Simplifying the Complex: That’s the Secret to Real Lean – Part 3: What Rickards Said

Simplifying the Complex: That’s the Secret to Real Lean – Part 3: What Rickards Said

Some people love to make things complicated. The key is to make things simple.

Taiichi Ohno

(As recounted by Michikazu Tanaka in The Birth of Lean)


In the last post, I began to outline some of the intricacies of “complexity theory” and tried to illustrate how that theory may apply to the “production systems” that we all interact with on a day to day basis. Remember that a “production system” is a system that creates value for someone (hopefully a lot of “someones”). But that system will only create value as long as that system can remain viable and sustainable. That sustainability is intimately intertwined with the inherent complexity of our system.

To quote Dr. Tainter from the previous post:

Most of the time complexity works. It is a fundamental problem-solving tool. In its early phases, complexity can generate positive feedback and increasing returns.”

In other words, complexity can be a strategic tool to allow our system to remain viable. But Tainter also says:

Problem-solving, whether involving resources or information, commonly evolves along a path of increasing complexity and positive returns, then higher costs and diminishing returns.”

Thus, complexity has a definite end point for continued viability and sustainability. But how do you tell when that end point is approaching? As they say in the vernacular, “It ain’t easy!”.

Next, I will pull some quotes from Chapter 10 of the James Rickards’ book Currency Wars. Rickards is a lawyer and economist and spent 35 years in and around Wall Street as a portfolio manager and in various consulting capacities. You can read more about him here. I chose Rickards because of all the writers that tackle the fairly recent study of complexity theory, he seems closest to the application of this body of work to the business world.

But I must point out that his view of complexity theory is somewhat darker than that of Tainter. His business world was comprised primarily of financial institutions and banks. Ever hear of banks failing? Thought so! To top it off, he was involved in the rescue (default) of Long-Term Capital Management (LTCM) in 1997. It was so bad that “Wall Street feared that Long-Term’s failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system”. They had to bring in the Federal Reserve. Surprisingly (or maybe not), two of the Board of Directors of LTCM shared the Nobel Prize for Economics in 1997, the year before the firm headed south. Their research had something to do with financial derivatives – financial derivatives rank near the pinnacle of complexity in financial institutions. Sound familiar?

First, here is Rickards covering the basics:

“Despite the name, complexity theory rests on straightforward foundations:

  1. Complex systems are not designed from the top down. Complex systems design themselves through evolution or the interaction of myriad autonomous parts.
  2. Complex systems have emergent properties, which is a technical way of saying that the whole is greater than the sum of its parts – the entire system will behave in ways that cannot be inferred from looking at the pieces.
  3. Complex systems run on exponentially greater amounts of energy. This energy can take many forms, but the point is that when you increase the system scale by a factor of ten, you increase the energy requirement by a factor of a thousand, and so on.
  4. Complex systems are prone to catastrophic collapse.

The third and fourth principles are related. When the system reaches a certain scale, the energy inputs dry up because the exponential relationship between scale and inputs exhausts the available resources. In a nutshell, complex systems arise spontaneously, behave unpredictably, exhaust resources and collapse catastrophically.”

To be precise, Rickards is talking about complex “adaptive” systems. I briefly discussed these in the first post of this series. “Complex adaptive systems” commonly involve people. And people can, and often do, become so “adaptive” that their actions can bring whole institutions tumbling down around their feet. Any history majors reading this? Tell us about it!

Here is Rickards’ further take on this phenomenon:

As society becomes more complex, it requires exponentially greater amounts of money for support. At some point productivity and taxation can no longer sustain society. …At that point society has three choices: simplification, conquest or collapse. …Collapse is a sudden, involuntary and chaotic form of simplification.

Anybody depressed yet? Don’t be. Both Rickards and Tainter give us a “way out” of this rolling, rumbling, inexorable human path towards complexity collapse. And the “way out” is……


(The carefully thought out and logical forms of simplification – not the “out of chaos” form mentioned above).

And that’s where TPS/Lean come in. I know, I know. I’ve hinted at this several times, but I haven’t delivered the goods as yet. But I will shortly. I just need to cover a few more interesting and important twists buried in complexity theory before we can rationally apply this line of thinking to TPS/Lean. Bear with me.

Contrary to the quotes above, Rickards is not all doom and gloom. He actually recognizes that complexity can be a positive tool in our human run society if we can just learn to see its positive power potential in the complex system world around us. If we can just learn to “adapt” in a positive manner. Here is Rickards taking a little deeper dive into the inner workings of complex adaptive systems:

“Complex systems begin with individual components called autonomous agents, which make decisions and produce results in the system. To be complex, a system:

  1. Requires diversity in the types of agents. If they are diverse, they will respond differently to various inputs, producing more varied results.
  2. Requires connectedness. …The agents must have a way to contact one another.
  3. Requires interdependence, which means that the agents influence one another.
  4. Requires adaptation. In complex systems, adaptation means more than change; rather it refers specifically to learning.

To understand how a complex system operates, it is necessary to think about the strength of each of these four elements. …At a setting of one, the system is uninteresting. It may have the elements of complexity, but nothing much is going on. Diversity is low, connectedness and interdependence are weak and the result is almost no adaptation or learning taking place. At a setting of ten, the system is chaotic. Agents receive too much information from too many sources and are stymied in their decision making by conflicting and overwhelming signals. Where complexity is most intriguing is…. the “interesting in-between”. This means the dials are set somewhere between three and seven, with each dial different from the others. This allows a good flow of information, interaction and learning among diverse agents, but not so much that the system becomes chaotic. This is the heart of complexity – a system that continuously produces surprising results without breaking down.”

Feel better now?

I don’t know about you, but I can recognize various businesses that I have been involved with over the years as I read through this synopsis of complex systems.

For example, the business/system with a low setting of one reminds me of a typical top-down hierarchy where everything/everyone has a predetermined, well defined role to play. All direction comes from the top and if everyone does what they are told, everything will run as planned. This is the organization that is supposed to run like clockwork. …. Until it doesn’t.

Inevitably something unexpected happens. At that point, all dials get turned up to ten to solve those unforeseen problems that unexpectedly stop the pendulum of that clock. All dials except number 2. Since everyone has a well-defined role, boundaries do not get crossed and connectedness cannot occur. But dial number 3 runs rampant because while they are not connected, they are still interdependent – they just don’t know it. Instead of adaptation, they get chaos.

But many times, “firefighting” works, and chaos is overcome. If it does, then everyone breathes a sigh of relief, congratulates everyone on a job well done and returns the dial settings back to one. Until …? Odds are that the “firefighting” added more complexity – but without the “learning” that needs to accompany it.

Fortunately, I have also experienced that “interesting in-between” where the dials are scattered around the middle range. The most notable example occurred when I reorganized an entire, previously traditional, manufacturing organization along individual value streams. And this reorganization encompassed the entire organization, not just the production floor. All functional silos were folded into these distinct and separate value streams. This changed the way everyone looked at their jobs – or a better way to say this is that everyone changed the way they looked at their responsibilities. The four dials became visible to everyone.

Diversity always existed and was visible, but the connectedness between the diverse individuals was not so visible. Now it was. And once the diverse connections along the value streams became visible to everyone, the interdependence of those connections became obvious. The value stream had now become visible to everyone. That became the focus – the value stream became everyone’s responsibility – top to bottom, bottom to top. And the energy levels needed to manage the system decreased – the dials were turned down.

And adaptation soared! Throughout my entire previous career, I had never seen such innovative, creative, breakthrough initiatives as I saw from all of these individual value streams. It was truly amazing. I was no longer running things. I, instead, became an observer and a coach. Maybe not the best coach, but out of necessity I had to try. And try I did. I became adaptive!

I wasn’t sure why this value stream approach worked at that time. I just knew it worked (a little of Ohno’s trial and error). But now that I have discovered a little bit about complexity theory, and it is a very little bit, it is starting to make sense.

Don’t confuse the dial settings with the amount of diversity, connectedness, interdependence and adaptation that is actually taking place. The dial settings are a measure of the amount of energy required (human labor – both mental and physical, time, money, etc.) to try to manage a given level of each of these traits. The more complex the system, the more energy must be expended to achieve that given level.

In my top-down example, the setting of one meant that the four traits were pretty much non-existent. But little energy was required – as long as everything went according to plan. But once unplanned disruptions appeared, complexity increased exponentially and so did the energy levels. But even with that extra energy input, the four traits did not really improve much. The system did not function well at higher complexity levels. System visibility was low.

But when the organizational system was transformed into value streams, system visibility improved dramatically. Information flow between the diverse agents was improved dramatically. Information actually flowed! (I hope that word flow rings a few bells). And when you have flow, you have connectedness. And interdependence becomes immediately obvious. Unplanned disruptions are adapted to with very little extra expenditure of energy. System energy levels remain reasonable. The dials are not turned much higher. System complexity has been constrained.

The system has been simplified!

See where I’m going with this?

In my next post I will contrast Toyota’s approach to the simplification of a complex manufacturing sub-system to the approach taken by the rest of the world.

Kanban versus MRP

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