Wednesday, April 22, 2009

Forget about material flow

Most lean consultants will tell you that lean enterprise is about three things: material flow; material flow; material flow. And this makes sense, that is, until you think about it. As we know, lean manufacturing techniques have been successfully applied to many nonmanufacturing processes, most recently to healthcare. So obviously whatever lean is about, it is about information as well as material flow.

In fact, it is all about information flow. Think of it this way. Organizations are great big computers. In other words, organizations are problem solving machines. Consider healthcare. A patient visits the doctor. The doctor gathers information about the patient by reading the patient’s history, looking at the patient, taking her temperature, etc. Then the doctor processes the information, looking for patterns that will indicate the patient’s condition. Once the condition is known, the doctor prescribes and sometimes delivers a treatment.

According to economist Oliver Williamson, organizational structure is not necessarily what we think it is, namely, an organizational hierarchy or the degree to which our supply chain is integrated vertically or horizontally. It has to do with we structure the decision-making process within the organization and how well manage our organizational knowledge. According to Williamson, two things determine the effectiveness of organizational structure. The first is the degree to which decision-making is decentralized. Decentralized decision-makers can find and fix defects in the process faster than one centralized decision-maker. Decentralized decision-making also leaves more time for leaders to think about the future. Unfortunately, being only human, we tend to pursue our own interests instead of the interests of the organization to which we belong. So, the second thing is the effectiveness of organizational control. Organizational systems that can balance decentralization with control achieve an organizational state of grace known as “double-loop” learning. In other words, the organizations learn on two levels. According to Chris Argyris and Donald Schon,

When [an] error detected and corrected permits the organization to carry on its present policies or achieve its presents objectives, then that error-and-correction process is single-loop learning. Single-loop learning is like a thermostat that learns when it is too hot of too cold and turns the heat on or off. The thermostat can perform this task because it can receive information (the temperature of the room) and take corrective action. Double-loop learning occurs when error is detected and corrected in ways that involve the modification of an organization’s underlying norms, policies and objectives.See Argyris and Schon, (1978) Organizational learning: A theory of action perspective, Reading, Mass: Addison Wesley, 1978, pp. 2-3.

In the history of business, General Motors is known to have made a breakthrough in organizational learning when it decentralized its decision-making into divisions (Chevrolet, Buick, Cadillac, etc.). At the same time, GM imposed a new system of financial targets and internal audits to control its divisional presidents. (GM’s control system was in fact the precursor of management accounting, which is used to control most organizations today.) In less than a decade of creating this new structure, GM had overtaken the Ford Motor Company, which never recovered its former position as the world’s leading automaker. GM beat Ford for two basic reasons: 1) GM could learn what its customers wanted and provide it faster than Ford; and 2) GM’s leaders had more time to think about the future and could therefore adjust their “norms, policies, and objectives” more readily than Ford. In other words, Ford was a “single-loop” organization; GM was “double-loop.”

With the concept of double-loop learning in mind, we can now understand Toyota’s eclipse of GM, Ford, and most of the world’s automakers. But in order to do so we have to forget what we know about material flow and focus instead on organizational structure and organizational learning. When an economist looks at Toyota, two innovations stand out. First, Toyota has decentralized its decision-making, and done so radically. Individual employees on the front line of operations are empowered to stop the production line, if necessary, to prevent defects from passing to the next process. The second thing is Toyota’s control system, which is not GM’s management accounting. According to H. Thomas Johnson, Toyota does not permit accountants on the shop floor! In place of accounting, Toyota installed hoshin kanri or strategy deployment, a method that aligns managers to strategic intent through a careful process of negotiation known as catchball. See for additional information about this method. Hoshin kanri creates and reinforces double-loop learning in four ways.

By asking managers to focus on a few, critical objectives, it encourages them to delegate, thus decentralizing decision making.
It provides a framework for feedback and control through regular, frequent, short meetings;
It provides a framework for coaching and mentoring direct reports so that they will become effective problem solvers who also know when and how to decentralize decision making;
Reflection on the companies norms, policies, and objectives is an explicit step in the process.

Tom Jackson
Portland, Oregon
March 29, 2009

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