Wednesday, April 22, 2009

What is lean management

Lean management boils down to two innovations in organizational structure and management control:

The radical decentralization of decision making; and
A cybernetic financial control system, known as profit management.

Radical decentralization

Radical decentralization is the empowerment of the entire workforce to find defects and fix them, and the quicker the better! It is most simply described as the combination of standard work and continuous improvement. Standard work requires every employee to perform each task in the same way and in the same sequence. Continuous improvement requires every employee to participate in changing standard work, when necessary, using the scientific method. As a matter of history, standard work and continuous improvement are part of total quality management (TQM), which Toyota implemented during the period 1960-63. For a more complicated but more elegant explanation of how Toyota dealt with standard work, see Spear and Bowen, “Decoding the DNA of the Toyota Production System,” Harvard Business Review, Sept.-Oct., 1999. (Toyota actually beefed up standard work by requiring employees to perform standard work sequences within a standard time and with a standard amount of work-in-process inventory. We will return to this point when we describe profit management.)

Profit management

Profit management is a highly refined system of widely deployed financial targets and real-time auditing on the front line of operations. Profit management hinges upon a technique of strategy formation and execution known as hoshin kanri or policy deployment, which in the late 1950s became an integral part of the peculiar Japanese version of TQM. Essentially, hoshin kanri is a knowledge management process that makes systemwide adjustments to standard work. Whereas continuous improvement aims at small, incremental improvements, hoshin kanri aims at strategic change in quantum leaps. Hoshin kanri is the ne plus ultra of strategic change management. Moreover, companies that practice it, really practice it, are constantly adapting to their increasingly chaotic competitive environments. See Cooper and Schlagmulder, Target Costing (Productivity Press).

Originally, hoshin kanri was a quality methodology. At Toyota it became much more. This may have been the result of Toyota’s unique interpretation of standard work. In its simple form, standard work requires employees to perform each task in the same way and each sequence of tasks in the same order. This will certainly reduce process variation, no matter how long you take to get the job done. No doubt inspired by its just-in-time approach to production management, Toyota added two dimensions to TQM’s standard work: time and WIP (work in process inventory). At Toyota, employees must not only perform standardized sequences of standardized tasks, they must do so in a standardized amount of time (takt time) and with a standardized amount of WIP. By incorporating takt time and standardized WIP into its definition of standard work, Toyota integrated its financial and quality systems. For, if you can control task, sequence, time, and WIP, you control cost as well as quality (assuming your standards are reliable).

By adopting hoshin kanri, Toyota made its new, integrated system fully dynamic. Hoshin requires an organization to deploy, which is to say communicate, challenging improvement targets to every one of its managers (top, middle, and front line). At first, such targets were limited mainly to improvements in quality. Toyota expanded the system to include other types of targets, including cost reduction targets. Thus was born “kaizen costing,” a companywide effort that placed Toyota on a path of systematic cost reduction as surely as stepping on the “down” escalator at the department store. (At the same time, Toyota developed the well-know but poorly understood approach to new product development known as “target costing.” Neither kaizen nor target costing are stand-alone inventions, but are part of the broader system of profit management. Again, see Cooper and Slagmulder.)

Radical decentralization, revisited: real-time audits

To avoid overwhelming the reader, I have postponed the discussion of a critical element of radical decentralization, namely, real-time audits. Toyota super-expert, H. Thomas Johnson, reports that Toyota does not permit accountants on its shop floor. How can that be? Well, because of standard work, everything on the shop floor is well under control, and accountants concentrate on external reporting.

Earlier I mentioned Toyota’s zeal in adopting TQM. My evidence is Toyota’s justly famous “andon” or “alert” system, which places the power to stop an entire factory in the hands of every employee. At Toyota, an “andon” cord (sometimes it is a button) literally hangs over the heads of the workers. There are strict rules about when to pull it, but everyone knows that when conditions deteriorate to a predetermined degree, pulling the cord is part of the job. Managers come running to help solve the problem and get things running again. You know this already. What you don’t know is that this is not merely a quality control; it is a cost control, too. Toyota’s andon cord amounts to real-time auditing.

At Toyota, a defect is more than a dented fender, it is anything that diminishes customer value. Defects include material defects and errors in standard work. To grasp this fully, recall the elements of standard work, Toyota style: task, sequence, takt time, and WIP. Of course, a dented fender is a defect. Trying to put it on upside down is tantamount to a defect. If a sequence of tasks cannot be performed within takt time--that’s a defect, too. If employees allow WIP to build up (or fall below) strictly defined limits--even that’s a defect. And, if necessary, the andon cord is pulled and managers come running.

The modern corporation is dead

With the twin innovations of radical decentralization and profit management, Toyota has reinvented the modern corporation. Ironically, Toyota’s most prominent victim, General Motors (GM), reinvented the modern corporation almost 90 years ago with a similar pair of innovations. GM decentralized decision-making by creating corporate divisions (think of Chevrolet, Cadillac, Buick, etc.). Then, to control the powerful presidents of its new divisions, GM imposed a new system of financial targets and internal audits, a system that has evolved into present day management accounting. GM’s innovations were so powerful that they almost put Ford out of business in 1927.

Do we see a pattern? Toyota has decentralized anew and imposed a new system of control. This put GM on the ropes long before the our current economic crisis.

Tom Jackson
Portland, Oregon
March 16, 2009

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