The Skunk In The Lean Garden Party

A few days ago Kevin wrote a piece about competition, making the point that any company that thinks it can follow the same old manufacturing practices, just keeping its nose ahead of the guy down the street who is also following those worn out practices, is likely to get blown out of the water by some competitor it didn’t even know it had from some place on the globe it didn’t even know existed.  The successful manufacturer must be ready and able to take on all comers, and those comers will be coming from all directions.

In the post he included a reference to my book, Rebirth of American Industry that had to do with takt time.  The structure of the book is a lot of blathering narrative by me, meandering all over the lean map, interspersed with keen comments and observations by Norm Bodek based on his wealth of experience in Japan and the U.S., having been through just about every great plant and having met just about every great lean thinker at one time or another.  The post quoted one of his observations of a production operation that could easily have reduced its direct labor element from five people to two through some basic lean principles.  So far, so good – another nice little lean example that should inspire everyone to go out and reduce their labor content by 60%, right?

Then someone who goes by the name of RD came along with a couple of insightful comments that upset the whole apple cart, tossed a skunk into the middle of our nice little lean garden party, opened up a particularly disgusting can of worms.  RD first asked just how it is that he or she is supposed to turn those three saved people into bottom line savings in the face of the lean principle of stabilizing employment.  If they cannot be laid off, how have we saved anything?  He or she made the whole mess even uglier  by pointing out that manufacturing does not operate in a vacuum.  In fact, sales and marketing have a lot to say about how level or not the factory load is, and that it is nigh unto impossible to do a lot of these lean things when the factory load is jumping all over the map.

I don’t know who RD is, but it seems to me that he has a lot of nerve – note that I dropped the ‘or she’ part; most of the women I know have far more empathy for their fellow human beings, Kevin and me included, than to bring up messy issues like this.  He broke the unwritten lean rule.  For twenty five years we have been cranking out JIT/Lean/TPS books urging factories to follow Norm’s excellent advice and do the lean things to reduce labor, while at the same time blasting any company that fails to show respect for people by laying them off.  Matters such as the mathematical impossibility of balancing flow, maintaining takt and practicing heijunka when demand rarely if ever follows such convenient patterns have been kept hidden away in the closet.  The fact that freeing up people from production but keeping them on the payroll anyway is not very lean and it saves nothing – in fact it is a lot like GM’s ‘Jobs Bank’ program – is not addressed in the mainstream lean literature. 

When someone has the audacity to ask questions like RD’s, we typically respond with answers like "Leadership" or a necessary "Leap of Faith". In other words, the answer is, "I don’t have a clue, but somehow Toyota does it, so if you just keep doing lean things in the factory but don’t lay anyone off, it’ll work out.  Just have faith."  RD – and you thought I was ‘cranky’ and deserving of the title of ‘Lean Curmudgeon’ – is apparently too ill mannered to politely accept those answers, as hollow as they may be.  He leaves us no choice but to take the bull by the tail and squarely face the matter.

The answer is that manufacturing does not operate in that vacuum.  It is impossible for manufacturing alone to bring lean labor savings to the bottom line without laying anyone off unless marketing and finance – and that means the CEO too – are completely integrated into the lean strategy.

For starters, the company has to be committed to the idea that the factory will be a significant contributor to profits – as great or greater than sales margin – through continuous cost reduction; but that cost reduction can only be realized if the factory is presented with a relatively steady demand load that increases at about the same rate of ongoing labor productivity improvement.

The traditional business model has been to task marketing and sales with the objective of selling the most they possibly can at a preset price point, then tasking manufacturing with developing the agility needed to chase volume up the peaks and down the valleys.  That concept, which has the plant as the tail to the sales and marketing dog, cannot possibly succeed.  Most of the folks who wrote to me accusing me of being legally insane for suggesting that MRP was a bad thing were coming at me from this perspective.  They cannot conceive of how manufacturing can do all of the planning, smoothing, inventory management and capacity balancing needed to chase sales all over the map without a very big and sophisticated arithmetic engine.

There is no computer good enough, however, to do it.  At best, the MRP systems enable manufacturing to avoid screwing up too badly in this impossible quest to support whatever sales and marketing does.  They certainly are not going to enable manufacturing to drive the sort of ongoing, substantial cost improvements lean provides.

That means that, in order to be lean, sales and marketing have to take all of the peaks and valleys out of the demand they present to the plant.  The only way they can do that is through pricing.  Getting rid of the valleys by dropping the price is straightforward enough.  Getting rid of the peaks by goosing the prices up is the hard part.  That is where it takes a disciplined commitment to a lean strategy.  Sales folks are like crows who cannot resist picking up every shiny object they see; only with sales, they cannot resist booking every order someone wants to place.  It is tough for them, and for the CEO, to walk away from an order that will spike the plant.  They have to understand manufacturing well enough to know that the cost of the disruption in flow will more than eat up any profits from such sales.  New business that will elevate the plant’s production levels can only be accepted if it will be sustained business that justifies a permanent increase in capacity.

Where finance and the CEO fit into all of this is that they have to toss Return On Sales (ROS) onto the same scrap heap they put ROI.  The old Sloan thinking has been that, if total cost equals $8 and we sell the product for $10, we will have an ROS of 20% on each sale.  So if we can sell everything at that price, and the erratic slobs in the factory keep their costs under control; and we can sell as many as forecast, our ROS for the year will be 20%.  That, in turn, keeps the ROI where it needs to be (again, assuming the factory doesn’t screw things up); which keeps Wall Street happy; which means we all get our bonuses.

ROS is a good enough measure in hindsight to see how pricing was compared to cost.  When it is driven down to individual sales in individual time buckets, however, it leads to disaster.  As the crude chart above tries to show, the objective of sales and marketing must be to get the highest price possible while presenting a demand pattern that averages along the center line, which is the factories projected rate of productivity improvement.  There is some room for variation, bounded by available capacity at the top and the point where the company is losing money at the bottom.  Over time, however, the trend line for demand must track the center line pretty closely; and the demand at any point cannot exceed the bounds.

Henry Ford and James Couzens understood this concept quite clearly.  It is funny to read the modern day writers who attribute the continual lowering of the price for the Model T to some altruistic desire to provide transportation to the masses.  In fact, continually lowering prices assured a steady increase in demand that roughly mirrored the improvements in efficiency at the Highland Park plant.  The amazing profits Ford kept racking up came from continuous cost reductions that more than offset continuous price reductions.

Toyota, of course, has this down to an art form.  When they cut prices to feed a continual, steady increase in demand on their plants, their American competitors howl that they are ‘Buying market share’.  They must not be paying too much for the market share they bought, because their profits are staggering.  In fact, they know that giving away a few bucks on the top line in order to keep fueling the cost reduction engine in the factories is a very, very profitable way to do business.

All of this is an abomination and the height of lunacy to the product of any American MBA program.  The folks who run things are so steeped in Sloan, ROI and ROS, and all of its trappings from MRP to functional organizational charts that the simple logic of this – the lean economic model – is impossible for most to appreciate.  To see old Alfred get slapped around and tossed out into the parking lot along with all of his "Decentralized Responsibility with Centralized Control" claptrap is more than they can bear.

So the brutal answer to RD’s tough questions is that lean in the factory alone won’t save much.  He has shoved us into the core of the looking lean versus actually being lean issue.  "How do you bring the labor savings from getting the operation down from five people to two without laying them off unless increased demand materializes?", RD asks.  The ugly answer, RD, is that in such a scenario you will not save a dime from your wonderfully lean looking takt driven U shaped cell.