This section develops an argument for a positive relationship between lean as an
integrated set of mutually supportive practices and operations financial performance. In acting as an integrated set of practices, lean can be viewed as a strategic archetype or configuration10. The existence of strategic archetypes, and their usefulness in explaining performance, has been proposed by several researchers (Bozarth & McDermott, 1998;
Meyer, Tsui, & Hinings, 1993; Miller, 1986, 1996; Miller & Roth, 1994; Ward et al., 1996). Ward et al. (1996) specifically identified “lean competitor” as a distinct archetype along with niche differentiator, broad market differentiator, and cost leader. Lean
competitors achieve differentiation and cost leadership simultaneously through the application of lean manufacturing management practices (Womack et al., 1991).
Miller (1996)11 describes strategic configurations as “complex systems of
interdependencies” that are brought about by “central orchestrating theme[s].” One of the key orchestrating themes of lean manufacturing management practices is the
elimination of waste, or “muda,” as coined by Ono (1988). Taiichi Ono identified seven wastes that lean practices propose to eliminate. Table 3.1 enumerates the seven wastes and proposes first order mechanisms connecting them to the operations financial measures included in this study. For example (row 1, column 1), a first order effect
10 The terms archetype and configuration are used interchangeably in the research literature. The term archetype will be used throughout this study unless a point is being made about a specific study that refers to configurations.
11 Miller, D. 1996. Configurations revisited. Strategic Management Journal, 17(7): 505-512., won the 1995 Strategic Management Journal best paper award for his this seminal 1986 work. (Bettis, R. A. 1996. SMJ 1995 best paper prize to Danny Miller. Strategic Management Journal, 17(7): 503.
resulting from the elimination of defects is “more good output.” Since output occupies the numerator of the return on cash adjusted assets measure, that measure should increase. Many articles have proposed reasons why lean practices should positively affect performance. For a summary explanation of lean first order effects on downtime, inventory reduction, workspace reduction, increased quality, increased labor utilization, increased equipment utilization, and increased inventory turns, refer to Inman and Mehra (1993).
Since the positive effects of lean are considered desirable, selection of a comprehensive set of operations financial performance measures to include in this study follows. Five measures were selected based on coverage and availability in public data sources. The first is asset productivity, which is measured by return on cash adjusted assets.
Removing cash from the asset base eliminates the influence of short-term financing decisions on the measurements (Barber & Lyon, 1996). The resulting measure better represents the firm’s physical assets productivity. Employee productivity is measured as operating income per employee. Use of operating income instead of the more common sales numerator recognizes the lean supposition that employees contribute on both the throughput and cost side of the operation. The gross margin ratio measures the
relationship between cost of goods sold and sales. Lean practices are expected to reduce costs and contribute to higher product quality and on-time delivery, which theoretically improves sales.
Two aggregate measures of cycle time are included in this study. Cash-to-cash cycle time is measured as the sum of inventory and receivables cycle time less payables cycle
time. This measure of cash-to-cash cycle time takes as its object the maximization of cash flow to the company. Available cash is increased by reducing the inventory and receivables cycle time and increasing the time taken to pay vendors. The other, total cycle time, is measured as the sum of all three component cycle time measures (i.e.
inventory, receivables, and payables). It takes as its object the reduction of the total transaction time within the company’s order fulfillment process. These measures are included to provide a broad and sensitive response to changes in lean practice
implementation.
3.1.2 Empirical Support
Several studies that have presented broad, comprehensive sets of lean practices indicate a positive relationship between a set of lean practices and operations performance. In their 2003 study of Industry Week annual survey data Shah and Ward (2003) argue for a generally positive effect from “lean bundles” (i.e. JIT, TPM, TQM, and human resource management (HRM) practices). Indeed, they find a significantly positive relationship between each individual lean bundle and an aggregate measure of operations
performance. The study measured performance as a single factor score comprised of self-reported five-year changes in manufacturing cycle time, scrap and rework costs, labor productivity, unit manufacturing costs, first pass yield, and customer lead-time.
Shah (2002) found that performance as measured by manager’s perceptions of delivery, flexibility, cost, time, and productivity were positively related to classification as a lean archetype but not to individual lean practices. Cua et al. (2001) also demonstrated a positive relationship between combined sets of lean practices (i.e. TQM, JIT, and TPM)
on all the perceived operations performance measures (i.e. cost efficiency, conformance quality, and volume flexibility) included in their study.
Both of the two survey-archival studies in the literature review that examined the relationship between lean practices and operations financial performance, found
significant relationships for operations financial measures. Fullerton et al. (2003) found significant positive relationships to all three of their financial performance measures (i.e.
ROA, ROS, and cash flow margin) but only for their general lean practice construct and not for their more specific constructs. The general construct included focused factory, group technology, reduced setup times, TPM, multifunctional employees, and uniform workloads practices. Their JIT unique practice construct (i.e. Kanban and JIT
purchasing) was not significantly related to financial performance and the quality construct (i.e. product and process quality improvement) was negatively related to all performance measures. They attributed this finding to a narrow focus on quality improvement programs and lack of consideration for the total cost of their
implementation. Callen et al. (2000), who used a heuristic to classify lean and non-lean companies across seventeen practices, found that all their financial performance measures were positively associated with lean practice (Table 2.6).
The announcement-archival studies tend to be less useful in predicting the outcome of implementing a holistic set of lean practices because they consider either JIT or TQM singly (Table 2.1). None of the studies in this category looked at announcements of lean implementation. Announcement-archival studies show a high degree of inconstancy in
results with respect to all financial performance measures except those relating to inventory reduction. The inconstancy in results may be due to examining either too narrow a set of practices or failure to control for the presence of other confounding practices.
Based on the theoretical argument and empirical evidence presented above, the following proposition is offered:
Proposition 1 (P1)12: Lean archetypes tend to have better operations financial performance than non-lean archetypes as measured either by asset productivity, employee productivity, gross margin ratio, cash-to-cash cycle time, or total cycle time.
12 Reference Figure 3.1 for a diagram of the relationship between propositions, practices, and performance areas.
Asset productivity
(ROCA)
Employee productivity
(EP)
Gross margin ratio
(GMR)
Cash-to- cash cycle time (CTC)
Total cycle time (CTT)
More good output.
More good output.
Reduced costs of scrap and
inspection.
Premium pricing for quality.
Less time spent in inspection process or in inventory
queues.
Less time spent in inspection process or in inventory
queues.
Assets focused on producing good for sale.
Employees focused on producing good
for sale.
Reduced labor costs.
Process time available for goods that are
needed.
Process time available for goods that are
needed.
Reduces inventory and required floor space assets.
Less employee time spent managing inventory.
Carrying costs for inventory
reduced.
Queue time reduced.
Queue time reduced.
Less assets required for inspections and
rework.
Less employees required for inspections and
rework.
Processing costs reduced.
Processing time reduced.
Processing time reduced.
Employee access to assets
improved.
Time focused on production rather than movement.
Labor costs reduced.
Processing time reduced.
Processing time reduced.
Assets required for transportation
reduced.
Employees involved in transportation
reduced.
Transportation costs reduced.
Transportation time reduced.
Transportation time reduced.
Asset utilization improved.
Employee utilization improved.
Labor costs reduced.
Processing time reduced.
Processing time reduced.
6. Unnecessary transport (of goods)
7. Waiting (by employees for process equipment to finish its work or and upstream activity)
Seven Wastes
Operations Financial Performance Measure
1. Defects (in products)
2. Overproduction (of goods not needed)
3. Inventories of goods awaiting further processing or consumption
4. Unnecessary processing
5. Unnecessary movement (of people)
Table 3.1: First order mechanisms connecting lean “seven wastes” (Ono, 1988) to operations financial measures.