Not long ago, just-in-time (JIT) production, or "lean systems" as it is more commonly referred to now, was considered to be an exotic and esoteric concept. In today's business environment, however, lean has become pervasive. It is no longer relegated to manufacturing alone; it has been applied to everything from hospitals and operatingroom utilization to the production of shortrun, collectible dolls. Its application, moreover, is no longer limited to a company's internal system. Now its principles and practices are being successfully applied to supply chains, including external participants.
Lean has played a critical role in making managers aware of the impact of waste and of variance on costs. It has heightened our recognition of the need for standardization. In fact, one of lean proponents' mantras is "Without standardization, there is no opportunity for improvement."
Lean is a demonstrably successful tool; many companies and manufacturing plants have benefited from the application of lean systems and procedures. For all its success, though, a lean system is not a perfect solution. It certainly is not applicable under all conditions. More importantly, under certain conditions, its use can actually be bad—bad for the company and bad for the supply chain. Its shortcomings are rooted in two areas: the over-application of lean practices and the lean systems' lack of flexibility.
Lean + SCM = fragile systems
Lean supply chains have the potential to become fragile supply chains. That is, without buffers in the form of extra capacity, lead time, or inventory, these supply chains lack the extra resources needed to cope with unplanned events.
Consider, for a moment, a massive and destructive storm. Such storms have always been part of our environment, and every economy, past and present, has had to cope with them. Yet in today's linked and lean supply chains, huge storms can and do cause devastating damage, as was so clearly shown in the U.S. Gulf region following a series of powerful hurricanes.
Another prime example of how a natural disaster can affect supply is the September 21, 1999, earthquake that shook Taiwan. That earthquake knocked out a great deal of computer-chip manufacturing capacity, causing delays of four to eight days and adversely affecting the performance of such companies as Apple, IBM, and Compaq.
Storms, floods, and earthquakes aren't the only disasters supply chain managers should be worrying about. On January 12, 2006, an article focusing on the robustness of our medical supply chains appeared in the Wall Street Journal.1 The authors concluded that those supply chains were unable to respond to significant but unanticipated events, such as the sudden emergence of avian influenza, or "bird flu." As the article pointed out, one reason for that failure is that lean systems have removed most excess inventory.
Cost control or creativity?
In addition to making supply chains more fragile, lean systems and practices can have another negative effect: undermining the transition from cost leadership based on lean to differentiation based on radical innovation. For companies that are interested in building a strategic foundation based on cost leadership, the widespread application of lean systems holds great attraction. After all, lean helps companies eliminate unnecessary costs by attacking waste and reducing variance. But for others, cost leadership is a strategy that is increasingly difficult to pursue and maintain.
This situation, says author Daniel Pink in his book, A Whole New Mind: Why Right- Brainers Will Rule the Future, can be attributed to three factors: abundance, Asia, and automation.2 Abundance denotes the fact that today's consumers have greater choice and greater availability of products than ever before. Asia (specifically China and India) has become a first-choice, low-cost location for manufacturing and tasks like computer programming, financial services, and technical engineering. And the main outcome of automation, of course, is a significant reduction in production and labor costs.
How can North American and European companies successfully compete in such an environment? The answer is innovation, especially radical innovation. For a product to differentiate itself in an increasingly crowded marketplace, it must be new and aesthetically pleasing. The outsourcing of manufacturing and other "mechanical" tasks to Asia means that companies in North America and Europe must focus on creative thinking rather than on routine problem solving. They must also address the whole rather than looking at specific components of a problem in isolation. Finally, automating the routine allows the focus in business to shift from cost leadership to the different and the creative.
Radical innovation offers many advantages: It promises higher profits, makes it more difficult for counterfeiters to copy new products, and provides legal protections (through patents), to name a few. But companies that are good at being lean may not be good at radical innovation. To understand this conflict between lean and radical innovation, it is important to understand the culture and business environment that lean systems sometimes foster.
How lean undermines innovation
Under a lean system, companies emphasize narrowly bounded, well-defined process improvements. The lead time for a process improvement driven by lean system tools such as a kaizen event3 is very short— just a matter of days, or weeks at most. Moreover, appropriate performance measures can be easily identified. For example, if our goal is to reduce lead time or reduce cost, we can measure and monitor changes by focusing on process metrics, such as the number of steps in the process, the distance covered, the setup time required, or the number of people involved. The certainty of the outcome is high because the relationship between the actions taken and the results of those actions are plainly visible.
In a lean environment, people are taught that variance is an "evil." It is something to be reduced and controlled through standardization. Consequently lean fosters a unique attitude toward "slack," or underutilized resources: It teaches that we should strive to reduce slack by identifying it and by equalizing loads and capacities. These attitudes are highly appropriate if our goal is to reduce variance and waste. They serve us poorly, however, if our goal is radical innovation.
Radical or breakthrough innovation is different from incremental innovation. Radical innovation strives to create new and different products that will develop new markets and that may cause some existing products or markets to disappear. It's not hard to find examples of radical innovation in the entertainment industry, for instance. The compact disc caused the cassette tape to essentially disappear from retail shelves, while the DVD has done the same for the VHS-format video. Another example is Apple's iPod, which triggered a whole new market. The iPod has become so popular that automakers such as BMW are redesigning their cars to accommodate these devices. It has even caused us to rethink our views about video—who would have thought it possible to view a video on a 2.5-inch screen?
To succeed as radical innovators, companies must recognize and cope with the challenges that come with the territory. They need a broad portfolio of product- and process-related projects. Lead times for successful radical innovations may span months or even years. Making things more challenging is the fact that performance measures for radical innovation are difficult to determine in advance. Unlike the outcomes of projects developed under a lean system, the outcome certainty of radical innovation projects is very low. It is difficult to know if you are working on the next iPod or the next "clear beer" (a famous product failure; it appears that American drinkers want their beer to look like beer, not like water).
In short, to avoid financial disaster, innovators must be prepared for failure. That's why variance and slack are so important: They allow radical innovators to make course corrections.
Variance and diversity are needed to foster product variety because only a handful of new ideas will succeed. In other words, the more varied ideas are encouraged, the greater the chances of succeeding.
Radical innovation necessitates experimentation, giving rise to four reasons why slack is necessary:
A word of caution about this last point: If a new product turns out to be very successful, the competition will study it and try to reverse-engineer it. A company that is unable to meet high levels of demand for a popular new product will soon find that its competitors have moved to provide similar products to meet unfulfilled demand.
Points of difference
As shown in the previous discussion, the attitudes, capabilities, and culture that emerge over time in companies that emphasize process management and lean systems run counter to those required—indeed, demanded—by radical innovation. It can be argued that organizations that have been developed specifically to support lean systems will not be organizations that encourage and foster radical innovation.
More importantly, when subjected to demands for change, a lean organization will tend to avoid taking the kind of risks required for achieving radical innovation and will instead respond with incremental innovation.
Consider the information in Figure 1. This table examines 11 factors and the differences between them in three environments: a lean system, incremental change, and radical innovation.
1. Scope refers to how activities are defined. In general, process management involves very tightly bounded, clearly specified projects that focus on specific processes and activities. Such is not the case with innovation.
2. Implementation lead time refers to the period from the time the activity is initiated until it is completed and results have been observed.
3. Performance measures deal with the selection of such measures and which types are used. There is also reference to output metrics and process metrics. Output metrics are measures that are recorded after the completion of an activity (for example, elapsed lead time). Process, or predictive, metrics are linked to critical traits of the process, which they monitor. For example, if the purpose of the project is to reduce lead time, then a logical process metric would be the number of steps. That is, as the number of steps is reduced, lead time would be expected to fall.
4. Outcome certainty refers to how predictable the results will be, and with how much certainty project managers view the outcomes being generated.
5. Outcome specificity refers to how well the anticipated outcomes can be identified.
6. Distribution of benefits/rewards examines whether those who make the investments are able to reap all of the benefits (local) or if other groups or functions are able to benefit extensively (global).
7. Task programmability refers to the extent to which the steps needed can be explicitly identified, organized, and taught as routines.
8. Transferability across projects indicates whether lessons learned during one project can be readily transferred to another group involved in a similar project or task.
9. Tool sets refers to the extent to which a set of appropriate procedures have been developed, formalized, and then used to facilitate the analysis of problems and quantification of outcomes.
10. Attitude toward variance describes the types of attitudes fostered or encouraged about that subject.
11. Attitude toward slack refers to the types of attitudes or the types of goals or predispositions that are fostered regarding resource slack.
An examination of this table makes it almost impossible to avoid the following conclusion: Lean management and incremental innovation are very compatible with each other, and lean management and radical innovation require dramatically different capabilities. What works well for lean systems hinders radical innovation but fosters incremental innovation. Furthermore, it can be argued that an organization that is focused on lean will have difficulty in making the transition to radical innovation. The skills and attitudes that promote success in a lean environment work poorly in an environment that focuses on radical innovation.
Can lean and innovation coexist?
Lean is important because of its ability to drive out variance and waste and to match supply with demand, while radical innovation is critical to successful future product development. Supply chain managers who are responsible for facilitating both of those functions must ask themselves: Can these seemingly opposing systems coexist?
The answer is a qualified "yes." But if these two approaches are to "live" together, a company must separate the system it relies on to foster innovation and the development of new products from the system that it uses to drive out waste and variance and to standardize products and processes. Each system needs its own resources and its own controls. The innovation system can then become the "feeder" for the lean system. That is, once a new product has been found to be economically and strategically viable, it is then passed to the lean system for production. In this environment, "separate but equal" is a strategic and cultural imperative.
This discussion should not be taken to mean that lean systems are flawed or somehow "wrong." Nothing could be further from the truth. Rather, the thesis of this article is something more basic: There is no universal solution or system for every business situation.
Every system or solution will perform well in certain circumstances and poorly in others. Although a lean system is very effective for cost control, that achievement comes at a price: the cost of standardization. One of lean's guiding principles is that there is only one way to do things. Without standardization, there is no opportunity for improvement.
Yet standardization may reduce a company's flexibility. An emphasis on standardization can inhibit the ability to adopt new processes or to introduce radical breakthroughs, either in product or in process. The perceived need for sameness conflicts with the desire for differentiation.
The danger lies in allowing lean systems to stifle innovation by transforming radical breakthroughs (something that lean has difficulty handling) into incremental breakthroughs (something it can deal with). Companies that are competing in an environment that rewards innovation must ensure that their supply chains support and facilitate flexibility.
1. B. Wysocki Jr. and S. Lueck, "Just-in-time inventories make U.S. vulnerable in a pandemic," The Wall Street Journal, January 12, 2006: A1/A7.
2. Pink, Daniel, A Whole New Mind: Why Right- Brainers Will Rule the Future (New York: The Berkeley Publishing Group, 2006).
3. A kaizen event is a short-cycle (1 to 4 days), process-oriented approach to improvements that brings together a team of individuals and allows them to devote their time to analyzing the current process, identifying the reasons for its problems, formulating and testing possible changes, and developing a new and improved process.