I am rarely the first lean consultant my clients hire. I do, however, expect to be the last one they hire. I typically work with companies that have been at lean for a number of years but are frustrated by a lack of results. The big question I get is why they can't see the cost savings they know they have made through their various kaizen, Six Sigma and rapid improvement events.
The first question I ask is whether they have laid anyone off. When the answer comes back 'no' I tell them the most likely reason for not seeing any cost savings is that they haven't really saved any money. This typically comes as a shock to people – especially their lean coordinators and others who have put a lot of time and effort into eliminating waste and have the metrics to prove it.
The problem is that lean is not a cost reduction strategy. Properly applied, lean principles will not reduce spending much at all. Lean is aimed at enhancing the top line – sales – not the total spending line.
The problem with this approach is that most of the costs boil down to payroll. You can use the lean tools to eliminate the need for material handling, quality inspection and dealing with quality problems, or the waste of administrative paperwork, data entry and other non-value adding tasks. But if you don't lay off the people doing those tasks, you haven't really reduced costs -just moved them somewhere else. Oh you can in-source some work, reduce utility costs and normal employee attrition will lower the waters somewhat, but these are usually nickels and dimes. Of course, if you do lay the people off, you aren't really lean, are you? You're not going to get the benefit of your most powerful resource when you use lean techniques as a headcount chopping tool.
The goal is not to reduce spending – since to do so means sacking valuable people – but to convert people's time and effort from wasteful activities to value adding ones – activities customers will pay for.
When people are kept on the payroll, and converted from performing wasteful tasks to value adding ones, that means you:
1. Have additional capacity – the ability to produce more product with the same cost base
or
2. Are able to build more value into each product you sell for the same cost – which means you can charge higher prices since you are delivering superior value.
Eiether way – growing the number of items you sell with the use of the 'free' capacity, or commanding higher prices as a result of providing superior products as a result of the great value add per product – the results of your lean efforts are going to show up on the top line – sales.
Of course, if the sales folks and accounting are not part of the plan they won't know how to identify and price the thing and turn the conversion of waste to value into sales growth.
At any rate, don't look for lean to do much for your bottom line if you don't have a plan in place to have it first help your top line.
leansimulations says
Excellent post. We know lean doesn’t always hit the bottom line, especially with traditional accounting methods, but your two graphs are great illustrations as to why… and how to leverage lean into the top line. Thanks.
Matt Wrye says
It is amazing how many people don’t see it as a growth or a top line strategy. Very nicely put.
Bill Waddell says
Matt,
Thanks for the comment.
I believe the problem is that manufacturing and sales are disconnected in most companies.
Sales goes their way and sells as much of they can of whatever they can to whoever they can. Manufacturing, however, has nothing to do with that. Their role is to make whatever is sold, and to continually focus on reducing the costs of the products.
Since lean is perceived to be a ‘manufacturing thing’ it is assumed to be a cost reduction device, since that is what manufacturing is supposed to do.
Standard cost accounting merely re-enforces this disconnected mess.
The trick is to have both manufacturing, sales and accounting integrated into a business strategy, then lean can become a growth engine with manufacturing and sales working to a common objective, instead of lean being simply a weak cost reduction approach.
JM says
Bill,
I think your last point is the best one that summarizes it all.
Perhaps said another way (correct me if I am wrong) is that Lean can improve profitability (better returns on the business) as the business grows by lowering the cost per unit. As production goes up, costs stay the same or increase at a lower rate than production.
Lean also increases top-line revenue by improving the quality of the product/service and thus increasing sales.
The first is easier to measure than the second one.
Bill Waddell says
Well put Jason. I should ask you to edit all of my posts :)
JM says
“Of course, if you do lay the people off, you aren’t really lean, are you?”
No, you are Six Sigma. ;)
Bill Waddell says
Good point Jason … that might explain why 6S is the tool of choice for the big time headcount slashers.
Mark Welch says
This post should be required reading for any organization wanting to adopt lean thinking, especially its leadership. CFOs in particular.
Mark Graban says
Lean is also very effective as a growth strategy in healthcare.
With an aging population, we will have increased demand and a newly retired decreased supply of healthcare providers.
Productivity is an imperative, not a cost-cutting exercise.
Of course, it’s hard to reconcile that with the non-lean thinking hospitals that are trying the old worn old layoffs card to try to manage costs. Short-term thinking that fixes nothing long-term.
Ken Settsu says
Thank you, thank you, thank you. Spot on article and follow-up comments!
Bill Waddell says
Thanks Ken … and Go Navy!
LELAND JORDAN says
IF THE COMPANY DOES NOT HAVE A PLAN AND STRATEGY THAT INTEGRATES MANUFACTURING WITH MARKETING, INCLUDING SALES, IT IS IN TROUBLE TO START WITH. THE BUDGET REVIEW SHOULD INCLUDE PRODUCTIVITY DATA FROM EACH FUNCTION AND EXPLICITLY CONSIDER SHIFTING RESOURCES, OR REDUCING THEM, WHATEVER MANAGEMENT ACTIONS HAVE YIELDED PRODUCTIVITY INCREASES.
SIMPLY INCREASING PRODUCTION CANNOT BE THE ANSWER, UNLESS SALES CAN BE INCREASED. EVEN THOUGH WE EXPECT IMPROVED QUALITY AND PRODUCTION COST DECLINES, THE FEASIBILITY OF SALES CANNOT BE ASSUMED WITHOUT ANALYSIS AND, POTENTIALLY, LOGISTIC OR MARKETING CHANGES.
Bill Waddell says
Dr. Jordan,
Thanks for the comment. I agree with you in the broadest sense, but I would suggest that the starting point is the sales strategy relative to capacity regardless of other considerations … “we want to have X share of this market and Y share of that market, and in order to do so we need to set prices at $N … doing so will generate volumes of Z” Management must assess and refine that to assure that the sales strategy will result in appropriate capacity utilization – say 85% or so. It is foolish to embark on a sales strategy that will oversell or undersell available capacity.
The objective is to drive the company to its ‘sweet spot’ at which fixed costs (and lean thinking is that everything except direct materials and a very few other costs are fixed) are fully leveraged.
The objectives when deploying lean tools and techniques on the factory floor and throughout the supply chain are to (1) drive out any and all non-value adding expenses in order to continually improve profitability at the resultant price/volume levels; and (2) continually expand the output capacity of resources in order to enable sales to continually increase volumes across the cost base.
This is really the embodiment of the Toyota principle that the core business equation is [Price – Profit = Cost] as opposed to the traditional view that [Cost + Profit = Price]. It is also the essence of a principle called ‘Factory First’ that essentially says the goal of the business is to optimize the massive set factory cost base, rather than to expect it to be dragged up the mountains and down into the valleys as sales volumes fluctuate all over the place. The sales strategy and pricing are aimed at optimizing that giant cost base.
I don’t know that this is much different from your view. In any event, you are absolutely correct in saying that this is a business endeavor, and hardly something lean manufacturing people can go off and do in a vacuum and expect the rest of the business to somehow divine from the fruits of their efforts.
Bill
David Hallsted says
Can you not do both the lean cost reduction with the reduction of your temporary employees and lean value enhancement by committing to train up your permanent employees? The books I read for my bronze certification say that it is possible, or is that just one way of fooling yourself into thinking that you are doing lean.
Bill Waddell says
David,
What they told you in your certification class is not wrong, so much as incomplete. I should have been more expansive when I wrote “Oh you can in-source some work, reduce utility costs and normal employee attrition will lower the waters somewhat, but these are usually nickels and dimes.” You can reduce costs when you get rid of the temps, but you soon run out of temps to can and then what do you do?
Of course the question can be asked why you have the temps in the first place. More often than not the use of temps is just to have a class of people exempt from leadership’s obligation to treat people with respect.
Bill Waddell
José Gramdi says
When Lean meets (finally) TOC, evolving from cost killing to value added!
David Hallsted says
Bill,
If I had to guess, a company that uses temporary employees does not know their own business. They are clueless on their direction and have yet to look at their processes. The solution for those batch & queue company is to throw manpower at the problem until it goes away. The work around suffices the need but the problem is never fixed, thus it resurfaces again. It is an endless cycle of firefighting that does not improve your employees or product/service. You never achieve stability, thus you never get better.
Thanks for making me look at that the use of temps in a business.
I am curious, what is your view on temporary employees?
David