International Journal of Scientific & Engineering Research, Volume 5, Issue 3, March-2014 1369
ISSN 2229-5518
IJSER Research paper
The Direction Towards Lean Management
Muhammad AlEnzy
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“If you can not measure; then you can not manage” a quote that we hear many times from managers and management experts. But, why do we measure? And what is the ultimate goal of measurement? Is it only to have good management insights? Or there is something more ultimate and more important? Most of the companies declare that their ultimate goal is “making mon- ey”, some of them add “making more money”, which means ultimately “profitability”. Other firms they have this goal as second or third after a “purpose” and a “vision”. But yet, they still have the “profitability” goal in the list.
In this paper, the measurement style in terms of measures and key performance indicators (KPIs) “which I doubt to have some of them as key!” will be discussed in the sense of the traditional
/ classical system and the modern lean system of measuring organizational performance. Some classification will be there for the traditional measurement system in terms of financial and nonfinancial measures, and how those measures differ from the ones in the lean systems.
Table 1.0: A set of indicators for business traditional measures
Lean can be defined as value adding and waste elimination. From this angle of view, decision-making in any business sector should deliver this value and eliminate waste and loss of value. Therefore, it is all about the value chain that is encompassed through out the measurement process and how it leads to a sol- id tangible value added from such a process.
However, some successful practices in lean management are adopting such purpose for the measurement process and they therefore incubate some lean measures, for example, the follow- ing list:
I like to call this sort of performance measurement system as | 1. | Defects rate |
the “macro” or “on the top” evaluation for the business per- | 2. | Rework index |
formance. It deals with more long term ends that can be | 3. | Average lead time for a supplied item |
measured in some times on annual basis, which leads to lots of | 4. | Inventory level |
hidden details of the status of the business and its sensitivity. | 5. | Scrap index |
However, some of those commonly used measures are shown | 6. | Work in Progress (WIP) |
in table 1.0 that gives some glimpses on the traditional style of | 7. | Process capability |
those measures classifying them into financial and nonfinan- | 8. | Operating expenses |
cial. Each of which of those measures have some sort of a big- | 9. | Inventory total cost |
ger picture for the decision makers. But, the question that aris- | 10. | Time to market |
es is when I need such information? And are they sufficient to | 11. | Machine utilization |
deliver high quality decision? Do those measures reflect the | 12. | Plant efficiency |
business in accurate ways? And how effective are they in “de- | 13. | On time delivery |
veloping” the business instead of just monitoring the busi- | 14. | % of employees with black belt training |
ness? |
The differences between the two styles of measurement can be summarized in four points as follows:
1. The causal modeling. The causal modeling is much more obvious with firms conducting lean measures,
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International Journal of Scientific & Engineering Research, Volume 5, Issue 3, March-2014 1370
ISSN 2229-5518
where each measure is strongly known where does input what value will be gained (cause & effect). In addition, the cascading method is very effective in based on the causal modeling where each measure is properly linked and filtered down from the head of the firm’s pyramid until the base of the company. And this helps this firm in having such “echo” effect which helps a lot in problem solving and root causes analysis as well as the assurance of value transfer. Whereas, the traditional style of measurement could lack the sense of linkage between the business units and saturates more on the corporate level of the com- pany. And by this, such a company can struggle in determining root causes and also can lack the power of alignment.
2. The lean measures as said to start from the “micro” mechanics of the business so it can build up the “mac- ro” picture for the stakeholders in a consistent basis. In addition, this gives the firm a good chance to im- prove throughout the way at any time because of the readiness of the system where you can point at any step and start digging down and finding the roots. In contrast, the traditional system does rely more the larger landscape for business view that can be com- pared with other businesses’ scores, for example, market share. And the competition will become more on such measures that can hide certainly other key success factors for competitors.
3. The lean measures are clearly seen that they have more to deal with first and middle class managers be- fore they get consolidated toward the top manage- ment dashboard. And that is extremely building the lean culture with accountability sense for each step throughout the company. However, in traditional measures systems the idea is different. The measures are more designed for the top management period! And that makes the culture for improvement and de- velopment less possible.
4. The lean measures do have more financial effective- ness over that traditional, according to Ittner and Larcker (2003) the lean measures could have resulted in higher Return On Equity (ROE) and Return On As- sets (ROA). That is not surprising, because, for exam- ple, if you know that you have this rate of defects on such a product and you started investigating and fix- ing up the problems, definitely, the firm is going to have more financial returns. However, that can be rooted to the leverage of the lean in building up the causal system of causes and effects, where each measure as said is having inputs and are being inputs to other measures.
The lean measures have the culture of “key” to really lead to a consistent and sustained high quality decision making. Tradi- tional measures can have more such “Just in Case” measures
which can result in noisy performance reflections.
It is very critical to measure what you do, and that is for the pur- pose of better improvements and high quality decision making. The idea is of measuring when things get completed can be very fatal to the business which is commonly used in many companies. More over, this style of long term frequency checking of measures can result in loss of business sensitivity to changes which in some cases can not be recovered.
The lean measures and causal modeling provide the organization
the power of alignment which has been discussed by Norton and Kaplan (1996). It makes the whole firm aligned around what pro- vide the company better chances for development over competi- tors.
However, it might be beneficial to the firms if nonfinancial measures in both lean and traditional systems can have some sort of “shadow” measures that can help in determining the loss of money in such a measure in case of target below achieve- ment. And that can be sole driving motivator to people while working with measures when they are translated into money and losses.
[1] Ittner D. & Larcker D. (2003). Coming Up Short in Nonfinancial Per- formance Meaures. Harvard Business Review.
[2] Kaplan R. & Norton D. (1996). The Balanced Scorecard. Harvard
Business School Press.
[3] Taguchi Loss Function. Retrieved from http://www.businessdictionary.com
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