From lean production to lean enterprise

This is an excerpt from Transitioning to a Lean Enterprise: A Guide for Leaders, Volume I. Provided courtesy of the Lean Aerospace Initiative at the Massachusetts Institute of Technology. © Massachusetts Institute of Technology, 2000. Used with permission.

Clearly, a “Lean” production system is far different from a mass production system. The differences are manifested not only in how the systems operate, but also in how the people working in those systems behave. This is true not only in the production function, but also throughout the Lean Enterprise. How is Lean thinking being elevated to the Enterprise level?

Work flow and work design beyond the factory floor

Enterprise. The Lean practice “one-piece flow” is just as applicable to administrative paperwork flowing through an office as it is to parts flowing on the factory floor. The concern with minimizing the inventory of custodial supplies should be just as great as the concern over the supply of raw materials. The concept of detecting defects immediately when they occur is applicable to administrative work, or to engineering design. Defects should simply not be passed to the next workstation. Similarly, there should be equal concern about optimizing the flow of information and the flow of materials. In short, applying Lean principles and practices beyond the factory floor is essential if there is to be a true minimization of waste throughout the Enterprise.

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Organizational structure

The entire organizational arrangement of the Lean Enterprise must be made compatible with the needs of the customer value stream. To focus all Enterprise endeavors toward the ultimate goal of maximizing value delivered to the customer, it is necessary to organize and deploy all Enterprise resources and actions toward that end.

The existing organizational structure is likely an outgrowth of the mass-production mentality. It may have a “silo” orientation, with the various units defined according to the traditional functions of a mass production organization: marketing, product design and development, production, procurement, finance/accounting, quality assurance, maintenance, and a number of other support units. Arranged in a hierarchical structure, these silo units impede efficient communication, coordination, responsiveness, and overall system optimization. The various units operate in an almost autonomous fashion.

The traditional organizational structure is incompatible with the value stream flow. Its design supports long production runs of standardized parts in batches with long flow times; it does not support one-piece flow and just-in-time (pull) production. It is structured to minimize machine and worker idle time, but at the expense of very high inventory levels, long flow times, cluttered shop floors, and high scrap/obsolescence rates; it is not structured for minimizing response time and maximizing flexibility. Its hierarchical and rigid structure results in extreme specialization of job functions and a large number of job classifications; it is incompatible with the team approach of Lean production, in which workers perform many tasks and have few job classifications.

Companies that have successfully transitioned to the Lean paradigm have found an effective structure in Integrated Product/Process Teams (IPPT) organized as self-managed work teams. A dedicated team for each product family includes expertise from marketing, engineering design, purchasing, tooling, manufacturing, industrial engineering, quality assurance, customer relations, suppliers, and customers.

Rather than reporting up a chain of command through many layers, work teams should be focused horizontally on a linked set of activities along the value stream. Such a structure facilitates ongoing efforts to minimize waste via continuous improvement initiatives. Organized in this manner, the work teams are in a position to perform many of the “indirect tasks” associated with managing their work, including workspace layout, quality assurance, maintenance, setup change-overs, rebalancing work loads, and continuous improvement. Such an arrangement greatly reduces non-value-adding functions, increases efficiency and flexibility, and enhances the workers’ value to the Enterprise.

It is interesting to note that the hierarchical structure is the organizational equivalent of batch-and-queue, whereas the horizontal team structure is analogous to one-piece flow (no handoffs, immediate quality feedback).

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Incentives and reward structure

Human nature is such that people will always respond to whatever incentives and rewards are in place. If we want “Lean behavior,” then we must reward such behavior and not reward non-Lean behavior. All too often, incentives are not aligned with the end results sought. (Looking at this issue from the other direction, it is just as important to remove disincentives.) As the organization is re-aligned into work teams, close attention must be paid to both individual and group incentives.

Incentives should be linked to the metrics through the use of visual scorecards. People need to be able to see immediately the impact of their performance on the Lean metrics, and their rewards need to reflect this relationship. The scorecard should include both financial and non-financial measures, which in turn should be traceable to the ultimate objective of creating maximum value for the customer.

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Adapting structure and systems

Extensive modifications will probably be required in the various systems, structures, and policies of the organization to bring them into compliance with the Lean transformation vision. The following are examples of the structures, systems and policies that may require modification.

Structures

Systems

Policies

Legacy systems, structures, and policies evolved under a mass-production mindset, and many are inconsistent—even contradictory with the Lean paradigm. Consider, for example, the information/communication system. Because of the high degree of planning, coordination, and corrective action required in mass-production systems, the attendant information systems are extremely complex. The Lean paradigm eliminates the need for many of these information processing requirements.

Lean principles should be followed in the redesign of the information system. Just as material flows should be optimized, straightened, and shortened in Lean production, so should the information flows deployed throughout the Enterprise. Waste should be eliminated wherever it occurs in the information system.

Similarly, with Lean principles and practices in place, the complexity of all resource planning/deployment systems (scheduling, MRP, ERP, etc.) can be reduced significantly. Likewise, the financial, accounting, human resource systems, and all core business systems should be redesigned following Lean principles and practices.

Many of the policies of the Enterprise will need to be brought into compliance with the Lean paradigm. For example, decision authority typically moves closer to the point of implementation in a Lean environment. Traditional middle managers may view this as an erosion of their authority. Policies regarding job classifications will likely be modified, causing concerns among the workforce and the union (if any).

All business systems should be modified following Lean principles. For example, a “Lean” accounting system is needed. Activity-Based Costing is only a start. What is really needed is value stream/product-based costing that includes product development, marketing, production, and supplier costs associated with specific products. Many traditional functions (e.g., purchasing) are eliminated or reduced, with the appropriate functional activities integrated directly into the value stream. In this way, costs can be assigned directly to specific products rather than allocated as overhead.

Similarly, other enterprise functions such as sales, order-entry, human resources, and all production management sub-systems should be redesigned to conform to Lean principles and to properly support Lean production.

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The critical role of education and training

By far, the most important element in any organizational transformation initiative is that of education and training. These are especially critical in transitioning an organization from a mass-production paradigm to a Lean-production paradigm.

A successful Lean transformation initiative will likely require the most extensive changes a company will ever have encountered. There will be a significant impact on every employee and every position. Successful transition to Lean will require a deep understanding of Lean principles and practices. Extensive education and training will be required at all levels. The focus of these efforts must be on changing mental models, beliefs, behaviors, and attitudes throughout the workforce.

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Achieving an extended lean enterprise

A Lean transformation is not complete until it reaches beyond the immediate company to include customers and suppliers in the overall Lean system design. Only in this way can the complete value stream be structured and optimized in accordance with Lean principles and practices.

Here are the major tasks to be accomplished with regard to the supply chain:

Similarly, it will likely be necessary to coach customers in Lean thinking—for instance, that the Lean Enterprise wants to deliver orders to customers in a steady, continuous stream rather than in large batches, and will deliver certified quality products directly to the customer’s point of use at the most appropriate time. Most customers will, at first, be apprehensive about this type of behavior, since they are accustomed to late deliveries of large batches, numerous defects, and so on—all the norm under the mass-production system.

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