When Clinton ran for President the first time, he had a sign posted at his headquarters that said, "Its the Economy, Stupid!". The purpose was to keep him focused on the only issue his managers thought really mattered in the campaign. They felt he needed such a reminder to keep him from wandering down all sorts of rabbit trails on various social issues that would have no bearing on the outcome of the election. Mangers – especially senior ones – in manufacturing companies might want to try the same approach. Lean manufacturing is first, last and everywhere in the middle about cost.
Way back in the 1880’s Andrew Carnegie constantly pounded into the heads of the management of his steel company the principle that pricing and volume are outside of the company’s control – they fluctuate with the economy and the whims of customers. Cost, on the other hand, was completely within the company’s control. Therefore, the only sure way to business success was absolute control of costs and constant pressure to reduce cost whenever they could. Now I would hardly hold Carnegie up as an example of lean manufacturing success. He was more the poster boy for incredibly dismal labor relations (although he did come up with a pretty innovative cost-price idea – he paid skilled worker a base rate plus a premium that was based on the average selling price the company got for a ton of steel. When the price was down, employees made the base rate; when it was up, they earned a pretty good wage.)
The point is that this central focus on cost control and reduction is an old business model, that has proven to work quite nicely. Henry Ford took it one step further by using cost reductions to fuel price reductions, which fueled even greater volume increases. Toyota has codified the Carnegie principle with their often repeated equation, PROFIT = (PRICE-COST) X VOLUME. This is diametrically opposed to the widespread American notion today that COST + PROFIT = PRICE.
What makes the American concept ‘work’ is the layoff. Companies can set prices each year based on their planned cost plus the needed Return On Sales, or margin, then take a pretty fixed price list out to the market. When the market won’t buy, they just lay off the people until the market comes around. Not only does that approach not work too well, it makes lean manufacturing impossible. The Toyota cost reduction focus, coupled with pricing that fluctuates with the market, is what makes stable employment possible. When the market is unreceptive to Toyota prices, they cut the prices – not the people. By stabilizing the people, lean manufacturing and continual cost reduction are possible.
Of course, most American manufacturers believe they already have a cost reduction focus. After all, they close plants and layoff people all the time – and that reduces costs. True enough, but it also reduces volume and so alienates the workforce that lean will never happen. Worse, it is a reflection of the fact that ‘cost’ in the American management mind has become synonymous with ‘workers’. Direct labor payroll is the single target of just about every cost reduction effort – that and trying to squeeze another percent or two from the suppliers.
There are a whole lot of other costs out there – overhead costs – that usually blow five or ten bucks for every dollar in direct labor cost, but overhead tends to get scant attention. Turning the whole thing around by having the direct labor people and their associated costs become fixed, then using them as a weapon to help gut the overheads, is a strategy that has worked pretty well for Toyota for a long time. It worked pretty well for Henry Ford, and even for old Andrew Carnegie.
Isn’t it sad that, in order to find effective manufacturing management examples in America, we keep having to haul out the names of guys that have been dead for almost a century? Even sadder is going into a company that is trying to become lean and finding out that the people from marketing and accounting are not part of the effort, at all. Without them on board, committed to the PROFIT=PRICE-COST principle, lean just ain’t gonna happen.