Get Your Ducks In A Row For Lean Accounting

I have known Russ Field since working with him on a few projects in a large Seattle (now Chicago) based aerospace company. Recently he posted a very (typically Russ) thorough reply on NWLEAN to a question about value stream accounting. I asked him to take the same basic material, clean it up a little, and let me publish it here as a guest post.

Added Feb 21: There are some good comments to this post as well.

Enabling Material-Only Costing in Value Streams

—————– By Russell Field ——————

For some time now, the value stream concept has been a topic of energetic debate. If you choose to implement that approach, you’ll find there is more than one reasonable way to organize them, each with its own requirements for management, measurement and performance assessment.

This discussion centers on the value stream design described in three excellent books:

Aside from my own experiences and observations, these works are the primary references for this article. I recommend them highly for anyone wanting to better understand the concepts and related impacts on the Finance function as a business “leans out”.

NOTE: This article is not an endorsement of this particular value stream form. Rather, it is examination of its enabling and prerequisite conditions.

The really short message, as in so many things, is “Don’t get the cart before the horse!” In this case, if material-only cost accounting procedures (discussed later) are implemented before the factory processes have been realigned and proven, the best which can be expected is a different flavor of misrepresentation.

First, though, some baseline thoughts.

“TRADITIONAL STANDARD COSTING” vs. COSTING OF (LABOR) STANDARDS

Remember, words have meaning. I’ve seen many discussions derailed because of confusion between these two phrases. The philosophy and practice of “Traditional Standard Costing” is not the same as the “costing of (labor) standards”.

The question is not whether I should know the cost of one widget, or the labor content (time) of that widget, or even the labor contribution ($$) to the cost of that widget; rather, the questions are how I should determine the hourly rate ($$) to apply to the labor content (time), and how I should account for other costs of producing that widget.

BUT – even those questions become academic in a value stream where all products have the same labor content and where all costs are contained within the value stream (more on that later); that’s when we can start talking about the average cost per unit at the value stream level.

“LEAN ACCOUNTING” vs. “ACCOUNTING FOR LEAN”

As described in AWCO (pg. 36), these are two different concepts.

“Lean Accounting” refers to the use of Lean tools and techniques to make the accounting process more efficient.

“Accounting for Lean” “… represents an accounting process that captures the benefits of a Lean implementation as well as motivates Lean behavior.”

MATURITY PATH OF “ACCOUNTING FOR LEAN”

Both PLA (Chapt. 2; pg. 141 et al) and WC (pg. 165 et al) make the point that changes in accounting techniques should be made in conjunction with or immediately following the successful implementation of Lean procedures on the shop floor (we won’t get into Service vs. Production in this article). To change the cost accounting processes BEFORE leaning out Operations merely confuses the situation and causes unnecessary churn.

That said, let’s proceed.

In my opinion, the ability to successfully implement and sustain the accounting techniques described in the books noted earlier is dependent upon getting the process “ducks” into four rows:

  1. Organization by value stream
  2. Elimination of task-level labor tracking
  3. Stabilization of overall value stream-level labor costs
  4. Lowering of inventory levels

Underlying each of these “duck rows” is, of course, a set of enabling conditions.

DUCK ROW #1) Organization by value stream

There’s plenty of material out there on value stream mapping, so for this discussion let’s just say there are some key characteristics:

  1. Similar process flows (or “routings”);
  2. Similar production cycle times (AKA “work content”);
  3. Similar physical size of product;
  4. Ideally, personnel dedicated to the value stream; and
  5. Again ideally, no “monuments” or shared resources (there are, of course, ways of dealing with shared resources and personnel, but I did say “ideally”).

In other words, this approach emphasizes segregation of product families with high similarity in multiple categories. What does all this buy us?

a) If every product follows the same process flow or path, physical segregation and rearrangement is much simpler. Additionally, there is a high likelihood that each product will use each resource (or resource type), further reducing the need for cost allocation between product lines/families.

b) If each product takes about the same amount of time at each task/resource, then the overall work content of all products is about the same.

c) If product size is similar, that helps keep the number of people needed and the need for additional, product-specific moving/handling equipment to a minimum (and supports similar work content).

d) & e) If people and equipment aren’t shared outside the value stream, then all of their costs can be attributed to the value stream.

NET RESULTS:

  1. The major sources of cost are captive within the value stream, so the need for allocation is minimized if not eliminated.
  2. Every product in the value stream population takes about the same flow time and has about the same total work content (which also minimizes allocation requirements).
  3. Some key sources of variation in that flow time and labor content are sorted out of the value stream by design.

DUCK ROW #2) Elimination of task-level labor tracking

There are two sub-elements here: “Stabilize task cycle times” and “Establish a common wage structure”. In order to reach these goals, we must create certain conditions.

a) Stabilize task cycle times

In order to create an environment in which a given task takes the same amount of time and effort regardless of who executes it, we need:

  1. Stable, high-quality processes (“reasonably under control and low variability”, PLA pg. 140/141 et al); this cuts down on how many times a job needs to be done, and how much input is wasted.
  2. Standard work; standardizing process steps helps assure that the job is done the same way each time.
  3. A cross-trained, multi-skilled workforce; in full implementation, this means that any member of the workforce can step in and execute any task.

b) Common wage structure

Note that a cross-training and multi-skilling not only helps stabilize task times, but also aids breaking down the “craftsman/guild” barriers to a common wage. For that, we need:

  1. A cross-trained, multi-skilled workforce
  2. Simplified processes; among other things, this makes cross-training and multi-skilling considerably easier.

NET RESULTS:

1) I no longer need to track how much time was spent executing an individual task; with high quality, standard work and cross-training, I know how long it takes because I know the plan.

2) I no longer need to track who executed the task in order to determine an appropriate rate (accountability/traceability is another issue), because everyone gets paid pretty much the same (within a job category, at least).

In short, I no longer need to run all over the production floor, tracking activity durations or costs at the task level. In fact, to the degree that the process paths and work content are very similar, I don’t even need to track them at the Item level.

DUCK ROW #3) Stabilization of overall value stream-level labor costs

Once I have eliminated the need for task-level labor tracking, then I need only to stabilize my labor population in order to keep my overall value stream labor costs at a fairly constant level.

The high-quality processes I put in place to stabilize my task cycle times will help by assuring that labor is used only for production (and not rework or re-make), but I also need to level my demand, either artificially within my walls or by working with the customer base toward that end (I may also need to level-sequence my product mix if I still have significant difference in work content between products).

In that way, I always have about the same amount of work to be done, and don’t need to bring people in, pull them back out, put them back in, or shake them all about (do the “Production Hokey Pokey”!).

NET RESULT:

I have a consistent amount of work to be done in the value stream, so I’m able to maintain a fairly fixed workforce population.

DUCK ROW #4) Lowering inventory levels

Once the inventory turn rate gets down to, or drops below the overall value stream cycle time, product is going out the door very soon after completion. Assuming a FIFO approach, I don’t need to put a lot of effort into tracking my inventory costs because a) they’re per current rates and b) there aren’t many pieces anyway.

NET RESULT:

I don’t have to keep separate track of what I have invested in each lot, batch or item. Even radical changes in material costs flush through the value stream very quickly.

SO:

IF I don’t have to mess with spreading/allocating costs;

AND IF every time I make a given product, it takes the same amount of time;

AND IF all the products I make in my value stream take the same amount of time;

AND IF anyone who makes it gets paid the same wage;

AND IF I don’t have to constantly change the size of my labor population,

THEN I can apply a flat hourly $$ rate – based on total value stream cost – to the product’s work standards (planned work content). In fact, at full maturity I may even be able to simply average my total periodic value stream costs over the number of pieces shipped – AKA “average cost per unit” (PLA pg. 124 et al).

If my value stream is fully segregated and mature, this is the closest I need to get to “overhead allocation”. I don’t have to account for variation in order quantity, labor expense or the like because I’ve designed/driven out those variations. I know what the labor content is because of the stable processes and high reliability; there’s no rework to account for because of the high quality; a worker is a worker is a worker from both a skill and pay standpoint, and I’m controlling the number of workers on the payroll (NOTE: Worker interchangeability must not be confused with worker dispensability / replaceability; it can take quite a while to adequately cross-train good personnel).

And the ONLY thing I really need to track is material consumption (you can throw in some consideration for features and characteristics costing if appropriate). Hence the term, “material-only cost system” (WC, pg. 38).

To recap, in order to enable truly simple, material-only costing we need to:

  1. Organize by value stream, driving out key categories of variation;
  2. Work to eliminate the need for task-level tracking of labor input and rates;
  3. Stabilize the overall value stream labor costs; and
  4. Lower inventory levels to less than one value stream cycle (or 5 days as some suggest).

To do all that, the fundamental enablers include:

  1. A value stream organized around product families with high similarity in routings, process time/work content, physical size and the ability to segregate personnel and resources
  2. Stable, reliable processes
  3. Standard work
  4. Cross-trained, multi-skilled workforce
  5. Simplified processes
  6. Stable, level demand

Of course, these enablers presuppose the existence of lower-level enablers (e.g. accurate BOMs and routings, and having appropriate metrics in place).

So what? My whole point is that there’s more to successfully implementing Lean Accounting techniques described in PLA, WC and AWCO than simply ceasing or starting to gather certain data or collect certain costs. If you already have these enablers in place, then you are better positioned to embrace the related accounting practices.

NOW – the BIG question is, “How do we manage our business until we can get these enablers firmly in place?”

I refer you again to the books noted above. All offer some good thoughts on this subject, but I will reiterate the sentiments expressed under the heading of “MATURITY PATH OF ‘ACCOUNTING FOR LEAN'”. Bottom line: “Don’t get the cart before the horse!”

Your current accounting processes are likely adequate for traditional manufacturing environments, especially those which are still largely mass-production oriented (PLA, pg. 4 et al). Both PLA and WC specifically discuss synchronizing the evolution of Lean Production Operations and “accounting for Lean” (and yeah, I capitalized it).

Genchi Genbutsu in a Warehouse

Now and then something comes across that makes it all worth it. And nothing is more “worth it” to me than to know something I said or did contributed to someone’s insight or impetus to do something spectacular.

Yesterday Earl sent me an email that is one of those times. I was going to edit it from an email to me into a story about Earl’s experience. But instead, I decided to just publish it (with his permission) pretty much as I got it. But to be clear, this is about Earl, and his learning, not about me or my teaching.

Mark,

I received this email [see below] the other day from John.

John was one of the lean leaders working for me in Rochester when I was the Lean Director for Kodak’s Global Logistics team and you were the Lean Director for Equipment Mfg. He is now a professor at RIT teaching lean.

One of the things he does with every class is bring them through his old operation in Kodak. The operation is an outbound crossdock for all of Kodak Park where, through applying our lean principles, primarily “flowing at takt”, we have taken a 2,000,000 square foot (186,000 m2) warehouse and replaced it with an 85,000 square foot (<8000 m2) crossdock.

Along the way we reduced the costs by 70%, improved the reliability to +/- a few hours, and amassed an enviable safety record….and as you can see in his note, we’re making it better every day.

When I think back to how we got here, I have to go back to what started as an innocent Friday night, when you, Paul Cary, and I were sitting around his office and you and Paul were pushing on me that we weren’t really thinking about lean in the right way in Logistics, and I was pushing back that “you didn’t understand”….that we just move pallets around the warehouse.

I can remember like it happened yesterday, but it was actually a few years ago, you and Paul looked at each other, looked at me, jumped up and said “Let’s go see”, so we did.

Several hours later, we emerged from the warehouse, not tired and worn out, but energized and excited. You had helped me to see what was invisible to me (and everyone else around)….even though I was the local “lean expert”.

The approach was classic “Mark”, and I have to admit I’ve stolen it and used it as my own many times, although not nearly as effortlessly. At your insistence, we entered through the outbound dock door, as you pointed out, “closest to the customer”. As I started to walk through and into the warehouse proper, you stopped at the door, and made me stop and describe what I was seeing.

The “Five Why’s” were relentless, and I think it was something like 30-40 minutes before we even moved off that spot, but the seeds were planted right then and there. I had now started to see the whole warehouse as “waste” and totally unnecessary if we could only get product flowing at takt. I can’t tell you how many times I’ve relied on the lessons learned that night to guide me when I get in the middle of something unfamiliar to me.

Well, it took us a couple of years, but your invaluable and patient counsel over the next few years shaped a whole organization’s culture. I know better (now) than to suggest “we’ve arrived”, but the principle of using “flow at takt” and making waste visible to drive continuous improvement is firmly rooted in our DNA now.

Aside from the impressive performance statistics of the operation I know you’ll appreciate more that the things you taught me have been dutifully passed along from me to the manager of the area, and through him, to his successor, and now through the college to many more. All we have to do now is close the loop and get you to hire one of the RIT students somewhere!

I’ll not pretend that a couple of hours on a Friday night several years ago was all it took, and I’m forever indebted to the many hours you spent with me afterwards helping me to grow, but it was truly a life changing event, and I thought you’d appreciate seeing a snippet of what it’s led to. Thanks again for all your insight and support in our, and my, journey.

If you ever find your way back East, you have to stop in to see it, drinks are on me. It is pretty wild, but if you do, I might tiptoe carefully around the idea that you’re the guy that taught me to “physically constrain the process to force it to flow at takt”. It was an essential part of our journey, but obviously anyone that would suggest we can change a 2,000,000 square foot warehouse into an 85,000 square foot crossdock can’t be seeing the world the right way! (Of course I have to follow that up with one of my favorite quotes one of the VP’s here used….”If it wasn’t for the fact we already did it, we would have said it’s impossible”. Thanks again.
This is the email he is talking about:

Dave and Tony, thanks again for giving the walk through to my 25 advanced lean class students yesterday. Some observations:

I think the floor was about the cleanest I have ever seen it. It is always clean, but yesterday seemed even more so.

The evidence of continuous improvement is amazing. Yesterday I saw a number of things that I did not see in my last visit Feb 10 – new lane structures, hybrid cards, changes in box 2, clearer e-box sheets, new standard work sheets and visuals, etc.

I really appreciate you taking to heart the input I gave you based on the feedback from my last class on the tour structure/agenda itself. The last tour was very good, this one was awesome. The standard work sheet Dave showed me for the tour was great standard work – content, sequence, timing and outcomes were all vividly clear. I asked for more of a focus on the production control system and you delivered on that request. Dave, in your intro, you sounded like me teaching my class (maybe not a good thing?!?).

[…]I was pleased the students had more time to ask more questions. I keep preaching continuous improvement in class and you guys model it which helps give the message credibility in the minds of the students.

The other thing that struck me, which is not new but seemed different for some reason I can’t explain….. You are moving large volumes of freight, […] and the floor is just so calm. There is no panic, no arguing, no anxiety, just people following the processes, getting product from point A to point B, in a quiet, controlled, efficient way. I still remember when I brought the facilities class over last spring, and especially 2 of the folks with lots of work experience said “I never imagined that a warehouse type of environment could actually look like this.”

Your safety performance is stunning. I know the record when I was there was 534 days. Then we had 2 “old-age” repetitive motion injuries in 2 weeks, then you went 600 + days. Now you are at 200+ days. Absolutely remarkable in a tight space with fork lift trucks moving around. 3 OSHA reportables in 4 years, wow.

I clearly remember “that Friday night.” I think we were in there until 10:00 or later. Paul and I had a really good synergistic style, we reinforced each other, and it was an intense experience for whoever was on the receiving end. This was not the last time we took someone through this exercise.

To be sure, it was Earl and his team that did all of the heavy lifting. All Paul and I did was give him a sense of an ideal flow, and challenged them to discover, and overcome, the obstacles between the current state and that vision – one problem at a time, a couple every day.

Behind The Scenes Of An Outlier

Yesterday when I published Gipsie Ranney’s white paper “Remembering Nummi” I did so because I thought she made some points that others would be interested in.

Let me take you behind the scenes of WordPress. One of the things this little program makes available is a stats tracker. This is the graph of daily “Site Views” over the last month. I think the graph speaks for itself:

graph1Needless to say “Remembering Nummi” got some legs under it.

Looking at the graph, you can see that this site has a pretty steady pulse to it. The dips are weekends. The little (second highest) spike you see correlates with a link back from a site in Europe. Looking at this, and other information, I can reasonably conclude that I have a couple of dozen regular readers, probably from feeds, and the difference is click through traffic from other sites and search engine traffic.

Something different obviously was going on today.

I also see the regular sources of click-throughs to this site. This is a pretty typical list:

gembapantarei.com/2009/01/the_essenti…
leanblog.org
google.com/reader/view
leansupermarket.com/servlet/Page?temp…
google.ca
gembapantarei.com
gembapantarei.com/2009/01/finding_tim…
linkedin.com/mbox?displayMBoxItem=…
us.mc354.mail.yahoo.com/mc/showMessag…
search.conduit.com/Results.aspx?q=Typ…
170.2.59.38:15871/cgi-bin/afterWorkOp…
my.yahoo.com/p/3.html
translate.google.com.br/translate?hl=…

But here is today’s:

tmalive.tma.toyota.com/toyota/story.c…
dailynews.tma.toyota.com/story.cfm?st…
clipsheet.ford.com/article_view.cfm?a…
clipsheet.ford.com/article_view.cfm?a…
dailynews.tma.toyota.com
clipsheet.ford.com/article_view.cfm?a…
toyota.lonebuffalo.com/story.cfm?stor…
global.clipsheet.ford.com/article_vie…
tmalive.tma.toyota.com/toyota
global.clipsheet.ford.com/article_vie…
dailynews.toyota.com/story.cfm?story_…

So I conclude that “Remembering NUMMI” got picked up by a couple of news clipping services and fed into Toyota and Ford.

First, then, is a “Welcome” to any new readers from these great companies. Please feel free to peruse, comment, and even offer to write a guest post.

Though I cannot attribute to anything other than who does, or does not, subscribe to a particular clipping service, I did find it ironic that this article, really taking a critical look at the need for government guaranteed “bailout” loans to the automotive industry, was read exclusively by people in two companies who (so far) have not asked for any help. (I speak primarily of Ford here – they conspicuously said “We can get by for right now, thank you.

To this I offer a personal comment – as a former Boeing employee I have met (though certainly did not know) Alan Mullaly (now CEO of Ford). While no leader is perfect, I believe he is certainly capable of helping the Ford culture to “confront the brutal facts” of their business. My main question about Ford is whether they had already hit the iceberg when they brought him on board.

To GM and Chrysler, though, I guess I would offer: Gipsie Ranney seems to be talking to you guys. It would behoove you to listen to her. Yes there are devestating external factors at work, but guys… your boat was leaking faster than the bilge pumps were pumping long before the storm. Stop blaming the weather and take a look inside. That is where your issues are.

Remembering NUMMI: Gipsie Ranney

Gipsie Ranney is a consultant with The Deming Cooperative.

A white paper she recently wrote, contrasting NUMMI with The Big Three, has been circulating by email. I requested, and received, her permission to publish it here.

Remembering NUMMI

Gipsie B. Ranney
January, 2009

The discussions of a bailout for the U.S. owned auto industry – The Big Three – and the recommendation that a czar be named to oversee them so that they don’t waste U.S. taxpayers’ money has led me to think about an experience I had in the early 1990s. I had the opportunity to tour the New United Motor Manufacturing (NUMMI) factory in Fremont, California. Thinking back on that experience has led me to wonder how much good an injection of cash would do.

Much has been written about Toyota’s production system, but my observations on that visit may help to shed additional light on the differences between Toyota and The Big Three and what the likely outcome of attempts to cure what ails The Big Three may be. As you probably know, NUMMI was established as a joint venture between General Motors and Toyota. Middle management personnel from GM were sent to NUMMI to spend time learning about how Toyota did things. The tour I made was conducted by some of those GM employees. As I understood it, the GM employees who were sent to NUMMI were required to write at least one white paper about what they had learned. Rumor had it that only a few people back in GM ever read those papers and employees who came back to GM from NUMMI found themselves unable to get back into the career progression at GM, so there were few who volunteered to go after the initial volunteers. This led me to believe, after my visit, that perhaps the best opportunity GM would ever have to learn something useful was being thrown away.

Before the tour, I didn’t think I was going to see anything remarkable. I thought I would confirm my belief at the time that all The Big Three had to do was get busy on improvement and all would be well. I came away shaken by what I learned. The most important things I learned were about thinking. Toyota clearly thought differently about producing vehicles. Whether they have maintained these ways of thinking in spite of opportunities to be diminished by adopting the practices of The Big Three will have to be answered by someone else.

Before the Fremont factory had been turned over to NUMMI, I was told it had the worst record of management/labor conflict of any U.S. automotive plant. Now, management/labor conflict was nearly non-existent. Further, I was told that among the assembly plants connected to GM, the NUMMI factory (since Toyota entered the picture) had the best quality record, although it had the worst quality record of any Toyota assembly plant. It was my understanding that the top management of the NUMMI factory were Japanese, as were the engineering staff.

The first area we visited in the factory was the incoming materials warehouse. This warehouse was devoted to parts and materials supplied within the United States. Of course, the warehouse had visual controls. There were areas painted on the floor with signs over them that said how much of what items should be there. As I recall, supplies came into the warehouse on a four-hour cycle; that is, suppliers shipped enough of an item to last for four hours. These supplies would be on their way somewhere in a new vehicle in four hours. This was part of the JIT (Just in Time) materials supply system that has been copied throughout the U.S. (I was amused at the time by ads I saw in airline magazines offering to warehouse a supplier’s parts and send them JIT to their destination. This was a new, more expensive version of the push system for production and management of inventory that I suspect still exists.)

The answer to a question asked by someone else on the tour was stunning to me. The person asked what kind of computerized inventory system they had at NUMMI. The leader of the tour at the time – a materials management person – responded, “we don’t have one; the Japanese say that computerized inventory systems lie.” I was somewhat familiar with inventory at Big Three factories. Huge inventories of component parts were maintained. It sometimes took days of shut down to do a complete physical count of inventory. We were told that NUMMI could do a complete physical count in four hours – that made sense, since that was generally all the inventory that was there except for parts shipped in from Japan. Why the huge inventories in Big Three factories? Partly because the production system was a push system – vehicles were built to satisfy sales forecasts that were often overly enthusiastic, and partly because the parts were there Just in Case. If there was a failure on the production line, there needed to be lots of spare parts to keep production going. I had heard horror stories about production lines that were halted for lack of parts that were the right size, even though there were hundreds of thousands of parts – of the wrong size – in inventory. I had consulted with several companies that had a very difficult time matching up the records of inventory in their information system with the actual physical inventory. That is, the computerized inventory system contained “lies.” They spent a lot of time and effort trying to decide what the correct numbers were. As a result of the design and operation of their production and supply systems, NUMMI was able to avoid the expense of the computerized record system and the expense associated with management of huge inventories. Whatever was spent trying to keep the records straight and keep track of where the parts were in Big Three factories was not being spent at NUMMI.

A friend commented that he believes the material flow system used by Toyota may provide their biggest competitive advantage. In American manufacturing systems, one of the first steps in providing for material needed to produce a product is to create a Bill of Material (BOM) based on the design of the product. The BOM lists all of the parts needed; for example, a car needs one engine, four wheels, one catalytic converter, one steering wheel, two headlights, and so on. When the production of one car is planned, the BOM is used to order all the parts needed to produce the car. When the parts arrive, the appropriate electronic records of inventories are altered accordingly. Then when the car is produced, the BOM is used to delete the parts used from the inventory records. This is known as “backflushing.” Engineering changes involving changes to part content of a product should lead to corresponding changes to the BOM. When this doesn’t happen accurately or soon enough, use of the BOM and backflushing leads to accumulating errors in inventory records and incorrect orders. The result is computerized inventory systems full of “lies.” One company expects to save approximately ninety percent of the cost associated with inventory by switching to Toyota’s Kanban system. My friend pointed out that the Kanban system is self-correcting and does not require the labor hours, elaborate information systems, and inventory expense associated with traditional systems of material management. Another friend pointed out that many of the practices Toyota uses to manage material may have been adopted by The Big Three. That may be the case, but this example illustrates differences in purposes, concepts, and questions, and therefore methods, that can exist in organizations’ approaches to their work.

Use of the traditional approach to materials management and the consequent cost of inventory leads to distraction of the management that prevents them from addressing issues of greater importance to the future of the enterprise. The statement, “you can’t manage what you don’t measure” has become a mantra for American business. But, as a friend has observed, when one decides to measure something and attaches a meaning to the measurements, one has framed the questions to be addressed and defined suitable answers. NUMMI had no interest or need to keep detailed records of inventory. They had changed the question from “how do we manage inventory and reduce inventory cost?” to “how should material flow through the system?” The Big Three could gain great benefit from asking themselves what the important questions might be. I have often wondered how often managers of American businesses fall into the trap of using existing measures for no other reason than because they are there – required by regulation or for tax reporting purposes, rather than deliberately choosing indicators that will help them manage. Questions should precede answers.

At NUMMI, some automobile components were imported from Japan. One of these was the engine. Another person on the tour told us that a materials director at the engine division of a Big Three company had just issued an edict that the purchase price of every part being supplied from other divisions and outside suppliers had to be reduced by exactly the same percentage in the next year: ten percent. While touring the area where engines were inserted into the vehicles at NUMMI, the tour guide related that the Japanese had evaluated the importance of every engine component to the proper functioning of the engine. He said that they would then attempt to reduce the purchase price of components that were not as important while they invested resources in improvement and perhaps paid a higher price for components that were critical to reliability. The contrast between the foolish edict to reduce the prices of everything by the same percentage and the intelligent consideration of functionality and reliability of the product was another example of a difference in thinking – Toyota’s approach being far more mature.

In the stamping area, we learned that the same approach was used to design and build the dies that were used to stamp parts of the vehicle body. The material used on the surface of the die was very expensive, but extremely hard, while the other parts of the die were far less expensive than what was used in US companies. NUMMI’s dies served longer and were, overall, less expensive to build. These two examples illustrate the notion of optimizing an entire product system in terms of cost and performance, rather than sub-optimizing by trying to minimize each individual component’s up front cost. These are different ways of thinking about purpose and method.

At the time I visited, the NUMMI factory was not highly automated in terms of the use of robots. We saw robots helping factory workers put the seats in vehicles. We were told that robots were not used in the factory to replace workers; they were used to assist workers when the work was physically very demanding or difficult. I was reminded of a Big Three assembly plant where robots were installed to replace the welders who welded the frames of vehicles together. After a short time, the robots were removed and replaced by humans. The reason was that there was so much variation in the components coming in to be welded that the robots got confused and were making pretzels instead of frames. The human welders had been adjusting to that variation for years.

The replacement of people by machines is a favorite method used in the U.S. to affect accounted costs. However, direct labor is often the least expensive per hour kind of labor in a company. Machines must be maintained (or should be) and the software associated with automation and other computer operated equipment must be revised to accommodate changes in production processes. The labor expense associated with these activities is often more expensive per unit time than direct labor. Some of these expenses even show up as engineering or information systems expense. Sometimes, humans are needed instead of automation run by software because they are more adaptable and more easily maintained. The more complexity in any production system, the more opportunities there are for failure. The point here is that choices made in the design of a production system must be considered from a total system viewpoint, rather than from a simplistic, accounted cost viewpoint. I understand that Toyota’s new U.S. factories are highly automated. I would expect them to have been sensible about the design of these systems and to consider the possible consequences of their choices.

Lots of attention is paid to the cost of labor, and labor cost has been a favorite excuse for lack of competitiveness. But the options for ways to be non-competitive are limitless. I was told that one of The Big Three required that measurements on approximately 1200 “key indicators” were required to be reported to the central administration monthly. There were probably thousands of people accounted for in overhead doing the work to make those reports. There were not enough executives in the central administration to review all those numbers and probably a rare few of them knew what to make of the numbers if they did review them.

There is no question that existing obligations are major factors in the financial problems The Big Three are having. It is interesting that the big focus is on organized labor and the obligations for benefits to salaried retirees are not discussed nearly as much. The UAW certainly isn’t lovable, and the concessions they have obtained in terms of pay and benefits have been enormous and seriously detrimental in the long run. But one question keeps coming to my mind with regard to those concessions. Did the UAW simply issue an edict that there would be concessions? Of course, the answer is no. It takes two to make a contract and the management of The Big Three agreed to those contracts with the UAW. Surely there was someone in the management of each company that did some computations to see what the concessions would cost the company in the short term and the long term. I suspect that there was an extreme desire each time a new contract was negotiated to avoid a strike. After all, a strike would happen right away and would affect that year’s bonuses, but the consequences of the concessions would come to roost in the future and it would be more difficult to find someone to blame.

The central administrations of The Big Three tend to issue edicts to their organizations about what performance is expected. An edict issued in one of the companies stated that warranty cost was to be reduced by fifty percent this year to next year. The design and testing of a vehicle and its components takes several years. Major redesigns are not done every year. Major components are often carried over from one year’s vehicle to the next. The designs of vehicles and production systems for next year were already completed. How could such a reduction be achieved? Obviously, the individuals responsible for the edict were not thinking clearly about the constraints the nature of their business placed on performance. Of course, one “reason” for high warranty costs that regularly surfaced was that the dealers were cheating. So the edict to cut warranty cost by half may have been aimed at making the dealers behave.

Are we beginning to see a pattern here? Problems that are assigned to suppliers, direct labor, and dealers as sources of non-competitiveness appear to me to be manifestations of what Peter Senge called “The enemy is out there.” According to this view, some of the problems of non-competitiveness that are due to poor thinking and poor decision-making are ignored and the blame for all problems is assigned to some other group. If in no other way, we could all follow Michael Jackson in this regard and “start with the man in the mirror.” Reflection on one’s own role in one’s situation is difficult, but seems to be critically important to avoid repetition of the same mistakes.

I have not discussed what I saw in production at NUMMI in any detail because Toyota’s production system has been analyzed many times. One aspect of NUMMI that I thought was very important was management of the labor force. We learned that direct labor on the production line had secondary jobs that they were supposed to do if and when the production line stopped. They would do various equipment maintenance tasks and cleanup tasks. My understanding of Big Three direct labor is that production workers have no responsibility for maintenance; they have quotas for a shift’s production, and when they complete their quota they can go sit in the cafeteria or find a place to sleep. The management of NUMMI was able to negotiate an agreement with the UAW that enabled the assignment of auxiliary tasks to workers, but apparently the management of The Big Three were not.

As I understood it, there were work groups in production at NUMMI that rotated among different jobs in an area. There were levels of qualification that could be achieved by an individual worker for each job in the area. As a worker gained more training and experience, he or she was able to move up to the next level of qualification. The highest level of qualification was “teacher” or “instructor” or something similar. The work groups had improvement projects that they worked on. Their tasks involved improving the quality of the output of their area, or improving efficiency, or making the work easier to do, or all three. If they were able to demonstrate that their ideas for improvement were good, they would be implemented. As I saw it, these aspects of the organization of work helped to enable people to be engaged and to have a sense of contributing to their joint enterprise. At times, there may be too much focus on the technical aspects of the Toyota production system (lean, JIT, …) and not enough on the culture. The commitment that comes from personal pride in one’s work is a critical, but unmeasurable, aspect of any employee’s contribution to the enterprise.
The most remarkable insight I gained at NUMMI came as an answer to a question from a member of the touring group. The person asked what had been learned about the reasons that management/labor conflict had been reduced so much. The tour guide answered, “The answer we get from members of the labor force is that the Japanese do what they say they will do.” This was the same labor force that had held the record for most grievances filed per year in an assembly plant in the U.S. To me, this says a great deal about trust. There are circumstances in which you can trust a manager to be generous or kind or helpful; there are circumstances in which you can trust that manager to be harsh or intolerant of certain behaviors. In both cases, the manager who can be trusted to behave as you expect may be preferable to a manager who is unpredictable and cannot be relied on to provide the resources you need to do a good job. Some consultants imply that all managers need to do is to be nice to people and everything will be O.K. I doubt if that is sufficient.

Several months ago, I remarked to a person who deals with 401K investments in a very large financial management company that I didn’t think investments in American car companies would be a good idea. He remarked that I was wrong since they were coming out with some great new products that would be fuel efficient. I don’t think he knew very much about the nuts and bolts of building cars and trucks. The new products would at first only be a drop in a giant bucket. It takes years to develop and test new vehicles and to retool factories to produce them. The Big Three had equipped themselves to continue producing SUVs and other fuel guzzling products that were becoming more and more unattractive as gas prices shot up. As a friend remarked, redesigning a car is not the same thing as redesigning the label on a soup can. Equipping a production line to build a car is not the same thing as printing a different label. Of course, this may change in the future as more flexible factories are built. The point of my rambling here is that the press and Congress are talking about redesigning the automotive industry in the U.S. when I suspect very few of them are qualified to do that. I think it would be preferable to have members of the Toyoda family do it – wishful thinking, I’m sure.

After World War II ended, Toyota had, or created for themselves, the luxury of taking time to think, to experiment, and to learn with the conscious aim to improve their capabilities. If The Big Three were not in such a state of emergency, they could profit by asking questions aimed at sustainability and improvement, such as: What is important to our customers? (This requires actual research, not just speculation or the use of company mythology.) What kinds of changes do we expect in the future that might change what our customers need and value? What changes do we expect that will impact our ability to serve the needs of our customers? How can we improve our relationships with our suppliers and our customers? How can we make our work easier or simpler? How can we design the work so that it flows better? What products or processes need improvement? How can we improve the interactions that take place between departments? How can we more wisely use performance indicators and the information they provide? As it is, The Big Three seem not to have the luxury of careful thought.

The Big Three, and the entire international automotive industry, are in deep trouble at the moment. They are certainly not responsible for some of the trouble they are in. But The Big Three are responsible for managing their organizations wisely. I think that will take more than money. It will take a different culture and a different mind.