Lean Management and Performance Targets in Organizations - Literature review Example

Lean Management and Performance Targets in Organizations Introduction The use of lean management system and performance targets has long been embraced by private organizations in order to improve efficiency. Based on its success, in the contemporary times, it is seen that the governments of many countries are put under enormous pressure to provide better services in primary areas like, healthcare, education, transportation and pension services. The democratic form of government in most countries is forcing the government to deliver quality services in these areas and failure to comply with this may affect the vote banks. In most of the European countries, it has been observed that the population is ageing fast and there is higher demand for better healthcare services. Productivity of the public sector is again less competent compared to that of the private sector (Bhatia and Drew, 2006). Hence, in order to improve service of the public sector, the authorities are now concentrating on a technique called “lean management” so as to achieve higher efficiency. This practice has been used extensively in the private sector over years and has shown positive results (Dixon, 2012). This technique is nowadays used in a large variety of public services like, income tax processing, health care systems and urban planning systems, to enhance quality of the service. The lean management system is particularly crucial for the public sector because this improves quality of the service as well as reduces cost of providing them (Panneerselvam, 2005). The purpose of this paper is to analyze ways in which lean management techniques and performance targets are used in organizations in order to ensure greater drive of efficiency. Lean Management The concept of lean management has been used both in the field of services and manufacturing. The concept was originally derived from Japanese manufacturing plants. The basic concept behind the idea is that if any process in unable to create value in the process of production, then it must be eliminated. The working of lean management is based on four main principles of flow, value, value stream and pull (Feld, 2001). The first one relates to elimination of interruptions from the process of production; the second one relates to price that customers are willing to pay for the products; the third one relates to elimination of the non-value activities; and finally the fourth factor relates to streamlining the products and process, until final consumption is made (Fliedner, 2011). The use of lean production techniques was embraced by the public sector for a number of reasons, namely quality of service, cost and resolving customer issues. Proper implementation of lean management system has the capability of improving the entire operating system by altering configuration of the assets, staff of the organization and material resources of the company. This in turn reduces costs of an organization by about 30%. The application of lean management system in the service industry could be attributed to Levitt (1972). Though application of the lean management system in the service industry has entailed criticism, yet it has produced positive results in delivery of public services. The chief argument was that it is difficult to describe customers for the government services (Bhatia and Drew, 2006). The works of Carter, et al. (2011) had shown that lean techniques can be easily incorporated for effective development of the public management services. They had further argued that adaptation of lean technique can bring about dramatic changes “that sought to maintain the dynamic of performance control but within new organizational frameworks centred on private sector business models” (Carter, et al., 2011). However, according to visions of Seddon (2003), modernization of the public sector can often prove to be detrimental as it tends to undermine quality of the service (Seddon, 2003). If the public sector is modernized, then it is likely to be characterized by targets and inspection, which in turn demoralizes employees. In the article published by Hood (2006), which had dealt with target approach of managing the public sector services in Britain, had indicated that three basic types of target gaming was adopted by public management system in U.K. The author had found that senior managers in the target regime did not employ enough resources for checking performance data, the performance gain were reported at face value and there was lack of a coherent anti-gaming strategy (Hood, 2006). The research of Sandberg, et al. (2007) had pointed out that the work of Womack, Jones and Roos in “Machine that changed the world” does not pay enough attention to consequences on the employees and that on productivity. There are other researchers as well who argue that role of workers is minimized by mechanization of the work process. Despite the criticism, lean management is still pursued for managing performance of the public services (Sandberg, 2007). Performance Targets Performance targets are mainly defined as a set of aims or objectives fixed by the management, which separates success from failure. This forms the basic structure of most corporate organizations in the contemporary times so as to improve their efficiency (Bourne, et al., 2000). Researchers identify this as the key aspect for improving attitude of people towards organizations, which in turn is expected to improve efficiency of the latter. Other group of researchers argue that performance targets demoralize employees, thereby affecting their performance adversely (Busby and Williamson, 2000). The concept of target based performance in the public sector has become particularly important from the 1980s, particularly for countries of western world like, U.K., Australia, Sweden and New Zealand. The rationale behind introduction of this principle was to enhance efficiency of the public sector and to measure its performance against predetermined benchmarks (Gregory, 2007). Benchmarks are generally the output that is generated by an organization. Though this approach was introduced with the objective of raising efficiency of the public sector, yet it has often been criticized in academic literature (Ordonez, et al., 2009). Randor (2002), for instance, has stated that the concept of “standard work” does not fit in the service environment of not only the public, but also the private sector, organizations (Radnor, 2010). The work of Arlbjorn, Freytag and De Hass (2011) had further stated the difference between public and private services in terms of the fact that public services require handling conflicting interests (Arlbjorn, Freytag and De Hass, 2011). Critics argue that presence of a large number of stakeholders in the government services makes it complex to balance interest of stakeholders. The measurement of output in the public sector is also a challenging task, which is why it is difficult for public organizations to be based on targets. The multiplicity of goals of the public sector combined with vagueness implies that performance relative to the goals is difficult to measure. When maximization of utility of individuals is concerned, they tend to improve performance measures by enhancing individual efforts; but this will not be true when a large number of stakeholders are involved. In terms of economics, this is called gaming. The work of Smith (1995) has shown that publication of performance measures by the public sector may lead to unwanted circumstances. Some of the adverse effects include myopia, sub-optimization, tunnel vision and gaming. The principle-agent problem is the main underlying reason for which this approach has been criticized in the public sector. Efficiency of Organizations It has been analysed from the previous section that though measures--lean management system and performance target schemes--that has been introduced by public services, following the suit of the private sector, has been subjected to mixed views. This section of the paper focuses on performance of the public sector after application of lean management techniques and target performance standards. The case of lean management system and its success in the manufacturing process of Toyota has been well documented. It has also been observed that in case of the European telecommunication industry, adaptation to the lean management system has provided a certain operator with major benefits compared to its rivals by reducing waste of production and improving time management. The customers of the operator were switching to different service providers, but application of the lean techniques proved to be successful in retaining users. During the global financial crisis of 2008, a large of organizations could perform efficiently because they had employed the lean production techniques. For instance, the case of Sealy, a mattress company, where it had greatly benefitted from use of the lean production techniques as that had greatly reduced cost of production. It has been observed that lean production techniques adopted by organizations is a strategy for observing leadership in value (Davidson, 2009). It has contributed to the method of production in a positive manner, than simply reducing price of the products. The quality of products produced under lean production system is superior to mass production techniques. The lean production also allows production of variety of products compared to mass production techniques, which give greater competitive edge to organizations (Taylor and Brunt, 2001). The performance of organizations, in terms of efficiency, based on adaptation of lean management principles mainly come from four parameters; leadership, organizational culture, improvement process and communication system (Womack, Jones and Roos, 2007). The lean management system is documented to improve performance and efficiency of the manufacturing process and a large number of privately owned organizations. In case of publicly owned organizations, the views are mixed owing to difficulty in defining customers for the government sector and lack of competition in the same. Even so, the following empirical evidences show that adaptation of the lean management system has led to increase in efficiency of the public sector (Kilpatrick, 2003). When NHS London had adopted lean management principles, level of efficiency in the organization had shown dramatic improvement. Similarly, HMRC had also implemented the lean management in their operations and a rapid rise was observed in rate of solving the customer issues. Such evidences indicate that lean management has been successful in solving issues of the public sector and able to raise efficiency, despite the criticisms against them (Deloitte, 2010). In terms of performance target and organizational efficiency, it can be argued that setting quantifiable targets is the key to implementation of the process. Most of the organizations use their financial targets to measure performance compared to the previous years. This allows them to identify the future avenues for expansion. One of the ways to achieve better performance targets is to form a proper relationship with customers. Interacting with customers allows business organizations to improve the level of their service, which has the potential to promote their growth. Benchmarking performance of the employees and providing each of them with performance targets is likely to enhance work productivity of the entire organization at an aggregate level. Benchmarking performance of the employee based on financial targets is a common practice adopted in most private organizations. Though these concepts are widely adopted by private organizations in the corporate sector, yet empirical studies on such theories are rare in literature. In this regard, the work of Kaplan and Norton (1992) had suggested that approach of balanced scorecard (BSC) can be useful for organizations for determining ways to evaluate performance (Kaplan and Norton, 1992). An empirical study that was conducted by Malina and Selto (2001) had suggested that BSC is an effective tool for controlling corporate strategy of an organization. Their research had revealed that there is a causal relationship between effective management control, strategic alignment, motivation and benefits of balance scorecard. The benefits that are accrued from following these measures constitute improvement in the customer-oriented processes, which in turn increases long-term efficiency of the organization (Malina and Selto, 2001). Though performance targets have been generally successful for private organizations, yet the same cannot be said about their applicability in the public sector. According to the research of Propper and Wilson (2003), though performance measures and targets approach have been widely embraced by the public sector, yet their usefulness is doubtful (Propper and Wilson, 2003). The works of Kravchuk and Schack had revealed that performance targets should be used just as indicators and not as tools of management. Empirically, it is very difficult to establish the performance standards of public sectors based on performance targets. For the government services, pilot schemes are often introduced for studying effectiveness of policies of the target programs, but results that are obtained are difficult to compare. Also, empirical evidence regarding rewards and performance schemes of target management is few and results obtained do not always show a positive correlation between the two (Kravchuk and Schack, 1996). Nevertheless, works of researchers like, Greatbanks and Tapp (2007), present a different view. Their research indicates that use of scorecards even in the public organizations has been successful in raising organisational efficiency by clearly mentioning roles of the employees and allowing them to focus on performance related measures (Greatbanks and Tapp, 2007). In addition, studies conducted by Ridwan, et al. (2013) have also shown that BSC approach, which has been adopted by the public sector in Australia, has contributed positively towards development of these organizations. This paper has also found a strong relation between rules that are imposed externally and performance management systems of the organizations. Conclusion This paper has analyzed lean management and performance targets of an organization, which are important in raising efficiency of organizations. In order to do so, both public and private sectors have been studied. The success of lean management techniques in the production system of Toyota has been exemplified time and again. These practices were even adopted by firms in the automobile industry of U.S. later for enhancing capabilities. These practices have been implemented in a number of industries, besides automobile, in the contemporary times to improve efficiency. In case of public sector too, these policies have been adopted. Though there is vast literature suggesting that complexity of the public sector makes adaptation of these practices difficult, yet it is evident from works of certain researchers that this practice can yield positive results. Similarly in terms of performance targets, it has been observed that they are widely adopted by management of the corporate sector to raise efficiency of organizations. The application of these practices in public sector organizations have, however, been subjected to mixed reviews owing to conflicting nature of interests of the stakeholders in the public sector. This has made it difficult for these organizations to adapt to them. Even so, few empirical researches do suggest that efficiency gains can be realized from these efforts. 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