By Bob Emiliani
This article is from the Superfactory Archives, an archive of content from the Superfactory website that existed from 1997 to 2012.
Believe it or not, the Lean community could actually use some help from economists, the very same people who largely failed to notice asset bubbles that led to the Great Recession (2007-2009) and who now seem incapable of determining their root causes. As a result, we watched Nobel Prize winning economists guess at cause-and-effect. Wouldn't it be wonderful to instead see economists apply Toyota’s scientific problem-solving process to economic crises and identify practical countermeasures to reduce the frequency and severity of economic problems in the future [1]?
Despite their spotty record as social scientists, economists remain very influential. Executives in companies large and small have long formulated many important views based on the work of economists, and these views play a prominent role in management decision-making.
Lean management has always been at a disadvantage compared to conventional management in part because economists have never truly understood flow; not for almost 100 years, since the time of Henry Ford's Model T. That is a long time to have your head in the sand. It seems that few economists have actually had front-line operations experience, and fewer still, if any, have had experiences designing flow production (processing) systems or operating one as a cell leader, for example. That is how they would really learn the technical and economic benefits of flow.
How might Lean management prosper if more economists knew about flow in detail? Economists could inform executives that Lean is safe for them to fully embrace (both "Continuous Improvement" and "Respect for People"), not some crazy thing to avoid or adopt half-heartedly. They likely would be more convincing to more executives than even the most accomplished Lean CEOs.
One of the things that economists do is look for the lowest cost solution to a problem such as production (i.e. processing) in service or manufacturing operations. Given their great interest in production work, it is enormously surprising that most economists know little or nothing about flow [2]. Why haven't large numbers of economists rushed to study Lean management in general, and flow in particular? I bet that nearly all economists have heard of Toyota's production system, but apparently few think it is worth studying. Most must see it as only slightly different from conventional batch-and-queue processing, in which all the same old rules apply. But we know that is not the case.
Lean management challenges how we think about business in so many different ways, including: customers and suppliers, design, production, distribution, sales, information technology, human resources, finance, and, of course, economics. Here are some examples that illustrate how Lean management challenges different aspects of economics:
Economic concepts that are impractical and therefore largely useless to a Lean thinker include:
- Economic man, efficient markets [3], free unfettered markets (i.e. laissez faire - little or no government regulation; market fundamentalism [4]), economies of scale (a trap which Toyota senior management fell into, other than Taiichi Ohno. See "Toyota's British Influence" [5]), and economic order quantities, because these concepts are misleading or lead to loss of customer focus and to poor decision-making.
Fundamentally, any economic concept that ignores human behaviors [6] also ignores reality and is therefore inconsistent with Lean principles - "Continuous Improvement" and "Respect for People" - and Lean practices. Ignoring reality is to ignore facts, which makes it impossible to make fact-based decisions.
In general, economists need to understand that conventional management (batch-and-queue processing) is more closely associated with neo-classical supply-side economics while Lean management (flow) is aligned more closely with demand-driven Keynesian economics [7]. For example:
- How current state value stream maps depicting batch-and-queue processing represent expensive supply-side (neo-classical) economics on a micro-scale (supported by standard cost accounting, of course). Supply-side being higher cost due to increased labor and inventories, long supply lines (hence, long lead-times), etc.
- How future state value stream maps depicting flow represent demand-side (Keynesian) economics. Demand-driven being lower unit cost, higher quality, shorter lead-times, less inventory, etc., resulting in lower total costs as well.
- The practice of leveling and concept of balance in Lean, versus economists ready acceptance of cyclic boom-bust performance in micro- and macro-economies.
Economists also need to understand the mind of a Lean thinker. For example:
- Why a Lean thinker would quickly cut production when demand drops, whereas others would maintain production and cut prices instead.
- How they view practical problems such as resource allocation, using policy deployment, versus the traditional top-down budgeting process (or bottom up, which ends up becoming top down) used in conventional management [8].
- How businesses and people (stakeholders) are seen as valuable resources that must be developed and improved over time, versus the common view in conventional management that businesses and people (especially employees and suppliers) are disposable assets.
Economists who understand flow could answer some interesting questions such as:
- Economists view laissez-faire economic policy as efficient, even though many problems arise (often, the same problems again and again) that negate efficient economic performance. Is laissez-faire synonymous with batch-and-queue processing (complacent, producer-focused push production system) and its many problems (also, the same problems again and again), or are they fundamentally different? If so, how?
- Economists view regulation of industry (by self and especially by any external party) as always bad because it automatically increases costs [9]. However, a REAL Lean business is, in fact, a highly regulated environment, yet it has low costs. Therefore, how can most economists, as well as most bankers and other finance professionals, claim that regulations will always result in increased costs to business [10]?
Lean management can be seen as nothing more than progressive reform and new regulations applied to control and correct the intrinsic excesses of batch-and-queue material and information processing and the excesses of conventional management overall. Lean people accept this practical solution. Why don't economists?
Lean economists will also help clarify and correct people's understanding of economic "laws" and practices, in part by adding a healthy dose of reality. For example:
- A global economy free of subsidies, trade barriers, etc., allows countries to focus their resources on the goods and services that it can produce with the least labor cost. This is known as the law of comparative advantage, whose focus is labor productivity, not wages. Unfortunately, executives' focus on wages in recent decades has led to massive outsourcing of work to low wage countries. From a global economic perspective, manufacturing and service industries that disappear from one country and emerge in another country, for whatever reason, is seen as a very good outcome. A Lean economist would immediately recognize that the law of comparative advantage is based on a flawed, unrealistic assumption: that of stability. This economic law requires there to be geo-political stability, economic stability, stable supplies of raw materials, a world in which wars and natural disasters (as well as cheating) do not occur, and, most importantly, stable productivity. Stable productivity means that a company cannot significantly reduce its productive disadvantage. That made sense in the early 1800s when the law of comparative advantage was first described, more than seven decades before industrial engineering was invented and fifteen decades before Lean management existed as we know it today. The law of comparative advantage also assumes that production and trade will occur under all circumstances. Therefore, it is acceptable to lose entire industries under this logic. When that happens, however, government will be left with the possibility of having to re-create (i.e. bailout) the missing industry in order to re-establish domestic supply in an emergency - and surely at great cost [11]. Policymakers need to factor in reality to this and other economic "laws," for the good of the country.
As you can see, there is a pressing need to get economists to understand how the economics of Lean management (flow) is different than the economics of conventional (batch-and-queue) management [12]. The question is, how do we engage them? And how do we teach early-, mid-, and late-career economists, given that most of Lean management is learned and understood by doing, not by reading textbooks or academic papers, or by talking to Lean practitioners?
In closing, there is no one answer to how Lean can gain greater acceptance among senior managers. But they do listen to economists, if not immediately then over time. A group of influential Lean economists can greatly help our cause.
Notes
[1] Macroeconomics is widely assumed to be science when in fact it is a social science, and researchers are plagued by a tendency to seek information that confirms an ideology and discard information that contradicts an ideology. See "Is the Dismal Science Really a Science?," R. Roberts, The Wall Street Journal, 27 February 2010. In layman's terms, economics will become a science when men have three balls.
[2] The New Palgrave Dictionary of Economics Online does not have an entry for the word "flow" or the phrase "flow production." However, some economists are familiar with flow. In their 1959 book The Motor Industry (George Allen & Unwin Ltd., London, U.K.), economists George Maxcy and Aubrey Silberston briefly noted on pages 56-57 the many advantages of flow production over batch production, and cite Frank G. Woollard's 1954 book, Principles of Mass and Flow Production (Iliffe & Sons, Ltd., London, U.K.). However, Maxcy and Silberston's treatment of flow is superficial at best and was not later pursued as a unique field of enquiry.
[3] Many economists claim competitive markets are efficient, but we know that processing of goods and services by companies is usually batch-and-queue, which the Lean community knows to be inefficient. How then can competitive markets be efficient, not even accounting for the cheating that often occurs. Note: economists define "efficient" and "efficiency" in various ways, none of which seems to affect the basic idea I put forth.
[4] Recognize that a Lean business is, in fact, highly regulated, so the idea of little or no regulation of markets would be viewed by a Lean thinker as impractical. Also note that Lean management, practiced correctly (and often even incorrectly), delivers economic growth and prosperity, despite being a more highly regulated environment.
[5] See "Toyota's British Influence" in REAL LEAN: Strategies for Lean Management Success (Volume Five), pp. 9-22.
[6] For more on the field of behavioral economics, see https://en.wikipedia.org/wiki/Behavioral_economics.
[7] For a more complete description, see REAL LEAN: The Keys to Sustaining Lean Management (Volume Three), "Diving to the Bottom," pp. 49-73, and REAL LEAN: Strategies for Lean Management Success (Volume Five), "Making Deep Problems Visible," pp. 59-68.
[8] Ask yourself this question: How can markets allocate resources efficiently when anybody who has worked in a company knows that executives, who have lots of inside information, typically do not allocate resources efficiently? Across-the-board budget cuts are one example of where no thought is given by executives to allocate resources efficiently. Allocation of resources in batch-and-queue processing of goods and services is another example where, by definition, resources are allocated inefficiently. The answer lies partly in the fact that the market is as good, or no better than, the people in companies at the task of processing information. In other words, information is always altered or filtered to gain advantage in a market or in a company (e.g. organizational politics), which handicaps the efficient allocation of resources.
[9] Don't lose sight of the fact that economists tinker with the economy and essentially regulate it by creating ideas, many of which fail the test of reality, that influence economic policy. It seems that ideas do indeed regulate - even if they have not yet become official organizational or governmental policy.
[10] Interestingly, economists, bankers, etc., can calculate the cost of just about anything, yet they can only provide lots of scary stories of the bad outcomes that will result from new regulations. Obviously, they seek to preserve the status quo, and do so very effectively by ensuring that matters related to money remain mysterious to people outside of the profession.
[11] Even non-distressed industries receive periodic bailouts in the forms of corporate tax credits, capital equipment credits, R&D tax credits, tax credits for hiring people, etc. One of the flaws with this system of credits is the assumption that corporations will apply the credits towards productive uses, rather than enriching themselves or shareholders. One of the things we again learned from the 2008-2009 bailout of Wall Street financial companies is that management will use the money to satisfy its financial interests at the expense of others (e.g. small businesses, consumers, etc.). Another inconsistency to recognize is that executives who loath social welfare to help people in need are usually the first in line to ask elected officials for tax breaks.
[12] Particularly the neo-classical "Chicago school" of economists because their ideas, many of which are disconnected from reality, have been the most influential over the last 50 years.