How to make a “Lean” Transformation work for you.

An article by James Raleigh BA CMC

www.raleighandassociates.com.

In Ireland we have witnessed the equivalent of the Tulip bubble in the property market between 2000 and 2008. There were very few commentators or business people willing to criticize the bubble as it inflated and the government, regulators, banks and the public assumed it would never burst. Unfortunately it did and it will take many years to deal with the consequences. Unlike Holland with its flower industry we have empty buildings and bank debt to show for the boom.

In a huge variety of businesses the current buzz word is “Lean” and many companies have  decided to transform themselves into “Lean organizations”. The Toyota Production System (TPS) has been envied and versions of it implemented over many years. There are very few stand out successes in the Western World where the system can be shown to have been fully implemented with enormous success. To take an existing large business and change its culture completely is a very tall order however every business can be improved by introduced the parts of the TPS that can be implemented in your company.

Honda one the original lean companies talk about Best Product, Best Profit, Best Position, Best Productivity. If they decide to work with a supplier they have a 13 week programme to transform that business. They focus on integration, collaboration, simplification, systems, behaviours, action as well as the elimination of waste. We need to learn from them that we are talking about a 13 week programme not two years. They also identify cost reductions from the exercise and expect their share immediately.  

Many businesses have embarked on a “Lean” journey which will transform the business at some future stage. The most common mistake is that the expectation is long term and there is no immediate improvement to the bottom line. Toyota or Honda expect immediate results when they include a supplier in their supply chain. If you decide to introduce a version of “Lean” into your business insist on profit improvement targets within three months and measure them.

“All we are doing is looking at the timeline from the customer gives us an order to the point when we collect cash. And we are reducing that timeline by removing the non-value added wastes”. Taiichi Ohno Founder of the TPS (1988). “Lean” is a process, a continuous journey with renewable goals which should bring into focus all aspects of the business from taking the order to receiving payment.

Most organizations in the West define “Lean” through its tools 5S’s, Kaizen, Value Stream Mapping. That has opened up a gap between Lean Implementation and Business Success. Art Smalley a veteran of Toyota  concluded that “There is a decided over-emphasis in the West on simply using the tools of TPS. More attention needs to be applied on solving systemic manufacturing problems that will generate business results.”

We forget that Toyota was a small company in the early days, competing with much larger established companies, and its challenge was to build quality cars sold at a cheaper price which Americans and Europeans wanted to buy. They needed a lower cost of production to compete and had no choice but to develop smaller and more flexible operations to deliver that cost despite low volumes. The Toyota Managers focus on finding solutions that lead to business results. They may apply countermeasures temporarily until they can find a more permanent solution. Indeed sometimes they build inventories as a countermeasure to deal with volatility in the mix and volume of customer demand so that they see the issue more clearly and solve it. 

Fujio Cho in the 1970’s depicted the house of the Toyota Production System. Jidoka is the harder part of the system to understand. It requires complex analysis and interpretation which will present a number of solutions. The real skill is being able to pick the winning solution and deploy it rapidly. He also states that the key to the TPS is to have all elements together as a system practiced everyday. It is hard in a large organization to understand the entire process from customer order to getting paid. Every company wants to deliver quality products or services to the customer at the right time at a affordable price. In the West the tools of the TPS have been widely used but getting the entire organization  to operate in a systematic way like Toyota or Honda has been more challenging. The change of behaviour throughout the organization is probably the single biggest cause of transformation failure.

A company culture has built up over time and has to change if a lean transformation is going to work in the long term. The level and nature of interaction and expectations between management and the shop floor will have to change. A good place to start a change process is the health & safety policy, laundry, the conditions in the canteen and the lavatory. By experiencing a real improvement in those areas the conditions are created for the introduction of a Lean transformation. In a lean company the workforce will be expected to take responsibility for their own work station, the quality of their output, cleaning it, eliminating waste and continually trying to improve things. They will expect a schedule which takes into account the machine limitations but will be happy to work as a team to improve the performance. They will have to be up-skilled to perform routine maintenance and have the authority to stop the machine to deal with quality issues.

Many companies rush into implementing the 5S’s which is a very good tool but the cultural change has to come first for the benefits to flow into the future. Any company that improves the conditions on the factory floor with better lighting and 5S’s will get an improvement in quality output.  That may or may not flow to the bottom line. If the payroll numbers and costs stay the same but people are now doing other work when the orders are finished then the improvement will have no impact. This demonstrates that the process has improved but overall the company is no better off.

Toyota and many other Japanese companies use Target Cost as an important component of defining value. They start with a customer price, subtract the required profit and then have the target cost. They set to work using activity based planning and value chain analysis working backwards in a systematic framework. This approach uncovers the places where the cost can be reduced and by how much. This technique can be an excellent driver for continuous improvement (Kaizen) that focuses Jidoka efforts to directly improve profit. In the current environment many companies need a step change (Kaikaku) to effectively compete and Target Cost facilitates that.

Every single Associate (employee) of Honda undergoes a basic course in “quality” giving them an understanding how to interpret and present qualitative and quantitative data to others. They also undergo training in the 5 Why’s which gets to the root cause of a problem. It is important to note that the question why focuses on process failures rather than people failures. The Ishikawa diagram helps in this process by helping to get to the root cause of a problem. The 6m’s are looked at Machine (technology), Method (process), Material (Raw Material, Consumables, information), Man Power (physical work. brain work, suggestions), Measurement (Inspection), Mother Nature (Environment). All assertions of fact must be evidence based and the group have the opportunity and understanding of contributing suggestions for improvement. They also use a team based review structure which encourages contributions and feeds into the global company suggestions scheme. In this way kaizen is part of the fabric of Honda and every Associate is involved.

If kaizen activity has to be arranged or facilitated then it is not part of the normal day job for people. There is also probably a Continuous Improvement Manager arranging events which are not measured back to the management accounts. Every business needs a dashboard of the real drivers of business performance. Unfortunately most have management accounts, and focus on cost of sales and measures like OEE which may or may not be the real drivers. OEE (overall Equipment Effectiveness) is a simple measurement but it is difficult to interpret for decision making. Toyota drill down to the six components that make up OEE and track them individually. A 75% OEE could actually be better than 85% if the route cause was production mix and number of changeovers. OEE is also based on machine cycle time and not production line takt time (is the pace of the manufacturing line in total) so driving the OEE can lead to over production.  

You must have a clear strategy for managing the P-D ratio which is clearly understood throughout the business. The P is defined as production lead time and D is the demand lead time. In the car industry they use a Build or Make to Order system where the product has a standard design but the final specification is defined by the customer order. In most FMCG companies the model will be Build to Forecast which will be fine tuned daily with fresh orders. The best way to fine tune is to have a clear Takt time which is the net available time available for work in the day (less breaks, maintenance, briefings) divided by the time demand (customer demand or units per day). In a FMCG business you will have variable demand during the week spiking on a Wednesday/Thursday to coincide with the Friday/Saturday busy shopping days. If the Takt time is clearly understood then you will be able to smooth out the weeks production to meet delivery schedules.

To get the most benefit out of a lean transformation the financial strategy must be aligned to the lean strategy. A good example is working capital and the valuation of stock. Normally stock is carried at cost in the accounts but a key driver of a lean strategy will be to eliminate stocks as much as possible. Unless the accounting stock valuation changes in a lean environment then the benefits of the transformation will not be seen or understood and the desired changes will not be implemented. Traditionally excess stock is written down at year end but the whole point of a lean transformation is to eliminate that excess stock before it gets produced.

Another common mistake is to try to get an IT solution to create the lean solution. Yes the ERP IT systems can play a major part in implementing a lean transformation provided your processes are excellent. If your processes are not good change them, simplify them and then implement a IT solution. You have to have clear measures for the Business which are reflected in the Profit & Loss account and the Budget. You need to get the Basics right! Align resources with the P-D ratio knowing that you are building to order or to forecast and then with a clear understanding of your Takt time have the optimum number of people on site to deliver the plan.  

Summary.

• Agree a Lean Plan with a Profit Target.
• Deal with any process issues that need to be changed, including HR, accounting, shipping, planning.
• Ensure that the Profit and Loss and Budget reflect the business drivers that can be improved in a Lean Transformation. Create a dashboard to capture where you are and show how the journey evolves.
• Establish how you are going to deal with your P-D ratio, Build to Order or Build to Forecast. Explain that concept to the team.
• Establish your Takt time and ensure that everyone understands the product flow and interaction between parts of the plant.
• Basic Training for all staff. 
• Start the improvement process with short interval controls in conjunction with the team at each work station.
• Expect 75% of your potential profit improvement to flow within 3 months. Best Product, Best Profit, Best Position, Best Productivity.
• Continue on the Lean Journey.