Danaher’s Low Profile Lean Excellence

The February 19th issue of BusinessWeek has a very nice article on Danaher.  Regular readers know that we often cite that company as an example of real lean manufacturing and lean enterprise excellence.  In fact, a quick search shows we’ve mentioned Danaher about thirty times.

In an age where many U.S. industrial companies believe they have to follow the outsourcing lemmings overseas in order to keep costs down, Danaher leverages lean to be very competitive from U.S.-based factories in typically lower-margin industries.

It owns such a mundane and sprawling portfolio of sleepy, underloved industrial businesses–companies that make dental surgery implements, multimeters, drill chucks, servomotors, and wrenches, just to name a few–that it seems deliberately assembled to be as unsexy as possible.

And the results show the impact of lean.

In 2006, Danaher posted revenues of nearly $10 billion and net profit margins of 16%, truly astounding for a company still in such Old Economy businesses as heavy-truck braking systems and hand tools. Its return on invested capital is 15%, way ahead of its industrial peer group, which is near 9%.  Over 20 years, it has returned a remarkable 25% to shareholders annually, far better than GE (16%), Berkshire Hathaway (21%), or the Standard & Poor’s 500-stock index (12%).

Danaher is probably second only to Toyota in terms of large company performance due to a real lean.  But Danaher’s growth model is significantly different than Toyota’s, thereby in some respects requiring an even more disciplined implementation of lean: they manage a portfolio of more than 600 subsidiary acquisitions.  How do they do that?

Danaher is a prolific acquirer, averaging about a deal per month. These conglomerateurs have built their portfolio not by buying undervalued companies and holding them but by imposing on them the "Danaher Business System."  DBS, as it’s called, is a set of management tools borrowed liberally from the famed Toyota Production System.  Before a deal, Danaher executives tour plants and search for ways to improve performance. They estimate how wide an acquisition target’s profit margins could get, given the Danaher treatment. "That allowed us sometimes to bid more on an acquisition because we knew we’d get that value back," says Mark C. DeLuzio, president of Lean Horizons Consulting, who used to spearhead Danaher’s DBS team.

While many companies believe it is best to try to not change the culture of an acquired company, Danaher intentionally starts to do it even before the deal is complete. 

Even before a deal is done, the DBS team, made up of managers throughout the company steeped in training, works with the acquisition target to inject a heavy dose of Danaher DNA. For employees at the newly acquired companies, it can be a jarring experience. It wouldn’t be at all unusual for a Danaher manager clutching a clipboard, a tape measure, and a stopwatch, in a search for wasted motion, to tick off how many steps a data analyst has to take to get to the copier.

But although traumatic, the results become evident.

When it bought Fluke in 1998, margins were 8%, much too thin for Danaher. As part of the team that managed the acquisition, Culp sought to boost that number to 20%. Many employees at Fluke, which had an engineer-centric culture where most good ideas got funding, said that couldn’t be done without hurting quality and innovation. But under Culp, Fluke narrowed its product focus, sped up inventory turns, and reduced floor space. Now, margins in that segment are 21.5%.

New employees and especially managers, both internal and from acquired companies, receive heavy hands-on training with lean methods.

New managers are often sent to Japan, where they soak up the attitude of kaizen, or continuous improvement. In fact, [CEO] Culp himself, fresh from Harvard Business School, started his tenure in 1990 at Danaher’s Veeder-Root Co. unit by spending a week in Japan building air conditioners in a lean manufacturing plant.

BusinessWeek gives a fairly good description of lean.

In essence, it requires every employee, from the janitor to the president, to find ways every day to improve the way work gets done.  The process breaks from the traditional "batch-and-queue" manufacturing system, in which big lots of product are assembled in discrete steps. In a lean environment, a company moves a smaller flow of items through production. Wasteful steps are easier to spot. And if a mistake creeps into the process, it won’t affect a huge amount of inventory and can be fixed quickly.  In a typical Danaher factory, floors are covered with strips of tape indicating where everything should be, from the biggest machine to the humblest trash can. Managers determine the most efficient place for everything, so a worker won’t have to walk an extra few yards to pick up a tool, for instance. 

The impact of lean extends all the way to corporate management and how they try to learn even when successful… similar to the presumption of imperfection at Toyota.

The lean attitude permeates the culture at Danaher–only 40 people work in the Washington corporate headquarters, at a company of 40,000.  "There are a lot of companies where if you win 10-9, nobody wants to talk about the nine runs [they] just gave up," Culp says. "We’ll celebrate the win, but we’ll talk about ‘How did we give up nine runs? Why didn’t we score 12?’"

Could you run a company that size with 600 subsidiaries with only 40 people?  That wouldn’t even cover the cost accounting staff at a typical $10 billion company.  Too bad the government agencies that surround Danaher’s headquarters aren’t learning something from them as well.

I know and have a lot of respect for two of the guys quoted in the article.  Mark DeLuzio, the original architect of the Danaher Business System and currently president of Lean Horizons Consulting, is a long-time supporter of Superfactory and we’re working together on a couple projects.  In fact just this month Superfactory has an article on Lean Supply Chains written by Robert Hawkey of Lean Horizons.  George Koenigsaecker, who now runs a private equity firm and is a principle at Simpler Consulting, is a fellow AME board member. 

Take a few minutes to read the BusinessWeek article.  You’ll understand why we talk about them so often.

[UPDATE:  Great minds think alike, or at least subscribe to the same magazines.  Our friend Mark at the Lean Blog has a similar excellent analysis of the article.]