When I first studied lean in the mid-nineties, I assumed, like many others, that performance improvement stemmed from process improvement. The idea at the time was that repeated “kaizen” (“change for the better”) workshops would lead to the elimination of waste and better-performing processes at lower costs. To someone with my systems thinking background, it made perfect sense to fix broken processes. It took me a while to accept the evidence that although most workshops were successful in the moment, the results rarely showed at the P&L level, and improvements were almost never sustained.

By studying how Toyota taught its suppliers to do kaizen and working with Toyota veterans, I came to accept that the lean challenge was not to apply lean tools to every process, but to develop the kaizen spirit in every person (for more details, see “The Thinking Production System,” by Michael Ballé, Godefroy Beauvallet, Art Smalley, and Durward Sobek, Reflections, Volume 7 Number 2). It turned out that kaizen was a methodology to teach employees on-the-job problem solving. Somehow, systematically developing each person’s problem-spotting and problem-solving capability led to significant overall results. This was consistent with what I’d been told by Toyota veterans about their golden rule of “making people before making parts.”

A Leap of Faith

I was taught repeatedly that lean is a practice, not a theory, or in the words of Taiichi Ohno, one of the founders of lean thinking, “practice over theory.” The general idea is to practice and practice and not worry about theory — and results will come. As a systems thinker, I was uneasy with this leap of faith, but I was forced to admit that managers who adopted this posture had better and more sustainable results than those with staff-driven process improvement programs.

As I continued to puzzle over this conundrum, I was shown a second part of the answer by Orest Fiume, of Wiremold fame. Wiremold’s value grew from $30 million in 1990 to a staggering $770 million in 2000 in a mature industry without any major technological disruption. As its CFO, Orry Fiume had been a key architect of the company’s growth, along with CEO Art Byrne. As Orry expressed in a personal communication, their leitmotiv was that “lean is a business strategy, not a manufacturing tactic.” From many discussions with Orry, it dawned on me that the leader’s role in kaizen step-by-step improvement was the key to overall results. In effect, leaders who use lean as a business strategy learn to

1. 1. visualize processes,
   2. so that employees can practice “problems first” and formulate their problems, and
   3. learn to solve them one by one,
   4. so that senior executives can study proposed solutions and progressively improve the company’s overall policies.

With this framework in mind, I could see a few typical learning areas that are central to lean success:

1. • Products: Toyota did not come to dominate its industry by reducing costs, but by designing and building cars that people bought — mainly through “built-in” superior quality.
   • People: Toyota has a fundamental commitment to developing mutual trust by involving employees in improving their own workplaces, and teaching problem solving at every opportunity by stopping and solving problems rather than working around issues.
   • Lead Time: Systematically accelerating workflows leads to better customer service and surfaces all wasteful operations in processes. Thus, along with product quality, it serves as a natural compass for identifying waste.
   • True Cost: Costs can be separated into the unavoidable cost of doing anything (price of materials, labor, equipment, and so on) and the added cost resulting from the chosen method of operation.

Furthermore, Toyota veterans kept insisting on “teamwork,” by which they meant individual responsibility to solve problems with colleagues across hierarchical and functional barriers. Indeed, according to Toyota’s own history, “just-in-time” was born from its founder’s belief that “the ideal conditions for making things are created when machines, facilities, and people work together to add value without generating any waste.” Kiichiro Toyoda then conceived methodologies and techniques for eliminating waste between operations, both lines and processes, which led to his just-in-time concept.

Three Loops

Discussing these elements with Jacques Chaize, with whom I coauthored “The Lean Leap” (Reflections, Volume 10 Number 3), I finally grasped the system-level explanation for why a relentless focus on individual development leads to overall performance improvement. Firms that do well in lean are those where the CEO gets engineers to do their utmost to really understand customer preferences (“seeking the customer’s smile,” in Toyota parlance), where engineering and manufacturing are taught to work together and come up with workable solutions to technical problems, and where win-win relationships are developed with suppliers. These firms see suppliers as a source of innovation and ideas for higher productivity, not just a resource to be squeezed.

In this sense, the firm can be described as three fundamental feedback loops (see “Three-Loop View”).

The feedback loop between customers and products is essential so that organizations design products that people like and want. The sales growth engine is based on market share and reputation (e.g., what existing customers say about the product). As long as the product is kept in constant sync with customers’ tastes, the top line grows. The second loop is about creating value streams that will consistently deliver good products at an acceptable cost to satisfy both market price and profitability objectives. The key to this second loop is getting engineering and manufacturing to work together to create easy-to-build designs that still fit customers’ preferences. The final loop, the manufacturing/supply chain loop, consists of involving suppliers as partners in order to improve the product’s quality and costs.

In systems thinking terms, we’re filling four stocks:

• Customer Satisfaction: This is the stock of goodwill from customers that will ensure sales, as customers replace their existing products with the newer version and encourage their friends and family to do the same. Customer satisfaction can be increased through better product fit or decreased through poor design, quality defects, slow service, cost of ownership, and so on.
• Engineering Expertise: This stock represents the capability of engineers to understand customer preferences and translate them in design parameters. Again, we can either “get” the customers or miss what they want, and we can either come up with designs that deliver this value or not.
• Shop-Floor Craftsmanship: This stock represents the hands-on know how to build the product safely with minimal waste. This skill grows out of a mixture of engineering astuteness and operator practice through kaizen in order to define working standards.
• Supplier Relationships: This is the stock of relationships that leads to cost-efficient supply chains. This stock is increased when the relationship is strengthened and decreased when it is broken.

Three Implications

There are three broad implications of such a model on our understanding of business management. First, this way of looking at firms goes beyond Toyota’s “lean” model; it also applies to the “German” product culture/family-owned business model, as exemplified by the equally successful Volkswagen, where strong product leadership is the main growth engine. The model also applies to technology-driven companies such as Apple and Google that capitalize on a transformative technology to create “killer apps.” Conversely, the model explains why cost-focused companies constantly lose ground by squandering customer confidence, which leads to lower sales, further cost reductions, lower margins, less investment capacity, lower customer satisfaction, and so on.

Second, this model makes it clear that continuous improvement is a “one mind at a time” problem. All four critical stocks in this framework have to be increased at the individual level: every customer matters, every engineer counts, every operator has to be involved, and every supplier needs to be developed. On the management front, this fact argues against sweeping motions and across-the-board policies, and for a deeper case-by-case management style where the leader’s role is to point toward ideal conditions and support every person on his or her way there.

Finally, the overall conclusion of this three-loop view of the firm is that a leader’s role is not to manage performance directly, but to create the right conditions for performance. Although the “I say-you do” style is more reassuring, a teaching approach turns out to be both quicker and more effective. By distinguishing conditions from day-to-day events, one can determine the broader challenges and then get the full benefit of small-step kaizen. Rather than set task-level objectives, business leaders can thus determine overall dimensions and support their personnel in progressing by repeated practice — putting learning at the heart of day-to-day work.

The overall conclusion of this three-loop view of the firm is that a leader’s role is not to manage performance directly, but to create the right conditions for performance.

The Three Knowledge Wheels

One of the enduring mysteries of lean is that when companies practice it effectively, their costs go down — although they never directly address expenses. The lean CEO safeguards her people and protects her customer, controls and reduces lead time, and relentlessly teaches problem solving — and costs go down! Actually, sales go up, costs go down, and profitability increases. Yet, despite this inevitable truth, it’s difficult to articulate a system level story to argue against the standard cost logic of financiers and accountants.

This problem is as true now as it was in Taiichi Ohno’s times, as he railed about the real-world costs of narrow-sighted cost-based logic. The Three Loop view proposes a framework to help business leaders base their long-term perspective on the experience of, each and every day, turning the three knowledge wheels of following customers, building teamwork between engineering and manufacturing, and developing win-win relationships across the supply chain.

Michael Ballé, PhD, is cofounder of the Institut Lean France and associate researcher at Télécom Paristech. He is the author of Managing with Systems Thinking and coauthor of The Lean Manager and The Gold Mine, for which he received the Shingo Prize in 2006 and 2011. Michael writes the weekly Gemba Coach column for the Lean Enterprise Institute. m.balle@orange.fr

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Lean, on the other hand, is strictly a practice, not a philosophy. It is based on hands-on know how about how to teach people to improve their own processes in terms of both customer satisfaction and cost management by eliminating waste. Taiichi Ohno, a key figure in developing the lean approach, would often say things like:, “Don’t look with your eyes, look with your feet. Don’t think with your head, think with your hands.” As a practice-oriented movement, lean is by and large wary of abstract thinking and generalizations.

Nonetheless, although systems thinking and lean operate at these two different levels, I have learned from personal experience that they are complementary and are based on similar insights. An understanding of system thinking dramatically improves the learning curve of lean techniques. Having worked with systems thinking concepts and system dynamics simulations for years before studying lean practices in detail, I immediately saw the purpose (if not the application) of lean, which wasn’t the case for my colleagues without a systems thinking background.

Conversely, at the time, I was part of a group tasked with figuring out ways to practically apply systems thinking concepts in day-to-day operations. Although we experimented, we generally floundered. What we did find was that the lean techniques offered a hands-on way to apply systems thinking concepts. Because lean practices have been developed over several decades, an entire field of experience exists in terms of how to make them work.

The bottom line: Without an understanding of systems thinking, it’s hard to get lean right, and without the practice of lean techniques, it’s difficult to make systems thinking a day-to-day reality to concretely improve system performance.

The Bullwhip Effect

To make my case, I shall focus on comparing a singular dimension that has been at the origin of both movements: supply chain systems dynamics and just-in-time. One of the seminal applications of early systems thinking was Jay Forrester’s modeling of the “bullwhip” effect (also known as the Forrester effect) in a supply chain. Anyone who has played the famous “Beer Game” knows that minor variations in customer demand can amplify throughout the supply chain to create huge instabilities in demand for rank three or four suppliers.

Suppliers work based on forecasts because they aren’t able to quickly change their product mix or capacity—and they often get the forecast wrong. From a systems thinking perspective, the main driver of the bullwhip effect is the delay in the information loop. Since suppliers can’t see what is going on at the final customer purchase point, they build forecasts based on the information they receive from their own immediate customers—information that is necessarily delayed and distorted.

The bullwhip effect is by now well known, and most supply chain systems try to moderate it, generally by increasingly sophisticated computer systems. Unfortunately, half a century after Jay Forrester first described the problem, the bullwhip effect is still alive and well—as anyone affected by the latest financial crisis or working for a thirdtier supplier will testify.

In the 1930s, Kiichiro Toyoda, the founder of Toyota Motor Company, wrote a lengthy pamphlet in which he coined the term “just-in-time.” He explained how each station of the assembly process should only manufacture what is required, when it is required, and in the exact quantity required. In other words, he described a remedy to the bullwhip effect that was plaguingToyota’s early operations. Other automotive manufacturers compensated for the effect by creating massive inventories. Toyota, however, was so strapped for cash in its early years that it constantly sought practical ways to deliver the cars customers wanted with the least inventory possible—they simply could not afford to carry large stocks.

The company abandoned the initial attempt at just-in-time and many other innovations duringWWII, whenToyota operations were more or less taken over by the government. During the 1950s and 1960s, Toyota engineers resumed their efforts to make the just-in-time dream a reality. To do so, they latched onto the idea of the supermarket.

The Supermarket

The supermarket concept was (and, strangely, still is) a revolutionary idea. Every operation in the supply chain would “own” its finished stock (as opposed to sending it to a warehouse, where it’s owned by “the system”) and would lay it out as on a supermarket shelf (in a fixed location). In the next process, the “customer” would then come and take what it needed, when it needed it, in the quantity it needed. The production operation would then replace what had been withdrawn and no more.

In attempting this deceptively simple discipline, Toyota hit upon a number of intractable problems that most industrial companies still haven’t resolved to this day. First, there was variation at the customer end, both in the total volume of orders and in the mix of specific products and their component parts (models, options, etc.). In order to avoid the bullwhip effect, Toyota had to learn to buffer and smooth this variation through a mixture of planning and the targeted use of finished product stock—a practice that became known as leveling.

Second, being able to resupply what had been withdrawn as well as provide for a wide variety of components on the same equipment required far greater flexibility than industrial processes can typically provide. Industrial processes are designed to optimize the parts, not the system, and machines are generally easy to run but hard to change. Toyota had to learn to change tools or assembly sequences frequently and painlessly to make its supermarket system work. More than 60 years later, the company is still working on it.

“And the Kanban”

In the process of developing this capability, Toyota has found that the information the production process receives is at least as important as its delivery capability. This is pure systems thinking. The company started by focusing on the impact of feedback loops on “lead time.” Lead time is the interval from the moment the customer gives an order to the point when the company collects the cash; it encompasses production and stocking time. Lead time is a good measure of the delays in the chain, which create the instability. Toyota developed a unique method called the “Material and Information Flow Analysis” to visualize where information flows impacted the process and how. (This technique became known outside ofToyota as “Value Stream Mapping,” from John Shook and Mike Rother’s bestselling book, Learning to See).

On the shop floor, information is represented by cardboard cards (the famous kanban), which symbolize production or withdrawal instructions. No crate of parts can be moved without being ordered to by a kanban card; no parts can be made without a kanban production instruction. To Toyota engineers, the link between leveling (smoothing demand variation) and kanban (production instructions) is intuitive, but to external observers, it can be hard to catch. My father recalls visiting a Toyota plant in the 1980s and studying their efforts to build several different car models on the same line to improve flexibility. Instead of scheduling runs of the same model in batches, they would mix models so no two cars on the line would be the same. Puzzled, my father, then head of manufacturing engineering for Renault, looked hard at the line and finally figured out:, “You’re scheduling a vehicle with a lot of work next to a vehicle with less work to stabilize the overall operator cycle,” he told them. “Yes, they answered—and the kanban.”

My father spent some time clarifying his understanding that to maintain productivity and limit variation on the line, they would first program a high-content vehicle, with more work than average, and then a low-content vehicle, with less work that average. The result was that operators would work at a steady rhythm overall. “That’s right,” they would insist. “And the kanban.”

When he finally asked managers what the kanban had to do with it, they explained that the sequence of cars was calculated so that the kanban instructions to suppliers of individual parts would be leveled. In doing so, they avoided demand variation on the parts supply. Managers tried to schedule the final assembly line so that each parts supplier would get the most stable, regular order message possible— something that remains a daily challenge, considering the complexity of building an automobile. Toyota has been remarkable both in understanding the dangers of demand variation on the whole supply chain and in developing the technical ability to be able to schedule at that level of detail. Very few industrial companies are lean yet, because most still have trouble understanding the fundamental link between information and production—let alone know how to deal with it.

Information Flows

The damage caused by the lack of systems thinking in attempts to apply lean shows starkly in two typical cases. Many companies have latched onto Value Stream Mapping as a great tool to analyze their processes (which it is). But when you look at their maps more closely, you often find that the production process is sketched in painful detail, whereas the information flow is barely suggested. Most people use the maps to clarify and simplify their material processes (mostly in terms of flow), not to optimize how the production process works as a whole.

What Toyota engineers have learned from their long experimentation with these ideas is that the lead time of planning, production, distribution, and sales is a good indicator of the overall performance of the process. The Material and Information Flow Diagram is one element of a full lead-time analysis, in which the information flow is largely as important as the material flow. Indeed, experienced lean practitioners tell you that their main headache, once the obvious flow problems have been solved, is leveling, leveling, leveling: managing the information flows to reduce the lead time in the feedback loops and minimize variation in all aspects of production.

Similarly, countless companies have tried kanban scheduling only to finally give up and go back to their ERP computer systems. Implementing kanban without a clear idea of the goal in terms of information management is doomed to fail. Kanban is about taking all ambiguity out of the information flow to make sure that the final assembly schedule is reproduced “mechanically” throughout the supply chain, avoiding the need for the individual judgments that contribute to the bullwhip effect. Indeed, when you play the Beer Game, you discover that communicating customer demand without trying to create forecasts reduces unwanted variation in your ability to produce and deliver.

Building on this insight, in the kanban system, if the final assembly has been scheduled so as to be properly leveled, the entire supply chain will behave smoothly by blindly following the cards; the cards mechanically reproduce the final customer signal. Interestingly, kanban is also a great tool for revealing the real leverage points for improvement in delivery systems—which rarely are those one expected at first. Most “bottlenecks” turn out to stem from mistakes in information and planning policies that wreak havoc on the shop floor.

Experimenting with these various techniques has ledToyota to address the other main causes of the bullwhip effect. For instance, the company offers far fewer rebates than its competitors and refuses promotions from suppliers in the aftermarket parts businesses. The company’s logisticians understand the impact of pricing fluctuations on the behavior of actors in the supply chain and have convinced their purchasing and procurement colleagues to try to minimize them. In the same manner, Toyota frequently provides its suppliers with running forecasts, which help vendors throughout the supply chain to anticipate demand. The forecasts also limit the incentives for suppliers to game the system; since there is little ambiguity in the information chain, gaming strategies are less attractive and have a much higher risk of angering the customer.

Improving the System as a Whole

Plants that supply Toyota in the U. S. have 14 percent higher output per worker, 25 percent lower inventories, and 50 percent fewer defects than operations that supply other automakers (A. Iyer, S. Seshadri, and R. Vasher, Toyota Supply Chain Management, McGraw-Hill, 2009). Efforts to get rid of the bullwhip effect (among other industrial problems) clearly pay off. So why don’t most industrial companies get such benefits from their lean programs? My personal belief is that without a strong foundation in systems thinking, people find it hard to understand the purpose of the lean tools, which is to improve the behavior of the system as a whole.

Furthermore, since Toyota developed these practices with a strong practical bias (it is said there is no expertise in lean, only experience), the underlying thinking behind the tools is hard to piece together. UsingValue Stream Mapping without looking for the effects of feedback loops misses the point. Trying out kanban without understanding how ambiguous information can cause oscillation in a system will produce disappointing results.

On the other hand, trying to affect system behaviors without the hands-on practice of lean can be equally discouraging. The experience of lean reveals that key leverage points are often hidden and counterintuitive—a fact well recognized by systems thinkers. Most bottlenecks turn out not to be so in practice. The lean field has a lot of experience to offer both in terms of know how to change systems and in terms of leadership practice to convince the people in charge of processes to make modifications. Without this practical perspective, a systems thinking approach to a problem can seem daunting. Realizing how everything is interrelated doesn’t help much when one wants to change the global behavior of a supply chain.

To Understand and to Change

The rapid progress of science since the Industrial Revolution has been driven by the close interplay of theoretical and practical advances. I believe that the mutual interdependence of systems thinking and lean offers a true opportunity here. By recognizing the synergies between these two fields, we can drastically increase our capacity to improve systems.

The bad news is that integrating these two approaches means more work. If I’m correct, system thinkers must acquire the discipline of lean practice. This has been my own particular path: fun, interesting, but never easy. And lean practitioners must make the effort to understand systems thinking, which is a significant intellectual investment.

Still, I believe this challenge is worthwhile. In today’s hyper-competitive markets, companies needs the performance improvement promised by lean. Furthermore, the strong systems thinking undercurrent of lean makes it focus on reducing waste of all kinds, including externalities such as pollution and garbage. Since its humble beginnings to its recent 2020 global vision, Toyota has continuously aimed to offer value to society overall. Considering the problems we collectively face in this new century, a proven method of industrial improvement also intent on reducing waste in all its forms should not be dismissed lightly.

One of the enduring puzzles of the lean movement is why it hasn’t spread more quickly through industry: Many try, few succeed. Systems thinking, I believe, could contribute significantly to solving this conundrum by providing an overall framework to lean practice. To paraphrase Karl Marx, the point is not merely to understand the world, but to change it. Systems thinking offers the means to understand; lean, the practice to change. By pursuing both jointly, we can learn faster how to change the world in the right way to face our global challenges.

Michael Ballé is associate researcher at Telecom ParisTech and managing partner of ESG Consultants. For the past 15 years, he has focused on how companies use lean techniques to develop a lean culture as part of his research on knowledge-based performance and organizational learning. He has written several books and articles about the links between knowledge and management (Managing with Systems Thinking, The Effective Organization, Les Modèles Mentaux), and more recently, co-authored two business novels, The Gold Mine, which has received the Shingo Prize for Excellence in Manufacturing Research, and The Lean Manager. Michael is co-founder of the Projet Lean Entreprise and the Institut Lean France.

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