Lean Management Pays Off, But You Have to Wait

The financial benefits of adopting lean management systems depend on the extent to which a firm embraces lean management as a company-wide philosophy and implements it extensively across the organization. This is the main conclusion of a study published in the recent paper Enterprise-wide lean management systems: a test of the abnormal profitability hypothesis by Arnaldo Camuffo and Alberto Poletto of the Bocconi Department of Management and Technology, appearing in the International Journal of Operations & Production Management.

"Lean" management is nothing new. The idea that a firm should relentlessly eliminate waste and reduce variability in all its business processes, was pioneered by Toyota decades ago and has attracted a considerable amount of research over at least the last thirty years. Past research has tried to measure the correlation, if any, between adopting lean operation practices and financial results. This has not led, however, to reliable estimates of the financial performance effects of lean, since the "distance" between lean operation practices in specific plants or processes and the company's bottom line is too large. Camuffo and Poletto, instead, set out to investigate whether a pervasive adoption of lean management ("company-wide lean management systems") actually generates higher than normal profits ("abnormal" in the paper title is to be taken in this sense) and over what timespan. The novelty of the methodological approach lies in the attempt to measure how much extra profit is directly and causally attributable to lean management when this philosophy is applied to all aspects of the organization as opposed to individual parts, plants or organizational units.

Camuffo and Poletto analyzed data on all Italian industrial companies with revenues in excess of 20 million euros at the end of fiscal year 2016, over the period from 2000 to 2018. The final data set thus includes 2,088 companies (of which 195 lean adopters) for 19 years. Results show that profitability, defined in terms of return on invested capital (ROIC), is 1.4% to 3.9% higher in lean adopters. But these effects are magnified (up to 6 times) for larger firms. Moreover, these additional profits start about three years after adopting lean management and peak at about eight years.

"There are two possible explanations for the variability in extra profits. First of all, firms that are better able to understand in advance the inner workings of lean systems (that are often implicit, imprecise and non-linear) can design and implement them more effectively, mitigating the uncertainty of their outcomes," Arnaldo Camuffo explains. "Secondly, firms seldom carefully assess the financial gains of their improvement initiatives and are often unable to establish whether the costs associated with them are compensated by substantial financial benefits."

Another important outcome of the study is the non-linear accrual of extra profits over time. "Lean management is not only hard to implement but also hard to sustain over time," Camuffo adds. "Our results show that the effects of lean adoption on profitability are weaker and controversial in the first years of adoption, suggesting that the effects of lean adoption on financial performance are lagged. It takes time to fine-tune the lean system and generate operational performance improvements that only later will eventually translate into financial performance improvements."

Arnaldo Camuffo, Alberto Poletto, "Enterprise-wide lean management systems: a test of the abnormal profitability hypothesis", International Journal of Operations & Production Management, Volume 44 Issue 2, 5 February 2024, DOI https://doi.org/10.1108/IJOPM-10-2022-0646