Lean archetypes were found to perform better than non-lean companies with respect to measures of cycle time. However, surprisingly, they were not found to perform better with respect to measures of asset or employee productivity. This finding is in contrast to MacDuffie (1995) who found a strong positive correlation between measures of both employee involvement and its interaction with JIT systems with labor productivity as measured by the number of hours required to build an automobile. This study finds that the primarily mode of lean’s effect on operations performance is a reduction in overall transaction time.
Some evidence suggests that lean firms operate with lower profit margins than non-lean firms. These results contrast to tests of the relationship between individual practice measures and performance, which found no significant relationship. This adds credence
to the proposition that lean acts as a unified set of interrelated, synergistic practices in affecting operations financial performance.
Lean archetypes were shown to have significantly better cycle time performance than non-lean firms. This corresponds well with both past empirical studies and theory regarding lean’s focus on waste reduction, especially in the form of excess inventory.
Cycle time is the total time it takes for a transaction, or unit of production, to be
processed from start to finish. The fact that both cash-to-cash and total cycle time seem to be equally effective in distinguishing between lean and non-lean firms indicates that payables cycle time, or the time between receipt and payment for raw material, is not a significant factor in measuring lean performance (Figures 4.2a and b). Examination of Table 4.13 supports the observation that shorter inventory and receivables cycle times are the distinguishing measures of lean operations financial performance. Lean firms operate with less total inventory than their competitors operate and are paid in less time by their customers.
There are some indications that lean companies operate with a lower gross margin (GMR) than non-lean companies (Table 4.13)36. In other words, lean companies operate with less difference between selling price and cost of goods sold. This finding conflicts with Proposition 1 that lean companies have better financial performance on all five
36 Gross margin ratio (GMR) is the measure used in this study and appears in all tables and formula. Since it is basically calculated as cost of goods sold divide by sales, lower values are “better” (larger difference between CGS and sales). A higher GMR value corresponds to a “lower gross margin.”
operations measures. A possible explanation for this observation is that lean practice implementation is a competitive response to price pressure. Low margins are a cause of lean implementation rather than a result; therefore, there tends to be a positive correlation between low gross margins and leanness. Huson and Nanda (1995) observed that
although the direct effect of JIT is to lower cost, the margins following JIT
implementation tend to decrease more than in non-JIT firms. Both the Huson and Nanda (1995) results and those of this study stand in contrast to Callen et al. (2000) who found a found a positive relationship between JIT-TQM implementation and contribution margin per sales dollar.
The net implication is that managers should be wary of gross profit margin improvement as a goal or measure of effective lean implementation. A comparison of above- and below-competitive median GMR performers within lean firms did not indicate a significant difference in implementation for any of the seven individual lean practices.
Lean practices should act to improve or maintain profit margins through waste
elimination and cost reduction. A larger sample size of lean companies (greater than 200 based on Table 5.1) may demonstrate definitively whether or not levels of lean
implementation are associated with improved margins.
Neither asset productivity (ROCA) nor employee productivity (EP) differs between lean and non-lean archetypes in this study. ROCA results contrast somewhat with Fullerton et al., (2003) who found a positive relationship between what they called JIT manufacturing (i.e. focused factory, group technology, reduced setup times, TPM, multifunctional
employees, and uniform workload) and ROA and ROS. They found no relationship between measures of financial performance and JIT unique effects (i.e. Kanban and JIT purchasing) although they did control for inventory financial benefits, which are a primary contribution from JIT implementation. The ROCA measure in this study includes inventory, excludes liquid assets, and compares the firm median five-year performance with that of a comparison portfolio of companies.
The lack of a significant result for ROCA could result from the fact that many plant and equipment assets are long term. Even as lean practice implementation reduces the requirements for floor space and increases the useful productivity of equipment, those assets remain on the accounting books. If sales growth is flat, the only way ROCA can be affected is through inventory reduction and reductions in operating expense. If that impact is not significant in relation to physical assets, the measure does not move. In any case, ROCA does not seem to be overtly responsive to lean practice implementation.
That employee productivity is not significantly different between lean and non-lean was somewhat expected. The literature review studies that included a measure of return per employee were split 50/50 on the finding of a significant relationship (Table 2.6).
MacDuffie (1995) found a significantly positive relationship between lean practice implementation and a more direct measure of productivity (labor hours). Experience in implementing lean programs attests to the likelihood of a labor requirement reduction.
A typical consultant recommendation relative to implementing lean manufacturing is to anticipate productivity improvements with either layoff up-front or plans for
redeployment of excess workers. One possible explanation for the lack of a significant finding is that the survey data lags behind the performance data. The performance data represents a time span of 1998 to 2002 while the survey was taken in the fall of 2003. A premise of this research acknowledges that lean implementation takes time. An oft repeated nostrum of lean production recalls that it took Toyota 40 to 50 years to achieve their current level of lean practice implementation, and the process continues today (Drickhamer, 2004; Womack et al., 1991). In the latest generation of lean
implementations, the expectation is that substantive results should be evident in two to five years. In fact, substantial improvements in inventory reduction are often achieved in the first six to 12 months. If this is indeed the case, the significance of cycle time
improvement and non-significance of productivity improvements could be indicative of a lag in performance effect, with cycle time improvements leading the improvement in productivity.
An assumption made in interpretation on all practice-performance relationship analysis results is that lean practices take time to implement and institutionalize and that
performance effects are cumulative. The company performance data are from the years 1998 to 2002 and the survey data represents lean practice implementation levels in the summer and fall of 2003. The survey data collection lags the financial performance data by at least one year. However, the assumption that lean practice take multiple years to implement and that the results are cumulative means that indications of changes to
performance should be evident in the earlier time period, especially for firms with high levels of practice implementation. A conscience decision was made in this research to focus on currently observed levels of implementation rather than more suspect “time since initiation.” Under the assumption of time to implement and cumulative effects, finding evidence of a significant effect of lean practice on financial performance may represent a conservative bias.
The alternative assumption is that firms with better financial performance tend to be better able to implement lean practices. The research methods employed in this study does not allow a definitive resolution as to which assumption is correct. However, the use of the median for five years of sustained performance reduces the negative
implications of the reversal in causality (performance ặ practice). An interpretation of the results in the reversed direction is that firms with consistently higher than competitive median financial performance implement lean and sustain good performance. In either direction of causation, lean is at least not detrimental to financial performance.
Another possible explanation lies in the relationship between lean implementation and capacity. It is possible that productivity increases do not show up as readily in firms where output is restricted by the market demand rather than plant capacity. In the case of a market restriction, lean implementation translates into an increase in relative capacity rather than output. Since a major lean production principle asserts that building more than is needed is a waste and warns against utilization as a goal, this finding is consistent with lean thinking.
These results bear significant implications for managers attempting to measure or justify lean implementation programs. It is unlikely that lean practice implementation will show immediate results in asset or employee productivity. Alternatively, one may postulate that total cycle time is responsive to lean practice implementation. Total cycle time should be the financial accounting-based measure of choice in either monitoring or justifying lean programs.