The lean idea was started by Toyota in the war-torn Japan in the 1950s, almost by necessity. It turns to be very effective and helped Toyota grow and even dominate the world auto market towards the end of the 20th century.
It also fundamental influenced the industrial world. Now almost all the large corporations are claiming that they are doing some versions of ‘lean’ to varying degrees of success. But the reason behind this is worth pondering.
It turns out that the lean philosophy coincides with almost every CEO’s desire to boost up ROA – Return on Asset – a key metric on how they are being evaluated and rewarded. Inventories are assets. By reducing inventories, their companies can claim to have a higher ROA, and in turn they will be rewarded by a higher stock price (that is how it works anyway, most of the time).
Knowing that will help us to see why lean can be so easily abused and misused. Lean started as a common-sense idea, but now it is often being used beyond common sense. I recently listened to a podcast on the book “How the World Ran Out of Everything: Inside the Global Supply Chain” by Peter Goodman. It is full of sharp revelations on how the consulting companies are using lean to fatten up the wallets of company executives.
“So the Lean Taliban refers to the way the people at McKinsey and Company, the business consultancy viewed themselves in proselytizing for lean manufacturing, or just in time as we know it[.] [N]ow, just in time, is a very sensible idea, pioneered by Toyota that says, you know, instead of having giant warehouses filled with all kinds of stuff that we may need at some point in the future, but who knows when it’s Japan, the end of the second World War space is limited, capital’s limited. Let’s have the suppliers bring the stuff we need on the supply chain as we need it. They, they sort of emulated the way a supermarket deals with milk. You, you want enough on the shelf that everybody gets milk, they don’t leave unhappy, they can’t buy it, but not so much that you’re spilling it. Well, this is a great idea until business consultancies like McKinsey get hold of it and turn it into this crude imperative to just slash inventory hand the extra savings to the corporate executives as a reward for being smart enough to hire McKinsey.“
The book has quite a few fascinating examples, and links the supply shortage during the pandemic to the misuse of lean. Here is one example:
“And I end up digging deep into how this actually works in the decades before the pandemic, and I spent time with this guy in Minnesota who was working at this industrial generator plant where McKinsey’s, lean Taliban show up, bunch of slick suited young people, straight outta Ivy League universities, one older guy from the Chicago branch. And they say, you’re doing it all wrong. You know, why do you have all these $5 sheet metal brackets sitting around taking up space in warehouses? Let’s go lean, just order them when you need them. And the guy I’m talking to, he says, well, well hold on Indus, these are giant industrial generators that need to be installed by Crane. Talk about just in time. And if we listen to your advice, we’re gonna be slow with orders. Which is exactly what happens. So now they’re spending hundreds of thousands of dollars to expedite delivery of their products. They’re losing sales because they’re upsetting the contractors. We’re waiting for their generators. Also, they can say, look at us being so lean that we don’t have $5 sheet metal brackets.”
You can listen to this highly entertaining and educative podcast here: