As the global economic downturn deepens, cash-strapped companies are looking for ways to cut costs and increase liquidity. One way to get fast results is to refocus your lean efforts on the basics -- and correct the bad habits that are undermining results. Besides generating much-needed cash, you'll make your company stronger and better positioned for the upturn.
It's critical to take a closer look at whether your lean initiatives are really boosting cash flow and improving the bottom line, especially during tough economic times. Our experience shows that well-executed lean programs can cut lead times and quality costs by half, increase productivity by 10% to 30%, and reduce inventories by 30% to 50%. What's more, quick wins can deliver a large share of these savings. The problem is that lean is rarely done thoroughly and effectively. In our client work, we consistently find that companies slip into costly bad habits that prevent them from achieving or sustaining these results. Here are the five bad habits we see most often:
Bad Habit #1: Not Focusing Lean Efforts
Ideally, lean should become a way of life, and applying its principles throughout an organization is a worthy long-term goal. But companies should scale back their ambitions at the start of a lean transformation -- particularly during a downturn. Too we often see companies diluting their efforts and misusing valuable resources by not scaling back and focusing on high impact areas. For instance, factories with sophisticated Overall Equipment Effectiveness (OEE) measurement systems often monitor hundreds of machines instead of focusing on the bottlenecks, where even minor improvements could boost output or reduce the number of resources needed. Improving the efficiency of non-bottleneck equipment has no effect on overall output. It only increases lead times and work-in-progress inventory, which ties up needed working capital.
Every factory has a few critical, high impact areas where even small changes can deliver major improvements to the bottom line -- especially important during a downturn. By spreading lean resources too thin, companies often miss these high impact areas, or don't fully capitalize on their potential. Be sure to target these critical areas.
Bad Habit # 2: Not Looking Beyond the Shop Floor
Because lean programs are often the domain of manufacturing, they tend to be production-focused. As a result, potential savings beyond the shop floor are often overlooked. For instance, they may fail to address administrative and support functions -- a good potential source of cash in a downturn. Examine the size, role and structure of support functions, especially if your business has high indirect labor costs. By applying lean concepts to these functions, companies can often reduce headcount without hurting service levels.
Bad Habit #3: Not Using Lean Insights to Avoid Capital Outlays
Done right, lean allows companies to do more with less. If your lean initiatives haven't allowed you to postpone or reduce capital expenditures, then something's wrong. For instance, most companies have much more available capacity than they think. The trick is to release the "hidden" capacity in bottleneck assets -- often tied up in unplanned breakdowns, changeovers, shift changes, small stops or lines running at non-optimal speed. Make it a point to analyze theoretical capacities and OEEs to determine what improvements could be made to key bottleneck machines to reduce or postpone short-term investments.
Capital outlays can also be postponed or avoided by improving equipment performance or replacement rates through enhanced maintenance practices such as TPM. Also, instead of buying expensive control or quality-inspection equipment, make improvements at the source through poka-yoka devices, statistical process control, or by making simpler products. A company we worked with in the chemical process industry was keenly aware the tradeoffs here -- that the many costly control mechanisms it "needed" would actually be unnecessary if the root causes of deviations were addressed.
Poorly-used space often leads to needless spending, too. Many companies expand their facilities instead of rethinking and redesigning their current workspaces. Kanban, just-in-time and pull systems can eliminate work in progress-the boxes and pallets that clutter up many factory floors. Rethinking or reconfiguring existing space can also result in excess assets that can be sold, consolidated factories or warehouses and lease or rental savings.
Bad Habit #4: Focusing Just on WIP Inventory
Even though raw materials inventory is usually much larger than work in progress, lean programs tend to focus disproportionately on reducing WIP inventory because of their shop-floor bias. This is partly due to organizational issues -- raw materials are often managed by the procurement group, whose incentives may be misaligned with lean programs. For instance, to get supplier discounts, procurement typically buys raw materials in bulk. As a result, large inventories of materials have become the norm -- a big source of potential savings.
Finished-goods inventory also must be carefully managed in a downturn. As demand falls, inventory levels will increase if quick corrective action isn't taken. High levels of finished goods can stem from factors such as overly optimistic sales forecasts, make-to-stock policies (due to long production lead times), poor delivery reliability (which gives rise to the need for buffer stock) and network configuration (factories are far from target markets, so inventory is held locally.) While not much can be done about network configuration in the short term, production lead times and delivery reliability can be improved relatively quickly. Now is the time to push for such a short order-to-delivery lead time that you can sharply reduce finished goods inventory and finally become a make-to-order shop.
Improving delivery reliability can also have a major impact. A manufacturer we worked with struggled with its dealers' high inventory levels. To lower those levels, production had drastically shortened the lead times for certain products. But as a result, delivery reliability was down sharply, and dealers were making the problem worse by building up added safety stock. Once the company's lean program refocused on delivery reliability, dealers' stock levels fell by more than 40%.
Bad Habit #5: Forgetting the Basics
The downturn is a perfect opportunity to refocus on the basics of cutting costs and waste, decreasing complexity, improving productivity, reinforcing a zero-tolerance policy to budget overruns and making "pure lean" improvements in productivity without added investment. Often, simple solutions yield major results. For instance, tracking and displaying real-time or hourly performance on the production floor can ensure that in a reduced-volume environment people don't spend more time doing less.
It's also a good time to question long-held assumptions and sacred cows, such as maintenance spending (is it too high for an acceptable risk of breakdown?), outsourcing decisions (should outsourced parts be brought in-house to keep people and machines productive?), and safety stock calculations (do the paremeter assumptions still hold?). One of our clients maintained six weeks of safety stock for every component needed to repair a critical molding machine. The rationale was simple -- to get the needed parts from the overseas supplier and repair the machine took a total of six weeks. We didn't doubt that this calculation was correct, but we did question the assumption that the only available supplier was overseas and that it took six week to repair a mold. As it turned out, the client had other options, such as paying the supplier a small premium for express service or switching to other suppliers-some local. With these options, the company would be able to cut service time from six to two weeks and release large stores of inventory.
Because of the challenges involved, many lean initiatives haven't lived up to their promise -- often because the initial rigor fades over time and counterproductive behaviors emerge. The economic downturn presents an opportunity for companies to revisit their lean programs and correct the bad habits that are consuming cash and hurting profitability.
Ian Colotla is a project manager for The Boston Consulting Group (BCG), based in Copenhagen. Pierre Derieux is a partner in BCG's Paris office and co-leader of the firm's Lean practice. Adam Farber is a Boston-based BCG partner and co-leader of the firm's Lean practice. Christian Greiser is a partner in BCG's Dusseldorf office. All are core members of the firm's Lean Experts Network. http://www.bcg.com/impact_expertise/practice_area.jsp?practice=61
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