This is Lean - The Efficiency Matrix

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Book Notes from 'This Is Lean' By Niklas Modig

The Efficiency Matrix

• The plethora of definitions and usages of lean provides a rather confused picture of what lean actually is.
• A new framework that we call the efficient matrix
• The efficient matrix
• Many definitions of lean are made at a low level of abstraction.
• The fact that organizations in many different industries are now starting to work with lean makes it necessary to have a definition of lean that is on a sufficiently high level of abstraction to ensure its applicability outside of large volume manufacturing
• The efficiency matrix depicts four different operational states in which organizations find themselves.
• Efficient Islands
• Resource efficiency is high and flow efficiency is low
• Efficient utilization of resources comes at the expense of efficient flow.
• Flow efficiency for every individual flow unit is low
• Products spending much of its time as inventory.
• Efficient Ocean
• Flow efficiency is high but resource efficiency is low
• The focus is on the customer and meeting their needs as efficiency as possible.
• Flow is efficient at the expense of an efficient use of resources.
• Wasteland
• The organization is unable to use its resources efficiently or create an efficient flow.
• This is not a desirable state to be in because it wastes resources and creates less value for the customer.
• Perfect State
• Organizations that achieve this state have both high resource efficiency and high flow efficiency.
• It should be clear by now that it is difficult to reach the perfect state.
• Variation limits possible positions in the matrix
• In order to understand what positions an organization can achieve in the efficiency matrix, its critical to understand variation and its impact on the organization.
• In order to reach the star and organization would need two things.
• Perfect access to all information regarding the customers present and future needs
• Require perfectly flexible and reliable resources -
• Variation in demand prevents organizations from reaching the star.
• The first prerequisite for being able to reach the star is perfect predictability of demand
• What is demanded
• When it is demanded
• Which amount is demanded.
• A demand pattern is extremely difficult to predict.
• Variation in supply prevents organizations from reaching the star.
• Reaching the star would require perfectly flexible and reliable supply
• First of all - resources must be perfectly flexible.
• The organization needs perfectly flexible resources in terms of
• What is supplied
• When it is supplied
• Which amount is supplied
• Perfect flexibility and reliability of the organizations resources would allow it to adapt to any situation.
• Level of variation establishes the efficiency frontier
• It is the level of variation in demand and supply that determines which operational states an organization can achieve.
• The existence of variation limits the possible operational states and organization can achieve.
• The main point to understand here is that it is impossible to reach an operational state beyond the efficiency frontier.
• Whether the organization prioritizes resource efficiency or flow efficiency -
• The efficiency frontier has been pushed in as the level of variation increases.
• Examples of organizations facing high variation are those in which the main flow unit is people.
• We cannot standardize or control people in the same way we can material or information.
• It is often possible to become better at eliminating, reducing or managing variation.
• Strategy decides position in the matrix
• Many definitions of lean define it as a means rather than a goal.
• Be clear about the difference between a business strategy and an operations strategy
• A Business strategy defines what type of customer need the organization wishes to satisfy
• An operations strategy defines how the organization will meet this need.
• A business strategy defines what:
• Defines the value the company will offer the customer.
• A fundamental idea is the literature on business strategy is the importance of choosing between differentiation and cost.
• When devising a business strategy - the level of differentiation that will be offered to the customer at what cost.
• Business strategies - are about understanding and choosing which objective to prioritize.
• What the customers value, what competitors do, what the organization is good at doing.
• An Operations Strategy defines how:
• Helps realizes the business strategy and defines how value is produced.
• Operations strategy answers the question - 'how shall we product value'
• How will we product a product given our business strategy
• An operations strategy can be broken down into operational objectives.
• Lean 2.0
• The efficiency matrix serves as a foundation for understanding what lean is at the 'fruit level'
• We want to define lean at a sufficiently high level of abstraction for it to apply to all kinds of organizations
• The matrix highlights the importance of strategic choice
• Organizations have a choice regarding where to position themselves and how to move within the matrix.