The Goal of a Company
After sitting through a presentation covering the basics of Lean such as the 7 wastes, value stream mapping, 5S and kanban, many students come away excited about the ideas that TPS offers, but unsure how to actually go about implementation.
During this training, students learn that the definition of Lean Manufacturing is something like “the total elimination of waste from all business processes in order to reduce non-value added activities”. While we fully accept this definition and consider it accurate, if it is the only way that a student thinks about making changes for the better, he or she will be at a great disadvantage when attempting shop floor implementation.
We ask the reader a simple question: “What is the goal of a company?” While an entire newsletter and perhaps more could be devoted to this topic alone, we will maintain that the goal of a company is to make a profit. This view is shared by both Nobel Prize winning economist, Milton Friedman1 as well as the Toyota Motor Company2. Of course, a business may have many secondary goals, including increasing market share, managing risk and making a positive impact on the environment. However a company that is not making a profit will not generate economic value, and therefore in the long-run, will weaken the welfare of the society in which it operates. At the operational level, we measure profit in terms of Operating Income (OI) since it compromises of those costs that fall within management’s control.
It is with this very issue of profitability that Toyota, as well as countless other Japanese manufacturers, was struggling with after August 1945. Japan was ruined by war, domestic consumer demand was weak and the economy in shambles. If Toyota was to remain a going-concern, it needed to find a way to make a profit. The company’s answer to this question is what set it apart from its American and European counterparts for the rest of the 21st century and beyond.
Toyota decided to look at profit, not as a function of selling price, but in terms of cost. That is, to determine profitability, the company needed to achieve the lowest possible cost required to make a high quality product. This mindset was in direct contrast to the mass production mentality of the time, which maintained that profit be determined by setting an appropriate selling price while placing much less emphasis on the cost of the part. From this thinking, the mass production equation was altered:
Mass Production Mentality: Selling Price = Cost + Profit
Toyota Mentality: Profit = Selling Price – Cost
Although the revised formula seems to be a play on words, Toyota’s mindset was that market demand and not producers set and therefore controlled the selling price of goods. Furthermore, it was consumers and not manufacturers who set this price based on their perceived value of an item. If this were true, then the only way to improve profitability was to reduce costs.
Production Methods
At this point, many readers may seriously be questioning what they have just read. After all, every marketing major knows that a company should never compete on cost alone. If the manufacturer with the lowest cost produces rubbish that does not meet consumer expectations, the business surely be a short-lived one. Nobody in Japan disagreed with this concept. They just looked at things the other way around: even if a company were producing the best quality with the latest designs and features, if it could not be done at a competitive cost, in the end the company would not find customers and would most likely fail.
Furthermore, the company determined that the costs paid for goods from outside sources (raw material, purchased parts, machinery and equipment, etc…) would not be significantly different between competitors over the long-run and consequently would offer no competitive advantage to any one manufacturer. So it remained that the only way to beat a competitors cost was to focus on the costs that a company controlled, notably it’s production methods.
On a very high level, we see this cost versus selling price phenomenon at work in the automobile industry in the 1980’s. Although there are clearly exceptions, in general, the Japanese began exporting simple, comparatively boring, yet inexpensive small cars that didn’t break down. It turned out that there was a huge market for these vehicles. Remember the simple 40 mpg 1973 Honda Civics or the 60 horsepower 1968 Corolla? The limited options included only automatic transmission and air conditioning.
How do we Reduce cost?
Post-war consumer expectations turned out to be high quality, reliability and low cost. Although Toyota is certainly not the only company that relentlessly tried to reduce costs, the mindset with which they approach the task was unique. Today we call this the Toyota Production System (TPS) or simply Lean Manufacturing. In its simplest terms, TPS’s goals is to compete by developing superior production methods. That is, by challenging ourselves every day to develop a better, less costly way. This simple idea of figuring out a ‘better way today' is at the core of TPS.
So the question becomes, how can your company figure out a way to produce at a lower cost than any competitors without sacrificing quality meeting other customer expectations? The answer is lead-time.
Fortunately, there is a direct correlation between costs and total lead-time. Specifically, the shorter the lead-time from sales order to customer payment, the less overall costs will be. As the quote shows, this is something Henry Ford figured out in the mass production environment in the 1920’s. So the goal is how do we reduce lead-time by using every employees ingenuity and thinking?
The reader would be keen to note that there has been no mention of any specific tools thus far in this article. The often missed point when businesses develop an understanding of TPS is that it is based on challenging everyone to thinking of a way to reduce lead-times and not applying certain tools. These are applied only after the current problem is considered in great detail before making a change.
Learning to Learn
Now that we understand that we are trying to use internal resources to lower lead-time and thereby reduce costs, we can begin to consult the countless books, training presentations and benchmark-worthy companies. It is 
at these companies that we will see specific tools being applied to reduce lead-time. However, as already mentioned, caution must be used when applying them. We should apply a particular tool not because it sounds good or has worked somewhere else, but because your team has determined that it makes sense in their environment. We learn not by analyzing data on a spreadsheet inside the four walls of an office. Instead, learning takes place by observing a process with our own eyes. The shop floor is where the action is. It is important to see the actual product, in the actual place where value is being added to get actual data with which educated decisions can be made.
The goal of a Lean company is to make a profit by reducing costs. If a manufacturer can reduce costs thought a superior production method while maintaining quality, it can win in the long-term. This is implemented by shortening lead-time through the use of employee ideas and know-how. Thinking of the shop floor in this way is the heart of the Toyota Production System. Once this is thoroughly understood, the TPS proven tools such the 7 wastes, 5S and value stream mapping can be applied with a greater chance of success.
Article Bibliography
1. The Social Responsibility of Business is to Increase its Profits, Milton Friedman. The New York Times Magazine, September 13, 1970.
2. http://www.toyotageorgetown.com/tps.asp
3. Taiichi Ohno, The Toyota Production System (p. 41), Productivity Press, 1987
4. Source of Honda Civic Picture: http://en.wikipedia.org/wiki/Honda_civic
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