3.2.1.1 Theoretical Support
The next research propositions relate individual lean practices to operations financial performance. Table 3.2 lists the individual practices and performance measures covered.
Proposition 2.1 (P2.1) is a corollary to P1. If operations financial performance is related strongly to lean practices as an interrelated and balanced set, then it should be less related to leanness expressed as a simple linear combination of practice levels. This proposition
assumes that lean practices may not necessarily be substituted for each other or that more of any given particular practice will lead to improved performance. The question
relevant to a company interested in performance improvement is not to select any or all practices, but to select a specific strategically important practice. McDougall’s (1988) theory of “slack ropes” contends that the main objective should be “improvement on only the strategically chosen variable, while the others are not allowed to backslide.” Miller (1996) describes strategic configurations as “complex systems of interdependencies” that are brought about by a “central orchestrating theme.” The assumption of complex interdependencies conflicts with the likelihood that simple additive combinations are sufficient.
3.2.1.2 Empirical Support
Much of the survey-perceptual literature supports the notion that simple linear combinations are effective as measured by manager perceived performance. The majority of studies in Category 1 (ref. Table 2.2) use statistical techniques with an underlying assumption of additivity (e.g. regression, structural equation modeling). The studies all find significant relationships between practices and multiple measures of operations performance. The announcement-archival studies tell a less consistent practice-performance relationship story and are less relevant. They do not control for lean practice implementation other than the particular one being studied. Therefore, the following is posited:
Proposition 2.1 (P2.1): The extent of lean practice implementation as measured in simple linear combinations is not associated with operations financial performance as measured by asset productivity, employee productivity, gross margin ratio, cash-to-cash cycle time, or total cycle time.
3.2.2 Relationship between Individual Practice and Performance Measures
The second and final proposition in this section is initially argued in the negative: Which specific lean practice is not related to improved operations performance? All of the lean practices considered here arguably result in positive first order effects. For example, the use of Kanbans in JIT production systems limits inventory. The use of SPC reduces process variation. TPM reduces unforeseen machine downtime. Considering all the first order effects to be ostensibly beneficial, then the questions from an operations financial performance measure standpoint become how much, how direct, and at what cost?
How much considers the effect size of the practice implementation on performance.
Given the effect size is small in relation to the unexplained variance in the system then the practice will not be significant. This is true especially in the case of the relatively small sample sizes anticipated in this study. If the effect is not direct, the amount of change in a specific performance variable may be attenuated by other variables in the system. What cost is captured through the translation of practice effects into accounting dollar values. In fact, the difficulties that financial accounting systems have in
effectively measuring the strategic impact of important operational activities (Kaplan, 1983) serves as a further justification for this study. All of the operations performance
measures used in this study are derived from accounting values. A lean practice may have a significant physical effect on the shop floor but not translated into a significant financial effect. For example, a highly involved and empowered employee team may solve a productivity problem on a portion of the production line that does not influence total plant output. This would be the case if a non-bottleneck operation were improved.
The preventative nature of lean practices in eliminating sources of problems results in cost avoidance that is also not effectively captured by traditional accounting systems.
For these reasons, a general lean practice-performance proposition is offered, with the expectation that only the most significant, direct, and cost effective practice effects will manifest themselves in the analysis:
Proposition 2.2 (P2.2): The implementation levels of all eight lean practices are positively associated with all five measures of operations performance.
Just in time production methods (JIT) Asset productivity (ROCA) SPC to monitor quality (SPC) Employee productivity (EP) Employee involvement in problem
solving (EMP) Gross margin ratio (GMR)
Group technology to enhance the flow
of product (GT) Cash-to-cash cycle time (CTC)
Total productive maintenance (TPM) Total cycle time (CTT)
Communication with suppliers (SCM)
JIT delivery by suppliers (SJT) Return on equity (ROE) Customer involvement (CUS) Sales growth (SG)
Stock return (SR)
Business Financial Performance Measures
Lean Internally Oriented Practices
Externally Oriented Practices
Operations Financial Performance Measures
Table 3.2: Lean practices and financial performance measures.