It seems to be popular these last years and more recently to explicitly state that Lean is not (only) about cost reduction or cost cutting. See the recent posts by Mark Graban or Matt Hrivnak. So let me be somewhat controversial in this post (which I think is allowed to spark the discussion) and drop a bombshell: I think Lean is about cost reduction.
Now I can’t of course argue with the interpretations that people may have when they read about cost reductions, and surely, generally it will have negative connotations. But it is interesting, still, to contrast these thoughts with the original ideas about what now is called Lean, by going back to what Toyota, Taiichi Ohno and Shigeo Shingo said and wrote about this topic in the period when the world first started learning about the Toyota Production System. Then when going back to the origins and the intent of the TPS, there clearly is strong focus on cost reduction. So how does this match up, one might wonder. A post trying to close the gap between cost reduction how it is often practiced, and understanding cost reduction as intended in Lean.
To better understand cost reduction as it was originally intended at Toyota, I would like to touch upon a few underlying lines of thought in the TPS, primarily based upon — to me — four books and an article close to the source of the Toyota Production System and that I consider key literature for any Lean practitioner (mentioned below the article, for reference). Much of the below text is also literally taken from these sources to avoid differences in representation (before someone accuses me of plagiarism).
The themes I will touch upon are the subtracted cost principle, the elimination of waste, just and unjust cost, increasing labor density and rationalization, worker saving versus layoffs and respect for humanity.
1. The Subtracted Cost Principle
Let’s first start with the way Toyota looked at cost. At Toyota, they do not use the “cost + profit = selling price” formula. Their line of thought is, that if they were to insist on abiding by this cost principle, they would say to themselves: “Well, we cannot help it if this product costs so much to make. We have to be able to make this much money out of it”. This would mean every cost would have to be borne by the customer and that the consumer is made responsible for cost. We cannot afford to take this attitude. Ohno called this “the easy way out”. It has no place in today’s competitive industry.
Since the market always determines the appropriate selling price, Toyota uses a “non-cost” principle instead, represented by the “selling price – cost = profit” formula. Shingo also referred to this formula as the “subtracted-cost” or “minus-cost” principle. Thus in order to make a profit, the only recourse left is to lower the cost as much as possible. Consequently, cost reduction activity should have the highest priority and cost reduction must therefore be the goal, as stated explicitly by both Ohno and Shingo in their writings. Shingo even states that this line of thought is the foundation on which all other principles in the TPS are developed.
2. Eliminating Waste
The concept of waste in the Toyota system goes back a long way. After World War II, Kiichiro Toyoda, then president of the Toyota Motor Company, said, “Catch up with America in three years.” Ohno describes how he figured out that the difference in productivity between American and Japanese workers must have been something like one to nine and how he wondered how an American worker could exert nine or ten times more physical effort. He concluded that the Japanese were wasting something and that if they could eliminate the waste, productivity could rise by a factor of nine or ten. This idea marked the start of the present Toyota production system, he states.
Following the above, at Toyota, they define the verb “to work” very precisely. To “work” means that they make an advance in the process and enhance the added value of the product. All other movements are seen as merely making a motion. So, one is the movement necessary for making products, one that moves the manufacturing process forward, and the other is not. The latter is wasted motion or waste (muda). When you have this frame of mind, you may suddenly discover that a lot of what you are doing and giving us the appearance of working hard (just because you are using your labor), is not real work; is not about getting work done. Ohno states that many mix up motion and work. Ohno considers wasting a workers capacity like this a terrible waste and strongly feels this waste must somehow be eliminated.
Briefly stated, value-added work means some kind of processing — changing the shape or quality, nature or character of a product or assembly, so that raw materials or parts are made into products that generate added value. Anything other than these operations constitutes waste and eventually become part of the direct and indirect labor cost, depreciation cost, and general management expenses. The problem is that waste usually escapes notice, because it has become accepted as a natural part of everyday work.
3. Just and Unjust Cost
Because of the nature of waste becoming part of our everyday work, when people speak of cost, it is in fact a hybrid of what is called “just” and “unjust” costs, and in the case of the latter, it includes those portions of personnel and materials costs that are not really necessary in manufacturing a product. In Toyota therefore they have a saying: “The true cost is only the size of a plum seed”. The trouble with most managers is that they have a penchant for bloating the plum seed into a huge grapefruit. They then shave off some unevenness from the rind and call it cost reduction, it reads.
4. Increasing Labor Density and Rationalization
Up to here, I hope it is clear that in the Toyota Production System, the focus definitely is on cost reduction, but — in order to try and be more specific — on the reduction of “unjust” cost related to anything that does not advance work, i.e., all wastes. And yes, that is more specific than and different from the general notion most people have of the concept of “cost reduction”. But let’s try and dive in deeper and focus somewhat more on the way labor cost is viewed.
When Ohno wrote about “manpower reduction” he described it as “raising the ratio of value-added work”, or — even more explicitly referring to the above description about reducing unjust cost — transforming the wasted motion (ugoki) into real work (hataraki) through improvement, referred to as “rationalization”.
This introduces the concept of “labor density” which is defined as the ratio of work (value-add) and all motion. The labor density or utility factor therefore can be seen as the percentage of labor expended for producing a given product (all motion) in relation to the labor required for making that product (real work). The act of intensifying labor density means making the denominator (all motion) smaller — by eliminating waste — without making the numerator (real work) larger. Ideally labor density must be at 100 percent. Shingo referred to this labor density ratio as the (net) operating ratio or operating efficiency.
5. Worker Saving versus Layoffs
It interesting to see that at Toyota the term “worker saving”, or even better: “using fewer workers”, is used explicitly. It is even used instead of “labor saving”. Reducing the work assigned to one person by 0.9 person — typically referred to as labor saving — does not result in cost reduction, Ohno wrote. In reality you have accomplished nothing. True cost reduction can come about only after the real number of workers is reduced. Therefore Toyota refers to “worker saving” to differentiate it from mere “labor saving”. So yes, Toyota does look actively and explicitly at reducing the number of workers. But what is different is that when Ohno speaks of “worker saving”, he does not speak of laying off workers. He explicitly considers that a bad practice. Instead, he writes, it is management’s responsibility to identify the excess manpower and to utilize it effectively.
So how does one effectively utilize the surplus of man-hours and actual idle workers that are the result of increasing labor density, when there is no way to increase the added value for the company? First of all, Toyota’s philosophy is that it is better to allow workers to be idle than to overproduce (considered the worst waste of all). Furthermore, in Japan, management is responsible for protecting a worker’s job — companies rarely lay off workers during slow periods and then call them back when demand increases. Therefore, at Toyota, idle workers contribute to cost reduction through various tasks, like repairing small leaks, maintaining and repairing machines, practicing and improving change-overs, fabricating jigs, tools and fixtures for planned improvements, training and improving standard work or by insourcing work that was previously done by outside suppliers.
But rather than starting out with a wasteful excess of people and gradually cutting back, so is Toyota’s line of thought, it is even better to begin the job with minimal manpower and handle production increases not by adding people but through creative ideas for improvement and rationalization. The layoff question can even be avoided completely, precisely by doing kaizen in slow demand periods.
6. Respect for Humanity
As we have seen, rationalization changes the wasted motion into real work through improvement. It therefore can be seen as channeling the energy of men into effective, useful and value-added work. Employees give their valuable energy and time to the company. If they are not given the opportunity to serve the company by working effectively, there can be no joy. For the company, to deny that opportunity is to be against the principle of respect for humanity. Rationalization therefore is an expression of our respect for humanity, so Toyota states.
Also in one of the earliest, if not first, publications about the Toyota Production System, the elimination of waste movements by workers was mentioned under the heading of respect for humanity. It was written that “workers may realize their work worthy only if the labour of diligent workers is exclusively used to raise added value of products.” It was one of the elements of Toyota’s system of respect for humanity, alongside the consideration for workers’ safety and the “self-display of workers’ capabilities by entrusting them with greater responsibility and authority”.
Lean is about Cost Reduction
Now isn’t that interesting? We moved from cost reduction interpreted as layoffs to cost reduction in the interpretation of reducing unjust cost, eliminating waste, increasing labor density and worker saving and all that apparently even under the heading of respect for humanity. And in my humble opinion this is why cost reduction — interpreted in the Toyota way — is still a worthy goal as part of a true Lean journey. But only if it is based upon the above lines of thought and understood like this by entire organization and specifically its leadership.
- Sugimori, Y, K Kusunoki, F Cho, and S Uchikawa. “Toyota Production System and Kanban System Materialization of Just-in-time and Respect-for-human System.” The International Journal of Production Research 15, no. 6 (1977): 553-564.
- Ohno, Taiichi. Toyota Production System : Beyond Large-scale Production. Cambridge, Mass.: Productivity Press, 1988.
- Ohno, Taiichi, and Setsuo Mito. Just-in-time for Today and Tomorrow. Cambridge, Mass.: Productivity Press, 1988.
- Shingo, Shigeo. A Study of the Toyota Production System From An Industrial Engineering Viewpoint. Cambridge, Mass.: Productivity Press, 1989.
- Kanban: Just-in-time at Toyota – Management Begins at the Workplace. Edited by David John Lu. Cambridge, Mass.: Productivity Press, 1989.
The thing that rankles most people is that cost reductions have become synonymous with layoffs and in fact, in the short term, they might be cost reductions. But in the medium-term that gain is seldom sustained. However, both Ohno and Cho said the objective of the TPS is “cost reduction through the elimination of waste.” Nonetheless, the majority of lean activities in the US continue to be the reduction of costs through labor reductions, which they euphemistically call productivity improvements. One issue that confuses people is that the majority of what is written about Toyota is the TPS and that was written about the manufacturing system. Once a product gets to the production stage, generally, both the selling price and the features that create value are determined. It is now up to the manufacturing firm to produce 100% good quality, delivered on time, and at the lowest cost…better, faster, cheaper.
My point is that you are right. It is a cost reduction system with the caveat that the means to reduce the costs are waste reduction activities. And don’t be sorry, you are right.