When improving operations, the only distinction of practical relevance is between necessary and unnecessary activities (See Occam’s Razor… and Whack-a-Mole). It really doesn’t matter whether they physically transform a product or whether a hypothetical customer would be willing to pay for them; the only thing that matters is whether they are needed to get the job done. Eliminating the unnecessary means getting the right things done, or being effective. The step after that is getting these things done right, or being efficient.
The American literature on Lean is centered on Value Added — defined as “what the customer is willing to pay for.” As I indicated, this is not the case for the Japanese literature or even the American literature on the Toyota Production System (TPS). I listed some examples from my personal library in Occam’s Razor…, and would like here to give more specifics.
1. “Value Added” in the TPS Literature
The following books on TPS — ranging in vintage from 1977 to 2009 — contain no reference that I could find to value added:
- Fundamental Principles of Lean Manufacturing, Shigeo Shingo (1977). The English title contains “Lean Manufacturing,” a term that wasn’t coined until a decade after this book came out. Shingo’s title translates to “Original intent of plant improvement” (工場改善の原点的志向).
- Zero Inventories, Robert W. Hall (1983). This was the first book in English to cover the technical content of TPS. ‘Doc’ Hall is an American academic, who researched Japanese sources. He is still active today in the AME, and was inducted in the Manufacturing Hall of Fame in 2012.
- Kanban, Just-In-Time at Toyota, JMA (トヨタの現場管理：カンバン方式の正しい進め方, 1985). This is based on training materials from one of the oldest manufacturing consulting firms in Japan.
- The Evolution of a Manufacturing System at Toyota, Takahiro Fujimoto (1999). Fujimoto is an academic who studied the emergence of TPS in the history of Toyota and, in the process, explains many details of its development in the 1990s.
- The heart of introducing TPS (トヨタ生産方式導入の奥義）Mikiharu Aoki (2009). The author left Toyota in 2004 after 26 years to become a consultant. He is still in his fifties, and what he describes is not your grandfather’s TPS. Still, there is not a word about value added.
There are mentions of value added in a few books on TPS, but they are brief and no connection is made with customers’ willingness to pay. In these books, what is called “value added” is what physically transforms the product, a definition that, incidentally, has its own problems. Following are the books I have on TPS that contain a fleeting mention of value added:
- Toyota Production System, Taiichi Ohno (トヨタ生産方式, 1978). “Value Added” is discussed on pp. 57-58, and that’s it: two pages out of a 132-page book. The English translation includes the following diagram, which does not quite match the Japanese original:
The original, Japanese diagram was as follows, with my own annotations in red:
There are differences in both style and content:
- The “Value-added work” caption in the translation does not make sense in its context and does not match the original, which is just one word, “sagyo” (作業) which just means work or operation.
- The bullet lists in the translation do not match the starred captions in the original, which only contain the first two items. I don’t know why the translator added items to each list.
- The original figure is in the style of a comic strip, which is almost standard for the Japanese literature on manufacturing. It is not intended to impress readers of the Harvard Business Review, but to communicate with people who read manga while riding trains to work.
One vital feature of this discussion is that it is exclusively about the breakdown of operator movements. It is not about materials handlers, managers or any kind of support groups, whose work is branded as intrinsically “non-value added” by managers who have read the US Lean literature.
Why this narrow focus on production operators? Most organizations have a subgroup of members who fill its purpose while all others support them. In a hospital, it is the surgeons; in aviation, the pilots; in the military, the shooters; in car racing, the drivers. In a manufacturing company, it’s the production operators. And their time is particularly precious because they work in sequence, so that, if you delay any one of them, you delay the entire production line. This is not true of the support staff, who work mostly in parallel.
Even in the restricted sense that he uses, if Ohno had felt that this was an important concept for TPS, he certainly would have used it elsewhere in his book. But he didn’t.
- Toyota Production System, Yasuhiro Monden, 2nd Edition (1993). Monden is a professor of production management at Tsukuba University, who has been granted extensive access by Toyota. Value Added appears once, on p. 179 of this 423-page book, where he repeats what Ohno had written.
- 25 keywords of the Nissan Production Way (実践日産生産方式ｷｰﾜｰﾄ25, 2005). This book is about Nissan, not Toyota. Keywords 11-15, on pp. 62-83 are about “the pursuit of Value Added production” (付加価値生産)。 “Value-added tasks,” however, are simply defined as the ones that physically modify the product.
- The Birth of Lean, Koichi Shimokawa and Takahiro Fujimoto (Ed.) (2009). There is one instance of “value added” on p. 52.
- The Toyota Way, Jeffrey Liker (2003). On p. 27, it says “The first question in TPS is always ‘What does the customer want from this process?’ (Both the internal customer at the next steps in the production line and the final, external customer.) This defines value. Through the customer’s eyes, you can observe a process and separate the value-added steps from the non-value-added steps.”
Since “internal customers” are really downstream operations that don’t pay, the willingness-to-pay criterion is not applicable, which explains why Liker changes it to what the customer “wants from the process,” and it may not be a physical transformation. For example, what car assembly wants from painting inspection is the assurance that the bodies started on the final assembly line are free of paint defects.
Later, on p. 89, the concept migrates to an engineering office. Finally, on p. 280, value-added work is “the actual transformation process core to the service that the customer is paying for.” So the willingness to pay that was excluded on p. 27 is back in, and so is the physical transformation, apparently mashing together the US Lean and Japanese TPS versions of value added. Again, this concept is only referenced in three of the book’s 330 pages, which strongly suggests that it is not important. Toyota is just not that into it.
2. Value Added in Lean
In light of this, why have American Lean authors focused on value-added? They zoomed in on a minor detail, changed the meaning from physical transformation to willingness to pay, and made it the foundation of Lean.
My personal guess is that they felt it necessary to attract decision makers under the influence of business schools and uncomfortable with TPS plain talk. If we need to intellectualize the notion of waste elimination, however, we can do it in other ways, for example by stating as principle that a factory in never Pareto-optimal, meaning that it can always be improved.
In fact, it is fortunate that the concept of value added plays such a negligible role in TPS, because, as discussed in More Musings on Muda, its definition in terms of physical transformation doesn’t withstand scrutiny much better than that in terms of willingness to pay. In particular, it is not applicable to anyone who does useful work that does not physically change a product.
In addition, in both senses, “value-added” is an attribute that an activities possesses or lacks. In economics or game theory, value added is a quantity of money.
In economics, the value added of a business is the difference between sales and external inputs, where the external inputs are materials, energy, and outsourced services. In other words:
This is the basis for Value-Added Taxes (VAT) in countries that charge them and. Aggregate it over an entire country, and you get its Gross Domestic Product (GDP).
Out of this Value Added, companies have to pay for people, facilities and equipment, and taxes. I have found this concept useful in several contexts. For example, a plant’s value added per employee is a better measure of productivity than sales per employee, because you can’t game it by outsourcing.
I have also found it useful to compare a company’s value added per employee with industry averages that you can retrieve from sources like the US Bureau of Labor Statistics or the Economic Census. But it is clearly not applicable to one production operator at one work station.
In game theory, the value added of a player is the amount by which his presence increases the size of the pot. A player who joins a poker table puts more chips in play. A company that sells software to run on a given hardware platform increases the value of this platform, while a competitor providing alternative hardware to run the same software reduces it. As explained in Brandenburger and Nalebuff’s Co-opetition, it is a useful concept in business strategy, but also irrelevant at the level of an individual work station.
Yet another use of the term is found in corporate finance, where the Economic Value Added (EVA) is the difference between a company’s net, after-tax profits and its cost of capital. The idea is that, unless a company has a positive EVA, its investors would be better off putting their money elsewhere.
None of these uses is applicable to a work station on the shop floor of a manufacturing plant, and there is no way any of them is connected to the notion of willingness to pay.
Focusing on what customers are willing to pay for is a direction that might be given to Marketing. Top management must of course be concerned with customers, but also with suppliers, employees, the local community, the environment, local and national governments, not to mention creditors and investors.
Because TPS is a system that was developed by an actual company with all these stakeholders and more, it encompasses approaches to supply chain management, human resources, corporate social responsibility, and finance. In this context, the notion that only activities add value only if customers are willing to pay for them is not helpful and is inconsistent with the more general usage of “value added” as a technical term.