1. IENG 451 / 452 Lean Processes: Economics & Systems Thinking
IENG Lecture 15
Lean Processes:
Economics & Systems Thinking
11/17/2018
IENG 451 Operational Strategies
(c) D.H. Jensen

2. Toyota’s “New” Necessities
Fragmented Markets
Tough Competition
Fixed / Falling Prices
Rapid Technological Change
High Capital Costs
Need for Capable Workers
… this goes beyond manufacturing automobiles …
11/17/2018
IENG 451 Operational Strategies

3. Lean is a Response to Necessity
Dysfunction in Mass Production
Worker Alienation
Adversarial relationship
Little involvement in problem solving
Production Primacy -
(Quality Secondary)
Inspection vs. improvement
Re-work vs. improvement
Over - Specialization
Machinery
High capital investment
Unit efficiency and utilization vs. Global productivity
Engineering & Labor
Sub-specialties
Communication walls
Results of the
“Historic Bargain”
Management “has skin in the game”
Workers become a fixed cost
Labor, Engineering & Management become tenured
11/17/2018
IENG 451 Operational Strategies

4. Economics of Lean Systems
Old World Economics (before 1972 … 1985 … ish)
Economies of Scale reigned supreme
Market share was stable and only changed by Marketing Effort
Unit efficiencies were the focus of improvement efforts
Price Equation:
Price was a dependent variable
the equation was:
Price = Cost + Profit
where:
Cost was fixed by negotiated agreements with suppliers (or labor) and could be weaponized by market share (big companies could squeeze suppliers)
Profit (margin) was common across the industry and could be weaponized to maintain market share (barrier to market entry)
11/17/2018
IENG 451 Operational Strategies

5. Economics of Lean Systems
New World Economics (after 1972 … 1985
or whenever you got the memo)
Customer choices reign supreme
Market share is un-stable and is changed by disruptive forces
Global efficiencies are the focus of improvement efforts
Price Equation:
Profit is the dependent variable
the equation is:
Profit = Price – Cost
where:
Price is fixed by global market forces and can only be weaponized by disruptive innovations
Cost is the more variable variable and can only be weaponized by continual improvement of the system
11/17/2018
IENG 451 Operational Strategies

6. Thinking in Lean Systems
What does the SYSTEM need?
Focus is on VALUE:
Who are our customers
External
Internal
Operationalized: What do they need from us?
How are we doing with respect to our targets?
What are our top problems?
What are we doing about our top problems?
What else can we improve?
How do we involve more people in our improvement efforts?
11/17/2018
IENG 451 Operational Strategies

7. Thinking in Lean Systems
Customer FOCUS:
Focus on Productivity
Focus on Quality
Focus on Cost
Focus on Delivery
Focus on Safety & the Environment
Focus on Morale
(no … that is not a repeat … it is a leverage point!)
We think of small productivity improvements …
within the context of our system …,
to make an impact for our customers (large productivity)
11/17/2018
IENG 451 Operational Strategies

8. House of Lean CUSTOMER FOCUS: JUST IN TIME INVOLVEMENT: JIDOKA
Highest Quality, Lowest Cost, Shortest Lead Time
by continually eliminating Muda
JUST IN TIME
INVOLVEMENT:
JIDOKA
Flexible, motivated team members continually seeking a better way
(Intelligent Human-Machine Systems)
STANDARDIZATION
STABILITY
11/17/2018
IENG 451 Operational Strategies

9. IENG 451 Operational Strategies
Questions & Issues
11/17/2018
IENG 451 Operational Strategies
(c) D.H. Jensen