Performance by Kevin McManus
Industrial Engineer’s monthly column about performance improvement (November 2012)
The real lean upside
One way to shoot me off on a lengthy rant is to bring up the subject of lean Six Sigma. Although I support implementing systems that mirror the Toyota Production System and strive for low variation and error-free work, we have compromised the design of our lean improvement approaches just as we have undercut the systemic differences that allowed Six Sigma methodologies to work so well for companies like Allied Signal, GE and Motorola.
How is lean viewed in your organization? Would your customers even notice your touted levels of lean success? Unfortunately, my take is that people essentially view, and often use, lean to reduce headcount, not to increase customer value and grow revenue. After all, you can cut costs to the bone, pass defects on to the customer, and not lose any significant business, right?
We should view lean Six Sigma practices more as a means to grow business and generate much more revenue. This is the real upside of lean, an often-forgotten benefit that should be promoted more actively.
James Womack tried to present both sides of lean – reduce waste and increase customer value – but many seem to have read only the waste reduction portion. Worse, many organizations limit their waste reduction focus to direct labor. Indirect labor waste, material waste and especially overhead costs have been ignored.
I was lucky. At my last “one company” job, I saw the power of the real lean upside. Because I had worked mostly in cost centers with little sales force contact, I had been exposed only to the bottom-line impact of expense-focused improvements. Profit margin shifts, however, are driven by growing revenue and reducing costs, so it is key to recognize the power of using lean to create agile work processes that can respond rapidly to customer needs.
My flavored syrup company produced 33 percent to inventory, so 67 percent of our daily work was made to order. I was amazed at how closely lean techniques and success in meeting shifting customer needs were related. Had we not employed a variety of lean techniques, we would not have doubled our annual revenue over three years without doubling our workforce. We grew because we consistently achieved our main daily goals – no late orders, no incorrect orders and optimized finished goods inventory levels. Notice what is missing – reducing headcount and labor costs.
Within three years, the plant went from one or two changeovers a week to often performing two changeovers a day. Lean methodologies helped us reduce average changeover times and the variation associated with changeover and process recovery cycle times, making our work systems more predictable. The cost of added changeovers was evident, but so was the salesperson’s delight and the extra revenue that came from our ability to accommodate a last-second customer change request.
My boss recognized the value of focusing on the customer and growing the business versus cutting labor costs. He knew that as we got better at meeting shifting expectations, customers were going to expect more, making it even harder to control or drive down direct labor costs. It did not matter because he saw that growing the business would absorb more fixed costs and increase profit margins. The main drive for applying IE strategies should be growing the business and the profit margin. We sell ourselves very short if we view industrial engineering as only a means for reducing costs.
It bothers me when I see major retailers reduce headcount and increase customer wait times at checkout counters. They save money but lose customers, making for smaller profit margins. Worse, such practices reflect an illogical line of thinking – defects can be passed on to the customer without consequences.
Kevin McManus is a performance improvement coach based in Rainier, Ore., and a 28-year member of IIE. He has written workbooks about personal and team effectiveness. McManus is an alumni examiner for the Malcolm Baldrige National Quality Award. Reach him at kevin@greatsystems.com.