in 1996. We walked the path of several products back from the store through two warehouses to production and packaging. No one had done this before and it opened their eyes and triggered Tesco’s lean journey. 

After a bit more digging, particularly to follow the order through the information processing maze, it became clear that the way to both improve the fulfilment of the shopper’s basket and to cut swathes of inventories and cost from the system as to dramatically compress the value stream through a series of tight, continuous replenishment loops.

Store sales should trigger replenishment of exactly the same quantities from Distribution Centres. Shipments from Distribution Centres should trigger daily pickups of exactly the same quantities from suppliers. These, in turn, should trigger daily production of the exactly the same quantities, and so on back through packaging and the production of ingredients. The ultimate example of a one-touch, flow-through product is soft drinks placed on rolling dollies at the end of the production line, which are wheeled through distribution to become the shelf fixture from which the customer selects the product. The same logic applies to slower selling products (the majority in most supermarkets) but with either an appropriately longer replenishment cycle – every three days or every week – or by more frequent deliveries of mixed-product shipments of the required quantities.

The model for us, and still the most impressive supply chain in the world, is the Toyota aftermarket parts distribution system we described in Lean Thinking. This still sets the global standard for how to run a lean replenishment system, with lean Distribution Centres, milk-run mixed-load deliveries picking up products and cross docks. 

In the early 1990s Toyota built two highly automated warehouses in the USA and Japan and discovered these could never match the efficiency and flexibility of their manual lean warehouses. They also knew from experience that big centralised ERP scheduling systems can never beat a series of simple reflexive pull loops. Economic Order Quantity logic leads to noise and expediting rather than the optimal use of assets. WebVan, the home shopping firm in California, went bankrupt trying the automated route. And Sainsbury in the UK and Coles Myer in Australia are now struggling because they followed the same path. When will we learn? 

While manufacturers can learn a lot about rapid replenishment from retailing this is not the only place to look for inspiration. Earlier this year I visited a plant making contact lenses. They were busy planning an even bigger, faster machine. This sounded like “hurry up to wait” to me. True enough these lenses went through three different warehouses, each containing mountains of stock and no doubt highly automated, before they reached the customer. And demand for contact lenses is by definition very flat! I suggested they make and ship just the right number of lenses directly to each customer’s home or design simple, but less “efficient” machines that could make these lenses in a local dispensary while customers waited. The room went quiet at this point, until someone said “We never thought of that!” 

What would happen if you applied the same logic to your supply chain? How short could it be? What difference would this make to your customers? What would this do to your investment, design and production costs, and the location of your activities? And how would this change your impact on the environment? 

I look forward to hearing both stories of how long your existing value streams are – and given a blank sheet of paper, how short they could become. 

Yours sincerely
Profeesor Daniel T Jones