LEAN MANAGEMENT
IMPLEMENTATION:
A DECISION MAKING FRAMEWORK
DEVELOPING A FRAMEWORK TO HELP DECISION MAKERS IN
INDUSTRIAL CONTEXTS INQUIRING WHETHER OR NOT THE
IMPLEMENTATION OF LEAN MANAGEMENT IS THE RIGHT CHOICE
FOR THEIR SITUATION
by Diogo Aurélio
Submitted to the graduate faculty Universidade Nova de Lisboa – Faculdade de
Ciências e Tecnologia in partial fulfillment of the requirements for the degree of
Master in Industrial Engineering
Universidade Nova de Lisboa
Faculdade de Ciências e Tecnologia
2010
Agradecimentos
Considero a dissertação de mestrado a actividade académica mais eclética, e, por este mesmo
facto, mais enriquecedora que realizei até hoje.
Seja pela sua rigorosa e extenuante exigência científica, pelo abundante enriquecimento a
nível de conhecimentos teóricos e, em alguns aspectos, o abrupto choque com a realidade
prática a que obriga, seja pura e simplesmente pelo crescimento pessoal que o desafio me
proporcionou; penso que poderei afirmar sem qualquer pretensão de provocação que escrever
uma dissertação de mestrado não é, como se diz na linguagem comum, pêra doce. Além do
natural prazer de a utilizar em semelhante contexto, acredito que a expressão “pêra doce” seja
a forma mais precisa, pela sua suficiente ambiguidade, para transmitir a alguém que aguarda
semelhante desafio o complexo sentimento. Começando pelo todo e só depois pela parte,
dirijo um primeiro agradecimento a todos aqueles que mo ajudaram a compreender
verdadeiramente.
Gostaria de dirigir agradecimentos a dois grupos de pessoas que contribuíram
significativamente, directa ou indirectamente, para a conclusão deste trabalho. Começo por
deixar um agradecimento ao Professor António Grilo, orientador do presente trabalho, e peça
fundamental na estruturação e desenlace deste projecto. Em segundo e não menos importante
lugar, em termos de contribuição directa com material para o presente trabalho, não poderia
deixar de agradecer ao Engenheiro Bernardo Dias, cujo contributo para a escolha do tema de
estudo, compreensão do problema, e para a passagem da teoria à prática foi de valor
inestimável.
Não poderia naturalmente deixar de agradecer também a todos os verdadeiros e incansáveis
amigos que não descansaram enquanto não me fizeram sentir alguma forma de embaraço por
não dar por terminada esta minha última tarefa do mestrado. À boa e típica maneira
cinematográfica americana de concluir as obras com um final feliz, embora exaustos, podem
agora descansar.
Deixo para último lugar as duas pessoas a quem mais devo em tantos aspectos, sendo este
apenas mais um. Cada uma à sua maneira será sempre um exemplo inspiracional a seguir em
termos de valores e de ambições profissionais e pessoais. De forma a fazer jus à minha
desequilibrada dívida, espero que esta seja apenas mais uma de muitas oportunidades que
terei para agradecer aos meus pais.
Posso, portanto, concluir que graças a todas estas pessoas esta pêra amarga tornou-se das
mais agradáveis que já provei, mesmo incluindo-a num mesmo saco de doces. Deixo aqui o
meu profundo e sentido agradecimento a todas elas.
Até à próxima “pêra”, caríssimos.
ABSTRACT
In this thesis the author proposes a thinking framework for decision makers considering the
implementation of Lean Management methodologies in their industrial contex. The
framework takes both internal and external context of each case into consderation. A logical
order when considering Lean’s implementation is proposed, where strategic considerations
should be taken first into consideration, and operational considerations after. Moreover, the
framework proposes the power and leverage perspective on transactional exchange as the
central factor to determine the strategic success of any implementation. Finally when it
comes to operational considerations, a key thinking factor is taken into consideration, which
is the potential penetration ability of Lean techniques according to the internal and external
context. The framework is applied to a portuguese leading company in the molding industry
that has already applied some Lean Management methodologies, which is Logoplaste.
Results lead to conclusions that, not only Lean’s suitability varies according to context, but
also that the potential penetration ability of Lean techniques decreases as the compliance
level to Lean’s core principles increases, and that companies where Lean techniques with
low penetration ability are suitable to be used, have a higher propensity to evolve into higher
Lean maturity stages.
Key-words: Lean Manufacturing, Lean Accounting, power and leverage perspective, Lean
implementation framework, Logoplaste.
Sumário
No dissertação de mestrado o autor propõe um modelo de apoio à decisão para decisores
que estejam a equacionar a possibilidade de implementarem as metodologias de gestão
Lean. O modelo tem em conta simultâneamente as variáveis que formam o contexto interno e
externo do caso em estudo. É proposta uma sequência lógica para o processo de decisão de
implementação de Lean, na qual se determina que se devem analizar primeiramente as
questões estratégicas, e apenas após as mesmas se deve equacionar considerações
operacionais. Para análsie da dimensão estratégica, é proposta a utilização da perspectiva
“power and leverage perspective on transactional exchange” como factor central para
determinar o sucesso de qualquer implementação. Para análise da dimensão operacional,
propõe-se a análise da potencial capacidade de penetração das técnicas Lean de acordo com o
contexto interno e externo do caso em estudo. O modelo é aplicado a uma empresa
portuguesa da indústria dos moldes que já tinha aplicado previamente técnicas Lean, a
Logoplaste. Os resultados levam o autor a concluir em primeiro lugar que a aplicabilidade
das metodologias Lean variam consoante o contexto em questão, e que a potencial
capacidade de penetração das técnicnas decresce à medida que o seu nível de afinidade em
relação aos princípios centrais da filosofia Lean aumentam. Por último o autor conclui ainda
que empresas onde se conclua que as técnicas Lean com maior afinidade aos princípios
centrais da filosofia Lean se aplicam serão empresas com maior propensão para evoluir para
estágios de maturidade Lean mais evoluidos.
CONTENTS
Contents .............................................................................................................................1
Chapter 1 ...........................................................................................................................1
1.
INTRODUCTION ..............................................................................................2
1.1 Problem Statement...................................................................................................2
1.2 Research Objectives ................................................................................................3
1.3 Research Approach ..................................................................................................4
1.4 Limitations ...............................................................................................................5
1.5 Thesis Contribution .................................................................................................6
Chapter 2 ...........................................................................................................................8
2.
REVIEW OF LITERATURE .............................................................................9
2.1 General Industrial Management ..............................................................................9
2.1.1 Industrial Strategy ............................................................................................9
2.1.2 Inventory Management Systems ....................................................................18
2.1.3 Cost Accounting .............................................................................................21
2.2 Lean Management ................................................................................................26
2.2.1 Lean’s guiding principles ...............................................................................26
2.2.2 Lean Management Methods and Techniques .................................................29
2.2.3 Lean Management Implementation ................................................................42
2.3 Conclusions ..........................................................................................................49
Chapter 3 .........................................................................................................................51
3.
Research methodology......................................................................................52
Chapter 3 .........................................................................................................................56
4.
FRAMEWORK CONSTRUCTION.................................................................57
4.1 Key Foundation Blocks: variables to consider ......................................................57
4.1.1 Lean Appropriateness Variability...................................................................57
i
4.1.2 Strategic accountable variables ......................................................................59
4.1.3 Operational accountable variables ..................................................................62
4.1.4 Lean penetration ability ..................................................................................70
4.2 Framework Formulation ........................................................................................80
4.2.1 Defining the Framework structure..................................................................80
4.2.2 Defining the decision making process ............................................................83
4.3 Decision Making Framework ................................................................................93
Chapter 5 .......................................................................................................................101
5.
Testing the Framework: Logoplaste Case Study ............................................102
5.1 Logoplaste Characterization ................................................................................102
5.2 Framework Application .......................................................................................112
5.3 Current Logoplaste’s Lean Status .......................................................................120
4.4 Discussion of Results ..........................................................................................123
Chapter 6 .......................................................................................................................126
6.
CONCLUSIONS AND RECOMMENDATIONS .........................................127
6.1 Conclusions .........................................................................................................127
6.2 Recommendations ...............................................................................................132
Bibliography ..................................................................................................................134
List of Figures
FIGURE 1REPRINTED FROM COMPETITIVE STRATEGY BY MICHAEL E. PORTER, P.13 (1997)
................................................................................................................................ 12
FIGURE 2 APPROPRIATENESS OF LEAN TOOLS AND TECHNIQUES ACCORDING TO PRODUCT
CHARACTERISTICS. ADAPTED FROM: ABDULLAH, F. (2003), P. 62........................... 65
FIGURE 3 APPROPRIATENESS OF LEAN TOOLS AND TECHNIQUES ACCORDING TO MATERIAL
FLOW CHARACTERISTICS. ADAPTED FROM: ABDULLAH, F. (2003), P. 63. ................ 66
FIGURE 4 INFLUENCE OF VARIABILITY IN DEMAND AND SUPPLY ON LEAN’S PENETRATION
ABILITY ................................................................................................................... 71
FIGURE 5 INFLUENCE OF PRODUCT VOLUME AND EQUIPMENT TYPE ON LEAN’S
PENETRATION ABILITY ............................................................................................ 73
ii
FIGURE 6 INFLUENCE OF RAW MATERIAL VARIETY AND PROCESS FLEXIBILITY ON LEAN’S
PENETRATION ABILITY ............................................................................................ 74
FIGURE 7 INFLUENCE OF NOVELTY OF PROCESSES, LEARNING RESISTANCE AND
RESISTANCE TO CHANGE ON LEAN’S PENETRATION ABILITY ................................... 75
FIGURE 8 STRUCTURE OF THE FRAMEWORK: STRATEGIC LEVEL CONSIDERATIONS .......... 82
FIGURE 9 STRUCTURE OF THE FRAMEWORK: OPERATIONAL LEVEL CONSIDERATIONS ..... 82
FIGURE 10 STRUCTURE OF THE FRAMEWORK: STRATEGIC LEVEL CONSIDERATIONS ........ 95
FIGURE 11 INFLUENCE OF VARIABILITY IN DEMAND AND SUPPLY ON LEAN’S
PENETRATION ABILITY ............................................................................................. 96
FIGURE 12 INFLUENCE OF PRODUCT VOLUME AND EQUIPMENT TYPE ON LEAN’S
PENETRATION ABILITY ............................................................................................ 97
FIGURE 13 INFLUENCE OF RAW MATERIAL VARIETY AND PROCESS FLEXIBILITY ON LEAN’S
PENETRATION ABILITY ............................................................................................ 98
FIGURE 14 INFLUENCE OF NOVELTY OF PROCESSES, LEARNING RESISTANCE AND
RESISTANCE TO CHANGE ON LEAN’S PENETRATION ABILITY ................................... 98
FIGURE 15 STRUCTURE OF THE FRAMEWORK: OPERATIONAL LEVEL CONSIDERATIONS ... 99
FIGURE 16 LEAN DECISION MAKING FRAMEWORK SCORECARD ................................... 100
FIGURE 17 LOGOPLASTE’S VALUE STREAM MAP .......................................................... 106
FIGURE 18 GENERAL REPRESENTATION OF INVENTORY SYSTEM IN LOGOPLASTE’S
INTERNAL SUPPLY CHAIN ....................................................................................... 107
FIGURE 19 PRE-FORM COST BREAKDOWN (2007) ......................................................... 109
FIGURE 20 PLANT LABOR HIERARCHY ........................................................................... 111
FIGURE 21 LEAN CONTINUOUS IMPROVEMENT: NEW CONTAINER .................................. 121
FIGURE 22 TPM INITIATIVES: ACTIVITY BOARD ............................................................ 122
List of Tables
TABLE 1 CHARACTERIZATION OF WASTE AND ITS CONSEQUENCES, (MASKET ET AL, 2004)
................................................................................................................................ 27
TABLE 2 VALUE STREAM MEASUREMENT: SOFP ........................................................... 42
TABLE 3 SCALE OF COMPARISON FOR EACH CRITERION ................................................... 83
TABLE 4 SCORING CRITERIA PAIR-WISE ........................................................................... 85
TABLE 5 SCORE TABLE FOR CRITERION 1 ......................................................................... 87
TABLE 6 SCORE TABLE FOR CRITERION 2 ......................................................................... 88
TABLE 7 SCORE TABLE FOR CRITERION 3 ......................................................................... 89
TABLE 8 SCORE TABLE FOR CRITERION 4 ......................................................................... 90
TABLE 9 SCORE TABLE FOR CRITERION 5 ......................................................................... 91
List of equations
EQUATION 1TAKT TIME CALCULATION ........................................................................... 34
EQUATION 2 FTP CALCULATION...................................................................................... 38
iii
EQUATION 3 WIP-TO-SWIP CALCULATION ..................................................................... 38
EQUATION 4 OEE CALCULATION ..................................................................................... 38
EQUATION 5 OEE: AVAILABILITY CALCULATION ............................................................ 38
EQUATION 6 OEE: PERFORMANCE CALCULATION ........................................................... 39
EQUATION 7 OEE: QUALITY CALCULATION .................................................................... 39
EQUATION 8 DECISION MAKING FORMULATION A) .......................................................... 83
EQUATION 9 DECISION MAKING FORMULATION B) .......................................................... 83
EQUATION 10 NORMALIZATION FORMULA ...................................................................... 85
EQUATION 11 CALCULATION FORMULA FOR THE FINAL WEIGHTS OF EACH CRITERION ... 86
EQUATION 12 FINAL WEIGHTS CALCULATION FOR EACH CRITERION ............................... 86
EQUATION 13 CALCULATION OF THE MINIMAL SCORE OF LEAN IMPLEMENTATION
APPROPRIATENESS ................................................................................................... 92
EQUATION 14 CALCULATION OF A SATISFACTORY SCORE OF LEAN IMPLEMENTATION
APPROPRIATENESS ................................................................................................... 93
iv
CHAPTER 1
Introduction
Chapter 1
1. INTRODUCTION
1.1 PROBLEM STATEMENT
Lean Management principles and techniques have gained over the years popularity
among industrial managers and management researchers as the number of
implementations extended across various organizations. In some cases, these techniques
have led to a real competitive advantage in their competing industries. The aumotive
industry is one of the main drivers of Lean implementations. However, it is still not
consencious amog researchers a direct relationship between Lean methodologies being
the way to success.
Although Lean proponents seem to argue that Lean is a methodology, or some even
dare to call it a phylosophy, that will ultimatly strech to further extends than just the
industrial reality onto the services industry, reaching unanimous oppinions about it’s
success ramains a hard task. V. Crute et al. suggest that plant specific manufacturing
strategies with a holistic scope have to be planned, so that more readily results can be
achieved (Crute, Brown, & Graves, 2003). Bhasin and Burcher conclude in their
research that the major difficulties companies are faced with when implementing Lean
are lack of direction, lack of planning and a lack of adequate project sequencing, and
add that knowledge of tools and techniques is not often a problem (Bhasin & Burcher,
2006). On the same page, Cox and Chicksand present concerns the appropriateness of
Lean’s potential as a universally extendable approach to production. Distinguishing
when are Lean approaches more appropriate to apply, i.e., in which industry context and
to which type of companies still remains blurish (Cox & Chicksand, 2005).
Common ground for discussion seems to be missing. It is still difficult to find the
correct basic factors to attend when considering Lean implementation, because it is not
by far linear that a certain operational measure will lead to finantial benefits in all
circumstances. The first misleading rationalization problem appears when operational
and commercial dimentions seem to be confused and lead simultaneously in several
debates (Cox A. , 2006). A very strict relationship to JIT Stock policies to Lean
management policies seems to swift and restrain discussions to an operational level,
which is only one of the dimentions of the problem. And this is one of the main causes
that leads to diverging oppinions – the application of Lean techniques can not be
summarized to this dimention, and arguing solely based on these methods can be
misleading.
On the other hand, analysing external and internal context analysis seems also to be
missing in several studies. A lot of researchers focus on the benefits of the application
2
Chapter 1
of some Lean techniques without even considering what consequences they will have
when it comes to relating to suppliers or buyers. Nor are the internal limiting factors
clear to which situations and to which specific technics they can influentiate the success
of Lean’s implementation.
Finally external power relationships can dictate in a majority of cases the versatibility of
a company to innovate its own processes. Not taking these relationships into
consideration can also retrinct the ability to predict the future success of any Lean
implementation.
The author is of the oppinion that the implementation constrains and implications
remain still fragmented in dispersed studies, and that collecting these into a single
thinking process is of the essence when analysing Lean potential benefits and suitability
to industrial contexts or when considering extending it to other industries. Thus, a
holistic view that gathers all key aspects is needed in order to successfully help any
decision maker inquiring whether or not to implement Lean Management.
1.2 RESEARCH OBJECTIVES
In order to reach the final goal of elaborating a thinking model for decision makers who
are inquiring for the possibility of applying Lean management methodologies, this
thesis focuses on three key objectives.
The first objective of this research is studying what are the key considerations that need
to be taken into consideration regarding Lean management methodologies
implementation.
One of the key challenges in this objective resides on the fact that technical
considerations regarding industrial management may not in fact be the only factor that
needs to be taken into consideration. In other words, Lean industrial management
methodologies may technically be the most attractive option to apply in some industrial
scenarios, when in reality, it is not the best management solution an administration
board may decide for the long term. For this matter, a key realization was taken into
consideration right from the beginning, which is the need for a holistic thinking
approach. In other words, it is vital clearly distinguish what are the strategic
considerations, and what are the technical and more practical implementation
considerations, how to incorporate both taking into consideration the relevance that each
should have. Thus, an effort was done to distinguish two types of considerations:
strategic related and technical implementation related.
Once the first objective is fulfilled, the following task concerns translating these
constrains into a reasonable framework that can be used for a majority of cases in an
3
Chapter 1
industrial context. Thus, the second objective involves establishing a thinking
framework to guide through the decision making process that, ultimately, may help
decision makers to understand if Lean methodologies are or not appropriate for their
scenario, and if so, how far Lean methodologies ought to be implemented.
Finally, the last research objective involves testing the validity of the built framework
by applying it to a practical scenario where Lean has already been implemented. The
practical scenario involves a Portuguese leading company in the molding industry,
which is Logoplaste. Logoplaste has implemented in the past some of Lean
methodologies and therefore consists of an ideal case study for a framework validation.
1.3 RESEARCH APPROACH
In order to successfully fulfill the established objectives, four key steps where defined.
The first step was to undertake a systematic study of the state of the art of industrial
management practices, as well as accounting practices and strategic thought.
Concerning industrial management practices, a special attention was devoted to
inventory systems, as they represent a key implementation step in any Lean
Manufacturing implementation.
As for accounting practices, an effort was done to point out the traditional mindset that
has been practiced over the years and is still taught in management universities, in order
to better understand the breakthroughs that Lean Accounting practices introduce in
traditional accounting.
Furthermore, an insight on how strategic thought is generally oriented was also
considered to be relevant for later formulation of the framework.
The last but not least procedure in this first step was to do review of literature also on
Lean Manufacturing and Lean Accounting procedures, so that a state of the art of Lean
methodologies could be well perceived.
The second step consisted on gathering the key literature material that could serve as
support for the construction of the framework. To do so, the author collected the most
extensive number of opinions concerning Lean Management benefits, barriers to
success and critics, most commonly applied tools and techniques, implementation
considerations, strategic considerations, and so forth. The goal was to collect a more
precise opinion on what were the main factions and thought currents regarding Lean’s
utility as an industrial management methodology.
Having collected what the author considered to be the opinions of the majority of
researchers in all factions, the next step consisted on two phases. The first was to order
4
Chapter 1
strategic considerations that could be applied to any specific case, and the second
consisted on concatenating the key internal and external factors that influenced
positively and negatively practical lean implementations. The first phase is critical in
order to assure the essential holistic view of the problem. Once the holistic view was
organized, the second phase consisted in constructing the decision making framework.
Finally, the last step consisted on testing the built framework in a real industrial
scenario where Lean had already been implemented. The goal was not only to validate
the thinking framework, but, most importantly, to draw further conclusions on how the
framework could evolve in future research.
1.4 LIMITATIONS
There are some limitations that influence directly the extent of the contribution of the
developed work around the present thesis to the research community. It is important that
these limitations are taken into consideration before further considerations.
The first natural limitation is that, as a student finishing its master thesis, the author did
not have access to the total universe of literature available within the research
community. Many papers were not available, as they required a certain amount of
monetary value. Since this thesis builds its own opinion and thinking model based on
existing literature, constrained access to existing literature about the subject might have
limited the drawn conclusions.
Another argument still about existing literature involves around the prior motivation of
the present work, which consists itself a challenge that must not be neglected. As
previously stated, a considerable set of biased opinions were found during the literature
research work, many with explicit commercial interests involved. Though this might be
considered to be a natural condition in a majority of research communities given certain
areas or topics, one cannot leave this fact out of the equation when doing the present
exercise.
On the other hand, the validation of the thinking framework is done with only one
practical case study. In order to formulate and validate a rigorous hypothesis, a larger
sample would be required.
Another considerable limitation might be the fact that the application of the thinking
framework on the decision-making process of Lean Implementation to Logoplaste’s
case might be biased, due to the fact that the results are already visible. In other words,
the framework intends to establish a prevision of results of future Lean implementation;
and, in Logoplaste’s case, these results are already visible.
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Chapter 1
Last but not least, one might consider a limitation the fact that the author does not have
any practical industrial management experience, nor previous research experience.
1.5 THESIS CONTRIBUTION
Extensive literature has approached the implementation process of Lean Manufacturing.
Benefits and barriers to success have been also largely covered, and object of intense
disputes between researchers. More recently, Lean Accounting is also becoming better
known, mainly thanks to BMA, CO, a consulting group that has been making a great
effort in the Lean Accounting “evangelization”. To what concerns Lean Accounting,
literature is clearly in an infant stage in terms of studying of actual link to better
financial performance. Even Lean Manufacturing has not shown yet undisputed results
showing this financial performance improvement guarantee to further industries other
than the automotive industry. One of the conclusions that the author was able to
withdraw from the conducted literature research, especially to what concerns Lean
Accounting, is that it seems that a completely impartial view is missing, that is able to
balance both potential benefits and potential defects. Furthermore, it seems that the
focus of literature has been largely concerned in alluring managers to Lean practices,
explaining how these methods would occur and the potential benefits. Even software
applications have been developed to help and guide practitioners in the implementation
process. However, at the same time, another perspective, one that opposes to much of
assumptions made concerning Lean’s benefits. These critics not only dispute the
benefits of Lean Business Management practices, but also their suitability to different
industries rather than the automotive industry.
An interesting gap seems to remain unfulfilled somewhere in the middle of both views
(defenders and opponents of Lean potential to companies), which concerns studying the
critical factors of Lean implementation that may be important for decision making
situation between which improving investments should a company chose. Therefore,
this thesis is focused in studying the critical factors relevant to support making the
decision of choosing whether or not to implement Lean practices in a manufacturing
context. It is not concerned with the question how to implement it; it rather focuses on
the questions that are important to answer the final question – is it worthwhile making
the specific investment in implementing Lean practices or not? For that manner, an
impartial view is required1.
Benefits of Lean implementation are subject to a number of studies. Many of which try
to force boundaries of Lean’s suitability and test it in more business market
1
An impartial view may be hard to find when there are interests involved. For this manner, a study
conducted in an academic context should have at least a starting advantage in terms of impartialness.
6
Chapter 1
configurations, either than just similar business to automotive branch. These studies are
of great importance, as they provide us more information about how valuable a Lean
tool can be.
The studies testing Lean’s suitability diverge on the focus, where it can be more devoted
to finding operational benefits, or more concerned with the strategic benefits, finding
financial performance evidence, etc. They also seem to vary in the results obtained, thus
being the cause of divergence in terms of Lean suitability to several business contexts.
In addition, some of these studies seem to depend in some matter on prior researcher’s
opinion about the potential benefits of Lean’s, which inevitably raise some doubts
concerning the results obtained. Moreover, research to Lean practices’ suitability to
different industrial contexts seems to lack. Browning and Heath point out Shah and
Ward (2003) affirmation about the lack of attention given to the Lean’s suitability in
various contexts and the tendencies of the existing literature that points out well my
point: “There is not only a lack of empirical attention given to contextual factors’
relationship with lean practices, but there is also a paucity of theory to guide our
expectations about the direction of possible effects.’’ (Browning & Heath, 2009).
Furthermore they add that: “A major source of knowledge continues to be studies of
successful applications, including the TPS, although much of the available literature
tends to be biased towards successes” (Browning & Heath, 2009).
Aggregating these distinct angle views about Lean’s potential benefits appears as a
value adding activity. Why is it important to aggregate such information? The decision
of implementing Lean’s practices carries a real cost with it, an opportunity cost, and a
tremendous effort in changing processes and mindsets. Deciding whether to invest in
Lean’s practices should be a well thought decision with as much objective information
as possible. It is to this particular benefit that this thesis aims to: providing a decision
making thinking model, to facilitate managers without any extent knowledge of Lean
practices to evaluate the potential key factors that may be relevant to the decision of
implementing or not Lean Business Management practices (both Manufacturing and
Accounting) in their manufacturing company.
7
CHAPTER 2
Review of Literature
Chapter 2
2. REVIEW OF LITERATURE
2.1 GENERAL INDUSTRIAL MANAGEMENT
In order to better understand the breakthroughs that Lean Management introduces it is
necessary to comprehend how general traditional management policies are practiced. As
such, an effort to clarify what the general industrial management practices are was
made. These include strategy generation, inventory management systems and costing
systems.
2.1.1 Industrial Strategy
The value chain
S. Brown points out Porter’s notion of value chain as an important notion to the
manufacturing firm (Brown, 1996). To Porter, value is translated into the amount that
buyers are willing to pay for what the company has to offer them. Thus, optimally all
activities performed within the company would contribute to increasing value to the
product or service intended to be sold, and part of the value chain (Brown, 1996). Now,
it follows that not all activities increase value directly. Thus, a distinction between
activities is made, dividing them into two types: primary and support activities. Primary
activities include (Brown, 1996):





Inbound logistics – logistics concerning all inputs to the product;
Operations – all activities implied in the transformation of the product until final
product;
Outbound logistics – all activities until distribution to customers;
Marketing and sales – activities that provide the means to sell the product;
Service – Activities that enhance the value of the product (such as training,
repair and maintenance);
On the other hand, support activities include (Brown, 1996):

Procurement – activity of purchasing raw material, supplies and other company
assets.
9
Chapter 2



Technology development – activities to develop procedures and expertise in
technological issues that support other main functions (such as production);
Human resource management – activities to select, evaluate, train, and develop
of the company’s human workforce;
Firm infrastructure – all general management activities and support systems.
The link between Strategy and production/operations
The role of strategy in manufacturing companies is becoming increasingly demanding,
as the market’s nature tends to progressively become more volatile, erratic, more
dynamic, and continuously fragment to smaller market segments (Crute, Brown, &
Graves, 2003). Decisions concerning operational effectiveness are also of a great
importance to the survival and success of the company. Moreover, the role of
production gains increased importance, as it demands management responsibility in
terms of assets utilization, costs and human resource management (Crute, Brown, &
Graves, 2003).
Machinery purchase is just one of many good examples how production related
decisions can affect the future performance of a firm. A decision like this affects
directly the production capacity in a variety of questions such as in the variety of
products, in the throughput rate, quality and cost of the product, delivery speed, ability
of introducing new products to the market, etc. This is an example of a competitive
choice, where production capability is directly implied (Crute, Brown, & Graves, 2003).
Though there are many factors that one could argue that can influence the success of a
manufacturing firm, the capability and competence of the productions/operations are
certainly key factors. However, though referring that operational effectiveness and
strategy are “essential for superior performance”, Porter stresses that many companies
are suffering from a mutually destructive competition, because they fail to see the
distinction between both (Porter, 1997). He explains that management tools associated
with operational performance have left strategic management out of the management
activity per se, by focusing too much on improvement and by neglecting possible
competitive positions (Crute, Brown, & Graves, 2003).
Decision-making responsibility
Strategic decision making is of great importance to the firm’s success. It should
therefore not admire that, though an increasing number of companies are including
various levels of the hierarchy and cross-functional teams in the process of formulating
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strategy, ultimately the last long-term concerned decisions still are of the responsibility
of senior (and therefore more experienced) managers (Brown, 1996). S. Brown stresses
the differences between traditional management policies and more actual trends to what
concerns the responsibility of the ultimate decision-making actors. Traditional western
management usually expects the responsibility of strategy formulation and decisionmaking from senior members of the board or chief executives (Brown, 1996).
Alternatively, he points that this view has been challenged to some degree by the
Japanese cross-functional model of strategy, which includes both bottom-up and topdown approaches; and that the levels of management hierarchy have been drastically
reduced in many firms (Brown, 1996).
General critical factors for strategy choice
Strategic management research has devoted a lot attention to studying the critical factors
which managers have to take account of. S. Brown summarizes some key points for
successful strategy, which include (Brown, 1996):






understanding the areas in the market where it can gain competitive advantage
and avoiding those that it cannot;
anticipating in order to be prepared for retaliation from competitors after the
attack on the chosen market;
focusing its resources and capabilities to succeed;
capability of making the strategy well known and understood within the entire
organization, and of involving everyone in the change process;
having a good sense of timing;
capability of establishing effective alliances.
Though its most known contributions date to 1980, Michael E. Porter remains still today
as an extremely important reference to strategic management research. He developed a
powerful framework to analyze external context that is specifically applicable to
strategic planning, in a time where traditional approaches where single focused on the
company per se (excluding it from its industry environment), or in a specific aspect of
the industry, such as cost/price relationship (Porter, 1997). He suggest as a first step to
strategic planning a structural analyzes of the surrounding industries where the company
operates. Furthermore Porter presents a general structure of the industry, which results
in the interaction between five basic competitive forces (Porter, 1997): Potential
entrants, Suppliers, Substitutes, Buyers, and industry competitors. The strength of each
force balanced together affects the overall scenario in aspects such as the effectiveness,
the profit share and the attractiveness of the market.
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Figure 1Reprinted from Competitive Strategy by Michael E. Porter, p.13 (1997)
Let us start explaining the forces that drive the industry competition by the industry
competitors. The intensity of the rivalry among the existing firms influences the market
share and customer’s demand that each company achieves to attract. Environments
where high levels of rivalry exist demand aggressive strategies from companies in order
to remain competitive, especially if the industry growth is not sufficient to guarantee a
profitable level to assure survival (Porter, 1997). For example, in situations of demand
fluctuations that result in overproduction, aggressive price cutting may be a solution
(Porter, 1997). Moreover companies running high risk ventures tend to be willing to
take more risks and sacrifices in return for rapid growth. The level of competitiveness
between competitors has also other consequences. For instance, in the presence of lack
of product differentiation or low switching costs, lead to increased price sensitivity of
the buyer (Porter, 1997). Or, in the other hand, the presence of high barriers to exit the
industry such as financial, strategic or emotional, may induce increasingly more
aggressive tactics (Porter, 1997).
The threat of potential entrants is also a concern. The less natural barriers exist for the
new competitors to overcome, the more the concerns should existing companies have.
The barriers to the entrance of new entrants are for example (Porter, 1997):

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

economies of scale (which usually demand a high volumes of production, knowhow, and level of customer service);
brand loyalty;
high capital requirements;
existence of switching costs;
access to distribution channels;
inaccessible advantages that competitors have access (such as facility location,
government subsidies, etc.)
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
governmental restrictions (like environmental related, or quality standards)
Another industry competitive driving force is substitute products. These products can be
viewed as an appealing alternative to another existing product. Therefore, substitute
products are a dangerous menace for companies with similar products, which can
compete directly on price and/or performance. The consequence of the entrance of
substitute products is usually a reduction on the price that companies can charge for
their products, which naturally drives down profitability (Porter, 1997).
As to buyers, Porter steps away from traditional interrelated supply-demand model, by
defending that these are two distinct forces. According to him, Buyers’ power is an
important force that also determines the intensity of the pressure that companies have in
setting the price and quality levels. This means that buyer’s power can also determine
the profit that can be extracted from a product or service (Porter, 1997). For example, in
situations where quality and other forms of added value are unimportant, the buyer will
look for the cheapest alternative. Or alternatively, situations of backward integration,
where the buyer has the capability of doing himself the product will result in loss of
profitability for the vendor.
The last existing force is suppliers. Suppliers can also have a significant bargaining
power, which gives them the power to limit the profitability of the buyer. This can occur
in situations such as in the following cases:
 there are several buyers and the supply is limited to a small number of
suppliers;
 when there are no substitute products;
 switching costs are high;
 the industry is not a significantly relevant buyer and to the supplier group;
 when the importance of the product to the buyer is high;
 forward integration is possible (production of the suppliers of the buyers
product)
Generic types of strategy
Planning a strategy is a hard task, that requires the confrontation between ideal actions
with the company’s feasibility in terms of the company’s resources and capabilities,
and, of course, the industry structure analyzes. Porter distinguishes three generic
competitive strategies to outperform competition, as well as their requirements, each of
these strategies having its own advantages and drawbacks (Wheelen & Hunger, 2005).
The set of generic competitive strategies is constituted by the following options: Overall
Cost Leadership, Differentiation, and Focus (Wheelen & Hunger, 2005).
Overall Cost Leadership is the most commonly adopted strategy, and involves an
aggressive pursuit of economy and efficiency in the overall operations of the firms in
order to achieve providing the product or service at the lowest price (Porter, 1997). It
usually requires in terms of skills and resources: “sustained capital investment and
access to capital, process engineering skills, intense supervision of labor, products
designed for ease of manufacture, and low-cost distribution system” (Wheelen &
Hunger, 2005). As for common organizational requirements, these include: “tight cost
control, frequent, detailed control reports, structured organization and responsibilities,
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Chapter 2
and incentives based on meeting strict quantitative targets” (Wheelen & Hunger, 2005).
This strategy has the advantages of being protected against cost cutting from less
efficient competitors, as profit margin remains bigger at any given price; flexibility to
defend against substitution and new entrants; and price flexibility to sustain impact of
supplier demands. Besides its natural requirements, other drawbacks exist, such as the
possibility of imitation of other players in the industry that may achieve competitive
cost minimization through imitation of technology and production process; and the need
for initial competitive advantage to be successful, such as high market share, access to
cheap materials or through presence in a competitive distribution chain.
The Differentiation strategy is generally targeted at broad mass market and intends to
charge a premium (Wheelen & Hunger, 2005). It may consist in developing a
significant aspect of a product or service, such as product’s functions or/and design,
distinguishing it from competitor’s products (Porter, 1997). Following a more radical
logic, it can also consist in inventing a new and unique product or service. Along with
the differentiation strategy are usually associated changes in design or brand image,
technology, features, dealer network, or customer service2. The commonly required
skills and resources for its implementation are: “Strong marketing abilities, product
engineering, creative flair, strong capability in basic research, corporate reputation for
quality or technological leadership, long tradition in the industry or unique
combination of skills drawn from other business, and strong cooperation from
channels” (Wheelen & Hunger, 2005). The usual organizational requirements for this
strategy are: “Strong coordination among functions in R&D, product development, and
marketing, subjective measurement and incentives instead of quantitative measures, and
amenities to attract highly skilled labor, scientists, or creative people” (Wheelen &
Hunger, 2005). The further drawbacks besides its requirements are the possibility of
perceived exclusivity and market share; and the risk of imitation.
Finally, the Focus strategy involves targeting the product or service to a very specific
market segment, and providing a low cost situation to the particular niche (Wheelen &
Hunger, 2005). This market segment can consist on a specific buyer group, product line
or geographic market (Porter, 1997). This last strategy requires the combined skills,
resources of the two other strategies, but this time directed to a specific strategic target
(Wheelen & Hunger, 2005). The same combined approach between the other two
strategies is necessary for the Focus strategy in terms of organizational requirements
(Wheelen & Hunger, 2005). The advantages of such strategy are avoiding the threats of
competition, substitution and new entrants; nourishing brand loyalty and rising
switching costs; focusing exclusively on profitable market segments; and increasing
company’s share by monopolizing its distribution channels (Porter, 1997).
There is also a further type of strategy, which normally supports the previously
discussed strategies, which is the functional strategy (Wheelen & Hunger, 2005). A
functional strategy addresses a specific company area, and intends to maximize resource
2
A recent and explicit example of such changes in brand image and design is the introduction of fiber
optic services by the Portuguese company Portugal Telecom (PT).
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Chapter 2
efficiency in order to improve performance and provide the company or business unit a
competitive advantage (Wheelen & Hunger, 2005). Such type of strategy is related to
issues such as (Wheelen & Hunger, 2005):
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

Sourcing of resources and capabilities – choosing where a determinate function
should be performed is an important strategic decision. Purchasing a certain
function outside the company should be considered whenever the activities of
that function are not essential to the company’s distinctive competence
(Wheelen & Hunger, 2005)..
Marketing strategy – the company or business unit can use market development
strategies, which are intended to capture a larger share in the existing market or
in penetrating new markets, using advertizing and promotions to achieve this
goal (Wheelen & Hunger, 2005). Alternatively, a product development strategy
can also be used to develop new products for existing or new markets (Wheelen
& Hunger, 2005)..
Financial strategy – this type of strategy is intended to maximize the financial
value of the firm. It is used to provide the appropriate financial structure and
funds to achieve overall objectives, by examining the financial implications of
corporate and business-level strategic options, indentifying the best financial
plan, searching for lower cost of funds and flexible ways to raise capital to
support business strategy (Wheelen & Hunger, 2005).
Research and Development (R&D) strategy – R&D strategies are used in cases
of companies that depend on technology for their success (Wheelen & Hunger,
2005). This strategy is depends a lot on the choice of the generic strategy – if a
company decides to choose a product differentiation strategy, or a low-cost
(Wheelen & Hunger, 2005). It has also to do with the choice either to be a
technological leader, pioneering the market with a lost-cost or with a unique
product or functionalities of a product, or rather to be a technological follower,
providing low-cost products by learning from the leader’s experience, or
adapting the product to buyer’s needs also from learning with leader’s case
(Wheelen & Hunger, 2005).
Human Resources strategy – such strategies are concerned with decisions
whether or not should hire low-skilled or high-skilled employees, career
planning of internal staff, promotions, motivation and teamwork effectiveness,
etc. (Wheelen & Hunger, 2005). An example of a concretization of a Human
Resource strategy for motivation and teamwork effectiveness promotion is team
building events.
Operations strategy – a company needs to formulate its operation strategy
whenever questions of how and where to do a product or service are placed.
This strategy is to some degree dependent on the product life cycle, the type of
activities required in its process, the demand’s characteristics of the product,
among other. Moreover, the operations’ strategy addresses other issues, such as
vertical integration (the decision to make or buy), partnerships establishment.
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Chapter 2
Formulating a strategy cannot be done without considering the risks involved. There are
several corporate, business, and functional strategies that can lead either to bigger profit
and growth, or rather to bankruptcy. Predicting this risk is a difficult task that requires
experience, intuition, intelligence and knowledge. Choosing the right strategy should,
therefore, not leave any previous knowledge aside that can indicate a potential flood in
the plan. Case studies of failing strategies contributed to strategy management literature,
providing valuable knowledge to determine which type of plans should be avoided.
Such type of strategies include:

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

Imitating the strategy of a leading competitor – companies that obstinate on
catching leading companies with the exact same strategy might fail with such
strategy, as it ignores the individual strengths and weaknesses, and, most of all,
that the leader’s strategy may simply be wrong (Wheelen & Hunger, 2005).
Expecting double success from the same strategy – companies that have
pioneered with an extremely successful product tend to believe that betting on
the same strategy will ensure growth and prosperity. The problem are the large
sums of investment that may not get the expected reward (Wheelen & Hunger,
2005).
Entering in aggressive battles with another firm – though competition for
increased market share might increase sales, it might also carry large sums of
costs that may overrule the gains, such as in advertizing, promotion, R&D, and
manufacturing costs, etc. Competitions such as price wars may simply only shift
the value to buyers, instead of to the sellers (Wheelen & Hunger, 2005).
Variety investments – company might have the temptation to invest time, money
and energy on a variety of projects, which, in time, may exhaust the company.
Inflexibility/stubbornness in the strategy – top management may be so fixed in a
particular strategy that they cease to see that it is not, in fact, the right strategy,
consequently leading to failure.
Cox and Chicksand refer that before building their operational strategy, companies’
management need to decide what their commercial goals are. Only after this should
management decide what the operational strategy should be (Cox & Chicksand, 2005).
This means that the operational strategy should be thought as a way of achieving the
commercial goals. Cox and Chicksand underlie the importance of the relationship
between the company and the two Porter’s forces: suppliers and buyers (Cox &
Chicksand, 2005). The capability of a company to achieve commercial returns by
operational means is ultimately limited by the power it is capable of leveraging to those
forces. Since all companies act both as buyers and suppliers, it is important to analyze
the power leverage of the company on both directions: to costumers and to suppliers.
Let us start by reviewing the possible interactions between buyer and supplier and then
approach the ideal situation for any company.
There are four interactions possible between buyers and suppliers: buyer dominance,
interdependence, supplier dominance, and mutual independence (Cox & Chicksand,
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Chapter 2
2005). A situation of the buyer dominance happens typically when there are few buyers
and many suppliers, and the buyer has a high share of total market for the supplier. In
this situation the supplier will be highly dependent on the buyer for revenue, and his
switching costs will be very high (Cox & Chicksand, 2005). The buyer, on the other
hand, will benefit from very low switching and search costs (Cox & Chicksand, 2005).
Therefore, the buyer will be in an extremely favorable position, where he will be able to
achieve all they want operationally and commercially at the expense of the suppliers.
In the interdependence situation, there are few suppliers and buyers on the market. Here
the supplier is very dependent on the buyers for revenue purposes, so his switching
costs are very high (Cox & Chicksand, 2005). He strives to offer a unique offer. As for
the buyer, he has also high switching costs, and high searching costs (Cox & Chicksand,
2005). It is normal to occur a buyer and supplier share of value from their relationship
in the interdependence situation (Cox & Chicksand, 2005).
The supplier dominance is characterized by an existence of many buyers and only few
suppliers. So, here the supplier has no dependence on the buyer for revenue purposes,
since he has many alternatives, and thus, a low switching cost. The buyer, on the other
hand, suffers from high switching and search costs (Cox & Chicksand, 2005).
Consequently, in this situation it is the supplier who is able to achieve all of his
operational and commercial goals at the expense of the buyer.
Finally, in the situation where there are many buyers and suppliers, for both parties the
switching costs are low, with little dependence on each other (Cox & Chicksand, 2005).
Buyers may achieve a favorable position at the expense of suppliers in terms of
operational and commercial efficiency.
So to conclusion, the most desired position to any company in a supply chain would be
to dominate relationships with both its customer and its supplier, so that it can be able to
impose price and quality standards upstream and downstream (Cox & Chicksand,
2005). This situation is called the Janus-faced Dominance, where a company is able to
achieve the maximum share of value for itself, and consequently, the above normal
desired results (Cox & Chicksand, 2005).
Operations strategy
S. Brown (1996) presents the results of survey in the 1990’s, done by De Meyer and
Ferdows, where the competitive priorities for a total of 224 companies were asked
(Brown, 1996). The results showed that a numerously quantity of factors that were
linked with production activities/functionalities, including (Brown, 1996):




Offer consistently low defect rates – related to process quality;
Offer dependable delivery products – delivery reliability;
Provide high-performance products or amenities – product quality;
Offer fast deliveries – delivery speed;
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Chapter 2

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Customize products and services to customer needs – flexibility manufacturing
system;
Profit in price competitive markets – low-cost production;
Introduce new products quickly – rapid product innovation;
Provide effective after-sales service – not a manufacturing related factor;
Offer a broad product line – flexibility manufacturing system;
Make a rapid volume changes – flexibility manufacturing system;
Make rapid product mix changes – flexibility manufacturing system;
Make product easily available – logistics concerned (distribution channels)
Make rapid changes in design – flexibility manufacturing system;
These are most of all issues related to manufacturing competences. Manufacturing
competences demand interface with other internal areas such as product technology,
capacity, facilities and their location, process technology, human resources, operating
decisions, and the relationship and integration of suppliers and customers, which, may
indicate that manufacturing can become either a process enhancer or a bottleneck.
Therefore, it should be no coincidence to include manufacturing competences in the
company’s strategic considerations, and these as their essential areas to formulate
manufacturing strategy (Brown, 1996). The strategy taken should, at least, enhance
some of these areas, either aiming to provide products with a low price, or at providing
innovating products, or by doing both.
2.1.2 Inventory Management Systems
Operational Research has shown a great interest in the study of inventory management
models and systems. The majority of the models use minimization of cost functions as a
way of obtaining optimal solutions that increase profitability by using various measures
(Chung, Ting, & Hou, 2009). Some of the costs included in these models are «the costs
of ordering or manufacturing, holding or storage costs, unsatisfied demand or shortage
penalty costs, revenues, salvage costs, and discount costs» (Liebermann & Hillier,
2005). There are three basic categories of inventory control systems:
1. Continuous systems – with fixed order quantity. In these systems there is a
predetermined and fixe quantity that is ordered, and so the reorder point is
calculated by subtracting the total time until next the stock is empty by the lead
time of delivery. This type of system uses models that belong to the category of
“pure models”, which often assume the demand rate and the delivery lead time
constant.
2. Periodic system – with fixed time period. In these systems there is a
predetermined period when the reorder is to occur. Inventory is checked and an
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Chapter 2
order of a certain quantity is placed, so that inventory would reach a certain
maximal level at the time of reorder. This means that the quantity to order is
equal to the difference between the maximal level of inventory and the actual
quantity at reorder time. This type of system uses models that also belong to the
category of “pure models”.
3. Hybrid systems – non-rigid systems that alternate or use both principles of
Continuous and Periodic systems simultaneously to decide when to reorder and
which quantity.
Each of these systems has specific models proposed to address specific situations.
Hybrid systems are the most common systems utilized, since they are more versatile
and flexible to answer real inventory management situations. The choice of the system
often varies according to the characteristics of the item considered.
On the other hand, cases of multiproduct inventory systems are also often in companies.
Sometimes companies have to deal with hundreds or thousands of products, which
sometimes calls for the need to distinguish the control model applied between the items
according to its characteristics (Liebermann & Hillier, 2005). Moreover, since
controlling inventory involves costs, some products may not need the same attention as
others (Liebermann & Hillier, 2005). So, the first question to answer when deciding
how to control the stocks of a company is to choose which products need tighter control
models and which do not. One option that can be useful to categorize each item
according to its relevance is using the “ABC Classification”. An ABC classification is a
method that divides all products into three groups: the “A”, the “B” and the “C”
(Liebermann & Hillier, 2005). The A group is consisted by the products that are priority
to the company – such as products that provide the biggest revenues, or the biggest
costs, or that have the highest rotation, etc3.
This means that these are the ones that suffer the most intense control. Group B
products ought to receive median attention, and group C is monitored only informally
(Liebermann & Hillier, 2005).
However, Hillier and Lieberman stress that sometimes it may not be the best policy to
apply a single-product inventory model, because it may have interactions with other
products (Liebermann & Hillier, 2005).
Periodic Review (Q,r)
Continuous and Periodic Review are two similar models, as both are based in the same
basic presumption, which is that one should only reorder ore restart production when
stock levels are low. This implies a continuous or periodic review of the stock level. So
where do the models differ? The Continuous Review model is designed to be applied in
3
Although the materials purchased by a company may not have a regular consumption pattern, the
regularly consumed items generally are the ones that account for most of the purchasing and inventory
costs. ([34], p. 103).
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Chapter 2
the presence deterministic demands. Alternatively, the Periodic Review model is
thought for situations where demand is stochastic. So, in both models the essential
questions are «when to order?» and «how much to order?».
Economic Order Quantity (EOQ)
The EOQ model is a mathematical formulation that attempts to determine the optimal
order to purchase, obtaining it in the formula of the sum of all costs involved. So, the
underlying idea in the EOQ model is that a rational buyer prefers to buy the exact
quantity that minimizes his total costs.
A large extent of literature has leaned on the EOQ model, making it one of the most
well known inventory management policies. Much of this literature relaxed some of the
basic assumptions of the classical EOQ model in order to better fit it to specific business
situations, such as quantity discounts, and shortage costs, etc.
The EOQ model has several basic assumptions. The first is that it assumes that the
demand rate is constant and known (Chung, Ting, & Hou, 2009). Demand is calculated
by adding already processed orders with demand forecasts. There are not many real
situations where demand rates are relatively stable, so risks of a stockout situation rise
when applying this mathematical formulation (with such assumption) to situations
facing large and stochastic demands.
Other basic assumptions including fixed ordering costs per order, and constant per unit
holding cost for inventory item are also considered (Fazel, Fischer, & Gilbert, 1998). It
is a common strategy by sellers to reduce the selling price of each unit in order to
increase the quantity sold per lot, creating thus a potential benefic economical
purchasing alternative to the buyer. Although the classical EOQ model is considered by
many a simplistic model, it is also considered a useful tool to estimate the most
economic lot sizes (Fazel, Fischer, & Gilbert, 1998).
Material Requirement Planning (MRP) systems
MRP systems are also inventory control systems, and, as opposed to JIT systems, they
control stocks through push demand systems (instead of pull demand systems), since
backward scheduling is considered a primary tool (Barriga, Makarand, Syal, & Jeong,
Material Requirements Planning for a Manufactured Housing Facility, 2005). But not
all are divergences. MRP’s goal is reducing inventory, in order to achieve savings in
«capital, resources, and space» (Barriga, Makarand, Syal, & Jeong, Material
Requirements Planning for a Manufactured Housing Facility, 2005). This is achieved by
determining all items that need to be purchased and completed to support the master
production schedule (Barriga, Makarand, Syal, & Jeong, Material Requirements
Planning for a Manufactured Housing Facility, 2005).
MRP systems are considered a complex systems, that requires the use of specialized
software in order to be able to manage the great amount of information needed (Barriga,
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Chapter 2
Makarand, Syal, & Jeong, Material Requirements Planning for a Manufactured Housing
Facility, 2005).
2.1.3 Cost Accounting
Cost elements of a product
There are three cost integral components, which are direct materials, direct labor and
factory overhead. These elements can provide valuable information for income
measurements and product pricing (Polimeni, Fabozzi, & Adelberg, 1991). The
definition of these elements will be given based on Polimeni, Fabozzi and Adelberg,
and will be important for further developments.
Materials are the principle substances used in production. They can be transformed into
finished goods by the addition of direct labor and factory overhead, and can be
classified into two categories – direct and indirect materials (Polimeni, Fabozzi, &
Adelberg, 1991). Direct materials are all materials that can be easily traced to the final
product and that represent a major material cost of producing a product (Polimeni,
Fabozzi, & Adelberg, 1991). On the other hand, indirect materials cannot always be
traced back into a specific product, and are therefore included as factory overhead
(Polimeni, Fabozzi, & Adelberg, 1991). Thus, a good example of an indirect material
can be the ink used for product painting.
Labor is considered to be the mental or physical effort applied in the production of a
product, and is divided as well in two distinctions – direct and indirect labor (Polimeni,
Fabozzi, & Adelberg, 1991). Direct labor constitutes all labor that can be easily traced
to the product and represents a major labor cost to producing a product (Polimeni,
Fabozzi, & Adelberg, 1991). Alternatively, indirect labor cannot always be traced back
into a specific product, and is therefore included as factory overhead. Thus, a good
example of an indirect material can be the glue (Polimeni, Fabozzi, & Adelberg, 1991).
An example of an indirect labor can be the work spent on machine maintenance.
Finally, factory overhead is a term used to accumulate all indirect labor, indirect
materials and other indirect manufacturing costs. Therefore, examples of factory
overhead are the rent, energy costs, etc.
Cost accounting systems
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Chapter 2
As stated before, the primary use of cost accounting is for internal use of managers. In
order for cost accounting to support managers in their decision making, planning and
controlling, it becomes essential to establish budgets and gather information about
actual cost of operations, processes, departments or product. Cost accounting also
analyzes variances, profitability and social use of funds (Polimeni, Fabozzi, &
Adelberg, 1991).
Nevertheless, cost accumulation and classification activities may be extremely difficult
in specific situations and time-consuming as the volume of paperwork processed in a
manufacturing firm can be overwhelmingly big, even if they are small or medium sized
companies. Polimeni, Fabozzi and Adelberg state that «small and medium-sized
manufacturing companies may handle thousands of requisitions, purchase orders,
receiving reports, vendors’ invoices, vouchers, checks, stock issues, and similarly
business documents each month» (Polimeni, Fabozzi, & Adelberg, 1991). Moreover, «a
large manufacturing company may handle tens of thousands of such documents a
month» (Polimeni, Fabozzi, & Adelberg, 1991). Therefore the design of a cost
accumulation system must be adequate for the nature and type of operations performed
in a manufacturing company (Polimeni, Fabozzi, & Adelberg, 1991).
There is a first division in the types of cost accumulation systems, which are periodic
and perpetual systems (Polimeni, Fabozzi, & Adelberg, 1991).
Periodic cost accumulation systems provide only limited product cost information
during a period and requires quarterly or year-end adjustments to arrive at the cost of
goods manufactured (Polimeni, Fabozzi, & Adelberg, 1991). A periodic count of
physical inventories must be taken to adjust inventory accounts to arrive at the cost of
goods manufactured (Polimeni, Fabozzi, & Adelberg, 1991). Therefore, a periodic cost
accumulation system is not considered to be a complete cost accumulation system since
the costs the of raw materials, work-in-process, and finished goods can only be
determined after physical inventories are counted (Polimeni, Fabozzi, & Adelberg,
1991). In other words, in order to obtain a final and confident result it is needed to
check periodically all real inventories.
It is to understand that this fact constitutes a limitation. As such, periodic cost
accumulation systems are generally used only by small manufacturing companies,
where accounting departments are small or information systems are not advanced
(Polimeni, Fabozzi, & Adelberg, 1991).
On the other hand, «perpetual cost accumulation system is a vehicle for accumulation
product data, through the three inventory accounts, that provide continuous product
information about raw materials, work-in-process, finished goods, cost of goods
manufactured, and cost of goods sold. Such cost systems are usually very extensive and
are used by most medium and large manufacturing companies (Polimeni, Fabozzi, &
Adelberg, 1991).
So, the big difference between the two systems is that in perpetual accumulation
systems information is continuously available concerning raw materials inventory,
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work-in-process inventory, finished goods inventory, cost of goods manufactured, and
cost of goods sold, as opposed to periodic accumulation systems, where accumulation is
done just in the end of the period (Polimeni, Fabozzi, & Adelberg, 1991). Since
perpetual accumulation systems are the best fitted to larger companies, this will be the
object of focus in this chapter. Furthermore, today’s information system, such as
Enterprise Resource Planning (ERP), allow for common databases and real-time
information sharing from different functional areas or even from different organizations.
Therefore perpetual systems will be our sole consideration in this chapter.
There are various managerial accounting approaches, which differ in the attention that is
given to the different organizational aspects to be measured. The main approaches are:




Standard Cost Accounting
Activity-based Costing
Resource Consumption Accounting
Lean accounting
Standard Cost Accounting is considered a traditional cost accounting system. These are
characterized by being volume-based cost drivers, that were specially adequate during
the mass production, when there was limited product variety and direct material and
direct labor were the predominant costs concerning manufacturing (Lea, 2007). As
variety of products increased, the distortion caused by these systems increased as well,
as factory overhead costs gained a big portion of total costs and was considered
proportional to production volume (which is not necessarily right) (Lea, 2007).
On the other hand ABC systems calculate the production costs based on the activities,
using both volume and non-volume based cost drivers (Lea, 2007). All activities
concerning production, sale, delivery, and customer support of groups and services are
identified and considered product costs (Lea, 2007). Throughput accounting considers
that no cost should be allocated to products, with the exception of raw materials (Lea,
2007). Instead, this systems calculates product costs by summing what they consider
truly variable costs of production that usually include only raw materials (Lea, 2007).
Traditional Cost Accounting Systems
There are two basic types of Perpetual cost accumulation systems that concern the type
of manufacturing process, which are job order and process costing (Polimeni, Fabozzi,
& Adelberg, 1991).
Job order Cost Accumulation System are suited for companies where «each job is
custom made» according to the client’s specifications. An example where job order cost
accumulation system can be useful are machine building firms.
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Under job order accounting systems, the three basic elements of a product’s cost (direct
materials, direct labor, and factory overhead) are accumulated into specific jobs. Each
job has its “job sheet”, where a work-in-process inventory account is processed
individually. The unit cost is obtained by dividing the total number of units in the job by
the total cost accumulated in that work-in-progress inventory account before
transferring these units to finished goods inventory. Selling and administrative expenses
are left a part of the cost of producing the job and are shown separately on the job cost
sheet and income statement. (Polimeni, Fabozzi, & Adelberg, 1991).
As for Process Cost Accumulation Systems, these are fit to companies that manufacture
homogeneous products in large volumes, either with continuous processing ore mass
production techniques (Polimeni, Fabozzi, & Adelberg, 1991). In this system, the three
basic elements of product’s cost (direct materials, direct labor, and factory overhead) are
accumulated according to departments or cost centers, which are major functional and
specialized divisions in a factory (Polimeni, Fabozzi, & Adelberg, 1991). The same
goes for individual work-in-process inventory accounts, also set up for each department
and charged with costs incurred in the processing of the units that pass through them
(Polimeni, Fabozzi, & Adelberg, 1991). At each department a unit cost for finished
product is calculated and passed to the next department. So the total unit costs is
obtained by calculating the sum of the unit costs in each department where the product
has passed (Polimeni, Fabozzi, & Adelberg, 1991). Similarly as job order costing,
selling and administrative expenses are shown separated on the income statement.
(Polimeni, Fabozzi, & Adelberg, 1991).
Activity-based costing (ABC)
Armstrong affirms that the original concern of ABC methodology was manufacturing
competiveness, by reducing distortion of managerial decision making caused by
misallocation of indirect costs (Armstrong, The costs of activity based management,
2002). He states that traditional accounting treated indirect costs as a homogenous
portion, to be allocated to product lines on a single volume-related base, often direct
labor. This procedure would lead to an inaccurate allocation of costs which were driven
by variety, activity changes or other forms of complexity, into «high volume, labor
intensive products and under-allocated to short-run capital intensive specialist items»
(Armstrong, The costs of activity based management, 2002). Furthermore, this
inaccurate allocation had as consequence a «systematic distortion of manufacturing
strategy, which favored the pursuit of specialists niche markets rather than head-to-head
competition in the world’s mass markets» (Armstrong, The costs of activity based
management, 2002).
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In contrast, ABC method calculates the product’s full cost by allocating indirect costs
according to activities performed by the staff in the concerning departments (Lebas,
1999). So, it allows answering the question where were costs incurred in a different
manner, by looking for specific activities (Lebas, 1999). Therefore the big advantage of
using ABC is discovering the activities through which factory overhead can be allocated
and controlled (Armstrong, The costs of activity based management, 2002).
The implementation of ABC focuses on indirect costs, such as manufacturing overhead
and selling, general, and administrative costs. So, one of the main primary tasks in the
implementation consists on reclassifying most, if not all, indirect costs as direct costs,
achieving this way a greater accuracy. Garrison and Noreen define other primary and
basic activities in ABC implementation, which consist on identifying and defining
activities, tracing costs to the activities (as long as possible), assigning costs to activity
cost pools, calculating activity rates, assigning costs to costs objects (using the activity
rates measures previously determined), and preparing and distributing management
reports (Garrison & Noreen., 1999).
Resource Consumption Accounting (RCA)
Resource Consumption Accounting (RCA) is a cost accounting system that allegedly
incorporates the best insights of other systems, including ABC, TOC and traditional
management accounting thinking (White, 2009). It is also largely based on German
management accounting methods (Grenzplankostenrechnung), which have been used
for 60 years and are still used over 3.000 companies, but are difficult to spread outside
German-speaking countries (White, 2009). So, in the middle of all these methods, what
are the key principles of RCA?
RCA is focused on the manager, as a primary user of its information, rather than on
external financial statements. White argues that decisions that start a new operation are
rarely made, which would imply that most of the decision-making throughout the
organization of managers represent incremental changes (White, 2009). This opinion
reinforces the importance of supporting empowerment of small decision-making with
facilitating management accounting systems, rather than only on executive decisionmaking (which implies more strategic and structuring changes) (White, 2009).
This system believes that the best source of data is the actual performance information
about the resources, the cause of costs and revenues. White states that an activity may
be stopped, and still costs will remain unless if resources engaged in the activity are
eliminated or significantly redeployed (White, 2009). This way, full attention is given to
resources, when building the decision support model for the organization.
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2.2 LEAN MANAGEMENT
2.2.1 Lean’s guiding principles
As previously stated, the TPS was developed with a clear sense of the main
inconveniences of mass production, which many of them are directly linked with
inventory management. In the first place it´s long setup times caused a great deal of
inventory waste, which resulted in storing, a activity that incurs in money costs and
sucks company´s resources without adding value to the product (McClellan, 2004). It
also causes a delay, for customers are obliged to wait until the fulfillment of lots,
although those quantities may oversize the customers demand. (McClellan, 2004).
Lastly, the storing of unsold inventory may mean the need for rework, the same to say
increased and unnecessary costs (McClellan, 2004).
This way TPS tried a different better fit approach to their own needs, with the purpose
solve this problem and other related to the production requirements and to achieve, what
would also be the main goal of Lean Production: "to get the right things to the right
place at the right time, the first time, while minimizing waste and being open to change"
(Cuc & Tripa, 2007). Lean Production activities have two main concerns: adding value
to the product and removing waste.
Lean theory presents value as one of the main primary concepts. Besides removing
waste from activities, the whole purpose of Lean’s initiatives is to stimulate and develop
all activities that bring added value to the product for the client. It does not matter if a
company has achieved to make substantial technological progresses to the product, if
these improvements do not represent any interest and utility for clients. It all comes
down to this: if clients are simply not interested in paying more for the product, even
though it has improved functions, then the product has no additional value. The notion
of value is therefore intrinsically dependent on the client. Lean proponents argue that
adding value to the product constitutes an ongoing task indispensable to company’s
survival, the same way continuous improvement through waste removal as well. Value
is determined by the customer, who wants a good, service, or even a combination of
both within a price and time framework and is willing to trade it for money (Paez,
2004). So the notion of value is largely vast, making it extremely difficult to precise.
What constitutes as a wanted characteristic in a product, such as a type of functionality,
may be the first more important criterion of choice to one customer, and the last one to
another. This fact reinforces the need to have a good knowledge and understanding of
the customer values (Melton, 2005).
After value, waste is Lean’s concept with the greatest focus (Dahlgaard & DahlgaardPark, 2006). It is a general term that implies all activities that do not add any value to
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the product. There are several types of waste that different authors consider, all linked
together. The concept of waste was developed, beginning to spread its meaning to a
wider notion, since it was originally defined by Taichi Ohno. He enumerated seven
wastes: overproduction, waiting, transport, overprocessing, inventories, unnecessary
movement, producing defects (Womack & Jones, Lean Thinking Banish Waste and
Create Wealth in Your Organization, 1996).
The literature reviewed showed that many authors tend to mix the notion of waste with
similar notions. Instead of referring to what specifically constitutes an activity that
doesn´t add any value, they sometimes call waste to what constitutes the cause of
practicing waste activities or, on the other hand, to the consequences of needless
activities. Thus, to understand well Lean’s notion of waste, a three-column table was
built, where the first column determines the category of the problem inherent in an
activity (“Type”), the second the specific activity that represents a waste (“Waste
(Activities with no added value)”), and the last the potential consequence of this waste
(“Consequence”), which obviously is considered negative.
Table 1 Characterization of Waste and its consequences, (Masket et al, 2004)
Waste (Activities with no added
value)
Bad Inventory: storage of raw-material,
use of intermediates and final products.
materia
ls
Overproduction: producing more
than needed (e.g. more than
Bad
customer’s demand);
use of
produc Over processing: using processes
tion
that do not add value to the
plannin
product;
g
Rework: activities to correct or
complete products;
Transportation: moving product to
decentralized locations;
Bad
use of
Waiting: people waiting to work;
time
equipment or products waiting to
be processed;
Bad Underuse of people: activities that
use of lead to underuse mental, creative
Energy and physical skills and abilities of
Type
Consequence
Inventory: huge use of working capital;
additional warehouse space need;
Overproduction: inventory; occupation
off resources that could be used for other
activities; engineering costs with facility
modifications;
Over processing: delays, increased costs;
Rework: increased operating costs;
delays;
Transportation: delays; need for
additional warehouse space;
Waiting: people waiting to work;
equipment or products waiting to be
processed;
Underuse of people: activities that lead to
underuse mental, creative and physical
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people, such as poor workflow, skills and abilities of people, such as poor
organizational culture, inadequate
workflow, organizational culture,
hiring and poor or non-existing
inadequate hiring and poor or nontraining;
existing training;
Machinery: excessive power utilization;
Machinery: excessive power
unproductive operations;
utilization; unproductive
Excess of motion: less activity on
operations;
important issues; delays
Excess of motion: unnecessary
movements of people, data,
decisions and information;
Bad
use of
quality
manag
ement
Quality management: activities
that don´t act according to zerodefect policy;
Complexity: trying to solve
problem in complex ways, rather
than in simple manner;
Quality management: errors during
process that sometimes cause production
stoppages, or defected products, which
require rework or additional work; data
and data entry errors, materials out of
specification and incomplete
documentation;
Complexity: over costing solutions; long
correction duration and overuse of
resources;
Similarly to Lean Manufacturing, Lean Accounting also strives to eliminate all waste
activities. In this case, waste such as transactions, and traditional controlling systems
that are no longer needed (Maskell & Baggaley, Practical Lean Accounting – A Proven
System for Measuring and Managing a Lean Enterprise, 2004). In other words, Lean
Accounting tries to manage the company’s process and activities without having to
create paper and computer transactions every time material is moved or altered. This is
a particularly important task, as companies may find that transaction volumes increase
dramatically specially when implementing Lean. Baggaley and Maskel suggest some of
the areas where this can happen, including (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004):
 «Purchase orders, receiving reports, invoices for daily deliveries from suppliers;

Work order volumes and batch tickets to deal with a larger number of small
batches and single-piece part flow;

Increased shipping documents and customer invoices t process daily shipments
to customers.
Baggaley and Maskel add an easy to understand comparison: transactions are to Lean
Accounting as inventory is to Lean Manufacturing (Maskell & Baggaley, Practical Lean
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Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
But similarly to inventory, it is difficult (not to say impossible) to eliminate all
transactions, with the risk of losing control. Elimination of transactions is therefore a
gradual process, which will need to keep traditional existing controlling systems. Let us
start by reviewing some of the most heavy transaction-drivers of cells in the initial stage
of Lean implementation, which consist in tracking production labor by using work
orders, tracking materials used in detail to work orders, and tracking all inventory
movements (McClellan, 2004).
The third Lean core principle is flow. Flow is a potential connector between value and
waste and represents processes, people and culture. For example, inventory is
considered a consequence of the lack of flow in a process (Melton, 2005). The lack of
flow in value added activities and processes is caused by constraints. These constraints
have to be found and eliminated.
Value Stream designates the sequence of processes through which a product and/or
service is transformed, and value is added into it until it reaches the customer (Maskell
& Baggaley, Practical Lean Accounting – A Proven System for Measuring and
Managing a Lean Enterprise, 2004). As for Pull, this principle designates the form of
how the flow is initiated through the value stream, which specifically defines that only
customer orders set off productions (Maskell & Baggaley, Practical Lean Accounting –
A Proven System for Measuring and Managing a Lean Enterprise, 2004). The
Perfection principle designates the need for delivering products with maximum quality,
which ultimately consists in 100% quality and zero-wastes (Maskell & Baggaley,
Practical Lean Accounting – A Proven System for Measuring and Managing a Lean
Enterprise, 2004). Finally, Empowerment is a principle that reinforces the importance of
attributing responsibility to the workers, training them, and involving them in problem
solving activities.
2.2.2 Lean Management Methods and Techniques
Just-In-Time (JIT)
JIT is a system that affects both production and inventory management and that has its
own principles, which can be applied autonomously. But the main reason why the JIT
principles are so important to Lean Production is because it shares perfectly aligned
visions to what concerns inventory management, which is no surprise since they come
from the same source: TPS.
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First of all, both view inventory’ storing as waste, because doing it implies that an
excessive quantity, that wasn´t needed in that exact time was produced. This way, the
basic notion of JIT systems consists on one of Lean’s waste removal concerns and
activities: elimination of excess inventories and overly large lot sizes, with the intuition
of minimizing customer delivery time, fewer defects, and less capital tied up in raw
materials, WIP, and stocks of unsold finished products (Birdi, et al., 2008) (Shah &
Ward, Defining and developing measures of lean production, 2007). Secondly both
have similar concerns in job floor: simplification of manufacturing processes and its
continuous improvement, the use tools that involve and empower operational workers,
and stimulation standardization of work. Lastly both encourage the relation with
suppliers and customers.
Equally in traditional inventory management systems and JIT systems customer’s
demand is the single source engendering production’s activation (Abdullah, Lean
Manufacturing Tools and techniques in the process industry with a focus on steel,
Monography presented at University of ... , 2003). However JIT´s main idea is having
production regulated by customers demand but with the capability of reacting to sudden
changes in demand’s pattern (Abdullah, Lean Manufacturing Tools and techniques in
the process industry with a focus on steel, Monography presented at University of ... ,
2003). So, instead of managing production through traditional upstream pull systems
that produce large quantities to satisfy demand within (relatively) long periods (which
implies distant in time), downstream pull systems are used, that react only to demand
within proximal periods of time.
JIT systems are also extendable beyond company’s own production, to both purchasing
and distribution activities (Abdullah, Lean Manufacturing Tools and techniques in the
process industry with a focus on steel, Monography presented at University of ... ,
2003). Coordination of JIT’s system can be managed through the use of a Kan Ban
system (Abdullah, Lean Manufacturing Tools and techniques in the process industry
with a focus on steel, Monography presented at University of ... , 2003), one of its most
critical components (Shah & Ward, Defining and developing measures of lean
production, 2007). Other JIT’s critical components are production smoothing, setup
time reduction, quality improvement and employee involvement.
Kan Ban consists in a visual information management system that manages the flow of
products through processes. Kan Ban is the Japanese word for card or box, and is used
to designate this information system due to its central role in it. Kan Bans contain
specific information in them, such as quantities to be produced by the subsequently
process, matching parts that need to be assembled, type of machines where it needs to
pass, and other specifications. The Kan Ban cards were used in the early stages, for
now-a-days the most usual method is electronic Kan Bans.
Through Kan Ban system workers have a clear visual perception of quantities existing
and their flow. This involves them by giving more responsibility and autonomy.
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JIT are difficult systems to manage in the presence of variance in customer’s demand,
requiring agile work processing, otherwise encountering high risks of losing sales or
keeping excessive chain-wide inventories (Kim, Jun, Baek, Smith, & Kim, 2005).
Moreover, JIT systems have a long implementation process, which makes it harder to
see in the short run returns on the investments made from JIT adoption (Fullerton,
McWatters, & Fawson, 2003). For example, initial investments on training or
machinery costs are required. Alternatively, JIT systems are expected to improve asset
turnover (which measure sales relative to investment), mainly by freeing up assets and
capital (Fullerton, McWatters, & Fawson, 2003).
Total Productive Maintenance (TPM)
Sudden machine breakdown can be a cause of great damage, for it can stop the entire
production line (Abdullah, Lean Manufacturing Tools and techniques in the process
industry with a focus on steel, Monography presented at University of ... , 2003). All
efforts to avoid such events or to be prepared for them are of the extreme importance to
production environments. TPM is a system designed to attend to all maintenance
relative activities. TPM establishes a program that acts on three areas, such as
preventive maintenance, corrective maintenance, and maintenance prevention.
Prevention maintenance attempts to plan regular checks on all equipment in a prioritized
order (Abdullah, Lean Manufacturing Tools and techniques in the process industry with
a focus on steel, Monography presented at University of ... , 2003). As to corrective
maintenance, it concerns activities linked with fixing machines, or making the decision
to buy new ones (Abdullah, Lean Manufacturing Tools and techniques in the process
industry with a focus on steel, Monography presented at University of ... , 2003).
Preventive and corrective maintenance are activities privileged for the short-term, where
attention is focused in creating a «autonomous maintenance program for the production
department, a planned maintenance program for the maintenance department, and a skill
development for operations and maintenance personnel» (McKone, Schroeder, & Cua,
1999). As for maintenance prevention, it concerns more the long-term program, where
the focus subjects are the choice of new equipment (McKone, Schroeder, & Cua, 1999).
Total Quality Management (TQM)
TQM is a management system based on the principle that quality control should be
embedded in the production process and done by operators, as opposed to being a
parallel activity (Birdi, et al., 2008). Thus it focuses in continuous improvement
activities that aim quality of processes, goods and services, focusing on customer’s
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satisfaction (Shah & Ward, Defining and developing measures of lean production,
2007). Fawaz Abdullah describes Continuous improvement (or Kaizen in Japanese) as
a systematic approach that gradually and orderly works to achieve improvements in an
incessant search for perfection (Abdullah, Lean Manufacturing Tools and techniques in
the process industry with a focus on steel, Monography presented at University of ... ,
2003). Moreover Bhasin and Burcher define Kaizen as «a continual pursuit of
improvements in quality, cost, delivery and design» (Bhasin & Burcher, 2006).
One of Kaizen’s tools is the 5-S, which consists on a visual method of looking for waste
in the jobfloor (including scrap, defects, excess of material, unneeded items) and
eliminating it, by organizing items in the right areas, separating materials used on
regular basis from those that are not to benefit the material flow, and cleaning the
workspace area (Abdullah, Lean Manufacturing Tools and techniques in the process
industry with a focus on steel, Monography presented at University of ... , 2003). Each
of the five S designate a Japanese word (Abdullah, Lean Manufacturing Tools and
techniques in the process industry with a focus on steel, Monography presented at
University of ... , 2003) (McClellan, 2004), that are Seiton (set in order/straighten),
Seiso (shine/Sweep and clean), Seiketsu (systemize), and Shitsuke (standardize).
Value Stream Mapping (VSM)
VSM is a technique developed by Lean production movement and is considered a
practical method to improve the whole productive system, since it gives to its
practitioners a systemic view which guides them on the application of the right Lean
tools (Serrano, Castro, Laburu, & Ochoa, 2009). It assists in visualizing all value adding
and non adding actions within the whole production process throughout the supply
chain, from raw material to final product (Abdullah, Lean Manufacturing Tools and
techniques in the process industry with a focus on steel, Monography presented at
University of ... , 2003). These actions include material and information flow (Abdullah,
Lean Manufacturing Tools and techniques in the process industry with a focus on steel,
Monography presented at University of ... , 2003).
Besides giving to its practitioners a holistic vision of each product family, the VSM
technique has other advantages. It is a simple and easy to use tool, but most of all
accessible to every member on the team because it uses a graphical interface that
represents a common language for everyone. Lasa et al. (2009) add to VSM’s
advantages that it also represents a unification of Lean concepts and techniques in a
unique body, which may consist on a starting point for all improvement plans (Serrano,
Castro, Laburu, & Ochoa, 2009).
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The VSM technique has five steps method to be implemented by a special team created
for such purpose, with specified roles to manage the whole process, which are
“selection of product family, current state mapping, future state mapping, definition of
working plan and achievement of working plan” (Serrano, Castro, Laburu, & Ochoa,
2009).
The VSM implementing team ought to lead the improvement projects, such as “work
method, cycle time improvements, changeover time reductions and maintenance
management” (Serrano, Castro, Laburu, & Ochoa, 2009).
Cellular Manufacturing
Cellular Manufacturing is a technique especially well fit to adapt to product mix,
because it consists in arranging people and equipment into cells, where similar products
are grouped into families to be processed in specifically designed equipments and in the
same sequence (Abdullah, Lean Manufacturing Tools and techniques in the process
industry with a focus on steel, Monography presented at University of ... , 2003). This
shortens changeover time of products and stimulates use of small lots (Abdullah, Lean
Manufacturing Tools and techniques in the process industry with a focus on steel,
Monography presented at University of ... , 2003). It also enables producers to deliver a
high variety of products in a fast rate, increasing flexibility to respond to customer’s
demand (Abdullah, Lean Manufacturing Tools and techniques in the process industry
with a focus on steel, Monography presented at University of ... , 2003).
Production Smoothing/Heijunka
Production Smoothing is a tool used to balance the load level intended to be produced to
the restrictions in terms of capacity inherent to the process, such as machines and
operators (McClellan, 2004). According to McClellan it is also known as mixed
production, and is a technique that adapts to the effects of demand variability and helps
to schedule production to customer’s demand (McClellan, 2004).
Single Minute Exchange of Dies (SMED)
SMED is a tool to reduce the lead-time and improve flows of WIP, by eliminating
change-over times on machines (Bhasin & Burcher, 2006). Though at first sight can be
considered a simple methodology, in order for it to correctly function requires expertise
and deep knowledge on how processes are done in the specific context. It consists on a
methodology to analyze the process of changing from one product to another, clearly
defining what activities can be performed during the production of the batch, from those
that are done when the process is stopped, and trying to understand how to maximize
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the number of tasks that are done during batch production time. This way optimization
is achieved by reducing the total time taken to complete this process.
Though its name, it does not intend to mean that all changeovers and startups should
take only one minute. However, it does advocate but that generally the process should
take less than 10 minutes.
Standardization of work
Standardization of work is a method of organizing the worker’s tasks in an efficient
manner (Abdullah, Lean Manufacturing Tools and techniques in the process industry
with a focus on steel, Monography presented at University of ... , 2003).
Takt time a tool to help standardization of work. It’s underlying concept is to have a
established reference production rhythm, which is done according to the takt (German
word for rhythm or beat) time. Takt Time can be calculated by the following formula
(Abdullah, Lean Manufacturing Tools and techniques in the process industry with a
focus on steel, Monography presented at University of ... , 2003):
Equation 1Takt Time Calculation
TaktTime(TT ) 
Available _ work _ time _ per _ day
Customer _ demand _ per _ day
Labor, material and inventory tracking
Traditional accounting and production planning uses work orders to a control and
instruction giving tool. Work orders is the document controls the traditional production
systems and cost accounting, and, therefore, is used for several purposes, such as
providing technical information and helping to collect data. For example, work orders
provides technical information to operators, and initiates production, and helps in
collecting data about the performance in production’s stages, and costs (including
material, labor and other direct costs) (Maskell & Baggaley, Practical Lean Accounting
– A Proven System for Measuring and Managing a Lean Enterprise, 2004). The use of
the document of work order is simple: it launches production of a batch and travels with
it on the shop floor, collecting the relevant data (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
Labor and material data are calculated and allocated according to specific jobs and a
standard cost is calculated. Performance will be measured by comparing this cost with
other preceding values.
MRP is an example of a system orientated by work orders to schedule production
(Maskell & Baggaley, Practical Lean Accounting – A Proven System for Measuring and
Managing a Lean Enterprise, 2004). These are push manufacturing systems that
function with a contradicting logic as Lean principles. Lean uses a pull system,
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activated by customers demand, and orientated by visual methods, such as kanban
cards.
As Lean cell’s are progressively implemented, production lead time is reduced, inprocess inventories decrease to a very low level as kanban and pull systems are
activated, bottlenecks are reduced, and production cycles become shorter and more
predictable. Variability starts to be measured at the level of the cell team and in real
time, which makes it dispensable to track production labor hours (Maskell & Baggaley,
Practical Lean Accounting – A Proven System for Measuring and Managing a Lean
Enterprise, 2004). This way, work orders become less important as a costing document,
as cost of the products is determined «more by the flow of the production than by the
resources added to an individual item» (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
On the other hand, instructions from work orders also become dispensable, as kanbans
and other visual means provide all the necessary information. Finally, since
measurements are done in real time, corrections can be done faster, as opposed to the
monthly measurements. Therefore, the goal becomes eliminating all work orders or
other production tracking documents, so the first step is to eliminate job step tracking
(and tracking only starts and completions).
Then detail labor tracking and variance reporting are eliminated, so costs to each order
are no longer tracked. Instead, labor, materials and overhead start to be backflushed
(which consists in using standard costing through standard production rates). In the case
of materials, detailed information will not be necessary until the bills of materials are up
to date and accurate, and scrap is reported separately (Maskell & Baggaley, Practical
Lean Accounting – A Proven System for Measuring and Managing a Lean Enterprise,
2004). Performance measurements based on variance between actual cost and standard
cost, induces the set of a wrong goal, which consists in maximizing the efficiency in the
use of labor, materials and machines. This contradicts Lean’s principles of eliminating
inventory, as the strive of minimization of variance induces maximizing the use of
resources. So the next step will be changing to value stream costing. By keeping WIP
inventories low and using blanket purchase orders, pull systems enable to charge
materials into the value stream when they are received (Maskell & Baggaley, Practical
Lean Accounting – A Proven System for Measuring and Managing a Lean Enterprise,
2004). Blanket purchase orders carry with them data about the products supplied by the
vendor, its corresponding price, and the terms of relationship with the vendor (Maskell
& Baggaley, Practical Lean Accounting – A Proven System for Measuring and
Managing a Lean Enterprise, 2004), and therefore eliminate the need for standard
costing of materials by locking the cost to the commodity purchased (Maskell &
Baggaley, Practical Lean Accounting – A Proven System for Measuring and Managing
a Lean Enterprise, 2004). Moreover, with Lean implementation inventory levels and
consequently value strongly diminishes. This facilitates the measurement of the
inventory, which can be done by the number of days within the value stream – the dockto-dock days.
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At the last Lean stage, labor, material and inventory are progressively tracked to the
value stream, rather than on specific products or production jobs (Maskell & Baggaley,
Practical Lean Accounting – A Proven System for Measuring and Managing a Lean
Enterprise, 2004).
Transactions
Traditional accounting systems often use transaction’s documents to track events and
this way maintaining operational and financial control. Lean Accounting strongly
opposes the use of transactions, directing many efforts to eliminate as much of them as
possible. The main reasons advocated are that it is a time consuming task, and requiring
investments in dispensable resources. However transactions can be useful when
processes are unstable, helping managers to regain control of them. So, the elimination
of transactions must be a gradual process that takes time to accomplish in order not to
jeopardize the control of any activity. Therefore, it should only be done when «the need
for those transactions has been eliminated», which is the same to say when the company
is already in a mature Lean stage, with processes under control (Maskell & Baggaley,
Practical Lean Accounting – A Proven System for Measuring and Managing a Lean
Enterprise, 2004).
Measurement of Performance
One of the big differences between the Traditional Accounting methods and Lean
Accounting methods start right from the beginning in the way of thinking the purposes
of the measurements. Lean Accounting does not use measurements just to control
performance or trace problems that occurred. Instead, it focuses on the future, on how
change is evolving and in its obstacles (Maskell & Baggaley, Practical Lean Accounting
– A Proven System for Measuring and Managing a Lean Enterprise, 2004). In that
sense, the measuring is directed to the critical success factors that are drivers in the
achievement of the organizational goals – these are what Lean intends to measure and
control – and plays a relevant role in motivating collaborators to follow the established
strategy.
On the other hand, measurement frequency is dictated by the concrete characteristics of
the processes and their linkage to the goals established. Measurements are scheduled
according to the speed the system is expected to change, and how long it takes to
respond to these changes, which is the same to say how long the changes take to reflect
on the system’s performance.
The starting point to establish performance measurements of Lean organization should
be focusing on the strategic objectives. All activities that drive the organization towards
these goals are naturally the ones that must have the best performance and that function
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Chapter 2
within the value stream. Thus, when defining value stream measurements the focus
should be in guarantying that value stream targets should be perfectly articulated with
the strategic objectives.
Finally cell goals are critical to the flow of the value stream. For that manner cell
critical factors orientate the cell measurements, and are also important to be clearly
defined. After establishing value stream and cell measurements, the Lean implementing
firm managers ought to review the currently in use performance measurements and how
these can gradually be adapted.
Cell/Process Mesures
Baggaley and Maskel present four different Cell/Process Measurement methods, as the
four primary cell measurements (Maskell & Baggaley, Practical Lean Accounting – A
Proven System for Measuring and Managing a Lean Enterprise, 2004). These
measurements are useful to measure lean goals and to motivate the cell operators. They
refer that it is not necessary to use all four of them in a cell.
The “Day-by-the-hour Report” is a method designed to achieve fast feedback in
tracking the cell’s performance to achieve the takt time required by customer demand
(Maskell & Baggaley, Practical Lean Accounting – A Proven System for Measuring and
Managing a Lean Enterprise, 2004). Not only it helps to maintain workers in the cell
involved and focused with objective set (which is rate of production equal to customer
demand rate), but it is also a fast method to identifying problems and keeping data about
the problems.
Reporting is done each hour4 by one of the cell people who writes each hour on a white
board localized within that cell information about the actual quantity achieved that hour
and the cumulative quantity in the shift or the day (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
If hourly production quantity or cumulative production decreases to a certain level, cell
workers will set an alarm, which alerts managers, engineers, and production specialists
in order for them to solve the problem quickly (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
The “Day-by-the-hour Board” can also contain the production schedule of the cell.
4
Measuring can be done at another pace that better fits production rhythm and convenient for people to
use), rather than in each hour.
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Chapter 2
Another useful report that is also recommended is the «First Time Through Report»
(Maskell & Baggaley, Practical Lean Accounting – A Proven System for Measuring and
Managing a Lean Enterprise, 2004). This report is used to measure the effectiveness of
the cell’s standardized work, which, in other words, means measuring if products are
done right the first time, which is the same to say units produced without any scrap,
repairs or rework. Measurement of FTT percentage uses the following formula:
Equation 2 FTP calculation
FTT = (Total Units Processed – Rejects or Reworks) / Total units processed
Data required for the FTT calculation should be collected by workers in the cell, who
have a check sheet or another similar data gathering method to keep track of all
products with problems. This information should not be used to criticize at all cost, in
order for measurements to remain faithfully true.
The third report presented is the «WIP-to SWIP Report», and it has the purpose of
maintaining the pull system effectively. SWIP stands for Standard Work In Progress.
This method is designed to control the inventory levels in the cells, which is usually
with the help of kanbans between the cell’s work centers. WIP-to-SWIP is calculated by
the shift, or the day or even by the hour, and in the following manner:
Equation 3 WIP-to-SWIP calculation
WIP-to-SWIP = Total Inventory on the cell / Standard cell Inventory
More than one or less means too much inventory or the possibility of shortage,
respectively. Therefore, neither of these results is wanted; one is the ideal result.
The last method is called Operational Equipment Effectiveness (OEE) and is usually
applied to support Total Productive Maintenance (TPM). It is designed to track machine
effectiveness, which means to track machines are producing on time and to the right
quality. OEE is considered a complicated method to apply, and therefore is not
recommended to be applied to all machines in the cell or value stream, but to the
machines that are creating bottlenecks. The OEE formula is calculated the following
manner:
Equation 4 OEE calculation
OEE = Availability * Performance Efficiency * Quality
Availability tracks the amount of time a machine was not working when it should have
been available (downtime):
Equation 5 OEE: Availability calculation
Availability = (Total Time – Downtime) / Total Time
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Chapter 2
On the other hand, performance efficiency measures the rate of production from a
machine compared to the total time it is designed to run:
Equation 6 OEE: Performance calculation
Performance Efficiency = Actual Run Rate / Ideal Run Rate
Finally quality measures the total number of items manufactured with the number of
items that were rejected (tracked by FTT measurements):
Equation 7 OEE: Quality calculation
Quality = (Total Quantity Manufactured – Number Rejected) / Total Quantity
Manufactured.
Other than these four methods, Baggaley and Maskel present additional supporting
measurements, such as cross-training-chart, Five S, safety, absenteeism, and Set-Up
Times measurements (Maskell & Baggaley, Practical Lean Accounting – A Proven
System for Measuring and Managing a Lean Enterprise, 2004). They refer that all
performance measurements should be presented visually in the cell and maintained by
the operators, which can be agglomerated in a performance measurement board in two
distinct divisions: one for problems that can be solved by the cell team and those
requiring help from other people (Maskell & Baggaley, Practical Lean Accounting – A
Proven System for Measuring and Managing a Lean Enterprise, 2004). Visual
measurements should be the only measurements required for the Cells.
Target Costing
Target Costing consists on a methodology to clearly identify and understand what is the
value created to customers, and how it affects value stream profitability (Maskell &
Baggaley, Practical Lean Accounting – A Proven System for Measuring and Managing
a Lean Enterprise, 2004). It is used when introducing new value streams, when
introducing new products and for current value streams (Maskell & Baggaley, Practical
Lean Accounting – A Proven System for Measuring and Managing a Lean Enterprise,
2004).
The target costing methodology proposes a process consisting of a total of twelve steps,
which, essentially focus on (Maskell & Baggaley, Practical Lean Accounting – A
Proven System for Measuring and Managing a Lean Enterprise, 2004):

understanding the customer needs – clearly identifying who is the customer,
what are his needs, and how to reach his satisfaction;

Understanding customer value – defining specifications to meet customer’s
needs;
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Chapter 2

Target costs – target costs of major components of products and/or services, and
of value and features/characteristics;

Drive to customer value – Compare potential value against cost in the value
stream, match target cost to processes, and continuous improvement.
Value Stream Measurement
Value stream focuses on representing the flow of all additional value for the customer
being produced by the company (Maskell & Baggaley, Practical Lean Accounting – A
Proven System for Measuring and Managing a Lean Enterprise, 2004). This means that
not only the manufacturing processes should be included but also other functions.
Moreover, Baggaley and Maskel suggest the extension of the value stream mapping
beyond the organization when the firm has already reached a mature Lean stage, in
order for it to include other business partners (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
This helps to have the “full picture” of value flow, which enables the development and
enrichment of the work with partners (Maskell & Baggaley, Practical Lean Accounting
– A Proven System for Measuring and Managing a Lean Enterprise, 2004).
Creating value to the customer consists on the most important mission of the company,
because it is what produces money (Maskell & Baggaley, Practical Lean Accounting –
A Proven System for Measuring and Managing a Lean Enterprise, 2004). A good
example are investments in improving processes that do not add much value to the final
product. A lean practitioner in a stage of current value stream utilization would argue
that investing money in low value creating activities consists in a strategic mistake,
because it would not lead to true impacts (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
Since it is also within the value stream were waste is, it is on its elimination that change
improvement efforts should be directed (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
Therefore Lean proponents insist on the change of organizational way of thinking into
the Lean thinking – managing by value stream. Managing by value stream is the first
stage of true Lean thinking.
A firm may have more than one value stream. Each value stream has its own
Continuous Improvement team assigned (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
These teams have the mission of measuring the value stream performance each week
and launch improvement initiatives (Maskell & Baggaley, Practical Lean Accounting –
A Proven System for Measuring and Managing a Lean Enterprise, 2004). Implementing
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managing by value stream may involve progressively assigning people and machines to
value streams. This involves radical change in the way the organizational structure is
thought. For example, some administrative tasks may be eliminated throughout Lean
implementation, such as Production Planning Department (Maskell & Baggaley,
Practical Lean Accounting – A Proven System for Measuring and Managing a Lean
Enterprise, 2004).
Still, it is not frequently possible to provide each value stream with their personal
resources. It may not be also possible to include all departments of the organization
within the value stream (Maskell & Baggaley, Practical Lean Accounting – A Proven
System for Measuring and Managing a Lean Enterprise, 2004). Managing by value
stream is difficult to implement and requires a lot of efforts invested.
Being the value stream Lean’s main business focus, it becomes essential to be able to
control and evaluate its performance. So, ensuring the ability to have quick and well
fitted responses to problem solving and keeping under control, and to maintain
continuous improvement are the main purposes of value stream measuring (Maskell &
Baggaley, Practical Lean Accounting – A Proven System for Measuring and Managing
a Lean Enterprise, 2004). The measurements provide the necessary information for the
value stream teams to come up with improvement efforts to improve the overall
performance of the value stream, which should lead to increasing value, reducing waste
and improving the flow (Maskell & Baggaley, Practical Lean Accounting – A Proven
System for Measuring and Managing a Lean Enterprise, 2004). Each value stream may
contain more than one team responsible for continuous improvement, and all of them
are cross-functional teams (Maskell & Baggaley, Practical Lean Accounting – A Proven
System for Measuring and Managing a Lean Enterprise, 2004). If a problem arises that
exceeds the knowledge of the continuous improvement team, it is brought to a higher
level of senior managers.
As opposed to measurements done in traditional manufacturing environments, where
the entire production plant is analyzed usually monthly, value stream measurements are
reported on a weekly basis (and specifically for each value stream). Another different
aspect is that measurements of value streams are not intended to stimulate competition
between the different value stream managers, as traditional measurements may be
intended to do between different plant managers (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
Rather than competition, cooperation activities are the desired stimulus for the work
environment (Maskell & Baggaley, Practical Lean Accounting – A Proven System for
Measuring and Managing a Lean Enterprise, 2004).
Baggaley and Maskel (2004) suggest six value stream measures that can be applied. The
summary of the value stream measures along with value stream profitability is compiled
in a visual report – the box score. The box score intends to be an extremely accessible
document, in the sense that everyone can understand thanks to its visual and language
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Chapter 2
comprehension easiness. It confronts present state performance evaluation with future
state goals in three different measures – operational performance, capacity usage, and
financial performance – allowing everyone to have a clear idea of Lean’s effectiveness
and targets. By being a weekly report, it allows to track closely the effects of
improvement measures, and to have a better base for strategic planning, including
capital investments (Maskell & Baggaley, Practical Lean Accounting – A Proven
System for Measuring and Managing a Lean Enterprise, 2004). A template of the usual
items used in a box score is shown in table 2 of chapter 3.
Table 2 Value Stream Measurement: SOFP
Fiancial
Capacity
Operational
Current State
Future State
Long Term
Future
Sales per person
On-time delivery
Dock-to-dock time - days
First time through
Average cost per unit
AR days outstanding
Productive capacity
Non-productive capacity
Available capacity
Annual revenue
Annual material cost
Annual conversion cost
Value stream profit
Value stream cash flow
2.2.3 Lean Management Implementation
Understanding how the process of implementation of Lean practices constitutes an
essential task when studying the potential of an organizational change to Lean Business
management principles. The next section will be dedicated to that specific task, which
will be particularly valuable material to further considerations in the model proposed.
A term often used by Lean proponents is the “Lean Journey”. This would constitute the
whole process of implementation of Lean management practices and philosophy in the
organization. Although the term “Lean Journey” is intended to designate a journey that
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is based on continuous improvement, and therefore, a never ending one, implied in it is
a limited number of development stages. Hung-da Wan*, F. Frank Chen (Wan & Chen,
2009) refer the relevance of a progressive implementation of Lean tools, rather than a
massive implementation of all the tools that would lead to chaos. Therefore, the stages
are intended to guide the practitioners in the transition process until a certain level of
change is reached, where the organization is fully submersed in Lean Business
management practices and so well structured this way, that organizational staff already
thinks in a “lean wise” manner. Nevertheless, it is important to refer that although the
change process in done in a progressive manner (rather than a radical one), organizing
the hole structure in a Lean manner (through value stream organized departments and
teams, use of visual methods to control and manage activities, “relentless” tackle
problems and elimination of waste, etc.) can be a hard task, because it involves a radical
way of thinking greatly different from traditional academic management thinking.
Let us start by understanding how traditional manufacturing organizations function.
Usually production and inventory management are carefully planned and controlled by
MRP systems, or other similar push systems, where production is activated by system
issued work orders instead of recent demand orders (Maskell & Baggaley, Practical
Lean Accounting – A Proven System for Measuring and Managing a Lean Enterprise,
2004). Thus, production is planned in advance (which means with a relatively large lag
of time until actual start of production) through demand forecasting and large quantities
purchases, obtaining lighter prices through quantity discounts. Furthermore concerning
inventory management, high levels raw material, WIP and finished goods inventories
are used. Production is done in large batches, with large changeover times in the case of
product mixing environment, which produce large sums of scrap, and frequently rework
is necessary due to defected material (Maskell & Baggaley, Practical Lean Accounting
– A Proven System for Measuring and Managing a Lean Enterprise, 2004). Moreover,
there are few visual controls in place and few concerns about involvement and
empowerment of workers in the job floor.
On the other hand, typically the number of suppliers is large, and few of them are
certified. Additionally, delivery and quality problems occur frequently with the material
purchased (Maskell & Baggaley, Practical Lean Accounting – A Proven System for
Measuring and Managing a Lean Enterprise, 2004).
Finally the structure is organized by functional departments.
This is the typical manufacturing scenario before Lean implementation. Lean
Manufacturing goal in the first stage is to install the Lean Pilot cells. So, the first task is
start training staff members to begin to understand Lean concepts. Basic notions as
value stream flow, waste elimination, work standardization, etc., are taught. After being
familiarized, managers are faced with the challenge of drawing the company’s value
stream maps. Although there is not a sudden immediate change into managing through
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Chapter 2
value stream, the value stream mapping represents an important role into pilot cell
building. The visualization of the actual flow of information and materials helps to
understand how to aggregate value in specific groups – the value streams – and where
the wastes are located (Wan & Chen, 2009). So, rearrangements of the manufacturing
environment should be done according to the conclusions drawn from value streams,
which obviously extends to the building of production cells.
However, prior to the building of cells, survey questionnaires are done simultaneously
to training, which have the purpose of evaluating the current state of the system, how far
it is from the ideal Lean state, and identify starting point to the project. Present and
future state maps are build, indicating the path to follow (e. g. where the main critical
areas are so that management can know in which type of activities to focus), and an
action plan is created (Wan & Chen, 2009).
Having had the intensive training in lean principles, the implementation strategy set,
cells can now begin to be created. Additional lean principles start to be implemented, in
order for the work in the cells can flow as planned, such as standardization of work,
visual controls in place, 5S, etc. Moreover, improvements start to focus on reducing
change-over time and reducing delivery lead times, and other critical issues to the flow
of value. In other words, improvement initiatives are moved towards eliminating
bottlenecks and other types of waste.
In the second stage the goal is having Lean manufacturing widespread, which requires
having Lean pilot cells successfully in place and having had an extensive amount of
training.
The next step involves changing from the traditional upstream push system to a
downstream pull system, based on recent demand orders. In order to do so, it is
necessary to have the system prepared to give quick responses when needed, and
meanwhile without losing quality in the halfway. Moving towards a JIT system, with a
switch to Kanbans to manage inventory, is the next step in the second development
stage. Kanbans start being used within the cells, which then is extended to a reduced
number of suppliers. Moreover to what concerns suppliers, initiatives to reduce the
number of suppliers are also taken and to improve cooperation with these suppliers.
With pull system in place in the cells, production batches are allowed to be reduced.
Inventory is also reduced to minimum levels and quality inspection is done at the
source.
The third stage’s goal is managing by value stream. Having cellular manufacturing
widespread across the plant, with standardized work and single-piece-flow, extensive
use of visual systems, teams trained and established, initial supplier certification
program and Kanban pull from some suppliers, manufacturing managed by value
stream, processes under control, WIP and finished goods inventory relatively low and
consistent, continuous improvement in place, it is possible to start thinking in extending
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Lean principles boarders to more functionalities of the company. Value stream is
composed not only by plant work, because the activities done in there are not the only
value adding activities. Therefore, after guaranteeing that the plant is under control with
lean principles functioning, it is time to consider switching focus to other value adding
activities, located in other departments such as marketing, sales, accounting, etc. These
departments can also be managed in a value stream logic (Maskell & Baggaley,
Practical Lean Accounting – A Proven System for Measuring and Managing a Lean
Enterprise, 2004).
Managing by value stream is one of the most radical steps in Lean’s Business view. It
implies that value streams start to function as the core strategic business system in the
company (Maskell & Baggaley, Practical Lean Accounting – A Proven System for
Measuring and Managing a Lean Enterprise, 2004). It defies traditional way of thinking,
and therefore is considered one of Lean’s major steps. Lean Accounting plays an
important role in this step, as will be seen next.
The last stage is called the Lean Enterprise, and involves extending Lean principles
outside the four walls of the company to suppliers and clients. The Lean Enterprise
concerns four sectors in the organization’s activities. The first one is design, meaning
activities concerning the development of new products and high-level research related
to market trends (Paez, 2004). Development of new products are more short-medium
term activities, and ought to be done with a development leader assigned by topmanagement authority and by a multidisciplinary team, with each department
represented, to facilitate communication and managing interests among departments and
projects (Paez, 2004). Communication with suppliers should also be assured, who
should conduct their own developments simultaneously (Paez, 2004).
The second sector is manufacturing (Paez, 2004). Lean Production has specific views
that, as sad before, are quite different from Mass Production. First of all, one can point
out the continuously implemented problem-solving analysis policy applied by a multiskilled workforce to eliminate all waste (Crute, Brown, & Graves, 2003), as well as
quality management focused on the source, rather than detection quality (Crute, Brown,
& Graves, 2003), preventing rework (Paez, 2004). Secondly all efforts are done to
simplify tasks, to perform them a reduced space, and to minimize resources, such as
inventory in process (Paez, 2004). Lastly Lean invests in an empowerment policy of the
workforce in the operational level, believing that they are the most competent workers
to solve problems in their level (Paez, 2004). The empowerment is done by training and
earned authority (Paez, 2004). This way, management is required only to problemsolving when other specific participants are required, such as suppliers, designers,
quality experts etc. (Paez, 2004).
The third sector of activities is supply (Paez, 2004). Lean Production invests in longterm relationships with a low number of suppliers based on mutual trust and
commitment (Bhasin & Burcher, 2006). The choice of these suppliers is done based on
the number of years of relationship with the suppliers, percentage of procurement
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Chapter 2
purchased and global satisfaction (Bhasin & Burcher, 2006).Collaboration with
suppliers in specific activities, as design of components, for example, ought to be done
and cost information can be shared in order to guarantee a trustworthy business
relationship. It is also important to «provide regular feedback to suppliers about their
performance» (Shah & Ward, Defining and developing measures of lean production,
2007).
The last one is customer relationship (Paez, 2004). As discussed before, value
specification is a task that requires a robust knowledge of customers’ needs, interests
and satisfaction with the company’s service (Paez, 2004). Thus, the same proximity
relationship logic applied to suppliers is intended when dealing with customers.
According to Paez, Dewees, Genaidy*, Tuncel, Karwowski and Zurada/ Paez et al
(2004) Lean Enterprise activities are achieved through development of workforce
capabilities, and implementation of Lean techniques (Paez, 2004). They argue that
«Lean Production demands new capabilities from people, such as problem-solving
focus, teamwork, and creative thinking» (Paez, 2004).
In order to set parameters around Lean Accounting development, Baggaley and Maskel
propose four Lean maturity stages that follow parallel to Lean Manufacturing
implementation (Maskell & Baggaley, Practical Lean Accounting – A Proven System
for Measuring and Managing a Lean Enterprise, 2004). According to Baggaley and
Maskel (2004) these stages are:
1. «Traditional» – stage where the company is still launching lean pilot cells, and
accounting systems are still run by traditional measuring systems or, in some
cases, by more developed systems (such as the ABC costing, for example).
2. «Piloting Lean Cells» – some changes in the accounting system begin to be
introduced, mainly concerning measurements in the cells.
3. «Managing by value stream» – after Lean Manufacturing principles are
established, focus is turned into extending managing through value stream to
other functionalities of the company. This way, measurement system should
follow the Lean developments and extend its measurements to the value stream.
4. «Lean Enterprise» – stage were Lean Business principles are already embed in
organization. Lean practices are extended to suppliers and clients. Therefore
accounting efforts should concern helping the approximation to clients and
suppliers, by accelerating, simplifying and improving communications
processes, and by stimulating cooperation efforts.
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Chapter 2
In order to explain in a more detailed matter how Lean Accounting serves the
manufacturing company, let us start by reviewing how the traditional company
functions5.
First of all, the accounting systems usually are based on the documentation of the
maximum quantity of details that can be quantifiable, and require many times
authorizations from a higher hierarchy level, sometimes from multiple levels. For what
matters the accounts payable, all orders of materials and supplies are documented with a
requisition and a purchase order, and all materials received are also checked and
documented. Furthermore, high value purchases require senior management
authorization, and all transaction entries that reach a certain level and affecting financial
statements require review and authorization by a specified management member.
To what concerns the three basic cost components – material, labor and overhead – all
production costs are tracked and controlled normally by a job costing system, using
variance reports to compare actual costs with standard costs. All sorts of inventory (raw
materials, WIP and finished products) are also closely tracked and controlled, and
normally each year a full physical inventory review is done in order to establish
accurate stock quantities. Inventory is viewed as an asset, and represents a value to the
company which is also measured.
Product costing is done by the tracking of material inserted into production, calculation
of labor required, and adding overhead in the end. This means that cost is determined by
internal measures (instead of targeting costs according to the representing value for the
client). Variance reports are also applied to product costs, analyzing for each item,
comparing once again standard cost with actual cost figures.
Another relevant aspect is that all measurements are done by the accounting department,
each usually are reported monthly. Accounting department is also concerned with the
budgeting off all departments and cost centers, which are usually done annually and
compared each month with the results shown in monthly reports with the gathered
information. Profitability is a major concern, which is also used to measure departments
performance. Consequently, rewarding and recognition system is typically based on the
achievement or exceeding (obviously in a positive way) of targeted budget costs and
profitability.
Furthermore, the role of accountants is exclusively controlling and presenting accurate
financial reporting statements, without getting involved in operational projects.
5
The author would like to refer that the information about how traditional accounting systems function
was mainly collected in the Assessment Diagnostic tool present in the CD that comes with the book
“Pratical Lean Accounting – A proven System for Measuring and Managing the Lean Enterprise”
combined with the preceding literature used in the preceding chapter about traditional accounting.
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Chapter 2
Now let us view in a more detailed manner how Lean Accounting can be implemented,
which is the same to say how the transition from traditional accounting methods to Lean
Accounting is followed.
The first acknowledge of lean Accounting is that it views transactions the same way
Lean Manufacturing views inventory: it is waste. Lean Accounting strives to eliminate
all wasteful bookkeeping activities.
First of all, the accounting systems usually are based on the documentation of the
maximum quantity of details that can be quantifiable, and require many times
authorizations from a higher hierarchy level, sometimes from multiple levels. For what
matters the accounts payable, all orders of materials and supplies are documented with a
requisition and a purchase order, and all materials received are also checked and
documented. Furthermore, high value purchases require senior management
authorization, and all transaction entries that reach a certain level and affecting financial
statements require review and authorization by a specified management member.
To what concerns the three basic cost components – material, labor and overhead – all
production costs are tracked and controlled normally by a job costing system, using
variance reports to compare actual costs with standard costs. All sorts of inventory (raw
materials, WIP and finished products) are also closely tracked and controlled, and
normally each year a full physical inventory review is done in order to establish
accurate stock quantities. Inventory is viewed as an asset, and represents a value to the
company which is also measured.
Product costing is done by the tracking of material inserted into production, calculation
of labor required, and adding overhead in the end. This means that cost is determined by
internal measures (instead of targeting costs according to the representing value for the
client). Variance reports are also applied to product costs, analyzing for each item,
comparing once again standard cost with actual cost figures.
Another relevant aspect is that all measurements are done by the accounting department,
each usually are reported monthly. Accounting department is also concerned with the
budgeting off all departments and cost centers, which are usually done annually and
compared each month with the results shown in monthly reports with the gathered
information. Profitability is a major concern, which is also used to measure departments
performance. Consequently, rewarding and recognition system is typically based on the
achievement or exceeding (obviously in a positive way) of targeted budget costs and
profitability.
Furthermore, the role of accountants is exclusively controlling and presenting accurate
financial reporting statements, without getting involved in operational projects.
To Lean Accounting, finance and accounting people have an active and thus important
role in the Lean organization, with the responsibility of being change agents on the Lean
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team (Maskell & Baggaley, Practical Lean Accounting – A Proven System for
Measuring and Managing a Lean Enterprise, 2004).
2.3 CONCLUSIONS
Several conclusions may be extracted from the topics discussed in the review of
litterature.
In terms of industrial strategy, S. Brown suggests that strategy formulation should not
be a fixed process, but a flexible and dynamic work method (Brown, 1996). By flexible
and dynamic he means:
1. that the order followed in the process of formulating the strategy could change
from case to case;
2. that it could change according to new appearing information about competitors,
customers, process developments and other pertinent data;
It should not also be forgotten in such process to maintain a holistic and simultaneous
approach to the many interlinked factors (Brown, 1996). These factors include: market
requirements, corporate goals, links with other firms, human resource development,
materials management, quality, new product development, and manufacturing process,
capacity and technology. Moreover, it is suggested for strategy formulation to take place
on a basis of contribution of various areas within the firm, in particular two areas –
marketing and production.
Viewed as essential to any strategy is the measurement of its success. This cannot be
done by exclusively controlling if the original plan took place in deed, because if it has
done harm to the company, then this cannot qualify to be a successful plan. It should be
achieved by measuring the companies capability of meeting market’s requirements,
such as delivery speed, delivery flexibility, speed of new product, and product and
process quality (Brown, 1996). Companies’ performance cannot also be analyzed
without a competitive sense. Prior to formulating a strategy when corporate established
company’s goals, these goals must be set having a clear idea of how competitors are
positioned. Thus, a successful strategy should be measured by its ability to perform in
its dynamic industry, where other similar companies also strive to profit the most.
Regarding Lean Management, an effort to collect the most explored and cited key
techniques in existing found literature, and those that were considered to better support
Lean’s core principles. Both Lean Manufacturing and Lean Accounting tools are
explored, since this thesis focuses on developing a holistic perspective on Lean
Management. The chosen techniques and methodologies are as follows:
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Chapter 2
1) Pull and Flow – JIT, production smoothing.
2) Reducing number of suppliers, proximate relationships with suppliers.
3) Ensuring that suppliers deliver JIT fashion.
4) Proximate relationships with Customers.
5) Continuous Improvement initiatives embedded in the culture.
6) Cellular Manufacturing.
7) TPM.
8) TQM.
9) Value Stream Mapping.
10) Visual Control methods.
11) Empowerment of workers.
12) 5S.
13) SMED.
14) Standardization of work.
15) Accounting methods.
16) Management by Value Stream.
17) LA Control Methods.
18) Value Stream Performance measurement and costing.
19) Target Costing.
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CHAPTER 3
Research Methodology
Chapter 3
3. RESEARCH METHODOLOGY
The whole purpose of this thesis is to provide an insight of what should be the core
considerations to a decision maker evaluating the possibility of implementing Lean
Industrial Management practices in his organization. For a decision maker that is not yet
acquainted or simply does not have extensive knowledge about Lean Management
practices, and needs to consider if Lean practices could be suited to his context, specific
issues such as the effectiveness of, for example, the SMED technique are not important.
What he needs to have is a thinking model, where he is able to see the “big picture” of
Lean methodologies and confront it with his specific case. As such, this thesis is
intended to discuss suitability aspects and establishing a thinking framework from a
higher level – high enough so that almost any industrial organization can utilize it –
rather than exploring deeply a certain practical issue, such as, for example, discussing
extensively a specific Lean technique.
Given the purpose of this thesis, three objectives were established:
1. Analyzing Lean Management methodologies appropriateness.
2. Establishing a Lean implementation consideration framework.
3. Testing the framework with a company already having Lean implemented.
Having the objectives well established, the methodology taken to achieve these
objectives consisted on dividing the work on three main stages. The first stage is a
preparation to next ones, the second would comprise the first objective and second
objective, as they are tightly connected, and the last stage would comprise the last
objective. The explanation of each follows next.
The first stage consisted of understanding what was important to focus, as well as
prioritizing the topics to investigate and develop. Lean methodology has gained
considerable popularity, and several diverging approaches have been raised since the
original Toyota Production System was established, such as Lean Six Sigma, Theory of
Constraints combinations with Lean principles, Lean in the service industry, Lean
Accounting, etc. The task of deciding what was relevant to the purpose of this thesis
was the first objective outlined in the first stage.
In order to fulfill such goal, a review of literature was performed, comparing standard
management principles taught in universities with Lean core principles. As such, this
first part should not only establish the state of the art of Lean theory, but also highlight
the main perspectives and currents of thinking. The chapter dedicated to this task was
the second – “Review of Literature”. Here the author first focused on establishing what
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the standards of industrial management practices are, respectively in “Traditional
Industrial Management”. The second part of Review of literature chapter was dedicated
in understanding what Lean Management and Accounting core principles are,
respectively in “Lean Managing” and “Lean Accounting”. Lean accounting was
considered to be an adding value branch of Lean’s theory to this thesis, as it extends
Lean practices to another organizational area (the accounting area), as opposed to other
branches of Lean theory that tend to focus a specific technical perspective.
As to the case of Lean in the service industry, it can also be considered to be an extent
of Lean practices. However, it is an extend to a whole different type of industry; and as
such, it was considered that the additional multitude of topics would raise unnecessarily
the level of complexity and would disperse the purpose of this thesis. Therefore, Lean
practices in the service industry where not taken into consideration.
The Review of Literature led the way into understanding Lean’s state of the art. Also
key to this study was to understand the general opinion about Lean methodologies in the
research community, its diverging points and arguments.
The second stage focused on researching and debating the suitability of Lean
methodologies in several industrial contexts. Although not yet very extensive, previous
literature concerning the appropriateness of Lean methodologies was found and used.
However, mainly this literature only covered particular aspects or methodologies of
Lean theory. As such, the work on this second stage consisted mainly on bringing these
perspectives all together, until a global and consistent perspective on several industry
contexts was build. Naturally, the second stage is the core of this thesis’ work, as it
contains two of the three main objectives: to analyze Lean Management methodologies’
appropriateness and to establish a implementation framework.
Furthermore, Lean Accounting theory is still very recent – no substantial studies about
the appropriateness have yet been conducted. So the author proposes himself an
appropriateness perspective considering Lean Accounting in industrial contexts.
Moreover, to structure the research about Lean methodologies appropriateness, two
types of dimensions were considered: a Strategic and a technical implementation
dimension.
The last stage consisted on testing the conclusions drawn in the the previous stage on a
manufacturing company, which has already implemented Lean’s techniques, and thus is
already able to show concrete results.
The purpose was, first, to understand if Lean’s implementation consideration
framework was in fact adequate to Logoplaste’s case, and secondly, how far Lean’s
techniques should be implemented in Logoplaste’s case. The advantage of studying a
case where Lean’s techniques were already implemented is that the results of the
framework can be compared to the actual results of Lean implementation.
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Chapter 3
i.
Objective 1: Analyze Lean Management methodologies Appropriateness in
different scenarios
The first objective consisted on gathering information that could indicate or answer the
following key answers:

Do Lean methodologies fit well in every situation?

If not, in what cases do Lean methodologies fit best?

If not, can one determine what the limitations are and in what situations are they
exposed?
In order to answer the first question, one sole limitation is already enough to
demonstrate that there are certain cases where Lean methodologies fit better than others.
Therefore, the methodology to successfully fulfill the first objective was to obtain as
much information as possible about the fitness of Lean methodology in various industry
contexts in existing literature.
For one to understanding the fitness of the Lean approach, the relevant task is to find
evidence of prior cases where certain limitations influenced the success of Lean
methods. These prior cases should consist of non-unique industry situations, so that
extrapolation to other scenarios can be made.
In order for objective one to successfully fulfilled, its results should be able to establish,
on the first hand, what are the key factors that limit Lean’s implementation. And, on the
second hand, the results should lead the way into understanding what techniques are
more easily applicable in every industrial context and what not.
The objective is presented in chapter IV, in section 5.1.
ii.
Objective 2: Establish a Lean Decision Making Framework
Objective two’s success largely relies on the first objective’s results. The research of
Lean management practices appropriateness is essential in order to establish a Lean
consideration framework. Such a framework should establish the core considerations for
any manager deliberating the implementation of Lean practices, namely:
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Chapter 3

What type of players influence the implementation and how;

Critical issues to take in consideration that enhance or limit Lean
implementation.

Order of issues to consider.

Two levels of analysis – a first level which should stipulate if theoretically Lean
fits the business case; and a second level, after having concluded that Lean
theoretically fits the organization, where the suitability of Lean’s practical
techniques is taken into consideration.
Given the fact the framework is suppose to be a tool to guide thinking in an initial
decision making process, the framework results should be able to establish a set of key
questions that not only are simple and objective, but manage to confront the decision
maker’s reality. The framework should also provide the decision maker a valid
mechanism to reach a final conclusion whether or not he should choose to implement
Lean Management methodologies, and in the case of a positive result, which practices
he should choose to implement.
The objective is presented in chapter IV, in section 5.2.
iii.
Objective 3: Testing the framework in a company already having Lean
Management practices implemented
Objective three consists on a simulation. The goal is to simulate that Logoplaste was
applying the built framework several years ago, at the exact moment it was considering
implementing Lean’s management methodologies. By doing so, one is able to compare
these results with the actual real results of Lean implementation, and confront the ability
of the framework to predict Lean’s ability to fit an organization.
The collection of data concerning strategic and operational dimensions was collected
through a series of interviews to Logoplaste’s expert of the Lean implementation
process in Portugal. He also provided internal materials, such as powerpoints about
Lean implementation at Logoplaste, as well as other information regarding inventory
and production history data. Some of this information was labled as non-disclusure
information, and as such, could not be revealed. This means that to a certain extent, the
amount of detailed information in the case study was avertedly limited.
The objective is presented in chapter V, in sections 6.3 and 6.4.
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CHAPTER 4
Framework Construction
Chapter 4
4. FRAMEWORK CONSTRUCTION
4.1 KEY FOUNDATION BLOCKS: VARIABLES TO CONSIDER
4.1.1 Lean Appropriateness Variability
The question of how versatile can Lean practices approach a vast number of cases that
do not follow Toyota initial pattern before TPS should come to mind to anyone
considering implementing Lean practices outside the automotive industry. Browning
and Heath (2009) discuss the view first promoted by Womack et al. (1990) that Lean
principles can be extendable to almost all types of industries, rather than just the
automotive business and the Japanese companies (Browning & Heath, 2009). They
argue that it is not linear that Lean production implementation will lead to decreasing
costs in various contexts and that there are many factors that can compromise or benefit
the implementation: “While lean theory suggests that lean practices will reduce
production costs, we propose that what have been thought to be the effects of lean
practices are in fact joint products of lean practices and their implementation context.
Thus, it would not be surprising to find cases where lean practices were not uniformly
successful” (Browning & Heath, 2009). A critique that Cox and Chicksand (2005)
present concerns the appropriateness of Lean’s potential as a universally extendable
approach to production. There is an opinion that Lean’s suitability depends on the
circumstances surrounding its implementation, which is sustained because of mainly
two reasons. The first is that the business environment is considered to be in constant
change, which implies that companies need to be flexible on the operational means
chosen (Cox & Chicksand, 2005). The second is that there is little evidence of a change
in all production systems to Lean approach in all industries (Cox & Chicksand, 2005).
V. Crute et al. affirm that Lean capabilities are not only dependent on the firm where
they will be implemented, but also dependent on the plant (Crute, Brown, & Graves,
2003). This means that even within the same company different difficulties may arise
from one plant to another. They stress the importance of adapting the approach
according to the situation, by adding that it cannot be assumed the characteristics of the
best performing plants within a company will, necessarily, be transferred to other plants
(Crute, Brown, & Graves, 2003). Shah and Ward share similar opinion to what concerns
Lean implementation dependability on the plant’s own context. They conclude that the
variables unionization, plant age, and plant size matter to what concerns the
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implementation of Lean practices (Shah & Ward, Lean manufacturing: context, practice
bundles, and performance, 2003). Generally speaking their research did not find out that
Unionization does influence negatively the implementation of Lean practices, except for
the case of cross-functional workforce, where inflexible work rules make it more
difficult to implement for such a measure (Shah & Ward, Lean manufacturing: context,
practice bundles, and performance, 2003). As for plant age, research found that plant
age is not a significant factor for many Lean practices (Shah & Ward, Lean
manufacturing: context, practice bundles, and performance, 2003). However, older
plants are less likely to implement some specific Lean practices than newer plants, such
as cross-functional work force, cycle time reduction, JIT/continuous flow production,
maintenance optimization, reengineered production process and self-directed work
teams (Shah & Ward, Lean manufacturing: context, practice bundles, and performance,
2003). Finally, their research concluded that larger plants are more likely to implement
Lean practices than smaller ones (Shah & Ward, Lean manufacturing: context, practice
bundles, and performance, 2003).
V. Crute et al. suggest that plant specific manufacturing strategies with a holistic scope
have to be planned, so that more readily results can be achieved (Browning & Heath,
2009). Bhasin and Burcher conclude in their research that the major difficulties
companies are faced with when implementing Lean are lack of direction, lack of
planning and a lack of adequate project sequencing, and add that knowledge of tools
and techniques is not often a problem (Bhasin & Burcher, 2006). They conclude that the
presence of some elements is essential for successful Lean implementation, such as
simultaneously applying five or more of the technical tools; viewing Lean as long
journey; practicing continuous improvement; making cultural changes embracing
empowerment and other Lean core principles (Bhasin & Burcher, 2006).
V. Crute et al. refer that improvement activities may be achieved when they are focused
on all or a large part of an identified product value stream with complementary
objectives (of waste removal, lead times reduction, pull system creation, and flow of
value to customer), rather than a specific functional area that produces a variety of
products. This holistic scope involves creating a Lean system, in opposition of applying
a piece-meal-approach (single Lean tools appliance) (Crute, Brown, & Graves, 2003).
Furthermore, better results can be achieved by defining process ownership, rather than
having several products sharing common manufacture processes (Crute, Brown, &
Graves, 2003).
V. Crute et al. also state that clear defined targets and performance measures play a
critical role for Lean implementation (Crute, Brown, & Graves, 2003).
Other internal critical factors for Lean implementation are the collaboration of operation
managers for a more strategic role, rather than a mere tactical role (Crute, Brown, &
Graves, 2003). Conversely, Senior managers play an important role in presenting a
coherent vision of their business, by clearly communicating business strategy and how
Lean philosophy are adequate to the business needs (Crute, Brown, & Graves, 2003).
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So, the firm’s culture is also an important factor to Lean implementation. V. Crute et al.
conclude that a company culture that supports autonomous working and learning
through experimentation achieve more rapidly positive results (Crute, Brown, &
Graves, 2003).
To resume, existing literature leads to conclusion that Lean Management
implementation success varies according to the context. In other words, Lean
methodologies appropriateness depend on the situation in which the company faces
itself. Research has shown that a holistic approach is missing, where both strategic and
operational dimensions are considered. The two following sections focus on exposing
the key factors that should be taken into consideration in any decision making process
of Lean implementation.
4.1.2 Strategic accountable variables
For a managing theory to be successful, it has to be able to generate a methodology
extendable to a wide set of business scenarios by providing the right set of possible
actions to achieve the goal of optimizing profit making activity.
Now, if one analyzes the actions that Lean Business strategy launches, they all focus
almost exclusively on operations strategy. Although Lean Accounting sets a first
concrete attempt to reach the accounting and finance areas, these are mainly initiatives
to guarantee a support to production measurement, namely to what concerns Lean
implementation. Strategy generated resulting in actions based on the vision of how to
tackle more market segments, bench marketing concerns, what are competitors strategic
movements, competitor’s products or potential substitute products, actual and potential
new contenders, governmental policies, etc. are generally left aside in Lean’s practices.
Examples of actions launched by Lean thinking are efforts to reduce operations lead
time, unnecessary distances in the plant perimeter (unnecessary motion), inventory
reduction, overproduction, etc. In fact, all of these actions follow a performance
enhancer goal mainly through a time and cost reduction, and are generated within the
dimension of operations strategy. Thus, Lean can be mainly classified as an operations
strategy generator, where efficiency and cost reduction are the main concerns.
Moreover, Cox and Chicksand (2005) stress the importance of not exclusively focusing
on operational efficiency when considering Lean benefits (Cox & Chicksand, 2005).
Therefore, Lean can be mainly classified as a type of “Overall Cost Leadership”
strategy.
However, Lean’s operational strategies also have consequences on other levels than just
from an operational point of view. Cox (2006) states that academics and practitioners
tend focus on operational improvements without fully understanding the commercial
consequences of exchange (Cox A. , 2006). Cox and Chicksand state that each company
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Chapter 4
should reconsider implementing Lean before even considering the potential operational
benefits, depending on the commercial model they intend to practice (Cox &
Chicksand, 2005). Lean stimulates a commercial model where value is passed to
customers in order to win volume, but with relatively low returns (Cox & Chicksand,
2005). Since Lean management principles constitute a methodology to optimize the
operations efficiency, the increase of value is only in the form of a lower production
cost and/or lower defect rate. Competitiveness is won by the ability of charging a lower
price for the exact same product. Now if a company channels most of its efforts in terms
of time, human, material and financial resources into such a purely cost leadership
strategy, then it is losing opportunity to engage in a differentiation strategy, for
example, where the commercial returns can potentially be higher.
Moreover, Browning and Heath discuss problems that may arise with a strategy that
focuses too much on efficiency in the operational level (Browning & Heath, 2009).
They suggest that there are several examples where this excessive focus lead to
accidents and work stoppages, including General Motors’s reliance on JIT, that was
seen to have contributed to the vulnerability of its entire North American operations and
resulting in a labor strike at a single parts plant in 1998 and in the loss of sales estimated
in 2.2 billion dollars (Browning & Heath, 2009).
The full scale Lean’s operationalisation is also target of critiques, in terms of the
strategic commercial dimension. First of all, although internal Lean implementation can
be relatively easy, external implementation can become very difficult in situations
where suppliers lack of competencies to undertake such an investment (Cox &
Chicksand, 2005). There is a perspective – the power and leverage perspective – that
defends that the power circumstances in which each company is faced with may have a
strong influence on how the commercial and operational relationships are held and,
consequently, their success (Cox & Chicksand, 2005). This influence is so big, that long
term collaboration will not be possible for a buyer unless there is a power situation of
buyer dominance or interdependence (Cox & Chicksand, 2005). And the contrary holds
valid: supplier will not be able to sustain collaboration for a long time if he is not able to
achieve a supplier dominance or interdependence state (Cox & Chicksand, 2005).
According to this perspective, Lean approaches “cannot be implemented successfully
within a supply chains as a whole, unless they are characterized by extended dyadic
exchange transactions of buyer dominance and/or interdependence.” (Cox &
Chicksand, 2005). In other words, for a firm to extend its Lean program to suppliers
successfully to another company, it needs to have a minimum power of influence in the
other’s strategic decisions, which would have to be a situation of buyer dominance,
supplier dominance or interdependence. So, for this power relation to hold valid
throughout a supply chain, it will have to hold valid for each set of relationship between
two companies until the last buyers. Intuitively, one can conclude that the task of
extending Lean programs throughout several players among a supply chain is
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increasingly demanding, raising the bar for the need of having monotonously decreasing
power relationships from the first player until the last of the supply chain.
Several authors have pointed the vital importance for a Lean company of extending
Lean approaches within the supply chain upstream in order to sustain pull and flow
principles. Maskell and Baggaley state that “… Lean Manufacturing relies on suppliers
that can deliver on time, in small quantities, and more frequently, that give perfect
quality without inspection, and provide additional value-added services such, as lineside deliveries, in which the supplier delivers goods directly to the production line.”
(Maskell & Baggaley, Practical Lean Accounting – A Proven System for Measuring and
Managing a Lean Enterprise, 2004). JIT systems are hard inventory policies to sustain
in a supply chain, especially if suppliers are used to EOQ based systems or other form
of push systems that work with large batches, and large quantities deliveries. Maskell
and Baggaley further add that the performance of such policies is usually poor, and that
the improvement of this supplier performance can be approached in one of two ways:
either by compulsion or by partnership (Maskell & Baggaley, Practical Lean
Accounting – A Proven System for Measuring and Managing a Lean Enterprise, 2004).
Lean thinking recognizes that basing relationships with suppliers by compulsion will
lead to lower margins for suppliers, as the buying-power is used to gain concessions and
to punish when demand requirements are not fulfilled (Maskell & Baggaley, Practical
Lean Accounting – A Proven System for Measuring and Managing a Lean Enterprise,
2004). Acknowledging that such behavior will cause supplier resection, Lean thinking
recommends the partnership approach trying to have the commercial exchange based on
equitable returns, which will lead to win-win situations. Maskell and Baggaley even
suggest certification programs for the close suppliers (Maskell & Baggaley, Practical
Lean Accounting – A Proven System for Measuring and Managing a Lean Enterprise,
2004).
However, in either way (of simple partnership or certification program), a situation of
buyer dominance or interdependence will be required for suppliers to be interested in
investing on such an effort just for a concrete account. Such conditions can be achieved
by the existence of small number of alternative buyers and multiple suppliers, and/or by
high switching and search costs for the buyer. Nevertheless, situations of buyer
dominance or interdependence are normally very hard to reach.
The same logic is also applied to customer relationship. Lean-thinking also recommends
the approximation to customers, so that problems such as demand variability can be
overcome. By working cooperatively with customers, Lean companies will be able to
maintain the use of pull methods, as the partnership enables close information exchange
– of each other’s demand and capacity – and frequent joint planning. Once again,
without a supplier dominance or interdependence power relationship, Lean companies
will suffer serious difficulties in achieving such a privileged proximal relationship. And,
in order to achieve such proximity, a scenario of few industry adversaries and lot of
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buyers, and/or switching and search costs are high is necessary – a scenario of supplier
dominance, or interdependence.
The car industry is an example where the Lean initiatives were first implemented and
where no significant commercial value has been extracted, taking into account that it
still earns low returns in the range 0% to 3% range annually (Cox A. , 2006). The
commercial and operational value is passed to customers, rather than being retained by
the entities upstream the supply chain. Lean can be a strategy of above normal
commercial results for a player if he is able to capture a considerable share of value to
himself through a Janus-faced dominance – a situation of both supplier and buyer
dominance held by one company (Cox & Chicksand, 2005). Since it is very hard to find
and keep exchange partners who are willing to make low returns, and if customers
demand continuous improvement through value, the power leverage perspective states
that it will be difficult to achieve above normal results through Lean practices (Cox &
Chicksand, 2005). Thus, the power and leverage perspective states that the success of
external relationships cannot be predicted only by equating operational gains. Instead,
the likelihood of success of supply chain relationships should consider the power
relationships between the identities involved, and the commercial value retained at each
participant.
Each company must carefully reflect on which operational improvements will lead to
commercial benefit, taking into consideration that what may be operationally and/or
commercially beneficial for one party may not be the same for another party in the
exchange relationship (Cox A. , 2006). Furthermore, each company must reflect on its
power leverage position relating to suppliers and clients, in order to guarantee
sustainability of Lean’s inventory policies (JIT system).
4.1.3 Operational accountable variables
Key external variables
There are many researchers that have investigated both external and internal critical
factors that can provide more information about the limits of Lean methods’ suitability
to the industry. Two major external factors have long been recognized as necessary for
managing to take into consideration: supply and demand variability. Browning and
Heath (2009) also present supply and demand volatility as some of the main drivers that
contribute to Lean implementation difficulties (Browning & Heath, 2009). Fazel et al.
attempt to study how demand can affect the suitability of two distinct inventory
policies, EOQ policy and JIT policy, a basic pillar for Lean Manufacturing practices
(Fazel, Fischer, & Gilbert, 1998). They analyze the break-even point between the two
distinct inventory policies in terms of variations in the demand, by formulating a
function the variables delivery prices, inventory holding and ordering costs, and the
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discount rate for EOQ purchases (quantity discounts). They conclude that EOQ model is
expected to remain competitive for items with a higher level of demand, and that it’s
competitiveness increases as ordering and holding costs lowers, and as quantity
discount rate gets higher (Fazel, Fischer, & Gilbert, 1998). On the other hand, JIT gains
advantage as holding costs and ordering costs increase and demand decreases and is
thus more predictable (Fazel, Fischer, & Gilbert, 1998).
Moreover, Cox and Chicksand argue that Lean may not be the best operational
management policy in industrial environments of low-volume and highly volatile
supply chains, where customer’s requirements are often unpredictable, and where
supplier capabilities and innovations are difficult to control (Cox & Chicksand, 2005).
In such cases, Cox and Chicksand recommend a more agile approach based on constant
innovation of products is operationally recommended (Cox & Chicksand, 2005). The
main distinctions between Lean supply and a Agile supply would be that Lean supply is
more adequate for a predictable marketplace demand, where product variety is relatively
low, product lifecycle is long, profit margin is low, dominant costs are physical costs,
information enrichment is highly desirable, and stockout penalties are defined in longterm contractual; whereas Agile supply would be more adequate for volatile
marketplace demand, where product variety is high, product lifecycle is short, profit
margin is high, dominant costs are marketability costs, information enrichment is
mandatory, and stockout penalties are immediate (Cox & Chicksand, 2005). Thus, they
conclude that supply chains cannot be solely managed by Lean techniques, though these
might be needed in specific cases (Cox & Chicksand, 2005).
Furthermore, Cox and Chicksand sustain that: “… there is little evidence that all
production systems are moving towards the lean model in all industries. This is because
just-in-time flow for production cannot be sustained unless production leveling is
possible within the organization internally and with the suppliers in the supply chain
externally.” (Cox & Chicksand, 2005). Thus, supply variability can also be a limiting
factor to what concerns Lean’s implementing appropriateness.
Key internal variables
Alternatively there are also internal factors that may affect Lean’s implementation,
namely the industry characteristics. Abdullah (2003) states that “…process industries
share characteristics with discrete industries that make it possible to implement lean
techniques, but in varying degrees depending on the specific industry”. Browning and
Heath (2009) refer that:” White et al. (1999) and Shah and Ward (2003) showed that
context matters, although it is not surprising that lean practices and their
implementation would require some customization to circumstances…” (Browning &
Heath, 2009).
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Browning and Heath present learning ability as an important factor conditioning to Lean
implementation (Browning & Heath, 2009). Since the elimination of long-standing
tasks, and the establishment of new processes and tools can cause disruptions, Lean
changes may be contra productive due to the novelty in processes ）. Within an
environment of continuous improvement, Lean practices make it difficult for employees
to learn with experience of practicing tasks, causing this way more instability
(Browning & Heath, 2009). So, timing in which changes are made is also a critical
factor for the implementation. In such a case of constant novelty due to bad timing to set
changes, Lean practices can be considered wasteful (Browning & Heath, 2009).
Moreover, they refer that in domains with greater variety of components, tasks, people,
tools, and goals, and with lot of relationships between them, novelty may damage even
more Lean implementation (Browning & Heath, 2009). Complexity makes it even more
difficult to identify the existing interactions between tasks in processes, fogging a clear
distinction to what can be considered waste. Since in complexes processes a small
change in one area might have severe consequences in the whole processes, Lean waste
removal activity can be thus limited (Browning & Heath, 2009).
Abdullah investigates how Lean Manufacturing tools can be adapted from the discrete
to the continuous manufacturing environment and to what extent these can benefit
according to the specific industrial context (Abdullah, 2003). He suggests that the
applicability of many Lean’s manufacturing tools and techniques are in part dependent
on the one hand on the raw material variety and product characteristics, and on the other
hand on the process flexibility and equipment used in the company. He further adds that
some techniques are universally applicable (Abdullah, 2003).
So, industries characterized by low variety of raw materials and high product volume
are considered to be more efficient, e.g. with less stoppages, less changeovers, and high
rates of throughput per hour (Abdullah, 2003), and thus more fit to TPM techniques.
Conversely, industries characterized by a high variety of raw materials and low medium
volumes are more suited for Lean tools such as JIT with kanban, small batches
production, and SMED (Abdullah, 2003). He summarizes this acknowledgement by the
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following
table:
Figure 2 Appropriateness of Lean tools and techniques according to product characteristics. Adapted from:
Abdullah, F. (2003), p. 62.
Considering the inherent process flexibility, in such cases where the material flow is
highly automated and continuous, Abdullah suggests that some Lean tools may not be
needed or even feasible, such as JIT, small lot productions and cellular manufacturing
(Abdullah, 2003). Alternatively, techniques and tools devoted to quality management,
like TQM and continuous improvement, and TPM to keep equipment reliability high are
recommended in these cases (Abdullah, 2003). Once again, he summarizes his
conclusions with the following figure:
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Figure 3 Appropriateness of Lean tools and techniques according to material flow characteristics. Adapted
from: Abdullah, F. (2003), p. 63.
Finally, Abdullah concludes that there are some Lean Manufacturing tools and
techniques that are universally applicable, such as 5S and visual systems (Abdullah,
2003).
Abdullah provides an interesting research about the suitability of Lean Manufacturing
tools and techniques to the different industries taxonomy, especially to the steel
industry, which can be extendable to more manufacturing industry types (Abdullah,
2003). As for Lean Accounting’s techniques and tools, there is still very scarce existing
literature. Moreover, as previously stated, it seems that, once again, its authors tend to
have a biased opinion. This can be due to the fact that most of the existing literature is
pushed by its proponents.
One could also argue that Lean Accounting has brought broader extension than solely
the operational improvement support. Traditional accounting methods also suffer some
changes, especially dedicated to simplify measurement system by taking advantage of
Lean Manufacturing changes introduced.
The author will base the following argumentation mainly based on Maskell and
Baggaley, one of the most complete so far existing literature about the subject
(Abdullah, 2003).
Lean Accounting provides practices to back up Lean Manufacturing implementation,
through reinforcement of control methods and management orientations, and extends
Lean penetration inside organizations to improve accounting methods. Maskell and
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Baggaley state that although many of Lean Accounting methods are not new, its
supremacy relies on the ability of these methods to support and apply Lean
Manufacturing principles (Abdullah, 2003). Dragana and Zoran share the opinion that
Lean Accounting methods are better suited for supporting Lean Manufacture initiatives,
referring that traditional accounting stimulates to over produce and to purchase
quantities at the lowest price, which will inflate inventory (Stojanovic & Radojevic,
2006).
Since Lean Accounting urges from the necessity of changing controlling mechanisms
that stimulate overproduction, large batches, push policies, and large inventory building,
Maskell and Baggaley consider starting the implementation of Lean Accounting when
the first stage of Lean Manufacturing implementation is set – pilot Lean production
cells are in place, extensive training in Lean principles has been done, standardization of
work is done, and flow and pull values are beginning to be implemented in plant
management methods (Maskell & Baggaley, Practical Lean Accounting – A Proven
System for Measuring and Managing a Lean Enterprise, 2004). Furthermore, they add
that when Lean Manufacturing is on an early stage it is not recommended to make
fundamental changes to the accounting, control, and measurement system (Maskell &
Baggaley, Practical Lean Accounting – A Proven System for Measuring and Managing
a Lean Enterprise, 2004). Thus, considering applying Lean Accounting to other
operations management systems differing from Lean’s prime values could lack of sense.
For this manner, this aspect can also be viewed as a limitation when one tries to
consider it as a general accounting system. Lean Accounting methods are large part
dedicated to support Lean implementation, which obviously reduces its versatility as an
accounting system per se. So, the first limitation would be that Lean Accounting
appropriateness depends on if Lean Manufacturing principles are already being
implemented or not.
Now if one compares Lean Manufacturing to Lean Accounting suitability to various
contexts, one could not say that the second’s techniques and tools appropriateness do
depend on the product and material flow characteristics as the first’s methods do.
Although no empirical study supporting such an opinion was found, review of existing
literature led the author to conclusion that Lean Accounting methods penetration rather
depends on the number of different resources (people and materials) and stages involved
in a process. The more indirect labor and indirect materials are involved in the
manufacture of a product, the more complex tends to be the allocation of costs. In the
traditional standard costing systems these variables tend to be hard to trace in order to
allocate to the proper users. This is a general difficulty that accounting systems face.
The more stages and the more combination of tasks it is needed to manufacture a certain
product, the harder it tends to get to trace the amount of labor and of quantities it was
used to fabricate it. By taking advantage of the inventory minimization mentality,
single-piece flow techniques, pull systems, and standardization of work, Lean
Accounting is able to have a clearer view of the costs incurred, and relax the need to
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trace all overheads. It is also able to simplify cost allocation methods, and transaction
bookkeeping, if the supplier limitation policy is indeed achieved.
This discussion will be scrutinized in the following three further topics related to Lean
Accounting: control methods, accounting methods, and management methods.
Control Methods
Although leaving the control practices out of scope of Lean Accounting, Kennedy and
Widener state that Lean control practices re-focus the performance measurement system
and emphasize social controls such as training and visualization (Kennedy & Widener,
2008). Lean Accounting suggests the implementation of cell performance measurements
both in production cells, and in non-productive departments that support the cells.
Variance reporting and other traditional performance measurements cease to be used to
control production in Lean Accounting. Direct cell performance measures are used to
meet to the TAKT time of the customer, by focusing on flow, standardized work, pull,
and timeliness (Maskell & Baggaley, Practical Lean Accounting – A Proven System for
Measuring and Managing a Lean Enterprise, 2004). Examples of such tools that can be
easily used are day-by-the-hour production, WIP-to-SWIP, first time through, operation
equipment effectiveness and so on. They are also all based on visual measurement as
the primary method of control – which also backs up the empowerment of people
throughout the organization. These are tools that are well suited for organizing
workforce tasks in production environments. As such, automation of processes
decreases the need for such techniques to be implemented, as production relies less on
labor activity. Thus, the author concludes that these are techniques that vary according
to the automation level
As for the non-productive departments that support the cells, these are measured by
value stream performance measurements. Sales per person, average cost per unit,
Accounts receivable days outstanding, average projects per person, average crosstraining per person, and number of safety incidents are all examples of such measures.
Although Lean Accounting uses these measurements for Value Stream performance
measurements, these are all general metrics that are not new.
The objective of these measurements is to remain visual, timely and action oriented
essentially for the workforce.
Accounting methods
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The changes introduced by Lean Manufacturing to reduce inventory, to introduce pull
management, flow and perfection, have the consequence of eliminating the need to
measure some aspects, such as labor reporting, WIP inventory tracking, and material
costs (Maskell & Baggaley, Practical Lean Accounting – A Proven System for
Measuring and Managing a Lean Enterprise, 2004). This is the first big difference. For
example, to what concerns labor tracking, traditional accounting measurements
stimulate a tendency for managers to occupy all workers with tasks, no matter what
tasks these consist of. However, this stimulates the appearance of waste activities, such
as unnecessary motion. And indeed workers and managers do get the feeling that they
are occupied, and consequently that each hour paid is being well spent. Conversely,
Lean practices facilitate a clearer notion of performance to the managers that releases
the dependence to accounting department. To what concerns labor tracking, a clearer
view is achieved by standardization of work, simplification of tasks and waste removal.
WIP inventory tracking and material costs tracking are simplified by production
smoothing and inventory reduction. Moreover, these changes lead the way to a change
of organization mentality, where empowerment of workers and their involvement in
continuous improvement represents a relevant preoccupation.
There is also another effort which is the reduction operational transactions, as well as
large part of bookkeeping activity. Another Lean Accounting initiative is the shift to
Value Stream costing method, which holds for advantages a large elimination of the
need for transactions and overhead calculations, and the fact that it is understandable to
anyone (Maskell & Baggaley, Practical Lean Accounting – A Proven System for
Measuring and Managing a Lean Enterprise, 2004). These changes are well suited
especially for batch production, where many different types of raw material are run,
where operational transactions are very heavy and overhead calculations before
implementation of Lean Manufacturing changes were difficult.
However, if Lean Manufacturing changes are not solidly implemented, it would not be
possible to cease to use these accounting inputs. Thus, once again Accounting initiatives
launched by Lean are directly dependent on Lean Manufacturing implementation stage.
Management methods
By improving traditional accounting methods applied to production, inevitably Lean
Accounting enters the domain of business management improvement. If indeed a
company imbibes value stream managing principles by restructuring its organizational
structure focusing department’s functionalities by value stream, then one can say that
Lean makes an effort to also change the business management way – managing by value
notion.
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Lean Accounting supports that way of managing business, by growing to a vaster
domain that is not only enclosed in manufacture, but in a domain that analyzes the
efficiency of the business structure – the accounting function. Accounting’s reporting
activity will be provided to corporate organized by value streams, and so will planning
and budgeting. SOFP (Sales, Operational, and Financial Planning) is an example of a
tool that addresses information support for executive decision making (Maskell &
Baggaley, Practical Lean Accounting – A Proven System for Measuring and Managing
a Lean Enterprise, 2004). Here, appropriateness dependent on the acceptation of Lean
changes, and on the resistance to Lean way of thinking.
4.1.4 Lean penetration ability
Previous research has clearly shown that Lean’s appropriateness varies according to
context, and that there are several of different types of limitations, both in a strategic
level, as well as in an operational level.
In order to formulate a decision making model concerning Lean implementation, it is
essential to understand how far Lean appropriateness goes. In order to do so, a new
abstract term is proposed; a term that could better express the extent of individual tool
or a set of tools appropriateness: lean penetration ability. Lean penetration ability is the
ability of one or more lean practices (methods or techniques) to fit the biggest number
of different scenarios in industrial contexts. So, the higher the penetration rate of a
certain method or technique is, the more scenarios that method or technique would fit
to.
Furthermore, the notion of rate should also be associated with this concept, in order to
quantify the penetration ability of a certain practice to a specific scenario. One can thus
define that, for instance, the bigger the penetration rate of a lean practice is, the better
that same lean practice will fit a certain industry context particular scenario. Conversely,
the lower the penetration rate of a certain Lean practice is, the less chances there are of
that practice to fit a particular scenario.
Hence, lean appropriateness to a particular scenario grows the more lean practices with
high penetration rate there are.
Influence of external factors on Lean’s penetration ability
To what concerns external factors that influence Lean’s appropriateness, existing
literature identified two external factors that could affect Lean’s appropriateness: supply
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and demand variability. The following relationship could be established: the bigger the
variability is in the supply chain, the smaller Lean’s tool’s individual penetration rate
is. Moreover, the more unpredictable demand and supply are the less principles and
techniques will one be able to use from Lean’s Business practice set. Research has
shown that the more variability there is in the demand and supply, the less Lean
practices with medium and low penetration rate are able to suit companies. The next
graphic illustrates this conclusion:
Figure 4 Influence of Variability in demand and supply on Lean’s penetration ability
Figure 4 shows a rationalization on how Lean practices vary in terms of their suitability
to fit the organization’s characteristics. Note that this figure is not supposed to be a
rigorous straight line, with a precise gradient what so ever. In other words, the author is
not trying to transmit the idea that it is exactly directly proportional the variation in
Lean’s techniques penetration ability.
Each letter designates a group of principles and/or techniques. Letter “A” designates all
techniques that enhance pull systems, as well as Lean Accounting own Accounting
methods. As variability on demand and supply rises, the need for building safety stock
naturally rises as well, so that orders are not lost. The consequence is that all measures
that directly or indirectly aim at minimizing inventory (raw material, WIP and finished
product) start losing strength. When a core value of Lean management practices – pull
systems – loses applicability, naturally so do all initiatives associated with it as well:
reducing batch size, reducing cycle time, making products just-in-time, etc. Moreover,
ensuring that suppliers deliver in a JIT fashion naturally also loses applicability.
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As for the accounting methods, management by Value Stream, proximate business
relations with suppliers and customers, these depend a lot on Lean’s ability to
simplifying and reducing resources used, as well on previous Lean penetration.
Although these do not vary directly according to variability in demand and/or supply,
the accounting techniques’ application depends in an indirect manner, for they depend
on prior Lean Manufacturing pull initiatives functioning. In this sense, they lose
applicability as supply and demand variability grows.
The triangle area named “B” designates Lean practices with medium penetration ability.
The Lean practices identified that could vary with these external factors are the
applicability of some Lean Accounting Control methods, Value Stream measurement
and costing, reducing number of suppliers, and target costing. Assuming that pull and
flow are major lean principles, the decrease of the techniques compliant with these
principles will ultimately cause a decrease in Lean penetration, which directly can
compromise the applicability of various Lean methods that are dependent on previous
Lean application. Therefore, increase of supply and demand variability may indirectly
reduce the applicability of Lean Accounting Control methods, Value Stream
measurement and costing, and target costing. Finally, reducing number of suppliers will
affect such initiatives. This happens because in situations of high supply and variability,
where inventory policies with large safety stocking quantities are needed, this policy
might be contradicting. In such situations quantity discounts are privileged. Note that
the area named “B” includes the area “A”.
However, practices such as Continuous improvement, Cellular Manufacturing, TQM,
TPM, Value Stream Mapping, Visual Control methods, empowerment of workers, 5S,
SMED, standardization of work do not vary with these external factors. The rectangle
area named “C” includes these. Note that though efforts to establish proximate business
relations with customers and suppliers are measures exactly to reduce such variability,
the ability of applying them is not dependent on them. Note also that the area named
“C” includes the area “B”.
Influence of internal factors on Lean’s Penetration ability
Existing literature identifies several internal factors that influence the penetration of
Lean practices. These internal factors are specific industry characteristics, and the main
identified are: product volume, equipment type, raw material variety, process flexibility,
novelty of processes, and learning resistance and resistance to change. Let us analyze
these factors influence to Lean penetration ability, starting with analyzing the influence
of the factors product volume and equipment type.
Existing literature lead to various conclusions, including that, once again, practices
related to pull systems are limited in their applicability because of these two factors
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(product volume and equipment type). As product volume produced and equipment
specialization grows, pull methods such as JIT techniques seam to lose applicability.
Naturally ensuring suppliers deliver JIT fashion loses likewise applicability. As for LA
Accounting methods, management by Value Stream initiatives, these lose applicability
for the same reasons as before – dependence on previous Lean penetration. These
belong to the triangle “A”.
However, opposite to this last tendency follow equipment maintenance techniques with
TPM. As equipment specialization increases, so does this practice increase its
applicability. This belongs to the triangle “C”.
Finally, no influence was detected from the factors product volume and equipment type
to the rest of Lean practices. These belong to the rectangle of the area “B”. The
following figure illustrates these conclusions:
Figure 5 Influence of product volume and equipment type on Lean’s Penetration ability
Once again, note that this figure is not supposed to be a rigorous straight line, with a
precise gradient what so ever. In other words, the author is not trying to transmit the
idea that it is exactly directly proportional the variation in Lean’s techniques penetration
ability.
As for raw material variety and process flexibility, these factors also affect directly
some Lean techniques. In this case the exact opposite happens: practices related to pull
systems increase their applicability as raw material variety and process flexibility
increases. Note that with the increase of variety of raw material techniques such as
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cellular manufacturing, seam to gain applicability. This way, as pull methods are
implemented, the way is lead for further Lean penetration for methods such as LA
Accounting methods, management by Value Stream initiatives. These belong to the
triangle “C”.
As for TPM methods, these lose applicability as raw material variety and process
flexibility increases. Process flexibility often means less robust machines, and less
automated equipment is used. This belongs to the triangle “A”.
As for the rest of techniques, no evidence was found in literature that these are
influenced by the two factors. The figure 5 on the present chapter illustrates these
conclusions:
Figure 6 Influence of raw material variety and process flexibility on Lean’s Penetration ability
Note that this figure either is not supposed to be a rigorous straight line, with a precise
gradient what so ever. In other words, the author is not trying to transmit the idea that it
is exactly directly proportional the variation in Lean’s techniques penetration ability.
Other factors were also identified in existing literature as potential influentiators to the
success of Lean initiatives. These factors are: novelty of processes, and learning
resistance and resistance to change. Existing literature lead to conclusions that these
factors work actively to block Lean Penetration generically as they increase.
Organizations that have high level of novelty in each job they accept have difficulties in
creating procedures to improve efficiency. Therefore, measures such as continuous
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improvement and standardization of work can be difficult to implement. Moreover,
existing literature even concluded that too much efficiency can be contra-productive.
On the other hand, much of Lean techniques impose a change in processes, from simple
processes related to production, to the way plant managers organize and manage the
plant. This leads to conclusions that almost any Lean technique that requires a
significant investment in changing current operations will not benefit Lean general
implementation ability.
To conclusion, techniques such as those proposed in the illustration can be in danger
with the growth of novelty of processes, learning resistance and resistance to change.
No clear distinction between which Lean techniques are most influenced by the factors
“Novelty of processes, learning resistance and resistance to change”, as existing
literature did not point out to a clear evidence that permits a clear differentiation. The
following figure illustrates these conclusions:
Figure 7 Influence of Novelty of processes, learning resistance and resistance to change on Lean’s Penetration
ability
The same comment holds valid for this illustration, which is that this figure is not
supposed to be a rigorous straight line, with a precise gradient what so ever. In other
words, the author is not trying to transmit the idea that it is exactly directly proportional
the variation in Lean’s techniques penetration ability.
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Proposed hierarchy for penetration ability
The first result obtained is that a relationship between techniques and their ability to suit
every type of industrial organization has been established with the concept of Lean
penetration ability. This concept is helpful in order to analyze whether or not to
implement Lean practices in an industrial context.
Having established how Lean practices penetration ability varies according to internal
and external factors, the next step should consist in ordering them according to these
conclusions. The following hierarchy of Lean practices penetration ability is proposed:
1. Lean practices with Low penetration ability:
a. Accounting methods – these Lean Accounting methods are depend on a
developed stage of Lean Manufacturing implementation. And a
developed stage of Lean Manufacturing requires a considerable
penetration rate of Lean values. Thus, these techniques are considered to
be techniques with low penetration ability.
b. Management by Value Stream – reorganizing departments by Value
Stream functions can be radical organizational change. Not only such
initiatives can be target of resistance to change, but holds a need
developed stage of Lean implementation.
c. Ensuring that suppliers deliver JIT fashion – very difficult to achieve
such an influence, because of the required buyer dominance or
interdependence state. These also require a previous pull and flow
initiatives implementation.
d. Pull and Flow – Inventory minimization, production smoothing, batch
reduction are techniques that are highly compliant with these Lean core
principles. As already seen, this substantially reduces these techniques’
penetration rate. Moreover, these techniques are also a lot dependent on
the existing process flexibility, as well on product volume, raw material
variety, and equipment type – all internal characteristics. They also
depend on external factors, such as demand and supply variability.
e. TPM – equipment maintenance techniques a lot dependent on the
existing process flexibility, as well on product volume, raw material
variety, and equipment type – all internal characteristics.
f. Proximate business relationships with customers – such type of
relationships can be very difficult to sustain, unless supplier dominance
or interdependence situations are at hand.
2. Lean practices with Medium penetration ability:
a. LA Control Methods – may be dependent on previous Lean operations
initiatives to achieve simplification. LA introduces control methods that
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may be insufficient when previous simplification in processes has not
been introduced yet. Requires new learning and change in processes.
b. Value Stream Performance measurement and costing – also dependent
on previous Lean penetration initiatives. Normally these require
substantial Lean thinking influence, which obviously decreases its
application rate. Requires new learning and considerable change in
processes
c. Target Costing – also dependent on change in previous Lean
penetration. Requires new learning and considerable change in
processes.
d. Continuous Improvement initiatives embedded in the culture – these
initiatives are source of continuous improvements most of all in the
operational level. So, the suitability of such initiatives decreases in
situations of high novelty in processes, namely in projects, which
normally are high scale and typically complex. In other words,
continuous improvement initiatives may lose applicability when in the
presence of high number of new processes/activities and complexity.
Moreover, constituting a special team for that activity also represents a
organizational change in the way of thinking, which can be blocked by
resistance to change.
e. Cellular Manufacturing – initiatives applicable only in situations of
different family of products with different processes inherent. Therefore,
they are dependent on necessity of product mixing. Moreover, layout
changes may require a lot of time invested, which increases the level of
difficulty of implementation. Requires change in processes.
f. Reducing number of suppliers and proximate business relations with
chosen suppliers – dependent, once again, on power leverage situations.
In situations of high supply and variability, where inventory policies
with large safety stocking quantities are needed, this policy might be
contradicting. In such situations quantity discounts are privileged.
3. Lean practices with High penetration ability:
a. TQM – Quality principles and techniques are know-how well spread and
with high applicability in various process types. Not necessarily
dependent on previous Lean techniques applied.
b. Value Stream Mapping – easy technique to apply, once training on lean
thinking has been given.
c. Visual Control methods - measure boards in cells are easy to implement
and with easily recognizable benefits.
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d. Empowerment of workers – is viewed as a good practice worldwide.
The only factor limiting it pointed in literature would be unionization
making it difficult for constituting cross-functional teams.
e. 5S – easy technique to apply. Requirements are training and attention of
plant managers. Not necessarily dependent on previous Lean techniques
applied.
f. SMED – technical solutions, that are compliant with reengineering of
processes initiatives. Not necessarily dependent on previous Lean
techniques applied.
g. Standardization of work – requires removal of waste activities, such as
transportation for example, and rethinking of processes. Not necessarily
dependent on previous Lean techniques applied.
Note that this hierarchy does not represent the maturity path of Lean methods in an
organization. What this hierarchy does is establish the ability of Lean principles to fit
into any industrial organization context. Practices with low penetration ability are
principles that depend on more factors (internal and/or external) to fit into all
organizations than practices with medium and high penetration ability. Following the
same logic, practices with medium penetration ability are practices with less limiting
factors than those with low penetration ability, and more limiting factors than those with
high penetration ability.
Now, a second observation can be extracted from the obtained results, which might lead
to further important conclusions. This observation concerns the link of each technique
to Lean core principles. Assuming that one can establish such a logic relation between
Lean core principles and each technique, than the result would be that the majority of
Lean techniques with a low penetration ability are the exact techniques that have a
higher compliance level with Lean core principles. Conversely, most of the techniques
with a high penetration ability have a poor link with Lean core principles principles,
with the exception of initiatives of workers’ empowerment. In between are practices
with medium penetration ability, which are principles and methods that have some
applicability limitations (e.g. dependent on some external or internal factors).
Why are these conclusions important? A recurrent subject in existing literature about
Lean Manufacturing is Lean maturity path. Subjacent to the concept of a maturity path
is the idea that some a Lean implementation should not be an abrupt transition, and
rather a smoothed phased transformation. So, considering that such a paced
transformation should always occur, then the underlying logic would be to leave
techniques that depend on other already implemented techniques to last.
So, assuming that the conclusion that Lean techniques with less penetration ability are,
in the majority, exactly those that have a stronger link to Lean core principles is correct,
then it is possible to assume that one can stipulate further conclusions on future success
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of a company in any stage of the Lean maturity path. How? If one is able to predict that
some Lean techniques do not fit the organization, and that these techniques are exactly
those that most strongly link to Lean core principles, then one is also able to stipulate
that a company in such situation will probably not walk fare away in its maturity path.
Let us rethink the hole discussion. Assuming that the suitability of the techniques varies
according to the situation, then, consequently, one must admit that there must be
situations where more techniques are applicable than in others. These are the exact
conclusions of Abdullah. So one could argue that the more Lean techniques and
principles are applied in an organization, the higher the penetration rate is of Lean’s
practices in that company. However, this thinking enters in a typical contradiction,
which is that most of the times quantity is not signal of quality.
The question that follows to the first argument given (the more Lean techniques and
principles are applied in an organization, the higher the penetration rate is of Lean’s
practices in that company) is that if all techniques are likewise compliant with Lean’s
core principles or not. If one considers that Lean techniques are not all likewise
compliant with Lean’s core principles, than one could argue that in some specific cases,
though an organization has less Lean techniques and principles applied than another, the
techniques applied by that organization are better facilitators of Lean core principles and
principles than another that has more lean techniques being practiced. In other words,
that specific company could have Lean thinking more embedded, or could be more
compliant to Lean core principles than the other.
Now, if one accepts that though Lean is an aggregation of various bundles, which share
some common principles (making them compatible to apply simultaneously and at the
same place), but some have a higher compliance level with Lean core principles than
other principles, it follows that the Lean techniques that serve these core principles
better would translate over the time in a higher Lean penetration rate than others that are
not so compliant with “pure Lean principles”.
A simple example would be sufficient to settle this question – comparing the “5S”
method for maintaining an organized and clean environment, which weakly is
compliant with the principles of perfection or empowerment of people. A good example
of a technique compliant with pull value is the Kanban method. This method is a
supporting tool for a JIT system, which is perfectly compliant with pull and flow values
and that supports efforts of minimization of inventory, production smoothing, and
others. The utilization of Kanban, not only is perfectly compliant with two Lean core
principles, but also strongly supports and incentives the penetration of other pull and
flow intended techniques. As a result, one can conclude that some initiatives are more
Lean compliant than others.
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Summarizing, assuming that one could scale Lean’s practices ability to fit any
organization in the proposed hierarchy, two conclusions follow. The first is that a
company where Lean practices with low penetration ability are suitable to be used, is a
company where Lean practices with medium and high penetration ability are also likely
to suit the same company. The second is that the same company where Lean principles
with low penetration ability are suitable to be used, is a company with a higher
propensity to evolve into higher Lean maturity stages. The reason for this conclusion is
that Lean practices with high compliance level to Lean core principles are better
supporters for further implementation of Lean methods than others.
4.2 FRAMEWORK FORMULATION
4.2.1 Defining the Framework structure
Previous conclusions drawn regarding Lean appropriateness led to interesting
conclusions in order to formulate such a decision making framework. First of all, the
players to be taken into consideration are Suppliers and the rest of upstream supply
chain, Buyers – which are the clients of the correspondent organization implementing
Lean values – and the organization target of Lean implementation – which has its own
internal factors affecting the organization. As to the critical internal and external
variables, these are the exact same that were considered previously which limit Lean
penetration ability. Now the third question – order of issues to consider – is the most
interesting to answer.
The author was lead to the conclusion that a Lean Implementation Framework would be
mainly distinguished by two consideration categories: one focused on the strategic
dimension, and another on the practical operational dimension. Note that in each of
these dimensions, the key players found to take into consideration were the organization
itself, and clients and suppliers – competition was almost left out. However, in an
indirect way, the power and leverage perspective incorporates the competition strength,
since one has to consider it in order to establish the amount of power to influentiate
clients or suppliers. So results of the research lead to conclusion that other competitive
players should not be necessarily be taken into consideration individually, but rather be
considered in a general way. Obviously room for exceptions is always left here, and
influence of specific players can either way be taken into consideration with the power
and leverage perspective.
The first order consideration would involve all subjects regarding strategic issues. In
terms of strategic considerations, three issues should be raised. The first should be
reviewing which type of strategy actually fits best to the company’s current needs and
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situation. Following Cox and Chicksand research, another concern should be the
commercial model (Cox & Chicksand, 2005). The company’s ability to capture value
through margins should be analyzed, taken into consideration that Lean is a strategy that
stimulates passing value to the customer.
The third concern within first order considerations should address the power relations
between the organization and its buyers and suppliers. Here, the ability of a company to
influence other companies is essential to extend Lean programs and establish JIT
systems throughout the chain. This consideration is especially important to analyze how
Lean will be limited in the long run, as it is already implemented in the company and
ought to be extended to partners and clients. These should be the first strategic
considerations, in order to understand how Lean can fit to the company’s strategy in the
mid/long term.
After analyzing these two first order considerations, and having concluded that Lean is a
potential strategy to be followed, practical implementation considerations should
afterwards be analyzed. These are all considerations regarding the fitness of Lean
methods to the existing operational level. Here Lean penetration ability analysis is of
most importance, for it allows us to establish what techniques ought to penetrate with
success. The existing literature pointed out several factors that can influenciate the
success of Lean implementation. However all of them can be aggregated in two groups:
internal and external factors. Internal factors consist on specific characteristics of the
company, and external are characteristics of the context outside of the company. Each
group should be considered separately.
So, summing up, a total of five key aspects are suggested as the most relevant criteria to
consider upon when analyzing whether or not to implement Lean. These criteria are the
following:
1. Organization’s strategic needs and capabilities.
2. Organization’s commercial model.
3. Company’s ability to extend in the future
throughout the supply chain.
its
operational
model
4. Influence of external factors to operational policies.
5. Influence of internal factors to operational policies.
The following scheme illustrates the structure of the framework:
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Chapter 4
Suppliers
Organization
1
Strategic
needs and
capabilities
Clients
First Order Considerations
Strategic Level
2
Interdepend
ence/Buyer
dominance
Commercial
Model
3
Value
captured
Power
Leverage
Ability
Interdepend
ence/Buyer
dominance
4
Figure 8 Structure of the framework: Strategic level considerations
Suppliers
Organization
4
4
Second Order Considerations
Operational Level
Supply
Variability
Clients
5
Product Volume
Demand
Variability
Equipment type
Process flexibility
Raw Material Variety
Novelty of processes
Learning resistance
Resistance to change
Figure 9 Structure of the framework: Operational level considerations
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Chapter 4
4.2.2 Defining the decision making process
Having established the critical factors to consider in this specific decision-making
process, the final step consists in formatting the framework to a decision model
formulation. The decision making of whether or not to implement Lean Management
was faced as a multicriteria problem, where the challenge was in establishing which
criteria are most critical. Thus, the problem can be formulated in the following manner:
Equation 8 Decision making formulation a)
n
w 
i
i 1
i
1
, where:

wi – weight or importance given to a certain criterion by the framework, where
0 < wi  1

 i - score given by the decision criterion to the consideration of Lean
Management implementation, where 0   i  1 .

n – total number of criteria. In this case it is equal to five.
Since there is a total of five criteria, this specific formulation is as follows:
Equation 9 Decision making formulation b)
w1 1  w2  2  w3  3  w4  4  w5  5  1
The next step consists on establishing the weight of each criterion. Now to do so, one
must inevitably compare each criterion to the others, and this way obtain a
prioritization. To obtain the weight of each comparison, a similar approach as the
Analytical Hierarchical Process, where, likewise, a weight is given to each criterion and
obtained through matrices of comparison. The scale of comparison will be as follows:
Table 3 Scale of comparison for each criterion
Value of
aij
1
3
5
7
9
2,4,6,8
Interpretation
Criteria i is as important as criteria j
Criteria i is a little more important than j
Criteria i is more important than j
Criteria i is quit more important than j
Criteria i is absolutely more important than j
Intermediate values
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Chapter 4
The purpose of this comparison is to reach a final result where the decision maker
clearly comprehends what criteria are most important for him in order to reach a
satisfactory decision. By attributing each pair a numeric value, the decision maker is
able to, in the end, determine in a hierarchical scale the relevance of each criterion to his
final decision. The underlying logic here is to express individual preferences into
numeric values.
In the quest to present a decision maker with the necessary tools to be able to choose a
well justified and suiting decision, the framework ought to deliver two functions. One
function should consist on presenting the decision maker with the critical criteria to be
taken into consideration in such a decision making problem. And the second function
should take into consideration that the decision maker is not yet well acquainted with
Lean Management, and thus should consist on determining the relevance of each
criterion to such a problem.
Thus, we are now finally able to define the relative weight of each criterion in respect to
others.
The first criterion was considered the most relevant of all criteria, because it reflects not
only what the company is able to accomplish, but most importantly what the company
needs. As stated before, Porter highlights that companies often fail to distinguish
between operational effectiveness and strategy, leading to unsatisfactory results (Porter,
1997). Moreover, Browning and Heath (2009) sustain that history has shown evidence
of problems that may arise with a strategy that focuses too much on efficiency in the
operational level (Browning & Heath, 2009). Thus, this criterion is intended to force the
decision maker to rethink what his priorities are, both in the present and specially in the
future, and how to harmonically to synchronize them by distinguishing operational
effectiveness and successful results.
The second criterion was also considered to be of extreme importance, however not as
important as the first. Cox and Chicksand warn that each company should reconsider
implementing Lean before even considering the potential operational benefits,
depending on the commercial model they intend to practice (Cox & Chicksand, 2005).
And though unequivocally the commercial model is acknowledged as central to any
Lean implementation, one cannot forget that the commercial model should only be a
derivation of the global strategy chosen. In other words, the choice of the commercial
model highly depends on the type of product that is being sold, on how the clients
perceive it, etc., and thus is dependent on several other strategies such as R&D,
marketing, for example. Hence, it is suggested that the first criterion should play a more
relevant role in the framework than the second.
As for the third criterion, though still part of strategic-level considerations, the author
considered that it represented the least representative of all criteria. The reasoning
behind this conclusion was funded on the fact that Lean can indeed provide valuable
techniques for the operational level without involving external players such as suppliers
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Chapter 4
or clients. Thus, though such an implementation would most likely be considered a
“peace-meal approach”, it could still present valuable results to a company.
Finally, the last criterion was considered to be more relevant than the fourth. The
reasoning behind this conclusion is simple: the number of variables found in existing
literature that influence Lean implementation is superior than the number of variables
found in the external factors. As such, criterion 5 should have a little more importance
than criterion 4 when being compared.
So, following the reasoning presented before, the matrice can be fulfilled. Table number
two of chapter five presents the pair-wise relations between each criterion, measured in
the scale of 1 to 9.
For example, criteria number one is considered to be a little more important than criteria
number 2. Thus, the score is 3; meaning criterion number one is 3 times more relevant
than criterion number two. Conversely, criterion two is 3 times less important than
criterion number one, and thus scores 1/3 = 0,333.
Table 4 Scoring criteria pair-wise
Criterion
ij
1
2
3
4
5
1
2
3
4
5
1
0,333
0,143
0,167
0,200
3
1
0,167
0,200
0,200
7
6
1
4
5
6
5
0,250
1
2
5
5
0,200
0,500
1
Sum
1,843
4,567
23,000
14,250
11,700
The next step consists on the normalization of the table. The normalization is obtained
by the following formula:
Equation 10 Normalization formula
a ij 
a ij
, where n is the number of criteria.
n
a
j 1
ij
For example:
a11 
1
= 0,543
1,843
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Chapter 4
Lastly, the calculation of the final weights of each criterion is obtained by the following
formula:
Equation 11 Calculation formula for the final weights of each criterion
n
wi 
a
i 1
ij
n
, where n is the number of criteria.
The results of the normalization are presented in the following table:
Equation 12 Final Weights calculation for each criterion
Criterion
ij
1
2
3
4
5
1
0,543
0,181
0,078
0,090
0,109
2
0,657
0,219
0,036
0,044
0,044
3
0,304
0,261
0,043
0,174
0,217
4
0,421
0,351
0,018
0,070
0,140
5
0,427
0,427
0,017
0,043
0,085
Sum
2,352
1,439
0,192
0,421
0,596
Wi
0,47046
0,28779
0,03843
0,08421
0,11911
1
A weight has been given to each criterion, which is the same to say that each wi has
been defined. However, it is still necessary to address the set of possible results. For
example, let us say that in a given Lean implementation consideration all strategic
criteria is rated a null value and the operational criteria are all rated with the value “1”.
The result would be bigger than one – 20,33% – however would it make sense to still
apply Lean? Conversely, if the strategic dimension scored the maximum value – all
given the value “1” – and the operational dimension null, the result would be: 79,66%.
Would in this case still make sense to apply Lean?
In order for the decision maker to be able to successfully apply the framework, i.e. to
conclude from the obtained results whether or not it is worthy to implement Lean, it is
necessary to establish the starting point where it is legitimate to consider Lean, as well
as to each conditions.
The next step constitutes in defining what each value of  i means.
Since each criterion has its own considerations, each should score in each criterion
should have a different meaning. As such, the following score-tables are proposed:
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Chapter 4
Table 5 Score table for criterion 1
87
Chapter 4
Table 6 Score table for criterion 2
88
Chapter 4
Table 7 Score table for criterion 3
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Chapter 4
Table 8 Score table for criterion 4
90
Chapter 4
Table 9 Score table for criterion 5
Lastly it is necessary to define minimal values from each Lean is not worthy to
consider, as well as to define from which point Lean can be recommended to be
implemented. In order to reflect the need to reflect at least a part of each dimension,
each criterion should guarantee a minimal score, enough to being worthwhile
considering Lean management.
To do so, the author has taken into consideration the given scoring parameters. Starting
with the first criterion, though still with a high risk, the score 20% could already be
considerable to a Lean implementation. Though the cost leadership strategy is not
viewed as the leading strategy, the company acknowledges that some areas, namely in
the operational level, would benefit from such strategy. However, the most critical
decision aspect is the ability to pursuit such a strategy, since it is considerate to be
limited. On the other hand, scores higher than 60% can already be considerate as
attractive values where Lean implementation should clearly be considered.
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Chapter 4
As for criterion number two, the advised minimum value should be 40%.Thus, the
company’s ability to capture value is one of the most critical criteria, and should thus
have a relatively high minimal score.
Conversely, again 60% strikes as a recommended value to consider more extensively
Lean as a right strategy to follow.
For criterion number three is considerate to be the less important criterion. The main
justification is that Lean offers valuable techniques that can effectively improve the
operational level without even extending abroad the organization itself. For example,
TQM, TPM, continuous improvement, and 5S are eligible techniques, even though the
company is not able to extend Lean abroad its own frontiers. Thus, it is admitted that
there may be a situation where Lean management can indeed bring added value to the
organization, even though it is not able to extend to neither customers nor suppliers. On
the other hand, scores higher than 60% can again be considerate as attractive values that
indicate that the extension of Lean to suppliers and clients might succeed, and thus
propose a more harmonic evolution in the future to higher maturity stages.
As for the fourth criterion, no recommended minimum value was established, since
there may be some techniques that are applicable even in such situations, such as
continuous improvement, cellular manufacturing, TQM, TPM, Value Stream Mapping,
Visual Control methods, empowerment of workers, 5S, SMED, and standardization of
work. As for the value from which Lean strikes as a value added methodology, 60% is
considerate to be a fitting value, as supply and demand variability are low, and thus are
permeable to techniques better related to lean core values.
Finally, for the last criterion, the minimum recommended value established was 20%.
Though again this should not be a recommended situation, since it is considerate to be
space for learning of new processes and methods, and since techniques with high
penetration ability could still fit in such situation. Once again, 60% is considerate to be
an appropriate value in order to consider Lean a valuable methodology to implement in
the organization.
To conclusion, the minimal score that the function of Lean implementation
appropriateness should score at least 23.30%. The value is obtained as follows:
Equation 13 Calculation of the minimal score of Lean implementation appropriateness
0,4705  0.2  0.2878  0.4  0.0384  0  0.0842  0  0.1191  0.2  0.2330 , where
1  0.2 ,  2  0.2 , and  5  0.2 .
On the other hand, a score equal or greater than 60% should suggest that the
implementation of Lean has good potential to lead to satisfactory results. The value is
obtained as follows:
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Chapter 4
Equation 14 Calculation of a satisfactory score of Lean implementation appropriateness
0,4705  0.6  0.2878  0.6  0.0384  0.6  0.0842  0.6  0.1191  0.6  0.60 , where
1  0.6 ,  2  0.6 ,  3  0.6 ,  4  0.6 , and  5  0.2 .
Finally, a table was constructed in order to help the decision maker to register his
results. The table was denominated “Lean Decision Making Framework Scorecard” and
is presented in the next section:
4.3 DECISION MAKING FRAMEWORK
Having established the order in which considerations should be taken, a last step needs
to be carried for the framework to be complete, which is producing a final layout for the
decision maker.
For someone not well acquainted with Lean methodologies, it is hard to know which are
the right questions in order to understand how each criterion exactly affects his
organization. Thus, the last step involves establishing the concrete questions that any
decision maker should pose to himself (when analyzing the Lean implementation
possibility in his organization), presenting them according to the proposed structure, and
integrated with the decision making model.
Given the thinking framework proposed, the following sequence of steps is proposed to
analyze strategic order considerations:
1. Step 1: Analyze the organization’s strategic needs and capabilities.
a. Is an “Overall Cost Leadership” strategy the best strategy to follow?
b. Is the “Overall Cost Leadership” strategy harmonic with other corporate
strategies?
c. Does the organization have the necessary aggressiveness to pursuit the
efficiency maximization of operations, given the capital investment
possibilities?
d. Does the organization have the necessary aggressiveness to pursuit the
efficiency maximization of operations, given the existing human
resource motivation and engagement with the company, human resource
skills and their process reengineering skills?
e. Is there no possibility of imitation of other players in the industry that
may achieve competitive cost minimization through imitation of
technology and production process?
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Chapter 4
f. Does the organization have an initial competitive advantage in terms of
high market share, access to cheap materials or through presence in a
competitive distribution chain?
g. Given the answers to the previous questions, please score  1 with a
value in the following interval: [0;1], multiply it by w1 , and register this
value in the Lean Decision Making Framework Scorecard.
To proceed to step 2, it is recommended that  1 is, at least, a bigger value than 0.2 . If
such condition is fulfilled, proceed to step 2.
2. Step 2: Analyze the organization’s commercial model:
a.
Is the profit margin high?
b. Does the organization manage to capture value to itself by focusing on a
cost leadership strategy?
c. Is the organization in a supplier dominance state or interdependence state
in terms of power relationship with the customer, sufficiently strong so
that value can be captured to the organization?
d. Given the answers to the previous questions, please score  2 with a
value in the following interval: [0;1], multiply it by w2 , and register this
value in the Lean Decision Making Framework Scorecard.
To proceed to step 3, it is recommended that  2 is, at least, a bigger value than 0.4 . If
such condition is fulfilled, proceed to step 3.
3. Step 3: Analyze Company’s ability to extend in the future Lean’s
operational model throughout the supply chain
a. Is the organization in a supplier dominance state or interdependence state
in terms of power relationship with the customer, sufficiently strong so
that it can work cooperatively with the customer and with close
information exchange?
b. Do suppliers have competencies to undertake the investment of changing
towards Lean practices?
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Chapter 4
c. Is the company able to influence general decisions of suppliers?
d. Is the organization in a customer dominance state or interdependence
state in terms of power relationship with the supplier, sufficiently strong
so that it can impose inventory and supply system?
e. Do clients have competencies to undertake the investment of changing
towards Lean practices?
f. Is the company able to influence general decisions of clients?
g. Given the answers to the previous questions, please score  3 with a value
in the following interval: [0;1], multiply it by w3 , register this value in
the Lean Decision Making Framework Scorecard, and proceed to step 4.
This logical sequence was schematized in the following figure:
Suppliers
Organization
1
Strategic
needs and
capabilities
Clients
First Order Considerations
Strategic Level
2
Interdepend
ence/Buyer
dominance
Commercial
Model
3
Value
captured
Power
Leverage
Ability
Interdepend
ence/Buyer
dominance
4
Figure 10 Structure of the framework: Strategic level considerations
As for the second order considerations, the questions should mainly force a
confrontation between real internal and external variables and Lean’s penetration
ability. Thus, the following sequence of steps is proposed to analyze operational order
considerations:
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Chapter 4
4. Step 4: analyze how external factors influence operational policies
a. Is the supply variability low?
b. Is demand variability low?
c. Given the previous answers, what Lean techniques fit the organization?
Note: please consult the illustration in order to reach conclusions.
Figure 11 Influence of Variability in demand and supply on Lean’s penetration ability
d. What is the level of compliance of the fitting techniques to Lean’s core
principles (waste, value, flow, pull, perfection and empowerment)?
e. Given the answers to the previous questions, please score  4 with a
value in the following interval: [0;1], multiply it by w4 , register it in the
Lean Decision Making Framework Scorecard and proceed to step 5.
5. Step 5: Analyze how internal factors influence operational policies
a. Is product volume low?
b. Is the equipment type general purpose equipment?
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Chapter 4
c. Is the raw material variety high?
d. Is process flexibility high?
e. Is the novelty of processes low?
f. Is the Learning resistance low?
g. Is resistance to change low?
h. Given the previous answers, what Lean techniques fit the organization?
Note: please consult the illustrations in order to reach conclusions.
Figure 12 Influence of product volume and equipment type on Lean’s Penetration ability
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Chapter 4
Figure 13 Influence of raw material variety and process flexibility on Lean’s Penetration ability
Figure 14 Influence of Novelty of processes, learning resistance and resistance to change on Lean’s Penetration
ability
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Chapter 4
i. What is the level of compliance of the fitting techniques to Lean’s core
principles (waste, value, flow, Value stream, pull, perfection and
empowerment)?
j. Given the answers to the previous questions, please score  5 with a
value in the following interval: [0;1], multiply it by w5 , and register this
value in the Lean Decision Making Framework Scorecard.
It is recommended that  5 is, at least, a bigger value than 0.2 .
This logical sequence was schematized in the following figure:
Suppliers
Organization
4
4
Second Order Considerations
Operational Level
Supply
Variability
Clients
5
Product Volume
Demand
Variability
Equipment type
Process flexibility
Raw Material Variety
Novelty of processes
Learning resistance
Resistance to change
Figure 15 Structure of the framework: Operational level considerations
Finally, sum the obtained scores in the table denominated “Lean Decision Making
Framework Scorecard” to reach a final score, and thus decide whether the decision of
implementing Lean is valid.
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Chapter 4
Figure 16 Lean Decision Making Framework Scorecard
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CHAPTER 5
Testing the Framework:
Logoplaste Case Study
Chapter 5
5. TESTING THE FRAMEWORK: LOGOPLASTE
CASE STUDY
5.1 LOGOPLASTE CHARACTERIZATION
In order to extract data from a real manufacturing context situation, a case study was
built in the renowned rigid plastic multinational Portuguese company - Logoplaste.
Logoplaste already began its Lean Journey, and consists therefore an excellent case
study to gather the essential considerations and guidelines of Lean implementation
considerations.
Before analyzing this case study it is necessary to take account of relevant information
to this study about the current situation of Logoplaste, such as their business model,
current management practices and how the production and inventory system works.
Business model and challenges
Logoplaste is an industrial group, specialized in the manufacturing of rigid plastic
packaging for a wide variety of markets segments. Its activity focuses in various
processes concerning packaging engineering, including extrusion blow molding, stretch
blow molding, and injection blow-molding.
It was founded in 1976, one year after Portugal´s 24th of April revolution. During the
first period after the revolution many business were taken from private owners. The
same happened with current chairman Marcel de Button, who was the owner of a
factory that dealt with plastic transformations. The fear of creating another business that
could be taken again in another revolution was critical in the process of coming up with
a new innovative business concept: the «Hole in the Wall».
The «Hole in the Wall» concept started by trying to figure out how to build a new
business model that (somehow) did not consist in a single point of failure, and therefore,
would be difficult to lose all at once (at least). In other words, the fear of losing all the
business at once got him thinking about new business models, where some kind of
redundancy business mechanism would prevent another loss.
On the other hand, he already had valuable know-how about industrial processes with
plastic. So, a time came when the essentials questions came to Button’s mind: is
installing a single plant for several clients the only business model possible? Can a
Business model function by having personalized plants to produce exclusively to a
single client? Button understood the answers to these questions, and as a result the
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«Hole in the Wall» concept was born. It consists in a close partnership with market
leading companies, where Logoplaste takes care of the hole investment in new
machinery, plant equipment and utilities, and installs these components in the client’s
plant. From then on, all activities concerned with the purchasing of raw material and the
entire manufacturing of the desired plastic recipients is of Logoplaste’s responsibility,
as well as all the maintenance and managing of the new implemented fabric.
This is obviously a win-win situation for both parties involved in this partnership. On
the side of the client, Logoplaste has the necessary know-how and experience on the
rigid plastic manufacturing. More importantly Logoplaste takes the risk of installing and
managing a new fabric, and also proposes to meet certain Service Level Agreements
(SLA) settled when the contract is settled. Summing up, Logoplaste offers the client the
option of not having to invest in new fabrics, manage all supply chain and production
issues, for the price of staying loyal to a single supplier for a contractually defined
period of time.
Now on Logoplaste’s side, this also represents a win-situation for various reasons. By
having numerous customers, it is able to achieve more competitive prices for raw
material by having quantity discounts privileges. On the other hand, Logoplaste is also
able to meet demanding SLA in terms of deliver time, for production occurs literally
right next to the customer. Logoplaste is able to deliver Just-In-Time. Moreover, all the
logistics and production cost are significantly mitigated by this same fact – production
occurs right beside the customer.
On the other hand, and one of the key success factors in this business model, for
Logoplaste these contracts are a form of guaranteeing a medium to long term exclusive
collaboration with the client. This kind of contract means supplier dominance, as it is
the only supplier delivering to the customer with no risk of adversaries for a certain
amount of time. The more Logoplaste’s clients sell their own products (that use the
plastic bottles), the more Logoplaste benefits from the partnership, as demand for the
plastic bottles increases.
Nevertheless, the «Hole in the Wall» is not the only form of business. Logoplaste has
developed also the possibility of producing to other clients without having actually
installed inside the client’s plant. Therefore, one could say that Logoplast’s business
model is a hybrid model – on the one hand it sells to customers like traditional fabrics
do, and on the other hand, it offers a alternative model to
In the late 80´s Logoplaste had already more than ten plants in Portugal, leading the
Portuguese market. In the 90´s started the expansion to other countries, and since then it
has evolved to an impressive number of countries such as Spain, Brazil, UK, France,
Italy, Austria, the Czech Republic, Canada, the USA and more recently Holland. It has
become Europe’s biggest rigid plastic manufacturer.
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Nowadays Logoplaste produces to a wide variety of market segments, especially in
gross consumption markets such as the food, beverage, household, care, and lubricant
industries.
The information age has created a highly competitive scenario and especially
unpredictable one. In order to remain competitive in the leading spots, Logoplaste faces
many challenges. Product life cycles are increasingly being reduced, upgrades on
technologies are constantly out coming, which enable more competitive prices and
products with more quality. Although the hole in the wall concept permits a relative
high level of confidence, disloyalty can always occur, resulting in customers switching
to competitors. Moreover, demand forecasting is still very hard to do in a reliable way.
Companies face with the challenge of constantly being prepared for abrupt and
unpredictable changes, which means being able to react with fast and fit responses.
To meet these challenges, Logoplaste strategy involves investing on technology and
innovation, develop high standards of quality in service performance, operational
performance and customer relationship, fast response to fast changing markets, and
expanding to more markets (taking advantage of the globalization). Examples of such
strategy are:

Investments on installing ERP information system (2001) – improving
information flow, facilitating management, and reaching out closer to the
customer for better service levels;

Investments on cost reduction – creation of a new line of PET pre-forms
considered the lightest in its packaging category, achieving a substantial
reduction of the amount of material used and consequently resulting in cost
reduction;

Investments on market expansion – expansion in the international markets such
as Angola, Russia, USA and Canada.
Other future challenges include incorporating reverse logistics methods to meet
environmental goals and the EU waste legislation.
Mapping Logoplaste’s Value flow
Logoplaste’s business model may seem complex at first sight. So, in order to explain
how the system works in the entire supply chain, and taking advantage that Lean
techniques have already been implemented, Logoplaste’s value stream map will be used
for the sake of the explanation6.
6
Note that value stream mapping encloses both material and information flow. Material flow corresponds
to a straight line, and information flow corresponds to lightening-shaped line.
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Since it is a pull system, demand is the launcher or driver of production. The several
final Logoplaste’s clients issue their demand forecasts, which are centralized in
Plastikit, where Production Control is done by MRP system. In the Value Stream Map
illustration corresponds to the red box, which is issuing information (information does
not follow a straight line, like material). This line is in red because this information flow
is done through ERP information system7. Two suppliers receive the orders planned by
the central Production Control – the PET producer and the Color Pigment Producer.
Note that sometimes PET can be bought in Spot Markets, according to the current price
fluctuations. The PET producer sells a determined quantity of PET raw material to
Logoplaste. At the dock, before delivering the raw material, a quantity inspection is
done.
After that, the raw material is accumulated at the dock, and then transported to a Silo.
This Silo is located in Plastikit, the first entity that actually is part of Logoplaste.
Plastikit is also called the mother-plant, because it is where the pre-forms are produced.
Next to the Silo, the PET passes through dryers, a proceeding needed to prepare it for
the injection.
During the same period that PET is sold until it is being prepared for the injection,
another iteration is occurring: a supplier of Color Pigment sells the color pigment to
Plastikit, where it is placed to inventory.
The injection process is done by combining simultaneously PET and the desired
pigment, in order to produce a pre-form with a certain weight and color. After this stage,
follows the refrigeration. A sample for quality inspection is collected; pre-forms are
loaded into containers (which have been prepared with plastic bags), and transported to
storage.
We are reaching the end of the material flow through Plastikit. Plastikit receives the
demand orders from the Stretch Blow Molding (SBM) Plants, who belong to two
distinct groups. The first group is still constituted by entities that belong to Logoplaste,
called “SBM Plants Logoplaste Group”. These SBM Plants are installed in a “Hole in
the Wall” fashion, meaning that they occupy a part of another company’s plant and take
charge of all the processes regarding the production of plastic recipients.
In the second group are all external Plastikit clients included, which exchange business
in a more standard model rather than the Hole in the Wall model. This means that these
clients have in common that they have their own SBM Plants, and therefore do not
desire the Hole in the Wall business model – they just want to buy the pre-forms, rather
than the final molds. A distinction is done within these two groups, which is based on
the size of demand (“E. Continent” and “Others”).
7
ERP used in Logoplaste is mySAP.
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After logistic paperwork is done, the demanded quantity is loaded into a truck that
transports the pre-forms directly into the SBM plants or to further transportation
methods that eventually lead to the final client’s SBM plant (according to the
localization of the client). In the case of the SBM Plants belonging to the Logoplaste
group, further processing is done. Pre-forms are molded into a recipient with a certain
shape, according to the client’s product intended.
Logoplaste’s Value Stream Map is summarized in the following illustration:
Figure 17 Logoplaste’s Value Stream Map
LOGOPLASTE’S INVENTORY SYSTEM
Operations research would classify this system as a Joint Lot Size (JLS) multi-echelon
multi-product inventory system, with a decentralized control. Let us explain these terms
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one by one. The system is considered a JLS because it integrates both vendor and buyer
at the same system in the case of SBM Plants in the Logoplaste Group. The big
difference to usual vendor-buyer systems is that in this case the vendor and the buyer
belong to the same entity, which is Logoplaste.
The system has one vendor that is called “Plastikit” (also known as the “mother
fabric”), and various buyers, e.g. a single-buyer and multi-buyers system. Plastikit
transforms raw material – PET – into different pre-forms. Buyers use the pre-forms to
produce molds.
The molds produced by the SBM Plants that belong to Logoplaste are used by the final
clients to put their own products in it. Such products include yogurts, detergents, and so
on. Note that final clients do not belong to Logoplaste, as opposed to the buyers, who
share the same owner and would therefore be viewed as echelons for modeling
purposes. Finally, it is a multi-product system, because it deals with more than one
product, in this case more than 60 references8.
Vendor: Plastikit
•Buys Raw
Material
•Conversion of
Raw Material
to preforms
Buyers: SBM
Plants
•Buys preforms
•Conversion of
preforms to
molds
Final Product
sellers
•Buy molds
•Use molds as
recepient for
their own
products.
Figure 18 General Representation of Inventory System in Logoplaste’s internal supply chain
To conclusion, management is done in a decentralized model. Each plant controls its
own production, and only forecasts and order related information are swapped between
SBM plants with Plastikit. In other words, Plastikit does not control the SBM plant’s
production; it is these that control the most part of Plastikit’s production (e.g. a pullsystem).
There are some additional details important to describe the system, concerning
planning, purchasing, storing and delivering activities. Plastikit receives all forecasts the
8
The exact number of references varies according to the year considered.
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SBMs (which receive from directly from their final client), and plans its production
ahead with a MRP system. Currently the Plastikit buys its raw materials to specific
sellers, or in spot markets. However in both options the buying policy is to use quantity
discounts as an opportunity to purchase materials at the lowest price. This policy
contradicts pure JIT policies, as it strives to maximize quantities in order to reduce the
price and maximize production batches. JIT norms would dispute this management
view, by arguing that it leads to the increase of holding costs and loss of quality. Buying
large quantities implies tying capital (e.g. capital use with an opportunity cost) and
increasing price of purchased materials when using loans of banks due to taxes
involved. Moreover storing may imply insurance costs, and of personnel who oversee
and protect the materials. Additionally quality can be lost in the storage of materials, or
in producing large sized batches to minimize production costs. Defective materials may
need further rework, which naturally increases costs.
After producing pre-forms, Plastikit accumulates the pre-forms in stock to guarantee a
certain safety level, which currently is estimated to have coverage enough for 30 days
period (without producing any more pre-forms and being able to satisfy customers
demand). Once again, JIT inventory policy would not implement such an extended
coverage period. As a matter a fact, JIT inventory policy would promote the exact
opposite policy in order to reduce as far as possible inventory levels.
On the other hand, transportation costs to move pre-forms to SMB plants are the cost of
the service bought to a transportation firm. As previously stated, some of the SBM
plants are Plastikit’s final clients, and other still belong to Logoplaste and are located
inside the plants of another set of final clients. Let us concentrate for a while on these
plants.
By being located inside the fabrics of the final clients with the Hole in the Wall strategy,
Logoplaste claims to be able to deliver products in a JIT fashion to final clients. And
through the clients perspective it is true, since they cannot say that they do not have
always the right quantities, with the right quality level, and at the right time. This
happens because once the molds are produced, no additional transportation time is
added to the total delivery lead time – they are located literately next to the client. Thus,
it is only necessary for the SBM plants to keep a sufficiently big inventory to meet the
SLAs agreed with the final client. Nevertheless, this cannot be considered a perfect JIT
system, since production is planned not only to meet current customers demand, but
also to maintain a certain inventory level.
It is difficult in this type of industry, where demand is highly unpredictable, production
quantities are big and service level is a priority, to perform in a perfect JIT environment
to what concerns inventory policies. In the specific case of SBM plants inside the
client’s plant, space is not a restriction in any plant, and so, there are practically no
additional operational costs involved in the storing of large sized inventories.
Furthermore, the contracting established in these partnerships stimulates the
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accumulation of large inventories for Logoplaste, as it establishes a high service level.
High service level means having the right quantity on time, with the right quality, in
whatever fluctuations there might be in the demand. And, in fact, these final clients all
sell goods that have high demand variability associated. Even if the case of a misleading
forecast that had set a higher demand than what really happened arouse, the
consequence would simply be an increase of the selling price of molds, in order to
compensate the overproduction that lead to lost sales. Normally the rise of the price
could mean a lost customer, as he could easily turn to another seller. Here is where the
Hole in the Wall clearly favors Logoplaste – it has higher negotiating power to set the
selling price than other competitors.
To conclusion, apparently Logoplaste would not have anything to lose by promoting a
policy of having large inventories. Plastikit achieves reduced purchasing prices by
buying large quantities, and achieves to always have the required quantities for the
SBM plants. The SBM plants do not carry additional costs for storing bigger quantities,
and this allows them to achieve high performance in the service level. The incentive of
such policy is natural.
Yet, a cost breakdown of Plastikit’s final product (pre-forms) – shown in the following
illustration – lead to interesting different conclusions.
Scrap 0,6%
Energy 3,9%
Maintenance
1,1%
Raw Material
78,4%
H.R. 2,5%
Depreciation
4,5%
Transports 2,1%
Others 6,9%
Figure 19 Pre-form Cost Breakdown (2007)
As can be seen in the Pie chart, raw material has a huge relevance in the product
costing. The first conclusion of this Pie chart might be that Logoplaste is choosing the
right inventory policy, by trying to purchase at the lowest price, in order to minimize
costs. Depreciation, maintenance and scrap costs are indeed not representative, when
compared to raw material costs.
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However, often companies have to turn to credit from banks, in order to be able to
purchase an amount of materials. When they accept an order, a large amount of
expenses must be spent, such as people, machinery, energy, transportations, for
example. And, of course, a large amount of expenses with materials has to done. All of
this money usually has to be paid in advance, until the payment arrives. So either the
company has enough receivables to cover all of these expenses – which requires for the
company having excellent balanced cash flows – or borrowing money might be the only
solution. By borrowing money, the cost of the purchase increases, because there is an
interest charge involved.
Therefore, the first financial problem of buying large quantities with the help of the
bank might be the additional interest charges involved. The second is that in that similar
financial operation the company is actually tying a large quantity of capital, losing the
opportunity to invest the money in other places. In the end, it all comes down to the
cash-flow management.
LOGOPLASTE’S ACCOUNTING SYSTEM
If Lean stands for simplicity, one could say that Logoplaste’s accounting system is
absolutely Lean. There are a number of reasons related to production system that are the
cause for the simplicity of Logoplaste’s accounting system. It is necessary to understand
these reasons, in order for one to understand this simplicity.
The production of plastic molds can be considered a simple process, in the sense that
there are no assemblies involved, the number of operation centers involved is very
small, the number of people involved is very small, and the same goes for the quantity
of materials. As a consequence, the cost centers are almost only concerned in measuring
direct costs, such as lost material percentage, energetic efficiency, occupation
percentage, efficiency in terms of the number of good products, and so on. In order to
calculate these metrics, one needs almost only to monitor the machine involved in the
production. Here there are only direct costs involved, which are easy to calculate.
As for operators, these do not have a significant role in the production process, for their
task almost only consists on monitoring the process. Since the process is done
continuously, they are positioned almost all the time in a static post. Consequently, no
indirect labor costs were involved. Logoplaste’s operational resources needed are
disposed in the following illustration:
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Plant
Manager
Quality (1)
Logistics (1)
Production &Maintenance
(1)
Team Leaders
(4)
Workers (44)
Figure 20 Plant labor hierarchy
So far no need to establish complex traditional accounting systems to trace costs, since
the direct operational costs are all easy to measure and to account. One could argue,
however, that the supporting structure outside the operations department could raise the
level of difficulty. Nevertheless, this is also not true.
Logoplaste’s business configuration works inherently in a pull-way. By this the author
means that the selling of the pre-forms and molds depends directly on the efficiency of
Logoplaste’s customers to sell their own products. If they are able to increase the
number of products sold, then more pre-forms and molds will be required, increasing
this way Logoplaste’s amount of sales. If demand of the final product of Logoplaste’s
clients decreases, the same will occur to Logoplaste. Thus, there is nothing Logoplaste
can do to increase demand; nothing that can be done to push product to their final client,
since he himself is also dependent on his customer’s demand. Supermarket customers –
those who consume Logoplaste clients’ products – are the unique entity that pulls
production.
How does this affect accounting? To begin with, it affects the organizational structure of
Logoplaste. No additional departments to support sales, such as commercial, marketing,
etc. are necessary. Having a simple structure means that overhead costs are also very
simply to track, because they are very few. Once again, the formula to calculate final
product cost is increasingly simplified.
The final conclusion that can be reached regarding Logoplaste’s accounting model is
that no traditional cost accounting system is needed. Adopting no traditional cost
accounting system in place can be considered itself a Lean option, if Lean stands for
simplification and removing unnecessary activities (or, in other words, waste).
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5.2 FRAMEWORK APPLICATION
The framework is intended to guide someone considering implementing Lean’s
methodologies. Building a case study around Logoplaste is a perfect platform to test
such type of framework, as it lets one predict how allegeable Lean’s methods are to
Logoplaste’s case.
In this case, applying the proposed framework means simulating that one is at a
previous point in time, respectively the point in time when Logoplaste first started to
consider whether or not Lean methodology would consist a good practice to their
context.
The framework proposes a step-guided approach, consisting of a total of five steps:
1. Step 1: Analyze the organization’s strategic needs, capabilities and competition.
2. Step 2: Analyze the organization’s commercial model.
3. Step 3: Analyze Company’s ability to extend in the future Lean’s operational
model throughout the supply chain.
4. Step 4: analyze how external factors influence operational policies.
5. Step 5: Analyze how internal factors influence operational policies.
Let us then start applying de framework.
1. Step 1: Analyze the organization’s strategic needs, capabilities and competition.
a. Is an “Overall Cost Leadership” strategy the best strategy to follow?
Logoplaste’s main leading strategy mainly relies on its innovative business model – the
Hole in the Wall. This can be considered to be partially a differentiation strategy, as it
does not target a niche market, and provides an innovative service to the customer,
clearly distinguishing it from competitor’s services. However, since it does not provide
the ability to charge a premium to their products, this cannot be considered a pure
differentiation strategy.
Now, after having deployed this differentiation strategy, the subsequent steps to take are
to develop the most aggressive cost reduction strategy, while maintaining and, if
possible, developing the products quality. Since prices are contractually defined, the
way to capture value is by reducing operational costs. Though Logoplaste an overall
cost leadership is not used for gaining clients’ interest, the actions performed through a
overall cost leadership strategy are exactly the most effective way for Logoplaste to
increase profitability.
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Thus, adopting the actions of an overall cost leadership strategy is the best strategy to
adopt, after having won the clients interest with the Hole in the Wall model.
b. Is the “Overall Cost Leadership” strategy harmonic with other
corporate strategies?
Yes, it is perfectly harmonic with other company strategies. On the one hand, and as
previously concluded in the previous question, it leverages the differentiation strategy,
allowing for Logoplaste to retain value, instead of passing it to the customer.
On the other hand Logoplaste’s core activity would be the exact target of attention of
the overall cost leadership – operational efficiency. Being Logoplaste’s core activity, it
is exactly the area more know-how is concentrated. As such, the effort to develop such
area would not require disfavorable learning courves, as well as new specializations.
Thus, developing know how and processes on the company’s core activity is consistent
with the overall cost leadership strategy.
c. Does the organization have the necessary aggressiveness to pursuit the
efficiency maximization of operations, given the capital investment
possibilities?
Yes, Logoplaste certainly does have the necessary aggressiveness to pursuit.
Logoplaste’s Hole in the Wall model provides assurance of control of accounts for a
long period, as the high switching costs provide a powerful disincentive to clients. By
having several clients “attached” to this model, Logoplaste’s manages to sustain the
required capital investment possibilities, as well as the time and teams to invest in
research.
d. Does the organization have the necessary aggressiveness to pursuit the
efficiency maximization of operations, given the existing human resource
motivation and engagement with the company, human resource skills
and their process reengineering skills?
Yes, one concluded that it does, for the same previously given argument: operational
efficiency is the core area of the company.
e. Is there no possibility of imitation of other players in the industry that
may achieve competitive cost minimization through imitation of
technology and production process?
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No, there is the possibility of competitors also incorporating Lean strategies. However,
the threat is minimized given, once again, to the main strategy: the Hole in the Wall
model.
f. Does the organization have an initial competitive advantage in terms of
high market share, access to cheap materials or through presence in a
competitive distribution chain?
Yes, Logoplaste has the advantage a large portfolio of clients with the small plants
inside their facilities, which raises the difficult for customers to, not only change
supplier, but also construct and manage their own plant. At this point in time,
Logoplaste has already expanded abroad to other markets outside the Portuguese
market, thus having a clear competitive advantage towards other competitors.
g. Given the previous answers, score  1 with a value in the following
interval: [0;1], multiply it by w1 , and register this value in the Lean
Decision Making Framework Scorecard.
In terms of the first criterion, Lean presents itself almost as a strong strategy to follow.
The “Overall Cost Leadership” fits extremely well to the Hole in the Wall model, the
company has the necessary aggressiveness at all levels to pursuit such strategy, and the
company has an initial advantage over competitors. Though Lean is a strategy always
with the possibility of imitation, taking into consideration that it is widely known, the
risk itself of imitation cannot be considerate severely threatening, since it is not linear
that the imitation of Lean strategy guarantees success.
Hence, 1  0.9 , and 1  w1  0.4234
2. Step 2: Analyze the organization’s commercial model:
a. Is the profit margin high?
No, the profit margin of the product is not high. Increasing profit is done by selling high
quantities.
b. Does the organization manage to capture value to itself by using a cost
leadership strategy?
Yes, since prices are contractual, reducing costs impacts directly on Logplaste’s profit.
Therefore, by being able to profit directly from cost minimization, Logoplaste is
capturing the added value to itself.
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c. Is the organization in a supplier dominance state or interdependence
state in terms of power relationship with the customer, sufficiently strong
so that value can be captured to the organization?
Yes, but in a limited supplier dominance state. Hole in the Wall model guarantees that
costs of switching supplier are high. For Logoplaste these contracts are a form of
guaranteeing a medium to long term exclusive collaboration with the client. This kind
of contract means supplier dominance, as it is the only supplier delivering to the
customer with no risk of adversaries for a certain amount of time. The more
Logoplaste’s clients sell their own products (that use the plastic bottles), the more
Logoplaste benefits from the partnership, as demand for the plastic bottles increases.
However contractual limitations do not permit Logoplaste to exercise price levels at
will, and do not completely prevent from clients moving to the competition. As such,
one cannot consider that Logoplaste manages to be in a perfect supplier dominance
state, where pricing policies can be easily changed in favor of the supplier and other
forms of controlling the clients are exercised.
d. Given the previous answers, score  2 with a value in the following
interval: [0;1], multiply it by w2 , and register this value in the Lean
Decision Making Framework Scorecard.
In terms of the commercial model Lean presents some fababilities. The first is the fact
that profit margins are low, and thus becoming more difficult to capture value.
However, it was concluded that the company is indeed able to capture value for itself,
so one must conclude that the score should not reach a superior score than 60%, but
likewise not less. Thus  2  0.6 , and  2  w2  0.1727 .
3. Step 3: Analyze Company’s ability to extend in the future Lean’s operational
model throughout the supply chain:
a. Is the organization in a supplier dominance state or interdependence
state in terms of power relationship with the customer, sufficiently strong
so that it can work cooperatively with the customer and with close
information exchange?
Yes, in some aspects it is. Logoplaste’s case is quit special regarding this aspect. Not
only Logoplaste is in a supplier dominance state, but this position obligatorily demands
cooperation and exchange of information with the client. This exchange mainly
comprises information about demand forecasts. As such, Logoplaste finds itself in an
excellent position towards clients that adopted the Hole in the Wall model for exchange
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of information and establishing cooperation. However, this does not necessarily means
that Logoplaste has enough power to have the ability of influentiating the clients
production system. Thus one cannot conclude that Logoplaste is in a complete supplier
dominance state
a. Do clients have competencies to undertake the investment of changing
towards Lean practices?
Yes, Logoplaste’s client portfolio consists mainly of major companies. However, this
does not mean that a Lean approach would necessarily favor their specific case.
b. Is the company able to influence general decisions of clients?
No; since the biding contract carefully establishes all the limits, Logoplaste does not
have an enough dominating power relationship so that it can influence the clients
decisions.
c. Is the organization in a customer dominance state or interdependence
state in terms of power relationship with the supplier, sufficiently strong
so that it can impose inventory and supply system?
No. PET sellers have large client portfolios, and as such, they are not dominated by
their client’s Will.
d. Do suppliers have competencies to undertake the investment of changing
towards Lean practices?
Yes, PET commercialization can be done in a JIT fashion, however a premium would
be charged in order to have such an agreement with a customer. This obviously means
that quantity discount prices would also be lost.
e. Is the company able to influence general decisions of suppliers?
No, PET sellers have large client portfolios, and as such, they are not dominated by
their client’s Will.
f. Given the previous answers, score  3 with a value in the following
interval: [0;1], multiply it by w3 , register this value in the Lean Decision
Making Framework Scorecard, and proceed to step 4.
Taking into consideration that the dependency of Lean of supplier and client dominance
can have a great influence on the success of its implementation, one can conclude that in
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terms of supplier and client control Lean is not able to deliver a favorable strategy to
Logoplaste’s situation. If one considers that most General management strategies do not
require such a power leverage ability as Lean does, the conclusion that follows
regarding the third criterion is that Lean fails to gain an advantage. Hence,  3  0.41 ,
and  3  w3  0.0158 .
4. Step 4: analyze how external factors influence operational policies:
a. Is the supply variability low?
Yes, supply variability is low. However, prices variability in the supplied products do
vary, and as such, they affect the way that the supply is handled.
b. Is demand variability low?
Logoplaste´s demand is the sum of all of their clients’ demand. Since the majority of the
companies to which Logoplaste supplies sell to the mass market, and since the mass
market tends to have high variability in their demand, the conclusion is that the demand
variability is high.
c. Given the previous answers, what Lean techniques fit the organization?
There are some Lean techniques that are not affected by these two factors, which are
continuous improvement initiatives, cellular manufacturing, TQM, TPM, Value Stream
Mapping, Visual Control Methods, empowerment of workers, 5S, SMED, and
standardization of work.
Since Logoplaste is affected by supply and demand variability, pull systems and the
related techniques are conditioned when trying to penetrate. Though one cannot say that
supply variability is high, there are two leading arguments that actively raise the
difficulty level of changing towards a pull system policy. First of all, the fact that there
is variability in the PET prices inevitably affects the purchasing policy. Whenever the
PET price lowers, the purchasing incentive to buy to stock grows.
On the other hand, the fact that there is a possibility of acquiring PET with quantity
discounts consists of another incentive not to buy in a JIT fashion.
However, though there are two strong arguments pushing towards a purchasing policy
more resembling a EOQ model, the possibility of changing the supply policy to a JIT
policy is not at all impossible. This is only a decision of Logoplaste, since there is no
variability in the supply.
As for the demand variability, this factor does not favor the Penetration of Lean
techniques. Agreed SLA’s turn the risk of stock shortage less appealing as the option of
having stock, since the penalty is high. As a result, producing in a pure JIT fashion
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could severely harm. However, this does not mean that tending to a JIT policy cannot be
done. A more hybrid system can still be implemented.
d. What is the level of compliance of the fitting techniques to Lean’s core
principles (waste, value, flow, pull, perfection and empowerment)?
A pure pull system – one of Lean core principles – loses applicability in this scenario.
Though approximation to pull systems could be viable, a hybrid model will always have
to sustain due to the binding SLA’s. Moreover, though only indirectly influenced by
both these factors, LA Accounting methods and management also lose applicability,
since a core fundamental Lean principle is not compliant with Logoplaste’s case.
However, value stream mapping, continuous improvement and empowerment are
central Lean techniques to Lean core principles. As such, one can say that the level of
compliance of the fitting techniques to Lean’s core principles is medium.
e. Given the previous answers, score  4 with a value in the following
interval: [0;1], multiply it by w4 , register it in the Lean Decision Making
Framework Scorecard and proceed to step 5.
External factors do not facilitate the incentive to implement Lean to the point that some
of Lean core principles such as pull are not well suited. Thus the score is:  4  0.41 ,
and  4  w4  0.0345
5. Step 5: Analyze how internal factors influence operational policies:
f. Is product volume low?
No, product volume is high.
g. Is the equipment type general purpose equipment?
No, the equipment type is specialized, and highly automated.
h. Is the raw material variety high?
No, PET is the only raw material.
i. Is process flexibility high?
No, the process flexibility is not high.
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j. Is the novelty of processes low?
Yes, the process is the same in every job. The work is not project-oriented.
k. Is the Learning resistance low?
Since work is standardized, and processes do not vary much, one could assume that the
learning resistance is low.
l. Is resistance to change low?
No signals were collected that could evidence that the resistance to change is low.
m. Given the previous answers, what Lean techniques fit the organization?
Given the previous answers, internal factors do not make Logoplaste’s case very
permeable to Lean solutions. In the previous equivalent question in step 4, the answer
was: continuous improvement initiatives, cellular manufacturing, TQM, TPM, Value
Stream Mapping, Visual Control Methods, empowerment of workers, 5S, SMED, and
standardization of work. However, techniques such as cellular manufacturing,
standardization of work and visual control methods seem to lose applicability in this
scenario given the internal limiting factors. The main reasons are the fact that the
process flexibility is low, and the equipment type is specialized and highly automated.
None the less, other techniques remain applicable in Logoplaste’s case, such as
continuous improvement initiatives, TQM, TPM, Value Stream Mapping,
empowerment of workers, 5S, and SMED.
n. What is the level of compliance of the fitting techniques to Lean’s core
principles (waste, value, flow, Value stream, pull, perfection and
empowerment)?
The techniques elected to be applied in Logoplaste’s case are not very related to Lean
core principles, in the exception of Continuous Improvement (perfection). Therefore,
the framework would predict that Lean Management principles would not penetrate
very extensively in Logoplaste’s case, and, consequently, that a peace-meal approach
would be the best case scenario for Lean techniques.
o. Given the previous answers, score  5 with a value in the following
interval: [0;1], multiply it by w5 , and register this value in the Lean
Decision Making Framework Scorecard.
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Once again, Lean scores poorly against general management principles, as the link to
core practices is poor. The result is:  5  0.30 , and  5  w5  0.0357 .
The final score given through the framework is the following value: 68.21%. Since all
of the minimum conditions were respected, and the score is even higher than 60%, the
framework suggests that Lean Management is appropriate to be implemented in
Logoplaste situation.
5.3 CURRENT LOGOPLASTE’S LEAN STATUS
First of all it is necessary to state that Logoplaste started to implement Lean principles
in the year 2002.Logoplaste used a consulting company to help them in a initial stage of
the implementation of Lean practices across Plastikit and the SBM plants.
The first step in Lean implementation consisted on Value Stream mapping of the hole
process9. Mapping the flow of value involves also questioning each step, rethinking
how to optimize flow, last but not least important, identifying waste and how to
eliminate it.
A closer analysis focused on first analyzing differences between the different SBM
plants. After closer analysis, results shown that 80% of the total sales belong to only 12
of a total of 74 Stock Keeping Units (SKU’s), corresponding to 10 SBM plants. A pull
system was build, through initiatives taken to reduce the total stock present in the chain,
delivery lead time reduction and categorization according to ABC analysis.
Another initiative to improve flow was the introduction of production planning through
information systems, with APO, SAP SCM application. The new IT system permitted
more accurate and a faster information flow between plants and Planstikit, as well as
between SBM plants and the clients.
Moreover, a new model of container was built in order to improve the quality of the
transportation of pre-forms. The new container was able to better accommodate the preforms, reducing the damages caused during transportation, and thus reducing 66% of
the returns of pre-forms.
9
- The map has already been presented in this same chapter, when presenting the complete supplying
process.
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Figure 21 Lean continuous improvement: new container
Finally, in terms of waste reduction, four main wastes were found in the following
production aspects were detected through the value stream mapping process: raw
material, energy, transports, and unforeseen stoppage hours.
In terms of raw material, substantial effort was done to reduce the percentage of scrap,
as well as to reduce the weight of raw material. This lead to surprising cuts on the
amount of raw material necessary to produce the pre-forms. The results from 2003 until
2008 show a 9% average weight reduction of each pre-form, which consequently led to
a 78% cost reduction in raw material and 9% reduction in total production cost.
In terms of energy waste, mainly four steps were taken. First maintenance and cleaning
started to being done during the periods of lower energy cost. An equalizer in the low
tension boards was installed – leading to 2% energy savings – kits “Saving Energy
EMK” for the Raw material dry systems were installed – leading to 20% energy savings
– and finally valves for flow control in water cooling circuit were installed – which
permitted a reduction of 6 units of water pumps in the system. The results from 2003
until 2008 show a 11,2% energy reduction, as well as 0,44% total cost of production
reduction.
As for transports waste, a solution was built in order to optimize the total volume usage
in each container. It was called the “Volume Optimizer”, and it basically permitted
better space allocation by shaking the containers during their filling, which facilitated an
optimization of the pre-forms distribution inside the containers.
Last but not least, substantial reduction in the unforeseen stoppages time was achieved.
From 2003 to 2007 a 68% of unforeseen stoppages time was reduced, which resulted in
a 0,15% of total cost reduction.
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All of the results of Lean implementation shown were achieved through the
implementation of mainly four Lean techniques: value stream mapping, continuous
improvement, empowerment of workers, TPM and SMED.
Value stream mapping allowed for optimizations mainly related to flow of value.
Continuous improvement allowed for developments across several aspects, mainly
related to waste reduction.
TPM initiatives were also related to empowerment of workers initiatives. The main
issues detected in the teams were increasing the team knowledge, lack of proactivity of
workers, excessive paper work, and downsizing fear. So TPM was implemented with
visual control methods, such as an activity board. The board contained the following
information: a team motto, production maps, stop maps, quality related information,
scrap control, stoppage hours, list of improvement ideas, minutes of TPM meeting, and
number of labels (solved and new). Also a reward process for the best ideas was
established.
Figure 22 TPM initiatives: activity board
As for SMED, a support cart for changing of stoppers was built, as well as an
organization of work was performed with a check list that avoided forgetting
instruments plus the execution of repetitive movements. Moreover, a reduction of the
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number of screws in the take out part also contributed significantly to the reduction of
time spent in mould change. Between 2002 and 2007 an impressive reduction of 50% in
the total time of mold change was achieved, as well as a reduction of 50% in the human
resources needed to perform such task. This resulted in a 0,05% reduction in the total
production cost.
5.4 DISCUSSION OF RESULTS
The framework model is intended to guide someone through an initial stage of decision
making, exactly in the beginning point when considering whether or not Lean is worth
considering to the current scenario of a certain industrial organization. However, in
order for this framework to be reliable, it has to be able to suit any industrial context,
and most importantly, provide a clear vision if Lean management methodologies are
applicable, and if so, what should methodologies best fit the case in hand.
Therefore, in order to test the framework, conclusions obtained when applying it should,
at least, be consistent with Logoplaste’s current situation. Being consistent means, on
the one hand, that the predictions of the techniques that do not fit Logoplaste’s case
should not have been applied, and that at least some of the fitting techniques should
have been applied. It is important to acknowledge that Lean implementation depends a
lot on the previous knowledge of the people implementing Lean’s techniques, and thus,
certain Lean techniques that could in fact fit Logoplaste’s case could have been left out.
Bottom line is that none of the ruled out techniques by the framework should have been
applied, and that those that have been applied were predicted – this is what is considered
as a consistent result.
So, applying the framework led to the interesting conclusions. In “step 1” the
framework concluded that the set of actions usually taken into place by an “Overall Cost
Leadership” strategy were in fact well suited for Logoplaste and harmonic with other
company strategies, such as the Hole in the Wall. In other words, actions such as
process reengineering, intense supervision of labor, products designed for ease of
manufacture, and low-cost distribution system, etc., are indeed well suited for
Logoplaste’s business model, and are tangible planned actions according to
Logoplaste’s ability to pursuit invest improvement measures and competitive advantage
comparing to other competitive players.
As for step 2, conclusions pointed out that though profit margins are not high, and that
Logoplaste is in a limited supplier dominance state, through a Lean strategy of
operational cost reduction Logoplaste would be able to capture value to itself.
Eventhough the most attractive ability to capture value would be by creating added
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value to the products and being able to capture that added value by the selling of those
products, and that Logoplaste hardly manages to do so, cost reduction initiatives do
impact positively solely on Logoplaste. Since prices are contractual, all cost reduction
achieved by operational efficiency is captured by Logoplaste, which thus sustains the
interest in Lean Management as a strategy generator for the Logoplaste’s case. In
conclusion, Logoplaste is in a supplier dominance state (though limited) and manages to
capture value to itself, and thus step two suggest Lean Management as a possible valid
strategy generator.
In step 3,results show that Logoplaste does not sustain sufficiently dominance power to
influentiate the clients production policies and other decisions. Moreover, in the
supplier side, Logoplaste has two big incentives not to enforce a pull system. Thus, one
cannot conclude that the company’s ability to extend in the future Lean’s operational
model throughout the supply chain is limited, and consequently, not favorable to Lean
methodologies.
Therefore, regarding the strategic level (step 1, 2 and 3) one can conclude that Lean
Management could be a well suited strategy to follow in Logoplaste’s case. Although
step 3 shows otherwise, step 1 and 2 have shown sufficient evidence of suitability to
Logoplaste’s case.
In the operational level, results did not favor that much Lean implementation. Step 4 has
shown that only Lean techniques with a poor link to Lean’s core principles fitted
Logoplaste’s case. Moreover, step 5 narrowed the set of techniques that are fitted to be
implemented, since some internal factors did limit Lean’s implementation extensibility.
The final results have shown that the techniques that could be implemented were
continuous improvement initiatives, TQM, TPM, Value Stream Mapping,
empowerment of workers, 5S, and SMED.
To conclusion, the framework predicts that, in Logoplaste’s case, some Lean
methodologies are suited for the company. It showed that strategically Lean constitutes
a very viable strategy, and that operationally it provides a set of techniques that fit the
organization. However, the framework also predicts that, since the techniques that
seemed to fit Logoplaste’s context are poorly related to Lean core principles, Lean
would not penetrate extensively. This means that Lean would not be able to change
management thinking and actions, such as by managing though Value Stream. Instead
Lean would only penetrate in a more operational level, failing to implement and embed
“Lean thinking” as an industrial management practice.
After reviewing Logoplaste’s Lean status, one can easily understand that though there
were some benefits extracted from Lean implementation, one can conclude that
techniques with strong link to core principles did not penetrate strongly. As predicted by
the framework, techniques such as Continuous improvement, TPM, Value Stream
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mapping, empowerment of workers and SMED were indeed implemented. Though
TQM was not implemented as a Lean feature, Logoplaste already used quality
controlling mechanisms.
On the other hand, some Lean methodologies related to pull systems were enforced,
however only those that fitted best to the organization strived. As predicted by the
framework, a pure pull system did not fit perfectly the company. Currently the Plastikit
buys its raw materials to specific sellers, or in spot markets. However in both options
the buying policy is to use quantity discounts as an opportunity to purchase materials at
the lowest price. This policy contradicts pure JIT policies, as it strives to maximize
quantities in order to reduce the price and maximize production batches. JIT norms
would dispute this management view, by arguing that it leads to the increase of holding
costs and loss of quality. Buying large quantities implies tying capital (e.g. capital use
with an opportunity cost) and increasing price of purchased materials when using loans
of banks due to taxes involved. Moreover storing may imply insurance costs, and of
personnel who oversee and protect the materials. Additionally quality can be lost in the
storage of materials, or in producing large sized batches to minimize production costs.
Defective materials may need further rework, which naturally increases costs. Lean’s
pull management (rather than push management) concept is used in a partial manner, in
the sense that to plan necessities through an MRP system in the mother fabric. which is
the same to say that customer’s demand is the driver for Plastikit to issue buying orders
for the purchase of more raw materials.
In conclusion, Logoplaste implemented a Lean peace-meal approach, the predicted
approach that could best fit its context.
Results have shown that the framework presented consistent results with the real
outcome of Lean implementation. Moreover, the comparison of the applied framework
and the evolution of Lean’s maturity path in Logoplaste also showed, as predicted, that
because the implemented techniques did not have a strong link to Lean’s core
principles, Logoplaste did not evolve to further advanced states in Lean’s maturity path.
Though the results cannot still be considered sufficient in order to prove the ability of
the framework to be applied in any situation, a satisfactory result was achieved in this
first attempt. As such, the framework can at least be considered a first initiative to set an
unbiased method in the research community for further development in order to build a
final tool for decision makers considering Lean implementation in their context.
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Conclusions and
Recommendations
Chapter 6
6. CONCLUSIONS AND RECOMMENDATIONS
6.1 CONCLUSIONS
This thesis strived to build a thinking framework that could guide any decision maker
with limited previous Lean knowledge through a process of testing if Lean Management
practices suit or not his organization’s industrial context and enable the decision making
process to reach fruitful conclusions to further actions. The framework elects two
dimensions to consider: a strategic dimension, as well as an operational dimension. The
purpose of the framework is not only to extract conclusions if Lean principles do in fact
or not suit a certain industrial context, but also, if so, to extract conclusions on which
techniques shall fit that same context.
Such a framework can consist of a valid and useful tool for a decision maker, as existing
literature seems to lack a holistic view of Lean management principles to different
contexts. The conducted research has found that though the growing popularity of Lean
Management principles and techniques over the years among industrial managers and
management researchers, it is still far from unanimous among researchers a direct
relationship between Lean methodologies and those organization’s success. Moreover,
divided opinions regarding Lean benefits still coexist in the research community, and
consequently a foggy view of which Lean approaches best suit each context still
persists.
So, the work developed in this thesis was not so much focused on finding if Lean is
really the best method, but rather on investigating which cases it best fits to. The gold
was to build a decision making framework, that not only could help to decide whether
or not to implement Lean, but also to help deciding which practices should be
implemented in case of an affirmative decision. And so the contribution of this thesis
was to simplify and guide the thinking process of any Lean implementation analysis.
The first basic conclusion, and that was taken as a basic premise, was that Lean is an
approach that does not succeed in every case. It rather varies on the success achieved,
and that every case is a different case, that should be analyzed individually. So the next
step, which consisted on the sole goal of this thesis, was to build a framework that could
be applied in any industrial context, which could be used by any decision maker. Any
decision maker means any employee that is faced with the responsibility of deciding on
whether or not to implement Lean methodologies, but that does not have any prior
extensive Lean’ knowledge.
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Three main objectives were established for this thesis:
1. Analyzing Lean Management methodologies appropriateness.
2. Establishing a Lean implementation consideration framework.
3. Testing the conclusion drawn from previous objectives in a company already
having Lean implemented.
In order to establish how Lean appropriateness level applies in each case, it is
fundamental to understand how each technique serves each purpose. Results from
objective 1 permitted to reach important conclusions to which factors limit Lean
penetration, both in the strategic dimension and operational dimension.
Summarizing the results, one could point out that in the strategic level, it is essential to
consider if a Cost leadership type of strategy is indeed the best fit solution to the
company, and should also consider carefully its ability to capture value to itself by the
implementation of Lean principles. Moreover, the company should also take into
consideration all important players involved in the market that influence its actions. The
most important ones are clients and suppliers, where a closer analysis should be done in
order to understand the power dominance state towards each one of these.
It is essential to consider the power dominance state the company has with other
players, since this not only determines its ability to capture value to itself, but also may
determine future Lean implementation success. Lean’s techniques focus almost
exclusively in the performance of the operational level. Consequently, the ability of the
surrounding supply chain to submit to a pull system also plays an important role in the
success of the company’s implementation of pull system.
On the other hand, it was also concluded that other competitive players are naturally
also to be taken into consideration, when analyzing the possibility of implementing
Lean. More importantly, their ability to copy the same strategy and obtain better results
needs to be taken into consideration, as their financial health and human resource capital
may be stronger than the company in discussion.
As for an operational level, conclusions pointed out that it is also very extremely
important to analyze the context in which the company is inserted. Both internal and
external factors were found that limit the applicability of Lean’s techniques. A hierarchy
was built, aggregating the techniques in three distinct groups using a criteria for their
selection their penetration ability according to the limiting factors.
Through objective one the author was also able to reach another important conclusion.
By arguing which factors do or nor limit each technique, the study was able to segregate
the techniques in different groups. Each group has in common that the techniques that
belong to it have a relative similar level of easiness of applicability in any industrial
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context. Or in other words, the techniques were grouped according to their penetration
ability.
A second observation concluded that the techniques that belonged to the group with less
penetration ability were also, in the majority, the exact techniques that are more strongly
linked with Lean core principles, specially to pull and waste principle. The author
concluded that the more techniques tightly connected to Lean core principles a company
was able to implement, the easier it would be to embed Lean thinking in a organization,
and thus the easier it would be to proceed in a the lean maturity path. Conversely, the
less techniques with a strong link to Lean core principles a company is able to
implement in its context, the less that company will evolve in Lean’s maturity path.
These conclusions are important in order to predict the future success of Lean’s
penetration in a company.
In the second objective the author concluded that though there are two levels of
consideration – a strategic and an operational – the questions leading the decision maker
should be organized in five logical distinct steps:
1. Step 1: Analyzing the organization’s strategic needs, capabilities and
competition.
2. Step 2: Analyzing the organization’s commercial model.
3. Step 3: Analyzing Company’s ability to extend in the future Lean’s operational
model throughout the supply chain.
4. Step 4: analyzing how external factors influence operational policies.
5. Step 5: Analyzing how internal factors influence operational policies.
The first three steps are dedicated to explore all important aspects in a strategic level. In
the first step the decision maker is obliged to rethink if a Cost overall Leadership
strategy is his best option, as well if the company has the necessary aggressiveness to
pursuit such strategy, and if it is possible for other competitive players to copy the same
strategy.
In the second step the decision maker is forced to consider its ability to capture value to
itself, by reviewing analyzing its profit margins and the power dominance state relation
with its clients.
The third step is intended to force the decision maker to consider its ability in the future
to influence both suppliers and clients to utilize a pull system, as well as progressively
support Lean management policies.
The last two steps, step 4 and 5, are dedicated to confront which techniques should fit
the organization. In order to do so, step four inquires the decision maker which of the
key identified limiting external factors do exist in his specific industrial context. By
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acknowledging which factors may exist in his context, the decision maker is able to then
to choose from the penetration ability illustrations of Lean techniques which techniques
best fit his case. Additionally, a last question was inserted, which is intended to oblige
the decision maker to rethink if the techniques that seem to fit his context are indeed
deeply related or not to Lean’s core values. Though this last question requires some
prior Lean knowledge (enough so that the decision maker understands which principle
is invoked which each technique), it may be a central question in order for him to
understand the future Lean evolution that he might expect in his company.
Step 5 is equivalent to the proceeding in step number 4, except for the fact that in step 5
the decision maker is forced to analyze which internal factors do exist in his context,
rather than external. Likewise in the end the decision maker is challenged to conclude
which techniques best fit him, according to the Lean techniques penetration ability
illustrations. Also the same question regarding the link of these techniques to Lean core
values is done. The intension is exactly the same.
Finally, the last objective was meant to test the success of the framework in guiding a
decision maker in the task of deciding if Lean is an appropriate strategy for his case or
not, through the application of the framework in a real scenario: Logoplaste.
The confrontation between Logoplaste real Lean implementation status and the results
obtained in the framework did not diverge at all. First of all, the framework led to
conclusion that strategically Lean would be a good choice. An Overall cost leadership
strategy fits Logoplaste strategic needs, and it was concluded that Logoplaste is in fact
able to capture added value. Furthermore, at the time when Logoplaste was considering
implementing Lean, it was faced with a advantage situation against competitors due to
the Hole in the Wall model. Lastly, the final argument would be that Logoplaste has the
necessary capital and human resource strength to pursue a strategy such as Lean
implementation. All of these arguments led to conclusion that strategically Lean fitted
Logoplaste’s needs.
As for the operational level, conclusions drawn in the framework were also coherent
with the evolution of Lean techniques at Logoplaste. The set of possible techniques
applicable for Logoplaste is constituted by the following techniques: continuous
improvement initiatives, TQM, TPM, Value Stream Mapping, empowerment of
workers, 5S, and SMED. Of all these techniques, all were implemented in Logoplaste,
with the exception of 5S, and TQM was already being used. The method to reach this
conclusion was by exclusion of other techniques that did not fit because of either
limiting internal or external factors. The reasons that pointed out for these techniques
can be resumed as follows:

Arguments against pure pull systems: Though the supply variability is low,
price variability is high; Demand variability is high,
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
High product volume, low raw material variety and specialized and automated
equipment which led to conclusion that TPM, TQM and SMED would be
appropriate;

Low process flexibility, low raw material variety and specialized and
automated equipment led to conclusion that cellular manufacturing,

Value stream is an universally applicable tool, as well as continuous
improvement and empowerment of workers.
Finally, the conclusion that the less techniques with a strong link to Lean core principles
a company is able to implement in its context, the less that company will evolve in
Lean’s maturity path, was essential to predict how Logoplaste would evolve to further
technical unpredicted implementations in the future. Since the techniques applied in
Logoplaste had a poor link to Lean core principles, Lean management’s practices did
not evolve, even at further stages of Lean implementation after the predicted techniques
were implemented.
What happened to Logoplaste is what happens in a wide number of organizations
implementing Lean methodologies. The techniques that have better penetration ability
were, naturally, implemented as opposed to those with low penetration ability. However
the same does not happen to the techniques with less penetration ability. And these are
precisely those that are better related to the core of Lean principles, thus meaning that
the ledged “Lean thinking” gets left behind in the long term. Each company absorbs the
methods that best fit their organization.
It is inevitable for any author to reflect in the end of his work on the obtained outcomes.
Though acknowledging that the built framework can still be a lot developed, a notion of
utility in the developed work none the less exists. The added value by the present thesis
consists mainly on the aggregation of distinct angle views about Lean’s potential
benefits appears as a value adding activity. Why is it important to aggregate such
information? The decision of implementing Lean’s practices carries a real cost with it,
an opportunity cost, and a tremendous effort in changing processes and mindsets.
Deciding whether to invest in Lean’s practices should be a well thought decision with as
much objective information as possible. It is to this particular benefit that this thesis
aims to: providing a decision making thinking model, to facilitate managers without any
extent knowledge of Lean practices to evaluate the potential key factors that may be
relevant to the decision of implementing or not Lean Business Management practices
(both Manufacturing and Accounting) in their manufacturing company.
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6.2 RECOMMENDATIONS
This thesis is fully focused on discussing the applicability of Lean techniques to
industrial contexts. As such, the author has two types of recommendations to
researchers also investing time on studying the applicability of Lean methods.
The first recommendation concerns the fact that Lean has become a very profitable
business, and consequently involves many interests. As mentioned before, evident
biased opinions were found along the conducted research for this thesis. As such, the
author recommends for extensive search of several opinions before conclusions are
drawn.
The second recommendation concerns further efforts on developing the proposed
framework. The built framework lacks of systematic testing in order to reach a mature
tool capable of being utilized in real scenarios. For a framework to be considered a valid
consistent method capable of being applied in real contexts, extensive prior testing
needs to be done in several and distinct case studies. A first good example of a gap in
the case study utilized concerns Lean Accounting. Logoplaste did not constitute a valid
research case study in order to test conclusions withdrawn related to Lean Accounting.
So, equally important as building the framework is the task of suggesting guidelines for
further research focused on studying Lean applicability. This last topic is solely
dedicated on such task.
The author recommends building case studies in industrial contexts where general
purpose equipment and a large variety of raw material exist in order to test Lean
Accounting benefits. Such environments are ideal, as they are the exact cases where
traditional cost accounting strives to deal with all of the indirect costs.
On the other hand, testing scenarios where the organization manages to capture value in
order to gain competitiveness would also be interesting case studies to test the
framework. Although Logoplaste does manage to capture value to itself with value
added initiatives, the adding value activities consist mainly on cost reduction efforts.
Lean provides tools such as target costing and management through Value Stream,
which are ideal in scenarios where the organizations are able to increase prices of their
products or services by adding value to them with quality improvements, new added
features, etc.
The author also suggests scenarios with general purpose equipment and raw material
variety to test the framework. Initiatives such as cellular manufacturing are good
enablers of other Lean techniques that are strongly linked to Lean core principles. Such
scenarios provide good examples where Lean penetration ability may be stronger, and
thus more interesting.
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Finally the author also suggests as an interesting topic focusing the tests of the
framework in complex supply chain scenarios, with different power dominance states.
Research focusing Lean’s strategic dimension seems also to lack, though its extreme
relevance.
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