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Japan in the post-war period has found itself in a harsh economic situation. Wartime destruction of manufacturing plants (and total obliteration of two major industrial cities) combined with difficulty to shift from war-oriented production have resulted in large shortages of capital and scarcity of resources. Under these economic circumstances Toyota developed an innovative way of efficient production - lean manufacturing. Since its implementation it has proven itself extremely useful and gained popularity with other firms in Japan, the US, and Europe. Can software developers learn from their business model, and benefit from it? As the title of this article suggests - they can.
Lean manufacturing principles - heijunka
Perhaps the most important principle of lean manufacturing is heijunka - otherwise known as just-in-time (JIT) production. Supply chain is adjusted to the main production line in such a way that only the necessary number of parts is being manufactured or ordered. Components are being replaced only to substitute for the parts already used in the production process. This way, Toyota keeps its inventory at low levels, only enough for current production. This idea solves the problem of scarcity of capital, as less money needs to be invested at a single point in time. Working capital is smaller but the working capital cycle is shorter as well. Costs are also cut on storage as only minimal warehouse space is necessary. This means that the inventory turnover is very high, constantly keeping capital in circulation. Another major advantage is the zero-waste policy resulting directly from JIT production. Parts are being replaced on a regular basis, so it is certain that they will be used instead of being wasted. Efficient resource management causes another cost reduction. However, this principle drags significant risks with it. Toyota is heavily reliant on its suppliers, as components always need to be delivered on time in order to avoid stops on main production lines. Minimal number of spare parts in stock also means that there is little room for defects or mistakes. Luckily, Toyota successfully minimises both of these risks by their unique approach towards suppliers.
The main reasoning behind Toyota’s relationship with their suppliers is that they don’t want them to be dependent on Toyota - they want their suppliers to serve other companies. These relationships may seem a little counterintuitive at first, but when we delve into the specifics, they all make perfect sense. An independent supplier can serve several companies and maintain production at an efficient level. Toyota especially cares that its suppliers are self-sufficient and can sustain their production without constant Toyota’s orders. John Macduffie - a management professor from the University of Pennsylvania who researched the process of creation of lean suppliers argued: * “If parts are single or dual sourced, suppliers may be able to achieve substantial economies of scale. The customer can help the supplier with technical assistance while not bearing full investment costs, and can still benefit from
any improvements due to the stipulation that productivity gains will be shared.” * This way Toyota has the flexibility to freely adjust their order rate to production. Strong economic performance of suppliers reduces their marginal cost and therefore the price of components on direct benefit of Toyota.
Lean production in IT
So what can software developers learn from the experiences of the seemingly unrelated automotive industry? It turns out that quite a lot. Here comes the good old idea of outsourcing
- but in a newly extended context. An IT company does not have to hire people on full time but rather employ specialists working elsewhere or freelancers to specific tasks encompassed by their area of specialisation. The benefits of lean production will follow:
- No tying-up capital - the company doesn’t have to keep a large sum of money for salaries every month, they can use that capital for project development, and adjust it more individually to separate projects. This is a straightforward effect of JIT production.
- Zero-waste policy - company pays only for the time used for development of their projects, no time (and therefore money) is wasted on unrelated work and other things. It is also easier to employ less experienced programmers to your projects when you don’t have to worry about finding them appropriate tasks in the remaining time.
- Flexibility - in a secure, booming economy, programmers are among the most busy people. However, as recent events reminded us, the world is often quite the opposite. Using lean production is safe in both cases. In a thriving market you can freely choose projects, and right people to work with on them. But also when the economy is shrinking, you’re free of carrying a burden of full-time salaries when there isn’t enough work to sustain them.
- Efficiency - when you employ people specialising in certain areas of programming, it is natural that their work will be efficient, and the time they spend on it - lower. This is an example of cost efficiency - the less hours used, the less you need to pay for. However, keep in mind that a specialist will likely charge a higher rate per hour, so the savings on time may be counterbalanced by this. Therefore, you can still benefit from the projects being done quickly and professionally, but you shouldn’t expect that this will save you a lot of money.
Lean production vs Outsourcing - relationships
What is a key difference between standard outsourcing, and lean production are the relationships built between the company and its suppliers. Outsourcing brings a lot of risks that lean production model is helping to overcome. First of them is unavailability of suppliers, that is most often manifested in giving your projects a low priority, or just declining them. When lean manufacturing is your primary model, you can counteract this by a sound promise of a lasting cooperation in exchange for timely, reliable contributions. The other threat are delays due to the complicated nature of programming. Just-in-time works perfectly in physical tasks - like constructing a machine. IT is a creative industry, mistakes are a part of the process. Deadlines are still important but you have to account for these potential processual difficulties when setting them. The relationships you have with your suppliers can minimise this risk by making them more dedicated to your projects, more likely to complete them before deadlines, and effectively communicate the issues they encounter to other members of the team.
The trust is mutual
This article’s tone may be strongly in favour of outsourcing but don’t get it wrong - you can, and should, still employ people who will be the core of all your projects. Sometimes you just don’t need to integrate the entire team within your company to develop innovative, diverse ideas. Instead, you can commission tasks to external specialists who you have good relations with. In lean production the trust is mutual - you have to earn it as much as your employees do.
Sources: Krafcik, J., 1988. Triumph of the Lean Production System. Sloan Management Review, 30(1), p.41. Macduffie, J.P. & Helper, S., 1997. Creating Lean Suppliers: Diffusing Lean Production through the Supply Chain. California Management Review, 39(4), pp.118–| Taiichi Ohno on the Toyota Production System https://www.youtube.com/watch? v=ZK6vyFz7yrM The Toyota Production System (TPS) https://www.youtube.com/watch?v=P-bDlYWuptM Williamson, O.E., 2008. OUTSOURCING: TRANSACTION COST ECONOMICS AND SUPPLY CHAIN MANAGEMENT *. Journal of Supply Chain Management, 44(2), pp.5–16.