by: Issues: March / April 2009. Tags: Strategy. Categories: Strategy.

The current liquidity crisis has revealed that the best-made risk management systems were not designed to manage risk in a volatile, unstable environment. “Lean” dynamics, however, properly formed and judiciously applied, can dampen the vicissitudes of uncertainty and create a dynamic stability that prepares a firm to weather an economic storm.

Going lean has become one of the most popular business-improvement practices today. Corporations across a range of industries—from aerospace and automotive, to health care providers and even retailers—have come to accept its tools and methods as a powerful means for driving up operational efficiencies by removing waste in all its forms, specifically by taking direct aim at everything from extra inventory to extra processing steps. The results can have a significant impact, and include lower costs, increased quality, and a faster flow of products and services to customers.

It is becoming increasingly clear that we need to better understand how going lean can be achieved in today’s complex, dynamic business environment. Too often, companies plan and fine-tune their activities on the presumption that they will operate in a largely stable environment. By taking action without first understanding their dynamic conditions — the uncertainty and sudden change that often drives waste to accumulate in the first place—companies risk falling far short of their goals. And in so doing, they risk ratcheting up the difficulty of navigating challenging times like those they face today.

The examples of some of today’s most successful companies point to a better way. Firms like Toyota, Southwest Airlines, Wal-Mart and others illustrate that achieving truly transformational results requires looking beneath the visible symptoms and rethinking some of today’s most entrenched management practices. These companies seem to build in the capacity to right themselves when things are going wrong, thus steadying their operations, decision-making, and information processing, and improving their ability to roll out innovations even in challenging circumstances.

This article explains that by applying lean dynamics — drawing on lean principles to address the forces of uncertainty and change — companies can produce stronger results and adapt to the challenging circumstances of today’s business environment. It describes why following the lead of Toyota and others requires companies to re-structure their activities with a new and different focus — on creating capabilities that are more responsive and business strategies that are more dynamic. The article also describes that achieving this goal begins with a clear understanding of what lean practices are intended to achieve and the consequences of deviating from the underlying intent of these practices.

A dynamic – not static — concept

To understand lean, consider, for example, one of today’s commonly applied means for cutting costs, the shift to long-term arrangements with key suppliers. By delegating total responsibility for producing major components to suppliers, and holding them accountable for delivering just-in-time for expected circumstances, organizations are seemingly targeting visible wastes. Driving down their inventories and slashing procurement actions are examples of such visible wastes. And these actions often do achieve strong results—just as long as conditions develop and remain as expected.

But what happens when firms single-mindedly focus on suppliers’ delivery outcomes rather than insist that these same suppliers restructure to build a more responsive organization? Suppliers that continue to operate using traditional methods, such as producing and storing large batches based on fixed schedules and then issuing from inventory, will be ill-equipped to respond to sudden changes. Significant downturns can cause waste to grow and costs to skyrocket; large spikes can quickly overwhelm inventories built for stable demands, undermining an organization’s ability to meet its commitments.

Advanced information systems, intended to identify and anticipate problems, can be found to be inadequate. Configured to regulate processes in a stable, predictable environment, such systems will prove to be a poor fit for dealing with large, sudden changes like those that many firms face today. Thus, corporations will have no way of knowing that such a serious vulnerability is building. Their first indication might come only when their suppliers suddenly fail, thus sending them into crisis.

So, if the solution is not to target excess inventories and other forms of waste, what is it? Answering this question requires going back to the underlying reason why the Toyota Motor Corporation—the widely-acknowledged architect of lean manufacturing—first embarked on its quest to become “lean.”

The dynamic roots of “Lean”

Toyota began its lean journey soon after the end of World War II—not as a means to reduce production costs, but as a way to deal with a serious crisis. The company faced the tremendous challenge of producing for low and volatile customer demands, just as it was being forced to compete head to head with Detroit (which was thriving amid expanding post-war mass markets). To make matters worse, the company faced a crippling labour revolt, forcing it to reach unprecedented agreements with its workforce.

Toyota took dramatic action, restructuring completely to overcome challenges that were far more severe than conventional methods could handle. Instead of applying traditional solutions, it developed a different approach. By taking measures internally, that is changing what it could control, the company proved the efficacy of techniques it had developed for overcoming the substantial challenges and constraints imposed by its external environment. Over time the company changed everything, from how it performed work, to the way it shared information and made decisions—even how it rolled out innovations. It gradually developed a range of techniques to support this new way of thinking.

For example, instead of optimizing operations for producing large, “economic” quantities of the same part, as many companies continue to do today, it developed the ability to rapidly and cost-effectively change over from producing one part to the next. This meant that its factories no longer had to produce and store enormous batches of identical items in anticipation of projected demand. Instead, they gained efficiencies from producing a mix of different items — for instance, parts requiring similar equipment, materials, or skills, turning out smaller quantities of each that more closely represented what the customer currently wanted. Demand volatility for individual items leveled out; managing them together created a much smoother combined demand stream.

This represents a fundamental break from traditional management methods. Rather than manage work as a series of discrete processing steps, Toyota came to structure its work based on product families — producing groups of complete parts or components and sharing similar processing characteristics. The company formed teams with sufficient skills and equipment to build these families from beginning to end, creating the ability to shift seamlessly from producing one product to the next across the family. This let the company more closely synchronize its activities (and those of its suppliers) with the actual needs of its customers as they emerged — pulling what it needed from production rather than pushing to meet preset schedules. The day-to-day activities of its production shops became tightly synchronized with the current needs of each successive work station, driving out the need for traditional inventory and schedule buffers.

Toyota’s relentless pursuit of “waste” supports this; the company’s near obsession with rooting out extra steps, padded inventories—anything that adds costs without creating value for the end customer—is critical to making this highly responsive method of production succeed. But rather than focus on attaining internal efficiencies and presume that the gains would flow to the customer, the method’s delegation of responsibility and authority enabled a system for maintaining direct accountability and making the creation of value at each step along the way highly visible. In so doing, the company more than offset the great economies of scale that traditional methods of building large batches of identical items could produce.

While many of its techniques are now widely recognized, the broader principles underlying Toyota’s approach are often overlooked — namely how they, taken together, support an underlying system of defaults for managing some of the most extreme circumstances—a capability that gives Toyota a powerful competitive edge.

It is important to note that Toyota is not alone. Other companies across very different industries, including Southwest Airlines and Wal-Mart, followed a similar path—ultimately demonstrating a common set of principles that they seem to have arrived at independently, as each grew and faced overwhelming challenges and constraints. By better responding to the shifting conditions and changing demands of today’s dynamic business environment, these firms now introduce innovations more effectively, creating greater customer value—a key to their strong, sustained performance over time.

This focus on applying lean principles to dampen the dynamic forces of uncertainty and change forms the basis of lean dynamics. Its aim goes beyond cost cutting to focus instead on building dynamic stability that promotes more sustainable results, and that responds to shifts in business conditions, but also prevents problems that can undermine a firm’s efforts along the way.

Structuring a Lean Dynamics solution

A distinctive characteristic of lean dynamics is its unique starting point. Rather than begin with a discrete project in a given facility, as is often done with improvement initiatives, getting to lean starts by conducting a first-order assessment that extends across the business—from suppliers to customers. Instead of targeting waste, it focuses on identifying sources of “lag,” or disconnects, that can amplify internal disruption when conditions change—often the underlying reason why waste accumulates in the first place. This builds a baseline understanding of how well the company sustains value over time—not simply when conditions progress as planned, but across a wide range of circumstances it might ultimately face.

How is this measured? By using the value curve, a graphic that shows how well the organization is responding to uncertainty and change. Introduced in my book, Going Lean, the value curve compares the firm’s value available (the tangible measure of value they receive from their customer) with what it takes to turn this out—its value required (the sum-total cost, including its wastes, related to doing business) mapped across its range of potential business conditions. Lean firms display a stark, distinct difference from the classic pattern that marks their peers. Rather than produce a positive margin between the value required and value available for only a narrow range of conditions, these firms sustain a stronger, steadier value margin, even as customers’ demands and market conditions continue to change.

The value curve analysis offers a clear way to identify those that have applied lean tools that give them the flexibility to respond to changes in customer demand, environmental shifts, and other factors. The curve can also serve as the foundation of the firm’s case for change—a specific, compelling argument that identifies both its current risks and targets for improvement. Based on an assessment of each of the elements for creating dynamic flow—from the structure of operations, decision-making, information, to rolling out new innovations into the hands of their customers—it defines the “as-is” condition, showing what is wrong now and what it will take to correct the situation.

These results can guide firms to structure a much more powerful program for improvement—not just for trimming costs, but for promoting the dynamic strategies and responsive capabilities that are critical for sustaining bottom-line value. Moreover, they can serve as a valuable tool for gaining the buy-in across the workforce (so critical yet so often absent). By helping individuals understand the importance of change to the future of the corporation, and by building metrics that support the increments of change, people across the business can better see why and how they must participate.

To support this effort, it makes sense to consider involving key stakeholders in creating the implementation plan. Their early participation can only contribute to creating an environment of trust and collaboration, opening an on-going dialogue and building buy-in to the result. Still, initial restructuring will likely be necessary in order to broaden their “span of insight”— visibility into the cause-effect relationships important to identifying solutions that likely had been limited by traditional functional compartmentalization (a term and approach identified in Going Lean that is critical to enabling the workforce’s meaningful contribution).

Implementing lean dynamics has the tremendous advantage of being able to build on the lessons learned and infrastructure many corporations have already put in place—from lean manufacturing, Six Sigma, and business process reengineering, to investments in information technology. Capabilities and infrastructure already put in place can likely be redirected to support lean’s underlying set of principles, rather than requiring them to be disassembled and then starting from scratch.

How a firm approaches its transformation to lean can dramatically affect its outcome. Those embarking on this journey must look beyond the narrow objective of cost savings. They must set their course for attaining broader, enduring results by creating dynamic business capabilities and strategies that are so critical to attaining stability and growth, and identifying and acting on new opportunities in an increasingly uncertain, changing world.