Is Lean Production Hayekian?
I had a eureka moment earlier this week: Lean Production is Hayekian in both a macro and a micro sense. In the macro sense, this management theory evolved in an intensely competitive environment and came out on top. In the micro sense, Lean solves the knowledge problem within the corporation.
Producing complex machines (system of systems) requires lots of information gathering. In the Classical model, economists imagined a society of small, atomized producers in contractual agreements. For example, obtaining part A (brakes) would look like this:
Exit the Classical model and enter the model of early mass production: Ford. Ford's vision was a completely vertically integrated system, which he realized in the Rouge plant. Ores and other raw materials came in one gate, cars went out the other. Ford was a genius, but he was also paranoid and insisted on centralizing all decisions in himself. This meant that one man, Henry Ford, had to have his hand in design, production, sales, marketing, finance, and everything else it took to make an automobile empire. The result: they made one model (the T), and they made it in every color you wanted as long as it was black. When Ford's mental faculties began to decline, so did the company.
Alfred Sloan at GM solved Ford's problem. He introduced decentralized centralization (or is it decentralized centralization?), a huge bureaucracy designed to solve the knowledge problem within the corporation by breaking it up and only dealing with aggregates. GM was (and is) a group of autonomous divisions managed "by the numbers"; they attempt to obtain economies of scale by sharing parts across platforms. Sloan graded each division chief on yield (number of cars) and quality (number of cars without defects), but that gives them the wrong incentive: managers move production lines quickly, fix problems in post-production, and keep huge reserves to prevent hold-ups. The central office decides how many of each car to make, then they make it dealers' problem to get rid of them.
While they solved the problem that Ford had - that no single person could possibly absorb, sort, analyse, and act on the information required to coordinate all the company's activities - the GM bureaucracy creates a huge overhead of specialists and a new knowledge problem. In the GM system, design engineers work with marketers, but don't know manufacturing, production engineers know manufacturing but not customer complaints, and industrial engineers are brought in to bridge design and manufacturing. The top knows whether each division is meeting its goals (whether the goals are appropriate is another question), but the left hand doesn't know what the right hand is doing, so they have to hire more hands to pass the information around. Thousands of faceless, third assistant headlight bezel design engineers have to put cover sheets on hundreds of thousands of TPS reports - didn't they get the memo?
Lenin's adoption of the dominant structure in America in 1918 (Taylorism and Ford-like centralization) turned out to be a ruinous decision from which Russia has yet to recover. If Schumpeter (Capitalism, Socialism, and Democracy, 1942) had been right about there being no significant scientific discoveries left to make, and that the only thing to do was to manage the economy scientifically (a gross oversimplification, I know), it's quite likely that the GM model, which was ascendant if not dominant at the time, would have been adopted. We would have had "corporatives" in another guise.
Fortunately, Schumpeter's observation about "creative destruction" was to prove his most lasting, and it was about to be illustrated in a way that hasn't completely run its course, even today. A Japanese engineer for Toyota by the name of Taiichi Ohno solved both the Ford and the GM problem with a set of brilliant insights, made necessary in part by Japan's post-war poverty (what is it they say about necessity and invention?). He developed a way to distribute decision-making at the lowest possible level, giving every floor worker the means and the directive to stop the assembly line when they saw the need. He also set up a system where downstream operations - starting with the dealer - initiate upstream activity by demand pull. Finally, designers, marketers, and factory floor technicians work together to solve customer complaints, adopting new accessories and features as needed. Toyota's cars are less costly to make in part because they design manufacturability into them. The central office provides guidance on strategic relationships and strategic investments. Today, the Toyota Production System (TPS) is the dominant paradigm. (The historical description of Ford, GM, and Toyota presented here is condensed from Womack, Jones, and Roos' The Machine That Changed the World: The Story of Lean Production)
Researcher Steven Spear says of Lean manufacturing,
Am I going too far in drawing an analogy between central planning and free-market states and between old-style mass-production and Toyota lean production? In both cases, central planners are remote from information and problems. They suffer from the fact that even if everything relevant could be communicated to them, there is too much information for one person to absorb the minimum information necessary for one person to make sound decisions. The GM (mixed economy) model is more successful than Henry Ford's was (was, not is: Ford has supposedly seen the Lean light) because it moved slightly toward decentralization, but it sets up a bureaucracy of specialists and bad incentives. Worse, central planning treats employee/citizens as cogs in machine, justified by the thought that "what's good the company is good for them". The central government/management is in an adversarial relationship with the citizens/workers. On the other hand, the Toyota/market system puts decision-making with those who have the best information, it eliminates specialists and their regulations, it allows more spontaneous decision-making by autonomous groups, and encourages cooperation among citizens/employees, among suppliers/trade partners, and between employees and the company.
That begs the question - why not make employees completely autonomous? One answer is that citizens in a market economy have complete autonomy about what to do, how to do it, when to do it, indeed whether to do it, but you cannot run a company nor raise capital on that management philosophy. Under TPS, employees have no autonomy in the short run about what to do, but in the long run they (in their role supporting the designers/marketers) may decide that disc brakes are less valuable than regenerative braking systems in some future model. Lean requires absolutely no autonomy in the short run about how to do it work because standardized work is necessary to process understanding and improvement, but in the long run, teams are required to improve methods constantly. Finally, Lean dictates when actions are performed by the pulling mechanisms (kanban).
So, what about the other question begged by my analogy - can you run a country like a lean company? I would say "no" for several reasons. First, a society is not the same as its government (witness current conditions), whereas a company may be closely identified with its governing board, executives, etc. Second, a company (especially Toyota) is an entity born of cut-throat competition whose goal is to gain 100% market share. No government wants that, and no society should want it. Third, a company has a few specific inputs and outputs, while a country has potentially unlimited inputs and outputs (Japan and Hong Kong have been surprisingly productive for countries with virtually no natural resources). Fourth, employees leave every day, and are (in general) compensated fairly, while citizens are largely stuck in their country 24/7, compensation and taxes vary widely and sometimes unfairly.
Finally, I'd like to suggest an area for possible research. The Lean company still exists to minimize transaction costs compared to the condition in the idyllic, atomized society of small craft manufacturers, but Lean production succeeds because it serves to minimize transaction costs on use and distribution of knowledge within the corporate context. You don't have to fight to convince someone that you know a better way or that it should be adopted, nor do you have to fight to find out who has that kind of knowledge: the people who need or have that knowledge are already working together. That leads me to wonder if there is a theory of minimum possible costs, or a theory of The Perfect Corporation? If so, you could measure against that instead of your competitors, much in the same way you can calculate theoretical limits of quantum efficiency and then gauge semiconductor design against those. Lean may be better than GM which was better than Ford which was better than craft fabrication, but there may be a next generation more efficient than Lean, and such research might indicate how much more efficient a productive process could be.
lean production
lean
hayek
Producing complex machines (system of systems) requires lots of information gathering. In the Classical model, economists imagined a society of small, atomized producers in contractual agreements. For example, obtaining part A (brakes) would look like this:
- Send out a request for bids for A
- Response from supplier #1: I make A' (like A, only different)
- Is A=A'?
- If no, then change design to accommodate A'?
- If no, then change A' to A?
- Bid based on quantity, price, quality, duration of contract, other considerations like adjustment to demand, etc.
- What about competing bids and bidders: How does A' compare to A''? What if better design, higher price?
Exit the Classical model and enter the model of early mass production: Ford. Ford's vision was a completely vertically integrated system, which he realized in the Rouge plant. Ores and other raw materials came in one gate, cars went out the other. Ford was a genius, but he was also paranoid and insisted on centralizing all decisions in himself. This meant that one man, Henry Ford, had to have his hand in design, production, sales, marketing, finance, and everything else it took to make an automobile empire. The result: they made one model (the T), and they made it in every color you wanted as long as it was black. When Ford's mental faculties began to decline, so did the company.
Alfred Sloan at GM solved Ford's problem. He introduced decentralized centralization (or is it decentralized centralization?), a huge bureaucracy designed to solve the knowledge problem within the corporation by breaking it up and only dealing with aggregates. GM was (and is) a group of autonomous divisions managed "by the numbers"; they attempt to obtain economies of scale by sharing parts across platforms. Sloan graded each division chief on yield (number of cars) and quality (number of cars without defects), but that gives them the wrong incentive: managers move production lines quickly, fix problems in post-production, and keep huge reserves to prevent hold-ups. The central office decides how many of each car to make, then they make it dealers' problem to get rid of them.
While they solved the problem that Ford had - that no single person could possibly absorb, sort, analyse, and act on the information required to coordinate all the company's activities - the GM bureaucracy creates a huge overhead of specialists and a new knowledge problem. In the GM system, design engineers work with marketers, but don't know manufacturing, production engineers know manufacturing but not customer complaints, and industrial engineers are brought in to bridge design and manufacturing. The top knows whether each division is meeting its goals (whether the goals are appropriate is another question), but the left hand doesn't know what the right hand is doing, so they have to hire more hands to pass the information around. Thousands of faceless, third assistant headlight bezel design engineers have to put cover sheets on hundreds of thousands of TPS reports - didn't they get the memo?
Lenin's adoption of the dominant structure in America in 1918 (Taylorism and Ford-like centralization) turned out to be a ruinous decision from which Russia has yet to recover. If Schumpeter (Capitalism, Socialism, and Democracy, 1942) had been right about there being no significant scientific discoveries left to make, and that the only thing to do was to manage the economy scientifically (a gross oversimplification, I know), it's quite likely that the GM model, which was ascendant if not dominant at the time, would have been adopted. We would have had "corporatives" in another guise.
Fortunately, Schumpeter's observation about "creative destruction" was to prove his most lasting, and it was about to be illustrated in a way that hasn't completely run its course, even today. A Japanese engineer for Toyota by the name of Taiichi Ohno solved both the Ford and the GM problem with a set of brilliant insights, made necessary in part by Japan's post-war poverty (what is it they say about necessity and invention?). He developed a way to distribute decision-making at the lowest possible level, giving every floor worker the means and the directive to stop the assembly line when they saw the need. He also set up a system where downstream operations - starting with the dealer - initiate upstream activity by demand pull. Finally, designers, marketers, and factory floor technicians work together to solve customer complaints, adopting new accessories and features as needed. Toyota's cars are less costly to make in part because they design manufacturability into them. The central office provides guidance on strategic relationships and strategic investments. Today, the Toyota Production System (TPS) is the dominant paradigm. (The historical description of Ford, GM, and Toyota presented here is condensed from Womack, Jones, and Roos' The Machine That Changed the World: The Story of Lean Production)
Researcher Steven Spear says of Lean manufacturing,
"The products and services characteristic of our modern economy are far too complex for any one person to understand how they work. It is cognitively overwhelming. Therefore, organizations must have some mechanism for decomposing the whole system into sub-system and component parts, each "cognitively" small or simple enough for individual people to do meaningful work. However, decomposing the complex whole into simpler parts is only part of the challenge. The decomposition must occur in concert with complimentary mechanisms that reintegrate the parts into a meaningful, harmonious whole."Note the similarity with Hayek's observation in The Problem of Knowledge in Society:
"Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others."It was upon reading Spears' comments that I realized that Lean is Hayek writ small. And large, as tiny little Toyota prepares to overtake big, bad GM (here, here, here, etc. - what the hell do you have to hit these guys with to get it through to them?).
Am I going too far in drawing an analogy between central planning and free-market states and between old-style mass-production and Toyota lean production? In both cases, central planners are remote from information and problems. They suffer from the fact that even if everything relevant could be communicated to them, there is too much information for one person to absorb the minimum information necessary for one person to make sound decisions. The GM (mixed economy) model is more successful than Henry Ford's was (was, not is: Ford has supposedly seen the Lean light) because it moved slightly toward decentralization, but it sets up a bureaucracy of specialists and bad incentives. Worse, central planning treats employee/citizens as cogs in machine, justified by the thought that "what's good the company is good for them". The central government/management is in an adversarial relationship with the citizens/workers. On the other hand, the Toyota/market system puts decision-making with those who have the best information, it eliminates specialists and their regulations, it allows more spontaneous decision-making by autonomous groups, and encourages cooperation among citizens/employees, among suppliers/trade partners, and between employees and the company.
That begs the question - why not make employees completely autonomous? One answer is that citizens in a market economy have complete autonomy about what to do, how to do it, when to do it, indeed whether to do it, but you cannot run a company nor raise capital on that management philosophy. Under TPS, employees have no autonomy in the short run about what to do, but in the long run they (in their role supporting the designers/marketers) may decide that disc brakes are less valuable than regenerative braking systems in some future model. Lean requires absolutely no autonomy in the short run about how to do it work because standardized work is necessary to process understanding and improvement, but in the long run, teams are required to improve methods constantly. Finally, Lean dictates when actions are performed by the pulling mechanisms (kanban).
So, what about the other question begged by my analogy - can you run a country like a lean company? I would say "no" for several reasons. First, a society is not the same as its government (witness current conditions), whereas a company may be closely identified with its governing board, executives, etc. Second, a company (especially Toyota) is an entity born of cut-throat competition whose goal is to gain 100% market share. No government wants that, and no society should want it. Third, a company has a few specific inputs and outputs, while a country has potentially unlimited inputs and outputs (Japan and Hong Kong have been surprisingly productive for countries with virtually no natural resources). Fourth, employees leave every day, and are (in general) compensated fairly, while citizens are largely stuck in their country 24/7, compensation and taxes vary widely and sometimes unfairly.
Finally, I'd like to suggest an area for possible research. The Lean company still exists to minimize transaction costs compared to the condition in the idyllic, atomized society of small craft manufacturers, but Lean production succeeds because it serves to minimize transaction costs on use and distribution of knowledge within the corporate context. You don't have to fight to convince someone that you know a better way or that it should be adopted, nor do you have to fight to find out who has that kind of knowledge: the people who need or have that knowledge are already working together. That leads me to wonder if there is a theory of minimum possible costs, or a theory of The Perfect Corporation? If so, you could measure against that instead of your competitors, much in the same way you can calculate theoretical limits of quantum efficiency and then gauge semiconductor design against those. Lean may be better than GM which was better than Ford which was better than craft fabrication, but there may be a next generation more efficient than Lean, and such research might indicate how much more efficient a productive process could be.
lean production
lean
hayek
Labels: decentralization, management
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