Searching around for lean success stories to write up is not an easy task because there are truthfully very few of them. It may come as a surprise to some, but among the publicly traded manufacturers, Ford, GM and Harley Davidson are the best the U.S. has to offer – by far. Danaher, Wiremold, Esterline, Masco, Boeing? Not even in the same league.
The fundamental measurement of lean manufacturing is cycle time. It doesn’t matter how many kaizen events a company held, or six sigma projects. Value stream mapping does not make a company lean, nor does implementing pull systems. Cycle time is to lean what weight is to a dieter. You can measure inches you lost or reduction in calorie intake, or whatever else you want, but the bottom line is determined when you step on the scales.
Let’s look at some numbers. In particular, let’s look at how many times some of these companies turn their Raw/Purchased and In Process Inventory (RIP Turns):
Masco 16
Danaher 11
Esterline 10
Wiremold 7
To understand those numbers, simply convert them to days by dividing 365 by the RIP turns figure. Masco, on average, takes about 23 days to convert raw and purchased material into finished building products, like faucets and kitchen cabinets. Danaher takes 33 days, or a little over a month, to convert material into tools, test equipment, medical equipment, and the other things they make. Esterline is at 36 days for airplane parts and Wiremold is at 52 days (or at least their parent company Legrand is) for electrical fittings and cables.
Toyota turns RIP inventory 45 times – material and purchased components into a finished car in 8 days. While Masco – the best of the four companies listed – is a fine company, making money, no doubt deploying the whole lean tool kit, and doing well, no one should kid themselves into thinking that a manufacturing system that takes 23 days to make a faucet is anything remotely close to a system that makes a car in 8.
Ford turns its RIP inventory about 37 times and GM and Harley-Davidson both come in at about 30. That’s a car in 10 days at Ford, and a car or a motorcycle in 12 days at GM and Harley. Keep that in perspective the next time you read an article blasting the auto companies and praising the darlings of the lean communities. Even pathetic Delphi turns RIP 18 times – better than any of the four ‘lean’ examples I listed.
Comparisons can be dangerous because the cycle time of the factory, which is what RIP turns essentially measures, is driven by the nature of the product and the complexity of the manufacturing process, as well as the effectiveness of the manufacturing system. To compare Boeing’s measly 5 RIP turns to drug maker GlaxoSmithKlineSmith’s 5 RIP turns is a bit unfair. Boeing is making airplanes in 73 days, while GlaxoSmithKline is making pills and putting them in blister packs in the same amount of time. GlaxoSmithKline, by the way, along with fellow pharmaceutical maker Johnson & Johnson who can make a pill and package it in only 52 days , will be glad to explain the inner workings of their lean strategies at a big confab on Applying Lean Six Sigma Techniques to Optimize Productivity & Profitability next month.
GM and Ford are taking a ferocious beating because they happen to be in the same business as Toyota. If Toyota were making faucets and windows, it would be Masco in junk bond status, or if they were making motorcycles, it would be Harley-Davidson feeling the pain.
Cycle time is not the only measure of lean manufacturing, just the most important one. The quality of the product coming out the end of the process, and the cost along the way are the other key ingredients. By all quality measures, Toyota beats Ford and GM by anywhere from 10-30%, depending on which of the controversial measures you want to use. According to the Harbour Report out today, it takes Toyota 29 labor hours to make a car, while it takes GM 33 hours and Ford 36.
It is not a coincidence that Toyota has the lowest cost, best quality and the shortest cycle time. Before Six Sigma was hijacked by people wearing multi-colored belts launching projects – back when it was originally conceived at Motorola – the driving principle was that "The best quality producer will be the shortest cycle time producer, and the shortest cycle time producer is always the best cost producer." Or, as Taichi Ohno put it, "All we are doing is looking at the time line, from the moment the customer gives us an order to the point when we collect the cash. And we are reducing the time line by reducing the non-value adding wastes."
That cycle time compression is the driving force of lean cannot be denied. And there is no way that a company can take a month or more to make wire cables, kitchen cabinets or airplane parts and profess to have mastered the principle of cycle time compression. The numbers speak for themselves. There is no doubt the companies I have cited are doing many things well, and that they are sincere in their belief that they are ‘lean’. But there is also little doubt that none of them have yet been able to wrap their minds around the fact that lean manufacturing is a fundamentally different economic model. It is managing and executing manufacturing at an entirely new level – not just getting very good at the old level. What they have done is used lean tools and techniques to wring the most they can out of the old management paradigm. They have yet to break out of that paradigm into the thought world where Toyota lives.
Ford and GM are trying hard to push through that last barrier and enter the realm of Toyota. Wall Street, the UAW and almost 100 years of entrenched management thinking are pushing back at them hard. Be certain, however, that the manufacturing management at Ford and GM, with all of their failings and foibles, is out-manufacturing, out-managing, and out-performing just about any company you will hear boasting of their lean prowess at some lean conference.
Cycle time compression is a tough sell in the U.S. and Europe. Cycle time and inventory are synonyms. Toyota says inventory is waste, which means excess cycle time is waste, which drives them to 45 RIP turns, which drives out labor, defects and facility costs. But inventory is not waste in the Western financial world – it is an asset – which means excess cycle time is not a problem. So we simply minimized it in our lean equation. It is like a 300 pound guy memorizing all the Richard Simmons sayings and religiously ‘Sweatin’ to the Oldies’ every morning, but still ordering pizza every night and topping it off with a slab of chocolate cake and a quart of ice cream – never giving a thought to his weight or to stepping on a scale. What would be the point? I guess he is better off than he would have been had never sweated to anything, but he will never reach the brass ring.
We have inundated our managers with philosophy and techniques, but missed the fundamental point of lean manufacturing. The first part of the old Motorola mantra – "The shortest cycle time producer is always the best cost producer" – conflicted with our financial beliefs, so we simply dropped it. The Six Sigma folks are out running wild with remaining pieces of the principle – ‘the best quality producer should somehow be the best cost producer.’ but they can’t prove it and they are stymied by the fact that their efforts have a hard time showing up on the bottom line. Without the cycle time element the financial model in which they work has blinded them.
Perfect quality by itself does not really add much to the bottom line. What perfect quality does – getting to the point that no one has to be concerned about defects – is that it enables all of the inspectors and reworkers to be eliminated, and all of the buffer inventories to be wiped out, floor space and material handling can be reduced, and parts can begin moving freely throughout the plant at a radically lower cycle time – like 45 RIP turns. That’s when quality pays off. If a plant has a 2% defect rate, an army of black belts cutting that in half, but not converting it into cycle time improvement, or more appropriately, a plant that does not deploy its black belts to the areas of greatest cycle time improvement opportunity, is not going to see much benefit.
The bottom line to all of this: I suppose a plant can achieve a high level of RIP turns without being lean, but there is no way for a plant or a company to be lean if they are not driving to and achieving a high level of RIP turns. The benchmark metric most critical to lean manufacturing – RIP turns, or cycle time – is the one least emphasized in the lean literature. To most of the companies out there proclaiming their leanness, unless you are putting up some radically better RIP turns numbers than you used to, you need to find a new book, a new consultant, go back to school. You’ve got more work to do.
And I think I’ll skip the big pharmaceutical manufacturing conference where those who have achieved ‘leanness’ are going to explain how they can make and pack a pill in only two months.
Srini says
All the examples that you had quoted are Discrete manufacturers that are operating in a fairly “unregulated” environments. They dont have to bother about the extra paperwork of batch records and a double confirmation for each and every transaction.
I would hazard a guess that a great of the “waste” in a pharma company would be to comply to regulations. Is that a fair assumption? Would love to hear your thoughts on this.
Micheal Gardner says
Bill, please let us know the source of your inventory turns data. I am not questioning it, but I wonder what the reporting parameters were. If you look at inventory levels of finished vehicles in the system, including dealer lots and distribution centers, many Ford and GM models have 180 days inventory on average. The inventory data is available in Automotive News on a regular basis. How do we reconcile the disparate information? Are GM and Ford measuring cycle time only until the finished vehicle goes out the factory door? Shouldn’t they measure it until the item is sold?
Another reason I ask is that there is a new piece of lean folklore making the rounds that says Toyota US is only averaging about 12 turns per year now because they are sourcing so many components from overseas. This is one of those pieces of popular wisdom that never seems to be proven, but is often quoted as true.
Josef Horber says
Bill, You write “Cycle time is not the only measure of lean manufacturing, just the most important one.” You are right. However, “lean manufacturing” should not be the goal of the company. Making profit should be the goal. And as Mr. Ohno said, Profit = Price – Costs. Lean manufacturing is the most powerful enabler of that goal. But only, if You treat it in a broad context… actually You have to delete the word “manufacturing” from it.
The ecuation includes all “Costs”, not just the manufacturing or material handling costs only.
Making materials flow faster and shortening their leadtime will reduce Your costs. However, if this great achievement is assisted by an uncountable hord of general management and administration staff, coordinating each other back and forward they will always contribute to closing the gap between the Total Price and the Total Costs in the Ohno ecuation.
Elimination of waste, one-piece-flow and short cycle times should be applied to all non-manufacturing functions as well. I guess, that´s where Ford & GM (and Volkswagen & DaimlerChrysler) fail and loose money, despite of their splendid turns.
And outsourcing the manufacturing of all components to hundreds of suppliers and limiting Yourself to put them together and fasten some bolts makes it of course easy to achieve high turns…. but it does not reflect the whole picture.
Best Regards,
Josef
Bill Waddell says
Michael:
All of the inventory data came from the companies’ most recent annual reports, rather than any industry data. One of the reasons for using RIP rather than total inventory turns is that these companies – especially the auto companies – all have different distribution models that can skew the total inventory data. Sometimes there is a good reason for even a lean company to have a substantial amount of finished goods inventory on the books, and sometimes not. Hence my statement, “I suppose a plant can achieve a high level of RIP turns without being lean, but there is no way for a plant or a company to be lean if they are not driving to and achieving a high level of RIP turns.”
At any rate, the annual reports of these companies (the 10Q filings) breaks inventory down into Raw/Purchased, Work In Process and Finished Goods. In the case of the auto companies, the data is also segregated by automotive operations and other operations.
Actually the overall Toyota figure was closer to 14, which is not very impressive, but with 45 RIP turns and 14 total turns, the issue is clearly in finished goods and has nothing to do with components. Toyota does have a very biased sourcing scheme toward Japanese owned companies, but that does not mean they take ownership of the components in Japan. Their larger Japanese suppliers own plants in the U.S., and Toyota forces smaller Japanese supliers through American distributors whose sole reason for existance is to hold Japanese owned components and deliver them to Toyota on a JIT basis.
Toyota holds quite a bit of finished goods inventory because they still make most of their cars in Japan. While their U.S. market is more and more served by their U.S. plants, globally, if you buy a Toyota outside of Japan, the odds are it was made in Japan. At any point in time, Toyota has an awful lot of inventory on the water on its way to just about everywhere in the world. This is especially true in Europe. If you buy a GM or Ford product in Europe, the chances are that it was made in Europe. If you buy a Toyota, the chances are much greater that it was made in Japan.
The other note regarding the inventory data concerns Boeing. Their inventory is actually much greater than the numbers stated in their SEC filings, and the RIP turns figure I used is overstated. They have quite a bit of physical inventory that is owned by their customers – especially the US government (Dept of Defense). It is common practice in aerospace and defense for customers to make progress payments – in effect buying the inventory before the product is completed.
Srini, I am sure you are right – there is a great deal of government imposed waste on the pharmaceutical companies, and they have to execute lot control and fill out a lot of forms. However, it reminds me of a time I was watching one of my sons little league baseball teams lose by a score of 20+ to 2. Late in the game, my son’s coach stormed out onto the field to argue with the umpire over a questionable call. The umpire told the coach, “Even if I am the worst umpire in basball, I am still the least of your problems coach.”
Even if the crush of FDA paperwork slows the pharmas down by a week, their cycle times are still an embarrassment. They also should not assume they are alone. Boeing and Esterline are defense contractors with a pretty hefty paperwork burden of their own. Even the auto companies, thanks mostly to the American Bar Association, have a great deal of lot control and item number control in their processes. You will recall the first World Trade Center bombing when they tracked the truck that carried the bomb to the rental company just by following the paper trail from the serial number of the axle they found in the rubble.
Actually this post began with the intention of writing something positive about the lean and six sigma initiatives in the pharmaceutical indutry. They make so much noise about their lean committment that I assumed there must be something positive to say. As I dug into them for details to write up, I found nothing but a mess.
The common thread in both of your comments is the old school American manufacturing rationalization for failure. (Athough I am not suggesting that either of you are looking for excuses for failure. I know quite the opposite is true.) The auto industry tries to drag Toyota down to their level, rather than rising to Toyota’s level, with misleading figures like the 12 inventory turns. If the world can be convinced that lean at Toyota is a myth, then the auto industry can duck responsibility for its manufacturing weaknesses. Likewise with the pharmas. Government regulations may be 10% of the explanation for their miserable factory throughput and excessive production costs, but if the spotlight can be kept on that issue, no one will notice the other 90% that is attributable to poor management.
rd says
Caution must also be taken when looking at any raw/purchased inventory figures. Consignment inventory gives the impression that on hands are low and turns are high yet the total value stream inventory is unchanged. I am not saying this is the case in your examples but one must look closely to determine reality.
Micheal Gardner says
Thanks Bill. At my company, we watch the auto OEMs’ inventory levels closely as an indicator of how our customers and our customers’ competitors are doing. Even though GM has technically sold a vehicle once it hits the dealer lot, I think those numbers are included in the inventory levels along with the acres of unsold vehicles sitting in the marshalling yards. For example, when I see 180 days of Chevy Silverados and 18 days of Honda Ridgelines in the reports, I can make a pretty good guess who is running lean and profitable and who is just putting out the iron in plants that should be closed already. Maybe some like to try to bring Toyota and Honda down in order to make other companies look better, but I don’t think of it like that. I was just trying to get a handle on the origin of a story that has been getting some distribution without any proof.
The supplier-owned raw material inventory system (Dell, Wal-Mart, Toyota) has merit–provided there is close cooperation between the supplier and customer so both prosper from the arrangement. The customer can’t be saddled with the costs of storing, insuring, moving, counting, and otherwise administering the inventory that is “owned” by the supplier and the supplier can’t be burdened with a customer who does not do everything in their power to sell that inventory quickly.
Bill Waddell says
Agreed, RD, although I don’t think consignment inventory is a major part of any of these companies production schemes.
Again, the important point is:
“a plant can achieve a high level of RIP turns without being lean, but there is no way for a plant or a company to be lean if they are not driving to and achieving a high level of RIP turns”
A company can achieve high RIP turns by holding a lot of consignment inventory, or by blowing a lot of unneeded production through the plant into finished goods where it might sit as waste (Ford, Delphi and GM might be guilty of some of this), and by any number of other very non-lean methods. Having high RIP turns is not proof by itself of lean manufacturing.
However, NOT having high RIP turns IS proof in and of itself of a company’s failure to become lean.
rd says
You are absolutely right.Coming from the automotive world my favorite method was the warehouses located across the street from the plants that shipped suppliers material several times a day (just in time)Ha… The plant could maintain low inventory therefore high turns but the inventory remained in the value stream. Looked lean as opposed to being lean. At least the plants with high inventory and low turns were not trying to fool themselves. The chances are they can still take the step to implement lean because they haven’t convinced themslves that it has already been done. Enjoy your blog… keep it up.
Mark Jaeger says
I’m reminded that Toyota concentrates on takt time, not just cycle time. Takt time fits downstream pull; Toyota sees cycle time differently.
Bill Waddell says
Mark,
Altough a lot of people use different and confusing definitions, when I use the term ‘cycle time’, I mean the time it takes a unit of material to arrive at the plant in its purchased state to the time it leaves the plant in the form of, or embedded in, a finished product.
With that definition, takt time is the regulator that assures minimal cycle time through the production process.