Lean Manufacturing Promotes Ethical Business Practices

Research tracks Nike’s success with lean practices.
Lean Manufacturing Promotes Ethical Business Practices
LEAN MANUFACTURING MIGHT be the best way to improve productivity at factories in developing nations while also maintaining ethical business practices, according to three scholars who studied what happened when Nike switched factories from traditional to lean manufacturing. Researchers include Jens Hainmueller, a professor of political economy at Stanford Graduate School of Business in California; Greg Distelhorst of the Massachusetts Institute of Technology in Cambridge, and Richard Locke of Brown University in Providence, Rhode Island.

In the mid-2000s, Nike introduced lean manufacturing principles to its apparel suppliers in the developing world to boost productivity. At the same time, the company performed audits of working conditions by grading factories on labor standards (in areas such as wages, working hours, and disciplinary actions) and health and safety standards. Factories with good workplace conditions received A’s and B’s, while those with serious violations received C’s and D’s.

While the programs were not related, their simultaneous deployment allowed the researchers to investigate what happens to labor standards when a factory adopts lean manufacturing. “We were not confident that we would find positive effects,” Hainmueller says. “This is something Nike committed to for business reasons, to increase efficiency and be more productive. It wasn’t clear that workers would necessarily benefit.”

Yet the researchers found that factories that incorporated even one lean production line improved by nearly a third of a letter grade; those that became 100 percent lean improved by half a letter grade. The adoption of lean practices reduced the probability of serious labor violations by 15 percent.

What explains the correlation? Hainmueller theorizes that going lean initiates a virtuous cycle where workers are expected to be more than just cogs in a machine. Therefore, managers invest more in worker training, which makes it more important to retain workers, which leads to better conditions. “With these efficiency gains, you basically increase the size of the pie, and you can share more of that back with the workers,” he says.

However, the benefits appear to be geographically specific. The researchers found that, while lean adoption affected labor compliance scores in India and Southeast Asia, they had little effect in China and Sri Lanka. The majority of Nike factories in Sri Lanka already scored well on labor compliance, so they had scant room for improvement, but the researchers are unsure why lean manufacturing had little effect in China.

Even so, they remain optimistic that lean processes can help a company align its business operations with its CSR goals. “There obviously might be other consequences that we have not looked at, but the beautiful result is that there is a business case for doing this, it’s in the company’s best interest to sustain it, and it also seems to have positive social consequences,” Hainmueller says. “Why not go for it, even if all you want to do is maximize your profits?”

Read the working paper at www.gsb.stanford.edu/faculty-research/working-papers/does-lean-improve-labor-standards-management-social-performance-nike.