Transitioning to "Lean" Part 1 - Top Management Implications

What Is Lean Manufacturing? While there are a whole set of techniques and related disciplines, the general concept of "Lean" is that of continuous product flow, without interruption, through the entire value stream.

Inventory is seen as an equivalent to cycle time (the more inventory, the longer any one item must wait for "its turn"). An underlying philosophy is that the reduction of cycle times and inventories will force waste to be exposed, and create the urgency for its elimination. Waste is re-defined as "anything that does not add value" from the customer's perspective".

The results of a successful transformation to this powerful operating philosophy can be staggering. Huge reductions in inventory and cycle times. Order of magnitude improvements in quality. Dramatic cost reductions. Good luck on your journey to World Class!

Top Management Implications

The philosophy, mechanics, and tremendous outcomes of "Lean Manufacturing" are well documented. What isn't well documented are the subtleties, the "implications", and their impact on top management. Over the last eighteen years of working with all types of manufacturing companies, in a myriad of industries, a set of top management issues continued to pop up. These are the major management inhibitors, the "gotchas" that you will likely encounter.It is the purpose of this article to forewarn you, as well as provide you with some recommended solutions.

Profit Impact:

During the initial stages of conversion to World Class practices, major changes occur in inventories. These inventory changes are what cause the anomaly in accounting profits. The profit impact is typically negative (occasionally companies experience an artificial increase due to exposed FIFI or LIFO layers). The aberration is caused by labor variance, and the associated absorption of overhead (to reduce inventory you must, for some period of time, produce less than you ship). Note that while the profit measurement looks worse, company well-being is substantially enhanced! Cash flow is up, often dramatically, and major inroads are being made in customer service, product quality, and costs. A proforma should be done by the CFO to quantify the impact, and get buy-in at the onset.

Performance Measurements:

People will perform so as to maximize their measurement. Most traditional measurements encourage the wrong behavior. This is particularly true when attempting to transition to World-Class practices. Volume related measurements encourage the production of "something" whether it is needed or not! "Performance against standard" can be totally misleading, particularly if standards are "adjusted" (doing so can destroy the baseline for comparison).
Another issue is the appropriateness of the measurement for the person / group being measured, (i.e. holding manufacturing accountable for shipping to a sales plan, regardless of whether or not the plan was actually sold!)

Optimize the Whole:

Another measurement problem is the traditional focus on optimizing each operation, instead of the total plant. To optimize the "whole" we will typically, at least temporarily, sub-optimize some of the "pieces". Expect it! Note that bottleneck operations must be treated differently than non-bottleneck operations. Since WIP inventory levels correlate directly with cycle time through the factory, WIP must be minimized. Since you'll want some "just-in-case" inventory in front of the bottlenecks, little or no inventory can be allowed in front of non-bottleneck operations. Expect some of the departmental measurements to look worse, while at the same time, the overall company measurements continue to improve.

Accountability:

Operating "Lean" increases the need for clear responsibilities. Action items, with realistic internal promise dates, will be required to achieve the established goal curves. People must be held accountable to achieving these promises. Continually ask "Who?" "By when?" Once a reasonable commitment is made, the focus must switch to "How to achieve the date", not "If it will be accomplished!"

Performance Objectives:

What are the performance parameters critical to the continued health and prosperity of the Company? How will you measure these parameters? What are your goals in terms of performance on these parameters? By what date should these levels be attained? We believe strongly in goal curves. Draw a straight line from your current performance to the target performance and due date. Plotting actuals against this curve provides a continual scorecard. When you fall behind the curve in any period, "cause and corrective actions" must be required. Continuous monitoring provides top management a means to force continuous improvement.

Critical parameters will include (at minimum): Promises kept (percent on-time delivery); Quality (internal and at the customer site); Cycle/lead time (equals inventory); and Cost. Idle Time and Overtime: By linking manufacturing steps together through kanbans (the pull system), individual manufacturing steps begin to take on the characteristics of an assembly line. As in any assembly line, when any manufacturing step is down, all operations shut down. Since the schedule must be met, every shift, an hour of idle time will typically demand an hour of overtime to recover. Avoid the temptation to "just work the one area over" and let the rest of the operations go home. Inventory will quickly refill the plant!

Slow Down the Machine:

A basic philosophy of Cycle Time Reduction is the concept of continuous flow. The idea is to produce product at the same rate that your internal customer (the next operation) uses it. If your internal customer needs 1000 units/hr, and your machine is capable of running 2000/hr, we would want to slow the machine down to 1000 units/hr (that's all your customer needs). This is "heresy" in many traditional cultures!

Temporary Reduction of Sales:

Long lead times and unreliable deliveries generally force your customers to carry a certain amount of "just in case" inventory (safety stocks, lot sizes, order early, etc.). As you, the supplier, get more reliable and reduce your lead times, customers no longer require as much "pad". Inventory corrections will temporarily result in reduced requirements (they need less material delivered because they are using up the excess inventory). You will need to work closely with your customers to minimize this impact. You'll also need to be aware that the capacity freed up during this period is a temporary situation. Don't make long term commitments for its disposal!

We've covered some of the more common "gotcha's" that occur when making this critical transition to Lean. While this list is not comprehensive, it will, hopefully, get you thinking.

Best of luck on your Lean journey!

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