If I were a Hollywood celebrity, or the subject matter of the Superfactory blog were just politics or other unimportant social drivel, the contents of my email inbox might be called "hate mail". Since this is just manufacturing stuff, however, the notes from people blasting me for categorizing their lean efforts as "light weight" or their management as "Wall Street lackeys" does not rise to the heady level of ‘hate mail’. It is just good, old fashioned name calling, which is OK with me. The folks I have panned for ‘looking lean’ instead of actually ‘being lean’ seem particularly prone to using the term ‘ignorant’ in the salutation of their notes to me. And having lived in Detroit for a while, I understand that "you s.o.b." can be a term of affection in some Michigan manufacturing circles.
However, to ease some of the stress I seem to cause, perhaps an explanation of my admittedly cynical attitude toward those in the manufacturing community who view Wall Street with such fear and respect is in order. I ought to draw the distinction between superficial lean and actual Toyota, Henry Ford style lean manufacturing. To do that, we have to get right into the belly of the management beast where the DuPont R.O.I. model reigns supreme.
Alfred Sloan and his partners in crime rolled out the DuPont model over 80 years ago. It is a weird little flow chart that purports to calculate business performance taking into account not only whether the company had a profit, but whether that profit was good enough relative to the assets it took to generate it. Over those 80 years, the chart has been polished, refined and so deeply embedded in business thinking that academic library shelves across the land are groaning under the weight of the adulation. Wall Steet has been conditioned to think that it – and all of the academic derivatives of it – are the only legitimate means of measuring business performance.
The problem is that the DuPont ROI model is fundamentally, diametrically, 180 degrees opposed to lean manufacturing. The DuPont ROI model is built on the principle that inventory and cash are completely interchangeable as far as measuring a business is concerned. No matter what else happens, whether money is in the bank or tied up in a heap of work in process inventory has no impact on results. Go ahead and look at it by clicking here if you want to see for yourself.
DuPont, Sloan, Donaldson Brown and the rest of the resident wizards at General Motors in the 1920’s declared inventory to be an asset. Taichi Ohno says inventory is waste. I wasn’t anywhere near the head of my English 101 class, but I am pretty sure that "asset" and "waste" are antonyms. Neither Henry Ford nor Toyota managed by the DuPont ROI formula. General Motors, the modern Ford Motor Company, Delphi, General Electric, Boeing, IBM, and virtually every other publicly traded American manufacturer does. (Notice a pattern there?) I’ll give you another clue. Smaller, privately owned manufacturers, who have a pretty good track record of becoming lean, tend to ignore DuPont ROI, also.
The problem with the DuPont ROI model in its application is that Americans are smart folks and it took no time at all to figure out the logic and realize that the ROI number would go up quite nicely if the cost of goods went down by just a little, even when the inventory went up by quite a lot. In fact, many of those academic library shelves are near collapse under the weight of tomes written on EOQ theory, which is just that – a way of calculating just how high can the inventory mountain grow in order save a nickel of manufacturing cost.
Pull inventory out of the DuPont ROI model and the entire batch manufacturing house of cards immediately tumbles. Looking lean happens when management and lean consultants run around the shop floor putting in kanbans and U shaped cells, but do not take on the question of DuPont ROI. When that happens, Delphi results occur. The telltale sign is inventory turns. When inventory does not start turning a whole lot faster, but lean looking stuff is happening on the shop floor, you can bet the ranch that either the lean consultants were unwilling to take on management, or management was unwilling to take on Wall Street. Nobody was willing to step up and declare that all of the accumulated overhead costs embedded in inventory needed to be written off, and that inventory would no longer be a place to park excesses in the future. In short, everyone was willing to give lip service to Ohno and publicly state that inventory is waste, but privately they went about worshiping at the alter of Sloan et al and managing the business as if inventory were an asset.
Eli Goldratt said that the Goal of manufacturing is quite simply to make money. If a company defines making money the way Wall Street does – as optimizing the percentage at the end of a DuPont ROI arithmetic exercise, lean isn’t going to happen. So when I deride lean efforts in one sarcastic manner or another, please don’t take it personally. I am just getting after those who want to become lean without taking on the challenge of confronting the ghost of Alfred Sloan.