Theories of Production

According to Koskela , there are three production theories for creating products and services:

1. Transformation
   
2. Value generation
3. Flow

The transformation theory, which is based on input, process and output (IPO) is the dominant production theory in use today. It is reductionist, it breaks down every process into individual tasks performed by specialists. Activities are tightly organized and controlled; it is consistent with Scientific Management and traditional cost accounting. It seeks to optimize the entire production phase by optimizing each individual task, assuming that minimizing the effort and cost of each task translates directly to maximum throughput and customer value.

Value generation focuses on delivering maximum value to the customer. All tasks and activities are measured and evaluated based on this concept. Activities that don't deliver value are not performed. Production efficiency is redefined as the efficient delivery of value to the customer. There is a strong focus on quality. If the customer does not want or value what is delivered, then activities that lead to these outcomes are considered waste. The theory is based on the assumption that a value focus will optimize the overall process of value delivery and lead to process optimization based on the larger context of value generation. The theory has a focus on quality, profits and ROI, not costs. Note that a process which transformation theory might consider efficient and successful, might be judged from the value generation point of view as a failure.

Flow is focused on realizing value quickly, minimizing inventory and reducing the total latency of production. Fast turnaround lets the market control what is wanted. Production does not occur unless there is a specific request for a product or a very strong expectation of such a request. Flow seeks to increase the tempo of production.

These three theories are very interesting and have many implications. For example, the Chinese economy is successful because it is a source of low cost inputs, maximizing value according to the transformation theory of production. The Chinese production model however, greatly slows down flow and can result in tremendous waste, since customer value is not a focus. By contrast, Japanese companies as exemplified by Toyota above all, focus on value generation and flow. These companies are not afraid to locate in high cost locations, because they know that the cost of inputs is not the only thing that is valuable to control. High cost locations are able to achieve faster flow and realize higher customer value (and therefore higher profits).

Recent data about China has started to raise questions about the performance of the Chinese economy. Chinese companies and operations are not turning out to be as profitable as might be expected, and companies in the Western world with high input costs, that focus on flow and value generation are able to compete with these companies.

Outsourcing of services is another instance, where these theories of prodcution have unexpected ramifications. Outsourcing is about reducing the cost of inputs and therefore reducing the cost of specific tasks, but flow and customer value creation are reduced, due to time lags, cultural issues and communication difficulties. On balance, outsourcing may not deliver the benefits its advocates expect and there are some indications that companies are starting to realize this.