MARCH-APRn 1994 From Lean Production to the Lean Enterprise · MARCH-APRn 1994 From Lean Production to the Lean Enterprise by James P. Womack and Daniel T. Jones In our book The Machine

MARCH-APRn 1994

From Lean Productionto the Lean Enterprise

by James P. Womack and Daniel T. Jones

In our book The Machine That Changed theWorld, we explained how companies can dramati-cally improve their performance by embracing the"lean production" approacb pioneered by Toyota.By eliminating unnecessarysteps, aligning all steps in anactivity in a continuous flow,recombining labor

tivities is not the end of the road. If individualbreakthroughs can he linked up and down the valuechain to form a continuous value stream that cre-ates, sells, and services a family of products, the

performance of the wholecan be raised to a dramat-

into cross-functional teamsdedicated to tbat activity,and continually striving forimprovement, companiescan develop, produce, and distribute products withhalf OT less of the human effort, space, tools, time,and overall expense. They can also become vastlymore flexible and responsive to customer desires.

Over the past three years, we have helped a vari-ety of North American and European eompaniesimplement lean-production techniques and havestudied many others that have adopted the ap-proach. We've seen numerous examples of amaz-ing improvements in a specific activity in a singlecompany. But these experiences have also made usrealize that applying lean techniques to discrete ac-

ue-creating activities can bejoined, but this effort will re-quire a new organizationalmodel: the lean enterprise.

As we envision it, the lean enterprise is a group ofindividuals, functions, and legally separate but op-erationally synchronized companies. The notion ofthe value stream defines the lean enterprise. The

fames P. Womack is principal research scientist in theJapan Program at the Massachusetts Institute of Tech-nology and a member of The Transitions Group, a con-sulting firm in Cambridge, Massachusetts. Daniel Tfones is professor of management at the Cardiff BusinessSchool University of Wales. They are coauthors of TheMachine That Changed the World (HarperCollins, 1991).a book on lean production in the auto industry.

DRAWING BY ELWOOD SMITH 93

THE LEAN ENTERPRISE

group's mission is collectively to analyze and focusa value stream so that it does everything involvedin supplying a good or service (from developmentand production to sales and maintenance) in a waythat provides maximum value to tbe customer. Thelean enterprise differs dramatically from the much-discussed "virtual corporation," whose membersare constantly eoming and going. There is no waythat such an unstable entity can sustain tbe coUab-

Any manager aspiring to a leanenterprise must understand theconflicting needs of individuals,functions, and companies.

oration needed to apply lean techniques along anentire value stream.

We do not know of any group of companies thathas yet created a lean enterprise, and understand-ably. Doing so will entail radical cbanges in em-ployment policies, the role of functions witbincompanies, and the relationships among the com-panies of a value stream. Managers will have toconcentrate on the performance of the enterpriserather than on the performance of individual peo-ple, functions, and companies. This is especiallyimportant because even tbough one company willbe the "team leader," the enterprise must be uni-fied by shared logic and shared pains and gains.

Admittedly, linking lean activities is difficult.We've been struck repeatedly by how hard it is formanagers, accustomed to overseeing discrete func-tions and narrow activities while looking out forthe interests of tbeir own companies, even to seethe entire value stream. Why sbould companies settheir sights on tbe lean enterprise wben so manyare still struggling to master lean production? Be-cause unless all members of a value stream pull to-gether, it may be impossible for any one member tomaintain momentum. (See the insert "Lucas: Un-dermined from Without and Within.") Even if onemember makes a lot of progress in becoming lean,neither that member nor the stream as a whole willreap the full benefits if another member falls short.

The Three NeedsGetting managers to think in terms of tbe value

stream is the critical first step to achieving a leanenterprise. Managers who have taken this first step.

however, have often run into stiff resistance fromemployees and functional units as well as from oth-er companies in tbe stream. Individuals, functions,and companies bave legitimate needs that conflictwith those of the value stream. Anyone aspiring toa lean enterprise must first understand these needsand bow to satisfy them. (See the insert "Cbrysler'sNext Challenge: Building Lean Enterprises.")

Needs of the Individual. For most people, havinga job is the minimum requirementfor self-respect and financial well-be-ing. Thus it is ludicrous to assumethat people will identify and orches-trate changes that eliminate theirjohs. Because making any processlean immediately creates large num-hers of excess workers and then con-tinually reduces the amount of effortneeded, the jobs problem is a majorobstacle confronting any enterprise

tbat is trying to make a performance leap and thensustain its momentum.

Beyond a job, most of us need a career to give usa sense that we are developing our abilities andare "going somewhere." Also, most of us need a"home" that defines who we are in our work lives.These yearnings can be filled by a function ("I'm anelectrical engineer"), by a company ("I'm a Mat-sushita employee"), or even by a union ("I'm aSteelworker"). But the value stream itself cannotfill tbese needs for long. Wbile functions and com-panies endure, an employee's position within a spe-cific value stream is tied to the life of the product.

Needs of Functions. In order to use and expandthe knowledge of employees, companies must orga-nize this knowledge into functions, such as engi-neering, marketing, purchasing, accounting, andquality assurance. But functions do much morethan accumulate knowledge; they teach tbatknowledge to tbose who identify tbeir careers withthe function, and they search continually for newknowledge. In the so-called learning organization,functions are wbere learning is collected, system-atized, and deployed. Functions, therefore, need asecure place in any organization.

Because of the required depth of knowledge, thetime and effort needed to obtain that knowledge,and its inherent portability (much knowledge canbe carried from one employer to anotber), function-al specialists often feel a stronger commitment totheir function and its intellectual tradition thanthey do to either the value stream or the eompany.But focusing processes, which is the means of mak-ing organizations lean, requires a high degree ofcross-functional cooperation. It is not surprising.

94 HARVARD BUSINESS REVIEW March-April 1994

Lucas: Undermined from Without and WithinBy implementing lean techniques, Lucas PLC, a

British supplier of mechanical and electrical compo-nents to the automotive and aerospace industries,made great strides in improving product quality andon-time deliveries. But after about seven years,progress ground to a bait in some operations becausekey customers bad not similarly adopted lean think-ing. And other operations began to backslide as Lu-cas's plant managers and functional departments re-sisted changes tbat they saw as threats to their power.

Lucas was one of the first British companies toadopt lean tecbniques wben it recruited University ofBirmingham Professor Jobn Parnaby in 1983 to beada new process-improvement function.Parnaby quickly introduced tbe con-cepts of tbe Toyota Production Systemthroughout Lucas, witb extremelypromising initial results. For example,a Lueas aerospace-component plantbalved its lead times and work-in-progress inventories, and a truck-com-ponent plant doubled its inventoryturns and boosted the portion of ordersdelivered on time from 25% to 98%.Tbanks to sueh improvements, Lucasbegan to overcome its reputationamong customers as the " Prince of Darkness."

But problems soon emerged. An electrical-compo-nent factory that had embraced lean techniques, forexample, found itself backsliding because big eus-tomers like Rover and Ford had not yet made their op-erations lean. As a result, these eustomers continuedto place orders in an unpredictable fashion. To cope,the factory bad to maintain relatively higb invento-ries, a cardinal sin in lean production. True to form,workers began to rely on tbe inventories as a safetynet, and tbe lean factory began to gain weight.

Within Lucas, tbe new process-improvement func-tion was soon locked in a struggle with the traditional.

Workers began toreiy on inventories

OS o safety net,*'^ and the leoii.iA^|qctory began to

gain

vertical functions-marketing, product development,engineering, and production-over tbe former's effortsto improve efficiency. One plant installed a produc-tion line to manufacture a mechanical system in acontinuous flow. But ignoring Parnaby's protests, theengineering function hought and installed some ex-pensive, inflexible machines, which, as is typical ofsuch equipment, were difficult to switch from makingone type of component to making another. As a result,the plant had to revert to batcb production, and inven-tories and inefficiencies quickly increased.

Internal conflict at Lucas was also evident at a plantfor making truck components wben the produet-de-

sign function refused tbe advice of theprocess-management function. Thelatter developed a component thatpromised to be superior to competi-tors' offerings, but it turned out thatthe component couldn't be manufac-tured to the tolerances required. Ifa cross-functional design team in-cluding process management andproduction engineering bad overseenthe projeet, this folly could havebeen avoided.

Discouraged by all the battles with-in and without, Parnaby scaled back his efforts to in-stitute lean tbinking at Lucas. Hard hit by slumps inits key markets in tbe 1990s, Lueas has seen its profitswitber, bas suffered from management turmoil, andbas dramatically shrunk its product offerings andslashed its payrolls. Tbe company has also been a ru-mored takeover target. Tbe person who must contendwith these problems is George Simpson, who will as-sume the helm of Lucas in May. As the chairman ofRover, the British automaker, Simpson has used leanproduction to improve Rover's competitiveness dra-matically. He will undoubtedly try to force Lucas tocarry on the lean revolution it began over a decade ago.

then, that many executives these days view theirfunctions as obstacles.

Some executives and husiness theorists advocatepermanently assigning memhers of functions tomultifunctional teams as the solution to this con-flict hetween function and process. Others proposeweakening functions or subsuming the activities of"minor" functions like marketing within productteams. Both solutions may work for a while butwill weaken companies in the long run.

Needs of Companies. The narrower the scope ofresponsibility, the more easily a company can cal-culate costs and the benefits it generates and see

the results of its improvement efforts. Therefore,the value stream should be segmented so that eachcompany is responsible for a narrow set of activities.

Throughout most of industrial history, the valuechain has usually been integrated vertically withinone company, or one company has dominated theother companies making up the chain. These prac-tices make sense; after all, a company's most basicneed is to survive by making an adequate return,and weak links in the chain can he a far greaterthreat to a company's survival than the vagaries ofthe end-user market. As a result, companies under-standably consider control more important than ef-

HARVARD BUSINESS REVIEW March-Aprii 95

Chrysler's Next Challenge: Building Lean EnterprisesAs we were finishing our research for The Machine

That Changed the World m early 1990, we decided tosay as little about Chrysler as possible. We believedthat the company's managers were brilliant at sellingpoor-quality products and terrible at product develop-ment, production operations, and supply-chain man-agement. While Chrysler executives vowed that theywere implementing lean techniques in each of theseareas, we were highly skeptical.

We were spectacularly wrong. Chrysler actually wasembracing lean production, and the company is nowtrying to turn the value chains it leads into lean enter-prises. As Chrysler has worked toward this end, theconflicts between the needs of value streams andthose of the individuals, functions, and companiesthat make up the streams have become fully apparent.Chrysler is beginning to realize that overcoming tbeseobstacles is its next great challenge.

As part of Chrysler's move toward lean production,the company revamped its purchasing system and de-ployed cross-functional "platform" teams, each ofwhich focuses on developing one line of cars or trucks.Tbe platform teams have been a spectacular success inpart because Chrysler appointed a traditional functionhead to lead each team in order to minimize process-function conflict. The head of purchasing, for exam-ple, also heads tbe small-car team. Therefore, if a func-tion acts as a roadblock to one platform team, tbe

team's leader can threaten to hold hostage the productunder development by tbe offending function head'sown team, We don't propose this as a model for othercompanies, but this approach bas certainly endedChrysler's long-standing functional feuding.

Tbanks to a host of new products tbat commandprices in tbe top range of tbeir market segments anddramatic reductions in production costs due to betterdesign, Chrysler will probably make as mucb moneyin 1994 as will all Japanese automakers combined.Moreover, the time tbat Chrysler requires to bringa product concept to market has been cut from 60montbs in tbe 1980s to 31 months for tbe Neon,launcbed in January 1994. The number of full-time en-gineers involved in developing a new body and inte-grating tbe vebicle systems has gone from 1,400 to700. And the enbanced manufacturability of the prod-uct bas reduced the number of hours required to paint,weld, and assemble a vebicle from 35 to 22. Both theamount of time spent on final tinkering witb the prod-uct in the early stages of production and the number ofproduct recalls have also been slashed.

But sucb successes do not mean all is well. Mostmembers of the platform teams have been permanent-ly removed from tbeir former functional "bome," thebody engineering department. Until recently, teammembers were content to be part of a process withclear and positive results. But they are now becoming

ficiency or responsiveness. The natural responseduring hard times is for the strongest company toreintegrate as many activities as it can within itscorporate walls or for each company in the valuechain to grab as much of the profits or revenues as itcan from its neighbors.

Hints from Three Industrial Traditions

Given all these conflicting needs, it is easy to seewhy few enterprises achieve maximum efficiency,flexibility, and customer responsiveness. Nor is

blasting clear the channel-the stated mission of theprocess-reengineering movement-likely to providerelief for more than a short spell hefore the conflict-ing needs of individuals, functions, and companiesgum things up again.

In> searching for a solution, it's useful to lookanew at the three preeminent industrial traditions:the German, the American, and the Japanese. Eachhas derived different strengths by trying to satisfythe needs of either the function, the individual, orthe company. The conventional wisdom has beenthat the three traditions, whose shortcomings are

96 DRAWING BY DAVID CROLAND

anxious about tbeir lack of a career path (tbese teamsdon't need layers of managers witb fancy titles) andtbe dilution of their skills due to lack of communi-cation witb colleagues elsewhere in the company.Chrysler's cballenge is to define a new career for tbeseemployees, which sbould involve alternating thembetween teams engaged in developing and makingproducts and jobs where tbey can deepen their skills.

Such a solution would also address an emergingproblem caused by the elimination of the body engi-neering department. White tbis department was a ma-jor roadblock for the company, its elimination has cre-ated a vacuum in functional expertise at a time wbenthe auto industry is experimenting with new bodytechnologies based on aluminum space frames withplastic or aluminum skins. Chrysler dares not fall be-hind in its fundamental technical capabilities but doesnot wish to send the advanced R&D function on ex-cursions unrelated to the practical needs of the plat-form teams. The company, therefore, must redefine itsengineering functions so that they support its key pro-cesses but still bave a life of their own.

Chrysler also faces the challenge of redefining itssupplier relations in order to create four lean enter-prises: small cars, large cars, minivans, and trucksand Jeeps. The company has winnowed its supplierbase from a chaotic mass of 2,500 in the late 1980s to alean, long-term nucleus of 300. At the moment, sup-

pliers love working for Chrysler, and for obvious rea-sons: the company's production volume is growingrapidly. Chrysler includes suppliers in developmentactivities from day one and listens eagerly to tbeir sug-gestions for design improvements and cost reductions.Chrysler has also replaced its adversarial biddingsystem witb one in wbicb the company designatessuppliers for a component and tben uses target pricing(figuring out bow much consumers will pay for a ve-hicle and then working backwards to divvy up thecosts and profits) to determine witb suppliers the com-ponent prices and bow to achieve them. Most parts aresourced from one supplier for the life of tbe product.

Despite tbese improvements, Chrysler still pays toomueh for most of its parts. The problem is not exces-sive supplier profit margins but tbat Cbrysler, likemost Western automakers, has not been successful ingetting suppliers to implement lean techniques inways that are best for the enterprise. In addition,Chrysler and its suppliers have yet to devise pain-shar-ing principles to keep their relationship from degener-ating into an "every company for itself" battle in thenext economic downturn.

Chrysler's management is energetically trying toaddress tbese problems. Indeed, Cbairman RobertEaton and President Robert Lutz have made it clearthat Chrysler's main challenge in the 1990s is devisingand perfecting its own lean enterprises.

the product of these unavoidable trade-offs, are mu-tually exclusive. We disagree. In tbe course of ourextensive research on German, U.S., and Japanesecompanies, it has occurred to us that there is afourth approach. We believe that our model of thelean enterprise will satisfy the needs of individuals,functions, and companies. The end result will offergreater value to the customer than the existing tra-ditions can.

The German Tradition. The backbone of Germanindustry has been its intense focus on deep techni-cal knowledge organized into rigidly defined func-

tions. Individuals progress in their careers byclimbing the functional ladder. And companiesstrive to defend their positions in a value chain byhoarding proprietary knowledge within their tech-nical functions.

The consequence of this focus has been greattechnical depth and an ability to compete globallyby offering customized products with superior per-formance. The weakness of the German tradition,strikingly apparent in the 1990s, is its hostility toeross-functional cooperation. Mercedes-Benz, forexample, requires three times the number of hours

HARVARD BUSINESS REVIEW March April 19y4 97

THE LEAN ENTERPRISE

Toyota requires to engineer and manufacture acomparable luxury car, largely because the engi-neering functions won't talk to each other. Mer-cedes makes durable, high-performance cars, hutwith too many labor-intensive loops in the develop-ment process and too little attention to manufac-turability. The same holds true for almost all Ger-man industries, which have discovered that theworld will no longer huy enough customized goodsat the high prices required to support the system'sinherent inefficiency.

The American Tradition. The individual has al-ways been at the center of U.S. society. At thebeginning of this century, the lack of strong func-tional and craft traditions and the willingness ofsuppliers to collaborate witb assemblers were ma-jor advantages in introducing continuous flow andmass production.

But extreme individualism created its own needs.In the postwar era, managers sought portable pro-fessional credentials (e.g., an MBA) and generic ex-pertise independent of a particular business (e.g., fi-nance). And rather than stressing cooperation, eachcompany in a value chain, itself acting as an indi-vidual, sought to create its own defendable turf.

The consequence was that U.S. industry gradual-ly became as functional as German industry, butself-preservation, rather than a desire for technicalknowledge, drove functionalism in the UnitedStates. At the same time, the "every company foritself" tendency most evident in hard times greatlyreduced the ability of U.S. companies to think to-gether about the entire value stream. Even thoughthe willingness of Americans to innovate by break-

The cult ofthe individual hasundermined the United States'sposition as the world's mostefficient manufacturer.

ing away from employers and traditional intercom-pany relationships imparts a real advantage todayin nascent industries like information processingand biotechnology, this extreme individualism hascaused the United States to lose its lead in efficientproduction.

The Japanese Tradition. The Japanese havestressed the needs of the company, which is hardlysurprising given the centuries-old feudal traditionof obligation between companies and employees

and between big companies and their smaller sup-pliers and distributors. Government policy, with itsfocus on production rather than individual con-sumption, has reinforced this emphasis. The enor-mous benefit of the Japanese tradition has been theability of big companies to focus on the needs ofthe entire value stream unimpeded hy functionalfiefdoms, career paths within functions, and theconstant struggles hetween members of the valuestream to gain an advantage over each other.

But such an exclusive focus on the company pro-duces corresponding weaknesses, which have be-come apparent over time. For example, the techni-cal functions are weak in most Japanese companiesdespite the overwhelming dominance of engineersin management. Because most engineers havespent practically all their careers on cross-func-tional teams developing products or improving pro-duction processes, they have gotten better andbetter at applying what they already know. Butthe creation of new knowledge back in the techni-cal functions has languished. As a result, manyJapanese companies (from Toyota in cars to Mat-sushita in consumer electronics) that prospered bycommercializing and incrementally improving well-understood product and process technologies havenow largely cleared the shelf of available ideas forgenerating fundamentally new, innovative productsand processes.

Sony is a case in point. The company recently ac-knowledged that, for the first time in its history, nodramatic product breakthroughs were imminentand that it would try to defend its competitive posi-tion by adopting lean techniques to cut costs in its

increasingly mature product lines.We applaud, of course, whenever acompany adopts lean techniques.However, these should complementrather than substitute for innova-tion. Sony must address the weak-ness of its core technical functions inaddition to becoming lean.

Another weakness inherent in theJapanese system is that preservingfeudal relationships has become

more important than responding to shifts in themarket. During the last five years, Japanese compa-nies with massive export surpluses shouid have re-deployed production so that their output in a givenregion corresponded more closely to sales in that re-gion. Instead, constraints on reassigning employeesto new enterprises and abandoning traditional sec-ond- and third-tier suppliers caused many hig com-panies to invest in additional domestic capacity formaking the same families of products. This is why

98 HARVARD BUSINESS REVIEW March-April 1994

so many companies, including the model companyToyota, found themselves in deep trouble when theyen strengthened.

New Models for Careers,Functions, and the Company

The critical challenge for managers today is tosynchronize the needs of the individual, the func-tion, the company, and the value stream in a waythat will yield the full benefits of the lean enter-prise while actually increasing individual opportu-nities, functional strength, and the well-being ofmember companies. Achieving this balance will re-quire new management techniques, organizationalforms, and principles of shared endeavor.

When individuals and functionsfeel threatened by streamlined

I, thesebe streamlined for long.

Alternating Career Paths. If we have learned any-thing in recent years about the value stream, it isthat individuals must be totally dedicated to a spe-cific process for the value stream to flow smoothlyand efficiently. The old division of labor, whichshuttled the product from department to depart-ment, must give way to a recombination of labor sothat fewer workers, organized in focused teams, canexpedite the value flow without bottlenecks orqueues. Similarly, functional specialists involvedin product development must completely focus ontheir task in a team context.

But there is a problem. The individual facingpermanent assignment to a cross-functional teamis being asked to abandon his or her functional ca-reer path. At the same time, key functions face theloss of power and importance. When both individ-uals and functions feel threatened hy streamlinedprocesses, these processes won't be streamlinedfor very long.

The solution is a career path that alternates be-tween concentration on a speeific value stream (afamily of products) and dedicated, intense knowl-edge building within functions. These functionsmust include a new process-management function(in place of industrial engineering and quality as-surance) that instills a process perspective in every-one from the top to the bottom of the company.

_

t

In following this new career path, the individu-al's know-how will still he growing. But the valuestream itself will get his or her undivided attentionfor extended periods. Making this model work willbe the primary task of the human resource func-tion, which is responsible for ensuring that each in-dividual has a coherent career-a key to attractingand retaining employees.

The concept of an alternating career path hasnothing to do with matrix organizations, in whicheveryone has two bosses. In this new model, theprocess leader rates an individual's performancewhile an individual is dedicated to a process, butthe function head rates performance while the indi-vidual is back in the function. The career planner inhuman resources, the function head, and the pro-

cess leader decide jointly where theindividual should go next.

Honda has embraced this approachin Japan and North America, par-ticularly for engineers. When engi-neers join Honda, they go through arotation, common in Japanese com-panies, that begins with severalmonths on a production line, fol-lowed hy short stints in marketing,product planning, and sales. Honda's

practice then diverges from the Japanese norm ofassigning engineers to and keeping them in processteams. At Honda, the young engineer's first extend-ed assignment is on a product-development team,where he or she performs routine engineering cal-culations. This assignment continues for the life ofthe development activity, or up to three years.

After this job, the young engineer is assigned tohis or her technical specialty within the engineer-ing department to hegin a skills-upgrading process.As part of this phase, the individual is assigned toan advanced engineering effort involving a searchfor new techniques or capabilities that the compa-ny wants to master. Tbe engineer is then typicallyreassigned to a development team for a new productto perform more complex engineering tasks thatcall on his or her newly acquired knowledge. Afterthis development effort, the engineer goes back tothe "home" engineering function to begin anotherlearn-apply-learn cycle.

Functions Become Schools. The problem withfunctions in most companies today is that they per-form the wrong tasks. Purchasing should not pur-chase. Engineering should not engineer. Productionshould not produce. In the lean enterprise, func-tions have two major roles. The first is to serve asa school. They should systematically summarizecurrent knowledge, search for new knowledge, and

HARVARD BUSINESS REVIEW March-April 1994 99

Unipart: Turning Functions into SchoolsBritain's Unipart Group has gone further than most

companies in turning its functions into schools as partof the company's effort to become lean. Unipart wascreated in 1987, when Rover sold a collection of dis-parate, highly autonomous functions to employees.Unipart then turned these functions into independentdivisions, which included auto-parts manufacturing;warehousing, distribution, marketing, and sales ofUnipart's and others' auto components; informationsystems; and video production.

John Neill, Unipart's CEO, pushed each Unipartbusiness to become lean on its own.But auto-parts manufacturing wasclearly the most successful Its plantsthat make fuel tanks and exhaust sys-tems for cars, which learned lean tech-niques from Honda's and Toyota'sBritish plants, won the U.K. Factory ofthe Year Award in 1989 and 1993.

When Neill decided that the auto-parts manufacturing business sbouldteach the other husinesses its secrets,he quickly realized that given theirhistory of operating autonomously,this was much easier said than done. He also realizedtbat if things did not change, Unipart would fail toleverage the knowledge of a practice leader, and, he-cause the husinesses were interdependent to a certainextent, the laggards would prevent tbe wbole compa-ny from becoming as lean as possible.

To tackle tbese problems, Neill created "UnipartUniversity." He made each business responsible forfinding the best practice in its field, customizing it forUnipart, and then teaching it to the other businesses

Each Unipartbusiness, complete

with its own* "faculty/' isa^ ^ center of |̂

expertise

and their partners. In otber words, each Unipart busi-ness, complete witb its own "faculty," is a center ofexpertise. "Through tbis forum we sbare tbe bestavailable learning with our colleagues," Neill says.

Tbe Information Tecbnology Faculty, which resides jin tbe information-systems company, for example, is|responsible for upgrading IT skills throughout Uni-part. And tbe Industries Faculty, which resides in themanufacturing company, is playing tbe lead role inteaching its suppliers as well as tbe warebouse opera-tion tbe process-management techniques it gleaned

from Honda and Toyota. In the caseof the warebouse operation, tbis en-tails teaching it how to work witb itsmajor suppliers so that together tbeycan fill orders on time, wbich willenable the warehouse operation to cut |its inventories.

Tbe "deans" of the faculties, most ofwbom are tbe heads of tbe businesses,sit on tbe Deans Group, wbicb steerstbe university, ensures tbat prohlemsare discussed eompanywide, and initi-ates research on ways to solve them.

The Deans Group recently charged two faculties witba critical task: researching how to select and developleaders of self-managed, shop-floor teams. As part ofthat effort, tbe group from the industries and ware-housing faculties visited Japan and the United Statesas well as Honda's and Toyota's British operations .

"Our vision," Neill says, "is to build the world'shest lean enterprise. Tbat means continuously inte-grating training, or should I say learning, into the deci-sion-making systems of tbe company."

teach all this to their members, who then spendtime on value-creating process teams. (See the in-sert "Unipart: Turning Functions into Schools.")

The second role of functions is to develop guide-lines - the best practices - for, say, purchasing ormarketing and to draw up a roster of those compa-nies eligible to be long-term partners in the valuestream (suppliers, in the case of the purchasing de-partment). With their counterparts in companiesup and down the value stream, functions should al-so develop rules for governing how they will worktogether to solve problems that span the companiesand for establishing behavioral codes so that onecompany does not exploit another.

So who actually performs the tasks that thesefunctions traditionally handled? Cross-functionalproduct-development and production teams should

select suppliers, develop products, and oversee rou-tine production activities. The traditional purchas-ing department, for example, should define theprinciples of enduring relationships with suppliers,draw up the roster of eligible suppliers, and strive toimprove continuously the performance of everysupplier. The product-development team shouldperform the purchasing department's traditionaljob of deciding to ohtain a specific amount of a spe-cific item at a target price from a specific supplierfor the life of the product.

The experience of Nissan's British subsidiary pro-vides a striking example of what can happen whena purchasing department rethinks its mission. Nis-san had serious problems during the 1989 produc-tion launch of the Primera, its first car designed forthe European market, when several suppliers dis-

100 HARVARD BUSINESS REVIEW March-April 1994

THE LEAN ENTERPRISE

rupted production hy failing to deliver workableparts on time. The normal course of action inBritain would have heen to replace the miscreants.Instead, Nissan's British purchasing departmentteamed up with the Nissan R&D center to placesupplier-development teams of Nissan engineersinside each supplier for extended periods to im-prove their key processes. Nissan's theory was thatsetting high standards and giving the suppliers ad-vice on how to meet them would produce superiorresults. Two years later, when Nissan began pro-duction of the Micra, a new small car, this approaehhad transformed these suppliersfrom the Nissan subsidiary's worstinto its best.

What is the role of other func-tions? Marketing defines principlesof enduring relationships with cus-tomers and/or distributors and iden-tifies suitable partners. The tradi-tional marketing and sales tasks ofspecifying the product, taking or-ders, and scheduling delivery he-come the work of the product-development andproduction teams. Engineering defines the hest en-gineering practices, which it teaches to engineers.It also searches for new capabilities, such as newmaterials to reduce weight in its products. By un-dertaking such jobs, the engineering function ex-tends the expertise of the discipline by finding waysto overcome the shortcomings of today's productsand processes. It can then apply its new knowledgeto the next generation of products or to entirelynew products. The product-development team per-forms all routine engineering; it solves problemsthat have been solved before for similar products.

Finally, a new process-management function(which still does not exist in the vast majority ofcompanies) does three things: it defines the rulesfor managing cross-functional teams and the con-tinuous flow of production, including quality assur-ance; it teaches team leaders in product develop-ment and production how to apply these rules; andit constantly searches for better approaches. Theold departmental structures within production -molding, painting, assembly, quality assurance -disappear into the continuous-flow productionteams in charge of making families of products.

While functions become "support" for value-cre-ating process teams, every function paradoxicallyhas a deeper and more coherent knowledge basethan was possible wben it divided its attention be-tween thinking and doing. Moreover, this knowl-edge base is more relevant to the company's long-term needs because function members returning

from value-creating assignments in tbe processesbring new questions for the function to answer.Constantly applying knowledge in this way fightsthe tendency of all intelleetual activities to veer offinto abstractions when left in isolation.

A Sharper Focus for Companies. Most companiestoday do too much and do much of it poorly. In theworld of the lean enterprise, each company in a val-ue stream will tackle a narrower set of tasks that itcan do well.

The company that is the assembler, for example,may find tbat it no longer needs to design or pro-

Nissan's British subsidiaryturned its worst suppliers into its

best by helping them improvetheir key processes.

duce any of the major component systems in itsproduct because produet development (in collabo-ration with suppliers and distributors) and final as-sembly are its real skills. The component-systemsupplier may discover it no longer needs to makethe parts in its systems because design of the com-plete system (in collaboration with customers andits own suppliers} is its competitive advantage.New companies may emerge to design componentsystems or make discrete parts and to supply ser-vices, like cleaning facilities, that are tangential tothe mission of focused companies. Japanese indus-tries, whose companies have been less vertically in-tegrated than U.S. and European companies, havelong taken this approach, and many North Ameri-can and European industries, from aerospace to au-tomotive to appliances, are following suit.

At the same time, all companies will need to par-ticipate in several enterprises involving differentsets of companies in order to obtain the stabilitythat any one value stream, with its inevitable upsand downs, cannot provide. Stability aside, compa-nies will want to participate in a range of streamsinvolving a range of products or services in order tolearn from companies that think in different ways.Tbis is a key to continuous improvement.

A New Code of BehaviorFor lean companies to be able to work together

and to be assured of survival, tbey must developnew principles for regulating their behavior. Cold

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THE LEAN ENTERPRISE

War-like relations prevail among companies inmost value chains today. No one would suggestthat the real Cold War would have been resolved ifthe Eastern and Western blocs simply trusted eachotber. The current notion that companies can endtheir hostilities simply by embracing trust is equal-ly implausible.

All negotiated peace arrangements, includingthose in the corporate world, entail an agreementon the principles of just behavior and proceduresthat enable each party to verify that others arekeeping their end of the deal. When this latter con-dition is met, trust occurs naturally because every-one can see what's going on.

Achieving cooperation within the value stream isparticularly difficult. Every stream needs a "teamleader," a company that orchestrates the decisionto form an enterprise, pulls together the full com-plement of member companies, and leads the jointanalysis of tbe total enterprise stream. Unfortu-nately, industrial history is replete with stories ofcompanies that have used their leadership posi-tions to extract advantage from upstream anddownstream partners. And the overwhelming ex-pectation is that these leaders will continue to be-have this way.

Obviously, the principles for regulating behaviorwithin a value stream will vary with the nature ofthe product and the degree of familiarity of itsmember companies. However, there must be clearagreements on target costing (deciding what pricethe customer would pay for a product and thenworking backward to determine how that productcan be made so tbat it also delivers a profit), accept-able levels of process performance, the rate of con-

An enterprise must draw up acode of behavior to keep itsmembers in line.

tinuous improvement (and cost reductions), consis-tent accounting systems to analyze costs, andformulas for splitting pain and gain.

In every case, companies in a stream must dis-cuss the total activity, tbe performance require-ments for individual activities, the verification pro-cedures for performance, and the reward formulas.They must do this before tbey embark on the taskand adopt explicit principles of interaction that ev-eryone agrees are just. This is what Nissan is at-tempting to do.

When Nissan established its manufacturing op-eration in Britain in 1986, it could not bring most ofits suppliers from Japan. (Its production volumewas initially too small, and it had agreed to makecars with a high level of local content in return forstart-up aid from the British government.) But theEuropean companies that were chosen as suppli-ers were initially unsure of the depth of Nissan'scommitment to them. Would Nissan eventually re-place them witb members of its own keiretsufrom Japan? Would tbe company's commitment toits European suppliers survive the next econom-ic downturn?

To dispel these doubts, Nissan bas worked hardto establish and adhere to principles governing itsrelationships with suppliers. These include a per-manent commitment to suppliers that make a con-tinuous effort to improve; a clear role for eachsupplier within the supply chain; a joint examina-tion of ways the entire value stream can reducecosts; and a commitment to help improve pro-cesses when problems emerge. These principlesexplain Nissan's decision to help inept suppliersimprove rather than dumping them, a decision thatsent a powerful signal to the rest of its suppliersand strengthened the group's pursuit of the leanenterprise.

Once companies in the stream, including theteam leader, accept a set of clear principles, the nextstep is mutual verification. The activities of eachcompany must be transparent so that the upstreamand downstream collaborators can verify that alltasks are being performed adequately. One way todo this is a continuing process "audit" similar inspirit to the audits companies currently perform on

the quality assurance techniques ofsuppliers. Such audits must be con-ducted jointly and in both directions:customer-supplier and supplier-cus-tomer. This means the end of secrecyin product development and produc-tion operations and suggests theneed to go even further with activity-based costing so that the indirect

costs of all activities are fully understood and dra-matically reduced.

The most difficult disputes between enterprisemembers will involve their respective productivityand creativity rather than their respective profitmargins. Some members might say to anothermember, "Your profit margin is actually too low.Your costs are much too high because you failed toapply lean techniques in product development andproduction processes. We won't help pay for yourinefficiency." Or they might say, "You seem unable

102 HARVARD BUSINESS REVIEW March-April 1994

to provide the next generation of technology fora key component system in our shared product.Address this issue or find a new enterprise!"

Proposals for virtual corporations, in which"plug-compatible" members of the value streamcome and go, fail to grasp the massive costs of casu-al interactions. These arrangements are fine fornascent industries in which product specificationand market demand are subject to dramatic and un-predictable change. But they are ter-rible for the vast majority of com-mercial activities.

The lean enterprise is also very dif-ferent from the vertical keiretsu ofJapan, whose members cement theirrelationships by taking equity stakesin each otber. Unlike keiretsu mem-bers, participants in the lean enter-prise must be free to leave if collaborators fail toimprove their performance or refuse to revealtheir situation.

Strategy for the Lean Enterprise

The companies joined in a lean enterprise musttarget the best opportunities for exploiting theircollective competitive advantage. But their strate-gic thinking must also include a new element tocomplement and sustain the new concepts of ca-reers, functions, companies, and the shared enter-prise: how to find additional activities sufficient inmagnitude to sustain tbe relationships that are thebasis of superior performance.

We noted at the outset that, hy its nature, thelean enterprise does more and more with less andless. This performance leap requires the continuinggung-ho involvement of every employee and alliedcompany. All companies in a value stream mustcollectively determine how much labor, space,tooling, and time are necessary. Each member oftbe enterprise must then focus its activities by re-turning all employees who are not creating value totheir home functions. It is impossible to imple-ment and sustain a lean value stream with excesspeople, space, time, and tools.

Of course, unceremoniously dumping employeesand allies as productivity gains are realized is thebest way to ensure that such gains are not sus-tained. Employees will naturally place self-preser-vation above the value stream. In addition, compa-nies that fire thousands of people run the risk of

sparking a public backlash that could lead to greatergovernment restrictions on their ability to shrinktheir workforces.

So how can companies avoid massive layoffs?One way is lowering prices by passing the cost sav-ings on to tbe final consumer in order to increasesales or to grab share from less lean competitors.(Obviously, individual suppliers, especially in theWest, now cannot dictate that their price reduc-

Companies must pursue everyoption for preserving jobs

as they create lean enterprises.

tions be passed on to final consumers. This is an-other reason the lean enterprise, which can makesure this happens, is so important.) Another way isspeeding up produet development to expand offer-ings in existing product families and to create newmarkets for core technologies.

Clearly, not every company in every enterprisecan preserve all of its jobs. Some companies in ma-ture industries may bave to lay off workers or aban-don suppliers. However, companies that sincerelyand visibly explore all options for preserving jobs asthey create lean enterprises will make unavoidablelayoffs easier for employees to accept.

The PrizeA concerted effort by companies across the in-

dustrial landscape to embrace the lean enterpriseand find new tasks for excess employees will bevastly superior to any industrial policy that govern-ments devise. An economy dominated by lean en-terprises continually trying to improve their pro-ductivity, flexibility, and customer responsivenessmight finally be able to avoid the kind of social up-heavals that have occurred when new productionsystems have rendered existing ones obsolete.

If this sea change in industrial practice comesto pass, most individuals, companies, and enter-prises will prosper. Equally important, we will wit-ness a productivity explosion, coupled with employ-ment stability, that will provide the long-soughtantidote to the economic stagnation plaguing alladvanced economies. ^

Reprint 94211

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