By Jim Womack, Founder
The Lean Enterprise Institute
This guest column is made possible by special arrangement with the Lean Enterprise Institute (www.lean.org).
I started writing my monthly e-letter in October of 2001 to speak to the worries of the Lean Community as the world economy slid into recession. So this month marks the end of one complete cycle -- seven years of bust, boom, and bust -- as the world enters a new recession.
When Dan Jones and I wrote Lean Thinking in 1996, we believed that the spread of lean production would damp the business cycle. Economists have long thought that at least half of the depth of recessions is due to companies working off their inventories and delaying the purchase of more materials from suppliers. Because lean firms have much lower inventories of raw materials, work in process, and finished goods in relation to their sales, we thought the adoption of lean inventory management would have a recession damping effect on the whole economy. And perhaps we were right. The 2001 recession was modest compared with the previous recession of 1991. If we really are right, maybe the current recession will be milder than we now fear.
| Womack Says:
The problem with a recession is that it challenges lean organizations as they try to protect their problem-solving employees. It also challenges them as they try to defend the problem solving relationships built over time with downstream customers and upstream suppliers.
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In any case, we do face a major recession. I think of these events as a form of mura (variation), indeed as "mega mura" affecting the whole economy. By contrast, the aspect of mura that has drawn most of the attention of Lean Thinkers is internal variation within enterprises that is not due to long-term changes in external customer demand. Let's call this "mini mura."
Mura internal to the enterprise does include day-to-day variation in customer demand as long as it is not part of a long-term trend. It also includes gyrations in orders and operational performance progressing up a value stream -- through production facilities and suppliers -- that are caused by the internal dynamics of the process. These variations are the norm in modern production systems, leading to firefighting and muri (overburden of employees and technologies.) Toyota learned years ago to deal with this type of mura by creating basic stability in processes and introducing heijunka. The latter involves conscious leveling of short-term customer demand at some pacemaker point, with smoothed pull signals sent upstream from there.
Mega mura, by contrast, applies to large and lengthy shifts in total demand by external customers across the economy. Unfortunately, a boom in demand -- caused in the current case by the surge in real estate prices fueled by low interest rates and relaxed lending standards -- always leads to a bust. The sad part of these episodes -- which are as old as market economies -- is that they are almost never due to a fundamental change in consumer desires. Millions more Americans and Europeans didn’t suddenly want to own a home or buy a bigger home in the years after 2001. They presumably had always had these desires, but lacked the money to act on them. Instead the boom was caused by manipulation of the financial system -- through cheap credit, relaxed lending standards, and fanciful mechanisms for spreading lender risk -- to pump up the housing market for the short-term benefit of those doing the pumping.
What we really need as an antidote is macro-economic heijunka ("mega heijunka"?) in which governments foster steady, moderate growth with no booms and no busts. And economic stabilization policies toward this end -- fiscal and monetary -- have been pursued by every modern government.
Unfortunately, we have learned that stable growth is hard to achieve as a political reality. The lure of making short-term windfalls through financial fiddles is very strong. And regulators, like generals preparing for the previous war, are always putting mechanisms in place to prevent the last crisis, not the next one. In my mind's eye, the folks who thought up the credit default swaps, the collateralized debt obligations, and -- my favorite -- the synthesized collateralized debt obligations that fueled the recent boom, are now sailing their yachts on some tropical sea thinking up the next lucrative boom. And I wouldn’t bet against them.
(Manufacturing Article - Continued Below)