When I first started my career in the pharma industry as a supply chain analyst, pharma companies were tempted to hire lean-manufacturing experts from the automotive industry to improve their production systems. Lean practice, which originated as a productivity tool in Toyota, strongly emphasizes the elimination of all sorts of waste categories along supply chains. Naturally, it helped Toyota and other lean champions reduce costs and improve the quality of their products. Following their success, other firms in all industries started to find alternative ways to benefit from lean practices, and pharma was no exception. It was not until 2010 that lean manufacturing’s popularity melted, particularly due to serious quality issues faced by Toyota. What is the problem with lean manufacturing? Under which circumstances can companies adapt lean principles to their production systems and improve the bottom line? To answer these two questions, we must look at the basics of lean manufacturing.
Lean manufacturing is a set of productivity tools that can be utilized by companies to eliminate all sorts of waste categories. Here, waste can be anything customers do not appreciate. If a feature of a product is unnecessary for customers, that feature is regarded as waste. Then, the activities taken to make it are deemed redundant, and they must be eliminated. If an employee sits idly, they do not create any value for customers. Such idleness must be avoided by employing workers for multiple tasks. If a product is defective, customers cannot use it. Defects must also be avoided along the supply chain. In sum, redundancy, idleness, and defects are all three waste categories, and lean manufacturing attempts to remove them from production systems. In other words, anything that does not add any value to customers is perceived as a waste. Here, the problem is that customers do not have a static view toward products. For example, some people want to buy a classic Casio watch at around $20; others may want to buy a Tissot watch at around $500; or ultra wealthy people may want to buy a Patek Phillippe watch at around $100K. Although they all want to buy a watch, they have different preferences having an impact on their valuation of products. The first group looks at merely utility, while the last one focuses on just aesthetic value.
If the price of a product truly reflects its utility value, lean manufacturing must be strongly promoted. Such products often have stable demand in the market. Lean practice helps companies minimize the production cost and fulfill the market demand at the lowest possible cost. As aesthetic value of products becomes more important than their utility value, demand uncertainty increases. Therefore, companies must stop promoting lean manufacturing but concentrate on supply chain integration. For instance, having idle resources (conflicting with lean principles) would help manufacturers integrate supply chains well. Such an integration helps match supply with demand perfectly, avoiding inventory distortion costs. When the aesthetic value of a product is extremely high (e.g., luxury goods), supply chain priorities change completely. Supply chain integration cannot even be the right strategy for luxury brands. There are four distinct supply chain strategies that can be categorized according to business models and operational trade-offs as discussed in my forthcoming book.
Author: Isik Bicer, PhD