Impact of Running Lean Series Part 2; Who is Actually Running Lean?

Continuing from our first part in the lean series, we pick up today with who is really running lean? A few years ago, AMR Research did a study of the companies that proclaim lean.  What they found was honestly no surprise:  85% of the companies that proclaim lean are really just “doing” lean. Just 15% of those companies are truly “running” lean.  The main difference is that in those companies that run lean, they are realizing and utilizing the entire scope of benefits that lean brings, such as shorter lead times, lower inventories, lower costs, better customer service levels, etc.   In stark contrast, companies only doing lean reveal efforts to achieve all of these objectives, but they still appear to be hampered by some invisible force.

For example, you may have worked on great projects that have delivered benefits at the project level, but the project just completely failed to translate to the company bottom line, where it really counts.  Something is missing or is interrupting the process, thus keeping the company from running lean. The ideas and concepts of lean are there, but something is missing in the implementation of lean.

If Ohno’s realization that the concepts of Lean are fairly generic and can apply to any business, then why have eighty-five percent of the companies struggled so much with Lean? I have a few ideas that might shed some light on this issue.

In visiting companies all over the world who have tried to implement some type of lean, I’ve witnessed two common principles used that are in direct opposition to what lean really is. One is cost improvement, and the second is productivity and utilization.

1. Lean is not a cost improvement technique. Lean delivers cost improvements, but the goal of lean is the creation of flow through connecting every supplier to every customer and eliminating as much waste and inconsistencies as possible, as well as eliminating anything that would hinder flow.  Ohno did not reduce scrap or rework to save money but to maintain flow; he did not reduce the space in between areas to limit the amount of inventory that could be held but to limit travel between areas, therefore reducing transportation waste.  The primary intention was to limit the amount of inventory that could be produced (this is known as over-production). The benefits of all three of these will impact costs on some level, but that is not the primary goal.

2. The mythical concept that productivity and utilization are important.  This would be true if 75% of the cost to deliver a finished good to the customer was made up of labor costs.  Unfortunately, this is not the case:   labor will typically represent less than 15% of the total cost of the product.  In an effort to be more productive we procure the most expensive portion of the product, then add value to it and convert it to inventory, where it will sit until a customer purchases that material.  Meanwhile, new orders come in for products that we need and we have just used the raw material on something we do not need. What do we do now?  Buy more of the most expensive portion of the product.  Now don’t mistake this as me saying productivity is not important:  keep in mind the 8^th waste of lean is Talent.  We want to ensure that we utilize the talent in the right place at the right time in order to maximize skillsets.  By focusing on productivity ask yourself this question: are we really wasting talent by giving them “busy work”? In the grand scheme of things, a few minutes of idle time will not have a tremendous impact on the overall cost if the result were a lower inventory position.

In reality, both of these business practices are driven by the root cause of cost-based accounting.  Everything is evaluated based on cost efficiency.  The focus should be on flow and waste reduction, not on simply cost. Please do not take this as saying we do not care about cost, on the contrary one of the five principles of lean is to profitably service the customer, keyword being profit.

Check back with us in two weeks for the conclusion of our series running lean, where we will discuss how to truly measure the impact and the three critical metrics that everyone should follow to understand how to profitably respond to change.

Read Part 3 of this Running Lean series.