Extract from Sense and Respond: The Journey to Customer Purpose (MacMillan 2005) Stephen Parry.
Customer Value Principles Continued:
Comparing the activities and behaviours you would find in a mass-production environment with those found in a Customer Value Enterprise® (Lean Enterprise)
Working to forecast vs. working on demand
In the mass-production environment in order to keep unit costs down, the primary concern is to maximise all assets and capabilities, to keep them working at maximum output. It is assumed that none of these assets or capabilities should be idle: keeping them working all the time thus becomes the driver – 'this is the main consideration that determines management actions' (Womack and Jones, 1996).
Maximising production does seem to make logical sense – but only if there is demand for the product: if not, the business needs to reduce production. In the Customer Value Enterprise® world, however, the business aims to produce only in response to known demand – it doesn’t build up inventories. You don’t make things ‘just in case’, because if you did you might waste resources, and you would certainly increase the cost of storage. Much better to introduce 'Just-in-time' but this this a completely different production approach with different measures of success with a different management focus.
Mass-production enterprises in the West are often driven by the production forecast: output is generated in the expectation that all products will be consumed. Many production companies are now moving to ‘build to order’ using Just-in-time production methods that is, creating an ‘on-demand' business.
The principles of operation between these two approaches are very different. In the ‘on-demand’ world it is logical to keep some assets idle and to accept idle costs in exchange for the reductions in inventory, in storage costs, and in losses from discounting over-produced products.
In the ‘on-demand’ world, even the idle-time cost can also be recovered if the organisation uses this time to improve and optimise the value chain and thus to reduce the cost of production still further and to increase quality or introduce variety by going for economies of scope instead of economies of scale.
One word or caution: the term ‘on-demand’ is used by many today to mean simply the transfer of transactions and ordering to the internet. While in many cases this is an effective means of providing customers with access to products, it does not necessarily mean that the end-to-end organisation has been set up to respond ‘on-demand’. Throughout this book we will not use ‘on-demand’ to refer to an electronic shop window: rather we will use the term to signify a complete change in how the organisation is designed built and operated end-to-end.
The last 'On-demand' principle is very closly linked to our next Mass-Production vs. Customer Value Principle:
Prioritising and expediting vs. on-demand capability
In the mass-production world, limited capability means that the business must choose to prioritise or expedite some things, and other things therefore have to wait. But waiting causes waste. In mass production, managers think that they
must prioritise and expedite because they don’t have enough resources: yet the systematic prioritisation of work actually creates more work.
When instead you create continuous flow and work on demand, you remove this need to prioritise and expedite.
More Customer Value Principles to follow soon.
©Stephen Parry 2010 All rights reserved.