Japanese Companies

Being a Scot myself, I often think of Japanese firms and their managers as “the Scots of the Orient”. Like the Scots, Japanese firms know the value of efficiency and using scarce resources wisely.

Japanese firms are very focused on productivity. However, they hone in on productivity from a labour perspective and tend to measure it in terms of labour, such as the number of parts produced per employee labour-hour or the number of employees needed to operate a particular machine.

The best Japanese firms are continually seeking to drive productivity improvements by increasing the marginal product of labour. This allows them to either produce the same output with less labour-hours, or produce more output with the same labour-hours.

The Japanese understand the economic principle known as the law of diminishing returns. In fact, this law is the secret of Lean manufacturing. According to the law of diminishing returns, in a production system with fixed and variable inputs, beyond a certain point, each additional unit of variable input yields less and less additional output. The law of diminishing returns says that a firm’s short-run marginal cost curve will eventually increase.

Through Lean we can improve the efficiency with which a firm combines its variable factor of production (labour) with its fixed factor (capital). As these inputs are more efficiently combined, the rate of increase in total costs slows down as output increases. Japanese firms know this and work at this assiduously to improve their short-run cost performance.

We should always understand why continuous improvement approaches like Lean work as they do. It is not enough to know the tools and how to apply them. The economic rationale behind the tools should be appreciated and understood – just as the Japanese do.

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