Lean thinking for Competitive Advantage

by Mr. Charles Standard and Ms. Dale Davis

Productivity in the manufacturing sector is rising steadily and has increased by 35% since 1995. This implies that manufacturers must improve continually just to keep pace with the competition. However, today's factory can do better than "stay with the pack." Today's factory can increase productivity, increase business performance in real dollars, and build sustainable strategic advantage over its competitors simply by integrating lean thinking into its operations.

"Does lean thinking actually improve business performance?" This is a question many business leaders are asking. Often the benefits of lean thinking are considered intangible and difficult to quantify. All of us agree that faster setup, shorter cycle time, and better visual management improve the operation of a factory. We also recognize that it is impossible to track, dollar for dollar, the financial benefits associated with these improvements. Nevertheless, we cannot dismiss the very real question of quantifiable returns from our lean manufacturing investment.

Most managers evaluate business performance by reviewing objective reports, spreadsheets, and financial statements. Analysts are often interested in trends, ratios, and formulae. On the other hand, the financial benefits associated with lean manufacturing are difficult to predict if we rely solely on case studies and personal experience. Those who are responsible to stockholders and boards of directors have every right to ask, "Is there any scientific proof that lean thinking improves business performance?"

Before we answer, let us discuss two related questions that were posed to the operations management community in 1992: (1) Are there laws of manufacturing and (2) what other forms of knowledge can help us analyze, manage, and improve manufacturing systems.

The answer to the first question is "yes." There are laws of manufacturing based on scientific reasoning and rigorous mathematics. These laws can be discovered empirically, and they hold true for a remarkably wide range of manufacturing situations. These laws constitute the emerging science of factory physics. They help clarify why production systems behave the way they do. Real production problems can be solved deductively using these general laws. Furthermore, the solutions are more robust and can be applied more confidently than solutions developed inductively from case studies or individual experience. Factory physics reduces guesswork and provides analytical tools to help us make difficult manufacturing decisions.

The answer to the second question is also, "yes." There is a philosophy of manufacturing that describes a comprehensive model of factory operations and production processes. This philosophy is known as lean manufacturing. Although factory physics and lean manufacturing originated independently, they lead us to the same conclusions when they are applied to manufacturing situations. Their corroboration is reassuring and helps clarify why lean philosophy is such a powerful approach to manufacturing improvement.

Lean philosophy emphasizes total system efficiency, continual improvement, value-added activity, and respect for people. Lean principles focus on streamlining the flow of production material throughout the entire enterprise. Lean practices support this by reducing production variability. Perhaps the single best measure for tracking lean progress is total product cycle time (total time that material spends in the production system).

Why is cycle time important and how does it affect profitability? Many factors influence production cost, and it is impossible to predict the precise dollar effect of each factor. It is possible, however, to develop a model that shows us, in general, how various factors affect production cost. Paul Zipkin developed such a model in 1995. He concluded that the very same manufacturing parameters that cause long cycle time also cause high production cost! The converse is also true; factors that cause short cycle time also cause low production cost!

Will reduction of cycle time improve business performance? Increase profitability? Yes! Operations improvements that shorten cycle time also reduce production cost. Other benefits of shorter cycle time are shorter lead-time, greater flexibility, lower inventory, better customer service, and higher revenues.

Streamlining the flow of production material throughout the value stream is a very practical strategy. We can streamline by (1) reducing cycle time and (2) minimizing the variability of cycle time wherever possible. Variability is anything that disrupts the smooth flow of material. Variability is minimized by reliable equipment, standardized procedures, excellent quality, controlled environment, short setups, small production lots, on-time suppliers, sound management decisions, and other factors. Reduced variability has immediate and measurable benefits reflected in cycle time, lead-time, WIP levels, response time, production cost, production flexibility, quality, customer service, throughput, revenue, and . . . profit!

Lean thinking apply to any industry from agriculture to aerospace and any process from repetitive manufacturing to customized assembly. It also provides us with excellent guidelines for decision making. Measurable improvements in operations and profit are promised with one caveat: lean manufacturing is a philosophy and achieving the promised benefits requires that we think about manufacturing in a totally new way.