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Art Smalley

Art Smalley: Financial Benefits

By Art Smalley, - Last updated: Tuesday, January 25, 2011 - Save & Share - Leave a comment

Historically Toyota Motor Corporation has been a very profitable company over the past 60 years in what is generally a very cyclical business. Before its recent problems Toyota was racking up annual profits for several years in the $15 Billion + range and had not reported an annual loss since the early 1950’s. Various problems and the global economic slowdown brought those numbers to a grinding halt in 2010 but the figures appear to be picking up again it seems.

Regardless the question remains why does (or did) Toyota produce such great financial results and in contrast why do other companies attempting lean not see similar financial results. Orry Fiume gives some excellent insight from his valuable perspective as do other responders to the question. I will try and add some other reasons however from my perspective.

For starters most companies attempting lean are just not as proficient as Toyota in their efforts. Like many a golfer who tried to emulate Jack Nicklaus or Tiger Woods it seems easy until you pick up the golf club and try to hit it. Then you find out rather quickly that real hard work, skill, and discipline are required to become proficient in the task and not everyone will be as successful as the best in the world. With coaching, good equipment, effort, and practice everyone can improve. It is just a question of how much.

Secondly the companies that I often observe tell me they are doing “Lean” and that it is modeled after the Toyota Production System. Unfortunately there is often little resemblance in the actions I observe and what really transpired in Toyota. There is simply too much emphasis on drafting superficial items or tools that look good on paper i.e. value stream maps, standardized work, or A3 reports and too little emphasis on obtaining results through targeted activities. Rather than applying the window dressing I tell clients to get to 100% schedule attainment (then do it with fewer resources), 100% on-time delivery (then cut the lead-time), 100% availability (at least on critical equipment), and 100% quality (no excuses). Yes it is hard work and perhaps impossible to some extent however unless that sort of directional effort and achievement occurs you won’t see the operational results that Toyota achieved.

Thirdly the other problem I observe is that Lean is primarily only practiced in production environments. That is a fine place to start just as Toyota did decades ago. However up to 70% of the cost of an item can be locked in during the design phase according to various experts. You won’t achieve large financial impact unless this big piece of the puzzle is analyzed and improved continuously and Toyota does an excellent job in this area. Toyota practices Target Costing and Kaizen Costing for the life cycle of a vehicle. Over the course of the product life from inception to the end of production different activities occur in design, procurement, and manufacturing to reduce cost. Some of the activities fall under the domain of Value Analysis (VA) activities after production starts. Other extremely important actions occur through on-going Value Engineering (VE) or Value Improvement (VI) activities which start before production ever occurs.

The combined effect of these activities across the life cycle of a program from design to final production in addition to all the efforts occurring in the plants are why Toyota was so profitable. You just can’t hang up a standardized work chart, draw a value stream map, and throw out a few kanban in an attempt to obtain financial results. It just is not that simple despite what you sometimes hear or read from various parties. Too many efforts on lean that I observe are both piecemeal in nature and minimal in scope in comparison to Toyota’s historical efforts. Prof. Yasuhiro Monden and Prof. Kazuki Hamada do a nice job of articulating some of the key points in Toyota’s Target Costing System in  book entitled “Toyota Management System: Linking the Seven Key Functional Areas”. The information is outdated now by about two decades however the main points are still on track. You can see the scope of the actions outlined in the following graphic.

In the text of the book the authors talk about the basics of Target Costing (Toyota calls it Genka Kikaku) and Kaizen Costing (Genka Kaizen). Toyota puts a lot of work into managing the planned versus actual costs associated with a vehicle. Just like every second is watched on the shop floor every dollar in a component is analyzed for improvement in vehicles as well. Sometimes this topic mistakenly turns into a narrow question of accounting principles but that dialogue usually missed the point from my experiences with Toyota. Just switching to some version of “lean accounting” (and I see minimal agreement on what exactly that topic is) won’t produce results. Measurement is just a piece of the improvement equation just as “Check” is only a part of the Plan-Do-Check-Action cycle for improvement. A critical piece of Toyota’s strength in terms of financial results lies in the realm of the overall cost planning process and the structured VA, VE, & VI activities that occur during the life cycle of the program.

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