Summary by Hsin-Yi Chen
Master of Accountancy Program
University of South Florida, Fall 2004
The purpose of this article is to provide a better understanding of the significance of the lean/TQ (total quality) movement, and how it can overcome the drawbacks associated with conventional performance management. The investigators of the Tyger case found (under the complicity of its auditor and legal-counsel), that its executives had been cooking its books for years unknowingly, a conclusion on the conventional performance management: No one knew–except the senior-most few. The author has given a reason why it is possible to be in this situation – no one knows. This could happen because managers under conventional performance management rely heavily on the misleading aggregated and averaged numbers related to its internal performance measures.
Actually, this problem can be solved by simply having the internal metrics revealing the truth such as late completions, rising scrap, rework, and stockouts of popular items. However, only lean/TQ management has a set of applicable and useful metrics to provide more relevant information about the operation. Basically, lean focuses on eliminating waste and accelerating responses from supply chains through the entire company and forward to the customer. Quality control has become total quality in all corners of the enterprise. Thus lean and TQ are complementary because both are needed to identify customer sensitive internal performance measurements.
Throughout the rest of the article, Schonberger points out the advantages of implementing lean/TQ management by comparing the different implications of metrics for both lean/TQ management and conventional performance management.
Lean Metrics and Their Opposites
The major goal of lean metrics is to allow the firm to be more flexible, dependable, and have a higher quality response in all processes. These measures are customer orientated. The traditional measures are output oriented rather than oriented towards the customer. Thus, when a company is using the traditional measures, it would tend to loose its market share to its competitors using lean/TQ metrics.
Lean and Batch
Quality only thrives in a lean environment because of the delay-free concept. On the other hand, the batch environment allows defectives to be accumulated because goods or services are in the waiting queues for batches. The main difference between lean/TQ metrics and batch metrics is the relevance of information provided. Lean/TQ metrics are filled with relevant process detail, and sensitive to customer demand, thus the lean/TQ approach can show the real strengths and weaknesses of the organization. However, batch metrics are remote from processes and vague as to causes because of the aggregations of data; thus the batch approach hides the strengths and weaknesses of the organization.
The adaptation of Exhibit 1 below provides a list of lean/TQ concepts and metrics. It is obvious that the metrics are the direct effect of the application of the concepts. A general designation is first-order metrics – meaning just removed from the basics of business such as designing, producing, and selling something.
Lean Total Quality Concepts and Metrics (Exhibit 1)
Quick setups/small lots
Labor flexibility & skills
Design for operations
time/Design to market time
On time/Fill rate
Employee & supplier certifications
The adaptation of Exhibit 2 provided below gives a list of batch concepts and two levels of metrics, the second-order metrics and third-order metrics. The second-order metrics are the monthly reports on turnover of raw materials, unit costs and labor productivity. These reports provide the performance measurements useful to the various departments and the managers. The third-order metrics are what the executives and external stakeholders care about such as sales, market shares and stock prices.
|Batch Concepts and Metrics (Exhibit 2)|
|2nd Order||3rd Order|
|Functional departments and Shops||Inventory turnover partials
||Total inventory turnover|
|Large production & transport
lots, buffer stocks, stockrooms
|Unit costs||Sales revenue|
|Scheduling to keep resources
|Lost time accidents||Sales per employee|
|Quality by inspection||Resource utilizations
|Specialized labor||Labor productivity
|Breakdown maintenance||Cost variances||Stock price|
There are two major strikes against using batch metrics to manage the business:
1. The usual stretched-out batch-release cycle for such business metrics is quarterly and annually - much removed in time from causal actions.
2. More frequent review of the numbers would reveal little, because the metrics are so highly aggregated.
Aggregation of data can become really misleading. Michael Paris has published a table showing that the geometric growth of variables accompanies higher levels of aggregation. An adaptation of Exhibit 3 conveys the idea.
|Measuring the Measurements (Exhibit 3)|
|Item in production
Lean/TQ management and its metrics are to the point and action-inducing because they allow continuous improvement. In addition, the lean/TQ approach uses many reactive tools such as SPC (Statistical Process Control) to unearth the abnormalities and other problem solving tools to fix root causes.
The Power of Lean/TQ - and Related Metrics
In most situations, managers tend to use those “BAD” metrics, the batch metrics, because batch metrics can provide managers with a comfort zone and seem to validly define the super ordinate goals of upper levels in the hierarchy. Thus managers are pushed to practice malfeasance such as inflate end-of-period sales and earnings, and pre-date sales.
Schonberger provides two excellent examples of companies with lean/TQ management, Dell and Wal-Mart.
Dell is the leanest company among all manufacturers because it has a high inventory turnover rate of 63.5. This means Dell holds inventory for less than six days from purchasing, manufacturing and finishing the product. People wonder why Dell, a company building every PC to customer preference, does not have to pile up the inventory. With lean/TQ management dominant, it combines the manufacturing and shipping into a single, streamlined unit because it places emphasis on the amount of boxed stock temporarily at rest in its shipping department.
Dell’s competitive advantage is its high turnover rate of inventory because as inventory goes, so go responsiveness and flexibility (up) and costs (down). Dell emphasizes continuous improvement; thus there is an endless cycle of improvements and re-measurement.
Lean/TQ management practice allows Wal-Mart to improve its inventory turnover rate. The main competitive strategy of Wal-Mart is EDLP (Everyday Low Price), which is completely different from the conventional practice such as periodic sales promotion. The periodic sales promotion would only artificially create cycles of very high demand for sale items followed by plunging demand for the same.
Technology and Commitment
With advanced technology, Dell and Wal-Mart can link up-to-the-minute customer purchases to a system of continuous replenishment that cascades back through stages of supply rather than simply reducing the labor cost.
Reversing The Priorities
A reversal of metrics priorities is needed to obtain the correct performance measurements. This is not saying the batch metric should be totally eliminated, but batch measurements should cease to be dominant in managing the business.
Investors are no longer willing to take the financial reports at face value. They seek the truth hidden behind the numbers. Lean metrics can reveal the truth to the investors because it is more relevant to the operation and sensitive to customer demand. Thus companies with lean/TQ management have an advantage of presenting their company’s health because lean metrics provides rate-of-improvement information on competitive process factors. Managers believe that if they take care of the processes, and the business will take are of itself.
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