by Art Byrne
To become lean, you must change everything in your business. Because lean practice embodies the exact opposite of the traditional batch approach to running your business (manufacturing or non-manufacturing), you will be forced to adopt a completely different philosophy and way of seeing—and doing—business.
Let me illustrate by comparing the four lean fundamentals to the way a batch company thinks.
LEAN FUNDAMENTAL 1
Work To Takt Time: Produce at the rate of customer demand. Sell one, make one.
Batch Thinking: Produce to a forecast in big batches to lower costs. Sell one make
10,000
LEAN FUNDAMENTAL 2
One Piece Flow: Line up processes/equipment so product is made in sequential
steps.
Batch Thinking: Arrange equipment into functional departments to optimize operator
efficiency.
LEAN FUNDAMENTAL 3
Standard Work: Establish standard work sequence and time so everyone doing a job
does it the same way. Creates the basis for improvement.
Batch Thinking: Focus on making a daily number without regard for how the work
gets done.
LEAN FUNDAMENTAL 4
Pull System: Work is pulled through the processes based on customer demand.
Batch Thinking: Work is pushed through the processes based on a forecast.
None of the lean fundamentals pictured above makes any sense for the traditionally run batch company. In fact, traditional companies who organize work into functional departments (based on types of equipment for manufacturing companies or by specialized skill set for non-manufacturing companies) find that implementing any of the lean fundamentals is an impossible task—even if they want to pursue them. That’s a huge reason why it is far easier for traditionally run companies to just see lean as some cost reduction program that can be added to their top ten strategic priorities.
This reductive view relegates lean almost exclusively to the shop floor while everyone else continues merrily down the batch path. It’s why telling a CEO that to become lean everything must change is invariably a showstopper. The thought of changing everything is too big to comprehend and prompts immediate rejection.
Viewing lean as simply a way to cut costs is a far stretch from the full promise of this system. Lean enterprise was adapted from the Toyota Production System and unfortunately became known as Lean Manufacturing, a label that came to be thought of as a short-term cost reduction program. Failing to see the full promise of this superior business approach explains why most companies that start down the lean path don’t get too far and eventually revert to their more comfortable batch ways.
I’ve learned from experience that for companies to benefit from lean they must embrace it completely, establishing this dramatically new approach to everything they do. These changes start with the first lean fundamental of working to takt time, which expresses the lean ideal of “sell one make one” — a marked contrast from the traditional batch company comfortable with the idea of “sell one -make 10,000.”
These changes extend to how companies coordinate production across the enterprise. While a traditional batch company allows different functions to operate fairly independently from one another, following the lean fundamentals forces the alignment of the entire organization. The pull system, for example, connects the entire value stream from customer, to factory, to raw material suppliers and their suppliers. Any one step that is not aligned causes the whole system to collapse.
Let’s get more specific and talk about how everything must change.
Shop Floor, or Gemba
Gemba is a Japanese word that refers to the place where actual work takes place. And it is here that the conflict between push and pull really stands out. While a traditional batch company can create one-piece flow cells, and even standard work, that deliver some gains, you will still miss out on the true promise of a lean transformation because you will continue scheduling production using your MRP system based on a forecast. This will force you to produce in batches, while carrying excess inventories, and suffering longer lead times. And every wrong forecast runs the risk of your writing off excess inventory.
I help companies launch their lean turnaround by creating flow, which begins with reducing setup times and creating distinct value streams. As you introduce pull from your customers to run the shop floor, the parts of the shop that have been converted will run on pull, while the remaining ones will continue to be driven by the MRP push signals. This confusing way to operate will force you to get everything in a flow as soon as possible. Setup reduction is a simple example here. If I cut setup from three hours to ten minutes but my MRP system continues to schedule production based on three hours, what gain did I really get?
Sales and Marketing
The lean sales force must be aligned with the one-piece flow production approach. If you are trying to level load production, then the last thing you want is for the sales force to hunt for large batch orders and offer volume discounts to get them. At Wiremold we found that our sales terms were forcing 50% of our shipments into the last week of the month. This made level loading impossible and was bad for our customers as well. We changed the sales terms, so our customers paid us twice per month and this helped to level out our incoming orders.
Even so our distributor customers were still ordering in batches of 3-4months. To level this we had our salesforce ask customers to just tell us what they sold every day. We would treat this as an order and put it on their weekly delivery truck. This not only helped us to level out the incoming orders, but it allowed our distributors to cut their Wiremold inventory from 3-4 months to 3-4 weeks, freeing up cash and space for them. A win-win due to lean.
The key point here is that a sales force can always overwhelm the shopfloor if they are not in alignment. One of our batch competitors at Wiremold learned this the hard way. They started out with the sales force guaranteeing customers that a certain array of their products would always be in stock or they would pay a penalty. The factory could not keep up and the penalties got so large they had to discontinue the program. Next, they gave a big discount and 180 day sales terms for full truck load orders of a single product. At the end of the 180 days they would extend the terms another 180 days if the distributor requested. They eventually got in trouble with the SEC for booking orders that were really just consignment.
Finance
Most traditionally run manufacturing companies use standard cost absorption accounting. This creates financial statements with so many “variances” that they can’t be understood by humans. These statements provide terrible information for decision-making and incentivize everything we are trying to get rid of with lean. This is especially true with inventory, where building excess inventory under absorption can make your short-term earnings look better, while lowering inventory will make them look worse. Excess inventory is in fact the number one waste under lean thinking, so as you reduce it the CFO goes crazy and tries to stop this lean nonsense.
Switching to lean accounting will give you much better information on which to make decisions as well as support the lean transformation. This change should occur early in your lean journey, or you will be constantly fighting with the finance department about whether this lean stuff makes sense.
Product development
Traditionally run companies have a hard time here. They throw new products over the wall and hope manufacturing can make them at the lastminute. They might still introduce some great new products, but over time you will find that 80% of their engineering time is spent fixing products they already introduced, and only 20% on new products.
At Wiremold we addressed this by introducing QFD (Quality Function Deployment) as our new product approach at the same time we started lean. This created teams of marketing, product engineering and manufacturing working together with our end user customers to introduce new products. This cut our new product development time by 75%, and, because of the customers input in the development process, assured us that our new products would be well received.
Human Resources and IT
To support lean our computer systems had to change significantly. We still used an MRP-based enterprise software system but did not use it to schedule the shop floor. Instead, we created a kanban system tied to incoming customer orders so that no production could be initiated without a kanban card. Human resources was busy testing for the type of individual that could work in a team-based lean system. They also created an annual employee survey, a reward system for employee ideas to cut waste and helped us go from 63 different shop floor job classifications (under the IBEW union) to the 6-7 that we actually needed.
SUMMARY
For the traditionally trained CEO the idea that “everything must change” to become lean makes no sense. As a result, you constantly see companies trying to implement lean just in operations while the rest of the company and all of its systems stay in a batch mode. They don’t understand that this will never work as it just pits one department against another. You cannot lower costs and level load production when sales is giving big discounts to get large batch orders.
You can’t do any of this stuff and expect to become a lean enterprise. Just implementing the four lean fundamentals shown above forces all departments into alignment. Not to mention that cutting lead times from 6-8weeks to 1-2 days, taking inventory turns from 3x to 20x, getting a 10x improvement in quality, reducing floor space by 40-50% and getting annual productivity gains close to 20% is pretty helpful too.
Art Byrne is the retired CEO of The Wiremold Company where his lean strategy increased enterprise value 2,467%, boosted sales from $100 million to $400 million, improved productivity by 162% and made dramatic gains in lead time and inventory turns.
He is also the best selling author of The Lean Turnaround and The Lean Turnaround Action Guide.