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ESSAYS ON ISSUES

THE FEDERAL RESERVE BANK
OF CHICAGO

MARCH 1993
NUM BER 67

Chicago Fed Letter
Lean m anufacturing:
understanding a new
m anufacturing system
Manufacturing is currently undergoing
a transition from a mass production
system to a lean production system
which emphasizes quality and speedy
response to market conditions while
utilizing technologically advanced
equipment and a different organiza­
tion of the production process. The
new manufacturing system has
achieved remarkable productivity
advances. The success or failure of the
Midwest’s manufacturing sector in
climbing on board this revolution will
be central to the region’s future pros­
perity due to the historic role of manu­
facturing in shaping the region’s econ­
omy. Successful adaptadon to the lean
manufacturing system is likely to re­
quire significant changes in both the
management of factories and the struc­
ture of the economy; for example,
changes in worker training, job perfor­
mance, public infrastructure, and per­
haps the location of factories and jobs.
The purpose of this Chicago Fed Letter is
to outline the differences between the
new lean manufacturing system and
the prior industry standard, the so
called Fordist system of mass produc­
tion. Examples from the auto industry
are used to illustrate the differences
between the two manufacturing sys­
tems, as the auto industry in the past
has had great influence on the way
many other businesses organize their
factories.
Henry Ford’s influence on mass
production

At the end of the 19th century there
were hundreds of small machine shops
in Europe and America, each produc­
ing no more than 1,000 cars per day.

Automobile manufacturing was revo­
lutionized when Henry Ford intro­
duced the use of interchangeable
parts and the moving assembly line to
the manufacturing process. The Ford­
ist system of mass production was
based on two principles: the Taylorist
(after Frederick Taylor) philosophy of
separation of intellectual and manual
work and the specialization and sepa­
ration of work activities into easily
learned, repetitive steps. These activi­
ties were administered by means of a
hierarchical, authoritarian style of
management. According to the Ford­
ist system, each worker had one or two
tasks, which were repeated over and
over. This specialization and repeti­
tion of activities gave rise to high levels
of output at low cost, yet the finished
products were often plagued by quali­
ty' problems. For example, a worker is
able to install many wheels and tires
per hour by repeating a narrowly
defined task. But in doing so, the
worker may ignore any visible flaws
previously made in the production
process. Checking for flaws is the task
of someone else—once a quality prob­
lem is spotted, an inspector is alerted.
Ultimately, the car will be repaired
before it leaves the assembly plant, but
only after it has gone through the
entire assembly line. Typical of Ford­
ist automobile assembly is a large
number of vehicles at the end of the
assembly line, waiting to be repaired.
The Fordist system is geared to the
mass production of a limited number
of models and is unable to respond
quickly to changes in demand. Ford­
ist manufacturing maximizes output of
a particular product by running ma­
chines with as few interruptions as
possible, requiring relatively large
buffer stocks of inventories set up at
the various steps of production. In
case a quality problem occurs, for
example at a piston machining opera­

tion, a large buffer stock provides
enough correctly machined pistons to
allow' for continuous operation of the
manufacturing process. This ability' to
replace defective parts with parts from
the buffer stock reduces the incentive
to investigate the source o f quality
problems. In combination with the
narrowly defined procedures of indi­
vidual workers, the practice of main­
taining buffer stocks disguises the
interdependencies of the production
process and prevents workers from
seeing how their actions affect the
system as a whole.
Fordist manufacturing was very suc­
cessful at lowering the costs per vehi­
cle; accordingly, between 1909 and
1916, the price of a Ford Model T
fell by 60 percent. By the early 1920s
this form of mass production allowed
Henry Ford to make 2 million identi­
cal Model Ts every' year at a very attrac­
tive price. By the mid-1950s, the Ford­
ist manufacturing system dominated
most of the world’s manufacturing
industries.
Lean manufacturing

In the early 1950s, Toyota discovered
that a smaller number of workers,
each capable of doing multiple tasks,
could turn out cars using less invento­
ry', less investment, and committing
fewer mistakes. Accordingly, under
lean or just-in-time manufacturing,
tasks are performed by teams in which
each member can do any of the team’s
tasks, including maintenance, inspec­
tion, and machine setup. Lean manu­
facturing encourages worker participa­
tion and discourages managerial au­
thoritarianism—a key difference from
Fordist manufacturing.
In designing the production process,
lean manufacturing gives top priority'
to quality control. In contrast to the

Fordist approach, it regards large in­
ventory stocks as a source of costs and
problems rather than a solution to
them. With lower in-process invento­
ries, quality' problems of a particular
assembly operation become visible
faster. Thus, tool and equipment
maintenance become more important.
In addition, the idea of continuous
improvement of operations is central
to the lean manufacturing philosophy;
most of these improv ements are the
result of suggestions from the factory'
floor. Under lean manufacturing, the
worker who installs wheels and tires
also maintains the equipment, cleans
up the work area upon completion of
other duties, and performs quality
control functions. If the worker spots
a flaw in the production process, he or
she alerts the group leader. The man­
ufacturing error is then corrected
instantly, either while the car is still
moving on the assembly line or after
the line has been stopped by the
group leader. Of course, shutting
down the assembly line to correct
defects requires highly skilled line
workers who must be able to recognize
and correct defects in order to restart
the assembly line quickly.
In addition to increasing quality , lean
manufacturing systems are able to turn
out small batches of customized prod­
ucts on relatively short notice and at
low cost. That makes it necessary to
provide flexibility' and quick set up
capability' in a factory', e.g. by reducing
the time needed to change dies. As a
result, lean manufacturing requires a
different process flow design and lay­
out within a plant, usually occupying
much less floor space. For example,
Jacobs Vehicle Equipment Co., a heavy
duty engine brake manufacturer in
Bloomfield, Conn., reduced its floor
space devoted to manufacturing from
240,000 to 120,000 square feet as a
result of the introduction of lean man­
ufacturing techniques.1
Lean inventories plus the ability to
flexibly adapt to changes in demand
place great strains on the flow of mate­
rials. In response, Toyota pioneered
the use of the “kanban” method for
moving parts and materials across the
factory'. Each of the containers trans­

porting parts downstream in the pro­
duction process carries a card. As the
parts are used up, the card is sent back
to the previous production operation
where it signals the need to produce
more of these parts. By maintaining a
continuous, tightly controlled but de­
centralized flow of parts and materials
in the factory', lean manufacturing
allows flexible adaption of the produc­
tion line to changes in the demand for
the final product.
Manufacturing “cells” increase the
flexibility' of the lean manufacturing
system. A cell is a cluster of clever ma­
chines and robots which is able to take
instructions directly from a computer
aided design terminal. In a truly flexi­
ble factory it would be possible not
only to build different versions of the
same car, like a coupe or a station wag­
on, on the same production line, but
also to build completely different cars.
For example, at two o f its assembly
plants Nissan installed a reconfigurable
body assembly jig capable of building
several different vehicles by simply
reprogramming its software.2 At its
engine plant in Anna, Ohio, Honda
builds both automobile and motorcy­
cle engines on the same line. Howev­
er, investments in advanced technology'
do not always pay off. Toyota scaled
back ambitious plans to automate final
assembly in a plant scheduled to open
in Japan in early 1993 because the
resulting improvements in quality
turned out to be too costly.3
With reduced inventories, the timely
supply of materials from outside suppli­
ers becomes crucial to the success of
lean manufacturing. It is therefore no
surprise to find relationships between
car assemblers and suppliers to be
characterized by communication and
mutual commitment. These close
relationships may help to explain the
fact that lean manufacturing assem­
blers have chosen to buy directly from
only a small num ber of “first tier” sup­
pliers. For example, Chrysler deals
with 230 parts and materials suppliers
in producing its new LH-platform.4 Its
assembly is based on the lean manufac­
turing system. That compares to 456
suppliers for the 1992 version of the
Chrysler New Yorker, a car introduced

in 1988 and built according to the
Fordist system.3
Ultimately, suppliers must also adopt
lean manufacturing techniques in or­
der to be able to meet the demands of
the auto manufacturers. In addition,
rather than produce parts according to
predetermined specifications, outside
suppliers must increasingly conduct
product research and development
both on their own and in consultation
with assemblers.
Lean manufacturing comes to
North America
Expanding the geographic boundaries
of lean technology' has also become a
hallmark ofjapanese auto companies
as the so called transplants have been
remarkably successful in North Ameri­
ca and Europe. In 1982, Honda of
America began to assemble automo­
biles in Marysville, Ohio. Less than 10
years later, during 1991, seven Japanese
transplants produced almost 1.4 mil­
lion cars in the United States (see Fig­
ure 1). Honda can now produce cars
in North America as efficiently as those
made in Japan and Nissan’s Sunder­
land plant in England is referred to as
one of the most efficient car plants in
Europe.6 From Figure 1 one can see
that most transplant assembly firms
have chosen locations in nonmetropol­
itan areas in the Midwest. Further­
more, joint venture arrangements be­
tween U.S. and Japanese companies
were used to facilitate the transfer of
technology'.
While technological changes were
pioneered and successfully transplant­
ed byjapanese producers, European
and American auto manufacturers have
been adopting the new manufacturing
techniques in order to effectively com­
pete internationally. For example,
Ford has improved its assembly produc­
tivity' by 36% since 1980. Some Ford
plants have all but erased the labor cost
advantage enjoyed by the most efficient
Japanese auto producers; among these
is Chicago’s Taurus plant.7 Similarly,
Chrysler has made strong gains in man­
ufacturing productivity' during the past
three years. Its adoption of lean manu­
facturing principles becomes visible as

1. U.S. transport*ition motor vehicle assembly plants
Plant
location

Launch
date

1991
capacity

H onda

M arysville , OH
East Liberty, OH

1982
1989

360
150

451 *

N issan

S m yrna, TN

1983

250

134

G M -T o yota
(N U M M I)

Frem ont, CA

1984

240

207
165

Com pany

1991
production

( ------ in th o u s a n d s - ...... )

M azda

F la t R o c k , M l

1987

240

T o y o ta

G eorgetow n, KY

1988

218

188

C h ry s le r-M its u b is h i
(D ia m o n d -S ta r)

N o rm a l, IL

1988

240

154

Isuzu-Fuji
(S u b a ru -lsu zu
A u to m o tiv e )

Lafayette, IN

1989

120

58

F ord -N issa n

A vo n Lake, OH

improve quality' and cooperative man­
agement in order to successfully har­
ness ideas for improving the produc­
tion process.
Last, but not least, lean inventories
render frequent timely deliveries of
parts and materials crucially important
for the successful application of lean
manufacturing. That places great
emphasis on a well designed and main­
tained system of public transportation
infrastructure.
—Thomas H. Klier
xIndustry Week, S ep tem b er 18, 1989, p. 26.
J a c k F eeb ler, “Q uick ch ange artist,” Auto­
motive Neios, N ovem ber 23, 1992, p. 16i.

T ota l

1992

135 in '93
1,818

N.A.
1,357

3M a ry A n n Mastery', “S tepping back,”
Automotive News, O c to b e r 26, 1992, p. 14i.

* T o t a l f o r M a r y s v ille a n d E a s t L ib e rty .
S O U R C E : Ward's Automotive Yearbook, 1990 a n d 1 9 9 2 . C a p a c ity m e a s u r e d as s t r a ig h t tim e
a s s e m b ly c a p a c ity ; N is s a n , F o rd -N is s a n , a n d S u b a r u - ls u z u c a p a c ity in c lu d e s c a rs , tr u c k s , a n d
v a n s ; a ll o t h e r c a p a c ity in c a rs .

well in the development of the LFIcars, introduced in the fall of 1992.
The LH-car was developed in 39
months with a technical staff of 740, as
compared with the development of
the K-car, which was introduced in the
early 1980s and took 54 months and a
technical staff of 2,000.8 GM improved
its assembly productivity by 11 % since
1980; one of the most prominent ad­
justments has been the launch of Sat­
urn in 1991.
Implications for the Midwest

If they are to compete globally, the
remainder of the region’s manufactur­
ing industries must follow Midwest
automakers and parts suppliers in
adopting the more efficient lean man­
ufacturing standards. A host of partic­
ular policy issues is crucial for the
Midwest in sustaining the successful
changeover to lean production in
autos, and in broadening it to other
manufacturing sectors. International
competition and direct foreign invest­
ment in the U.S. were important ele­
ments supporting the introduction of
lean manufacturing techniques into
North America. The success of the

Japanese transplants has demonstrated
that manufacturing technology can be
transferred internationally. Fostering
openness to trade and investment are
therefore crucial for the Midwest’s and
nation’s success in an environment
where advances in manufacturing
technology' are being made around
the world. Within individual states,
efforts have been made to support the
adaptation of lean manufacturing
technologies. For example, Pennsylva­
nia instituted a “Manufacturing Inno­
vation Networks” program that sup­
ports the growth of lean manufactur­
ing networks by means of nine indus­
trial resource centers. Other pro­
grams, like Michigan’s Technology
Centers or Ohio’s Edison Technology
Centers, are more broadly targeted
and serve as an intermediary' organiza­
tion for technolog)' development in
specific industries.
Successful implementation of lean
manufacturing in factories also rests
on the ability' to enhance skills and
responsibilities of assembly line work­
ers within a team oriented manage­
m ent approach. This wall require job
training programs that teach how to

4P Iatfo rm refers to th e structural un d erb o d v o f a car. For ex am ple the D odge
In tre p id , Chrysler C o n co rde, an d Eagle
V ision are separate m odels, yet are all LHp la tfo rm vehicles.
5W ards Automotive Yearbook, 1992, p. 53.
6The Economist, “Survey: the car industry,”
O c to b e r 17, 1992, p. 6.
J o s e p h B. W hite, “G M ’s lab o r cost disad­
v a n ta g e to F ord is placed at $4 billion a
y e a r by study,” Wall StreetJournal, O cto b er
6, 1992, p. A2.
8B rad ley A . Stertz, “Im p o rtin g solutions,”
W all StreetJournal, O c to b e r 1, 1992, p. A l.

K arl A. Scheld, S enior Vice P resid en t an d
D ire c to r o f Research; David R. A llardice, Vice
P re sid e n t an d Assistant D irector o f Research;
C aro ly n M cM ullen, E ditor.
Chicago Fed Letter is p ublished m onthly by the
R e search D ep artm en t o f the Federal Reserve
B a n k o f Chicago. T h e views expressed are th e
a u th o r s ’ an d are n o t necessarily those o f the
F e d e ra l Reserve Bank o f Chicago o r th e Federal
R eserve System. Articles may be re p rin te d if
t h e source is credited an d the Research
D e p a rtm e n t is provided with copies o f the
r e p rin ts .
Chicago Fed Letter is available w ithout charge
f ro m the Public Inform ation C en ter, Federal
R eserve Bank o f C hicago, P.O. Box 834,
C h ica g o , Illinois, 60690, (312) 322-5111.
ISSN 0895-0164

Auto production has been the center of improvements in manufacturing both
for the Midwest and the nation in recent months and is likely to continue to drive
manufacturing activity in the months ahead. The Board’s manufacturing index
for December increased 0.5%, but only 0.1% excluding autos and trucks.
The most recent production plans announced by the domestic auto industry call
for a steady increase in car assemblies in the first and second quarters of 1993,
rising from an average annualized rate of 5.7 million units in the fourth quarter
of 1992 to 6.4 million units in the first and second quarters of 1993. While these
plans depend on an accompanying improvement in sales to be sustained, they
provide a solid basis for expecting continued improvement in the Midwest’s
manufacturing sector.

SOU RC ES: T h e Midwest M anufacturing In d ex
(M M I) is a com posite index o f 15 industries,
b ased o n m onthly hours w orked an d kilowatt
h o u rs. IP represents the FRBB industrial p ro ­
d u c tio n index for the U.S. m an u factu rin g sec­
tor. A utos and light trucks are m easu red in a n ­
n u a liz e d physical units, using seasonal adjust­
m e n ts developed by the Federal Reserve Board.
T h e PMA index for the U.S. is the p ro d u c tio n
c o m p o n e n ts from the NPMA survey an d fo r th e
M idw est is a w eighted average o f the p ro d u c ­
tio n c o m p o n e n ts from the C hicago, D etroit,
a n d M ilwaukee PMA survey, with assistance
fro m B ishop Associates an d C om erica.

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