Wednesday, May 21, 2008

Success Secrets: The Toyota Production System Part 3

I am discussing the Toyota Production System, as articulated in a great article by Clayton Christensen Earlier posts are Here and Here. In particular, I am attempting to broaden the scope of the discussion beyond the car business, into various business and life domains.

To review, the four key principles are:

1. Highly Specified Activities
2 Clearly define the transfer of material and information
3. Keep the pathway for every product and service simple and direct
4. Detect and solve problems when and where they happen

Today I am discussing Rule 2: Clearly Define Transfer of materials and information, and a corollary mentioned in the article is: Pathways must be simple and direct.

It is easy to see that this rule has a far wider applicability than building automobiles.

There are at least three consequences of violating this rule:

1. Diffusion or confusion of responsibility
2. Loss or degradation of information
3. The Incentive Bias

How do these consequences unfold?

If you don’t know who is going to FedEx the job to the client…it probably won’t get done.

If you don’t know who is going to take Jimmy to soccer practice, …it probably won’t get done.

Another example of paths that are not “simple and direct" comes from my experience as a trader. In the late 90’s the only way to get an order to the pit was to phone my broker. Electronic futures trading was not available at that time (at least to me). I would call the number, wait for the guy to answer, tell him my order, he would phone it into the pit, and then, sometime between 5 and 30 minutes later, I would get my fill. Sometimes the market would move hundreds of dollars away from the point I wanted to enter at, causing losses for me, but gains for a lot of the other providers in the chain. Now, since I can electronically enter the trades myself, I get filled at the price I expect, and I save a lot of money.

What does it mean when you eliminate just one person from an information path?

One fewer salary
One fewer set of benefits
One fewer person to be out sick, late, on vacation
One fewer person who forgot to listen to their voicemail, read their email, get the memo…etc

The savings of time, money, and angst are clearly huge as one pares down the path in a process.

As you pare down the people in a given process path, you also progressively eliminate what Charlie Munger calls the Incentive Bias. I have mentioned Charlie Munger’s work extensively. The Incentive Bias states that individual suppliers (salespeople, brokers, doctors, lawyers, ad infinitum) will serve you in accordance with the incentives that benefit the supplier, not necessarily the customer. I am not saying the incentive bias is 100% bad, after all, the profit motive is what creates all the services we use every day. However, as these biases accumulate, the efficiency of the process path degrades. Suppose you have five people in your process path. If each one of them just holds you up long enough to take a 15-minute coffee break, you’ve lost over an hour. And a coffee break is the smallest incentive bias I can think of. More normally, your suppliers want to make money by billing you extra hours, supplying you in ways that maximize their profits, working on their highest paying client (not you), etc. If you keep the path “simple and direct”, eliminating as much incentive bias as possible, through online purchases, auction tactics, “no haggle” pricing, careful questioning, you are actually using the Toyota Production system to your advantage.

I’ll continue my discussion of TPS in an upcoming post.

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