LEAN - How to become 500 times more efficient – part 1

A new book rejects years of focusing on resource efficiency in production and logistics, and argues that flow efficiency creates more value. Up to 500 times more value, in fact. In this first article we look at the (hidden) sources of inefficiency. In the second article we will take a closer look at how you can apply flow efficiency to achieve a multiple increase in efficiency.

Efficiency can be inefficient. This is proven by two Swedish researchers in the new book "This is Lean", in which they write about "the efficiency paradox" and present a solution to this paradox. They divide efficiency into two main groups, which they call resource efficiency and flow efficiency. When looking at production logistics, most manufacturing companies in the western world traditionally focus on resource efficiency more than flow efficiency. Resource efficiency focuses on making efficient use of the resources that add value. This means that the aim is that all of the resources in the form of machines, tools, transport materials and employees that are needed to keep the production logistics flow moving must be running for as much of the time as possible. Ideally, production capacity should not stand idle at any time. The most commonly used method of management by objectives and optimisation, OEE (Overall Equipment Efficiency), is a good example of an indicator and an approach based on resource efficiency.

Why 500 times more efficient? The figure comes from an example in the book, in which the researchers tell the story of a woman who has suspected breast cancer and is waiting for a diagnosis. The throughput time for the tests, which are conducted according to resource efficiency principles, is 42 days. They compare this with the throughput time for a diagnosis at the One Stop Breast Cancer Clinic in Malmö, where they have brought together all of the competences needed to produce a cancer diagnosis in one place. The focus here is on flow efficiency, and the throughput time is two hours. The difference is thus a factor of 500. The figures are taken from real life and have been verified by five professionals from the health service.

Hidden negative effects

But there is one problem. A resource-efficient approach creates problems based on a customer perspective and has a number of negative effects, which in many cases means that:

the approach generates lots of waste or hidden inefficiency, and
the overall efficiency of the production chain as a whole is far lower than the company thinks it is.

Resource efficiency has a number of negative effects that create new needs and require extra resources, extra work and tasks that would not arise in a flow-efficient organisation. This is where we find "the efficiency paradox". The paradox consists of the fact that a major focus on resource utilisation tends to increase the volume of work. According to the two Swedish researchers Niklas Modig and Pär Åhlström from the Stockholm School of Business, organisations that focus to a large extent on resource efficiency are inviting a number of negative effects. They are not only negative from a customer perspective, but also from an employee and company perspective. According to the researchers, these negative effects have their origins in three sources of inefficiency.

Long throughput times

The first one relates to the ability of people to deal with long waiting times. If we want to secure a high level of resource efficiency in production, we must make sure that production always has something to do. Work must not stop. This means that we have to have a buffer of flow units (raw materials, semi-finished goods, etc.) so that we do not run the risk that parts of the production chain are not waiting for work. It is better for flow units to be waiting for parts of the production chain to become free than for the production chain to be waiting for flow units to be ready and reach the production stage. But the way in which processes work is governed by certain laws that are universal and can be mathematically proven. One of these laws is known as Little’s Law, which states that:

Throughput time = flow units in work x cycle time.

Little’s Law thus shows that the throughout time is increased if we increase the number of flow units in production. To be resource-efficient, we must increase the number of flow units in production, which thus increases the throughput time. Another law is the law of the bottleneck, which states that if there is a bottleneck, there is also a longer throughput time.

In their book, the two Swedish researchers show that when things take time, negative effects arise in the form of secondary needs that did not even exist previously. They cite the example of a cancer patient, who because of a resource-efficient hospital service has to wait 42 days for a diagnosis. During this waiting time the patient is naturally extremely concerned, which results in sick leave, which results in the workplace hiring a temp, who has to be trained and for a period is less productive and produces work of a lower quality than the person on sick leave, which in turn results in unsatisfied customers, etc.

There is a domino effect, as one domino knocks down the next one, and so on. The same principle applies for an industrial production facility, in which a long throughput time first and foremost creates higher stocks and more capital tied up, as well as poorer liquidity and financing capacity. According to the two researchers, people have a limited ability to deal with long throughput times, and this generates a number of problems.

High number of flow units

The other source of inefficiency that arises in organisations that focus on resource efficiency relates to people’s ability, or inability, to deal with several elements at the same time, and is closely connected with the first source of inefficiency, a long throughput time. A manufacturing company with low flow efficiency will quickly need to increase its stock levels. This creates a number of secondary needs. Firstly, it requires more storage space, which as well as being expensive in itself, also generates costs of heating, administration and monitoring. Secondly, it is difficult to maintain a proper overview if there are several different warehouses. Thirdly, big warehouses and high numbers of products tend to conceal problems. Just imagine that you start to produce low-quality products in the very first stage of the production process. If the process is set up in such a way that several components are produced simultaneously, it can be difficult to identify and rectify quality problems. Secondary needs can therefore arise in connection with high stock levels. The point is that if stock levels were lower, these secondary needs would not arise.

In their book, the researchers show that when there are increased requirements to deal with too many things at the same time, the human factor will ultimately create new secondary needs. It’s easier to juggle three balls than thirty at the same time. Resource-efficient organisations create lots of balls that have to be dealt with at the same time, which results in a number of secondary tasks and sources of waste, which ultimately places a burden on overall efficiency.

A lot of rework and returns

The third source of inefficiency that arises in organisations that focus on resource efficiency relates to people’s ability, or inability, to deal with a lot of rework or returns. "Rework" means that for various reasons you have to start again from the beginning on a piece of work or a production process, and are thus effectively doing the same piece of work more than once.

The researchers put forward the argument that if a long throughput time and several flow units are involved, more rework will also arise. Starting from the beginning on the same task or process creates mental down time, and a high number of repeat deliveries also creates frustration. A high number of repeat deliveries, which typically occurs in a production chain that focuses on resource efficiency and large batch sizes, also creates quality problems. A high number of repeat deliveries creates a "Chinese whispers" effect, which means that every time information is passed on to the next stage in the chain, it becomes distorted. The situation is often that each stage thinks: "Now I’ve done my bit, the next lot can take over and do their bit." No one assumes responsibility for the whole, and sub-optimisation problems arise. This damages the overall level of efficiency as a whole, because:

We forget, which means that we have to start again from the beginning.
Our mental down time is increased, which makes us inefficient.
Information risks being lost, which results in errors.
Repeat deliveries are shoddy, which creates duplicate work.

The paradox

According to Pär Åhlström and Niklas Modig, the great paradox when it comes to resource efficiency is that we believe we’re using our resources efficiently, while in fact we’re being inefficient, as much of the work we’re doing is extra work and non-value-adding activities. The paradox exists at both the individual and the organisational level - and according to the two Swedish researchers it actually also exists at the social level. This is a problem and a major waste of resources. In the second article we’ll take a closer look at how we don’t know that putting too much focus on utilising resources can create a solution to the efficiency paradox.

See more at www.thisislean.com or buy the book at www.amazon.co.uk

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