April 11, 2013 - FILED UNDER Agile Business
Agile Marketing Series: Lean Manufacturing and the Theory of Capabilities
Tech companies began to move to Eastern management practices in the late 1980s to mid 1990s. Influenced by the success of Japanese consumer electronics and auto makers (like Toyota, in the following Virginia Mason Medical Center example), firms in the U.S. began to switch from high-inventory, huge-capacity, low-customization models of business from the Post-World War II era to favor “lean” manufacturing. But under the banner of lean manufacturing techniques, American firms also began to outsource valuable capabilities, leaving tomorrow’s agile managers with a cautionary tale.
Kanban and Lean Manufacturing
Lean manufacturing, or “kanban” or “just-in-time” or “six sigma” or whatever you want to call it, emphasized making products according to immediate demand, responding to the pull of the market rather than trying to push products onto the market after they had already been manufactured.
Lean manufacturing also meant reducing inventories, the amount of raw materials firms had sitting around waiting to make products with. Why was inventory reduction so key? Because if the market changes and suddenly nobody wants white vinyl boots anymore, then you’re stuck holding the bag if you have a warehouse full of spools of white vinyl.
First-in/last-out accounting can’t hide unsaleable inventory forever.
The RONA Pressure
Reducing inventory was also the easiest way for businesses to improve their RONA, or Return on Net Assets, a measure equal to a firm’s income divided by its assets.
If increasing RONA is the goal—as it has been for the past two or three decades—the first way is very difficult: increasing the numerator, a.k.a. sales. But lowering the amount of assets you have—or “going lean”—is a much easier way to increase RONA, and it’s not as psychological as sales. It’s more practical. Thus, businesses began to outsource assets, both inventory and capital equipment as well as personnel and payroll.
Denominators went down, and RONA went up. The results are mixed, and we’re still seeing the ramifications—while some industries need to go lean, other industries have gone so lean they’ve nearly put themselves out of business.
Going Lean Gone RIGHT: Virginia Mason Medical Center
Inspired by a field trip to see the Toyota Production System first-hand, leaders at Virginia Mason Medical Center in Seattle instituted some changes: performance monitoring, measurement, and weekly team meetings. These simple steps dramatically improved patient care at the hospital. For example, the breast clinic lead times—from initial patient call to diagnosis—fell from three weeks to three days. Not coincidentally, the hospital soon returned to profitability after years and years of successive losses.
But why wouldn’t all hospitals go lean? Isn’t that the kind of reform we need in health care?
It is. But as Harvard Business School professor Clayton Christensen points out in his book “How Will You Measure Your Life?” the medical industry lacks a prime motivator for reforms like lean manufacturing: competition. Most regional areas are served by one hospital and one hospital only. That takes hospitals out of a competitive market, like that of technology or software, and puts it more in a world of monopoly business practices.
If you don’t have to go lean—or if you don’t take on going lean as a matter of principle the way the administration at Virginia Mason did—you won’t. And hospitals aren’t. And that means we have a big problem.
Going Lean Gone WRONG—Dell and the Semiconductor Industry
On the other side of the coin, Christensen recounts the story of Dell and the American semiconductor industry as an example of going lean the wrong way. Dell, he says, outsourced itself to near obscurity. Working with the Taiwanese electronics firm Asus, Dell began outsourcing some of its routine component tasks of computer building to reduce its assets and increase its RONA.
But Asus wasn’t a passive operation. They started by doing simple things for Dell, but they gradually began to move up-market. They did what innovators do: They undercut a bigger, more lethargic firm that was trapped in an up-market game.
As it tried to make its return on asset goals, Dell had to outsource more and more design and innovation problems to Asus. But by doing so, Dell was also outsourcing its capabilities, including the ability to maintain sharp problem-solving processes as a company. With Asus doing most of the real work, Dell became little more than a brand stamped on the outside of a computer, and Asus eventually moved into the consumer market on its own, using processes it had developed on the job working for Dell.
Because of pressure to reduce assets, American companies, especially those in the semiconductor industry, have spent the better part of the last 20 years outsourcing tasks to Chinese and Taiwanese manufacturers, cutting too deeply into their capabilities. Companies that adopt agile practices over the next couple of decades (which they must) must not also make the same mistakes as those caused by race-you-to-the-bottom outsourcing from the past 20 years.
Agile and the Theory of Capabilities
Christensen says our capabilities are composed of three things:
- Resources: what you have to work with, including technology, skills, money, patents, etc.
- Process: how you work, including hierarchies, lean, agile, networks
- Priorities: why you work, including company culture and values
He suggests that, in some ways, American business has been so awash in resources that our process and priorities have suffered out of balance.
Agile is an attempt to bring process back in balance and restore the priority of innovation to our work. Part of that is to focus on what your suppliers are trying to do in the future, rather than what they’re doing today, so that you can keep your future capabilities in-house.
Although his summary of outsourcing sounds a bit protectionist, Christensen points to other sociological changes that outsourcing has created in American life, like hiring out all the housework. That is, many American kids don’t have to mow the yard anymore. Instead, they are awash in excess resources like endless soccer practices and non-stop summer camps. The perspective is a bit home-spun, perhaps, but the point remains: We’ve outsourced a lot of our dirty tasks, but important capabilities emerge from doing the dirty tasks.
Agile is part of that roll-up-the-sleeves-and-do-it-ourselves discipline.
The Metaphor of the Ship of Theseus
Christsensen compares outsourcing to the Greek myth of the Ship of Theseus, which was kept docked in a harbor for posterity as a tribute to Theseus’ travels. However, as it weathered and aged, parts of the ship were replaced, until, eventually, all of the ship had been replaced.
The question is: once every part of the ship had been renovated and replaced—where none of the original components during Thesus’ time remained—could it rightly be called Theseus’ ship anymore? Is it not another ship entirely when none of the original components remain?
Agile Picks Up Business History Where Outsourcing Left Off
Agile development sprung from software creation, and software has since evolved into a service (SaaS) rather than a product. With all the versioning, continuous improvements, and going to market with minimum viability, software is the leading industry for agile processes.
Scrums, sprints, data visualizations, exploratory teams—all of these things seem intuitive to software developers. They are both the result of software development and the tools of software development. But like the health care managers in Seattle who went to Toyota, agile practices build upon a lean manufacturing legacy that only the most progressive workplaces have adopted. Most businesses are far behind the curve. It’s as though agile workplaces have gone from jogging to extreme cross-training, while much of the working world is still debating the idea of taking the stairs instead of the elevator.
We can’t carry all that fat around anymore. It’s too expensive and it won’t solve the problems that wait for us on the horizon.
Agile as Philosophy
The yin and yang oscillation between innovation and marketing—the ability to target opportunities, create incentives, and monitor progress—is what agile is all about. Agile means your business can change course when a new opportunity arises, because you retain your capabilities to change as a valued discipline, in-house.
And similar to the rather straightforward findings that show good management is the solution to bad management, the best way to facilitate innovation may be to remain steady to the agile process.
Agile requires building lean muscle akin to yoga and core strength, not the fast bulk and disproportionate mass of times past.