Is Cost Reduction the Goal of TPS?

In a rebuttal to John Seddon‘s latest paper, An Exploration into the Failure of Lean,  Bob Emiliani asserts that the original purpose of TPS was to reduce cost. He quotes both Taiichi Ohno and Yasuhiro Monden saying so, and chides Seddon for not reading their works carefully enough. In the context of these documents, however, I think the quotes are misleading. Neither Ohno’s and Monden’s books, nor any other Japanese publication about manufacturing systems that I have seen, contain a discussion of what costs actually are.

“Cost” is assumed to be self-explanatory, as when we discuss the cost of a bottle of milk or a subway ticket. In manufacturing, with resources being shared over time among multiple uses, assigning a cost to any object, decision, or event, is anything but obvious, and is the object of spirited discussion in the world of cost accounting. You would reasonably expect the explanation of a system developed for the purpose of reducing costs to start with an explanation of what it means.

With TPS, it doesn’t. In Workplace Management, on p. 19, Ohno says “Costs do not exist to be calculated. Costs exist to be reduced.” On the face of it, it is like saying that, to lose weight, you don’t need to step on a scale. But there is no argument as to what weight is. In manufacturing, costs are whatever the accountants say they are, based on a model that takes into consideration some of the parameters of the activity, and applies rules for the depreciation of assets of time as well as their allocation among products. How well these models map to economic reality is a question that most managers don’t ask but that has been raised by academics like Robert Kaplan, and consultants like Eli Goldratt, Brian Maskell, or Orrie Fiume.

Right after saying that the purpose of the system is to reduce costs, Ohno and Monden treat the subject of costs like a can of worms that is best left unopened, and move on to topics like increasing productivity and improving quality, with the implication that it will drive costs down, regardless of what they  mean and how they are calculated. They certainly do not advocate any of the actions that, everywhere else, are understood under the label of “cost reduction,” such as cutting every department’s budget by 5%, reducing employee benefits, brow-beating suppliers into cutting prices, and outsourcing to cheap labor countries.

Whatever Ohno’s motivation may have been to declare cost reduction as the primary purpose of TPS, I don’t find it helpful in understanding the system or communicating about it. What, on the other hand, strikes me as essential is the notion that improvement consists in enhancing one or more dimensions of performance without making any other one worse, and that it is always possible. Increasing productivity does not mean cutting corners in quality, eliminating defects does not mean adding more inspectors, and order fulfillment lead times can be shortened without increasing inventory… It is the end of management whack-a-mole.

12 comments on “Is Cost Reduction the Goal of TPS?

  1. Hi Michel – RE: “Neither Ohno’s and Monden’s books, nor any other Japanese publication about manufacturing systems that I have seen, contain a discussion of what costs actually are.”

    I presume you are familiar with Monden’s books Cost Reduction Systems: Target Costing and Kaizen Costing (1995) and Cost Management New Manuf Age (1995). These provide good descriptions of what costs actually are – but only up to a point.

    You are correct, however: What is cost? Nakao-san challenges us with this question all the time because it is so expansive in how it can be understood and, in turn, the many ways it can be reduced (positive ways via process improvement, not negative cutting).

    I don’t agree with you that the quotes are misleading. Also, I have found cost and cost reduction to be very helpful in understanding the system and communicating about it. It forces me to think!

    • How is the following, as a definition of cost:

      “The cost of a decision or an event, to a given observer, is the schedule of differences between the funds outflows for this observer if the decision is implemented or the event happens, and the outflows for the same observer in a reference scenario to be determined.” (C. Riveline)

      It is a bit of a head-scratcher when you first hear it, but it makes sense when you apply it. For a production machine, for example, the reference scenario is not buying it. If you decide to buy it, you pay the price at time t=0, then you have a schedule of outflows for operating and maintaining it, and, at the end, there is what you get back from disposing of it.

      This schedule of differences is your total cost of ownership, and it’s a schedule, not a number. You can reduce it to a number in a variety of ways, but the schedule itself remains the objective basis.

      In manufacturing, you don’t have unit costs, because your decision is not to make one unit, but, for example, a flow of 20,000 units/month for the next four years, for which you can generate a schedule, including equipment you may have to buy, people, materials, etc.

      An earthquake is an event to which you may apply the same reasoning. Its cost is what you have to pay over time to regain what you lost because of it.

      I don’t have Monden’s complete works, but I have his discussion of target and kaizen costing in Toyota Management System. I don’t see anything in it that goes beyond the traditional unit cost thinking, in which it makes no difference whether you are making 200 or 20,000 units/month.

  2. I think Lean has made a mistake by not rallying under Deming’s System of Profound Knowledge. It provides a coherent framework on which to attach, interpret, and test all the disjointed tools and philosophies falling under that lean title. As the article hints at even the more through formulations of the TPS lack the coherent philosophical pinning’s of Deming’s system.

    • In Deming’s The New Economics, Chapter 4 is devoted to “A System of Profound Knowledge,” comprised of the following four parts:

      1. Appreciation for a System
      2. Knowledge about variation
      3. Theory of knowledge
      4. Psychology

      While I greatly value Deming’s many contributions, I find his writings often confusing because of the way he labels them. Out of the Crisis is a good title, but the book contains no reference to a crisis. “The New Economics” contains no economic theory, and I don’t see how the four parts of his “System of Profound Knowledge,” valuable though they may be, add up to something I would want to call by that name.

      So it makes me wonder how, specifically, you would present TPS in terms of Deming’s ideas.

      • I do agree that Deming’s work can be difficult to digest through his first hand books. I’ve gained much more thorough understanding of his teaching as synthesized by others like Henry Neave in The Deming Dimension. I don’t have Out of the Crisis in front of me to point to a thesis statement, but I believe the crisis being referred to is/was the traditional western system pioneered by the likes of Sloan and the Whiz Kids who sought to run business solely on the basis of balance sheets.

        I’d start by outlining the System of Profound Knowledge as a set of guiding principles, and then start discussing the mechanics of the TPS in that context. For example, value stream mapping is a means to help us keep a system focus. PDSA based improvement methodologies like Kata and A3 thinking ensure our organizations are leaning in a sustainable way, (Theory of Knowledge). The concept of respect for people is ingrained in Deming’s teaching on psychology. I.e., focus on intrinsic motivation, remove barriers to pride in workmanship, etc.

        I need to think more on how I’d present mechanics like JIT and Jidoka, but I’d probably focus on their ability to improve customer satisfaction (system) and identify improvement opportunities (knowledge).

        Thanks for calling me out on this. Looks like I’ve got some more thinking to do.

      • There is more to Sloan than using balance sheets. For decades, the management practices he put in place at GM were studied as a model. Nobody looks up to GM now, but everybody did in the 1950s, when it was the largest, most successful manufacturing company in the world.

        The tools you list are from Lean, not TPS. Value Stream Mapping, known in Toyota as Materials and Information Flow Analysis, is not fundamental. It’s only used as needed, with suppliers. Kata is a term borrowed by Mike Rother from martial arts to designate generic improvement patterns. It actually diverges from martial arts usage, where a kata is a sequence of specific moves in a simulated fight against multiple opponents.

        TPS contains many other tools, like cells, SMED, Kanban, Just-in-Sequence, Heijunka, Andon, Yokoten, supermarkets, kitting techniques, work-combination charts, Yamazumi charts, TVAL,… They are worth studying, learning, and experimenting with. Then you can figure out where they fit within a set of guiding principles.

  3. Thanks a lot Michel bringing the topic up about “cost”, and its meaning in order to understand and successfully apply TPS in the workplace, and the organization at large.

    Generally speaking any production consumes other material, services, resources in general. All this is evaluated by “cost” measured in terms of a currency, either $, €, £ or other.

    And to add on that, the general cultural understanding/meaning of “cost” is each input into a product or service that has a value in terms of money.

    Taking this as the basis for the mentioned cost reduction for TPS, means that we would focus on the “cost” that is represented in money terms. Salary, credit/loan payments, raw material, logistics, etc. would fall into that.

    Extending “cost” into the field that is seldom measured, found on a balance sheet such as search effort, manual effort to bring data from paper into computer (of course there is cost seen here, the labor cost that is paid the employee), or the meetings of the c-level/mid-level execs (with unclear outcomes to the benefit of the organization, the combined time spent at the meeting at least not measured in money terms), social networks that let the organization (or not).

    Taken these latter areas of “cost” into account it makes totally sense to speak of “cost reducing” by the mentioned authors, and I would say even in the TPS sense by Toyota itself.

    Isn’t the aim of TPS to get rid of “waste” (muda, muri, mura) and in this sense reduce “cost” in the most general way?

  4. @Ralf — I am not sure I get your meaning correctly, but what I read in your comment is that you consider cost to be any consumption of resources. But “cost” always designates a metric of consumption, not the consumption itself. A 1-hour meeting of 10 managers consumes 10 manager-hours. You can find metrics for every resource you use, but how do you add 10 manager-hours and 3 tons of steel? The only way we know is by translating all these metrics into money, and this is what costing is about.

    The problem, of course, is that there are many ways of assigning costs, particularly when resources are used over time and shared among multiple uses. I have in front of me a 650-page textbook entitled Management Accounting, complete with review questions and exercises for each chapter, by leading academics, and this is the closest they come to explaining what they mean by cost:

    Cost: Efficiency to the provider of a product; that is, using minimum resources to achieve objectives, and price paid to the purchaser of a product,” (p. 49)

    Later, they have a circular definition for efficiency as “A measure of an organization’s ability to control costs” (p.513) . “Using minimum resources to achieve objectives” is a goal, not a statement explaining what cost is. As to “price paid to the purchaser of a product,” I always assumed that the purchaser was the one paying. Clear-headed thinking in this area is hard to come by, which is why I value Riveline’s work.

    To get back to TPS, regardless of which accounting theory you go by, “cost” is a concept in the language of money, which is not spoken on a manufacturing shop floor. You have to express yourself in the language of things, which includes materials, machines, times, etc. with non-financial metrics for productivity, quality, lead times, safety, and morale. And that is exactly what is done in the Japanese literature on manufacturing. After one abstract sentence about “cost reduction,” you switch to the language of things.

  5. Hi Michel this is a very interesting topic . As you mentioned we need to convert the waste reduction [ 7 Mudas] in to the language of things in financial terms . This is the challenging as many times we find difficult to assign cost under which header.Sometimes the resource is shared among the functions.

    TPS focus on the efficient way to produce and sell and collect the cash from customer with minimum resource [ Cost ] but at the same time other objective of TPS is sustainable profit . Using this efficiency i.e the production strength we need to maximize the sales and increase the sales price by adding value or price position for which the customer is ready to pay . This I would like to quote from the same book Workplace management by Ohno san on page 32:

    “Because there is commonly accepted belief that mass production is cheaper and conversely we accept that low volume products must be expensive we can sell these products at a higher price. This can be extremely profitable so as long as the world believes that high mix low volume products are more expensive, you might as well consider another type of cost reduction and make as much money as you can. If you just use your head , there may be quite a few ways to make money as long as there are all these misconceptions in the world that have turned in to common sense.”

    So I feel the Goal of TPS is a sustainable profit model that can be achieved by cost reduction , increased sales and increased sales price by adding value that can customer can pay.

  6. Lean thinking was extracted from the Toyota Production system. Unfortunately during the process it lost some of the original simplicity and two key features. —
    The main performance goals for TPS are to give the customer;
    What they want. (The best P, S, and E available in your industry. Product, service and experience). —
    In the quantity they want, without defects. (Any multiple of one. One piece flow facilitates this capability. Jidoka and Poka- yoke will ensure zero defects). –
    Delivered when they want it. (Just in time to suit their needs. Takt time is the driver). —
    These values must also be improving faster then those of any existing or future competitor. —
    There are three main activity goal areas in TPS to achieve this. They are called the 3 R’s. Only the first one is used as a central theme in Lean Thinking.
    The first ‘R’ is Resources.
    The goal in this area is to achieve the three performance goals using the minimum ‘Resources’ (i.e. materials – machinery – methods – movement – minutes – manpower – money). Anything above the minimum resources required to produce the product, service and experience that will delight the customer is defined as waste, and is a target for removal. This is one the main areas of focus for TPS and lean activities – Waste elimination. What cannot be removed should then be seen as a target to be continuously improved. The first rule in this area is; remove it before you try to improve it—

    The second ‘R’ has been largely missed by the lean movement. This is Resourcefulness.
    The goal in this area is to release the ‘Resourcefulness’ (talent, creativity and enthusiasm) of all our people to achieve the first three goals. This ability must also drive the waste elimination and continuous improvement process throughout your organisation and down through your supply chain. A key rule in this area is; sustain the gains, maintain the change.
    The third ‘R’ is ‘Respect’. From my own experience we must see ‘RESPECT’ as the password that gives access to the file that contains our people’s total ability (talent, creativity and enthusiasm). Without the correct code, access will not be possible. This is one of the key bonding elements between managers and their people. This style can be called TLC, Tender Loving Care. Too many managers show TDC for their people, Thinly Disguised contempt. The key rule in this area is; Star managers make their people shine. —
    One of the most enlightening comments I have heard on the ‘Toyota Respect for people’ subject came from a manager at their Burnaston plant. He explained that; “The respect we have for our people means that we must FILL their days with valuable work”. . Respect should not be seen as a ‘soft-side’ subject. A lot is given and a lot is expected in return. —
    Anyone who understands TPS will tell you the second and third R’s are central to its success. They are missing from too many lean programmes and are the reason for many of their failures.
    When you apply this thinking not only to your external and internal customer contact areas, but also down your supply chain, you will start to understand where and how Toyota’s amazing performance and competitive advantage are created. —

    Two quotations to clarify and confirm our thinking. — “Of course what is important is not the system, but the creativity of human beings”. Taiichi Ohno. —
    When trying to understand lean and TPS, or anything else, we should always remember Pavlov’s words. “Don’t be a collector of facts. Try to penetrate to the secrets of their occurrence, persistently search for the laws that govern them”. –

  7. We must remove Dr Deming from our debates about the origins of TPS. In his book ‘Out of Crisis’ he states, “Kanban and JIT follow as a natural results of statistical control of quality, which in turn means statistical control of speed of production.” This knowledge is not only not ‘profound’, it is wrong. I studied with Dr Deming, and agree with Michel that he made some significant contributions. ‘Out of Crisis’ was a wake call for many of us.

  8. I believe “lean” is more about growth than it is about “cost reduction”.

    I re-read a special addition of Workplace Management a few months ago and Ohno certainly had strong feelings about how people define cost and the accounting community in particular. He uses batch sizes quite often to illustrate “the problem with the math” and it kicks off from page 18 onwards.

    Regarding batch sizing, in the all manufacturing businesses I have been involved with the material cost was the greatest total cost incurred. So if we look at the total cost of a batch then the bigger it gets the more expensive it becomes. It cost more to make 100 than 25 in total cost terms.

    For me it is “unit cost” thinking which leads to poor thinking and local efficiencies in place of global understanding of impact

    If we apply the same thinking at a business level and acknowledge profit is equal to total revenues less total costs then we can say for sure that between 2004 and 2015 Toyota’s costs have gone up every year on year. The exceptions were during the recessionary years of 2009 and 2010 which I believe coincided with their quality glitch.

    Of course in each of these years cost increase years Toyota made very decent profits because their revenue increases exceeded their cost increases.

    Which makes me tend to agree with John Seddon and Brendan O’Donovan that Toyota is amazing but growth over cost reduction is the primary motivator.

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