All businesses desire high and stable profitability, period after period for as long as possible. That surely is the goal of most performance improvement programs, including lean initiatives. However, such programs invariably boost profitability for only a while, followed by increasing instability and reduced performance until the cycle repeats and management once again rolls out another improvement program. Again, profitability increases for a while, followed by another disappointing downturn that leads to yet another improvement program. As a consequence of such improvement-initiative cycles, average results over the long term move in the opposite direction to the desired result, despite brief periods of improvement in the short run.

Unintended Consequences of Improvement

I believe this unintended consequence of improvement initiatives occurs because management’s view of what causes business results differs greatly from how the business system itself would naturally produce those results. In virtually all businesses today, and for the past 50 years or more, management actions meant to improve financial performance reflect a mechanistic view of what causes financial results. In that view, financial results are a linear, additive sum of independent contributions from different parts of the business.

In other words, managers believe that reducing an operation’s annual cost by $1 million simply requires them to manipulate parts of the business that generate spending in that amount each year. Because managers assume that all parts of their operations make independent contributions to overall financial performance, like the parts of a machine, they would consider any or all of the following steps to be equally effective: lay off employees whose annual pay equals $1 million; force suppliers to accept reduced prices for their goods or services; outsource employment or contract purchases to less-developed countries. It doesn’t matter what steps are chosen, as long as they eliminate $1 million of annual spending.

Were managers to assume, however, that the financial performance of business operations results from a pattern of relationships among a community of interrelated parts, and is not merely the sum of individual contributions from a collection of independent parts, their approach to reducing cost could be entirely different. In that case, managers might attempt to reduce costs by improving the system of relationships that determines how the business consumes resources to meet customer requirements. This would suggest that they view “improvement” primarily in terms of a system of relationships the human social system that is the business and not simply in terms of an arithmetic sum of separate parts. Viewing current operations through the lens of this vision would enable everyone in the organization to see the direction that change must take to move operations closer to that vision.

However, such thinking has not yet influenced business education and practice. Indeed, the thinking and behavior of almost all managers in today’s business world reflect a worldview grounded in the whole-equals-sum-of-parts and win-lose competitive principles of 19th-century mechanics and 18th-century classical physics, not the systemic, cooperative, and win-win symbiotic principles of 21st-century cosmology and life science. That explains, I believe, why virtually all improvement initiatives, including so-called lean initiatives, inevitably generate long-run financial results that fall far short of what was intended by the initiatives’ designers.

Confusion of Levels

This failure has to do with a “confusion of levels,” a phrase writers often use to describe what the 20-century systems thinker Gregory Bateson called a type of epistemological error. Bateson said that humans in any culture share certain premises about epistemology, that is, “about the nature of knowing and the nature of the universe in which we live and how we know about it” (Gregory Bateson, Steps to an Ecology of Mind, p. 478). Many of these premises, because they work at some levels and under certain circumstances, are misapplied to other levels. Problems occur when this happens.

People in Western cultures have premises for explaining or understanding the world at two main levels, referred to briefly above. At one level, call it the mechanical, all events are explained by the influence of external force or impact on independent objects. At the other level, call it the living, all events are explained by patterns of relationships connecting a world of self-organizing beings. The premises at the first level have been successfully used for nearly two centuries to study mechanical processes and to promote engineering technology. They are the basis for scientific and business education and practice in the Western world today.

But problems have grown increasingly severe from the erroneous application of these premises to human dealings with nature and to social organizations, such as businesses, that embody principles of living systems. For example, viewing reality through the premises of the first level, a management accountant in modern business views a spreadsheet of financial results as the company. Oblivious to premises at the second level, this person fails to see the system of human relationships that produces those financial results as the company. As a consequence, the person promotes policies to “improve financial results” by arbitrarily destroying relationships through layoffs or outsourcing, not by nurturing and reinforcing the features of those relationships that produce robust results. The long-term outcome, predictably, is less than expected.

Lean Practices Versus Toyota Results

In their customary way of doing things in business, managers confuse linear cause-effect connections at the abstract quantitative level of financial results with the non-linear, complex cause-effect connections that naturally exist at the concrete level of relationships among employees, suppliers, customers, owners, and community. Their business training and experience cause managers to believe that linear cause-effect connections at the abstract quantitative level apply everywhere in the world, including the level of real operations. Thus, they proceed to manipulate and control people and things according to the linear principles that apply at the abstract quantitative level.

Therein lies another confusion of levels. Whereas in a mechanical system, one-dimensional quantities can both describe results and enable one to control the linear process that produces those results, in a living system, quantities can only describe results, but cannot explain or enable one to control the multi-dimensional interactions and feedback loops of the process that produces the results. As I discuss in more detail below, this confusion of levels invalidates all management accounting practices in which businesses attempt to use financial quantities to explain and control financial results. Those practices, which are endemic to American management but are not evident at Toyota, are the main reason why lean initiatives fail to have their desired impact on financial performance in American business.

An example of the damaging impact of this confusion is in a case (co-authored with MIT Professor David Cochran) I describe elsewhere that compares the financial (and other quantitative) results in two automobile bumper-making plants (H. Thomas Johnson, “Lean Accounting: To Become Lean, Shed Accounting,” Cost Management, Jan/Feb 2006, pp. 3-17). One is run by an American “Big Three” automaker whose managers continually manipulate separate parts of the plant’s operations and arbitrarily increase output in order to achieve unit cost targets defined by an abstract financial cost equation. The other is run by Toyota, whose managers focus on nurturing systemic relationships in the plant according to a constant vision that has guided all operations in the company for many decades. The case demonstrates that Toyota does not confuse linear cause-effect connections at the abstract level of financial cost equations with the complex cause-effect connections at the concrete operating level of human relationships and that it, in turn, achieves lower costs and higher overall performance.

I believe lean initiatives fail to achieve results like those observed at Toyota because they do not change the underlying mechanistic thinking that has guided management decisions in virtually all American businesses for the past half century or more. Lean initiatives in non-Toyota companies invariably fail to embody Toyota’s unique way of thinking about business and the fundamentally different approach to management. Thus, businesses transplant Toyota practices into a context of alien thinking that overpowers and dilutes their effectiveness. As a consequence, such companies can demonstrate Toyota-style management practices, but not Toyota performance results.

“Going to the Place”

The prevalence of management accounting control systems in American business probably contributes more than any single thing to the confusion of levels that causes managers to believe they can run operations mechanically by chasing financial targets, not by nurturing and improving the underlying system of human relationships from which such results emerge. It is significant, then, to note that Toyota doesn’t use management accounting targets (or “levers”) to control or motivate operations. I argue that this is an important reason why Toyota’s financial performance is unsurpassed in its industry.

People at Toyota place great importance on genchi genbutsu, or “going to the place” where the problem occurs to see it firsthand. They don’t rely on secondhand reports or charts of data to get true understanding of root cause. Instead, they go to the place (gemba) where they can watch, observe, and “ask why five times.” This attitude shows a deep appreciation that results (and problems) ultimately emanate from and are explained by complex processes and concrete relationships.

Managers in a Toyota plant, unlike their counterparts in American organizations, do not refer to accounting documents such as standard cost variance budgets to discuss the state of current operations. Indeed, in 1992, during my first of scores of trips to Toyota’s Georgetown, Kentucky plant, I was told that the Toyota accounting system treats daily plant operations essentially as a “black box” that it does not enter. Accountants of course record everything that goes into the plant and all the products that come out. But within the plant they don’t track the flow between incoming resources and outgoing finished product. Everything one needs to know about the transformation that takes place inside the plant is inherent in the flow of the work itself. Indeed, a key feature of the Toyota Production System is that the work itself provides the information needed to control its state.

Professor Kazuhiro Mishina introduced me to this aspect of the Toyota Production System (TPS) in 1992 when he showed me a high-level “material and information flow map” for the Georgetown plant. He explained that the map is designed to show material flowing from left (raw material) to right (finished autos) and information flowing from right to left. Basically there was only one line going from right to left a line to represent the customers’ orders entering the plant each day and going directly to the body-welding operation. Today this type of map is familiar to anyone who has studied “value-stream mapping.” But Kazuhiro pointed out to me that no lines representing information enter the plant from either the accounting system or the production control system. The work itself provides all the information that in non-Toyota plants customarily comes from computerized material requirements planning (MRP) and standard cost variance reports.

While the value-stream mapping literature does an excellent job of showing how the TPS dispenses with the need for production controls in daily operations, it is silent on how the TPS also dispenses with the need for accounting controls in daily operations. This is an unfortunate lapse, in my opinion, because it has left the door open to the idea that lean manufacturing programs must include lean accounting controls.

In Toyota plants, all information needed to control operations is in the work, simply because all work flows continuously at a balanced rate through virtually every operation, from the beginning to the end of the manufacturing process. The work has been carefully designed so that one can “see” its current state quite literally. Is it on time to meet the day’s orders? If not, how much additional time will be needed? Have defects or other errors occurred along the way? Are components to final assembly being replenished on a timely basis? Has any undue inventory accumulated anywhere? Are problems being identified and addressed according to standard procedures? Such questions, and hundreds more, can be answered every moment in every step of the process throughout the plant. Any “exceptions” that managers might need to address to keep financial results on track are visible real time as the work is being done, not days, weeks, or months later in a report from the accounting department.

The Wrong Question

If traditional management accounting practices are the key problem preventing American businesses from emulating Toyota’s performance, what should companies do? Many proponents of lean accounting suggest that companies should reform management accounting itself by doing things such as activity-based value-stream costing, direct costing, cash-flow accounting, value-add capacity analysis, and more. These proposals should cause a sense of deja vu among those who are old enough to recall the proposals 20 years ago to gain better control over burgeoning overhead costs with activity-based cost (ABC) information. ABC seemed like a good idea at the time, but in retrospect it was a good answer to the wrong question. We see better today, when we understand more fully what Toyota does, that reducing manufacturing overhead costs requires a new way to organize work, not better cost information. The question that proponents of ABC should have been asking was how to organize work to eliminate the causes of overhead activity, not how to trace costs of overhead activities to products in more discriminating ways.

The question most companies ask now is how to control the financial results of business operations, as if financial results are a linear sum of individual contributions from separate parts of the business. Accounting control information seems the logical way to show how those contributions, and changes in those contributions, add up to the organization’s overall financial results. But if we assume that financial results emerge from complex interactions and non-linear feedback loops in the interrelated parts of a natural living system, then attempting to control those results with linear accounting information is not only erroneous, but possibly destructive to the system’s operations in the long run. In this case, the new question is: How does one control, if at all, the financial results that emerge from operations that abide by the principles that govern a natural living system?

Managing by Means

An early answer to this question was provided in the 1930s and 1940s by Walter Shewhart and W. Edwards Deming, both trained in mathematical physics and experienced in using state-of-the-art statistical tools in business and government. One of their lasting contributions was to devise a scientific way to estimate the “control limits” within which a business system’s results would normally fall until one of two steps were taken that altered the limits. One step was to ignore all but abnormal variation in results and work to improve the system itself, thereby narrowing the control limits and improving long-term performance. The other step, a less desirable but more common way of managing, was to try to improve long-term performance by intervening in the system every time results varied from a desired target. The inevitable consequence of the second step, Shewhart and Deming proved, is to widen the system’s control limits and impair its long-term performance.

In essence, Shewhart and Deming likened a well-designed business system to a living system in nature. Its results vary over time, but the range of variation has limits. However, in a human system such as the operations of a business, managers can improve performance by taking steps to reduce that range of variation. The key to performance improvement, then, is to nurture the system that produces results, not to drive the system to achieve targets that fall outside its normal performance limits. In his early work, Deming articulated 14 principles (or points) that defined what he meant by nurturing the system. Those principles included things such as create constancy of purpose, constantly improve systems by reducing variation, cease dependence on inspection, do not base purchases on price alone, do not reward individual performance, institute training, eliminate management by objectives, and more.

This is precisely the approach that Toyota takes to manage its operations. Toyota lives by a set of deep underlying systems principles that I tried to sum up in my own words with the concept “managing by means.” As I outlined it in my book Profit Beyond Measure, the essence of that concept is that satisfactory business results follow from nurturing the company’s system (the “means”), not from manipulating its processes to achieve pre-determined financial results (a mechanistic strategy popularly known as “managing by results”). In other words, nurture the process and satisfactory results will follow.

This sentiment is central to Toyota’s deep-seated belief that one cannot improve financial performance by intervening in the system and forcing operations people to achieve results targets. Instead, they emphasize the importance of defining the properties their operating system should manifest and of having everyone in the organization work assiduously to move the system toward those properties. Toyota people frequently refer to those properties as “True North.” True North in Toyota’s system includes safety, moving work always in a continuous flow, one order at a time on time, with no defects, with all steps adding value, and with the lowest consumption of resources possible. The assumption is that the more that every process in the system manifests the properties of True North, the better will be the company’s long-term performance.

These three approaches to managing operations the Shewhart-Deming approach, managing by means (MBM), and Toyota’s approach all suggest how different it is to nurture the system that produces a company’s financial results than it is to arbitrarily intervene in and wrench the system in an attempt to force it to produce a desired result beyond its current capabilities. The latter strategy is, of course, followed by virtually all large companies in the United States today, especially the large publicly traded companies whose top managers are pressured to deliver results demanded by financial markets and other outside interests. Many of those companies are pursuing lean initiatives in the expectation of achieving performance like Toyota’s. The fact that they will not or cannot forego pressure to drive operations with management accounting “levers of control” makes the likelihood of their realizing such expectations nearly zero.

Accounting Controls or System Principles?

If managers look primarily at financial information to judge the performance of a business, then they are certain to be working in the dark. Financial quantities cannot reveal if a system is improving or not. To assume otherwise is to fall prey to confusion of levels. If a company requires cost information to show the “savings” from “going lean,” it will never get there. When managers look at cost information in order to eliminate unfavorable unit cost variances, they discourage people from continuously removing sources of delay and error. Instead, employees will create workarounds such as rework loops, forks, and inventory to keep work moving (even if it is not continuously flowing). In other words, the demand to justify operational decisions with cost information causes people to forego root-cause problem solving and, instead, to build “cost-effective” workarounds that violate systems principles. Eventually the systems principles are forgotten, and managers spend increasing amounts of time working to improve the efficiency of the workarounds.

No company that talks about improving performance can know what it is doing if its primary window on results is financial information and not natural system principles. No amount of financial manipulation will ever improve long-term results. The dilemma facing all companies that intend to become lean is that they can follow a truly systemic path to lean or they can continue to use management accounting “levers of control.” They can’t do both.

Life-Enhancing, Not Life-Denying, Businesses

Management accounting controls impose a curse on lean management programs; they cause managers to believe that addressing the imperative of growth is compatible with the possibility of systemic well-being. Abstract quantities by themselves can of course grow without limit. However, the universe has never allowed any real, concrete system to grow endlessly. Such attempts inevitably fail.

Nevertheless, all businesses that chase accounting targets for revenue, cost, profit, or return on investment somehow believe they are an exception to this universal pattern. They are deaf to the primordial message being delivered every time their real operations fail to deliver the long-term performance that their abstract equations and their occasionally favorable short-term returns seem to promise. They fail to see that the pursuit of endless growth is incompatible with the long-term survival of the system.

This message applies to the entire human economy as well as to individual businesses. Even if every company in the world were to become as lean as Toyota, the economy in which they operate is not sustainable. Forces drive it to focus on quantitative goals, hence, on extensive growth. Government tax, spending, and monetary policies promote more and more production and consumption, to grow GDP endlessly. Financial markets drive companies, including Toyota, to play in the same game. But an economy that lives on steroids is no more sustainable than any growth-driven organization operating within it. Until they can escape the curse of endless growth, both the economy and all its members are doomed to collapse and die.

Our Earth and its life-sustaining biosystem, as well as all systems in the entire universe from which Earth emerged, reflect the existence of continuously open fields of possibility. The most fundamental and pervasive process in the universe, and especially on our Earth, is the constant emergence of newness out of what went before. Nothing ever constrained the flourishing of possibility in that process until humans introduced the idea of quantitative choice to the system. Quantity automatically limits possibility and emergence to outcomes that can be measured. Quantum physicists have suggested that undisturbed systems in the universe naturally stay in multiple states simultaneously, unless someone intervenes with a measurement device. Then all states collapse, except the one being measured. Perhaps what you measure is what you get. More likely, what you measure is all you get. What you don’t (or can’t) measure is lost.

By using quantitative targets to manage results without regard for the effect our actions have on the underlying system from which the results emerge, we close fields of possibility and limit ourselves to what our measures will produce. In effect, that describes existence inside a machine, not life. Life implies flourishing in fields of continuously renewing possibility. Mechanistic existence suggests a repetitive, homogeneous system running down to death, without hope of renewal or new possibility. Our worship of quantity virtually guarantees that the economy we inhabit today and the businesses within it are life-denying, not life-enhancing.

Businesses, like any living systems, should grow to be what they are supposed to be, not more. Ants grow to be ants, elephants grow to be elephants and humans grow to be humans. Each in its context flourishes in life, in being not in growing, accumulating, or having. Sustainability, as my colleague John Ehrenfeld has said, is the possibility that humans and other life flourish on the Earth forever. Nurturing that possibility is the challenge that companies, citizens, and the communities we inhabit must accept in the name of sustainability. Lean management in the sense of running companies according to living system principles is an important first step in meeting this challenge. Then comes the hard part: conducting our economic activities within the limits of Earth’s regenerative processes. To fail at that will make all the lean initiatives irrelevant. But we can succeed, as long as we choose to live according to the principles of living systems and not according to the imperative of quantitative growth.

© 2006 H. Thomas Johnson. All rights reserved. This article is adapted with the author’s permission from his 2006 working paper that received the 2007 Shingo Prize for Excellence in Manufacturing Research. A later version of that paper appeared as chapter 1 of Lean Accounting: Best Practices for Sustainable Integration, edited by Joe Stenzel (Wiley, 2007).

H. Thomas Johnson is Professor of Business Administration at Portland State University in Portland, Oregon, U. S. A. Direct comments to tomj@sba.pdx.edu.

For Further Reading

Bateson, Gregory. Steps to an Ecology of Mind (Ballantine Books, 1972).

Capra, Fritjof. The Hidden Connections: A Science for Sustainable Living (Doubleday, 2002).

Ehrenfeld, John. Sustainability by Design: A Subversive Strategy forTransforming our Consumer Culture (Yale University Press, 2008)

Johnson, Elaine B. The Dismantling of Public Education and How to Stop It. (Rowman & Littlefield, 2004), Ch. 3.

Johnson, H. Thomas., “Using Performance Measurement to Improve Results: A LifeSystem Perspective,” International Journal of Strategic Cost Management, Vol.1, No. 1 (Summer 1998), 1-6.

Johnson, H. Thomas, and Anders Broms. Profit Beyond Measure: Extraordinary Results through Attention toWork and People (The Free Press, 2000).

Joiner, Brian L., and Marie A. Gaudard. “Variation, Management, and W. Edwards Deming,” Quality Progress (December 1990), 29–37.

Rother, Mike. Toyota Kata (McGraw-Hill, forthcoming in Sept. 2009).

The post A Systemic Path to Lean Management appeared first on The Systems Thinker.

Lean, on the other hand, is strictly a practice, not a philosophy. It is based on hands-on know how about how to teach people to improve their own processes in terms of both customer satisfaction and cost management by eliminating waste. Taiichi Ohno, a key figure in developing the lean approach, would often say things like:, “Don’t look with your eyes, look with your feet. Don’t think with your head, think with your hands.” As a practice-oriented movement, lean is by and large wary of abstract thinking and generalizations.

Nonetheless, although systems thinking and lean operate at these two different levels, I have learned from personal experience that they are complementary and are based on similar insights. An understanding of system thinking dramatically improves the learning curve of lean techniques. Having worked with systems thinking concepts and system dynamics simulations for years before studying lean practices in detail, I immediately saw the purpose (if not the application) of lean, which wasn’t the case for my colleagues without a systems thinking background.

Conversely, at the time, I was part of a group tasked with figuring out ways to practically apply systems thinking concepts in day-to-day operations. Although we experimented, we generally floundered. What we did find was that the lean techniques offered a hands-on way to apply systems thinking concepts. Because lean practices have been developed over several decades, an entire field of experience exists in terms of how to make them work.

The bottom line: Without an understanding of systems thinking, it’s hard to get lean right, and without the practice of lean techniques, it’s difficult to make systems thinking a day-to-day reality to concretely improve system performance.

The Bullwhip Effect

To make my case, I shall focus on comparing a singular dimension that has been at the origin of both movements: supply chain systems dynamics and just-in-time. One of the seminal applications of early systems thinking was Jay Forrester’s modeling of the “bullwhip” effect (also known as the Forrester effect) in a supply chain. Anyone who has played the famous “Beer Game” knows that minor variations in customer demand can amplify throughout the supply chain to create huge instabilities in demand for rank three or four suppliers.

Suppliers work based on forecasts because they aren’t able to quickly change their product mix or capacity—and they often get the forecast wrong. From a systems thinking perspective, the main driver of the bullwhip effect is the delay in the information loop. Since suppliers can’t see what is going on at the final customer purchase point, they build forecasts based on the information they receive from their own immediate customers—information that is necessarily delayed and distorted.

The bullwhip effect is by now well known, and most supply chain systems try to moderate it, generally by increasingly sophisticated computer systems. Unfortunately, half a century after Jay Forrester first described the problem, the bullwhip effect is still alive and well—as anyone affected by the latest financial crisis or working for a thirdtier supplier will testify.

In the 1930s, Kiichiro Toyoda, the founder of Toyota Motor Company, wrote a lengthy pamphlet in which he coined the term “just-in-time.” He explained how each station of the assembly process should only manufacture what is required, when it is required, and in the exact quantity required. In other words, he described a remedy to the bullwhip effect that was plaguingToyota’s early operations. Other automotive manufacturers compensated for the effect by creating massive inventories. Toyota, however, was so strapped for cash in its early years that it constantly sought practical ways to deliver the cars customers wanted with the least inventory possible—they simply could not afford to carry large stocks.

The company abandoned the initial attempt at just-in-time and many other innovations duringWWII, whenToyota operations were more or less taken over by the government. During the 1950s and 1960s, Toyota engineers resumed their efforts to make the just-in-time dream a reality. To do so, they latched onto the idea of the supermarket.

The Supermarket

The supermarket concept was (and, strangely, still is) a revolutionary idea. Every operation in the supply chain would “own” its finished stock (as opposed to sending it to a warehouse, where it’s owned by “the system”) and would lay it out as on a supermarket shelf (in a fixed location). In the next process, the “customer” would then come and take what it needed, when it needed it, in the quantity it needed. The production operation would then replace what had been withdrawn and no more.

In attempting this deceptively simple discipline, Toyota hit upon a number of intractable problems that most industrial companies still haven’t resolved to this day. First, there was variation at the customer end, both in the total volume of orders and in the mix of specific products and their component parts (models, options, etc.). In order to avoid the bullwhip effect, Toyota had to learn to buffer and smooth this variation through a mixture of planning and the targeted use of finished product stock—a practice that became known as leveling.

Second, being able to resupply what had been withdrawn as well as provide for a wide variety of components on the same equipment required far greater flexibility than industrial processes can typically provide. Industrial processes are designed to optimize the parts, not the system, and machines are generally easy to run but hard to change. Toyota had to learn to change tools or assembly sequences frequently and painlessly to make its supermarket system work. More than 60 years later, the company is still working on it.

“And the Kanban”

In the process of developing this capability, Toyota has found that the information the production process receives is at least as important as its delivery capability. This is pure systems thinking. The company started by focusing on the impact of feedback loops on “lead time.” Lead time is the interval from the moment the customer gives an order to the point when the company collects the cash; it encompasses production and stocking time. Lead time is a good measure of the delays in the chain, which create the instability. Toyota developed a unique method called the “Material and Information Flow Analysis” to visualize where information flows impacted the process and how. (This technique became known outside ofToyota as “Value Stream Mapping,” from John Shook and Mike Rother’s bestselling book, Learning to See).

On the shop floor, information is represented by cardboard cards (the famous kanban), which symbolize production or withdrawal instructions. No crate of parts can be moved without being ordered to by a kanban card; no parts can be made without a kanban production instruction. To Toyota engineers, the link between leveling (smoothing demand variation) and kanban (production instructions) is intuitive, but to external observers, it can be hard to catch. My father recalls visiting a Toyota plant in the 1980s and studying their efforts to build several different car models on the same line to improve flexibility. Instead of scheduling runs of the same model in batches, they would mix models so no two cars on the line would be the same. Puzzled, my father, then head of manufacturing engineering for Renault, looked hard at the line and finally figured out:, “You’re scheduling a vehicle with a lot of work next to a vehicle with less work to stabilize the overall operator cycle,” he told them. “Yes, they answered—and the kanban.”

My father spent some time clarifying his understanding that to maintain productivity and limit variation on the line, they would first program a high-content vehicle, with more work than average, and then a low-content vehicle, with less work that average. The result was that operators would work at a steady rhythm overall. “That’s right,” they would insist. “And the kanban.”

When he finally asked managers what the kanban had to do with it, they explained that the sequence of cars was calculated so that the kanban instructions to suppliers of individual parts would be leveled. In doing so, they avoided demand variation on the parts supply. Managers tried to schedule the final assembly line so that each parts supplier would get the most stable, regular order message possible— something that remains a daily challenge, considering the complexity of building an automobile. Toyota has been remarkable both in understanding the dangers of demand variation on the whole supply chain and in developing the technical ability to be able to schedule at that level of detail. Very few industrial companies are lean yet, because most still have trouble understanding the fundamental link between information and production—let alone know how to deal with it.

Information Flows

The damage caused by the lack of systems thinking in attempts to apply lean shows starkly in two typical cases. Many companies have latched onto Value Stream Mapping as a great tool to analyze their processes (which it is). But when you look at their maps more closely, you often find that the production process is sketched in painful detail, whereas the information flow is barely suggested. Most people use the maps to clarify and simplify their material processes (mostly in terms of flow), not to optimize how the production process works as a whole.

What Toyota engineers have learned from their long experimentation with these ideas is that the lead time of planning, production, distribution, and sales is a good indicator of the overall performance of the process. The Material and Information Flow Diagram is one element of a full lead-time analysis, in which the information flow is largely as important as the material flow. Indeed, experienced lean practitioners tell you that their main headache, once the obvious flow problems have been solved, is leveling, leveling, leveling: managing the information flows to reduce the lead time in the feedback loops and minimize variation in all aspects of production.

Similarly, countless companies have tried kanban scheduling only to finally give up and go back to their ERP computer systems. Implementing kanban without a clear idea of the goal in terms of information management is doomed to fail. Kanban is about taking all ambiguity out of the information flow to make sure that the final assembly schedule is reproduced “mechanically” throughout the supply chain, avoiding the need for the individual judgments that contribute to the bullwhip effect. Indeed, when you play the Beer Game, you discover that communicating customer demand without trying to create forecasts reduces unwanted variation in your ability to produce and deliver.

Building on this insight, in the kanban system, if the final assembly has been scheduled so as to be properly leveled, the entire supply chain will behave smoothly by blindly following the cards; the cards mechanically reproduce the final customer signal. Interestingly, kanban is also a great tool for revealing the real leverage points for improvement in delivery systems—which rarely are those one expected at first. Most “bottlenecks” turn out to stem from mistakes in information and planning policies that wreak havoc on the shop floor.

Experimenting with these various techniques has ledToyota to address the other main causes of the bullwhip effect. For instance, the company offers far fewer rebates than its competitors and refuses promotions from suppliers in the aftermarket parts businesses. The company’s logisticians understand the impact of pricing fluctuations on the behavior of actors in the supply chain and have convinced their purchasing and procurement colleagues to try to minimize them. In the same manner, Toyota frequently provides its suppliers with running forecasts, which help vendors throughout the supply chain to anticipate demand. The forecasts also limit the incentives for suppliers to game the system; since there is little ambiguity in the information chain, gaming strategies are less attractive and have a much higher risk of angering the customer.

Improving the System as a Whole

Plants that supply Toyota in the U. S. have 14 percent higher output per worker, 25 percent lower inventories, and 50 percent fewer defects than operations that supply other automakers (A. Iyer, S. Seshadri, and R. Vasher, Toyota Supply Chain Management, McGraw-Hill, 2009). Efforts to get rid of the bullwhip effect (among other industrial problems) clearly pay off. So why don’t most industrial companies get such benefits from their lean programs? My personal belief is that without a strong foundation in systems thinking, people find it hard to understand the purpose of the lean tools, which is to improve the behavior of the system as a whole.

Furthermore, since Toyota developed these practices with a strong practical bias (it is said there is no expertise in lean, only experience), the underlying thinking behind the tools is hard to piece together. UsingValue Stream Mapping without looking for the effects of feedback loops misses the point. Trying out kanban without understanding how ambiguous information can cause oscillation in a system will produce disappointing results.

On the other hand, trying to affect system behaviors without the hands-on practice of lean can be equally discouraging. The experience of lean reveals that key leverage points are often hidden and counterintuitive—a fact well recognized by systems thinkers. Most bottlenecks turn out not to be so in practice. The lean field has a lot of experience to offer both in terms of know how to change systems and in terms of leadership practice to convince the people in charge of processes to make modifications. Without this practical perspective, a systems thinking approach to a problem can seem daunting. Realizing how everything is interrelated doesn’t help much when one wants to change the global behavior of a supply chain.

To Understand and to Change

The rapid progress of science since the Industrial Revolution has been driven by the close interplay of theoretical and practical advances. I believe that the mutual interdependence of systems thinking and lean offers a true opportunity here. By recognizing the synergies between these two fields, we can drastically increase our capacity to improve systems.

The bad news is that integrating these two approaches means more work. If I’m correct, system thinkers must acquire the discipline of lean practice. This has been my own particular path: fun, interesting, but never easy. And lean practitioners must make the effort to understand systems thinking, which is a significant intellectual investment.

Still, I believe this challenge is worthwhile. In today’s hyper-competitive markets, companies needs the performance improvement promised by lean. Furthermore, the strong systems thinking undercurrent of lean makes it focus on reducing waste of all kinds, including externalities such as pollution and garbage. Since its humble beginnings to its recent 2020 global vision, Toyota has continuously aimed to offer value to society overall. Considering the problems we collectively face in this new century, a proven method of industrial improvement also intent on reducing waste in all its forms should not be dismissed lightly.

One of the enduring puzzles of the lean movement is why it hasn’t spread more quickly through industry: Many try, few succeed. Systems thinking, I believe, could contribute significantly to solving this conundrum by providing an overall framework to lean practice. To paraphrase Karl Marx, the point is not merely to understand the world, but to change it. Systems thinking offers the means to understand; lean, the practice to change. By pursuing both jointly, we can learn faster how to change the world in the right way to face our global challenges.

Michael Ballé is associate researcher at Telecom ParisTech and managing partner of ESG Consultants. For the past 15 years, he has focused on how companies use lean techniques to develop a lean culture as part of his research on knowledge-based performance and organizational learning. He has written several books and articles about the links between knowledge and management (Managing with Systems Thinking, The Effective Organization, Les Modèles Mentaux), and more recently, co-authored two business novels, The Gold Mine, which has received the Shingo Prize for Excellence in Manufacturing Research, and The Lean Manager. Michael is co-founder of the Projet Lean Entreprise and the Institut Lean France.

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