LEAN OPERATING SYSTEMS CHAPTER 17 DAVID A. COLLIER AND JAMES R. EVANS

17-1 Explain the four principles of lean operating systems. 17-2 Describe the basic lean tools and approaches. 17-3 Explain the concept of Lean Six Sigma and how it is applied to improving operations performance. 17-4 Explain how lean principles are used in manufacturing and service organizations. 17-5 Describe the concepts and philosophy of just-in- time operating systems.

A Michigan hospital manager noted, “Our hospital pharmacy processes are out of control. Patient health is at stake.” A study of pharmacy outcomes revealed that technicians were spending 77.4 percent of their time locating products, medication errors were high, and the current 14-stage process had some unnecessary steps, resulting in a total lead time of 166 minutes to fill a hospital prescription. Teams with names like “Paper Pushers” and “Zip Scripts” were formed and trained in lean operating methods and principles. Their objective was to apply lean principles to enhance the ability to deliver medications safely to hospital patients. After redesigning the system, the pharmacy realized a 33 percent reduction in time to get medications to patients, and reduced the number of process steps from 14 to 9 simply by removing non-value-added steps. Patients have experienced a 40 percent reduction in pharmacy-related medication errors, and the severity of those errors has decreased.

What do you think? Can you cite any personal experiences in your work or around your school where you have observed similar inefficiencies (how about your dorm or bedroom)?

Lean thinking refers to approaches that focus on the elimination of waste in all forms, and smooth, efficient flow of materials and information throughout the value chain to obtain faster customer response, higher quality, and lower costs. Manufacturing and service operations that apply these principles are often called lean operating systems. Lean concepts were initially developed and implemented by the Toyota Motor Corporation.

Principles of Lean Operating Systems Eliminate Waste: Eliminate any activities that do not add value in an organization. Includes overproduction, waiting time, transportation, processing, inventory. Increase Speed and Response: Better process designs allow efficient responses to customers’ needs and the competitive environment. Improve Quality: Poor quality reduces yields, requiring extra inventory, processing time, and space for scrap and rework. Reduce Cost: Simplifying processes and improving efficiency translates to reduced costs.

Exhibit 17.1 Common Examples of Waste in Organizations

Lean Tools and Approaches The 5Ss are derived from Japanese terms: seiri (sort), seiton (set in order), seiso (shine), seiketsu (standardize), and shitsuke (sustain). Sort: each item is in the proper place. Set in order: arrange materials so that they are easy to find and use. Shine: clean work area. Standardize: formalize procedures and practices. Sustain: keep the process going.

Lean Tools and Approaches Visual Controls Visual controls are indicators for operating activities that are placed in plain sight of all employees so that everyone can quickly and easily understand the status and performance of the work system. Examples: electronic scoreboards in production processes, painted areas on the floor where certain boxes and pallets should be placed, employee pull cords to stop production, signal lights on machines, and even Kanban cards.

Lean Tools and Approaches Single Minute Exchange of Dies (SMED) SMED refers to quick setup or changeover of tooling and fixtures in processes so that multiple products in smaller batches can be run on the same equipment. Reducing setup time frees up capacity that can be producing output, and therefore, generating revenue. Example: Yammar Diesel reduced a machine setup from 9.3 hours to 9 minutes!

Lean Tools and Approaches Small Batch and Single-Piece Flow Batching is the process of producing large quantities of items as a group before being transferred to the next operation. Single-piece flow is the concept of ideally using batch sizes of one. To utilize single-piece flow, a company must be able to change between products quickly and inexpensively by reducing setup times.

Lean Tools and Approaches Quality and Continuous Improvement Quality at the source requires doing it right the first time, and therefore eliminates the opportunities for waste. As an organization continuously improves its processes, it eliminates rework and waste, thus making the processes leaner.

Lean Tools and Approaches Total Productive Maintenance (TPM) TPM is focused on ensuring that operating systems will perform their intended function reliably. Goals: maximize equipment effectiveness and eliminate unplanned downtime. Create worker “ownership” of equipment. Improve equipment operation through employee involvement activities.

Exhibit Extra Timken’s DMAIC Toolkit for Lean Six Sigma

Lean Six Sigma Lean tools focus on streamlining processes, while Six Sigma tools focus on root causes of problems. Both are complementary and often used together, focusing on customer requirements and dollar savings and apply to both manufacturing and nonmanufacturing. Lean Six Sigma draws upon the best practices of both approaches. Often Lean Six Sigma is an important part of implementing a strategy built upon sustainability.

Lean Six Sigma Key differences between lean and Six Sigma: Lean is focused on efficiency; Six Sigma is focused on effectiveness. Lean tools are more intuitive and easy to apply; many Six Sigma tools require advanced training (e.g., statistical methods). Companies might start with lean principles and evolve toward more sophisticated Six Sigma approaches.

Lean Manufacturing and Service Tours The Timken Company is a leading manufacturer of highly engineered bearings and alloy steels and related products. Lean examples: Eliminate waste: eliminate non-value-added steps from processes. Increase speed and response: radically reduce cycle time for new product development with integrated supply chain. Improve quality: utilizing Six Sigma process variation tools and ISO 9000 quality standards. Reduce cost: using technology to reduce costs.

Lean Manufacturing and Service Tours Southwest Airlines has consistently been profitable, even though it cannot capitalize on economies of scale available to larger airlines. Lean examples: Eliminate waste: eliminate non-value-added steps from processes. Increase speed and response: radically reduce cycle time for new product development with integrated supply chain. Improve quality: utilizing Six Sigma process variation tools and ISO 9000 quality standards. Reduce cost: using technology to reduce costs.

Just-in-Time Systems Just-in-Time (JIT) was introduced at Toyota a half- century ago. Traditional factories use a push system, which produces finished goods inventory in advance of customer demand using a forecast of sales. Parts and subassemblies are “pushed” through the operating system based on a predefined schedule that is independent of actual customer demand. Push systems typically have long setup times and large batch sizes, resulting in high WIP inventories.

Just-in-Time Systems In a pull system, employees at a given operation go to the source of the required parts, such as machining or subassembly, and withdraw the units as they need them. By pulling parts from each preceding workstation, the entire manufacturing process is synchronized to the final-assembly schedule. Finished goods are made to coincide with the actual rate of customer demand, resulting in minimal inventories and maximum responsiveness.

Just-in-Time Systems JIT systems are based on pull-production, synchronizing the entire manufacturing process to the final assembly schedule. This results in smaller inventory between production stages, lower costs, and less physical capacity requirements.

Operation of a Just-in-Time System A Kanban is a flag or a piece of paper that contains all relevant information for an order: part number, description, process area used, time of delivery, quantity available, quantity delivered, production quantity, and so on. Kanban cards are circulated within the system to initiate withdrawal and production items through the production process. The Kanban cards are simple visual controls.

Exhibit 17.2 A Two-Card Kanban JIT Operating System Source: A Two-Card Kanban JIT Operating System in Martijn Thierry et al., “Strategic Issues in Product Recovery Management,” in California Management Review vol. 37, no.2 (Winter 1995), pp. 114-135. © 1995 by the Regents of the University of California. Reprinted by permission of the University of California Press.

Number of Kanban Cards Required K = d (p + w)(1+ ) [17.1] C where K = the number of Kanban cards in the operating system. d = the average daily production rate as determined from the master production schedule. w = the waiting time of Kanban cards in decimal fractions of a day (that is, the waiting time of a part). p = the processing time per part, in decimal fractions of a day. C = the capacity of a standard container in the proper units of measure (parts, items, etc.).  = a policy variable determined by the efficiency of the process and its workstations and the uncertainty of the workplace, and therefore, a form of safety stock usually ranging from 0 to 1. However, technically there is no upper limit on the value of .

Operation of a Just-in-Time System The number of Kanban cards is directly proportional to the amount of work-in-process inventory. Managers and employees strive to reduce the number of cards in the system through reduced lead times (p or w), lower α values, or other improvements.

Solved Problem Babbit Manufacturing uses a Kanban system for a component part. The daily demand is 800 brackets. Each container has a combined waiting and processing time of 0.34 days. The container size is 50 brackets and safety factor () is 9 percent. How many Kanban card sets should be authorized? What is the maximum inventory of brackets in the system of brackets? What are the answers to (a) and (b) if waiting and processing time are reduced by 25%? If we assume one-half the containers are empty and one-half full at any given time, what is the average inventory in the system for the original problem?

Solution Using Equation 17.1: K = d (p + w)(1+ )=(800 units)(0.34)(1 + .09)=5.93  6 C 50 Thus, 6 containers and 6 Kanban card sets are necessary to fulfill daily demand. The maximum authorized inventory is K×C = 6×50 = 300 brackets. K = d (p + w)(1+ )=(800 units)(0.255)(1 + .09)=4.45  5 C 50 Thus, 5 containers and 5 Kanban card sets are necessary to fulfill daily demand. The maximum authorized inventory is now K×C = 5×50 = 250 brackets. The average inventory under this assumption is 300/2 = 150 brackets.

JIT in Service Organizations Service organizations are increasingly applying JIT. Firms have reduced order cycle time, office space requirements, and inventory investments, and have increased profits. However, lean techniques can be detrimental to customer services that are based on human interactions.

JIT in Services

Exhibit 17.3 Example JIT Characteristics and Best Practices

Community Medical Associates Case Study Explain how CMA used the four principles of lean operating systems to improve performance. Using the information from the case, sketch the original paper- based value chain and compare it to a sketch of the modern electronic value chain that uses a common database. Explain how the performance of both systems might compare. What is the total annual record retrieval cost savings with the old (paper-based) versus new (electronic) systems? Does this CMA improvement initiative have any effect on sustainability? If so, how? If not, why? Using lean principles, can you simultaneously improve speed and quality while reducing waste and costs? What are the tradeoffs? Explain your reasoning.

JIT Difficulties at Starbucks Extra Slide JIT Difficulties at Starbucks Lean principles can’t be blindly implemented in services without considering its effects on customers, as Starbucks is discovering. Starbucks began to roll out “better way” initiatives—a series of process improvements using lean principles. Starbucks initiated a “lean team” that goes around the country with a Mr. Potato Head toy that they use in a lean training program for Starbuck managers. Managers learn how to assemble the toy in less than 45 seconds and apply the learnings to their store processes. However, customer service encounters may have suffered as one customer wrote: “Customers come into Starbucks—at least they did—to experience something that could only happen without lean—friendly banter with the barista, sampling coffee or a pastry, etc. Lean is best suited to assembly lines and factories, not so for managing human interaction, which is never a repeatable routine.”