What It Takes For Lean to Deliver Bottom Line Results
Part One: Strategic Issues
By: David Kwinn
If there is a criticism about many lean deployments, it is that although the efforts are worthwhile, the results cannot be seen in the bottom line. Many people see this is an accounting issue. Practical Lean Accounting by Brian Maskell and Bruce Baggaley looks at lean from an accounting point of view and points out how accounting itself can become a leaner process. Although accounting practices are certainly an issue in tracking lean benefits, the subject of potential lean savings should be addressed before lean deployment begins to define what potential savings are possible, what would be involved in capturing them, and what would happen once the savings were achieved. That is, lean deployment can deliver many benefits, but turning them into savings goes beyond just having a series of kaizen events; benefiting from lean savings requires strategic decision making at the highest levels of a business before lean deployment starts. The also requires a strong commitment from the accounting community to track and validate the savings. The attainment of lean results will be examined first in terms of strategy and then and then tactics.
Lean efforts typically report the following range of outcomes (www.mamtc.com/lean/intro_benefits.asp)
- Increased productivity by 75%-125%
- Higher throughput by 40-80%
- Shorter lead time by 50-90%
- Lower WIP by 60-80%
- Higher first pass yields by 50-100%
- Less manufacturing space by 5-30%
There is no debate about whether lean can achieve these results, but what does it take to see them in the bottom line? First off, the percentage improvements assume that all other things are equal. That is, that product lines, product mix, workforce composition, level of business, etc., are all constant. If a business is very stable, it is easy to see the changes. However, if some of the elements are changing, things get much more complex. For example, if old products are ramping down and new ones phasing in, productivity gains on the dying line will be offset by loses on the new products while they ramp up. If employee turnover becomes an issue, productivity gains may be lost. If there are changes in suppliers that impact lead times, then WIP, service level, and first pass yield may be impacted as well. In other words, lean benefits have to be evaluated in a dynamic environment. It helps to define and measure each saving separately so that waste in one area does not swallow up newly achieved savings in another area. What follows are some of the variables that need to be analyzed strategically to ensure that potential savings turn into real savings.
Productivity: What are you going to do with the labor lean frees up?
At its simplest level, a productivity gain means achieving more output with the same input. Perhaps the most controversial part of lean deployment is the issue of headcount. When Toyota initiated lean manufacturing with its Toyota Production System (TPS), one of the key tenets was that there would be no layoffs as a result of kaizen continuous improvement events. TPS is supposed to provide a competitive advantage, and as a result of lower cost and higher quality, there should be more business and no layoffs. There are two major assumptions behind this concept: TPS is a competitive advantage, and you can sell your increased output at an acceptable profit. However, what happens if everybody does TPS? Are the differences in TPS deployment enough to create a competitive advantage? What happens if you can lean out a production line faster than demand will grow for your products? And most importantly, what happens if markets are declining? Toyota had enormous success with lean since the 1950’s when the developed it, but in the current environment all automotive companies have deployed lean, and even Toyota is facing excess capacity and the prospect of layoffs. TPS was originally thought of as a win-win situation, but the reality in today’s markets seems to indicate that the probability of reductions in force needs to be addressed up front in the deployment process. The risk of not addressing this risk at the beginning is to face painful decisions later for which the workforce may not have been prepared.
Linked to the idea that TPS shouldn’t result in layoffs is the idea that if there were a layoff as a result of lean, the remaining employees would refuse to participate in further lean activities. This is a potential issue, but there may be situations where they don’t have a choice. I have worked in plants where people were made redundant immediately after a kaizen, and the people who did not lose their jobs did not stop participating in kaizens: having played musical chairs as kids, they didn’t want to be left without a seat when the music stopped. The issue of job security is enormously important and complex in terms of legal and union requirements in various cultures. However, in the current economic environment, pretty much everybody understands that if the demand for a product drops precipitously for a long period of time, you can’t keep manufacturing that product just because you would like to. Perhaps people would like to get paid for not working (like a farm subsidy), but most people realize that isn’t viable over the long term, as the recent crises at GM and Chrysler have shown.
Thus, the first issue management has to put on the table before lean deployment is what would be done with the labor that might become redundant. If an assumption is made that 30% of the staff might become redundant with a successful lean deployment, what are the options?
- New hiring could be frozen before deployment so that the labor level would start falling due to attrition.
- The percentage of temporary workers could be increased so that they could be made redundant as productivity increases.
- Alternative work could be planned for redundant workers; this might involve retraining or assignment to a new product line.
- Working hours could be reduced to deal with increased productivity and lagging demand.
- In the happiest of all scenarios, expected growth in demand would result in the same number of employees building more products, with no redundancy required.
Once there is a plan for redundant labor, management can explain why change is necessary and what is going to happen to the staff. Once the staff understands where they will end up as a result of the productivity improvement, the question of buy in should be resolved. One would hope that the plan would result increased job satisfaction and possibly higher job security. If proper planning is not done, it should be expected that employees would feel suspicious and threatened when the company starts to deploy lean.
A specific productivity target should drive lean deployment. The headcount to be made available as a result of lean should be defined before the deployment begins, be it 30 or 300 heads. The people deploying lean must keep this number at the forefront from the start. The target needs to be apportioned among the various direct and indirect employees. Product lifecycles have to be considered. Products should be ranked in terms of their expected remaining product life and growth prospects. For example, if a product is declining and expected to become obsolete in 6 months, lean efforts should be directed toward a better prospect for longer-term payback. The next step would be to perform kaizens on the lines to meet the productivity target. People made redundant by these actions would need to be redeployed or made redundant. The cost system needs to be updated to make sure that the system starts reporting reduced labor content by product line. The cost saving should be easy to capture and not subject to debate. If the cost out does not turn up on the bottom line, then the cause of this anomaly has to be discovered. What new inefficiency offsets the productivity gain? If the potentially redundant employees did not come off the payroll, blame cannot be placed on whether lean tools were used effectively. The tools may have done their job, but management may not have been willing to face the consequences.
In the event that the business is growing and the increase in productivity is used to produce an increased number of products with the same number of people, then the cost avoidance of not hiring more people needs to be captured. In any event, the bottom line should look better because revenue has increased without a corresponding increase in labor.
Higher Throughput: Can the market absorb the additional product lean will enable you to build without diluting your margins?
Lean achieves higher throughput in a variety of ways, especially by reorganizing line layouts for smoother flow. In addition equipment constraints and process steps can be addressed. A classic example is a paint line that was restricting throughput of parts until someone asked why the parts were being painted at all. When no one could come up with a reason to paint the parts, the painting operation was eliminated and throughput increased significantly.
To capture throughput benefits, issues with both routings and timing in the ERP system must be addressed. Unless the system reflects the improved flow on the shop floor, material won’t be planned properly, and the potential savings from the improved throughput will disappear, as other inefficiencies develop to swallow them. Every line should have a production tracking system visible to everybody on the line, and after a kaizen improves throughput, the new throughput level should be tracked to ensure that it becomes a permanent change.
The result of higher throughput is only going to appear on the bottom line if there is a way to sell at an acceptable margin the incremental product that the plant is capable of making. In other words, if the plant can make 200 units a day instead of 100, the additional products should carry an adequate margin, and the plant certainly should not be building inventory just to absorb overhead. The excess inventory runs the risk of becoming obsolete or sold at a discount.
Thus, the lean effort has to be based on a good understanding of incremental market demand. If the demand isn’t there, increasing throughput may not be a top priority.
Shorter Lead times: Do your market and your marketing department value shorter lead times?
Lean certainly can shorten lead times by linking operations. Short lead times should result in reductions in finished goods inventory because the factory can respond to market fluctuations faster with reduced buffers. To see the result of shorter lead time in the bottom line, the supply chain must be synchronized with the new demand pattern. This should not be too difficult if kanbans are deployed correctly. Planning lead times and order quantities in the ERP system must be updated or incoming inventory could actually go up because the system may be ordering items before they are needed. Additionally, in a make to stock business, the stocking levels have to be reduced to reflect shorter lead times.
Perhaps most interesting of all, is the sales/marketing area willing to advise the customer base of shorter lead times? That is, does the sales/marketing community trust the shortened lead times enough to publish them to the customers? Lead times have to be calibrated against the competition as well as customer requirements. If the customers value shorter lead times and plant provides them, then revenue should increase and the bottom line should have a positive impact.
If your business strategy can benefit from increased productivity, throughput, and shortened lead times, tactical issues concerning inventory, yields, and manufacturing footprint need to be addressed.