New frontiers for applying the Lean system in services

It is increasingly evident that Lean is a business system that can be applied to any sector, including services, since it makes it possible to serve customers with high quality, low costs and appropriate delivery times.

The long-term success of this business philosophy is due to the lean way of thinking, which must be present in every place and area of the business, including administrative work.

Applying lean concepts in offices makes work and information flow more visibly. A purchase order or the process of developing a new product can be seen as a series of steps, just like industrial production, with problems of quality, flow, waiting, etc. And the tools used on the shop floor can be applied to these new environments. Much of non-manufacturing work can and should also be standardized.

Recent publications, with practical examples of application in the most diverse sectors and countries, have shown this reality. Here we will discuss the cases of the Construction industry, Postal Services, the Healthcare Sector and Civil Aviation.

1. Construction: an airport in Japan

As one of the most significant activities in national economies, construction in several countries around the world, after decades of trying to implement mass production concepts to tackle the enormous waste of the prevailing craft system, has awakened to lean concepts in recent years.

One example recently reported in "Lightening the load: Airport cuts costs using Toyota as guide" in the Asahi Shimbun newspaper of 8.10.03 is the construction of Chubu International Airport in Japan, which shows the effectiveness of Toyota’s methods in reducing construction costs.

Central Japan International Airport, the company responsible for the construction, is chaired by Yukihisa Hirano, a former Toyota director. The new airport, originally estimated to cost 768 billion yen, had its cost reduced by 16%. It is scheduled to begin operating in February 2005.

It was found that construction companies are not cost-conscious and that, if left unchecked, costs grow exponentially, a lesson Toyota learned many years ago.

The first thing the company did was put an end to practices that led to cost increases, such as costly design and specification changes made by the contractors.

The cost control process began in the early stages of the planning process and contractor selection. It is harder to cut costs once construction has already begun.

The basic design is the fundamental factor in determining construction costs. From the start, the airport company set cost reduction as a requirement and asked the company responsible for the design to make the necessary changes.

The contractors were not selected through the traditional lowest-cost "bidding" process because it was believed that this process actually resulted in higher costs.

Requests for changes after contracts have been signed are common practice in public project work. Although some are unavoidable, many are mere attempts by contractors to make additional money once the initial budget for the work has been set.

In the case of the Chubu airport project, the contractors involved only in building the passenger terminal made around 500 change proposals. The airport company adopted some that led to lower costs, but rejected most of them.

Every week, airport company officials held meetings, as close as possible to the construction site, with the project engineers and the construction companies to discuss the change proposals.

A contract was signed with Taisei Corp. for the passenger terminal after 6 months of analysis of the candidate companies. The contractor made more than 150 suggestions to reduce costs. The contract for building the cargo terminal went to a construction company linked to a major steel producer, at a price 10% lower.

Mr. Hirano chose consultants knowledgeable in Toyota methods to oversee the key construction operations.

Like this one, examples are flourishing in other parts of the world of applying lean concepts to construction, although still at an early stage.

2. Postal Services

Postal companies remain public enterprises in most countries, and they rank among the largest national employers. In countries such as Denmark, Canada and Japan, the postal service has sought to apply lean concepts to its activities.

In the Japanese case, as part of an effort to prepare for privatization, there has been a government effort to improve its efficiency based on Toyota’s methods, as shown in "Model post office or return to sender?" published by the Asahi Shimbun on 13.02.04.

Opening the market to competition is one of the factors driving this effort. What matters for Japan Post will be reforming its loss-making mail business. The target for the postal service business during Japan Post’s management plan period (2003-06) is a bottom-line profit of ¥50 billion.

In January 2003, the postal services agency decided to implement a reform of the work process in post offices using as a reference Toyota’s production and distribution management methods, which have been praised as "squeezing the last drop out of an already dry towel."

The opportunities for improvement are evident. At one post office, more than 400 problems were cited in the process from mail collection to delivery.

Toshihiro Takahashi, a former Toyota director who was chosen as vice president of postal services at Japan Post, expressed confidence that work efficiency can be improved by more than 20%.

The pilot model post office chosen in Japan is in the Saitama-Koshigaya region. Seven instructors from Toyota Motor have worked at this post office since January 2003 to teach the implementation of the JIT-Kanban system. The system reduces time and increases productivity using a large board that shows employees the progress of assigned tasks.

Hopes were high that the system could help the post office improve. Even with the support of these experts, this unit found itself in a difficult situation due to lost mail problems that may call into question the effectiveness of the new system. Three letters posted in December, which therefore should have been delivered in the first week of the new year, went undelivered for more than a month; more than 100 pieces of mail, including New Year’s cards, were left abandoned in the mailboxes of a condominium in Koshigaya; and a delivery company complained that a bill sent from Koshigaya to a customer never arrived. A search revealed that it had been sent to a post office in Kawaguchi instead of Saitama, both in the city of Saitama.

Compared with the performance of other countries’ systems, these errors are very small. Even so, one of the keys to Japan Post’s success will be whether employees, including managers, can accept the discipline of the Toyota System applied to a sector that has been used for years to operating as a public agency, with no strong pressure for efficiency.

3. Healthcare System in the US

Healthcare system costs around the world continue to grow exponentially, with the medical justification that people’s health is priceless. Lately, however, this has been increasingly questioned, since it is possible, by applying new work methods, not only to improve the quality of services but also to reduce their costs.

An article of 9.04.04 published in the Wall Street Journal (Toyota methods help to increase hospitals' efficiency) shows that the application of lean concepts is gaining momentum in the US Healthcare System. The examples shown refer to hospitals in the Pittsburgh region and in the states of Virginia, Iowa and Wisconsin. In the intensive care unit of Allegheny General Hospital, Pittsburgh, techniques such as rapid problem solving, andon to call attention to problems and the search for the root cause of these problems have brought significant economic results, partly resulting, for example, from the reduction of infections.

Other areas of action concern creating flow, optimizing resources and reducing lead times in various areas and types of activities in hospitals.

Executives and consultants who came from industrial companies and accumulated successful experience applying Toyota methods are leading these changes and transferring these techniques to various hospital organizations.

Although physicians’ resistance remains strong, with the argument that methods typical of industrial production cannot be brought into the hospital system, progress has been steady thanks to the excellent results that the application of lean methods has brought.

Numerous pharmaceutical companies, as well as medical equipment manufacturers such as GE, Medtronic, etc., which also have a strong presence of physicians in their leadership, have applied the concepts with excellent results and are beginning to set an example for the rest of the healthcare system.

Pressure from public opinion, users, governments and insurers also contributes to pushing the system toward more efficient practices.

4. Commercial aviation

The commercial aviation sector has been one of the most affected in recent years by economic and political changes. Financial problems continue for the vast majority of companies in the sector, although there have been signs of recovery in passenger volumes in recent months.

The problems go far beyond the traumas caused by September 11 and the rise of international terrorism, and are much more related to the obsolete business model adopted by the sector worldwide practically since its origin.

A special report in The Economist magazine (27.03.04) deals specifically with the current problems of commercial aviation (Silver linings, darkening clouds) and points out some of the ways out that are being envisioned.

Drawing on the experience accumulated with lean concepts at the leading equipment manufacturers in the sector, such as Boeing, Airbus, Pratt & Whitney, Rolls Royce, GE, etc., the commercial service providers are seeking, although still timidly, a way out through lean practices in order to improve the efficiency of their operations and, in this way, reduce the system’s costs.

Looking internally at the companies’ operations, one can see that they have chronic management problems that can be tackled with lean concepts. Assets not used properly, equipment typically designed based on mass production concepts, aircraft spending a long time on the ground for maintenance, changeovers or even due to lack of demand, etc. And dissatisfied customers.

The dominance of the "hub and spoke" system, in which cities became regional air traffic centers and countless routes passed through these centers, is beginning to decline (See Womack & Jones, Lean Thinking, chap. 1). Looking at the definition of value from the customers’ perspective, one notices an increasingly explicit interest in point-to-point or direct travel, without getting on and off planes or even spending hours waiting in airports. The substantial sales of Embraer and Bombardier regional jets are one element of the rise of this new business model.

The ever-higher costs of the traditional system had for many years been covered by government subsidies, as it was believed to be a sector of national interest. The era of an industry of strategic interest to nations has passed, thus opening up the need to improve the efficiency of operations to ensure the survival of companies and of the business.

It is clear that airlines are now much more ready and open to adopting lean concepts. Maintenance activities have often been the first to be tackled with lean concepts.

The only companies that have been performing better are those that offer lower prices, because their cost structure and strategies more closely attuned to customers’ needs and definition of value have allowed them adequate profitability.

Conclusions and next steps

What these cases have in common, besides the application of the same concepts, principles and tools, is the existence of business crises, making them open to trying new and significantly different work methods.

In addition, the origin of the change agents in these organizations stands out: they often come from Toyota or have had years of experience with the system in industrial companies.

Another common characteristic is the fact that the use of lean practices in some companies in a sector, usually those involved in the physical production of goods, serves as a demonstration effect for the other companies in the sector, more identified with the production of services as such.

The challenge of understanding this philosophy ever more deeply and of translating the concepts in a practical way to the most diverse areas of economic activity remains a challenge for all those interested in improving operating systems.

Initially, it involves applying the known elements of the production system, such as task standardization, continuous flow, bringing problems to the surface, the pull system and production leveling to avoid excesses and overloads, stopping in order to solve problems, getting the desired quality the first time, visual control, etc.

As important as spreading the tools is understanding the cultural elements implicit in the system, such as developing leaders who thoroughly understand the work, apply the lean philosophy and teach others; managers with knowledge and responsibility; developing people and teams who follow the company’s philosophy; respecting partners and suppliers by challenging them and helping them improve; going to the place and seeing the problems for yourself to fully understand the situation; and making decisions slowly by consensus, considering all options, but implementing them quickly.

We at Lean Institute Brasil believe that there will soon be greater interest in lean applications in the services area in the country, and we are working to build our capabilities to face this arduous journey.