Maybe Strategy is Best Achieved through Lean Execution

The following column comes through special arrangement with the Lean Enterprise Institute. It was authored by Lean experts Michael Ballé, Jacques Chaize, Orest (Orry) Fiumea and Daniel T. Jones. It is pretty "deep."

Just as the world that businesses compete in has changed dramatically, so too must the way we conceive of what we call strategy. Strategy today is routinely assumed to consist of setting goals, developing a plan to meet these goals tracking towards the progress of these goals and re-planning accordingly. It conforms to the competitiveness model popularized by Michael Porter in which companies dominate by identifying market opportunities and locking in their position against competitors.

Yet the power of this approach when faced with dynamic markets and what might be seen as "wicked problems" remains an on-going debate, one that has raged amongst strategy experts since Von Clausewitz's landmark writings on "friction" and "the fog of war" that show that no plan can ever sustain contact with the enemy – or reality for that matter.

Supply Chain Digest Says... Toyota engineers realized early on that the kind of issues that propped up from the use of Kanban were hard to solve with traditional engineering solutions What do you say? Click here to send us your comments Click here to see reader feedback

The dazzling success of Lean companies (Toyota being the exemplar) provides a powerful alternative to the notion of strategy consisting of having the best plans and greatest bargaining leverage. Toyota's success might best be attributed to its Lean strategy, a dynamic, agile, and learning-based approach that can be summarized as: understand your challenges, your core practical problems, train your officers to do so and know how to respond, trust their initiatives and then reflect on what happened and learn fast.

Traditional strategy is about optimizing the situation as we see it (assuming perfect knowledge and the assumption that nothing will change quickly); the other is centered on creating a dynamic of trained, autonomous people that can align spontaneously on a shared intent. Facing your challenges, responding faster with all your people, studying your response and learning to do things in new ways together is the Lean strategy needed to face the disruptions of the twenty-first century.

Most of the twentieth century's leading companies based their strategy on the premise of optimization through standardization: the key to making money was to design products for the widest possible segment, find the lowest cost production location for each component, and batch work to get unit costs down. These companies leveraged economies of scale - the massive cost advantage from doing the same thing in the same way all the time, which has driven the success of the McDonalds and Coca-Colas as long as every customer is happy to purchase the same Big Mac all around the world, all the time. This one-size-fits-all "best practice" approach had benefits yet turns out to be incredibly inflexible and wasteful of both human initiative and capital.

So far, the twenty-first century's disruptions are all about treating each customer as a unique individual, striving for near-instant responses and connectivity – a very different world indeed. Advances in computing power have allowed the Google, Amazon, Apple, and Facebook disrupters to personalize their answer to each person. Google gives you answers to any question you will have, Amazon ships to you any product you want from an infinite shelf, Apple lets you customize its devices in any whimsical way you like through apps, and Facebook allows you to exist in virtual space through the avatar you design. Products and services can now be both scalable and custom-made.

Yet while the disruptive few have thrived with this approach, the majority of established companies have failed to grasp the underlying way of thinking that drives this model. They adapt to the new strategic model by rearranging processes and systems without rethinking and transforming them. Many companies still believe that digitization means running their one-process-fits-all, batch systems on computers. Undaunted by the repeated failures and increasing complexity of traditional IT solutions, they continue their search for "best practices" to the point that many management teams are reduced to upgrading systems, hiring subcontractors and fire-fighting. To any immediate problem the answer is "we'll have the perfect solution in 2 years' time" but no one knows what to do right now to solve a customer issue.

These companies fail to grasp the true function of the new tools, which largely transfer the authority they used to outsource to outsiders back to their own hands. Consider the new way we think of photographs. Taking a photo with your smartphone instantly breaks down the image into unitary pixels, enabling you to share it immediately from the phone on any social media you like. This is worlds apart from taking a picture with a film camera, having to have it developed, and then keeping paper copies in an album.

We humans fail to use tools properly if we don't grasp the idea behind it, or if our mental model is no longer current. For instance, machines in factories in the days of steam were organized in straight lines, with each machine powered by a transmission belt running from a central rotating shaft. Electricity then enabled machines to be placed anywhere to create flow lines, but many factories are still designed as batteries of same-process machines as if there was a central line shaft. Likewise, the mental model of the line shaft lingered long after the technical constraints were lifted. Today many factories still operate as if this constraint were necessary: they continue to create process villages with batteries of same machines producing heaps of parts. They still design organizations around functional departments, with the belief that if each department did its job efficiently, the whole would somehow be effective.

Such "phantom limbs" of production continue to constrain companies. A large part of management literature of the twentieth century has been about how to fix the previous mess, from process reengineering, IT workflow controls, flat organizations without much success. Today functional departments are mostly run by IT systems (the real boss of any plant is its MRP system), more silo-ed than ever and more incapable than ever to react quickly to spot customer demands through teamwork. Nobody remembers the line shaft, but the moment you try to create a multi-process flow cell to flow all value directly to customer, you hit all the barriers of functions trying to maintain ownership and win turf wars—rather than cooperate to flow value to customers. Similarly, the flow line is a result of electricity, and the technical ability to create small machines on each process step, place them where they make more sense to build the product in sequence one by one and ship it right away to customers.

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What is needed is a fresh start along with a new mindset. The thinking we see in the digital-native firms that are disrupting the twentieth century business model is radically different. Economies of scale no longer make much sense; economy of data analysis and learning does, spectacularly. It's about winner-takes all through customer-centricity, velocity of innovation, concentration of talent, and financing growth through access to cheap capital rather than painstaking generation of cumulated profit. Traditional firms are trying en masse to get with the program, but it's simply hard to get there from here.

So how can it be done?

Kanban as Strategy

With Kanban, problems appear at a very detailed and granular level: one card cannot be served, or cards accumulate anomalously at some point in the flow of cards. They reveal problems as they arise, where they arise. The people doing the work themselves can - indeed must - learn to take responsibility for the problems and solve them, which then creates a flow of ideas throughout the company.

Back in the 1960s, a bunch of engineers at Toyota, which was then a little-known Japanese automaker scrapping by after recovering from bankruptcy, had a breakthrough insight. They would replace lists of things to do, production programs, etc. with Kanban cards. A Kanban card is a signal with which the customer process goes to pick up parts (components, information, jobs) at the preceding supplier process where the work is held in a supermarket. The supermarket is replenished by the supplying process on the basis of "a little of everything all the time" so that the needed work is always available in small quantities. It operates in the "real time" of the work flow. As a result, real customer information is transmitted through the system and work flows back in response. One card being the demand for the production of one box of parts, much as in a restaurant, one slip of paper is one order for one meal.

But Toyota's aim was not only about changing the work instruction and scheduling method, as the West has generally interpreted it (projecting its old thinking on a new insight): they also immediately started to measure the response time to one card. They tracked the lead-time between the specific demand for one box of products and when this box was physically delivered.

This humble looking Kanban system turned out to be a complete revolution because it opened a new path to improvement. In mainstream management thinking, improvement stems out of "design thinking" – smart people figure out the entire system, find out what's wrong, and make changes for a better system.

With Kanban, problems appear at a very detailed and granular level: one card cannot be served, or cards accumulate anomalously at some point in the flow of cards. They reveal problems as they arise, where they arise. The people doing the work themselves can—indeed must—learn to take responsibility for the problems and solve them, which then creates a flow of ideas throughout the company, and very different ideas as that. Rather than "we must invest to change the whole system" engineering thinking, people at the coal face tend to find astute, capital free ways of making things work, and opening creative solutions no one would have thought of by redesigning the system.

Toyota engineers came to focus on two types of problems:

• Distinguishing normal from abnormal conditions: Items that lagged on the standard delivery time, which meant focusing immediately on issues. Imagine that you need to deliver a job in two days. If something happens and work is not sent to your customer on day three, you know immediately that you have a problem here and now and call for help to get back into a normal condition.

• Bringing value closer to customers:the standard response time can be constantly challenged and reduced, to surface new technical problems. If we normally deliver the job in two days, let us set the challenge of delivering it now in one. This will seem impossible, but lead us to scratch our heads and find new ways to do old things – and occasionally stumbled on innovative insights.

Toyota engineers realized early on that the kind of issues that propped up from the use of Kanban were hard to solve with traditional engineering solutions – they were too granular, too small. They went about solving this through kaizen: continuous small steps improvements from the delivery teams themselves, supported by engineering when needed. Getting engineers to support line operators in their kaizen efforts taught engineers many new, unexpected and clever ways of solving engineering problems. Kanban was a key tool for kaizen, as they discovered.

Again, the physical tool disproportionately influences the thinking, and over time Toyota leaders began to think about their car lineup with the same mentality that launched the Kanban card. Rather than design new models to capture the entire market, they saw each model as a specific response to customer needs they needed to upgrade at a regular rhythm (and trying to reduce this as far as they could) to continue to serve the customers with the same needs.

The Corolla, for instance, was introduced in 1966 and is currently in its 11th generation with the same principle of an affordable family car with some luxury features, which has been reinterpreted every 4 years for half a century. In a sense, there is a Kanban on the Corolla design with a 4-year lead-time. This is the model that Steve Jobs embraced with the iPhone, releasing a new model every year, almost to the day.

We had the opportunity to see the impact of Kanban firsthand in the early 1990s as we studied how Toyota started their operations in Europe and drew their local suppliers in their just-in-time supply chain by begging them "not to mess with the Kanbans." Previously, the supplier would receive a global order, schedule its production in large batches, and ship to the customer when the stuff was ready. Working with Toyota, suppliers had to learn to deliver to Toyota trucks that came several times a day with precise manifests requiring a little of everything in each truck, according to Kanban cards (paper slips by then printed from electronic communication in the morning). This forced the supplier to organize the consolidation of truck preparation according to the Kanban cards, reduce the batches and deliver boxes one by one. Like putting on a suit two sizes too small, this created friction everywhere and led the supplier to solve a variety of problems:

1. Quality issues now appeared starkly (no Kanban card would be served with bad parts). Rather than produce an entire batch, inspect it, isolate the doubtful pieces and deliver the rest (in which case some bad parts always slip through), the supplier lines now needed to deliver to shipping only good parts—every part needed to pass quality standards, every time). Reworked pieces created endless problems, because it would take time from making a good part right-first-time, and so increase the response time, and so on.

2. Flexibility issues became unavoidable. In order to produce a little of everything all the time, changeovers had to be made so easy the operators themselves could do them in response to the Kanban sequence. Layout of cells was changed again and again, processes improved, until work could flow more or less continuously, shifting easily from one product to the next in the product family.

3. Involving people became as essential as it had been in Japan. At first European suppliers tried to crack the problem the usual way with engineers devising engineering solution, but they soon found out they had to work with the frontline teams to solve all sorts of very small issues, such as screws not screwing right, machines not being 100% reliable, cross training, inconvenient logistics and so on.

To be continued...

SCDigest will publish part two of this column in two weeks.

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