LEAN - How to become 500 times more efficient – part 2

A new book rejects years of focusing on resource efficiency in production and logistics, and argues that flow efficiency creates more value. 500 times more value, in fact. In the first article we looked 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 focus more 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. They cite an example from the health service to show that the throughput time for a cancer diagnosis can be up to 500 times longer using a resource-efficient approach than a flow-efficient approach.

Hidden negative effects

But, as we saw in the first article, there is a 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.

Lean has not been properly understood

Niklas Modig and Pär Åhlström from the Stockholm School of Business have a fundamental belief that many companies can achieve significant benefits by focusing more on flow efficiency and then adding resource efficiency.

They point out that Lean is a good example of a strategy for achieving flow efficiency. There has been no shortage at all of good books and articles written about Lean and the Toyota Production System, but there are also so many different definitions and perceptions in circulation that there is a very confused general view about what Lean actually is. They believe, for example, that one major problem is that definitions of Lean exist on so many different abstract levels without clients or users of the definition appearing to be aware of it. The result is that terminology used by researchers compares fruit with apples, pears, whole red apples, half green pears, etc. It has no meaning.

Start with why, not how

According to the two Swedish researchers, another widespread problem is the fact that Lean is used as a means and not an end. Means explain how, ends explain why. The problem of focusing on the means instead of the end is that the relationship between ends and means is not the same for all individuals. The same means do not always need to produce the same ends. Far too many western companies have tried to copy Toyota’s means or tools such as, for example, 5S, Poke Yoke, value stream mapping, control panels, etc. Pär Åhlström and Niklas Modig recommend that companies first of all consider why they want to improve efficiency, before then considering which means best support their specific journey towards this end.

The researchers launch their own new framework, which they call the efficiency matrix, see Figure 1.

Figure 1: The Efficiency Matrix. Source: Niklas Modig & Pär Åhlström: This is Lean, 2012.

The matrix consists of four fields, with the field in the top left-hand corner being resource efficiency, the field in the bottom right-hand corner flow efficiency and the field in the top right-hand corner the perfect combination of the two kinds of efficiency. The other field is the least attractive one, where the company achieves neither one thing nor the other.

First flow – then resources

The researchers emphasise that the choice of efficiency depends on the business strategy. The business strategy defines which customer needs an organisation has to satisfy.

The corporate strategy defines how the organisation satisfies these customer needs. The choice of efficiency strategy will be a part of the corporate strategy.

"We see Lean as a corporate strategy, as it’s all about how an organisation creates value. It’s important to emphasise that this strategy could be called anything at all. Lean is just a word. It doesn’t matter in the slightest what we call the strategy. What does matter is that the strategy is about a) aiming at the top right-hand corner in the efficiency matrix and b) moving towards that corner by heading to the right and upwards in the matrix," write the two researchers.

The researchers cite Taiichi Ohno, the father of the Toyota Production System, saying: "All we do is to study the time line from when the customer comes to us with an order until we receive payment." A Lean corporate strategy always focuses on flow efficiency ahead of resource efficiency, never vice versa. This is absolutely fundamental.

Niklas Modig and Pär Åhlström feel that western companies should stop copying what Toyota does or copying the Toyota Production System. The point is to understand why Toyota and other flow-efficient organisations do what they do. Only then can you do something similar in your own organisation.

Create a flow-efficient production process

According to the researchers, Lean is not about methods and tools. Nor is Lean about principles, which is also a generally held perception. They believe that Lean is a corporate strategy, or if the focus is on production logistics, a strategy for production logistics. Lean is a strategy to achieve an end. The real question, according to Niklas Modig and Pär Åhlström, should therefore be: how do you achieve a Lean corporate or production strategy? They develop this question further: which means can increase flow efficiency without our compromising or even increasing resource efficiency?

Means can be divided into four different groups:

Values: Define how an organisation should be.
Principles: Define how an organisation should think.
Methods: Define what an organisation should do.
Tools: Define what an organisation should use.

At the same time, these groups form a kind of pyramid of the various abstract levels, in which values are at the highest level and tools at the lowest level, important to keep apart. Means can first and foremost help to reduce variation at different levels. By integrating values, we can reduce differences in individual behaviour. By using principles, we can reduce differences in how we prioritise and make decisions. By standardising methods, we reduce variation in what we do. And by using tools, we reduce the variation in what we use.

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

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