Are you Lean or not?

Most small to medium manufacturing companies I visit believe they are doing Lean. There may even be plenty of the 3 B’s around to support this belief. The 3 B’s are Banners, Baseball caps, and you can figure out the other B… So, how do you know? If you own multiple businesses and manage remotely, it gets more difficult to understand.

Here’s what I use as a quick litmus test for Lean:

1.      How quickly do they turn inventories? In a high-mix, engineered-to-order (ETO) business, I expect to see 10 or more turns. If they also source many goods overseas, then at least 8 or 9 turns. In a low-mix, repetitive manufacturer, I expect a minimum of 20-30 turns. Many of the companies I visit have 2.5-3.5 turns. This is not Lean!

2.      What percentage of an order’s total lead-time is value-added? I use a machining analogy to show whether a process is value-added or not. If you’re not chipping metal, then you are non-value-added! If you are a world-class Lean manufacturing firm, then you should see a number like 20% or higher. Most companies I visit are well below 5%. This is an important metric when you think about velocity. Most of the time an order is in house, no value is being added!

3.      What is their on-time delivery performance? In automotive for example, you must be on-time for 100% of your orders. Bad things happen if you fail to uphold this performance. Most advanced Lean businesses do well with this metric. In heavy ETO companies, you need to be careful using this test as customers control much of the schedule, including the shipping dock.

4.      What is their average setup time in various areas of the plant? Most often, they respond in hours, not minutes or seconds. When I tour the shop, I’m looking for shadow boards, tool presetters, setup carts or kits, to name a few. Long setup times almost always leads to big batches.

5.      What do I see when I go on walkabout in their shop? Do I see several orders and goods stacked up in front of machines? If yes, then they are not doing single-piece flow. It is a batch process. Is there any evidence of 5S? I’ve never conducted a Kaizen event that didn’t include a healthy dose of 5S. When I go through their warehouse, do I see a lot of dust on goods? If yes, they are not using pull systems with their suppliers to replenish stock. At a minimum, they are not using Lean inventory management policies.

6.      Finally, I ask them to tell me what abut their Lean tactics. The most common Lean tactic I’m told is that they don’t bring anything in until they really need it. I rarely hear about Kaizen events or value stream mapping.

There are many more items you can list to evidence Lean, but these are the ones I use most often when I visit a key supply chain partner or potential acquisition. If your plants fall well below the suggested benchmarks, then you know there is much upside available!

I often hear about cycles that repeat in these companies. Sales complains that they can’t sell out of an empty wagon, while accounting worries about excess and obsolete (E&O) reserves. The operating folks worry about efficiency, so they want large batches to leverage setups. You may have unintentionally fueled these cycles through incentive systems. As each group chases their own interests, they collectively fail to notice there is a common denominator that gets all of them what they want – Time.

First, let’s talk about inventory investments and overall working capital needs. This is where the adage that time is money needs no creative interpretation. Simply stated, inventory investments are designed to cover customer demand during the time it takes to restock the shelf plus some safety stock. You hope demand for your goods go up, so outside getting your suppliers to stock your shelves, time is the only variable driving the investment. If you reduce the time it takes to replenish the shelf by 80%, outside of safety stock, your average inventory investment drops directly by the same amount. If your sales team can now quote 80% shorter lead-times, do you think they will have any issues?

So, how do you do this? What wrench in your Lean toolbox do you use? When it comes to speed, I use Kaizen events. Having conducted dozens of events, there is nothing I have tried that comes close to matching the decreases in cycle times I have achieved with Kaizen events. I’ll comment in future postings on this topic. If you would like to learn more now, I suggest you grab a copy of Art Byrne’s book, The Lean Turnaround. I’ve not had the pleasure to meet or talk to Mr. Byrne, but I can tell you that his book is a great primer for leaders and owners alike. So, what about the concerns your manufacturing folks have?

I use setup reduction events to make small batches efficiently. From a working capital point-of-view, I would rather make a single capex investment to reduce setup times dramatically than a continuing inventory investment to support large batches. Achieving decreases of 80% or more are not uncommon.

There are numerous other benefits to consider related to these events. We know that nothing ever goes according to Hoyle… When you dramatically reduce batch sizes and overall work-in-process (WIP), you reduce your failure cost exposure. You also improve the time it takes you to recover from a problem.

If you’re in private equity where it’s all about EBITDA, please keep the following speed bump in mind. This applies to standard cost environments where direct labor is being used to absorb overhead. When you reduce WIP and batch sizes by 80% or more, there will be a brief period in which you will under absorb. Until levels stabilize at the new reorder points and quantities, you will not be producing new parts to get absorption credit. Your accounting folks can estimate the valuation impact, so you have an idea of what to expect. Large improvements to execution often generate top line growth, so there is a direct offset. It really becomes a timing issue. They can also model the increase to liquidity.

You should now have an assessment tool you can use to determine if your business is Lean or not. If it isn’t Lean, you should also have a sense of how to quickly simulate the benefits. I’ll go into some of these topics more deeply in future postings. I’m also in the process of updating a Kaizen manual I wrote for my teams 20 years ago that I plan to make available for download.

As always, thanks & Good Wishes for a successful 2018!

Mike