Effects of Lean Management on company value

TABLE OF CONTENTS

1. INTRODUCTION
1.1. OBJECTIVES OF THE MASTER THESIS
1.2. COMPOSITION OF THE MASTER THESIS

2. INTRODUCTION BUSINESS VALUATION
2.1. DISCOUNTED CASH FLOW – EQUITY APPROACH
2.2. CALCULATION OF FLOW TO EQUITY
2.3. CAPITAL COST RATE – CAPM: CAPITAL ASSET PRICING MODEL
2.4. MARKET MULTIPLIER METHOD

3. INTRODUCTION LEAN MANAGEMENT
3.1. OBJECTIVES OF LEAN MANAGEMENT
3.2. TOOLS AND METHODS
3.2.1. Value Stream Mapping
3.2.2. Kaizen
3.2.3. Kanban
3.2.4. One-piece flow
3.2.5. 5-S-systematics
3.2.6. Standard operation sheet
3.2.7. Poka-yoke
3.2.8. Single minute exchange of die – changing tools in one minute
3.3. CHALLENGES REGARDING LEAN MANAGEMENT
3.4. POTENTIAL EFFECTS ON COMPANY VALUE

4. PRIMARY RESEARCH
4.1. QUALITATIVE RESEARCH – INTERVIEWS
4.2. DECISION OF INTERVIEW-TYPE
4.3. INTERVIEW AGREEMENT
4.4. INTERVIEW CHECKLIST
4.5. ANALYSIS OF THE INTERVIEWS
4.5.1. Qualitative assessment of the interviews
4.5.2. To which extent is an increase of turnover possible through lean management
(specification in %)?
4.5.3. To what extent is a decrease of variable cost possible (specification in %)?
4.5.4. What are the outputs of lean management regarding fixed costs (specification
in %)?
4.5.5. Can the above mentioned percentages and information be used for all
industries and sizes of companies?
4.5.6. Which tools are the ones you would suggest for a company trying to implement
lean management?
4.5.7. What are the reasons for a failure of a lean management implementation?
4.5.8. At which point of the process can a failure be determined?
4.6. SIGNIFICANT POINTS OF THE INTERVIEWS
4.7. EFFECTS OF LEAN MANAGEMENT ON COMPANY VALUE

5. CONCLUSION
5.1. CONCLUSION REGARDING OBJECTIVES
5.2. EFFECTS ON COMPANY VALUE – THEORY AND PRACTISE
5.2.1. Porsche
5.2.2. Toyota
5.2.3. Anonymous company
5.3. RESUME OF THE AUTHOR

BIBLIOGRAPHY
BOOKS AND ARTICLES
THESES AND DISSERTATIONS
INTERNET-JOURNALS
INTERNET-PAGES

TABLES AND FIGURES

Figure 1: Assessment of business valuation methods. Source: adaptation through author

Figure 2: Cash-Bezüge zwischen Cash-Flow-Begriffen: adapted from Wolfgang Ballwieser. “Unternehmensbewertung. Prozeß, Methoden und Probleme”. Translated from the German by S. Petschnig. 2nd ed. 2007. Stuttgart: Schäffer-Poeschel. p. 117. Adaptation through author

Figure 3: Cash-Bezüge zwischen Cash-Flow-Begriffen: adapted from Wolfgang Ballwieser. “Unternehmensbewertung. Prozeß, Methoden und Probleme”. Translated from the German by S. Petschnig. 2nd ed. 2007. Stuttgart: Schäffer-Poeschel. p. 117. Adaptation through author

Figure 4: Sea of inventory. Alpen-Adria-Universität, “Lean Management“. n.d. Internet. p. 24. Adaptation through author

Figure 5: Examples of muda in the area of production and administration. Source: adaptation through author

Figure 6: P-Q-Analysis: Kenichi, S., Keisuke, A. “Kaizen for quick changeover: going beyond SMED”. Translated by B. Talbot. 1992. New York: Productivity Press. p. 123

Figure 7: Example for a Value Stream Map, Hellingrath, B., “Konzepte und Methoden des Supply Chain Management. 2007. Internet. p. 25

Figure 8: Comparison Kaizen and Innovation, Antoni, C., Der kontinuierliche Verbesserungsprozess. 2000. Internet. p. 3. Adaptation through author

Figure 9: Example for a kanban: Schönsleben, P. “Integrales Logistikmanagement. Planung und Steuerung der umfassenden Supply Chain“. Translated through S. Petschnig. Berlin: Springer Verlag. p. 313

Figure 10: Principle of the kanban approach: Schönsleben, P. “Integrales Logistikmanagement. Planung und Steuerung der umfassenden Supply Chain“. Translated through S. Petschnig. Berlin: Springer Verlag. p. 314

Figure 11: Buyer’s decision. Qualitätsmanagement. 2000. Internet. p. 9. Adaptation through author

Figure 12: SDCA-PDCA-Cycle: Imai, M. Gemba Kaizen: a commonsense, low-cost approach to management. 1997. New York: MacGraw-Hill. p. 53

Figure 13: Standard operation sheet. Source: adaptation through author

Figure 14: Before and after Poka-yoke: Kogyo, N. Poka-yoke. Improving Product Quality by Preventing Defects. 1988. Portland: Productivty Press. p. 238. Adaption through author

Figure 15: Six phases of the change curve. Source: Internet, Schwab, 2007. p. 23. Adaptation through author

Figure 16: Kotter’s eight stage concept. Source: Internet, Deutsche Gesetzliche Unfallversicherung, 2005. p. 4. Adaptation through author

Figure 17: Stages of personal attitude change. Source: Internet, Vohs, Baum & Winter, 1999. p. 39. Adaptation through author

Figure 18: Possibility for a suggestion system. Source: adaptation through author

Figure 19: Comparison between Germany and Japan. Source: Internet, Kneisel, p. 13 Adaptation through author

Figure 20: Effects of cultural differences. Source: Womack, J., Jones, D. & Roos, D. Die Zweite Revolution in der Autoindustrie. 1992. S. 97. Adaptation through author

Figure 21: Process quality improvement: Imai, M. Gemba Kaizen: a commonsense, low-cost approach to management. 1997. New York: MacGraw-Hill. p. 43

Figure 22: Theoretical effects of lean management on operating cash flow. Source: adaptation through author

Figure 23: Defined values: increase of turnover. Source: adaptation through author

Figure 24: Defined values: decrease of variable costs. Source: adaptation through author

Figure 25: Defined values: decrease of fixed costs. Source: adaptation through author

Figure 26: Defined tools for an implementation. Source: adaptation through author

Figure 27: Defined reasons for a failure. Source: adaptation through author

Figure 28: Defined values within the interviews. Source: adaptation through author

Figure 29: Defined values for the calculation of the effects of Lean Management on company value. Source: Adaptation through author

Figure 30: Data basis for the calculation model. Source: adaptation through author

Figure 31: Calculation of company value after two years implementation. Ratio 70/30 Source: adaptation through author

Figure 32: Calculation of company value after two years implementation. Ratio 50/50 Source: adaptation through author

Figure 33: Calculation of company value after two years implementation. Ratio 20/80 Source: adaptation through author

Figure 34: Stock price Porsche 1990 - 2009. Source: Internet, Börse.de

Figure 35: Amount of pieces sold from 1999/00 till 2002/03. Source: Internet, Porsche, 2005 p. 43

Figure 36: Amount of pieces sold from 2003/04 till 2006/07. Source: Internet, Porsche 2008 p. 59

Figure 37 Figure 37: Manufactured cars 2007: Toyota – General Motors. n-tv. “Toyota überholt GM”. 2007. Internet. p. 1. Adaptation through author

Figure 38: Development of company value. Source: anonymous company

1. INTRODUCTION

The following thesis deals with the effects of lean management on company value. In some industries lean management was implemented very successfully (e.g automotive) but in some industries it failed. This was caused through wrong translations as the main focus was to be lean and not to eliminate wastage. Hence companies began to cut not only fat but also muscles which constrict companies in their daily business. Nowadays there is more basic understanding of lean management and the concept behind it but a lot of research still needs to be done.

1.1. Objectives of the master thesis

The main objective is to define whether lean management really has an influence on company value as this is the overall objective for each enterprise. The result is going to be a calculation model which includes the basic aspects of the defined business valuation method to get information on whether lean management increases company value or not. Sub goals are the explanation of the basic lean management tools, to gain an understanding of how it works and the consultation of different interviewee groups. These groups have massive impact on the calculation model as they define the values of the different possible achievements regarding lean management. A last sub goal is to prove the calculation model by means of real companies.

1.2. Composition of the master thesis

First of all some concepts of business valuation methods are discussed to define the right approach for the calculation model. It is important that the business valuation method has as few external influences as possible. In the next part of the thesis lean management is explained as otherwise the reader cannot understand the calculation model. In part four of the thesis the qualitative research is conducted which is made through interviews with different interview groups. The output of the interviews is the input for the calculation model which should show the effects of lean management on company value. The fifth point is the conclusion and the attempt to prove the concept on the basis of real best-practise companies.

2. INTRODUCTION BUSINESS VALUATION

Drukarczyk & Schüler (2007, p. 102) state that the purpose of a business valuation is the identification of a company’s fair market value for potential buyers. Naturally a business valuation is also important to analyse whether a company has created or destroyed value for the company owner. As mentioned before the objective of the thesis is to analyse whether lean management efforts have effects on company value. The first step is therefore to define the business valuation method.

Fischer (2003, p. 8) describes different approaches which are as follows

- Market capitalisation
- Single valuation methods (asset value methods)
- Company is assessed as a whole and not as the result of the several assets (gross rental method, DCF, multiples)
- Combined systems (excess profit method, average value method)

It is important to define the right approach as each method has advantages and disadvantages. Therefore a matrix should be used.

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Figure 1: Assessment of business valuation methods. Source: adaptation through author.

The author defines four important attributes as well as a weighting. The total of available points in reference to weighting is 10 and each criteria can be assessed from 1 to 10. Each attribute has to be assessed which then leads to a total. The assessment itself is made on a basis of the subjective perception and experience of the author in agreement with the adviser of this thesis. A low number in the assessment defines a low meaning for the attribute. So if market capitalisation gets a 3 this means that it is below average in the business valuation practice. The only attribute which operates in the opposite way is external interferences. This attribute includes the possibility of a change on the business value through external interferences. If the attribute is assessed with 1 it means that there is a high potential to influence business value through external interferences; however if it is assessed with 10 there is no possibility for any external interferences.

According to the above mentioned matrix the author concentrates on the discounted cash flow method and not on asset value, gross rental, multiplier or other business valuation methods. Nestler & Kupke (2003, p. 170) constitute the DCF-approach as the approach with the highest international awareness level. Gantenbein & Gehrig also (2007, p. 602) summarise according to an empirical ascertainment within a thesis at the University of St. Gallen in 2006 that the DCF-approach is the most beneficial method. In reference to the gross rental method Ballwieser (1999, p. 27) thinks that the gross rental method focuses on earnings and the DCF on payouts to the investors and is therefore the best approach for a business valuation.

Born (2003, pp. 8-9) writes that the present value of the future net payouts is symptomatic for the DCF method. In contrast to the asset value method in which the several assets of a company are added, the discounted cash flow method takes the company as a whole. Hence, for a business valuation it is essential to use the future payouts for the investors.

Another reason for using the DCF method is Rappapport’s Shareholder-Value approach (1999, p. 39) which estimates the economic value of an investment through discounting the prediction of future cash flows with the capital cost rate.

Within the DCF approach there are three different procedures. Strauch (2004, p. 77) specifies them as the Adjusted-Present-Value, the weighted average cost of capital (both entity approaches) and the equity approach. Ballwieser (2007, p.116) states also that the entity approach is divided into adjusted present value-approach and the weighted average cost of capital approach. These are characterised through a double stage approach in which firstly the entity value is calculated and secondly the value of the debt is deducted. The equity approach is characterised through direct identification of the company’s equity.

In this thesis the equity approach is used as it is more transparent for the effects of lean management on company value. Especially the weighted average cost of capital approach has a lot of levers (changes and complexity in the financial structure etc.) which have effects on the result and therefore an equity financed company without any debt is assumed. This is also consistent with the attributes.

Ballwieser for instance states (2007, p. 182) that the equity approach does not have the problem of maintaining the capital structure and also the Kammer der Wirtschaftstreuhänder (2006, p. 22) state that the capital structure will probably change from period to period. Consequently the weighted average cost of capital will not remain at the same level. If the weighted average cost of capital changes the business value changes as well and so the development through lean management efforts can not be measured accurately. Wagenhofer & Doralt (2007, p. 241) also recommend the equity approach.

2.1. Discounted Cash Flow – Equity Approach

Gantenbein & Gehrig (2007, p. 606) explain the equity approach as a method in which the owner’s equity is calculated directly. The flow to equity and the going concern value or residual value respectively, which would be paid out to the investors are discounted with a capital cost rate.

Drukarczyk & Schüler (2007, p. 229) describe that in a first step the flow to equity should be predicted and then the expected flow to equity would have to be discounted with adequate discount rates (capital cost rate). These discount rates should consider the relevant investment risk but also the financing risk. Furthermore the discounting rate has the function of making different temporary payouts comparable. Through that discounting the current market value of the money will be considered adequately (Nowak, 2003, p. 58).

The concept of capital cost is characterised through an orientation on the objectives of the investors who allocate money to the company and therefore the investors expect a minimum rate of return (Hachmeister, 1999, p. 153). In short the equity approach deducts the interest expenses directly and is therefore able to provide a clearer picture of the operating company value (Adamus & Koch, 2007, p. 155).

2.2. Calculation of flow to equity

According to Pohl & Thielen (2007, p. 25) within the equity approach the flow to equity has to be calculated first. Ballwieser (2007, p. 117) published a pattern for the calculation of the flow to equity. First of all the payment out of the operational area will be calculated which cuts down the payouts of the operational area. This results in the cash flow before interest and taxes. After that the taxes of an equity financed company are deducted. The result is the operating cash flow. This will be decreased by the volume of investments and increased by the volume of disinvestments which leads to the free cash flow. After that the company savings, because of tax shield, are added which results in the total cash flow. Then the interest expenses are deducted and loans are accounted for the flow to equity.

illustration not visible in this excerpt

Figure 2: Cash-Bezüge zwischen Cash-Flow-Begriffen: adapted from Wolfgang Ballwieser. “Unternehmensbewertung. Prozeß, Methoden und Probleme”. Translated from the German by S. Petschnig. 2nd ed. 2007. Stuttgart: Schäffer-Poeschel. p. 117. Adaptation through author.

In general the investments are missing as they minimise the flow to equity but it has not to be considered within this thesis as the operative cash flow is not influenced by investments.

Lean management just influences the operational part of the business. For that reason, and also because of traceability or less interferences of external influences respectively, the author does not discount the flow to equity but the cash flow before interest and taxes. Especially later in this thesis it is important that traceability is given and if the cash flow before interest and taxes is discounted then it always needs the same calculation basis. This is also the case in reference to external influences like interest policy, investment strategy, equity structure or repayments.

2.3. Capital cost rate – CAPM: capital asset pricing model

One of the key parameters of the equity approach is the capital cost rate. As mentioned before this is the discounting rate which is used to discount the flow to equities and should illustrate the necessary return for the investor. One of the most common approaches is the calculation of the capital cost rate via the capital asset pricing model.

Hagemeister & Kempf (n.d, p. 1) write that the CAPM is still one of the most important models of financial economists although it is more than 40 years old. Among other things it is deployed to calculate the capital cost rate in a company valuation. Weißenberger & Ulmer (n.d, p. 6) state that the CAPM is in place especially in Germany and Switzerland. However in the USA this model enjoys great popularity as well.

Klosterberg (2007, p. 304) indicates that the CAPM can be used to define the cost of equity capital. This model considers the risk of an investment through applying a market risk premium and a beta factor.

Paiusco & Riffner (2007, p. 330) also write that the cost of equity capital can be calculated through the CAPM. According to the authors the beta factor indicates the volatility of a valuation object in reference to the market portfolio. Schäfers & Matzen (2007, pp. 559-60) state that the cost of equity capital should be calculated via the CAPM. In so doing a risk premium to the riskless rate is added and multiplied with the equity. The risk premium itself is created by the multiplication of the market risk premium and the beta factor. A beta factor of 1 indicates the same risk as the market risk and a beta factor higher than 1 indicates a disproportionate risk. A beta factor between 0 and 1 signifies a disproportional small market risk.

Rappaport (1999, p. 48) uses the CAPM with the following formula.

Capital cost rate = riskless interest rate + beta x (expected market rate of return – riskless interest rate)

Born (2003, p. 77) works with the same formula and explains that the beta factor contains an investment risk and a financing risk. The CAPM is necessary to define the capital cost rate which is important as a discounting factor; however it is not necessary to calculate it concretely for the objective of the thesis. As long as the capital cost rate remains on the same level, the framework is the same and has therefore no effects on the results of the thesis.

illustration not visible in this excerpt

Figure 3: Cash-Bezüge zwischen Cash-Flow-Begriffen: adapted from Wolfgang Ballwieser. “Unternehmensbewertung. Prozeß, Methoden und Probleme”. Translated from the German by S. Petschnig. 2nd ed. 2007. Stuttgart: Schäffer-Poeschel. p. 117. Adaptation through author.

Logically the calculation model deals only with operating cash flows which is a result of cash in minus cash out.

2.4. Market multiplier method

This approach is a market approach to calculate business value by means of stock exchange price multiplied by the amount of shares on the market.

It is an alternative to assess companies with the market multiplier method as it is possible to calculate future cash flows. Contrary to the discounted cash flow based business valuation, market values naturally have a less decision-theoretical basis as it is not a business valuation method but it is a result of the stock price. The stock price is equilibrium-price as a result of supply and demand. This approach is criticised caused by a lack of theoretical basis and the verifiability (Adamus & Koch, p. 159).

To check the result of the theoretic model there will be a calculation with operating cash flows as well as a calculation according the market multiplier method.

3. INTRODUCTION LEAN MANAGEMENT

In this part of the thesis it is important to describe some definitions of lean management as well as the lean management principles. This is crucial to gain a comprehension of the different definitions, the history and to understand the approach.

Joka (2005, p. 8) declares that lean management had a lot of problems e.g. in Germany as a reason of translation problems. The concept of lean management was translated into slim or exploitation respectively and this is not the real meaning. As a matter of fact the point is to minimise waste.

Wiegand (2006, p. 11) states as well that detractors of lean management denounce it because of misinterpreted translation. Lean management means creating value without waste.

In the early years Mc Kinsey traced the lean movement very closely and defined an overhead-reduction of 40%; however consultants in general cut away not only “fat” but sometimes also muscles or much worse vitally important parts of the business. The whole company has to focus on the customer and if lean management wants to be successful a company has to invest into the education but also into the soft-skills of the employees. Very often companies start with such programs if costs have to be reduced but first the company has to invest and that is the reason why such programs are not successful (Füser, 1999, pp. 65-6).

The Alpen-Adria-Universität (n.d, p. 2) writes that out of the top 500 companies of the nineties just a handful remained on that level. It seemed that new approaches were required and in the early nineties the prestigious MIT (Massachusetts Institute of Technology) tried to investigate the reasons for the success of Toyota. The result of this investigation is the book “Lean Thinking: Banish waste and create wealth in your corporation“ written by James Womack and Daniel Jones. In that book it is described how Toyota is able to create sustainable growth linked with high profits and outstanding quality. Toyota has a high reputation in reference to quality and according to the ADAC (June 2008, p. 1) which is the most popular car drivers club in Germany Toyota occupies the 6th place in their brand ranking. This is an indication that the quality demand is not only defined through Toyota internally but also perceived by the market.

Womack (1996, p. 15) states that one of the important words of Japanese in reference to lean management is waste which is called muda. Any human activity which absorbs resources without creating value is called so. Lean thinking is a way to do more and more with less and less – less human efforts, less equipment, less time and less space.

One of the key points in lean management is against human nature as everything should be available when information, a product or service is needed and not just because of security reasons. This is the push-production-system as a company pushes the goods through the company to store it in a warehouse. A lean company has a pulse generator which is the customer who gives the impulse for the company. The company or the production respectively will change into a pull-production-system as the customer pulls the products through the company with his order (Selders, 2006, pp. 52-3). Pull in simplest terms means that no one upstream should produce a product or service until the customer downstream requires it. The best way to understand the logic but also the challenge of pull thinking is to start with a real customer expressing a demand for a product and to work backwards through all the steps required to bring the desired product or service to the customer (Womack, 1996, p. 67). The takt time is the important figure, as it is the pulse of the market. It is the figure everybody in the company must live by. Cycle time, on the other hand, is the actual time required for each employee to complete an operation. When the cycle time is compared with the takt time in a company, the cycle time is usually shorter. Very often the cycle time is half the takt time if a company is not operating with kaizen (Imai, 1997, pp. 148-9). This implies the pull principle which means that the production pushes products through the company although the customer requires only half of the products which results in higher stocks etc.

According to Wiegand (2006, pp. 27-8) there are five principles of Lean thinking:

1. Customer-orientation: the quintessence of lean management is the value of a product or service. The value itself is always determined from the customer’s perspective. Only if the demand of the customer is fulfilled, the customer pays money for the product or service.
2. Identification of the value stream: any activity which does not add value to the product from a customer’s perspective has to be eliminated.
3. Flow-principle: the different process steps should intertwine smoothly and without any delays until the product or service is finished. Waiting time or rework are wastage or muda respectively. The flow-principle shortens the lead time, minimises any stocks and existing capacities are used optimally.
4. Pull-principle: only products which are needed by a customer are produced which means only if there is a demand. Each form of overproduction or defective production has to be prevented. Pull-principle means therefore that products or services are not pushed into the market but the customer has a demand on that product or service.
5. Aspiration to perfection: time is changing and so do the demands and expectations of the customers. Internally a company has to check whether technology has changed and therefore there is a need for enhancing the know-how of the employees. Anyway it has to be considered whether the then efficient processes are still efficient or if there are any necessary changes. A successful company always checks the potential for improvements and focuses on continuous improvement to succeed in the market.

One of the most important points in lean management is the elimination of wastage. Martin (2007, p. 118) writes that all operations within a process can be broken down into three classes based on the concept of customer value. These are value-adding, business-value-adding, and non-value-adding activities whereas business value adding operations may be necessary in the short term but should be eliminated when technically feasible.

Thus, resources either do add value or do not add value and muda refers to any activity that does not add value. There are seven categories of muda (Imai, 1997, p. 75):

1. Muda of overproduction
2. Muda of inventory
3. Muda of repair/rejects
4. Muda of motion
5. Muda of processing
6. Muda of waiting
7. Muda of transport

Usually a company starts on the shop floor with the introduction of lean management as there the change is easier to implement. All the changes in the layout, work in progress and standard operation can be seen very easily; however in practice lean management can not be executed just in one part of a business. If a company decides to be lean it has to revise not only the processes on the shop floor but also the processes in the administration area.

According to Kletti & Braukmann (2006, p. 34-6) particularly the minimisation of inventory can be a problem for a company as in thus way the quality of a process is demonstrated. High inventories and buffer stock hide weaknesses and usually cause high costs which are not transparent at all (space, administration of stock, scrapping, pallet racks etc.).

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Figure 4: Sea of inventory. Alpen-Adria-Universität, “Lean Management“. n.d. Internet. p. 24. Adaptation through author.

Figure four shows some of the risks if lean management is implemented. The ship itself illustrates the company and the water symbolises the inventory. On the ground there are some barriers in the sense of material handling, transport, machine breakdowns, set up times or search time. All of these barriers create muda or an extension of delivery dates or even worse a delay for the customer. Through lean management stocks will be decreased and in this picture it would mean a decrease of the water-level. At a certain level the rocks are a problem resulting in damages to the ship (company).

Figure five shows the different kinds of muda on the shop floor as well as in the administration area.

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Figure 5: Examples of muda in the area of production and administration. Source: adaptation through author.

From a process perspective it is essential to understand the influences of lean management. Transportation, machine breakdowns, quality problems, queries and loops as necessary information is not provided, set-up times etc. can be hidden with large stocks but if lean management is executed, stocks will be decreased and if the processes are not secure or have a certain quality, huge problems could be the result. A lot of lean management specialist advise against using lean management as a tool kit or just copy other companies. Each enterprise needs the development of its own lean strategy. Takeuchi, Osono and Shimizu (2008, pp. 2-3) accompanied Toyota for six years and studied it intensively. They visited subsidiaries in eleven countries, attended reams of meetings and analysed the documents. The authors also suggest that if a company wants to learn about the success factors it is not possible to apply certain lean management tools but have to adapt the whole culture.

3.1. Objectives of lean management

This section should be a summary to clarify the objectives of lean management.

Lean management is the approach to generate value with concerted processes without any wastage. Value is always defined through the customer and not through the company itself. A lot of companies define their value but the customer perceives value in a different way. Each company has to strive for elimination of non-value-added activities to gain the optimum for the company as well as for the customer. Through the application of lean management principles a company is able to do so. According to the author it is essential to concentrate not only on the shop floor but also on the administration area – the whole company so to speak. In practice there are a lot of enterprises which think that the focus on production will help them to become lean. Certainly lean management is easier to implement on the shop floor but without applying lean management in the whole company, the results are limited. Lean management has to take place in the whole entity to become a lean company.

3.2. Tools and Methods

There are dozens of tools and methods in the literature but in this thesis there are some selected ones which are the most important ones from the authors point of view. To gain the right understanding these tools are described in detail. Lean management is very process-driven. When Opel introduced their lean programme the goal was to get a more processed-oriented company rather than a traditional functional oriented company (Howaldt, 1998, p. 97). One of the first effects of converting from departments and batches to product teams and flow is that the time required to go from concept to launch and sale to delivery to the customer will be decreased dramatically (Womack, 1996, p. 24).

As already mentioned Toyota is the outrider in reference to lean management. They established the Toyota Production System (TPS) conducted by Taiichi Ohno who developed the system. Regarding Kenichi & Keisuke (1992, pp. 121-134) an implementation consisting of 14 steps:

Step 1: Form a U-shaped cell study group which is necessary for the material flow.

Step 2: Study current condition in reference to products and quantities. The best way to begin an effort to build up an improved U-shaped cell for wide variety small-lot production is to study the wide-variety small-lot production conditions that already exist at the factory.

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Figure 6: P-Q-Analysis: Kenichi, S., Keisuke, A. “Kaizen for quick changeover: going beyond SMED”. Translated by B. Talbot. 1992. New York: Productivity Press. p. 123.

A very useful tool to decide the right product line is the P-Q-Analysis. The “P” stands for products and the “Q” stands for quantity. The systematic is similar to the ABC- or Pareto chart. Figure six shows a product-specific quantity table. By filling in lot sizes, a company can determine the average lot size and this enables to estimate the number of changeovers. It can be seen that group A occupies up to 70 percent of the total product volume which gives an indicator not only on the importance but also on the effect which could be achieved.

Step 3: Observe the factory.

Step 4: Use process-route analysis to group the different products into families. The different processes are grouped into families to reduce their number. Most factories have no more than five different process families and standardisation is thereby easier to standardise.

Step 5: Draw up a part-specific capacity worktable for conditions before the improvements. For each machine a part-specific capacity worktable is created. On that account the existing processing capacity for each type of part can be calculated. The result of this exercise is the process capacity which is necessary to plan the different lines afterwards.

Step 6: Draw up a standard operation combination chart for conditions before the improvements. At this stage the focus is on the elimination of wastage. The production cell will be analysed with reference to the operations within that cell. This is a list with all the different tasks of the operation chart to produce the product. The necessary equipment and the required time are also defined whereas the time is usually divided into manual operation time, auto-feed time and walking time. Auto-feed time usually creates operator standby because operators idly observe auto-feed devices at work. Particularly the Toyota Production System (TPS) stresses the need to eliminate this type of standby wastage. The last thing is to calculate the cycle time. This figure is characterised as the amount of time required to produce one product.

Step 7: Draw up a standard operation chart (walking-route diagram) for conditions before the improvements. The purpose of standard operation charts is to explain to involved employees the standards that will enable them to work as part of an effective interconnection of people, material and machines to produce high-quality products safely and at lowest possible cost. An equipment layout diagram includes numbers corresponding to the operation sequence indicated in the standard operation combination chart or standard operation sheet respectively. There are different systems of creating a standard operation sheet and Toyota works with different symbols e.g. a diamond symbol for processes which require quality checks and cross symbols warrant extra caution for safety. Black dots mean standard stock on hand which is required at the different stages. Particularly standard stock on hand, cycle time and the net operation times should be entered too. These are the facts which have to be improved in the future.

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