Walmart CSR again

So, here's my kindergarten summary of how the mass market apparel industry works:

You have a company (a manufacturer) that makes clothing. If you don't actually sew it (you contract that out), you are still called a manufacturer. You are selling your clothing through boutiques, the internet, and so on. You want to make the leap into large retail outlets like J. C. Penney, Wal-Mart, Sears, Dillards, Macy's, whatever, so you start trying to get into those stores.

Those stores have very funny (funny-strange, not funny-haha) policies on charge-backs, returns, and how they pay their bills. Basically, they make you take all the risk. You send them clothing, they send back what they don't sell, they charge you back for every non-compliant item they can find (e.g. the tags are crooked). And to top it off, they don't get around to paying the bills for 3, 6, 9 months on end. But still, you are moving a lot more product through them.

Eventually, you realize that the interest rates on the money you are borrowing is killing you, so you get involved with a factor. The factor acts as a bridge: they take over your accounts receivable, but they pay you faster. The factor holds lots of sway over the retailers because they represent lots of their suppliers exclusively. If the retailers wants product, they have to pay the factor. The factors, though, charge for this service, and charge a lot: 15-20%. And that comes from you, the manufacturer. But at least you're getting paid, right?

So by choosing to sell through a major retailer, your choices are either to borrow money and pay interest on that or get a factor and pay them (though effectively you become their employee, since they have now taken over your accounts receivable). If you want to keep making money at these volumes, you need to cut costs. The easiest way is to go offshore and get cheaper sewing contractors.

Wal-Mart, on the other hand, has the reputation of paying their bills in a timely manner. They berate you on pricing [1], but at least they pay on time and offer volume opportunities.

If the major retailers would pay their bills quickly, there would be no need for factors and thus less temptation to go offshore [2]. Perhaps people concerned about Corporate Social Responsibility (CSR) are going after the wrong target? Perhaps they ought to be scrutinizing manufacturers' complaints about retailers' pricing and other policies, their business-to-business relations, rather than their employee or customer relations.

I'm just sayin'.

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This is Wal-Mart CSR again because I already wrote about it.

[1] Apparently, Wal-Mart also brow-beats its suppliers over their use of packaging and renewable fuel content, among other things. Wal-Mart is the world's largest buyer of organic cotton (WSJ-$), and becoming the largest purchaser of sustainably harvested shrimp and fish (WSJ-$). Is it green-washing? Could be. These efforts overlook more sustainable practices -- they are optimizing locally while sub-optimizing globally. But they aren't the ogres normally claimed.

[2] Why wouldn't they go offshore, for profit maximization, even in a factor-free world in which everyone paid on time?

1. Quality control, the ability to see and control problems

2. Flow, in Chandler's sense, the flow driven by the visible hand. This was the preferred method of operating a mass production business before WWII and the ascendancy of the GM/DuPont theory of management. You can't achieve flow with a 3 week or longer delay in the supply stream.

3. Leisure time; if you run a local business, you have the opportunity to blur work, relaxation, and other personal time, whereas when you run an international operation, you have to be "on" 24/7. This is the same problem faced by racing enthusiasts who are offered a sponsorship: do you really want it to be a job instead of a hobby?

4. Some other stuff that will have to wait for another post. Why do factors exist? Why doesn't someone vertically integrate textile, apparel, and retail? Or perhaps we can just shame my wife into writing that book.

Rationalizing the Oldest Industry by Force

Alfred Chandler's best known book, The Visible Hand: The Managerial Revolution in American Business, describes the shift from the atomistic, entrepreneurial market described by Adam Smith to the modern economy dominated by small groups of integrated, managed firms. The references to the apparel industry can be summarized briefly since apparel is not one of the industries that became rationalized in the way he describes.

The first industrial use of non-animal energy was the water-powered automatic loom developed in England in the late 18th century and brought to New England in the early 19th century. This led to a concentration of the textile industry around water sources. There was only a slight shift in the industry when anthracite coal arrived and steam-drive replaced stream-drive.

The coal-fueled energy revolution led to the railroads becoming next big industry, not because they were using it but because they were hauling it (coal-driven locomotives didn't become widely used until the last quarter of the 19th century). Telegraphy followed the railroads in a symbiotic relationship that formed the foundation for what followed: use of all-weather, high-speed transportation and long distance communication to coordinate the flow of goods from production through distribution to consumers.

The next industries to rationalize were those that could either use heat, transportation, and/or communications. These included:

• metal working (steel, using coal)
• wholesale & retail (using telegraphy to coordinate, trains to streamline)
  
• meat packing (Swift's rail cars)
• oil (first railroads, then pipelines)

Aside that will become relevant later: Dry goods merchants protested the rise of the department store, then the rise of the mail order operation (like Sears). Today, they protest the rise of the Big Box Store (Wal-Mart). The small retailer, while less common than before, has survived each of these consolidations, so far.

Chandler returns to apparel later in the book while looking at the most heavily capitalized and concentrated industries. He asserts that the returns to scale and capital for apparel are very low because

[e]ssentially, the machines took the place of manual operations. A machine did a task comparable to that of a worker in spinning, weaving, sewing, cutting, and fabricating. The maximum speed of cutting or shaping wood, cloth, or textile products by machinery was quickly reached. Nor did the spinning and weaving of natural fibers or the tanning of natural leather lend itself to massive increase of throughput by a greater application of energy.

This is entirely consistent with Kathleen's point

Sewing will always be labor intensive because cut fabric pieces cannot be smelted out like metal rods. Garments cannot be cut like sheetmetal and welded by machines. Fabric is flimsy; it must be handled by hands. No amount of technology will ever change this.

So, despite being an early link between the entrepreneurial Smithian world and the managed Chandlerian world, apparel was not consolidated, streamlined, and "rationalized" when so many other goods have been.

Not content to simply make a living, some people become enamored with the idea of getting rid of the competitors who kept them from becoming fabulously wealthy. There are few mechanisms for doing so successfully. You can try undercutting them and then buying them out, but John McGee showed that was not a feasible strategy even for Rockefeller. You can try combining with them through a cartel or horizontal merger, but the former is known not to work and Chandler showed that horizontal integration also failed; you had to both vertically integrate and develop a successful management structure to make mergers work.

Gabriel Kolko has described a third alternative; get the legislature to pass legislation ostensibly designed to help the consumer but which actually serves the interests of industry (or specific groups within industry). When rate cartels failed, the railroads ultimately turned to the federal government to act as their cartelizing agent. This function was performed by the Interstate Commerce Commission (ICC), an agency ultimately charged with responsibility for setting both maximum and minimum rates for the railroads. In time they came to serve a similar function for over-the-road trucks and served as a model for the Civil Aviation Board (CAB), which oversaw the creation of no new interstate airlines from its inception in 1938 to its demise in 1978. Meatpackers also sought protection, which they received with the help of Upton Sinclair's The Jungle, the novel which aimed at Americans' hearts but managed to cover Congress' backside. Bankers also wanted protection and got it with the Federal Reserve Act, which gave them input to a quasi-public board of governors and the US Treasury.

The Kolko Thesis describes what is happening in the apparel industry today. No firms have been able to internalize the coordination of a significant portion of the industry, either from the production or the distribution end. Though not perfect, it is surprisingly atomistic given the enormous size of the world market.

If you try to produce something of superior value and charge premium prices, there is nothing preventing someone from "knocking off" an article that required no small amount of inspiration, engineering, costly fabric and accessories (buttons, zippers, doodads) to produce. Like the Red Queen who was running as fast as she could just to stay in place, you are forced to constantly innovate in order to stay ahead. That's not a very satisfying way to get rich. The other option is to produce a commodity -- t-shirts, jeans, hoodies -- on which you make pennies on every piece and try to make it up on volume. That also is not a very satisfying way to get rich. Rather than taking either of these losing paths, it looks like a group of designers has decided to enlist the state to eliminate competition by seeking patent protection for designs.

The standard argument for copyright or patent protection is that it will encourage innovation by securing to the innovator exclusive rights to the innovation long enough to extract some monopoly rents. While that is a superficially plausible argument in this case, I'd say that Kathleen's description of the outcome of HR 2033 is much more likely:

I realize that sounds like a dramatic and exaggerated claim but if this legislation passes, contractors, pattern makers and even retailers will be exposed to liability. Let's say you have this nifty design that you claim you made up all on your own, with no inspiration from anybody anywhere and you hire one of us to make it up for you and you sell it and make your pile. Then, somebody comes out of the woodwork and claims it is their design, they own it and now you owe them. Problem is, you likely don't have much money, they'll want to sue everyone in your production and retail chain. That means me, your contractor and the stores who bought your stuff. After all, we "enabled" you. So, in order to avoid exposure, any contractor, pattern maker, sales rep or store owner -in the interests of avoiding law suits or facing criminal prosecution for dealing in pirated goods- is going to require you to prove ownership of your concept before they'll have anything to do with it. Minimally, you'll have to hire a lawyer, pay for searches through a design database of all existing design registrations. I cannot even begin to imagine how long this would take. You thought a trademark or logo search was bad? I have no doubt there's over 10,000 clothing designs out there for every logo. This will cost a fortune. But, you'll have to do it. No one will take your work otherwise. And because we'll have to have our own lawyers to check up on you and draw up contracts, the prices we charge you will at least double. We operate on tiny margins. I charge $50 an hour for patterns. IP attorneys get $250+, I'll have to triple my prices just to break even. Even with proof in hand, you will have no recourse other than to produce your registered design exactly as sketched. No design changes or iterations in process are allowed, otherwise you'll have to start all over again. Forget shortening that sleeve, changing the shape of that neckline or tapering the pant leg of that prototype. So what if it ends up looking lame and you have to start all over? That's the new cost of doing business. Feeling protected yet?

But hasn't IP protection been good for those industries that use it most? Perhaps, but the temptation is to say, "Look at the cell phone industry: there seems to be no shortage of innovation there." Ah, yes, but compared to what, exactly? What does cell phone innovation look like in an atomistic, entrepreneurial economy instead of in the oligopolistic, state-capitalist economy we (and Japan and Finland and South Korea) have now? Indeed, there was lots of innovation in the industry: as Bell's original patents expired, there were something like 200 telephone companies operating in Illinois, Indiana, Iowa, Missouri, and Ohio alone (from Adam Thierer's "Unnatural Monopoly"), but AT&T appealed to the federal government in 1913 and had themselves set up as a protected monopoly. You might remember that we had one phone company for the next seventy years.

The cell phone market consists of a few companies (Nokia, Motorola, LG, Samsung) while apparel consists of thousands of producers and thousands of retailers. Recall that small retailers have repeatedly complained about and then survived the onslaught of department stores, then mail order houses, and now big box stores. There survival has remained possible because the small retailers can still purchase from small manufacturers. When IP protection comes along, the industry will get vertically integrated and the supply for the small retailers will dry up. The companies that secure patents first will hold something over on first their competitors. Retailers will not be able to sell something from a producer who doesn't have a copyright. There will be no more than a dozen producer/retailer companies in the end: Wal-Mart, Nike, The Gap, and Target may soon be integrated apparel retailer-producers.

But why now? IP was around 100 years ago; they were aware of it in the industry (you should see the number of patented fit systems from the 19th century). Here is my best guess at the relevant history (with help from my wife, who clearly understands this better than I and may not agree with all of what follows):

1) Regionalism: In the period in which Chandler describes the process of consolidation in many other industries (roughly 1880-1920), apparel was resistant to consolidation for a number of reasons.

• The returns to scale limited as Chandler asserts
  
• Regional weather differences - cold, wet, dry, hot, windy all require different dress schemes.
• Resistance to rail distribution for various practical reasons. You wouldn't want to get the clothing near a coal-fired steam locomotive because it would be filthy upon delivery. You also couldn't effectively fill the box cars. In the steam rail era, it would have been much better to ship stacked bolts of cloth (only the outsides would get dirty, you could fill a box car) and produce garments on site.
  
• Shipping cotton and cotton cloth had occurred since the late 18th century, but there were still regional resource differences. Wool, cotton, leather would not have been equally available everywhere.
  
• Regional preference differences based on, for example, what they did for a living. Cowboys don't dress like bankers.
• Foreign influences - Texans met different people than New Yorkers
  

2) The post-war era created several changes:

• Increased prosperity. Prior to 1950, people generally only had a limited wardrobe. More disposable income set the stage for change.
• The washing machine. Prior to the 1950s, you had to wash it all by hand. More appliances lowered the cost of ownership.
• War: The federal government became the single largest consumer of clothing both through WWII and the Cold War. This meant the government set certain design and production standards, and as the single largest consumer, the various related industries (sewing machine manufacturers, for example) followed orders (in both senses). Women started wearing pants.
• Television and the interstate highway system: Prior to that, there was more regionalism in speech, food, and clothing. The decline of those barriers through television allowed more mass distribution, and that meant shifting from catering to local tastes to catering to the lowest common denominator. The interstate system lowered the cost of trucking. Hats and dress gloves became passe.
  

3) Logos: Terry Agins' The End of Fashion describes how, as clothing all became similar, companies began to resort to logos and branding to distinguish themselves. Remember the Izod alligator?
4) Sloan Managerialism: As Bill Waddell has theorized, many manufacturing firms have been taken over by MBAs with little or no production experience and an education in an Ivy League school where they were all taught the Sloan/Dupont theory of management. Production is a cost, so keep the logo and IP, outsource the production, and rely on branding.
5) Piracy: Branding has led to the rise of piracy. If you knock off a generic piece of clothing, you make no money. Knock off a Polo shirt, you make a little less than what Ralph Lauren makes. Piracy has also proliferated as Chinese production has come onto the market.
7) Agency: Diane von Furstenburg is the new president of the Council of Fashion Designers of America (CFDA) and the perfect agent of change. Having achieved only one notable design success, she basically became a brand and now wants to take the concept to the next level: the corporation with the most lawyers gets to control fashion. The CFDA is pushing HR2033 with the help of several trial-lawyer-fueled congresspersons. She could be a character in an Ayn Rand novel.

Apparel manufacture is still one of the few manufacturing businesses that you can start in your garage and sustain profitably on a small scale. HR 2033 will effectively put an end to that.

Local, action: Buying Whole Foods' local claims

In Kevin Carson's book chapter, "Decentralized Production Technology", he has this to say about my comment about Viking appliances and planned obsolescence:

Here I take issue, at least in part, with Husman's analysis. First of all, it's hard for me to understand why the average lifetime of an appliance, as determined by the durability of its components, should as a matter of strict definition be excluded as a matter of design choice. After all, Husman himself mentions Viking refrigerators as an example of a product specifically designed for longevity. Second, he seems to be defining "planned obsolescence" far too narrowly. Planned obsolescence refers not just to how soon or how frequently an appliance breaks down as a result of problems with individual parts, but also to how amenable it is to repair. Planned obsolescence, in this latter sense, includes 1) a deliberate choice among design alternatives in favor of a design that makes repair more costly, difficult, or complicated, and 2) the use of such expedients as patents to control the availability and pricing of replacement parts.

First, as I pointed out, the Viking appliances are expensive, on the order of $6,000 for a refrigerator. And the same is going to be true of many such things: a Mercedes or Lexus is going to last longer, all things being equal, than any economy car. So I'm not opposed to including longevity as a design criteria, but rather pointing out that the longest lasting items are going to utilize the latest and most expensive elements and techniques. On the other hand, a Toyota lasts longer than its similarly priced competitors and people desire that feature. Second, I'm going to definitely concede that Kevin has a good point about repair difficulty/ease being part of the equation. The original Model T was made to be easy for farmers to repair, and they loved it. The current generation of cars is ridiculously difficult for the shade-tree mechanic to do anything but change a tire.

But that's beside the point I'm after in this post. What I'm mostly after is the fact that moving to an economy that we might prefer is going to look expensive. I introduced this with the appliance debate, but I'm going to flog the "controversy" between Michael Pollan and John Mackey for the rest of the material.

I first happened to hear about Michael Pollan during this interview on Fresh Air; I have his book Omnivore's Dilemma on my get-around-to-reading list, but this interview will have to suffice for now. It supported most of the things I have come to believe about our diet, corn, and related issues. Note especially his comments after 29:00, in which he says,

To eat in a way that is healthy for you and healthy for the environment and doesn't use a lot of energy is more expensive. That's an issue we have to grapple with. A lot of this food is elitist food, and can be called elitist food, and often is -- usually by proponents of the industrial food system. Any situation where McDonalds is claiming the high moral ground, I'm a little dubious of and this is one of them. But I think we have to confront this.

There's several different ways to look at it. One is cheap food is not as cheap as it looks. The real cost of that $0.99 burger in terms of ... is charged to public health, is charged to the environment, is charged to your health. Even though it's cheap at the register, that is not the real cost of that food. That is an irresponsible price. I don't know that people want to buy irresponsibly.

Now some people don't have a choice. There are a percentage of people in this country who probably can't afford to eat organic or even to eat more sustainably 'cause organic is not the only answer. Let's not oppose organic to everything else; there are many more alternatives out there. Grass fed beef is not organic but it's better, I think, than organic.

If you go to the supermarket, it is true that -- and you're a rational actor, and you don't have a lot of money -- if you're basically buying energy for you're family -- that's to say calories -- the rational thing for you to do under the system we have is to patronize the center of the store, all the processed food. Because a dollar will get you 2500 calories of cookies, of snacks, of potato chips and if you go to the produce aisle, it will only get you 250 calories of carrots

So, y'know, we're programmed by evolution to seek the most energy with the least effort possible and the supermarket has created an environment where that forces people essentially to buy the least healthy calories. But that's not a function of the free market, that's not a function of nature, either. That is a function of policy. There's a reason that the least healthy calories in the supermarket are the cheapest, and that is essentially "policy": we subsidize the cheap calories. We subsidize ... those calories are calories that come from corn and all those calories -- all that high fructose corn syrup -- is subsidized by our taxpayer dollars, the carrots are not.

So it seems to me that for the people who are shopping this way, the challenge is to change the set of incentives and figure out a way to make the healthy food cheaper and to make the unhealthy food a little bit more expensive.

[transcript acquired the with old-fashioned method: listen and type. I hope it's accurate.]

From the interview, Pollan's point seems to be that we should be more careful about what we eat. For example, avoiding anything with HFCS is a good shorthand for not confusing "food products" with "food". He also differentiates between good and bad organic, where bad organic is the type where free range hens never actually get outside (apparently, they haven't checked their contracts). I believe that the use of petroleum as the major input to our food is a problem since one of petroleum's alternative uses is transportation and that means that the cost of food to our poor people is rapidly becoming impacted by the transportation choices of increasingly wealthier people in China and India.

And we thought we freed ourselves of such considerations when we shucked the gold standard.

So Pollan finally ends up endorsing something like the 100 mile diet described by Alisa Smith and J.B. MacKinnon in their book of the same name. He believes that eating local means that farmers will use better inputs (no pesticides or petroleum) and that local farming will inhibit sprawl. And since localism is the point of this post, I swear I will return to it after dealing with two asides.

First, I believe he could have selected better examples. For example, by having all of our farming concentrated in Iowa, they may have eliminated birds there, but we increase the potential for green space around our cities everywhere else. He is basically proposing that we replace the native species of plants around our cities with food stuffs, which only shifts the problems around a little, but does not eliminate them. Indeed, this is the argument of Nobel Peace Prize winner Norman Borlaug, the so-called father of the green revolution. In an article in The Economist, he argues

Thanks to synthetic fertilisers, Mr Borlaug points out, global cereal production tripled between 1950 and 2000, but the amount of land used increased by only 10%. Using traditional techniques such as crop rotation, compost and manure to supply the soil with nitrogen and other minerals would have required a tripling of the area under cultivation. The more intensively you farm, Mr Borlaug contends, the more room you have left for rainforest.

Granted, Borlaug and I are offering a false dilemma here*, but the point is that Pollan doesn't seem to have thought this far through the problem (perhaps he has and it didn't come out in the interview; I haven't read the book).

Second, Tyler Cowen's critique at Slate left me flat. Tyler points out that Pollan's approach neglects to value our time and other market signals. Tyler makes a good point when he says that we may respond to higher fuel prices by driving less or buying smaller cars, but that we probably won't start growing grapes in the back yard. However, I'm surprised that Tyler doesn't more strongly endorse Pollan's descriptions of the problems of subsidization. Neither does Tyler recognize a benefit in which I expect him to be most interested, which is the improvement in food quality that might arise from a more local, fresher supply of ingredients.

While Tyler mentions the problem with the corruption of the term "organic", and agrees with Pollan that shopping at Whole Foods is an insufficient response to the three problems in the industrial food system (our health, our environment, the treatment of animals), Whole Foods founder John Mackey responded much more vigorously in a series of blog posts and public forums. As a result, each has moved a little in the direction of the other, Pollan agreeing that the Whole Foods approach is not as bad as he thought and getting better, while Mackey conceded that some of their practices needed review and changing.**

Mackey's summary of his arguments can be found in this presentation. In slides 39-41, he mentions something that has bothered me for some time now. While writing about the theme of self-sufficiency in Kirkpatrick Sale's Human Scale, I told a story about driving out to a local chile farm to acquire the green ambrosia. Even in my high efficiency automobile (46-50 mpg), it probably required a quart or two of fuel to make the round trip. Most other vehicles would require more, and most of the city lives further away from Lujan Farms than I do. The fuel required per pound of a truckload of chile would probably be much lower when delivering to a market in the center of town, but people still have to get to the market. This is an optimization problem, so the least-energy solution will not necessarily be "don't shop at Wal-Mart". Given existing social circumstances, the optimal solution will probably depend on where you live and what you drive; "shop at Wal-Mart" may actually be the solution for many people.

That is only part of the issue. When you account for all of the inputs (soil, sun, water, etc.), the fact that some geographic regions are blessed with some of these in abundance while others are not, and that economies of scale can be realized when using railroads and ships, local may not be the answer for everything. Mackey's summary of this part was, "If you live in Berkeley, you will use less fossil fuel and produce less carbon dioxide by buying rice from Bangladesh than from California." I'm inclined to think that even if that particular claim is not correct, it will be true that some foods will be less energy intensive when grown and shipped from afar rather than locally.

But is Mackey sincere when he claims that Whole Foods' supply chain is not as bad as Pollan claims and getting better? I was originally going to post about an article in Forbes that I bookmarked some time ago (To Fight Rivals, Whole Foods Buys Local). Unfortunately, Forbes can no longer find the article on their own site. Fortunately, Google can find it elsewhere, so I excerpt it here without linking:

Dairy general manager Matt Lucas began bringing the glass bottles himself from the Morning Fresh farm in Bellevue, Colo., 60 miles north of Denver. Until then, Morning Fresh had long made its name on home deliveries.
Since his Whole Foods deliveries began in 2004, Lucas estimated, his dairy's sales have increased 20 percent. Morning Fresh now sells at least 1,000 gallons a week to supply a Whole Foods distribution center serving 10 stores.
"It's a breath of fresh air to get involved with a group like that. They were so excited to get our product in their stores," Lucas said.
By strengthening -- or, as some farmers say, returning to -- their commitment to local products, Austin, Texas-based Whole Foods and Boulder-based Wild Oats Markets Inc. are fending off big chains like Wal-Mart Stores Inc., Kroger Co. and Safeway Inc., which have expanded their own organic offerings and put pressure on the smaller "natural" grocers. "With Wal-Mart barging into the lower-end organic sales, this is a way these other retailers can differentiate from what Wal-Mart is doing," said Dan Hobbs, a cooperative development specialist with the Rocky Mountain Farmers Union.
...

Small local growers often cannot offer lower prices than large-scale operations that benefit from economies of scale and cheaper labor. But fuel costs for shipping food are less for shorter trips, which in turn often require less packaging to preserve food. Buying local also shortens the time it takes produce to get to market, preserving nutrients and freshness, ....
...
Whole Foods defines a local product as having traveled less than seven hours to get to the store.
It sells more than 200 produce and floral items from more than 60 local growers in the region covering Colorado, New Mexico, Kansas and Missouri. Overall, it does business with more than 2,400 independent farms.

Apparently, Whole Foods is looking at local foods (in the article, consumer interest in local food is credited in part to Pollan's book) as a competitive advantage over purveyors of "bad organic" such as Wal-Mart. If true, it means that Whole Foods' conscience and self-interest are aligned with those of their customers, suppliers, and (if you believe John Mackey's New Agey Manifesto) employees and stock holders. If true, that's pretty cool.

A few things can be pulled out of this.

• I think the struggle between Whole Foods and Wal-Mart leaves us all better off than Pollan does. I can't tell which paradigm will win, but I am certain that having them square off with two different formulas -- and having the local farmers market and small grocery stores as well -- means that my food supply is simultaneously more secure, less expensive, and of higher quality than if someone was to start mandating that their favorite approach should be the victor. Also, Wal-Mart is a big boy, so perhaps the merger of Whole Foods and Wild Oats creates a stronger competition between the two.
• Still, as Pollan points out, it is policy that the corn industry should be as large as it is. Frito-Lay and Coke need to occupy all that premium shelf space because they have products that need to be sold to keep the machine running. In that sense, Wal-Mart is a creation of both Sams: Uncle and Walton.
• Mass producers have genuine advantages over craft production. For one, their cash prices are lower. Amana is cheaper than Viking, Kraft is cheaper than the dairy farm down the road, Wal-Mart is cheaper than Whole Foods. If I'm on a limited budget, that's going to be important.
  
• However, there are hidden costs. Note that above I said, "moving to an economy that we might prefer is going to look expensive", not "be expensive". All things considered, and on average, cheaper appliances and vehicles are typically not as long lasting or efficient, cheaper food products are not as tasty or nutritious as organic and artisan foods, and mass production relies on a massively subsidized infrastructure. We taxpayers pay for agriculture subsidies and transportation subsidies, while we as people pay for the externalities (farm runoff, smog and soot).***
  
• The cost of transportation is a factor in whether local or mass produced is less expensive. The railroad ushered in the first age of mass production and broke down state and regional barriers and built a nation while the container and container ship ushered in the age of globalization. If we are entering an era of permanently higher fuel costs, those trends may reverse. That's not all bad.
  

I am interested in understanding how to reverse some of the policy decisions of the past 150 or so years without reverting socioeconomically to what existed then (grinding poverty, extreme inequality -- contra to what populist demagogues would have you believe about today being the worst of times in those regards). Employing lean production can build a local manufacturing base that produces high quality goods at low costs with little waste, benefiting both workers and consumers. Removing taxpayer supports shifts the advantage from ADM and Cargill toward local farmers. And local governance moves power out of distant capitals and bureaucracies into our hands.

In an upcoming post, I want to say something about local energy production.

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* You could combine localism and organic methods.

** Other takes on the Pollan/Mackey "smackdown turned lovefest":

• An Open Cupboard suggests that Whole Foods should be more diligent about teaching people to shop on a low income. Easy: vegetarian.
• Whole Foods blog: Points out that Whole Foods stock took a $2 billion dive after Pollan's book came out, but also notes that may be attributable to other problems.

*** Yes, it is literally true that the corresponding costs of obesity cost us money through Medicare/Medicaid. However, that also is a matter of policy and I am not going to start using that as a pretext for dictating other people's behavior and food choices.

Hirschman and Olson

In this article, I briefly mentioned a problem that Hirschman had overlooked with respect to the use of voice in improving school quality. Upon starting to read Olson, two more occur to me.

The first has little to do with Olson. It has to do with Hirschman's oversight. In Exit, Voice and Loyalty, he makes the case that as quality declines, consumers differ in their responses to that decline. The work overall is brilliant and addresses a set of issues that economists have inadequately treated: the mechanisms by which consumers respond to declines and by which those responses affect the declining organization. But it seems to me that Hirschman similarly has overlooked a key point: how does decline occur in the first place? Is it due to a set of decisions carefully crafted and acted upon, or to outside factors, or to gradual shifts in the organization's attention?

The implications are serious. If, for example, the organization has decided to take a new direction, those decisions could be reversed when the customers' exercise of exit or voice has the intended effect; the more explicit the link, the easier to reverse course. On the other hand, if the decline is due to outside factors, then management may not know how to respond: there is no decision to reverse, and the outside factors could be causing the problem in a non-obvious way. For example, it could be that society itself is creating more difficult conditions in which to conduct education, with less emphasis on study and discipline and more emphasis on distractions. Or the quality decline could be a perceived decline in comparison to other, similar products, in which case the organization needs to research the underlying comparison and formulate a responding change.

Finally, the decline in quality may be due to a shift in the organization's attention (their mission) toward, for example, greater employee morale rather than toward greater productive outcome. If that is the case, it could be difficult to reverse because the shift was probably determined by other real problems such as high turnover, increasing costs of retention, and increasing costs of recruitment. Reversing course here is in fact a requirement for more resources so that, in the common example, both more guns and more butter be produced.

Quality changes - real or perceived - that result from poor decisions, new environments, and new organizational motivations all require a different set of management responses to the resulting expressions of dissatisfaction. I suggest that exit and voice may interact with each of them with differential success. For example, voice would seem to interact very simply with poor decisions, possibly even preemptively. On the other hand, voice may inform decision-making in the new environment problem, but exit would inform experimental entrepreneurs searching for a better answer. Neither exit nor voice would seem to help in the third case (mission shift), since the organization might discount the voice as uninformed about the true nature of the problem, while exit would only serve to starve the organization of the "required" new resources and thwart the proof of what they have already decided is the correct answer. Please note that this list of possible causes and responses is not exhaustive or even representative or realistic. These were merely the first three I thought of; a true set of causes for decline might be much larger, but perhaps only a few dominate the history of failure.

The second problem has much to do with Olson. In the introductory material to The Logic of Collective Action, Olson makes the case that small groups are more likely to achieve the desired outcomes, and that groups will tend to sustain costs until the outcome desired by the participant with the largest share is achieved. Hence, group members will tend to exploit the largest member. This seems to support Hirschman, since it supports his thesis that the rest of the community will rely on the parents with the greatest interest in quality to lobby for the restoration of quality. However, the problem is that once that person gets what they want, the group will tend to fall apart because that person will then stop contributing. We might find, for example, that one parent insists on getting AP classes in the high school, and stops lobbying when they get them. That works great for that person, but what does it do for parents with special needs children? The school, with limited resources, cannot choose both without an increase in resources, but the most effective lobbyist has now exited just as effectively as if they had gone to another school. If they had *actually* gone to another school, the additional resources would now be available for the parents of the special needs student - oops!

Halt in the Decline of Work Hours

I'm sure someone must have done more serious research on this, but I'm curious as to why the work week has been frozen at 40 hours. Going back 200 years, farmers worked sunup to sundown (and perhaps then some), 7 days a week. Through the 19th century, various laws in England, the US, and elsewhere were passed, sometimes following private practice, reducing the hours to 12, then 10, then 8, while the workweek was reduced from 7 to 6 and then to 5. So far as I know, with the sole exception of France, that trend stopped at the 5 x 8 = 40 hour week in the 1920 or 1930s. Yet productivity continues to climb, so why haven't work hours continued to follow suit?

1) Due to the passage of the 16th Amendment and then SSI legislation, taxes have eaten up all of the surplus since then.

2) Health care insurance has absorbed all of the gains.

3) The period in which it has become feasible to drop to 20-30 hours per week has coincided with the rise in globalization. The competition won't let us slow down.

4) It is a coordination problem: high income workers prefer to work longer weeks, and want/need someone to be on the other end of the phone whenever they call.

5) It is a different coordination problem: because of the explosion in labor legislation at the state and federal level in the Progressive and New Deal eras, it is simply too complex to change all of the relevant law.

6) There has been a realization that such legislation shackles those at the bottom who would like to get ahead by working longer hours.

7) The productivity gains have been apparent, not real.

8) Some of us *are* working less, it just isn't showing up. One way is by retiring early. The other is by switching to alternative work schedules (4 x 10) or work arrangements (telecommuting, comp time, better vacation and sick leave packages). Yes, 4 x 10 is still 40, but the off-book time to commute is less, and the one day per week to run errands without taking time off is significant.

I think 1 is overplayed. 2 is a strong contender, but doesn't explain all of it, especially outside the U.S. 3 might make a slight contribution. I doubt 4, 5, and 6; not the truthiness of them, but rather the strength of these arguments to dissuade a majority from obtaining the desired change; after all, the same arguments in 6 apply to minimum wage laws. I doubt the truth of 7. There might be something to 8, but probably not as much as we would like; the benefits described have fallen to high income workers, whereas previous work hour reductions helped those on the low end.

Things happening in the world of business

Starting with this angry post by Bill Waddell, I agree that gathering a bunch of politicians and lobbyists into a room and expecting something useful to come out the other end is a fruitless endeavor. Yes, the National Association of Manufacturers (NAM) are merely protecting factory owners, not consumers (in the process, they probably side with their unionized workers a lot more than against). Bill's anger is mostly justified, except that I don't believe that "we" as a country necessarily need manufacturing so much as we need the freedom and ability to trade. Remember that Jefferson thought we should aspire to be a nation of farmers; manufacturing is just the next level of development above agriculture; I'm not sure what will come next, but I'd hate to put too much emphasis on manufacture and find that commitment to it condemns us to life as a second-rate nation.

Fortunately, most of the grim stories about modern manufacturing and modern business in general can be examined with data. Russell Roberts passes along this Sebastion Mallaby column in which he lays out the evidence that jobs are not filled with more insecurity than they were a generation ago. Malalby writes,

In a paper to be released today, a trio at the London School of Economics -- Nick Bloom, Tobias Kretschmer and John Van Reenen -- sort through a hard drive's worth of data on 732 manufacturing firms in the United States and Europe, assessing their policies on work hours, vacation, assistance for child care and so on. Then they test whether the most fiercely productive companies in their sample treat workers badly. They find no such correlation.

Pretty cool, and yes, Russ, I am surprised. Not for the assumed reason, but for the reason that we have been reading so much about workers' lack of loyalty to a single employer. Has somebody tested that? If not, I'd suggest that they use a dummy variable to control for whether the firm has Lean tendencies or not.

Finally, Russell's co-blogger at Cafe Hayek, Don Boudreaux, points out the need to think about the whole real world in relation to labor law: the people yet to come, the effects on employers, etc. It's the incentives, stupid.

(It's not quite the same whole I pointed out in a comment on this post at Catallarchy, but the whole matters in many contexts)

Kaizen for everything

From Gemba and today's NYT:

Gemba links to Helmuth Sole's article about visiting Toyota's Formula 1 racing facility, and finding that their pit crew is consistently the fastest thanks to engineers brought in to kaizen the process. Pit times run about 12 seconds for a complete fuel fill-up and tire change. Nice.

The kaizen activity in this article in the NYT is not nearly as pleasant. Breaking bad news to patients used to be thought of as a talent you either had or didn't have. Some oncologists are trying to challenge that assumption and show that it is a skill that can be taught. They employ actors to serve as the patients, and then through a "grueling" 20 hour seminar teach the doctors to find out what kind of doctor the patient wants them to be before bombarding them with a flood of jargon and inappropriate facial expressions.

John Dillon, another actor, said, "No matter what level the doc is at, we see them go up a notch."

For a more formal validation, Dr. Back and his colleagues have accumulated a load of pre- and post-training questionnaires and videotaped interviews, which are still being analyzed.

I hope I never have to find out how good the program students are, but I certainly respect that aspect of the profession.

Kaizen, learning, and coordination

Yesterday, I was starting a 5S campaign in my office; it began with cleaning up my collection of diskettes. Yes, I have an awesome collection of 5-1/4", 3-1/2", CD, and DVDs; some of them are labeled, and some of the labels even make sense. Some of them contain private information, and some of them I can't read, so to make sure, I decided to destroy them.

With a stack of about 60 diskettes in front of me, I began to dismantle them and realized that I had a process in need of improvement. One piece at a time was disappointingly slow. Wait, not only slow, but highly variable. There are 5 steps in the process:

1. Remove the sliding door.
2. Pry the cartridge open
3. Remove the disk
4. Pop the hub out
5. Stack the plastic disks for shredding
   

Of these, #2 was the cause of most of the variation because some diskettes are different than others. So I processed a batch through #1 so I could work on the technique #2. (Ack! Batch processing? Only to increase the cycle time on #2 so I could study it.) Once I had that down, I realized that there was no more workroom on my desk, so I cleaned it up and prepared to start anew. At that point, I realized I should add another step:

6. Throw the scrap away

I pulled a wastebasket around the corner and started over, one piece at a time. I can now dismantle diskettes without thinking about it in a smooth process that takes less than 10 seconds, and I can do this at my computer workstation immediately after I check the contents. Because the waste goes immediately into the garbage, I can essentially process indefinitely (or at least until the trash needs emptying).

The problem here was the variability of the second step, and I was not doing it frequently enough to really understand it. Therefore, I altered the standard process in order to isolate the problem, developed my technique, and returned to the process. This is what happens when people in a workgroup tackle similar problems: each person applies his own knowledge and experience to a process and finds small tweaks to it. There's nothing new or unique about that; that's what Hayek was describing about the use of knowledge in society.

Organizational learning = standard work + experimentation + communication

Kaizen is the formalization of the last part of that:

Organizational learning = standard work + (experimentation + communication)
= standard work + kaizen

As Ohno says, standard work instructions cannot be written from behind a desk: you must go to the factory floor. From there, you can see what is really happening. But the supervisor can't also do the work, or he would not have the time to work on other supervisory tasks (hiring, timesheets, etc.). Someone must conduct the experimentation, and the workers themselves are closest to the activity. If each worker does his own experimentation and develops his own solutions, you would no longer have standard work, so there must be communication vertically and laterally.

As I have said before, kaizen is a formal process for disseminating knowledge in a business setting, and is therefore addressed to reducing transaction costs within a firm. Kaizen is a process, not an event, so it is said that Lean is management of processes, not outcomes. The outcome is the goal of the process.

These things are true whether you are talking about people working together within a group, or across organizational boundaries. In fact, it is when people are working across boundaries that kaizen has the most potential. Within a group, it is easy for the supervisor to set priorities and to maintain focus on the process. Across groups, even if everyone agrees to the intended outcome, it is difficult to coordinate priorities. That is especially true on temporary projects. Production and sales may have divergent views about delays and costs, with one considering them to be necessary and unavoidable while the other one sees them as deadly and unreasonable. Kaizen serves as a formal coordinating focal point, to which the team members can appeal to their supervisors for higher priority. The kaizen activity trumps local concerns or at least calls for alignment of local priorities with the priorities of the kaizened process.

One final note: the learning is not effective if there is no standard work. Everyone "doing his own thing" is chaos, and chaos is not a good way to run a business if you want happy customers. Hayek's point was that chaos does not exist in society even in the absence of central planning because a coordinating mechanism exists: price. Mine is that chaos will not exist in a business if management emphasizes standard work, but this is not enough if you also want to improve. To improve, you must have a formalized method for experimentation and communication, and kaizen is the best one yet devised.

lean management
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Project kaizen

I have been goaded into participating in this activity, even though I am neither a consultant, nor an accomplished expert in Lean or JIT or other related topics. My interest has been as a student and in the relatively untapped theoretical basis. If anything, i have the unique perspective of coming at this from a (non-finance) service industry point of view.

A while back, one of our groups that doesn't normally do engineering projects got tapped with installing a closed network between themselves and their customer. It was a simple, one-off project. Because of something one of our other engineers said to me about his experiences, I thought that I would get us in the habit of always doing an all-hands engineering review of these projects. I invited everyone, including the mechanical engineer, even though I didn't expect a lot of input. The people doing the project were conscientious, so what could we offer?

After some brief comments from the engineer with the most experience in networking, the single most significant contribution to the project review was from the mechanical engineer. He pointed out that they had probably underestimated a particular series of parts for hanging conduit or unistrut (I don't recall), and that they had underestimated the cost. It was obvious: they had used $1 even for each part, but a quick look on the internet showed that the part was more like $7/each.

It just goes to show what a fresh pair of eyeballs does. Whenever you spend lots of time working on something, you make assumptions, and you assume your assumptions are true. Other people unfamiliar with your procedure either don't assume they are true, or assume they are not true. That may not be out of malice; they simply may not understand, and in trying to understand, they uncover more than anyone expects.

I reject the basic premise of this topic: nobody does a "unique" project. You may never build a house at this address again, or work with these particular people again, but you always follow some similar procedure: design building, hire contractor, hire subcontractors, rough-in plumbing, pour foundation, etc. It's worthwhile trying to plan, to measure your success against the plan, and to try to identify shortfalls to improve upon the next time. Whatever improves any part of the process (planning, measuring, improving) improves your next attempt at a similar process.

The only way you would be doing something completely unique is if you were going to change careers every day. Say I wanted to be a surgeon tomorrow and a pilot the next, etc. In that case, yeah, those would be unique, one-off projects. And guess what? I'd damn sure want to plan ahead and check as I went for those activities!

Here are the other blogs posting on this:

Norman Bodek's Kaikaku blog
Bill Waddell's Evolving Excellence blog on Superfactory
Chuck Frey's Innovation Weblog
Hal Macomber's Reforming Project Management blog
Joe Ely's Learning About Lean blog
John Miller's Panta Rei blog
Mark Graban's Lean Manufacturing blog

and of course Kathleen Fasanella's Fashion Incubator blog

Approval authority: Tragedy of the anti-commons

Reading something about lean in a service organization the other day, I recognized something that probably everyone who has ever dealt with a large bureaucracy has probably encountered. In the story (sorry, I can't find the link), they had a design approval process that required something like seven sign-offs. Each person had approval authority, but added little or no value to the process. The form went from out-basket to in-basket, where it might sit for as much as 2 weeks because someone was on vacation. This is the muda of overprocessing. The corrective action after a kaizen blitz (kaikaku) was to remove a few of the signers from the chain altogether, and to change some of the signers from approval authority to advice. For me, this only reinforces my theory that the real secret to lean is to identify and remove transaction costs.

Many of you familiar with environmental economics are probably familiar with the Tragedy of the Commons, for which the best known essay is Garrett Hardin's. The basic example is an ancient village in which all land is held in common (that is to say, not owned), but each farmer owns his own livestock. Even after the combined herd is grazing past sustainment, it is worth while to each farmer to introduce another cow to his own herd. Farmer A benefits by one cow, though the whole village may suffer by the combined loss of 1/10th of a cow from farmer B, another 1/10th from farmer C, ... and so on for the other farmers. The village is one cow better off (farmer A's), but 11/10ths of a cow worse off (the reduced weight of cows belonging to farmers B-L), and so there is a net loss for the village even thought there is a net benefit to A. Seeing this, B will repeat it, as will C, and so on until they ruin the land and destroy their prosperity. In fact, one of the problems in this scenario is that any farmer practicing conservation will end up being a net loser because he can't capture the gain from his action. The solution is to divide the land up among the farmers; each can ruin his own or manage it effectively as he sees fit. Conservationist farmers are able to capture the gains from their practices, and farmers who don't practice conservation either end up either copying the successful practices or going out of business and selling to the others.

The Tragedy of the Anticommons is the mirror image. The phrase was coined by Frank Michelman and popularized by Michael Heller in an article in the Harvard Law Review in 1998. In that article, he pointed out that there was no developed theory of the anticommons. James Buchanan and Jong Joon picked up the gauntlet in their JLE (2000) article Symmetric Tragedies: Commons and Anticommons. Whereas the Commons problem results in overuse of a resource, the Anticommons results in the underuse of a resource. In Heller's article, he focused on the lively business of street kiosks in Moscow, right in front of empty storefronts. The stores were empty because so many people have to sign off on the use of them.

But why do I believe that lean is uniquely capable of dealing with this? Underused resources are a red flag for lean practitioners. People waiting for work, or work waiting for people, reduces the speed of the operation. Furthermore, if you are trying to get approval to change an existing product, it must be because you recognize a problem with it. The longer you wait on approval to change the product, the more defective products you are producing. Another muda! Everyone recognizes the problem of approval authority delays, but they were considered necessary under the command and control management practices before lean. As I've said before, lean's primary means of reducing transaction costs is to push the decision-making down to the level where people have the necessary information. That necessarily means removing approval authorities, or better yet, placing emphasis on reducing the approval time and placing it where it belongs.

lean manufacturing
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transaction costs
tragedy of the commons
economics

Lean and the Project Triangle

If you've been an engineer for any appreciable amount of time, you've seen the Project Triangle. You are given three constraints, as pictured, but told that you can only pick any two. This gives you three choices:

• Fast and Good, but not Cheap. Designing and building something fast and having it come out good will cost lots of money.
• Fast and Cheap, but not Good. You can have something built fast and be cheap, but with a sacrifice of quality.
• Good and Cheap, but not Fast. You can have something built well and at a reasonable price, but it will take longer to think it through.

But this is short term thinking. In the longer run, technology tends to push the parameters closer to the center, allowing you to have Fast and Good, cheaper; Fast and Cheap, better; or Good and Cheap, faster. Instead of thinking in terms of what two features you can choose, think in terms of the maximum area of the circle you are allowed to draw with given resources. Technology allows you to capture more of each feature in a given sized circle.

The other thing that can push all three parameters closer together is Lean Production. Toyota's secret is that their processes are fast, they are error free, and both of these together cost less money. In Natural Capitalism, the authors talk about "tunneling through" the cost barrier. Besides their babbling about how this violates the thinking of "economists" (or at least their straw substitute for economists), it gives the wrong impression of how this kind of thing works. Upon closer inspection, their example is economy of scale.

Lean is an economy of scale with respect to transaction costs within a factory. Information is valuable and finding it incurs cost. Lean is a better way of signaling between workers and their peers, and between workers and management. A kanban is a signal that you are ready for more raw materials (raw to your process). A poka-yoke is a signal to the worker that something is wrong; it doesn't even require someone to initiate the signal, if done perfectly. A kaizen is a focused discussion involving workers, managers, engineers, and designers to perfect a system. A culture that encompasses all of those things uses economy of scale in communication between the various functional divisions within an organization.

This is the kind of thing my wife and I enjoy discussing, which is one reason why she gets a link as the smartest woman I know.

technorati tags: lean, kaizen, kanban, pokayoke, project

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:

• 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?
  

All of these are costs incurred just to get to the point of agreeing to a transaction, i.e. they are transaction costs. In "'The Nature of the Firm" (1937), Coase suggested this as the basis for creating a corporation in the first place: reducing transaction costs. Instead of going out for bids for these parts, firms will either grow the ability to do the work internally or buy a manufacturer outright, and then dictate design and cost to that department.

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
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