Management

Occam chooses a razor

Feb 2 2012

Occam’s Razor, Value Added, and Waste

The manufacturing people I know are not fond of theories. They prefer to be on a shop floor with oil mist in the air and machines banging away, observing and acting on the actual situation, than in a conference room, drawing boxes and arrows on a white board, calling it a system and arguing about it. Theories, however, are not a luxury. We need them to structure, organize and focus our thinking about the reality we perceive. Pascal Dennis calls them mental models, and, as Georges Matheron used to say, nothing is as practical as a good theory. A good theory is sophisticated enough to solve real problems, yet simple enough for people  to understand and apply. This is a tall order. To fulfill it, you must not only be inclined to abstract thinking, but you must also have the time to do it, and the ability to communicate.

And there are theories on how to make theories, such as Occam’s Razor, which says that,  among competing theories, you should use the simplest until you have evidence to prove it false. Scientists, engineers, medical doctors, and cops do this all the time. If you make a theory more complicated than it needs to be for its purpose, you make it more difficult to confirm or refute, apply, and teach. About Lean, Occam’s Razor says that we should not have more hypotheses or concepts than strictly needed, as they would be unnecessary, or  muda. If we had a list of seven categories of waste for building theories, Occam’s Razor might provide the first: Unnecessary complexity.

When you read Jim Womack’s theory of Lean, as expressed in Lean Thinking and replicated in much of the American and European literature, you find that it is based on a concept of value-added (VA) that is more complex than the concept of waste (muda) used in the Japanese literature. Jim Womack’s VA is defined as what “the customer is willing to pay for.” I found no reference to this notion either in the works of pioneers like Taiichi Ohno and Shigeo Shingo, or academic observers like Yasuhiro Monden or Takahiro Fujimoto, whose works are available in English. Even a recent author like Mikiharu Aoki, whose 2009 book on the heart of introducing TPS is only available in Japanese, manages to explain the entire system without this notion. It is also absent from Jeffrey Liker’s Toyota Way. You do find occasional references to “value-adding work” in the Japanese literature, but always to designate activities that physically change materials, which is not the same as Womack’s VA. If they don’t need this concept, do we?  or is it a violation of Occam’s Razor?

The confusion about VA is reflected in the large amount of questions and requests for clarification that every mention of it generates in discussion groups. VA sounds deep, and everybody wants to make sure they understand what it is,  how to recognize it, and how to separate activities among “Value-added,”  “Non-value added but necessary” and “Unnecessary.” In particular, the distinction between “Value-added”  and “Non-value added but necessary” would be useful if there were differences in the actions taken about these two categories of activity. Let us take two examples:

  1. Fastening two parts with a screw is usually put in the “Value-added” column. About this kind of operation, first you make sure it is effective, meaning that you use the right screw on the right parts, thread it truly, and apply the right torque. Then you work on making it efficient, so that, for example, no operator has to walk six feet back and forth to pick one screw or fetch a screwdriver.
  2. Revision control on process specs usually goes into the “Non-value-added but necessary” category. A customer would not be thrilled to pay for it, but the plant could not operate without it. First, you want to make sure it is effective, so that the right instructions are posted at each workstation and the right programs downloaded to machine controllers. Then you want to make it efficient, so that engineering changes are either rejected or approved and implemented promptly, without using an army of people to do it.

The two F’s, Effectiveness and Efficiency, are what you pursue in both cases, in the same order. Several people have tried to explain to me how fundamentally different these cases were, but I still don’t see it. I really don’t care how different the activities may be from a philosophical standpoint. All I am interested in is what you do about them, and if the actions are the same, I see no point in having two categories. One argument I heard is that you do “non-value added but necessary” activities only because you have not yet found a way to eliminate them. But the same is true value-added activities. The fastening operation could be automated, the screw replaced by a rivet, or the parts could be welded together, or the entire assembly could become a single molded part… Just because the operation is “value-added” doesn’t mean you are not trying to eliminate it.

Using just two categories — what you need to do and what you don’t — is not only simpler but these two categories are also easier to tell apart. As we all know, customers’ willingness to pay is only proven by actual payments, and therefore cannot be clearly established for a fastening operation halfway through an assembly line. On the other hand, an operation is unnecessary if and only if its elimination would not degrade performance in any way, and we have Ohno’s list of waste categories to help us locate them. If we eliminate any kind of waiting, for example, we know that we will improve quality, reduce costs,  accelerate delivery, without jeopardizing safety or hurting morale. We don’t need to look anywhere outside the workstation to establish this.

Womack’s VA/NVA analysis bestows the “value-added” label on a small number of activities while branding everything else as “non-value-added.” By contrast, Ohno’s list of waste categories is finite. and everything that is not explicitly identified as waste is accepted as necessary. Whenever this kind of classification is made, it is only valid under current conditions.

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Clearing the bar

Jan 27 2012

Improvement project financials – the hurdles

From a discussion in the PEX Network & IQPC – Lean Six Sigma & Process Excellence for… on LinkedIn:

Angelo Fraschilla • I work for an aerospace corporation with 18,000 employees worldwide.
We need a 3 year ROI or better to get a project approved.

Answer: You seem to be using the term ROI for payback period or breakeven time. This is a common indicator for investments but often considered insufficient because the purpose of the investment is not just to get your money back but to make a profit on it. That is why project evaluations often also include the Internal Rate of Return (Excel function IRR).

If the cash outflows of your project were loans and the inflows reimbursements, the IRR would be the interest rate of that loan. The IRR is based on the entire life of the project, not just how long it takes to break even.

Looking at both the payback period or breakeven time and the IRR makes sense. You wouldn’t want to do the project if it took 15 years to break even, even if the IRR were 50% because management is not that patient and because the numbers 15 years into the future are iffy. On the other hand, if the IRR is 0%, the project is financially pointless even if you recover you money in 6 months.

John Macdonald • Michel
Is that the same as NPV?
John

Answer: Not quite. NPV, or Net Present Value, is the value today of a schedule of future cash flows. To calculate it, you have to assume a Discount Rate, the ratio by which a dollar a year from now is worth less to you than a dollar today, in the absence of inflation. The NPV is a sum of money, not a ratio.

The IRR, or Internal Rate of Return, is the discount rate for which the NPV of a schedule of cash flow is zero. If you lend money at a given interest rate, and use that interest rate as discount rate, the Net Present Value of the borrower’s payments over time will match exactly the amount of the loan, and the interest rate will equal the IRR.

That is why I was saying that the IRR compares your investment with a loan, and, if the outgoing and incoming cash flows of your investment were loans made and repaid, the IRR would be the interest rate. The IRR is not a trivial calculation manually, but no problem with the Excel IRR function. Pocket calculators with financial functions usually do it as well.

Many companies have hurdle rates on both payback period and IRR, and MBAs are trained to use it. Once you get the hang of it, the logic of the IRR is compelling. Its weak point is that it depends on predictions of cash flows far in the future, and this brilliant logic is applied to fuzzy numbers. That is why you complement it with a metric that has a short-term focus.

If you need to learn about this, I recommend Chapter 6 in Eric A. Helfert’s Techniques of Financial Analysis. It provides clear explanations for professionals who are NOT specialists in finance.

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Lean versus Toyota

Jan 24 2012

Lean versus the Toyota Production System

Is there a difference between Lean and the Toyota Production System (TPS)? This is a recurring question. The short answer is yes, but, when you look deeper, it is an issue of packaging as well as of substance.

If you are working in a car company, you cannot openly say that you are using Toyota‘s production system. How could you borrow such things from a competitor, especially if you have been in the business 50 years longer? It is embarrassing to employees, and a weak marketing message. So, regardless of how much you actually use from TPS, you must call it your own “Production Way” or “Operating System,” or…

It is even worse if you are not in car manufacturing. If you maintain aircraft for an airline, applying tools from car production will not appear to make any sense. And, likewise, patients in a hospital may not take kindly to the idea that they are treated like cars on an assembly line.
Company-specific names serve a purpose, but we also need a generic name around which to organize literature, public training, professional conferences, blogs, etc. Several were tried in the early 1980s, such as Just-In-Time, Demand Flow Technology, or World Class Manufacturing, but John Krafcik’s Lean Production, introduced in the late 1980s by the book The Machine that Changed the World, swept all aside and, to my astonishment, is still current after more than 20 years.

A generic name like Lean clearly has many practical advantages over TPS. This being said, the minute Lean branched out from Toyota, divergence was to be expected. Major tools of Lean, like Value-Stream Mapping or Kaizen Events are either minor or non-existent in TPS, while the jidoka column of TPS is largely ignored or misunderstood in Lean. See Art Smalley’s presentation at the 2006 Shingo Prize conference, or Working with Machines. The combination of Lean with Six Sigma is also popular in the US, even though Toyota evaluated and passed on Six Sigma.

The umbilical cord, however, was never broken, and the promoters of Lean still use Toyota as a reference. Clearly, nobody would be interested in Lean if it weren’t backed up by the Toyota story, and this raises the question of how far Lean can drift from TPS and still retain this vital link.

The following two comments in the Leadership and Lean The Top 5% discussion group on LinkedIn, highlight the issues. This is what Allison Corabatir has to say, based on her experience at Magna:

There is a lot in a name…. When one says they are implementing TPS, it usually means they are taking a cookie cutter approach and assuming what worked well for Toyota would work well for them too. Obviously, there is no denying that their tools are great and we should learn from Toyota, but in reality, some of the tools need to be tailored to the culture and operation of the company we are working for. […] some tools like VSM does not get enough attention with TPS ( I am a big fan of VSM) and some approaches are totally missing (We put a lot of importance to employee recognisition and rewards). I prefer using the term “lean” and making the system our own.

Who would argue with that?  Anna Johnson,  on the other hand, describes a very different experience:

My experience with TPS has been that there is a greater emphasis on retention, and lowering of costs through collaboration and teamwork and attrition, whereas while lean equally emphasizes cost cutting, headcount reduction seems more acceptable through RIFs…

When Anna says that Lean “emphasizes cost cutting, headcount reduction,” she describes a 180-degrees turn away from TPS. This version of “Lean” isn’t just a watering down but a betrayal. It is taking the approach with which financial managers have hurt US Manufacturing from the 50s to the 70s, and calling it Lean to mislead audiences into believing that it is Toyota’s approach.

Anybody can slap the Lean label on anything, and it is only a matter of time until this free-for-all makes it worthless. It results in implementations that are best described as L.A.M.E. (Lean As Mistakenly Excecuted) or L.I.N.O (Lean In Name Only). To avoid this, you have to start from the underlying principles of TPS and deploy them in an context-appropriate fashion, but it is easier said than done, because Toyota didn’t do a great job of articulating these principles and we have to reverse-engineer them from TPS.

Lists of principles can be long, abstract, vague and toothless like the UN’s Universal Declaration of Human Rights, or short, specific, and actionable, like the US Bill of Rights. In The Toyota Way, Jeffrey Liker spells out specific and actionable principles, but there are 14 of them, which is too many to remember. The Lean Enterprise Institute has 5 principles,  easier to remember but focused exclusively on the flow of materials. They say nothing, for example about human resources. You could claim to follow these principles while practicing yo-yo staffing, hiring massively in boom times and laying off in recessions.

The HBR article on Lean Knowledge Work summarizes Lean principles as follows:

  1. Relentless attention to detail
  2. Commitment to data-driven experimentation
  3. Charging workers with the ongoing task of increasing efficiency and eliminating waste in their jobs.
This is short and specific, and covers ground that the LEI list omits, but it includes no mention of flow.
Following is my own, manufacturing-centric list:
  1. Focus on people are the main driver of performance.
  2. Look for profits in the details of shop floor operations.
  3. All manufacturing is repetitive at some level, even where it doesn’t appear to be.
  4. Make materials, information, and people flow.
  5. Make it easy to do what you do often.
  6. Improve, don’t optimize. Optimization comes to a full stop; improvements never end.

There are good reasons to use the word Lean rather than TPS to designate what we do. Lean evolves in many different directions as it inspires people in different industries to pursue improvement in ways that work in their context, and it is healthy that they should do so. But there will always be bandwagon jumpers just using the label to sell products or services.

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Wealth of nations board game

Jan 17 2012

Manufacturing and Wealth

When you are engaged in an activity, it is easy to endow it in your mind with qualities an outsider would not see. Manufacturing produces tangible, physical goods, things that you can see, touch, use, and express your social status with. It is a necessary sector of the world economy and, as manufacturing professionals, we have the privilege of working in it. But we have no grounds to claim that it is the only true way to create wealth.

What is wealth, anyway? To accountants, it is the difference between the totals of what you own and what you owe, synonymous  with net worth;  it is expressed in money and easily quantified. To others, it is how long you could survive if all your sources of income dried up, and expressed in time, however it might be measured. To others yet, it is related to human relations and happiness.

In none of these meanings does it make sense to assert that  the production of material goods is the only source of wealth. This leaves out movie making, health care, tourism, or software development, just to name a few activities that generate wealth for many. As much as I personally like manufacturing, reality is that converting materials into products is only one of many ways of getting other people to pay. Making things is necessary, and somebody needs to do it. But immaterial goods or services are equally valuable creations, that can be exchanged for material goods.

18th century physiocrats thought that agriculture was the only true wealth creation. They were deluded because agriculture was the dominant sector of the economy of their day. Just because manufacturing was dominant for, say, 150 years doesn’t mean that sector has special virtues. In advanced economies, I see it headed in the same direction as agriculture : a vital and important sector, but employing a small, highly skilled fraction of the work force. It has been moving slowly and steadily in this direction since 1960, and I don’t think it can be reversed, no matter what politicians may say.

On the other hand, the human and social consequences can be anticipated. A production operator with 15 years of experience on the same machine is vulnerable; a multi-skilled machinist is much more likely to be retained and to find a rewarding alternative job if necessary. Schools can train young people wishing to make a career in manufacturing to meet the rising requirements.

Like agriculture, manufacturing matters because we need the goods, not because it provides jobs. Whether we make the goods or buy them is a decision that should not be based on direct labor cost alone but instead on all the relevant issues, including engineering, quality,  logistics, intellectual property, the skills base, customer communications, public relations, taxes, etc.

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Lean certificate

Jan 11 2012

Certification, shmertification!

Several of the comments on Six Sigma R.I.P.   touched on certification. With the belt system, this issue is of course central to Six Sigma, and, with Six Sigma on the Lean bandwagon, is merging with that of Lean certification, as evidenced in plant Lean champions who introduce themselves as Black Belts.

In his comment, R. Kester said the following:

Certification is the accepted way to communicate to others that you have successfully studied and can apply the concepts and tools of your profession (CPA, MD, RN, PE, etc.).

It is true that you want a Certified Public Accountant to help with your taxes, and that, if you go to a clinic, you don’t want anyone to mess with your health who doesn’t have the proper credentials posted on the wall. On the other hand, if you buy a painting, you usually don’t care whether the artist learned the craft in a school of fine arts or by spraying city walls: the paintings tell you all you need to know. There are also fields where certification exists but is not necessarily sought by all. For example, many university engineering departments seek ABET (Accreditation Board for Engineering and Technology) certification, but some don’t, such as Electrical Engineering at MIT, UC Berkeley, or Stanford. Their own brands are more prestigious and better known than ABET.

In the continuum of certifiable human activities, where does Lean sit between MDs and CPAs on one side and artists on the other? Lean experts sell their services to businesses, not consumers, and the primary use of certification is as a job applicant filter. To a recruiter with no personal knowledge of Lean and 100 resumes to review, the absence of a Lean certification is quick way to dispose of 80%. But what guarantee does the Lean certification give  that the surviving 20% are the best candidates?

For a certification process to achieve this result, there has to be a consensus on a body of knowledge (BOK) and on institutions qualified to certify proficiency in its application. Having doubled life expectancy in 200 years, modern medicine is a credible BOK. We know its theories are sound because they prevent, cure or control many diseases. Tax law is different, in that it is a set of rules defined by people for people to follow, like the rules of poker.  Outside of a specific human society, there is no corresponding physical reality. The difference between the two was dramatized in the library scene in  The Day After Tomorrow: the coming of a new ice age had made the tax code fit for burning, but medicine had retained its relevance, as seen when the heroes used a medical book to save one their own (See Figure 1.).

Figure 1. Burning the tax code to survive in a new ice age

In that it affects the physical reality of factories, Lean is more like medicine than tax law. However, besides the absence of consensus on a  BOK, Lean manufacturing differs from medicine is in the role of institutions, and academia in particular. Most medical discoveries are made in university medical schools; nearly all breakthroughs in manufacturing, on the other hand, have been made by self-taught practitioners in factories, with no academic affiliation. I am thinking of high school graduates like Taiichi Ohno, Frank Gilbreth, Charles Sorensen, or Frederick Taylor. Whatever consensus eventually emerges on a Lean BOK, it will not have come from universities. This leaves professional societies and for-profit training companies, and no answer to the question of who certifies the certifiers.

By requiring certifications, company recruiters are making them valuable to applicants, and are generating business both for genuine training organizations and for diploma mills. However, what these recruiters are not doing is their job, because  the next Taiichi Ohno won’t make it past their initial review.

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Jan 7 2012

Why people don’t learn Lean Management — Question from Nicolas Stampf on LinkedIn

You might as well ask why people keep behaving in self-destructive ways when they know better, for example overeating and not exercising. The rewards of changing behavior are obvious and they know it, yet they don’t do it until a significant event happens. Getting seriously ill will do it, but so will running for president.
In your question, you also treat the adoption of Lean as an personal choice. It’s not. Organizations choose to implement Lean, not individuals. It is a decision made by top managers, and they must communicate to all levels why they are doing it and that they are dead serious, which means that participation in the effort is a condition for continued membership in the organization.
Also, as Tom Berghan said “Lean isn’t Feng Shui on the business, it is the business.” In other words, if you want to be successful in implementing Lean, you cannot cherry-pick elements of it. Your question is centered on continuous improvement, performance management, and problem-solving, which won’t make much of a difference if they are all you do. In Manufacturing, the core of Lean includes specific approaches to production line design, operator job design, production control and logistics, quality assurance, maintenance, human resource management, accounting, strategy deployment, etc. I understand your work in Banking, where many of these approaches are not directly relevant, which means that you have to invent their equivalent for banking operations.

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