The Missing Pieces in the Lean Enterprise Model (Revised) - Raphael L. Vitalo, Ph.D. and Christopher J. Bujak

Introduction

Several years ago, we undertook a project to document the Lean Enterprise approach to commerce and provide additional tools to enable its successful use. Both authors had studied and applied Lean thinking for more than two decades. We each had observed and measured its effects. When implemented with the aim of benefiting all stakeholders inclusively, Lean thinking increases the value received by customers, reduces operating costs, and provides employees the opportunity to experience pride in the products they produce and the services they deliver. It also yields new learning, improved employee engagement, elevated teamwork, and has raised the performance of businesses on traditional measures of business success.

As we proceeded with our project, however, we uncovered problems in documenting what we understood to be the Lean Enterprise approach to commerce. Addressing these problems caused us to elaborate and extrapolate what is termed “Lean thinking” to the point that we could no longer confidently say that what we were describing was “the Lean model.” These problems included:

• confusion among Lean practitioners about the meaning of Lean Enterprise,
• gaps in the development of Lean Enterprise as a commercial model,
• absence of foundational knowledge¹ that explains the intellectual basis for Lean thinking, and
• failure to recognize Deming, not Toyota, as its origin and the proper inclusion of his thinking in its teachings.

This paper shares the results of our efforts and describes the gaps in Lean thinking we uncovered. We see it as a first step in problem solving ways to improve the Lean Enterprise model and its use by Lean community members. Since no one person controls the content and interpretation of the Lean model, the solving of these issues will require consensus across the Lean community.

Confusion About the Meaning and Purpose of Lean Enterprise

We, and others in the lean community, consider the name, “Lean,” to be misleading. Yes, the application of “Lean thinking” (Womack and Jones, 2003; Womack, Jones, and Roos, 1991) does streamline work and workplaces and results in less use of resources, but that is the least of what it achieves. Exhibit 1 explains two possible origins of the name we uncovered. One possible source of the name appears to be due to an error in the translation of a statement by Taiichi Ohno, a person presumed by the Lean community to be a primary source for Lean thinking. Another source for the name, “Lean,” is John Krafcik, a member of the Massachusetts Institute of Technology research team that studied the question of why Japanese manufacturing was superior to manufacturing done elsewhere in the world. It reflects his amazement at what was, at the time, a startling discovery—namely, that one can actually produce quality products, tailored to customer needs, and in relatively small quantities with strikingly fewer resources.

In researching the origins of the name lean, we uncovered another, more serious problem that challenged our understanding of what Lean really means. We discovered that there are, in fact, inconsistencies among Lean community members about the ultimate aim the Lean approach to commerce serves. That judgment is not just based on our analysis of the Lean literature. Indeed, the fact that Lean community members are confused about the ultimate purpose their approach seeks to realize is apparent to all who participate in or are observers of various Lean community online forums. Witness, for example, the different answers members produce to the basic question of “What Is Lean?” (See Exhibit 2). Members appear to anchor their responses in their personal experiences, training, and readings. And, while not agreeing with each other, everyone with an answer speaks with confidence.

In every online discussion about the meaning of Lean Enterprise we observed, at least a third of the answers asserted that Lean is all about “efficiency and cost reduction” with the intent of maximizing profitability for the company. For these community members, the name “Lean” is a good fit. While respondents proposing this ‘efficiency and cost reduction’ interpretation rarely cite sources for their assertions, they could. For example, despite Ohno’s assertion in his work Workplace Management (Ohno 2013) that efficiency in itself is destructive, he makes the following seemingly paradoxical statements in his book, The Toyota Production System (Ohno 1988).

“The most important objective of the Toyota system has been to increase production efficiency by consistently and thoroughly eliminating waste” (Ohno 1988, page xiii). And, later he adds, “In the Toyota production system, we think of economy in terms of manpower reduction and cost reduction [italics added]. The relationship between these two elements is clearer if we consider a manpower reduction policy as a means of cost reduction, the most critical condition for a business’s success” [italics added] and “... all considerations and improvement ideas, when boiled down, must be tied to cost reduction. Saying this in reverse, the criterion of all decisions is whether cost reduction can be achieved [italics added]” (Ohno 1988, page 53).

Be clear, we do not propose that this excerpt, on its own, presents a correct understanding of Ohno’s perspective. Nonetheless, on its face, it does strongly support the assertions of the ‘efficiency and cost reduction’ camp.

A second portion of respondents define Lean from a continuous improvement perspective. They see Lean as focusing on the application of tools (e.g., 6S, Kaizen, TPM) to eliminate all non-productive work from work processes and to elevate the utility of workplaces. Ohno is also the touchstone for their thinking, perhaps especially his book, Workplace Management (Ohno, 2013). In that work he emphasizes continuous improvement. He exhorts everyone to challenge the current state of work processes and imagine still better processes. He wants everyone to understand that the term, gemba,² applies not just to production areas but to administrative areas as well.

Still another cluster of respondents view Lean Enterprise from an executive perspective. Their minds are anchored on the extended value stream and see Lean Enterprise as a cooperative strategy integrating the contributions of all participants to commerce. They also see it as a different approach to leading and involving people, one that recognizes the knowledge and creativity of workers. The Lean approach emphasizes the importance of engaging people’s minds. It develops people’s knowledge and skills and provides them opportunities to contribute to improving the business and share in the benefits they generate. These community members define Lean’s purpose as maximizing the delivery of value to customers as judged from the customers’ perspective. This maximizing of customer value, however, must be accomplished in a way that benefits all stakeholders in commerce inclusively. Proponents of this perspective sometimes emphasize waste removal as the singular means to this end. For example, Womack (2016) states “The objective [of Lean] must be to produce a better result for the customer, better work experience for employees, and better performance for the organization, all by removing waste.” At other times, Womack and others also discuss the importance of affirmatively adding of value to offerings and services and not just eliminating waste. For example, Jones (2016) states, “At its core, Lean is a customer-focused strategy to develop better products, which are created and delivered by much better product development and production processes.”

Authors assuming the executive perspective also envision the Lean approach as responsible for creating value for communities, governments, and society as a whole (for example, see Emiliani 2004). Their focus leads us to characterize their view as strategic and not just operational. This strategic perspective also emphasizes the importance of competing through the excellence of one’s offerings and of engaging the extended value stream³ in applying Lean thinking. Regarding executive functions, they discuss the need to change the role of managers from overseers and controllers to enablers of employee success and to adjust human resource management systems to comply with the Lean perspective (for example, see Liker and Hoseus 2008). They also assert the need for all business activities—ranging from the board room and executive suite through the management, supervisory, and front-line tiers in and across every business function—to work together as a team in the continuous pursuit of maximizing the delivery of value to customers in ways that benefit all stakeholders inclusively.
While you might respond that none of these different perspectives are necessarily mutually exclusive—that comment leaves unanswered the central question: “Which of these notions or what higher order notion represents the controlling aim of the Lean approach to commerce?” Minimization of cost? Maximization of profit? Delivering of value to customers? Benefiting all stakeholders inclusively? What should constrain the pursuit of one or another of these ends when trade-offs are required? How does a Lean community member systematically resolve conflicts between the different ends businesses pursue without a definitive understanding of the controlling aim Lean pursues?

The legitimacy of our confusion about the goal of Lean Enterprise was reinforced by the findings of a survey implemented by Womack in 2010 (Womack 2010). He asked community members at large to identify what the major barriers to propagating Lean’s application were. To his “surprise”—but not ours—Womack discovered that “Many of you [Lean practitioners] identified confusion about the meaning of Lean as a barrier to progress in your organization [sic]” (Womack 2010a).

The Implications of Uncertainty About Lean’s Ultimate Aim

The significance of this definitional problem seems poorly grasped by the leaders of the Lean community. A set of ideas coheres into a system only when they are organized around a specific aim. The aim of each system determines the relevance of each component within it and the role it will perform. It defines the relationships among elements and regulates how they interoperate to achieve the system’s aim. The necessity for a definitive statement of a system’s aim applies to every system whether human or mechanical (Barnard 1968; Deming 2000). Thus, the purpose of Lean Enterprise, the ultimate end that its approach to commerce is to serve, determines the validity and meaning of all other assertions one may make about it. Its absence renders Lean thinking a mere collection of ideas with no way to detect which ideas truly belong in its ensemble of thought or which applications are proper to its purposes. Our research findings make clear, there is no consensus-based, commonly accepted definition of a Lean enterprise’s aim.

This definitional issue, therefore, is a fundamental problem for the Lean community and any serious researcher. No science about any conceptual system is possible if one cannot define its boundaries and establish what is and is not part of it. To realize this end, a single, common, operational, and stable definition of the conceptual system’s function is essential. Absent a definitive statement of the model’s function that is endorsed community wide, “Lean thinking” becomes a euphemism for a set of tools and activities pursued by different people, in different ways, for different purposes.

The Question of What Constitutes a Lean Enterprise

The significance of definitional problem concerning what the aim of the lean approach to commerce is renders unknowable what constitutes a lean enterprise. Given the controlling function of a system’s aim in defining its components and processes, the absence of a singular definition of lean’s aim means that there cannot be a definitive description of what constitutes a Lean Enterprise. The factual basis that supports this logical conclusion became exposed with regard to the Delphi Corporation’s bankruptcy in 2005, a company that had won “many Shingo Prizes for lean manufacturing excellence” (Waddell, 2005). Following its bankruptcy, there was much disagreement about whether Delphi had been truly a “Lean Enterprise .” Indeed, Waddell lists many factual features of that company’s conduct and management that he and others considered not Lean (Meyers and Waddell, 2005). Waddell stated that “The lesson is that looking lean is not the same as being lean” (2005). Yet, in the same article he reports that James Womack himself declared that Delphi was indeed a Lean Enterprise.

Other Gaps in Lean Thinking

Tools support people in accomplishing tasks. No matter how carefully designed a tool might be, its actual use is determined by the judgments its user makes. These judgments decide the the task the tool will be used to accomplish and whether and how it should be used in a given situation.

In a commercial context, the judgments that guide task performance are steered by the goals and principles embedded in the commercial model an organization chooses to implement. The knowledge detailed in that model of commerce, as understood by the tool user, provides the only intellectual control on the purpose for which a commercial tool is put and the manner in which it is used. Thus, for example, if my commercial model is based on the singular pursuit of the producer’s self-interest as expressed in maximizing the producer’s profit—I will apply tools to uses in ways that realize that end. If my commercial model’s purpose is to maximize the delivery of value to the business’s customers in ways that benefit all stakeholders inclusively, I will make other choices.

We understood this requirement. Therefore, given that we wanted to add some tools to the Lean tool kit, we drafted a summary of the Lean model organized around the aim we thought defined the purpose Lean commerce pursued. We populated this summary with the contents of Lean thinking consistent with that aim. Our initial summary of the model captured what we perceived to be the Lean Enterprise approach as described in existing Lean literature, albeit culled to align it to the aim we imagined Lean Enterprise to have. We used this summary to guide our tool building and to construct the principles that should control each tool’s use. Our premise was that the Lean literature would provide us with any additional content we needed to complete our work.

The first shock to our thinking was the discovery of uncertainty about the aim Lean Enterprise pursues described above. We encountered more shocks the deeper we proceeded into building the new tools. As we encountered issues that a tool user would have to resolve, we derived a solution for the tool user from our understanding of Lean Enterprise. When we sought to verify our thinking, we could not uncover within Lean literature a commonly accepted principle upon which to rest our thinking. The more we proceeded, the clearer it became that Lean literature did not address all the issues we encountered in guiding people in the proper use of the tools we were building. We uncovered a number of different gaps the most significant of which we grouped into the following categories:

• lack of knowledge to guide one in discriminating the the ends served and controlling values that should determine the application of Lean tools in specific, but common, circumstances;
• lack of knowledge to guide one in determining how certain executive functions should be implemented (e.g., structuring an organization, understanding what market strategies are acceptable, how a business should deal with externalities, etc.); and
• lack of knowledge that explained the “why” behind Lean management rubrics.

By “definitive knowledge,” we mean a set of principles expressed, defined, endorsed, and applied consistently across the community of people who represent a particular system of thought—in our case, the Lean community.

Ends Served and Controlling Values for Tool Applications

Certainly everyone in the Lean community will agree that Lean is about driving waste out of processes. But, we could not find agreement across the Lean literature about how the benefits of waste removal should be shared or applied. Should they be disbursed to owners or shareholders as the popularly endorsed aim of a Capitalist enterprise would seem to suggest (Bainbridge 2012; Friedman 1970)? Should some of it be put at risk and applied to discovering better ways to meet customer needs? If so, how does one assess the amount of profit to apply? Should the increased margin produced by reduced cost to current price be shared with employees, returned to customers, or both? Who decides such issues and what guidance does one use to answer these questions?

As another example, can one properly apply Lean tools to downsizing a company. If you say “Yes,” then how do you address the negative effects on worker participation in continuous improvement activities when people realize they are assisting in ending their jobs? Would we not be endorsing the view of people who see the true meaning of the term ‘Lean’ as, “Less Employees Are Needed”? How do you resolve the application of Lean tools to downsizing with Womack’s assertion that, “those of us in the Lean Community have always said that we won’t work with enterprises that use Lean knowledge to eliminate jobs” (Womack 2016).
If you say “No,” do not use Lean tools to downsize, then how do you resolve your position with Ohno’s assertion that “we consider a manpower reduction policy as a means of cost reduction, the most critical condition for a business’s success” (Ohno 1988, page 53).⁴

Similarly, what about the use of Lean tools to drive cost reduction solely for the purposes of improving the company’s profits? Is that consistent with the purpose of maximizing the delivery of value to customers or the notion of generating benefits for all inclusively? In our experience as management consultants, owner profit alone certainly has been the most common end that cost reduction has served and the main interest business’s have had in applying Lean thinking. And, as you recall, perhaps a third of all Lean community members agree with this use. But, if you accept Emiliani ’s position (Emiliani 2004, 2011), you will not. He decries what he sees as the dominant business thinking which, he terms, “zero-sum thinking.” By that calculus, one stakeholder can only improve his or her wins at the cost of other stakeholders. Owners maximize their profits by keeping them and that extracts resources from the enterprise. It benefits themselves singularly, not all stakeholders inclusively.

The above are just a sample of the decisions one faces in “properly” applying Lean tools. And, in our research of a wide number of such decisions, Lean thinking lacks a consistent and authoritative set of knowledge to guide one in choosing the right course of action.

Executive Functions Guidance

Executive functions are those activities that ensure an enterprise maintains itself as a whole and viable enterprise capable of accomplishing its purpose (Barnard 1968). They include activities such as defining a company’s business intent, designing the organization, setting yearly goals, developing plans, solving organizational problems, and improving organizational performance. They also include the activities that ensure the presence, engagement, and effective contribution of each person needed to accomplish the business’s aim. Finally, they ensure the integration of efforts among all contributors to the business. Most of the tools we were developing were targeted to enable the performance of executive functions. Below, we select four executive activities and discuss the gaps we found in Lean guidance. They are: defining a company’s business intent, designing the organization, developing a market strategy, and structuring employee compensation.

Defining a Company’s Business Intent

A statement of business intent expresses a company’s purpose, vision, and core values; how it defines the meaning of profit; and the stakeholders the enterprise recognizes and its relationship with each. It also specifies the outcomes the business must produce at the Strategic level for it to claim success. The purpose component of this statement states what the business will produce for exchange, with whom, where, and why.

Lean thinking provides little guidance at all concerning how a Lean enterprise decides these issues. Here are a few examples. Can a company that makes a product that is inherently unhealthy (e.g., cigarettes) become a Lean enterprise? Can the pharmaceutical companies that knowingly produced and profited from drugs they knew were injurious to health (e.g., Celebrex, Vioxx, and OxyContin) have been Lean enterprises? What about the chemicals and coatings manufacturers who knew the toxic consequences of such products as teflon and talcum powder could produce yet sold them while hiding that knowledge? Or can any of the other producers of commodities that reap profits from selling products that undermine their buyers’ well being be Lean enterprises? Is the caveat emptor (“let the buyer beware”) principle that is perfectly appropriate within the commonly applied producer-focused, profit-driven capitalist approach to commerce also appropriate within a Lean enterprise?

Apart from the purpose component of a company’s business intent, how should a Lean enterprise define profit? What constitutes profit in a Lean enterprise? Is it only money acquired that exceeds costs? Is it money at all? Do monetary gains, in themselves, advance the purpose of a Lean enterprise? Or do they only advance it based on how that money is applied? Is learning profit? Is having more knowledgeable, better skilled contributors as a result of an organization’s development efforts profit? In our image of what a Lean enterprise is, we answer these questions thusly. Profit is whatever directly advances the purpose of an enterprise. Monetary gains, in themselves, do not advance the purpose of a Lean enterprise. Only when surplus money is applied to advancing the value-adding capability of an enterprise does it have value within the context of the Lean Enterprise model. In this vein, we also would assert that developing learning that improves the value-adding performance of the enterprise is profit. So too is the result of having more knowledgeable people who are better skilled and capable of generating greater value-adding outputs. But, based on our research, such a set of answers would generate much disagreement and, most relevant here, there is not a body of authoritative knowledge within Lean thinking that one could use to resolve such disagreement.

Organizational Design

Organizations larger than a single work unit or implementing processes more complex than a single activity must divide their work into subsets of operations with progressively more specific focuses. This division of the work is called departmentation. Its output is represented by the various “boxes” that appear on a company’s organization chart. Each box identifies a distinct work group. Each lower tier represents a more limited level of activity.

Beyond structuring its work, an organization’s designer must distribute authority and responsibility for accomplishing the organization’s goals across its work units. The designer also must define the reporting relationships among work units. His or her purpose is to clarify accountability for segments of the company’s performance and to define the default communication path members should use. This task draws the solid or dotted lines that connect the boxes in an organization chart. An organization’s designer completes the definition of the social aspect of an organization by clarifying the basic role organization members are expected to perform, their involvement in business decision making, and how they will work together to accomplish the purpose of the enterprise.

Based on our business consulting experience, the design of most if not all organizations is a hodgepodge of tradition, some logic, and a good deal of politics. For example, in most businesses you will find parts of one business function split away and placed under different function heads. This splintering of functions hinders implementing important aspects of the Lean Enterprise approach. These include implementing a business measurement system capable of supporting learning from performance; the implementation of an organization-wide, yearly planning and renewal process (Hoshin Kanri); and functional teaming within and across all work units and locations.

Realizing the problems with the existing designs of most businesses, we decided to develop a tool for reconceiving an organization so that it enables the implementation of Lean thinking. This purpose led to the question of how a Lean enterprise is organized. Most Lean community members would likely answer by value streams. But, operationally, what does that mean? A modern organization is composed of very many functions each of which has a value stream. How should they be identified? How should they interrelate? By whom should they be managed? We could not find content in our Lean literature research that addressed these questions. Yet, without that knowledge one cannot design an organization in a manner that will support critical elements of the Lean Enterprise model.
Absent explicit guidance, we developed a solution. That solution was triggered by statements made by Tokihiko Enomoto (1995) that revealed to us the role of Chester Barnard in Japanese management’s conception of organizational structure.⁵ But, this solution—despite its pedigree, logic, and utility—does not make it Lean thinking. As far as we can discern, Lean community members are not even aware of Barnard and his role in shaping Japanese management thinking.

Market Strategy

The Lean literature is markedly deficient in its discussion of the competitive strategies a Lean enterprise may undertake. Certainly, one well-rooted notion is that a Lean enterprise competes in the marketplace by offering its prospective customers better value than its competitors. Beyond that point, little to nothing is said about what other marketplace strategies a Lean enterprise should and should not use to realize its success. For example, one approach to competing in a marketplace is to use control strategies such as creating barriers to market entry by potential competitors so that customer choice is limited. IBM reportedly used this strategy to build its almost monopolistic control of the “big iron” mainframe computing market in the 1970s and 80s (Baase 1974; U.S. Department of Justice 1995). One technique used was “bundling.” It “often required buyers to pay for a lot of services they did not want at all or could have obtained more cheaply elsewhere, but they wanted IBM equipment enough to accept the package deal” (Baase 1974). As well, some customers complained that IBM threatened “to stop maintenance service or cancel leases if the user attache[d] equipment made by a competitor to an IBM main-frame” (Baase 1974). Bill Gates’ Microsoft Incorporated used a similar tactic in the 1980s to squash competition to its MS DOS operating system. It required all computer manufacturers to pay for an MS DOS license for every machine they made whether or not it had MS DOS installed. Otherwise, the vendor could not install MS DOS on any of its machines (U.S. Department of Justice 1994). In both cases, the market strategies used were not judged illegal, although actions to modify the behaviors were negotiated with each company. Nonetheless, can a Lean enterprise use such strategies? If not, why not? Where does Lean stand on these practices? Can a company using market control strategies be a Lean enterprise?

Companies seeking a competitive advantage sometimes compete on price. One can restrain prices by applying Lean tools to remove waste thereby reducing cost and applying that saving to reducing prices. Another approach companies have used is simpler. It shifts cost to the customer without the customer seeing it. Consider a simple example involving rework costs. Let’s say that a company attempts to reduce its rework cost by determining the likely breakdown point for its product—essentially, its product’s “mean time to failure” given the product’s existing state of quality in terms of both its design and execution. Despite knowing ways to improve the product’s mean time to failure, the company chooses, for profitability reasons, to adjust its warranty period so that there is little chance that a product failure will occur within the warranty period. By doing this, the company shifts that cost to its customers. This means, rather than paying for the product’s repair when it fails, it arranges matters so that the buyer pays. Can a Lean enterprise use such a strategy? It is certainly legal. If you say “No,” then what if the Lean enterprise is low on funds and can’t afford to make improvements in its product? Would it then be acceptable? If so, why?

Still another strategy producers use to win customers involves withholding information from customers that might negatively affect one’s sales or profits. As documented by Vitalo and Bujak (2021), Toyota used this strategy to protect its sales and profits during the period between 1995 and 2010.⁶ It withheld information about defects in its cars. Before that, U.S. tobacco companies used this strategy to sustain their sales of cigarettes for decades (Levin 2006). More recently, Exxon has apparently used it to protect its highly profitable fossil fuel business (Banerjee and Song 2015; Banerjee, Song, and Hasemyer 2015; Banerjee, Song, and Hasemyer 2015a; Cushman 2015; Hasemyer and Cushman, Jr., 2015; Song, Banerjee, and Hasemyer 2015). Again, can a Lean enterprise use this strategy? If not, why not?

Externalities

An externality is a cost (negative externality) or benefit (positive externality) experienced by a party who was not a participant in the transaction that caused the cost or benefit. Air pollution experienced in eastern states in the United States caused by coal-burning power generating companies operating in the western states is an example of negative externality. Companies implementing the dominant producer-focused, profit-maximizing approach to commerce do not recognize externalities as a producer responsibility. When a negative externality exists in a free market context, producers take no responsibility for the costs required to remedy it nor the human harm it produces. Rather, these consequences are passed on to society. Such companies employ a two part strategy in dealing with externalities. They seek to off-load negative externalities and to maximally benefit from positive externalities.⁷ What is the Lean thinking about how a Lean enterprise should deal with externalities? What principles should guide its conduct? What is permissible and not permissible?⁸ If you use Toyota’s behavior as your reference for deciding this question, you would find that Toyota has indeed used externalizing cost as a method to advance its profits. Specifically, it withheld information and released inaccurate information about company actions and product defects from customers and government regulators in order to protect its profits during the period of 1995 through 2010. Revealing that information would have provoked a vehicle recall and exposed Toyota to liability claims. Thus, Toyota externalized the cost of poor quality to its customers who were left to pay for repairs of the defect and any other damages it might have caused (Vitalo and Bujak, 2021).

Employee Compensation

Compensation refers to the monetary benefits provided to employees in exchange for their work. It includes base pay, variable pay, awards, and benefits. Compensation is one of a set of actions that distribute the financial gains produced by a company. The commercial model a business implements and, to some extent, the form of business it assumes (e.g., a C-corporation (for-profit corporation), limited liability company, partnership) determine how those decisions are made and in whom the power for making them is vested.

Within a producer-focused, profit-maximizing corporation, management decides the compensation of all roles except the chief executive officer role. At least for hourly wage workers, the pay structure is designed to ensure the lowest cost compensation system that will attract, motivate, and retain needed employees since the company seeks to maximize its profit and wages detract from profits.
What is Lean thinking’s guidance on compensation? Liker and Hoseus (2008) describe the approach to compensation they report the Toyota Motor Corporation uses. In the absence of foundational knowledge, Toyota is used as the case example one studies to understand what constitutes the Lean approach to commerce. Toyota’s guiding concept for compensation within the United States is “perceived fairness.” If it sets compensation such that employees perceive it as fair, then compensation will be deemed acceptable from the employee’s perspective. It judges that “perceived fairness” is essential to employee morale and retention, at least in the United States culture.

Operationally, Toyota sets the pay for hourly wage workers using market surveys. These surveys reveal what other companies pay people in specific roles within a geographical area. These surveys always find a range of pay and Toyota attempts to either match the first or second best pay level in a given locale. This intent is subject to a controlling condition. Toyota “wants to be competitive without giving away its profits [italics added] (Liker and Hoseus, 2008, page 408).”

But, is “perceived fairness” really “fairness?” And, if not, what approach is consistent with Lean thinking? Consider these facts. The findings of market surveys for determining a fair wage can be artificially depressed due to coordination between employers for the purpose of suppressing wages or through Governmental actions that weaken labor’s ability to organize and bargain for better wages. An example of the former action, is how major IT companies conspired to and succeeded in suppressing employee wages in Silicon Valley. “In early 2005, ... Apple’s Steve Jobs sealed a secret and illegal pact with Google’s Eric Schmidt to artificially push their workers wages lower by agreeing not to recruit each other's employees, sharing wage scale information, and punishing violators” (Ames 2014). The participants in this agreement expanded to include Intel, Adobe, Intuit, and Pixar (Knoczal 2014). With this collusion among employers, employee wages were effectively suppressed. An example of governmental action, over the last 60 years both at the state and federal levels in the United States, governments have limited the right of workers to unionize, strike, and otherwise bargain for what they perceive to be fair wages. This weakened state of workers has been openly acknowledged by Federal Reserve Chairpersons Alan Greenspan and Janet Yellen (Pollin 2002). By either of these means (employer coordination or governmental action), any market survey would reveal comparative wage levels that would be “perceived” as fair but, by any common sense measure, not be fair.

What if one took a different perspective to judge fairness, a perspective used by businesses themselves? Consider, for the moment, compensation as being an employee’s return on investment. His or her investment is the time, effort, and skill applied in advancing the company’s goals. It also includes all the costs associated with being able to make that investment. These include the currently non-reimbursed cost of the worker’s prior education and non-compensated time spent in developing his or her expertise. It also includes all costs associated with the worker’s personal maintenance (food, shelter, clothing, safety, maintenance of fitness to work, etc.), and any expenses related directly to his or her work (e.g., travel, uniforms, cleaning of uniforms). One might challenge that a truly fair wage must deliver a positive return on this investment. Since employers look at their success in these terms, would it not be “fair” for employees to do likewise? Would this perspective be more consistent with Lean thinking?
Still another possible perspective on fairness is to set “total compensation” as a negotiated portion of the monetary value of what a worker produces for the business.⁹ Such pay would reflect the actual yield of benefits the business derives from the worker’s invested effort. Is this the perspective a Lean enterprise should assume?

Finally, consider this. According to Liker and Hoseus (2008), Toyota decides what compensation it will pay an employee with an eye to preserving its profit. It alone, without transparency, decides what amount of profit Toyota “deserves.”¹⁰ Would not equity in a Lean enterprise, with its emphasis on team and community, require that both employees and employer participate in this decision making with equal access to information?

Foundational Knowledge

The third significant problem area in documenting the Lean model concerns the absence of an explicit statement of the basic theory that explains why the actions Lean thinking directs one to do make sense. This theoretical underpinning is the set of assumptions and derivative principles that form the knowledge foundation from which the model’s various ideas and edicts flow and which explain they work.
All theories of commerce and organizational performance are rooted in their premises about people. People are the agents who accomplish commerce and achieve corporate goals. They do it by direct action or by working through other people they manage. Especially with regard to management decision making and action, one needs to understand people’s motives, values, inclinations, and purposes, and management must use that understanding to guide it in engaging, enabling, and supporting the performance of others.

Deming (2000) referred to this set of knowledge as “psychology,” a fundamental understanding of the nature of people and the factors that affect their behavior.¹¹ It answers questions such as: Are people inclined to be self-serving? Do they act on the basis of external rewards alone or is their behavior directed by inner values and for reasons other than the acquisition of material rewards? Do people consider what effects their actions have on others? Are they inclined to ensure that their actions benefit others as well as themselves? Each of these questions affects whether and how an organization can be created and sustained; whether and how people can be aligned to a common goal; and whether and how one can successfully engage, involve, and enable their successful performance.

The prevailing producer-focused, profit-maximizing approach to commerce, for example, has explicit assumptions about human motivation and the end people pursue when interacting with others. Its view of people’s nature is that they are driven to maximize their gains from every exchange with another and that they rationally pursue this end without regard for the impact of their decisions on others (“Homo Economicus”) (Hubel 2014; Yamagishi, Takagishi, Matsumoto, and Kiyonari 2014). From these assumptions, the model deduces that each person looks out for his or her own interests and engages with others only on a quid pro quo basis. In every transaction, each party seeks to get more than he or she gives.

Based on this thinking, people join an organization to garner material rewards. Thus, employees should be recruited using monetary incentives. They should be persuaded that the deal being offered is the best they can expect to find anywhere. As to obtaining from employees the performance the business seeks, employees must be ‘managed’— i.e., actively supervised to ensure that they align to the organization’s purpose since their intrinsic direction is to pursue their own interest. Given that their interest is to maximize their own benefits, they will be inclined to do the least to get the most (Hubel 2014). That is, to take the rewards while not having to give the effort expected in return.

Within the context of seller-buyer exchanges, these assumptions translate into the rule of caveat emptor—“let the buyer beware.” The producer-focused, profit-maximizing model assumes that it is the customer’s responsibility to look out for his or her own interest, not the producer’s. The producer seeks to maximize profit measured monetarily. The buyer seeks to maximize the satisfaction of his or her values, which, in economics, is also measured monetarily.
What are Lean Enterprise’s assumptions about people? How does Lean thinking replace this producer-focused, profit-maximizing set of assumptions? Does Lean thinking accept that model’s assumption that people operate from self-interest alone and are a singularly focused on maximizing their personal gain? Is a Lean marketplace ruled by caveat emptor?

If you think the answers to Lean’s assumptions about people are contained in the Lean management literature, think again. Lean management guidance is essentially a set of rubrics that clarify what one should do and how one should behave. “Strive for perfection in all operations.” “Respect people.” And many others. While at first it may appear that one can extract from these rubrics Lean’s view of the nature of people, that is not the case. For example, the two just mentioned rubrics might imply the need to correct a natural inclination within people—i.e., the inclination not strive to improve themselves and the natural inclination not to respect others. Or, they may be attempts to reinforce and encourage the free expression of an inherent inclination people already possess. Vitalo and Bujak (2019a) attempted to derive Lean’s perspective on human nature from Lean management’s rubrics and failed. In their article, Why Lean Management’s Rubrics Cannot Tell Us What Lean’s View of People Is, they demonstrate that it is not possible to extract a definitive statement of Lean’s perspective on the nature of people from its guidance on how to manage a Lean enterprise.

As an alternative to developing Lean’s view of human nature, one might respond that there is no need to replace the assumptions about people that underpin the dominant producer-focused, profit-maximizing approach to commerce. People can act on a selfish basis and still provide benefit to others (i.e., value-adding products) because “benefiting others will maximize benefit for oneself.”

This “enlightened self-interest” response, however, does not withstand real-world, rational analysis. First, in the zero sum world of the dominant approach to commerce (Emiliani 2004), any benefit a second party gains from a transaction is a benefit lost to the first party. Second, if I, as an individual, am driven to maximize my personal gain, I will seek out a way to get all I can from every exchange with another. Based on the self-interest model, I would search out and use methods that accomplish the redistribution of all benefits to myself. And, those methods both exist and are in use. Essentially, they boil down to establishing power over the other party in commerce. The means for doing this are many. A few have been described above. These methods may be direct, as through the use of deception, misinformation, or the withholding of information. They may be indirect, as through the manipulation of the commercial context by influencing law and regulation or by colluding with others.

If you counter argue that one cannot continue to exploit others in a commercial context over the long-term and win—again, you would be historically wrong. As just one example, big Tobacco did it and these firms continue to thrive today.

Finally, consider the time horizon of “self.” By definition, it is the length of one’s adult life or, more narrowly, one’s commercial career. While a business may exist over many employee “lifetimes,” it is implemented by people pursuing their self interest within their limited lifetimes. Any argument that self-interest will be constrained by the ‘long view’ in which the long view assumes the accumulation of wealth past one’s personal lifetime is, by definition, nonsensical since it implies that self-interest persists past the death of ‘self.’

Why Toyota Cannot Be Used to Close the Gaps

When in doubt about how Lean should respond to one or another issue, many Lean authors attempt to discern an answer by referencing the practices of the Toyota Motor Company. One source for Toyota’s thinking is its famed document “The Toyota Way 2001.” But as a resource for uncovering a deeper clarification of Lean thinking, it has proven disappointing. According to Baudin (2013), that document does not provide any deeper understanding of the “whys” behind Lean thinking. Baudin is one of a few people who were provided the opportunity to read the document. He states, “As a stand-alone document ... it’s not that useful ... . Based on its content alone, it would be difficult to tell the Toyota Way apart from other corporate philosophies like the HP [Hewlitt-Packard] way. A manager of a mid-size traditional plant, reading The Toyota Way 2001, would reasonably conclude that all he or she needed to do to emulate Toyota was follow its recommendations.”

As an alternative, Lean writers have used their experiences in working with Toyota to help bridge some of the foundational knowledge gaps. But uncontrolled observations of specific work units in a worldwide organization do not render usable information for generalizing about how Toyota as a company behaves. Only a properly formed random sample of observational points across an organization and over a sufficient period of time can provide us with solid data. As we detailed in our exploration of this issue (Vitalo and Bujak, 2021), there are many inconsistencies between the performance of the Toyota Motor Company and so-called Lean thinking as derived from the selective work experiences reported by Lean authors. These inconsistencies occur at the strategic, operations, and executive functioning levels. They are numerous and serious and occurred over a considerable period of time. To date, no one has established in an empirically valid manner what the Toyota Way is. Policy statements are insufficient, especially in light of officially endorsed and fully-documented violations of those policies reported Vitalo and Bujak’s (2021) technical report.

The Missing Deming Content

If Lean community members seek to establish the set of premises that underlay their approach to executive functions, they have easy access to a beginning point. Our research to find answers to the problems described above, and others not detailed here, led us to revisit the work of W. Edwards Deming. We say revisit because both of the current authors had studied and used Deming’s ideas in our early careers as managers and consultants. When Lean emerged, we both heard echoes of Deming in its edicts but rarely saw any mention of him outside of Lean’s incorporation of his Plan Do Check Act tool for guiding problem solving actions.¹¹ Based on our further research of Deming (Vitalo 2017), however, it was clear to us that he had made the seminal contribution to what evolved into the Lean model. We based this judgment on the following facts:

• First, Deming’s thinking and the Lean model’s views concerning the role of executives, managers, and supervisors are essentially identical except that Deming’s provides a theoretical underpinning for it.
• Second, Deming taught the leaders of Japanese industry about the quality approach to commerce through the auspices of the Union of Japanese Science and Engineering (JUSE) beginning in June, 1950. His teaching of top Japanese management began in 1950 at the Hotel de Yama on Mt. Hakone in Japan (Deming 1950a, 1982a). He continued to teach and consult with Japanese management throughout the decade and into the 1960s.¹²
• Third, Deming played a pivotal role in enabling the resurrection of Japanese industry to its place of worldwide importance in the post 1950s era. Indeed, Japan, as a nation, recognized Deming’s contributions to the resurrection of its industry by extending to him the Second Order Medal of the Sacred Treasure.
• Fourth, Ohno himself stated, “The Toyota production system is one and the same with TQC¹³ ... . They are simply different names for the same basic approach” (Shimokawa and Fujimoto 2009, page 3).¹⁴
• Fifth, Masao Nemoto, a former Toyota senior Manager, credited Womack, Jones, and Roos’ original book on Lean by stating that, “It was truly an excellent book.” But, he went on to say that, “Its one really disappointing flaw is that it fails to mention the role of TQC in Lean manufacturing. It’s a pretty thick book, but even where it mentions quality control, it leaves off the T [for Total]” (Shimokawa and Fujimoto, 2009, page 175).
• Sixth, Toyota’s rise as an automobile manufacturer took off in the 1960s after it adopted Deming’s quality management approach (Shimokawa and Fujimoto, 2009, page 177).
• Seventh, Deming’s contributions to the Lean model, as practiced by Toyota Motor Corporation, were personally acknowledged and appreciated by Dr. Shoichiro Toyoda, the son of the founder of the Toyota Motor Corporation and its chairman from 1992–1999. “Everyday I think about what he [Deming] meant to us,” said Dr. Toyoda, “Deming is the core of our management” (Toyoda, 1988). The Toyota Production System is often cited as a foundation for the Lean Enterprise model.
• Eighth, many elements essential to Lean thinking were first expressed by Deming in his teaching to Japanese leaders. Just one example is the concept of the value stream and the necessity of managing from the perspective of the whole system. In Out of Crisis, Deming reproduces a graphic of what, in the Lean lexicon, we term the extended value stream (Deming, 1982a, Figure 1, page 4). In its caption, he tells us that “This chart was first used in August 1950 at a conference with top Japanese management at the Hotel de Yama on Mt. Hakone in Japan.” Elsewhere he states “The simple flow diagram was on the blackboard at every conference with top management from 1950 and onward” (Deming, 2000, page 57). Another example is the redefinition of the management role from oversight and control to enabler of every employee’s success (Vitalo 2017). Exhibit 3, next page, provides additional examples.

Most relevant to this paper, Deming’s teaching is underpinned by four sets of what he termed “profound knowledge” and we term, “foundational knowledge.” He declares managers must master this knowledge because it provides the “why” behind all management decision making and actions (Deming 2000; Vitalo 2017). These four domains of knowledge are:

• a theory of organization (the nature of systems),
• the concept of variation and its significance,
• a theory of knowledge, and
• the basic principles that reveal the nature of people and the source of their striving.

Should the Lean community seek to develop its fundamental premises about the nature of people, human organizations, and commerce itself, Deming’s thinking would be the place to start. It provides a knowledge foundation for all Lean’s executive guidance.

To explore further Deming contributions to Lean thinking, see Deming Revisited: The Real Quality Model (Vitalo 2017). This monograph provides a detailed analysis of Deming’s thinking and contains citations to his original works. Use this monograph as a pathway into primary sources: Deming 1950, 1950a, 1967, 1975, 1982, 1982a, 1988; Reddie 2001; and Deming Prize 2006.

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Footnote

¹ Foundational knowledge refers to the set of concepts, principles, and relations used to explain the “why” underlying observed facts or the set of assumptions from which the judgments and directives of a deductive knowledge systems are deduced.

² The term gemba means “where the real work is done.” It refers to the front-line workplaces where the product or service offering of a business or a business function are actually produced.

³ An extended value stream represents the flow of input resources from suppliers to and through a business’s production system and from the business’s production system to the customer of its output. Each of the organizations who contribute to that flow, whether internal or external to the business, is represented in it.

⁴ Again, this Ohno statement seems at odds with his statement in Workplace Management (Ohno 2013) that efficiency in itself is destructive. Nevertheless, he stated it and it seems unequivocal.

⁵ Chester Barnard (1886–1961) is considered by many to be the premier theorist on the topics of organization and executive functioning. His seminal work, The Functions of the Executive, was published in 1938 and is still taught in graduate programs in business and management today. While the model of organization and executive functions he formulated is an excellent fit to the current dominant approach to commerce, it is antagonistic to the Lean Enterprise approach. Nonetheless, his writings about how an organization should be structured, among other topics, were widely praised in Japan in the early 1950s and did contribute to the Lean model (Enomoto, 1995).

⁶ See Why Toyota Is Not Lean Thinking’s ‘Rosetta Stone’ (Vitalo and Bujak 2019) for a thorough discussion of the limitations of using Toyota as your guide for understanding what constitutes the Lean approach to commerce.

⁷ Milman (2019) reports on an effort underway to pass legislation that will extend to polluting corporations legal immunity for damages done to the environment by the pollutants they emitted. The law “would squash [a] raft of climate lawsuits launched by cities and counties across the US seeking compensation for damages.” The promoters of this plan include British Petroleum, Exxon Mobil, Chevron, ConocoPhillips, Shell Oil Company, and Microsoft Corporation. Can any of these corporations be a Lean enterprise?

⁸ We are aware of Toyota’s publicly expressed vision of community responsibility and acting as a good citizen. However, we cannot use Toyota’s words. See Why Toyota Is Not Lean Thinking’s ‘Rosetta Stone’ (Vitalo and Bujak 2019) for thorough discussion of the limitations of using Toyota as your guide for understanding what constitutes the Lean approach to commerce.

⁹ This calculation could be refined to net out from the value produced whatever producer incurred costs were expended to produce that value and add in whatever costs for producing that value were born by the employee.

¹⁰ We say, “without transparency” because we have not read anywhere that the Toyota Motor Corporation uses open book accounting to share financial information with its employees and nor do they share the specific decision criteria executives use in making financial choices.

¹¹ Actually, the tool derives from Shewhart. Deming consistently represents the four-stage Shewhart cycle as plan, do, study, and act and sees it as a systematic process for uncovering “learning, and for improvement of a product or process” (Deming, 2000, page 131).1 In his earlier works, he refers to it as the “Shewhart Cycle.” Later, he labels it the “PDSA Cycle.” See Exhibit 14, Deming’s Different Representations of the Shewhart Cycle in Deming Revisited: The Real Quality Model for Commerce (Vitalo 2017).

¹² Noguchi (1995) claims that Deming did not specifically teach his “14 management points” in Japan; however, a review of the contents of his lectures and his notes indicate that the same ideas were embedded in the content he presented.

¹³ TQC is the term used at Toyota to refer to Deming’s total quality management as reflected in the standards used to assess the Deming Quality Prize in Japan (Union of Japanese Scientists and Engineers, 2016).

¹⁴ Of course, Ohno did also reveal in this statement his incorrect understand of total quality management as he aligns it with the “principle of zero defects” (Shimokawa and Fujimoto 2009, page 3). Deming abhorred “zero defect” and condemned it as a empty slogan. He stated, “Of course we do not want to violate specification, but to meet specifications is not enough” (Deming 2000, page 16). One can have zero defects many ways, most which can still deliver customers undesired outputs to customers. Nonetheless, Michikazu Tanaka, a student Ohno, does confirm the importance of Deming. He reports that, “Ohno always said, ‘Kanban won’t work right anywhere that TQC isn’t working right. ... The kanban system only works when you’re making quality products’” (Shimokawa and Fujimoto 2009, page 9). Thus, Ohno’s acknowledgment of Deming’s contribution appears to stand.

Published June 12, 2019, Revised June 4, 2022 - © 2019-2022 Vital Enterprises - Austin, Texas

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