Friday, July 2, 2010

BP = #Lean ?

If BP was a hospital, they would have been shut down by the Joint Commission.

As @LeanBlog points out, a Wall Street Journal article called BP's operations on another oil platform in the Gulf of Mexico "lean".

Of course BP did not run a Toyota Production System-kind of lean operation. They did not employ "Five S", "Kanban" pull systems (to become a "just in time" company), or "poka-yoke" error proofing in order to increase their quality and safety.

What the WSJ authors Chazan, Faucon, and Casselman mean is that BP was running a low cost-low safety operation. 76% of the willful and almost 100% (760/761 in almost three years) of the "egregious willful" citations were issue to BP. If BP was a hospital, they would have been shut down by the Joint Commission a long time ago.

Not surprisingly, their efficiency, value, cost-effectiveness, however you want to call it was high. That's because the extra investment in safety (even after repeated citations, minor spills, a refinery explosion and probably many "near misses") did not shrink their profits and the shareholder value. Arguably, the latter are important measures that CEOs of publicly owned corporations are held accountable for on a daily or at least a quarterly basis.

They also did not value-map. Except that they did. They might have  looked at decision trees like this (with a little more details and figures):

A major spill is a rare event, even under comparatively low security measures. Therefore, you will only account for this scenario with the probability it occurs. You could make a major spill an even rarer event with investing in extra security.

However, here's the real kicker: under the current laws and regulations (which are probably going to be changed in light of the recent results), the liability of a major oil spill has been capped at $75 million! That means that in the model above, it's very clear that the "low cost, low safety" strategy is much more attractive, since you do not have to pay for the extra security (note that you would have to pay for this both in the event of a major spill or no major spill.

Is this was BP decided according to the currently enacted liability situation? If that's the case, then the lawmakers and regulators are partly to blame for the mess we have now!

Where is the analogy to health care?
It has been argued early on after the spill by President Obama and others that the relationship between the oil industry and their regulators has been to cozy. The Minerals Management Service, which belongs to the Department Interior, had clearly a conflict of interest as they both had to ensure the safety of oil drilling in Federal waters and at the same time cashed in on royalties from the oil industry.
Another Federal agency, the Food and Drug Administration also collects "user fees" from the pharmaceutical companies it is supposed to regulate. Another conflict of interest?


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