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Is Lean Toast?

March 25, 2020 by Bob Emiliani

Toast

Political economist David Ricardo (1772-1823) coined the term “comparative advantage.” From that came the economic law of comparative advantage, and the intellectual foundation for international free trade. More familiar terms these days are “global sourcing” or “global supply chains,” which means procuring goods from the source that can produce most efficiently regardless of location. That usually means to procure “commodity” and even “specialty” materials in countries with labor low wages. Here is an explanation of Ricardo’s comparative advantage:

Ricardo suggested that industry specialization combined with free international trade always produces positive results. Ricardo  suggested that there is mutual national benefit from trade even if one country is more competitive in every area than its trading counterpart and that a nation should concentrate resources only in industries where it has a comparative advantage, that is in those industries in which it has the greatest competitive edge. Ricardo suggested that national industries which were, in fact, profitable and internationally competitive should be jettisoned in favour of the most competitive industries, the assumption being that subsequent economic growth would more than offset any economic dislocation which would result from closing profitable and competitive national industries.

Source: Wikipedia

As a result of this then-new idea, it was increasingly seen as acceptable to lengthen supply lines and source goods from whomever could produce them most efficiently (cheaply). As we all know, global sourcing expanded greatly since the mid-1990s. The implication of the above description of Ricardo’s “Law” in relation to the coronavirus pandemic is obvious. Production of a wide range of basic necessities, such as personal protective equipment (PPE), were moved to far-away places. Sudden demand for PPE and other medical equipment and supplies has led to massive supply chain disruptions in production and distribution, causing shortages that will affect human life. The result, as we have all seen, is criticism of Lean and Just-in-Time, criticism of business leaders for their over-zealous pursuit of low costs and unwise use of monies earned (executive compensation, stock buy-backs, etc.), criticism of consumers for demanding ever-lower prices, criticism of the long lead-times needed increase production, criticism of low wages at home, criticism of inadequate social safety nets, and so on.

Global supply chains, as has long been known, are “fragile.” Recall that in the mid-1980s, one of the generic names that the MIT research team considered giving to Toyota’s production system was “fragile” — fragile production. But, they recognized that people don’t like the word “fragile” and chose “lean” instead — lean production. COVID-19 exposes fragility in numerous forms and in numerous unsettling ways, whether or not Just-in-Time is used (Note: 3-4 months of inventory is not JIT). People don’t like “fragile.” And the words “lean” and Just-in-Time aren’t doing so well lately either.

But what is most important here, after caring for the ill and saving lives, is a long-lasting lesson that governments, business leaders, and society may learn from COVID-19. The emerging commonplace view is that the pursuit of low costs through global sourcing has led to intolerable vulnerabilities in healthcare and several other important industries. The natural human reaction produced by COVID-19 is to stockpile, Just-in-Case, this drags on. This memorable event may propel a return to higher-cost batch-and-queue production methods for current manufacturing — as well as the future domestic manufacturing that will return from overseas. After all, batch-and-queue production is much easier for the producer, and everybody makes money along the way. Though, consumers end up paying higher prices if even more inventory sits in warehouses. They may be willing to do this in exchange for higher domestic productive capacity (or unused reserve capacity that can be quickly activated) and short, domestic supply lines. People might skimp and save in other spending categories to feel more secure and better prepared.

In is book, Toyota Production System, Taiichi Ohno said (pp. 14-15): “We naturally feel more secure with a considerable amount of inventory.” Indeed, we do, now, for sure. And “…buying and hoarding [are] natural behaviors.” Indeed, they are. COVID19 is a big shock to ALL systems and nearly all corners of society — government, business, financial, family, and individuals. This event will likely not be easily forgotten. It could lead to a nostalgia for days past, perhaps the Cold War era, where materials were produced locally and always readily available, and where preparedness was high on everyone’s mind at all times. People felt prepared then.

Lean people will surely be among those who stockpile Just-in-Case of a future pandemic or other emergency. Perhaps more than others because of what we know or don’t know. Whether we like it or not, business leaders’ interest in Lean may fade in some measure because of COVID-19. If it does, it may re-emerge after people forget COVID-19. When might that be?

Filed Under: BobEmiliani.com, Conventional v. Lean Thinking Tagged With: coronavirus, COVID-19, Just-in-Case, Just-in-Time, Lean, Lean management, pandemic

Reader Interactions

Comments

  1. Alex Abraham says

    March 25, 2020 at 10:17 pm

    Just thinking aloud here… “Whether we like it or not, business leaders’ interest in Lean may fade in some measure because of COVID-19.” Was this the reason traditional management always won over lean management? Is it time for lean thinkers who advocated an extremely fragile system to apologize? Stolper-Samuelson economic Theorem (SST) of 1941 follows from Ricardo model and shows the obvious, that free trade with low-wage nations would hurt workers in a high-wage country. In other words, cheap prices are actually expensive.

    Taiichi Ohno: “We naturally feel more secure with a considerable amount of inventory.” We also naturally think that cheaper prices are better for everyone. It turns out that the former is right under some circumstances like covid, and the latter is wrong! It is interesting to note that the truth in SST or the argument against a mindset of low prices was known as far back as 1817 (Ricardo) and reinforced in 1941(SST), but Toyota Systems, Lean and Six Sigma ignored them. Jack Welch followed aggressive strategies that hurt the American workers.

    Lean or fragile system was created by going against the natural hoarding mindset and going with the low-price mindset, both of which are wrong.

  2. Gene Flenke says

    March 25, 2020 at 10:33 pm

    Bob, Thank you for sharing your thoughts. Your article is very thought provoking and I agree that there will be some who will say Lean is the problem and does not work. I would have to respectfully disagree with those who believe this. One element of Lean that you did not mention is Policy Deployment which is the strategic part of Lean. Based on what has been exposed during the Coronavirus Pandemic, Federal and Corporate leaders either ignored or did not properly consider the impact of systemic breakdown during their strategy sessions.

    Lean systems no matter how strong cannot make up for poor strategic direction and decisions. I have experienced firsthand where sourcing decisions where based on piece price over total cost. Lastly, when previous Supply Chain breakdowns due to things like the Coronavirus outbreak were not seen as opportunities to learn and improve, then we should not be surprised that we are not able
    supply what is needed.

  3. Bob Emiliani says

    March 26, 2020 at 6:49 am

    Hi Gene – I agree. Well said!

  4. Bob Emiliani says

    March 26, 2020 at 6:55 am

    Hi Alex – Thanks for your comment. In TPS, the mindset is lowest total cost, not lowest-price. In the Great Recession (ca. 2009), Toyota did put pressure on suppliers to quickly lower prices, but that is not the normal approach to interacting with suppliers. The appearance of fragility belies the ability of the system to flexibly adapt to rapidly changing circumstances. Where Lean is closely modeled after Toyota’s management system, the system is robust, not fragile. I don’t think the Lean advocates need to apologize. Leaders are responsible for how Lean is understood and practiced. In most cases Lean is just decoration on top of an otherwise classically managed business. As leaders, that is their prerogative.

    What is truly fragile is the financial system because runs on credit. The “equity cushion,” cash/debt ratio for lenders is about 0.1. That’s how business comes to a screeching halt — not JIT.

  5. Alex says

    March 26, 2020 at 9:37 am

    Thanks, I agree it is not just a problem of lean. There is a whole bunch of other systems around business improvements that fall in the same category. All are in the same boat although they pretend they are not. It is simply the difference of top down versus bottom up approach. The success of Toyota Production Systems is the involved and engaged people. My LinkedIn post today highlights this aspect, taking the success of community covid response in Japan.

    Those who introduced Lean in the West have wrongly focussed on reducing man power and reducing inventory. One of the lean practices is to arbitrarily take out a few people from an assembly line and then ask the ‘lean expert’ to readjust the production to same output as before. Another mistake is to reduce inventory to zero, no matter what. This has given rise to other systems like TO. and DDMRP to come up as ‘correct’ models. Goldratt pointed out cracks in Ohno’s methods respectfully, but those who use his name today are antagonistic.

    Then there are the Six Sigma advocates starting with the success of Jack Welch, but for the wrong reasons.

  6. Bob Emiliani says

    March 26, 2020 at 11:15 am

    In generally, business leaders have strongly favored expediency over competence, in self or others. So the new systems whose intention is to do good are always compromised, diluted, or adulterated by business logic. I don’t see that changing because most business leaders do not see it as mistaken.

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