Operations Management
W. Edward Deming
3.7 Lean management
Lean production and its management involves a consolidation of improvement systems into a single coherent process for continuous improvement. The concept was born from the expe-rience of Western fi rms competing with Japanese businesses with their emphasis on qual-ity. For some fi rms this new type of competition proved fatal whilst others realised that if they were to survive they would have to radically change the ways in which they transformed their inputs into outputs. Consequently, ‘operations management’ has been elevated from being viewed in the West as a largely mundane and unimportant aspect of management to being seen as the key to revitalising organisations. Womack et al. (1990) famously traced the impact of new approaches to manufacturing in the automobile industry.
Henry Ford’s adoption of assembly line production methods early in the twentieth cen-tury transformed the way cars and many other products were made. An alternative way of making things pioneered by the Japanese is now making mass production obsolete. Lean producers are thought to achieve a 2:1 advantage over non-lean producers. This method involves bringing together the activities of managers, employees and suppliers into a tightly integrated system that can respond extremely quickly to changing customer demands. The result is what is called a ‘lean production’ system which focusses on a removal of all forms of waste from the system, whether parts, people or processes and is explained by Dankbaar (cited in Brown et al., 2001) as:
● making use of the workforce by giving them more than one task
● cross-functional management and employee involvement
● integrating direct and indirect work
● taking advantage of quality circles.
Cross-functional teamwork involves active project-based communication and problem solving. Inevitably this demands a change of organisational culture in order to overcome damaging inter-departmental rivalry, confl ict and politics. Often the only way in this can be facilitated is by organisational restructuring and different specialists working together in the same physical location on common problems (the use of quality circles).
Flexible manufacturing is only achieved where ‘economies of scope’ make it economical to produce small batches of a variety of products with the same machines. This represents a stark contrast to the infl exibility of traditional mass production assembly lines with their emphasis on ‘economies of scale’. This leads to the manufacture of a larger variety of prod-ucts at lower cost and higher quality. For Womack et al. (1990) the position of the cus-tomer should be taken whereby six lean principles need to be observed:
1. Solve my problem completely.
2. Don’t waste my time.
3. Provide exactly what I want.
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4. Deliver value where I want it.
5. Deliver value when I want it.
6. Reduce the number of decisions I must make to solve my problems.
All six principles will provide a defi nition of value for the customer. Womack et al.
describe waste as any human activity that absorbs resources but creates no value. They quote a Toyota executive who categorised waste as:
● product defects
● over-production of goods not needed
● stocks of goods awaiting further processing or consumption
● unnecessary processing
● unnecessary movement of people
● unnecessary transport of goods
● employees waiting for process equipment to fi nish its work or an upstream activity to be completed.
Coote and Gould (2006) evaluated the work of Womack and applied it to the latter day fi nance function. They suggest that a further category of waste is the design of goods and services that do not meet the needs of the customer. In the context of fi nance they suggest ways of delivering customer value without waste, including:
● focussing on products where benchmarking shows high costs for relatively little value
● talking to customers to establish their defi nition of value
● assigning process ownership, responsibilities and power
● establishing clear and frequent measurement of the process’s effectiveness and effi ciency
● building a culture of continuous improvement, and using this as a foundation for more transformational change.
From these explanations it is clear that the main characteristics of lean production include fl exible workforce practices and high-commitment human resource policies. It will also require a commitment to continuous improvement through the organisation whether inventory management, capacity management or performance enhancement methods.
Despite the obvious advantages of lean production it does have certain limitations and has at times been criticised. For instance, Brown et al. (2001) suggest that it ignores four critical areas of operations:
1. manufacturing’s contribution to corporate planning 2. manufacturing strategy
3. the seniority of operations staff 4. potential alliances.
In addition it may not empower employees, indeed it could be seen as a top-down approach forcing employees to devise ways of doing more for less resource.
3.7.1 Managing inventory
From the Toyota listing of ‘waste’ (specifi cally over-production of goods not needed, stocks of goods awaiting further processing or consumption) it is clear that lean thinking can be applied to methods for managing inventory. Managing inventory is a major contributor to improving material, customer and information fl ows from the business to satisfy the
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needs and wants of the customer. All those studying accountancy will readily recognise that inventory can exist in several forms (raw materials, work in progress, fi nished goods, etc.). They will also know that stock holding has costs attached to it and such costs may ultimately contribute to an organisation becoming uncompetitive.
Brown et al. (2001) point out that different organisations hold inventory in different places. For example, some sandwich shops only sell pre-packaged food (fi nished) while oth-ers make on site at a special location, and othoth-ers still hold a combination of raw materials (salads, etc.) and allow customers to customise their basic sandwiches (work in progress).
Decisions such as these leads to the concept of ‘make-to-order’ approaches where inventory is only taken and assembled on receipt of an order or ‘make-to-stock’ where items are held in anticipation of an order.
There are of course several methods for managing inventory (summarised in Table 3.10) the challenge for organisations is to determine which supports their ‘lean’ efforts best.
3.7.2 Managing operational capacity
Methods of ‘balancing’ demand and productive capacity is a key challenge in operations, because in the short term all organisations are capacity-constrained, demand fl uctuations impact on inventory management and operations, and demand may exceed supply leading to a reduction in quality.
Table 3.10 Methods for managing inventory
System Explanation Usage
Continuous inventory Levels are continually monitored, and when stock drops below a predetermined level a fi xed amount is ordered to ‘top up’
levels.
The tinned food in person’s home or the cleaning materials held are domestic examples. Continuous inventory can be operated using a fi xed order quantity replacement system or an Economic Order Quantity system (EOQ), which takes into account variable costs associated with ordering the item and holding the item. The system encourages buffer stocks and refl ect ‘just in case’ rather than
‘just in time’.
Periodic inventory (or bin) Stock levels are checked after a specifi c time and this leads to variable ordering of new stock.
Commonly used in retail outlets such as a supermarket at the end of a day’s trading.
ABC system ABC is not an acronym, ABC is a
classifi cation based on the Pareto 80/20 rule which suggests that 20% of the items are likely to account for 80% of the annual expenditure. ABC focuses on those items that are most important and therefore need careful monitoring.
A: items of high value, close monitoring needed including managing the supplier/buyer relationship.
B: medium items less tightly managed.
C: low value inventory requiring little management (e.g. nails, screws, tacks, etc.).
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There are issues when demand is high. Problems might be avoided by either manag-ing capacity and/or managmanag-ing levels of demand (usually by applymanag-ing marketmanag-ing practices).
Supply is inevitably fi xed by factors largely internal to the organisation such as facilities, systems, technology, human resources and capability. Demand is by comparison an exter-nal force. Inevitably there will be fl uctuations between these two dimensions. Three main means are used for balancing capacity and demand, namely: level capacity, chase and demand management strategies.
1. Level capacity strategies involve the organisation building inventory levels so that these excess stores can be used to deal with increases in demand beyond capacity. Clearly this has cost implications and will not apply to service organisations where excesses of demand over capacity will result in queues (a good example being waiting lists for oper-ations in the UK’s National Health Service).
2. Chase strategies involve constantly adjusting organisational activity levels to shadow fl uctuations in demand. This is diffi cult for a fi xed workforce operating under rigid conditions.
3. Demand management strategies involve attempts to infl uence demand to smooth vari-ations above or below capacity. For example a football club that has to maximise attendance for an upcoming fi xture against ‘unattractive’ opposition in a minor com-petition might introduce a two people for one ticket price scheme or a ‘kids go free’
with an adult initiative. Table 3.11 summarises the main approaches available to service organisations.
McDonald (2008) explains that in reality most organisations combine several approaches when managing capacity. She cites the example of Ikea stores with:
● large warehouses containing goods that have yet to be ordered
● extended opening times over Christmas periods in order to cater for extra demand
● price cutting in order to shift products that have gone out of fashion.
In terms of supply of goods, most modern manufacturing processes now utilise the com-puter-aided design (CAD) and comcom-puter-aided manufacturing (CAM) operations. CAD and CAM are also the keys to fl exible manufacturing as they enable computerised machines to perform a variety of functions. Computer-aided design and computer-aided manufactur-ing (CAM) can help an organisation:
● provide fl exibility to meet customer requirements more fully
● eliminate mistakes
● reduce material wastage.
These advances work towards world class manufacturing performance. When CAD and CAM are integrated it is possible to achieve computer-integrated manufacturing (CIM)
Table 3.11 Main approaches for managing service capacity
Through managing demand Through managing supply
● Complementary services ● Sharing capacity
● Reservations ● Cross-training employees (multi-skilling)
● Price incentives ● Part-time employees
● Off-peak demand ● Flexible working patterns
Source: Based on Fitzsimmons and Fitzsimmons (2004)
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whereby a system directs data fl ow whilst also directing the processing and movements of material.
These IT developments may be allied to production techniques such as Just In Time (JIT) methods of production which according to CIMA (2004) ‘is driven by demand for fi nished products whereby each component on a production line is produced only when needed for the next stage’.
A systems’ ability to accommodate signifi cant changes in volume, capacity or capa-bility can prove an invaluable source of organisational competitive advantage. Flexible Manufacturing Systems (FMS) react to both predicted and unpredicted changes. This might take the form of machine fl exibility to produce new product types and change the order of operations conducted on a part.
Exercise 3.10
What measurements of performance might be developed for a production department?
Solution
● Degree of fl exibility
● Time taken to acknowledge an order to the customer
● Time taken to process orders into a form acceptable to the factory
● Speed of dispatch to the customer
● Quality achieved.
Queuing theory is the study of waiting times through mathematical analysis of related proc-esses. The theory enables performance measures to be calculated including:
● average waiting times for a product or service
● the expected number of customers (or clients or patients) waiting at a particular time
● the probability of encountering the system that is either empty or full (e.g. such as arriv-ing at a hospital department).
Within the operations system itself recent approaches such as cellular manufacturing have had the effect of altering traditional plant layouts by creating a U-shaped fl ow of work in which different machines assisted by CAD technology are grouped to make prod-ucts with similar machining requirements.
The relationship between manufacturing and engineering and maintenance should be acknowledged. Engineering is responsible for providing the methods of manufacture.
While they work with design engineers, their task is to provide the most economical way of manufacturing the product, to pre-agreed quality levels, at pre-planned costs, and in respect of forecast quantities. The maintenance function is responsible for the maintenance of the factory buildings, machinery, plant and for power and lighting.
3.7.3 Practices of continuous improvement
There are several practices of quality management that an organisation might operate, some are discussed here.
Quality Circles. Prof. Kaoru Ishikawa, pioneered quality management processes in the Kawasaki shipyards following the Second World War. One concept he introduced was that
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of the Quality Circle (QC). QCs are small groups of staff that meet on a regular basis to identify quality issues and attempt to formulate solutions. QCs are normally multidisci-plinary, and are given a brief to work as a team to identify, investigate, analyse and solve work-related problems or tasks. The basic concept is that QCs form part of an organisa-tion-wide quality control activity.
QCs can help the quality process in a number of ways by:
● using interdisciplinary quality teams to help staff gain a better perspective of the whole organisation and their part within it
● strengthening linkages between functional areas
● devolving authority and responsibility for quality down to the operational level
● fostering commitment and ownership of problems.
Kaizen involves continuous improvement by small incremental steps over a long period.
This Japanese concept emphasises providing the workforce with the tools and techniques for improving operations. Maurer (2005) stresses Kaizen’s impact in setting and achieving higher standards, and the value of Kaizen events in:
● bringing people together to face up to technical and quality challenges
● encouraging stakeholder involvement and interaction
● allowing participants to leave with a plan in hand.
Some of the most commonly used kaizen tools are refl ected in Table 3.12.
Table 3.12 Kaizen tools
Tool Explanation Use
PDCA Use of a plan-do-check-act operating
sequence.
A cycle that encourages the key stages to continuous improvement.
The fi shbone diagram A cause and effect diagram used to analyse all contributory causes (or inputs) that result in a single effect (or output). For example, lost sales because of temporarily stock outs would frustrate quality. The cause, however, might be diffi cult to pin down and may not be due to a single reason. A line is drawn indicating a route to continuous improvement and off this line ‘fi sh bones’ will splinter indicating problems that may be encountered. Causes can be arranged into categories (typically systems, technology, people and resources).
A map in the form of a fi shbone illustrates all the diffi culties and so focusses effort.
The Pareto rule Vilfredo Pareto identifi ed that 80%
of the country’s wealth was held by 20% of the population. Similarly 80/20 classifi cations occurred regularly in most other areas.
The ‘rule’ encourages a focus of effort on the important 20% in order to be effective.
The fi ve why process Examine issues by constantly asking
‘why’ until the real issue is identifi ed.
First developed at Toyota; it encourages employee problem solving.
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5-S practice is a technique used to improve both the physical and the thinking environment of the organisation. It encourages standardisation of procedures, and is devised to improve the clarity of management processes. 5-S is based upon fi ve Japanese terms ‘seiri, seiton, seiso, seiktsu and shitsuke’ or ‘organisation, neatness, cleanliness, standardised cleanup and discipline’ (interpreted below):
S-word Meaning Example
Structurise Organise Delete old information, throw away unwanted items Systematise Neatness Clear organisation of documents and fi ling system Sanitise Cleanliness Individual responsibility for own tidiness and cleaning Standardise Standardise Transparency of storage and fi ling systems
Self-discipline Discipline Do the above daily
Six Sigma reduces variation in a product offering. It is a methodology that strives for near perfection. It is a data-driven approach for eliminating defects (aiming towards six stand-ard deviations between the mean and the nearest specifi cation limit) in any process. To achieve Six Sigma, a process must not exceed 3.4 defects per million opportunities (where a defect is anything outside of customer specifi cations).
Exercise 3.11
What does an organisation need to adopt the Six Sigma philosophy?
Solution
According to The British Quality Foundation an organisation needs:
● the tools
● the methodology
● training
● metrics
● total commitment from executive level
● signifi cant culture change.