It is not exactly breaking news that, due to the need for driving down costs and increasing efficiency, manufacturers (if not enterprises of all kinds) are increasingly subject to massive pressures. These pressures, however, often invalidate the traditional materials requirements planning (MRP) batch- and push-based production planning and associated economies of scale product costing approaches.
This is Part One of a multi-part note.
For this reason, there has been increased interest in the lean manufacturing support philosophy. To understand this trend, one need look no further than the enterprise resource planning (ERP) systems of the 1990s, which, unfortunately, are cognitive (i.e., sending well-devised "plans of mice and men", which, without feedback from the real-world would "often go astray") rather than reflexive in nature. In addition, there is a host of other well-publicized MRP-related problems, such as complex bills of material (BOMs), inefficient workflows, transactions and activities that add no value, and poor (typically manual) data collection. It is not surprising then that companies struggling to serve their customers using purely traditional planning and costing methodology are often unable to meet the demands for agility and responsiveness that consumers at the end of the supply chain are requesting.
Consequently, for some time now, almost every industry publication, consultant, analyst, and industry pundit has been touting the lean approach as the panacea to whatever troubles manufacturing and distribution across the globe. The early revolutionary efforts of a handful of manufacturers have indeed established that lean works, especially in terms of increasing customer satisfaction levels (i.e., ensuring they get exactly what they want, when they want it), decreasing costs, and improving responsiveness via shorter lead times and improved quality and consistency.
Nevertheless, manufacturers today face additional challenges in the form of increased customer expectations, shortened product cycles, product proliferation, foreign competition, and, occasionally, a declining economy. To make things worse, decreasing product life cycles mean that manufacturing and distribution are increasing in complexity, which, for the manufacturer, translates into a need to better manage customer demands and expectations and respond accordingly.
Hence, while several years ago most prospects inquired tentatively about lean capabilities, now they seem to be increasingly requesting these. An ARC Advisory Group's strategy report from 2004 suggested that "today 36 percent of US manufacturers and 70 percent of UK manufacturers are using lean as their primary improvement methodology", which should show how prominent lean thinking has become. Many of these companies may not yet be involved in full-blown lean manufacturing, but they are at least using some lean tools and principles as their primary improvement methodology.
What Constitutes Lean Manufacturing?
According to the APICS Dictionary, the philosophy of lean manufacturing is to emphasize the minimization of the amount of all the resources (including time) used in the various activities of the enterprise. This involves identifying and eliminating non-value-adding activities in design, production, supply chain management (SCM), and dealing with the customers. Lean producers employ teams of multi-skilled workers at all levels of the organization, and use highly flexible, increasingly automated machines to produce large volumes of products with potentially enormous variety. The lean philosophy sets out principles and practices to reduce cost through the relentless removal of waste and through the simplification of all manufacturing and support processes.
What is commonly referred to as lean manufacturing today is an extension of the proverbial Toyota Production System (TPS), which was originated by Taiichi Ohno and first saw use in the 1950s. The conditions that led to its development stemmed from the aftermath of World War II, when Japanese automotive manufacturers faced serious competition from American counterparts. At this time, Japanese manufacturers not only were rebuilding their war torn factories, but also were facing a serious shortage of raw materials. American companies, on the other hand, had an abundance of manufacturing capacity and resources, and dominated the Japanese market by flooding it with low cost products. However, they still had some shortcomings, since they provided little product variety and had rigid, top-down production processes that limited their ability to respond to increasingly changing customer demands.
Toyota Motor Corporation realized the only way it could survive was to provide the Japanese consumer (and the global customer ever after) with the one thing American automotive manufacturers could not provide at that stage—product variety—all while maintaining as high a quality, short a lead time, and low a cost as possible. Toyota, with fierce competition in terms of quality and price, a market opportunity for increased product variety, and limited production resources and raw materials, had to create a radical new method of manufacturing in order to survive.
The result was the aforementioned TPS, which methodically eliminated any waste in the production process and yet stayed focused on satisfying customer demands. It has revolutionized automotive manufacturing with kaizen (the Japanese term for improvement, which in the manufacturing context relates to finding and eliminating waste in machinery, labor, or production methods), poka-yoke (mistake proofing techniques), kanban (pull-signal) replenishment and point-of-use delivery, and assembly line innovations that are the now backbone of virtually all automotive plants around the world.
Today's concept of lean manufacturing grew from TPS, and the name "lean" stems from its driving principle to use less of everything (i.e., less labor, less space, less inventory, less movement, etc.) than traditional manufacturing processes, while producing a greater variety of products. In other words, it is essentially an umbrella philosophy that focuses on creating customer value-adding activities, the systematic identification and elimination of waste, and continuous improvement in manufacturing environments to increase productivity. The primary focus here is on customer value-adding activities, while the elimination of waste (muda in Japanese) and continuous improvement are consequences of this.
What Constitutes Waste?
Implementing a lean philosophy usually leads to cost reduction and employee empowerment, and many people tend to translate lean as mean. This is because, though lean does not necessarily set out to be mean in terms of relentless cost cutting, the approach of maximizing customer value and eliminating hidden waste (i.e., any activity that does not add value to the goods or service in the eyes of the consumer) inevitably leads to the removal of unnecessary operating costs (including some unneeded jobs). There are seven typical categories of hidden muda or waste, as follows.
- Overproduction. Overproduction consists of making either unneeded, excess goods or making needed goods too early or in too large a quantity. This could also be described as giving in to the temptation to make goods just-in-case rather than just-in-time (JIT). Traditionally, manufacturers have used the concept of economic order quantity (EOQ), which is also known as economic lot size or minimum cost order quantity, to determine their "optimal" manufacturing batch and lot sizes or quantities of purchased materials. EOQ is a type of fixed order quantity model that determines the amount of an item to be purchased or manufactured at one time, with the intent of minimizing the combined costs of acquiring and carrying inventory. The basic EOQ formula is:
whereby "d" is the annual demand (expected or determined), "c" is the average cost of order preparation, "i" is the annual inventory carrying cost percentage, and "u" is the unit cost.
Inaccurate scheduling, long lead times, long changeovers, and being too far from customers to understand their changing needs typically lure manufacturers to have longer production runs and piles of finished goods, with the idea that the customer might want more than expected. However, the organization will have to absorb the unforgiving cost of unsold goods. Conversely, the lean and flow manufacturing nirvana would be the situation where a manufacturer can afford an EOQ of only one manufactured or purchased product (i.e., EOQ = 1).
- Waiting. This refers to queuing delays coming from people, processes, or work-in-progress (WIP) inventory sitting idle while waiting for instructions, information, raw materials, or any other resources. Wasteful waiting ties up capital, increases the risk of obsolescence or damage, and often requires additional handling and movement of goods.
- Transportation. Unneeded movements occur when, instead of processes being sequential or positioned next to each other, they are physically far apart, and require moving and handling devices to be repeatedly repositioned for the next step in the process.
- Over-processing. Poor process design can lead to producing better products or services than a customer needs or is willing to pay for. In other words, over-processing is adding gratuitous features that are not value-adding in the eye of the customer.
- Motion. Unnecessary movement activities of people, product, or equipment do not add value to a process. For instance, workers walking back and forth from the work area to the supply area, moving around unneeded equipment, or performing redundant motions can be completely eliminated or automated to speed up the process.
- Excessive inventory or WIP. Stock that is sitting and accumulating cost without necessarily providing value is a costly way to cover up quality problems, such as rework and defects, manpower or production scheduling problems, excessive lead times, and supplier problems.
- Defective units (scrap) or rework. Defective units are typically a result of not having preventive systems that include failsafe techniques. When an error or defect is passed onto the next operation, or even worse to the customer, a loss is inescapably incurred, since something has to be manufactured, assembled, or serviced twice, whereas the customer will rightfully only pay once for the goods or service. Thus, doing everything right the first time is the most efficient, least wasteful way.
This concludes Part One of a multi-part note.