Manufacturing Engineering December 2006

I was sent the link to this article by Professor Thomas Johnson, noted author of books including Profit Beyond Measure.

After reading the article, I'm a bit confused (although he makes some excellent points). Dr. Johnson begins by attacking “lean accounting” when it's really traditional management accounting and traditional management thinking that he's attacking throughout the piece, it seems. I guess maybe his point that “lean accounting” is just tweaking a harmful system, ala “putting lipstick on a pig?” I make that comment having nothing other than a surface understanding of the “lean accounting” movement.

Johnson says:

“Lean accounting is part of the management problem besetting US industry”

“The adjective “lean” merely denotes particular features of a business activity that presumably improve the activity's performance, but do not change the principles that shape how it is carried out.”

“But the improved business performance promised by these features can never be more than temporary, because “lean” does nothing to change a host of finance-driven practices that inevitably increase instability and diminish long-run business performance.”

“Examples of such practices include optimizing the efficiency of individual operations at the price of reducing efficiency in the whole; building work-arounds to keep work moving instead of solving problems that cause delay and interruptions; and sacrificing quality and lead time to increase output and meet standard cost-variance targets.”

Of course the things he mentions above are bad practices. However, what Johnson is describing is not “lean.” Sub-optimizing part of the process is not “lean.” Building workarounds is not “lean.” Honestly, I don't know where Dr. Johnson gets his definition of “lean” from.

“A key reason why American companies fail to emulate Toyota's long-term financial results is their belief that managers can use financial targets as “levers” to control those results.”

I would tend to believe that statement. I would say it a little differently: traditional management focuses on the results, whereas “lean management” focuses on the process. Focusing on the process leads to better results than focusing on the results (and ignoring process) gets you.

“If such a linear cause and effect relationship connects the parts to the whole, then to change the whole by a desired magnitude requires no more than changing one or more of the parts by the same magnitude. In other words, to reduce operating costs and increase profit by $1 million requires no more than reducing payroll in that amount by steps such as laying off personnel, reducing wages and salaries, or outsourcing work to a lower-wage region. It doesn't matter how the reduction is accomplished, since removing a dollar in one part of the business has the same impact as removing a dollar in any other part. All that is required is to change the financial size of some part or parts by the magnitude of the desired total financial change.”

I agree with his point there that the traditional finance driven management looks at labor as a “cost” as something to be reduced, the results of that loss of talent be damned. Toyota treats people as an asset since that asset can improve the process, which can potentially lead to more cost savings than laying off the employees would have accomplished. The layoffs as cost-savings view ignores the work that those employees did, the value they created, etc. Very sad – the race to the bottom, the death spiral of layoffs hasn't really been successful for anyone, has it?

He says Toyota's view of the world recognizes the complexity of our living business systems:

“In that context, the company's long-term financial results emerge from countless nonlinear feedback loops in a complex, self-adaptive, and self-corrective living system.”

Systems Thinking!! Great stuff.

“For example, the money saved by replacing high-paid experienced employees with low wage contract workers in another country is likely to result in more defects, longer lead times, and increased customer dissatisfaction.”

Exactly! That's the sad view of how traditional management “improves” the company.

“It's hard for Americans to understand the idea that a business organization cannot improve its long-run financial results by working to improve its financial results.”

Yes, why is that so hard to understand? It's heresy in some management circles to say you cannot focus solely on the results of the process. I guess that's why the lean management system and mindset is so much tougher to embrace than the “cost cutting” lean tools (such as 5S, kanban, etc.).

“Toyota focuses its operations on continuous system improvement through endless rapid problem solving. And they emphasize genchi genbutsu, or “going to the place,” to see where a problem occurs, firsthand. They don't rely on second-hand reports or tables and charts of data to achieve a true understanding of root cause. Instead, they go to the place (gemba) where you can watch, observe, and “ask why five times.” This attitude shows a deep appreciation that results (and problems) ultimately emanate from, and are explained by, complex processes and concrete relationships, not by abstract quantitative relationships that describe results in simple, linear, additive terms.”

Exactly! I like how he said that.

I visited a healthcare organization recently that was processing billing for insurance and Medicare reimbursement. Their management, while caring and competent, was oriented around managing metrics rather than “genchi genbutsu.” I spent days directly observing the process, different employees in different departments, and saw the employees spend most of their time inspecting paperwork, fixing errors created upstream, and generally struggling with problems. Employees showed me their “error logs” with some amusement. Some of them filled them out diligently and said “I get tired of writing the same errors down all the time” while other employees admitted not filling out the reports at all (since filing reports hadn't led to any action that actually eliminated the problem.”

When I sat with management and told them my estimate was approximately 50% of employee time as spent fixing errors or dealing with the aftermath of errors was met with friendly surprise.

“But our reports say the error rate was only 1.8%!!!!!!!!!”

The manager promised to spend the entire next week doing as I had done – directly observing the process herself.

“We see better today—when we understand more fully what Toyota does—that reducing manufacturing overhead costs requires a better way to organize work, not better cost information.”

Again, brilliant.

“One step was to ignore all but abnormal variation in results and work to improve the system itself, thereby narrowing the control limits and improving long-term performance. The other step, a less desirable but more common way of managing, was to try to improve long-term performance by intervening in the system every time results varied from a desired target. The inevitable consequence of the second step, Shewhart and Deming proved, is to widen the system's control limits, and thus impair its long-term performance.”

Healthcare is just as guilty of overreacting to changes in metrics and “tampering” with the system as anyone back in manufacturing was. I'm giving a presentation at a healthcare workshop in April that explains the use of control charts for analyzing management data to avoid overreacting and tampering (much of the material is based on the outstanding book “Understanding Variation” by Donald Wheeler).

“If a company requires cost information of any kind to show the “savings” from “going lean” it is lost, and will never get there.”

Another brilliant point. Calculating an “ROI” on a lean effort (including my own consulting work) is difficult or based on altogether faulty logic (or unknowable numbers).

Lots of provocative thoughts, what do you think?

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