The document provides background information on lean manufacturing and the Toyota Production System. It summarizes that traditional manufacturing systems have high inventory levels and long lead times, while lean systems based on Toyota aim to reduce waste and optimize flow. The core of lean is the Toyota Production System (TPS) which treats all processes as experiments to continuously improve. TPS creates a "community of scientists" using the scientific method to solve problems at all levels.

1. Background Slides on Lean Manufacturing and The Toyota Product Development System John Cleveland [email_address] www.in4c.net

2. Traditional Manufacturing Traditional “mass production” manufacturing systems are characterized by: High volume production of identical products.(Low variety/high volume) High direct labor costs. Production organized around large “batches” between operations. High inventory levels (raw, WIP, finished). Long lead times and long cycle times. A focus on individual labor and machine efficiency. Management of quality through inspection and rework rather than prevention. Strong functional organizations and strong divisions between the functions. In these manufacturing companies, there are very high levels of inventory, and long delays in the time from purchasing raw materials to actually selling the product and receiving revenues. In traditional companies lead times often exceed three to six months, and inventory can equal to 30% to 40% of total annual sales. These systems are increasingly being replaced by “lean” manufacturing systems based on the Toyota Production System.

3. Lean Manufacturing As most students of lean practices know, the concept of “lean manufacturing” or the “lean enterprise” was popularized by Jim Womack in his two books, The Machine That Changed the World (1989) and Lean Thinking (1996). Womack extracted the core elements of his lean philosophy from benchmarking of automotive production facilities. While the idea of lean manufacturing has gained popularity within the last decade, the core of the lean approach is based on the practices of the Toyota Corporation, and its Toyota Production System (TPS), a business philosophy that has been in development for over 40 years. The essence of TPS has been described by two Toyota executives: Shigeo Shingo’s classic book, A Study of the Toyota Production System From an Industrial Engineering Point of View (1981). An internationally famous consultant, Dr. Shingo is credited with being the originator of the SMED (Single Minute Exchange of Dies) concept (first developed in 1969) and the Poka-yoke defect prevention system. The Shingo prize is given in his honor. Taiichi Ohno’s Toyota Production System (1978). Mr. Ohno was vice president of Manufacturing for Toyota, where the core operating systems for “lean” manufacturing were developed. Mr. Ohno tracks the origins of TPS back to initial efforts in the 1940’s. These two classics continue to be some of the best and most accurate sources of information on lean manufacturing principles and practices. Dr. Shingo summarizes the basic differences between TPS and traditional “mass” production (in this case exemplified by Ford Motor Company) in the following table (Shingo, P. 94): Reduced WIP; adjusts to change; promotes load balancing. Mixed flow (many models) Single product (few models) 3. Product flow WIP reduction; order-based production. Small Large 2. Lot size Shorter cycles; reduced finished goods inventory; reduced work-in-process. In processing and assembly Only in assembly 1. One-piece flow BENEFIT TOYOTA FORD FEATURE

4. The Essence of the Toyota Production System In what is one of the most insightful analyses of the Toyota Production System to date, Steven Spear and Kent Bowen from the Harvard Business School published a 1999 article in the Harvard Business Review titled “Decoding the DNA of the Toyota Production System.” One of their purposes was to distinguish between the visible practices (e.g. Kanban, visual control, reduced set up; etc.) and the underlying system that drove the practices. They discovered an interesting phenomenon – the essence of the TPS was not the rigorous application of established methods and practices. Instead, it was the disciplined application of the scientific method to everything that happened in the plant. What TPS had done was to create a “community of scientists” that is continuous conducting experiments on the production process. (“ If we make the following specific changes, we expect to achieve this specific outcome .”) Any method is treated as a countermeasure, not a solution. The purpose of standardization in this context, is not to enforce discipline, but to enable experimentation – you can’t accurately test a hypothesis for improvement if you don’t have stability in the system you are experimenting on. The core rules of this scientific community (see box) are tacit, not explicit. They are learned through a version of Socratic dialogue where supervisors and managers ask questions that allow the workers to discover rules as a result of solving problems. THE FOUR RULES OF TPS Rule 1: All work shall be highly specified as to content, sequence, timing, and outcome. Rule 2: Every customer-supplier connection must be direct, and there must be an unambiguous yes-or-no way to send requests and receive responses. Rule 3: The pathway for every product and service must be simple and direct (flow). Rule 4: Any improvement must be made in accordance with the scientific method at the lowest possible level in the organization. “ The fact that the scientific method is so ingrained at Toyota explains why the high degree of specification and structure at the company does not promote the command and control environment one might expect. Indeed, in watching people doing their jobs and in helping to design production processes, we learned that the system actually stimulates workers and managers to engage in the kind of experimentation that is widely recognized as the cornerstone of a learning organization. That is what distinguishes Toyota from all other companies we studied.” (Spear and Bowen, “Decoding the DNA of the Toyota Production System”, Harvard Business Review, Sept. – Oct. 1999) The role of managers is to ask questions: How do you do this work? How do you know it is being done correctly? How do you know the outcome is free of defects? What do you do if you have a problem?

5. TPS As A Self-Organizing System A number of writers have noted that the underlying logic of the Toyota Production System is consistent with the principles of self-organizing natural systems. The science of complex adaptive systems theory studies the characteristics of natural systems and how they are structured to be able to evolve, grow and adapt. Systems that have the capacity for growth and adaptation live “on the edge of chaos” with enough structure to stay together and evolve, but enough flexibility to respond to new circumstances. These systems share a common set of characteristics, including: Autonomous Agents -- Diverse collections of independent agents who use simple rules to make decisions based on information in their immediate environment. (In the TPS, these “agents” are associates and teams and the “simple rules” are the core tenets of TPS articulated on the previous page.) Networked Structures -- Moderately dense and flexible connections between “agents” that allow them to communicate and create larger structures, but also to rapidly reorganize. (In the TPS, these network structures are the internal customer-supplier relationships that dictate the flow of value added.) Profuse Experimentation – Continuous experimentation with novel arrangements, and the rapid exploitation of solutions when one is found . (In the TPS, this is the scientific method that workers and teams use to continuously experiment with new processes and methods. Self-organizing systems are “emergent” systems – the over-arching structure emerges from the interactions of the agents in the system, and is not imposed from the top down. A flock of birds, for instance, is able to move fluidly and coherently as a whole, without anyone serving as the “flock CEO” or “flock manager.” The structure and dynamics of the flock emerge from the interaction of the birds, which are governed by a relatively simple set of rules. (Scientists have determined that it takes no more than three simple rules of behavior for birds to form a flock: 1) match the velocity of your neighbor; 2) maintain a minimum distance; and 3) move to the center.) In a system like TPS, all the information needed to “manage” the system is embedded in the local transactions between the agents in the system. There is not any need for outside monitoring and control – the system controls itself. “ Indeed, everything that decides how efficiently and effectively material, people and other resources are consumed inside the plant is determined by how well everyone inside the plant masters and applies the practices of TPS in a continuous flow setting…No accounting information compiled during the period can help the managers and workers in the plant achieve, or improve, that outcome. The only things that will insure proper costs are mastery and maintenance of TPS: perform every step according to the established takt time; follow standard work procedures; recognize abnormal conditions and stop to current them when they occur; work only in response to a customer order; space varieties over the shift as evenly as possible, and so forth. Do those things properly, and cost takes care of itself.” (Johnson & Broms, Profit Beyond Measure , p. 108)

6. Lean As A Business Philosophy, Not Tools Many American and European companies fail to understand the essence of the Toyota Production System as a business philosophy, a set of values, and a culture . The focus is too often on the techniques and tools with the underlying essence of the innovation lost. Jeffrey Liker has been a long-term student of the Toyota production system, and a leading author on lean practices in the U.S. His recent book, The Toyota Way , reinforces the idea that the essence of the TPS is a mindset that embraces continuous improvement and the development of the capacity of employees and partners. “ Despite the huge influence of the lean movement, I hope to show in this book that most attempts to implement lean have been fairly superficial. The reason is that most companies have focused too heavily on tools such as 5S and just-in-time, without understanding lean as an entire system that must permeate an organization’s culture. In most companies where lean is implemented, senior management is not involved in the day-to-day operations and continuous improvement that are part of lean. Toyota’s approach is very different.” “ I learned that all the supporting tools of lean such as quick equipment changeovers, standardized work, pull systems, and error proofing, were all essential to creating flow. But along the way, experienced leaders within Toyota kept telling me that these tools and techniques were not the key to TPS. Rather the power behind TPS is a company’s management commitment to continuously invest in its people and promote a culture of continuous improvement.” (Jeffrey Liker, The Toyota Way , P. 7-10)

7. Jeffrey Liker’s Summary of the “Toyota Way” ADOPT A LONG-TERM PHILOSOPHY 1. Long Term Focus: Base your management decisions on a long-term philosophy, even at the expense of short-term financial goals. THE RIGHT PROCESS WILL PRODUCE THE RIGHT RESULTS 2. Flow: Create continuous process flow to bring problems to the surface. 3. Pull Systems: Use “pull” systems to avoid overproduction. 4. Level Scheduling: Level out the workload ( heijunka). 5. Continuous Improvement: Build a culture of stopping to fix problems, to get quality right the first time. 6. Standardization: Standardize tasks that are the foundation for continuous improvement and employee empowerment. 7. Visual Management: Use visual controls so no problems are hidden. 8. Technology: Use only reliable, thoroughly tested technology that serves your people and processes. ADD VALUE TO THE ORGANIZATION BY DEVELOPING YOUR PEOPLE AND PARTNERS 9. Leadership Development: Grow leaders who thoroughly understand the work, live the philosophy and teach it to others. 10. People Development: Develop exceptional people and teams who follow your company’s philosophy. 11. Partner Development: Respect your extended network of partners and suppliers by challenging them and helping them to improve. CONTINUOUSLY SOLVING ROOT PROBLEMS DRIVES ORGANIZATIONAL LEARNING 12. See It: Go and see for yourself to thoroughly understand the situation. 13. Decide Slow; Implement Fast: Make decisions slowly by consensus, thoroughly considering all options; implement decisions rapidly. 14. Learning Organization: Become a learning organization through relentless reflection and continuous improvement.

8. Jim Womack’s Lean Principles Jim Womack develop a set of five principles that form the basis lean enterprise implementation. Because they are used by many companies to guide their lean initiatives, they are worth repeating here: VALUE – Value must be understood from the customer’s point of view (aka “voice of the customer”). VALUE STREAM – The process of value creation must be clearly understood and mapped out in detail (aka “process documentation” or “value stream mapping”). FLOW –ALL interruptions to the value-adding process must be eliminated. PULL – Don’t produce anything until your customer asks for it (demand-based production vs. speculative production). PERFECTION – Never settle for “good enough”; there is always more waste to be eliminated. By starting with value understood by the customer, Womack pushed the lean philosophy out of the factory and into product development; sales and marketing; customer service and other functions that are “upstream” from manufacturing. THE EIGHT KINDS OF WASTE Overproduction – making more than is immediately needed by the next process or customer. Time – waiting due to a lack of parts, watching machines run, etc. Transportation – unnecessary moving of things that could be eliminated by better flow Processing – unnecessary processing steps that could be eliminated by better design or manufacturing Inventory – in excess of immediate needs Motion – unnecessary movements that do not add value and waste time and energy of workers Defects – mistakes that require inspection, rework or replacement production Unused creativity – failing to use the talents of all employees to solve problems

9. Lean vs. Mass Production on the Shop Floor Raw Material Step 1 Step 1 Step 1 Inventory Step 2 Step 2 Step 2 Inventory Step 3 Step 3 Step 3 Inventory Step 4 Step 4 Step 4 Inventory Finished Goods Step 5 Step 5 Step 5 Step 1 Step 2 Step 3 Step 4 Step 5 Raw Material Finished Goods Step 1 Step 2 Step 3 Step 4 Step 5 Raw Material Finished Goods

10. Lean vs. Economies of Scale & Excess Capacity One of the less-well understood ways in which lean manufacturing transforms the logic of cost management is in its approach to economies of scale and excess capacity. Traditional manufacturing designs production systems for high volume, low variety manufacturing. This kind of production tends to favor large, dedicated machines and other fixed costs. A high fixed to variable cost ratio in turn favors over-production in order to reduce the marginal costs of each additional unit produced. In traditional manufacturing companies, excess capacity is “allocated” to current product lines in order to “full absorb” all overhead. This, of course, grossly distorts the actual cost of producing products, since the unused capacity is unrelated to a specific product. A core principle of TPS and other lean manufacturing systems is to match production capacity to customer demand (embodied in “takt” time, or the pace of production that exactly matches required delivery schedules). Excess capacity or worse, excess production, are treated as serious wastes to be avoided at all costs. This philosophy seeks to achieve the same product costs regardless of volumes, thereby eliminating the entire concept of ‘economies of scale.’ This, in turn, leads to the design of small, flexible production units with smaller, flexible machinery that can be rapidly adapted and reconfigured. As high a variable to fixed cost ratio as possible is sought. This enables a company to be profitable during a downturn in sales, as well as during a growth period. Critical to this concept of “right-sizing” of production capabilities to meet demand, is the elimination of large ‘tombstone’ machinery – dedicated capacity such as heat treating, painting, washing and other common processing equipment. A continuous struggle in lean enterprises is the elimination of these constraints and bottle neck through the design of new manufacturing processes and equipment innovations. “ Adding the cost of excess capacity to a product line can greatly distort actual costs, leading to inaccurate information, and in turn, poor decision-making. Whether excess capacity exists or not should have nothing to do with the costs of individual product lines. In the scope of the enterprise as a whole, excess capacity must be understood and accounted for, but charging it to individual products is misleading and inaccurate.” (Huntzinger, P. 179)

11. Lean vs. Other Improvement Technologies There is a frequent lack of precision in the use of different terms to describe business improvement philosophies. Many of these concepts fall victim to what might be called “context inflation” in which an important but relatively modest concept is unfairly expanded to encompass far more than it was originally intended to. The authors (or advocates) of new insights tend to present them as the “next great thing,” seeking to subsume all prior insights as subsets of their ideas, rather than recognizing that they are simply adding to an already large body of knowledge. The lean movement suffers from this tendency, leading to confusion about what it is and what it is not. The relationship between lean practices and generic improvement practices such as Total Quality Management (TQM), Continuous Improvement, the Theory of Constraints, or the more recent fad of “Six Sigma” can be particularly confusing. While there is much overlap and duplication between these terms and their meaning, there are some useful distinctions that can be made between “lean enterprise practices” and these other improvement technologies. Quality improvement practices tend to be generic approaches to improving processes and products that are not focused on any specific outcome, other than an improvement in quality, efficiency and delivery time as defined by the “voice of the customer,” whether internal or external. These practices and tools are well documented in the TQM literature and affiliated resources, such as the Malcolm Baldrige National Quality Award criteria. In general, they tend to use rigorous problem-solving processes (Plan-Do-Study-Act) focused on the three stages of: 1) planning and designing processes; 2) controlling processes so they achieve statistical stability; 3) improving processes so that they achieve statistical capability. (It is important to note in this context that the tools of “Six Sigma” have been around for over 20 years and do not represent an innovation in quality improvement technology.) It is also worth noting that the TQM approach has always started with the Voice of the Customer and therefore has tended to be more focused than lean strategies on product design and non-manufacturing processes (such as customer service). Traditional Quality Improvement Principles and Practices PRINCIPLES: Systems Thinking : Understanding your work as a system focused on the needs of those you serve. Management By Fact : Using data and knowledge of variation to know how you are doing. Continuous Improvement : Using an organized and disciplined way to change the way you work. PRACTICES: Systems Thinking: Clarifying mission, vision and values Developing key organization-wide quality indicators (”scoreboards”) Defining and mapping key systems Organization-wide improvement plan Management By Fact: Defining and documenting key processes Using Statistical Process Control Continuous Improvement: Teaching team and improvement skills Supporting improvement teams Recognizing and rewarding improvement

12. Lean vs. Other Improvement Technologies Lean strategies are distinguished from other improvement approaches by their emphasis on time as a dimension of world class manufacturing. In this respect, there is a content focus to lean (i.e. a predetermined improvement outcome) that is not inherent in traditional improvement technologies that tend to be more about generic process improvement. This is reflected in three dimensions: Focus on flow. Lean has a clear and relentless focus on improving flow through the elimination of waste. The purpose is to reduce the time and effort it takes the company to transform raw materials into value-added products. Focus on immediacy. Much of the lean approach is focused on creating systems for immediate recognition and response to disruptions in quality or flow. Hence the emphasis on visual management and control; on error proofing and in-process inspection; on rigid workplace organization; on use of kanban cards for inventory management; etc. The idea is to create an environment where you can immediately recognize if something is out of the norm, and respond to it. Focus on rapid change. Lean approaches tend to involve a compression of the improvement process that emphasize rapid and real-time implementation (“discontinuous improvement” as opposed to “continuous improvement.”) This is best reflected in the “Kaizen” process, which compresses the improvement activity into a two to five day timeframe, with immediate implementation at the end of the event. This can be contrasted with many improvement team processes that involve shorter team meetings stretched out over several months duration. This focus on time creates a direct connection to the flow of cash in the organization. And it tends to reinforce a cash-based, vs. accrual-based approach to finance and accounting , in order to deal with immediate and “real time” financial information. “ All we are doing is looking at the time line from the moment the customer gives us an order to the point where we collect the cash. And we are reducing that time by removing the non-value added wastes.” (Ohno, Toyota Production System 1988) “ I think a business should have reflexes that can respond instantly and smoothly to small changes in the plan without having to go to the brain. It is similar to the fluttering reflex action of the eye when dust is around or the reflex action of a hand pulling away quickly when it touches something hot.” (Ohno, Toyota Production System 1988, P. 46)

13. A Definition of the Lean Enterprise Lean enterprises are organizations that systematically eliminate waste from their processes in order to achieve the highest quality, fastest delivery and best price for their customers. Systematically – Improvement is built into the daily work of the organization; it is not a “project” or “program.” Eliminate – Waste is permanently removed; it is not taken out on a “one time” basis. Waste – Waste is anything that does not add value to the product or service Quality, delivery and price – Waste elimination applies to all dimensions of the company (product development, sales and marketing; support; etc.) not just manufacturing.

14. Lean Methods and Tools There is a core set of methods and tools that are associated with lean manufacturing. These tools are used to support the continuous improvement of processes and the elimination of waste. These methods and tools fall into four basic categories. Just-In-Time Production Creation of the right part, at the right time, in the exact amount required. Pull production system Set up reduction & quick changeover Line balancing Cell production In-Process Quality Assurance Designing the work process so that quality problems are immediately revealed and solved. Error-proofing (“Poka-yoke”) In-station quality control “ Autonomation” Continuous Improvement Continuously redesigning processes to eliminate waste and improve performance. Problem solving teams Five Why’s Root cause analysis 7 Statistical Tools 7 Management Tools Stable and Reliable Systems Production systems that reduce variability. Standardized work Schedule leveling Preventive maintenance Visual management 5S (Workplace Organization) The majority of these tools have historically had a manufacturing shop floor focus, reflecting the reality that the typical focus for lean activities has been on the shop floor, where the nature of the waste is more obvious and visible. More recently, however, increasing focus is being applied to planning, marketing and sales, product development and design, costing, finance, human resources, information technology and other areas of the firm. It is increasingly being recognized that some of the greatest sources of waste are in non-manufacturing functions.

15. The Lean Implementation Process Although every company takes a slightly different approach to implementing lean principles and practices, there are some common elements to the process. Leadership and Champions A lean leadership structure will usually involve top management participation and leadership, as well as the development of a cadre of “champions” who provide both training and facilitation of improvement events. Champions go through a focused training process. (Today, many companies classify them according to different “belt” levels –e.g. green belts, orange belts, black belts, etc.) Part of the role of leadership is direction of the “Hoshin Planning” process – the process of deciding at the full company level what the priorities are for improvement, and how they fit into the company’s strategic plan. Kaizen Events Kaizen events are improvement processes that are compressed into two to five day “events.” Typical characteristics include: 6-8 team members, both from the process and “useful outsiders” Training in lean techniques Value stream mapping of the process Immediate implementation of improvements Calculation of the “return on investment” for the improvements Implementation of a scoreboard to track progress against metrics Presentation to management at the end Value Stream Mapping Value stream mapping is an updated version of process flow diagrams, with an emphasis on showing value added and non-value added steps in the work process. A value stream map uses standardized icons to create a visual representation of a product’s production path from beginning to end, showing both material and information flows. It is used to show three levels of information: “ Current state” – the process as it is today. “ Future state” – the ideal process, with all possible waste eliminated. Implementation – the actions that have to be taken to implement the improvements necessary to get from current state to future state. Team Structures and Training Companies will typically utilize a multi-level structure for organizing improvement efforts that distinguishes between lean projects that fall within “natural work teams” – i.e. a group that typically works together – as opposed to cross-functional projects that transcend natural work teams. In addition, special teams are often used for Kaizen and improvement work on large scale corporate projects. Training is typically provided to employees at different levels of intensity, ranging from a 2-4 hour introduction for all employees, to several weeks of intensive training for champions.

16. The Importance of the Value Stream Map A “value stream” is the path that a product or product family follows in the course of production. A value stream map is a graphic display of this path, with key operational information annotated. The value stream map is critical to the implementation of lean practices. This is for several reasons: The definition of the value stream becomes the organizational unit for production. The value stream becomes the basic unit of financial information in the advanced lean company. The data in the value stream map is real-time data that directly informs product costing. Because the value stream is the unit of production, it also becomes the unit of improvement and data collection for the company (including financial information). Until the company becomes more deeply organized around its value streams, it is difficult to implement many lean accounting and finance opportunities. Defining value streams is not always an easy thing to do. Typically, it also forces companies who are not one-product focused to go through a difficult exercise of deciding on their “product family” structure. In the lean company, these product families typically end up being organized around common processes rather than common product functions. Operational Information Embedded in the Value Stream Map Process flow and sequence (routing) Amount of processing time at each station Inventory levels Lead times – total and station to station Total processing capacity available at any one time

17. An Example of a Value Stream Map (Source: Mike Rother, Rother and Company; Michigan Manufacturing Technology Center presentation)

18. Lean Scoreboards A core element of the lean philosophy is the development of key performance indicator systems (“balanced scoreboards”) at multiple levels of the organization (e.g. teams; departments or divisions; company-wide). These scoreboards are designed to provide immediate and clear feedback to individuals and teams about how they are performing against targets, so that they can make in-process adjustments. Typically, scoreboards are organized around categories such as Quality, Cost, Delivery, Safety and Morale. Scoreboards are used to drive daily, weekly, monthly and annual improvement efforts, and are tied into a disciplined problem-solving process. Scoreboards are critical to the lean accounting and finance process, because they establish a degree of process control at the value stream level that enables a company to remove some of the wasteful finance and accounting “checking” practices that are used to substitute for a lack of process stability and capability. Organizations that have not established reliable key performance indicator systems at multiple levels of the organization will typically have to continue to rely on externally-imposed accounting-oriented control and measurement systems, until alternatives are in place. Removing these system (no matter how ineffective they are) without a viable alternative in place creates too much organizational risk. Scoreboards are the data source for the “experiments” carried out by the lean “community of scientists.” It is critical that the emphasis be retained on the use of data for root cause analysis and process improvement, rather than as the development of an arbitrary set of top-down performance targets. As Dr. Deming frequently emphasized, the performance of a system is determined by its design, not by how hard people are working. Improved performance only comes through system re-design. Characteristics of High Quality Scoreboards Easily visible to those doing the work Cover all important areas of operations Team members understand them and participate in root cause analysis They measure things the unit controls They are tied into a periodic review and improvement process There are clear links to other levels of scoreboards The Scoreboard Measurement Plan : Operational definition -- how is it calculated? Data source -- where do the numbers come from? Sampling -- how frequent, how many? Target value -- what is “good”? Indicator owner -- who collects, analyzes, displays? Graphics -- how is the indicator visually displayed?

19. Lean Scoreboards Every company, every division and every team has a slightly different set of measures that it needs to track. However, there are some common measurements that are widely used as indicators of world class manufacturing performance. Some of these typical measures are described below. Financial Total sales Sales per person Value added per FTE AR Outstanding DSO Outstanding Earnings Cost Inventory turns Average cost per unit Cost of Quality Premium freight Set up time Quality PPM First time capability Scrap rate Customer complaints PPAP attainment Delivery On-time delivery Dock to dock time Cycle times Safety and Morale Employee morale Improvement activities Lost time due to accidents Attendance Turnover

20. Stages of Lean Implementation Companies implementing a lean business philosophy will typically progress through a series of developmental stages in their process. While there are many different ways of describing these stages, each progressive stage involves a deepening of the lean process and an increasingly systematic integration into company operations. As the level of implementation deepens, the need to transform systems outside of manufacturing also increases. It becomes necessary to develop a lean supply chain; to refocus product development; and to restructure sales and marketing to support level scheduling and improved flow. Most experts estimate that the percent of U.S. manufacturing companies that have accomplished deep levels of lean implementation is under 5%. “ What percent of companies outside of Toyota and their close knit group of suppliers get an A or even a B+ on lean? I cannot say, but it is far less than 1%. The problem is that companies have mistaken a particular set of lean tools for deep ‘lean thinking.’” (Jeffrey Liker, The Toyota Way , P 10.) Freudenberg-NOK’s Definition of Lean Stages Six Sigma integrated into lean STAGE VI Breakthrough analysis – redesign of basic manufacturing processes STAGE V Integration of cells (“focused factories”) STAGE IV Cell production, based on one-piece flow (“islands of improvement”) STAGE III Improve batch processing with some lean tools STAGE II Batch manufacturing STAGE I Brian Maskell’s “Lean Maturity Path” Whole company organized by value streams Extensive partnerships with suppliers and customers Lean applied throughout the entire organization Lean Enterprise Plant-wide cell implementation Organization around value streams Use of visual control; CI teams; process control Supplier kanban Low WIP and finished goods Lean Manufacturing Widespread Pilot lean cells in place Extensive training provided Some implementation of practices (kanban; quick changeover; standardized work; in-process inspection) Pilot Lean Cells

21. Different Levels of Lean Focus Over time, the lean philosophy is typically applied at progressively more inclusive levels of the company. These stages include: Lean Manufacturing. This is often as far as many companies get. The focus is on the shop floor, from point of order entry to shipping of the product to the customer. Lean Enterprise. A lean enterprise focus extends the lean philosophy to other functions within the company, including sales and marketing; product development and engineering; supplier development; finance and accounting (the focus of this study); human resources; and customer service. Lean Extended Enterprise. The “extended lean enterprise” refers to the company’s full value chain, from raw material through the full lifecycle of the product (disposal and recycling). It typically looks beyond the part of the value chain currently controlled by the company for potential opportunities to grow share of the value chain through innovation and waste elimination. As a company migrates from lean manufacturing to lean enterprise to lean extended enterprise, the focus of lean typically becomes less operational and more strategic. Lean Enterprise Extended Lean Enterprise Lean Manufacturing Shipping Sales & Marketing Customer Service R&D and Engineering Support Supply Chain Customers and Markets

22. The Extended Enterprise Tier 1 Tier 1 Tier 1 T2 T2 T2 T2 T2 T2 T2 T2 T2 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 OEM Customer Retailer Web Site Warehouse Dealer Distributor Direct Customer Customer Customer Supply Chain Producer Distribution End Markets

23. Waste Elimination Opportunities PRODUCT DESIGN & DEVELOPMENT VOC Product functions Engineering specs Component design Production and tooling engineering Process design QUOTING Product costing BOM Routing Overhead allocations Quote terms PRODUCTION PLANNING Set the schedule Plan production Monitor on-time PURCHASING Select suppliers Negotiate volume & price Issue POs Inspect in-coming Issue payment MANUFACTURING Maintenance Man. Engineering QC Production processes DELIVERY & PAYMENT Shipping & logistics Invoicing Collections Customer service SALES AND MARKETING Marketing Leads and prospects Key account management Price negotiations Order entry SUPPORT AND OVERHEAD HUMAN RESOURCES Hiring Evaluation Development FINANCE & ACCOUNTING Transactions Statements Reporting INFORMATION TECHNOLOGY ERP Systems Desktop Web transactions PLANNING & STRATEGY Strategic planning Market research Mergers & acquisitions OTHER Legal & regulatory Real estate Shareholder relations Public relations The vast majority of lean activities are focused in these areas.

24. The “Lean Enterprise” Companies that have been applying the lean philosophy to their manufacturing operations eventually find that the “root cause” of waste is often in non-manufacturing activities (see box on right) that are off the shop floor. The traditional “eight deadly wastes” are mostly related to the making of physical objects. Many of these other processes involve knowledge work and the making of intellectual products that embody ideas . These processes create some different kinds of wastes; for instance, the wastes generated by: Not understanding customer requirements. Targeting the wrong customers. Not having the right information for decision-making. Poor communications across the extended enterprise. Unclear articulation of strategy. Unclear company values. Destroying trust. Making product designs that are hard to build. Not tapping the innovation and creativity of the supply base. In many instances, these are wastes of “omission” as well as “commission.” They involve missing out on opportunities, as opposed to executing an existing process inefficiently. Potential Sources of Waste Outside of Manufacturing: Market selection Customer selection Positioning and differentiation Product line decisions Product development Product design and engineering Sales and marketing Customer relationship management Customer service Supplier selection and development Support infrastructure Finance and accounting

25. Lean Supply Chain Typical Lean Supply Chain Activities Just-in-time supplier deliveries Supplier-managed inventory Reduction of the supplier base Outsourcing of non-strategic functions Long-term contracts Electronic commerce (web-based; EDI; EFT) Supplier development and support Supplier target costing Supplier kaizen costing The extension of lean practices to a company’s supply chain is a natural evolution from lean manufacturing practices. Value stream mapping processes will typically lead to decisions on the part of the firm about what functions are and are not strategic and proprietary. Non-strategic processes are outsourced wherever possible, leading to a more “networked” organizational design. (It should be noted that many lean organizations outsource fewer of their functions as they find that they can perform them more efficiently than non-lean companies.) This requires the company to work with its supplier network on the adoption of the lean philosophy within their own firms and within their network of suppliers. A leaning of the supply chain will typically lead to high levels of improvement in the efficiency of transactions with suppliers, including production scheduling; verification of incoming materials; financial transactions; and overall communication. Characteristics of Lean Supplier Relationships* Focus. Reduced number of suppliers. Tiering. Organization of suppliers by level of strategic involvement and level of design responsibility (strategic partners; major suppliers; subcontractors; commodity suppliers). Building of trust. Emphasis on interdependence, stability, cooperation and long-term mutual benefit. High levels of sharing. Increased sharing of design information, cost information, and manufacturing skills. A blurring of the boundaries between firms. Increased innovation. Rewarding of suppliers for product and process innovation. (* Adapted from Robin Cooper and Regine Slagmulder, Supply Chain Development for the Lean Enterprise)

26. The Evolving Automotive Supply Chain Vehicle Assemblers (OEMs) In-House Components (Declining Number) Direct Delivery Components Tires Fasteners Non-Modular Glass Direct Delivery Modules & Subsystems (Strategic Components) Engines Transmissions Exhaust Windshield Cleaning Body Sealing Systems Wheel-end Modules Integrated Supplier Assembly Systems Integrators Total Interiors Braking/Suspension Powertrain Front-end HVAC/Engine Cooling Steering Systems Components (Process Dominant) Metal Forming Injection Molding Aluminum Extrusion Etc. Materials Plastics SMC Magnesium Paint and Coating Electronics/Electrical Power Storage & Distribution Micro Processor Lighting Systems Tooling and Equipment Molds and dies Production equipment Fixtures

27. Lean and Company Strategy “ There are people out there who are big in the lean world in the U.S. and still don’t understand the strategy part. They feel that no matter what the situation, add a little lean and your going to fix it. If you don’t have a good business strategy, lean alone won’t solve your problems...You have to look at the markets you’re in, the business, your technology and your competitive advantage. I’ve seen some businesses without good strategies that have done very well with lean and not perform. Without the fundamentals of strategic planning and the right business, its useless. There are a lot of manufacturing guys out there who don’t understand strategy and conversely there are a lot of marketing guys out there who don’t understand lean. You need a good mix.” (Mark DeLuzio, Lean Horizons, quoted in Manufacturing News , 6.29.01) Lean is primarily an improvement technology, not a business strategy – it focuses on “doing things right” vs. “doing the right things.” It is not, at its core, a discipline that helps companies formulate their broader business strategies and answer such strategic questions as: What business do we want to be in? What markets do we want to be in? What customers do we want to serve? What products and services do we want to offer? How do we want to be positioned in the market? What is our basis for market differentiation? Lean does, however, eventually become closely linked to company strategy in two dimensions: Strategic flexibility. The new performance capabilities of a lean organization (quality levels; costs; delivery times; production flexibility) give it greater flexibility to make strategic choices in the market. Eliminating the waste of having the wrong products for the wrong customers in the wrong markets. When “lean thinking” begins to be applied at the extended enterprise level, not just the manufacturing level, (for instance, Womack’s principle of understanding quality from the customer point of view), it forces the company to revisit its strategic positioning, as well as its product and service scope, and its choice of market segments and customers.

28. A Summary of Lean vs. Traditional Manufacturing Visual management and shop floor indicators Focus on process availability and through put Data used to improve system stability and capability Management by reports done by outsiders Focus on individual labor and machine efficiency Setting of arbitrary improvement targets Measurement Many layers of management. Strong functional organizations and clear separation between functions (“silos”) Top-down monitoring of performance. Large volume of direct suppliers Suppliers deliver in frequent large batches based on volume discounts. Frequent supplier changes based on price differences. Management of quality through inspection and rework. Infrequent changes in production practices. Production for inventory (Just In Case) Production dictated for all steps by an MRP or other production scheduling system. Production organized around large batches to maximize machine utilization High inventory levels (raw, WIP, finished) Assembly-line flow; each worker does one function Infrequent changeovers; long set up times Messy, cluttered and dirty shop floor High direct labor costs High volume production of identical products (Low variety/high volume) Long lead times TRADITIONAL MANUFACTURING Low volume production of many variants. (High variety/low volume) Short lead times and cycle times Production Mix Fewer layers of management Strong team-based structure High levels of team autonomy Disciplined team-based measurement systems Visual control systems Management Structure Reduced number of suppliers Supplier responsibilities for maintaining inventory levels Long term supplier relationships Supplier Relationships Management of quality through prevention. Continuous changes to improve efficiency and productivity Continuous Improvement Production on demand (Just In Time) Manufacturing schedule sets the initial order volumes only; all other production is driven by “pull” signals (Kanban) One-piece flow Inventory levels are radically reduced Cell production; each worker performs multiple operations Frequent product changeovers; short set up times Spotless shop floor with visual management Production Practices Direct labor is a small percentage of total labor costs. Difficult to distinguish between direct and indirect labor Labor Costs LEAN MANUFACTURING FEATURE

29. The Toyota Product Development System

30. Toyota’s Second Wave of Innovation The Toyota Product Development System (TPDS) is another extension of their design as a “radical learning organization” The TPDS system is extraordinarily efficient: Toyota managers and engineers achieve an 80% level of value added productivity – four times that of the typical American manufacturer Development times are one-half their American counterparts Toyota uses one-quarter the number of engineers on a vehicle project used by their NA competitors Milestones are rarely if ever missed The end product has one of the highest quality records in the industry

31. Key Elements of the TPDS Toyota Product Development System Functional Managers As Teachers Reward for Technical Competence Pull Scheduling System Standardization Through Checklists and Design Standards Knowledge Capture and Re-use Set-Based Concurrent Engineering Visual Management of the Development Process

32. Key Elements of the TPDS Visual control boards used to track all aspects of the product development process Visual Management Detailed engineering checklists and design standards used to assure focus on product performance Standardization Standardized “performance tradeoff” data collected for each alternative Engineers required to be knowledgeable about all solutions Knowledge Capture & Re-use Multiple alternatives developed for each sub-system Combinations that meet performance tradeoffs “survive” Set-Based Concurrent Engineering No elaborate sub-schedules; chief engineer sets “key integrating events” Work is “pulled” to these events Milestones are never missed Pull Scheduling Authority in the system derives from technical knowledge “ At Toyota, your boss can always do your job better than you.” Reward for Technical Competence Managers are the most technically competent engineering Their primary role is to teach by asking questions Manager=Teacher Description Element

33. Set-Based Concurrent Engineering “ Point-Based” Concurrent Engineering “ Set-Based” Concurrent Engineering Few Concepts Select Detail Test Many concepts for each system Evaluate against trade-off curves Eliminate the weak Add knowledge Combine in different ways Iterate if Required