Economies of Scale (Don't)

December 2, 2008 — Posted by Guy Beaver

"Economies of Scale" is a phrase that is often mentioned as a desirable state for growing enterprises. After all, being large enough to drive cost down by sheer purchase volume is a logical progression of successful companies. But what is the price paid for achieving this milestone? This blog post exposes hidden waste that must be controlled when economies of scale take over.  I'll touch on how Lean approaches can prevent and eliminate the wasteful belief systems that clog the flow of product delivery.

Jeffrey Liker describes the motivation for Lean in his very excellent book, The Toyota Way. The post-World War II economy was so limited that manufacturing enterprises could not afford inventory, so they had to find other ways to manufacture.

While Ford and GM used mass production, economies of scale, and big equipment to produce as many parts as possible, as cheaply as possible, Toyota's market in post-war Japan was small. Toyota also had to make a variety of vehicles on the same assembly line to satisfy its customer. Thus, the key to their operations was flexibility. This helped Toyota make a critical discovery: when you make lead times short and focus on keeping production lines flexible, you actually get higher quality, better customer responsiveness, better productivity, and better utilization of equipment and space. (p. 8)

So what principles are in play here, and how can we create a belief system that leverages this approach?

With good intentions, business success and growth is often accompanied by a focus on cutting costs. Increased size creates opportunities to reduce costs by volume purchases and the ability to store inventory. But, too often, the ability to purchase and store inventory creates unintended opportunities to hide waste and wasteful activities. Since the cost of inventory is reduced, its perceived value is also reduced. In the manufacturing world, this is manifested by organizational focus on further reduction in cost, which de-focuses the enterprise from its fundamental purpose- adding value to their customers. A common result is that wasteful behavior creeps in. In the interest of keeping large, expensive machines (or processes) running, inventory is allowed and even encouraged to grow. Cost accounting even values inventory as an asset. The cost reduction achieved through large volume purchases can create a wasteful culture that hides inefficiencies, defects, and non-value-added activities.

A reoccurring pattern that I've discovered in large organizations is what I call "The Professional Syndrome." It occurs when large groups of highly skilled professionals are individually tasked with multiple projects and make progress each and every day against what they individually perceive as the "most valuable" way to fill their productive time. With large batches of non-prioritized (but important) work "pushed" through the professional organization, individuals can easily be blocked due to waiting, delays, etc. But their professional behavior (and skills in multi-tasking) drives them to work on the next most important task. Integrate this over time for the large number of projects that are pushed through the organization and the unexpected result is the biggest cause of unnoticed waste – everyone "almost" working on the most important thing. There is even a well-documented approach for managing this pattern known as "project portfolio management," which by its very nature, batches up large volumes of work with little or no visibility into priority, other than "it all has to be done."

If parts are cheap then it becomes OK to waste them. If requirements are plentiful, then the same behavior creeps in. Hidden in each day's task-shifting activities are wasteful delays and impediments which the organization has no motivation to address. If instead, small batches of highest priority requirements are worked on to completion, any delays are instantly made visible, and the organization can "inspect and adapt" on a regular basis.

The Lean approach was created by the need for sustainable manufacturing practices that did not require inventory. In doing so, the unexpected outcomes were optimized approaches that maximized flexibility and created structures that brought immediate attention to wasteful activities and behavior. This "line-of-sight" seems to be missing in most large enterprises that organize around skill sets. Transparency and focus on value-added activities should be the structure of the delivery organization if Lean methods are to take hold.

So here's a question: Are your people working on almost the most important thing?

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About the author | Guy Beaver

Guy Beaver was VP of Enterprise Engagements and a Senior Consultant. He is a seasoned technology executive known for building Lean organizations that are driven by business priorities. With 30+ years experience in Financial Services, Aerospace, Health Care and eCommerce, his technology accomplishments include managing enterprise web development and delivery for world class transaction systems (16 Million users), large data center transitions, and SaaS operational excellence utilizing Lean IT practices. He is skilled at organizational change and is the co-author of Lean-Agile Software Development: Achieving Enterprise Agility.


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