Stop Using Lean to Cut Costs Part 1

Just last April, CNBC ran the headline that “Coke goes 'lean,' to cut 1,200 jobs as part of $800 million cost-savings plan.”  So many companies use “Lean” to cut costs, that lean has become a “four-letter-word” or “flavor of the month” in many businesses.

Interestingly, when Jim Womack coined the term “lean” in the book “The Machine that Changed the World” in 1991, he was describing how there was little to no “waste” in how Toyota produced products while simultaneously (and more importantly) bringing value to customers in a way that earned revenue for the company. 

This takes careful thought and preparation, and ultimately is inspired by the goal of earning revenue, not cutting costs.  When lean is done well, some costs may be brought down, but that is not the ultimate purpose. 

One great explanation is by Kevin Meyer, Co-Founder of The Gemba Academy who blogged, “The goal is not to reduce spending – since to do so means sacking valuable people – but to convert people's time and effort from wasteful activities to value adding ones – activities customers will pay for.”  Kevin describes how one method to increase the top line is to have additional capacity with the same cost base; to sell more product with what you have.  This can happen by reducing throughput time.

For example, Company X quoted a 6-week lead time to customers, and was not making this happen.  When asked about their actual average lead times, they did not have data to provide an answer.  Thus, data was collected for 30 products over the course of two and a half months.  It turned out that they had an average of a 7-week lead time, but interestingly, most of the time that each product spent in their production system was in waste.  This is not the waste of scheduling, motion, inspection, rework, or other non-value-add tasks that didn’t change the form, fit, or function of the product.  This was actually just the waste of “wait time.”  As in, 75% of that 7-week average duration, the product sat idle. 

Company X Value Add versus Wait Time

Again, in this chart every time the product was “touched” in some way, even just for scheduling, programming, staging, inspection, or rework, the time was considered “Value Add” and is shown in green bar.  Every time the product sat and did nothing, it is shown in a red bar.  With 75% of the time just WAITING, the company was able to implement a Pull System at the largest green bar – the bottleneck of machining the product.  They ensured that only when a small buffer, called a kanban, produced a “hole” for product staged in front of a particular piece of equipment, that was when upstream work would be done, or “pulled” to the equipment.  In this way, they were able to reduce almost 70% of the time spent on production. 

Production Durations Before and After Lean Process Implementation

Collectively, the shorter throughput time spent in production translated to improved cash flow due to sooner invoicing, improved inventory turns, improved equipment utilization, and overall increased equipment capacity which could then be spent producing more customer-requested products.  The other thing that Company X can do is offer better terms to customers as a competitive advantage, further increasing sales!  

All of these things increased revenue WITHOUT cutting jobs, reducing materials on hand, or even cutting out other traditionally “non-lean” steps like inspection.  Not a lot of “cuts” per se, but definitely a great result!

Many other companies have a similar story, but one critique is that lean can only work well in this way for manufacturing companies.  This, however, is not true.  Next time, I’ll give an example of how considering use of Lean (or Process Improvement) for a web platform company worked in much the same way.

Until then, read this article and more on AJC’s blog, and sign up for our newsletter online at: http://andreajonesconsulting.com/blog.aspx