The economic theory of lean is universal – pretty much the same whether it is applied to the company, or to an individual or to the country. Resources – human resources in terms of hours and natural resources – that create value are good and ones that do not are bad. Lean is all about eliminating the ones that do not create value. One common, big problem is that we tend to measure work al the same – work is good – doing something is inherently better than doing nothing. In fact, the guy who spends half his day creating value and the other half surfing the net and playing games on Facebook is actually more productive than the guy who works like a dog every waking moment on non-value adding stuff. Ideally, of course, no one would be surfing the net or knocking him or herself out of non-value adding work, but in order to get there we need to rethink how we measure work.
Case in point – how we measure the GDP. Let’s say that, instead of the gradual, inevitable transition from brick and mortar retailing to e-tailing we could wave a magic wand and have half of our consumer buying take place online. I don’t mean buying it from Walmart on line, but buying it directly from the manufacturer’s web site. That would be a good thing – right? We would get all of that stuff without the cost of trucking large quantities to distribution centers; the cost of the DC’s themselves; then trucking to stores; and all of the cost of the stores. We would save all the natural resources and fossil fuels that go into all of that trucking and all of those buildings. Stuff would be cheaper because we would not have to pay for all of those manhours that don’t add value and natural resources that didn’t go into the product. The only offset would be the much lower consumption of resources necessary for UPS or FedEx to bring the package to us.
While all logic and common sense dictates that would be a big boost to national productivity and the environment – a very good thing indeed – it would be an economic catastrophe of the highest order in the eyes of many. According to a guy named Robert Yuskavage of the US Department of Commerce who wrote a paper with the eye-catching name of “Distributive Services in the US Economic Accounts” in 2006, “The industries that provide these services – wholesale trade, retail trade and transportation and warehousing – account for about 15 percent of gross domestic product (GDP), 18% of total employment, and, in 2004, contributed nearly 20% to real GDP growth.”
If half of retail buying were to switch to on line buying the GDP would drop by some 7-8%. To put that in perspective that GDP dropped by 5.1% in the recent recession. So much for GDP as an accurate measure of economic goodness. So much for the notion that the service economy is just as valuable as that portion of the economy that actually creates wealth – value. The truth is that the GDP has been a false measure – and grossly overstated measure – of the economy for a long, long time.
Yuskavage asserts that, “Retailers, for example, provide services that are values by consumers in addition to the merchandise, such as convenient hours and locations, a selection of different types of merchandise, speedy or efficient check-out and information about products.” That value proposition has to justify the customer paying $20-25 for a product that cost $10 to make.
More and more, however, both manufacturers and customers are looking at Yuskavage’s value proposition and deciding that there are no hours more convenient than the 24-7 of the internet, no location more convenient than the customer’s own living room, no store selection as broad as the selection on line, no check out speedier and more efficient than on-line check out, and that the typical minimum wage store employee knows far less about the product than the information on the manufacturer’s web site.
All of this grand economic theory is one thing, but the same confusion between people working and people actually creating value takes place in spades at the company level. Warehouse people are measured on the basis of how much stuff they put on and take off of racks; accounting people are measured on the basis of how many documents or transactions they process; quality inspectors are measured on the basis of how much stuff they inspect … and we tend to assume all is well with them as long as they are doing plenty of work even though the work they are doing shouldn’t be done at all.
At an individual level we have an increasing number of unemployed and under-employed young people with liberal arts degrees who were never told that the paycheck is tied to the value they create – and the value propositions in the philosophy, anthropology, poetry and Romance languages businesses are tough.
Creating value is the essence of all economics, whether one is in Washington, the corner office of the business, or in one’s own living room. And real economic growth comes only from eliminating things that don’t add value for customers. That is what we need to measure – not just how hard we are working.