Lean Returns Really Take Off When Velocity Improves

July 7, 2011
Financial returns are not always obvious in operational activities

I recently spoke with Ken McGuire about the lean ROI topic. Ken leads an independent consulting firm and is a long-time authority on leading manufacturing practices. A founding member of the Association for Manufacturing Excellence (AME), most recently he designed and manages the AME Institute's leadership development initiative.

ROI is a really confusing term. It's not transparent what it means. Financial returns are not always obvious in operational activities. But shorter lead times are obvious. Better quality is obvious. But is that a financial return? There are clear financial returns only when the improved velocity is leveraged to benefit the whole business.

Investment is the other question with ROI. Is that the cost you pay for something? Or is it the cost of time when you could have been doing something else? How do you know which is which?

To simplify things, the manufacturing cycle begins with the buying decision and ends with delivery and cash collection. Everything within that cycle takes time and costs money. The longer something takes, the more it usually costs. If you focus on reducing activities and cycle time, your costs will go down. From a quality standpoint, if first-time through improves, your quality costs will go down. If you have a less convoluted pattern of material flow, lead times will be shorter, and costs will be lower. If quality is better and you have better flow and you can extend it for a wider variety of items, you create the opportunity to serve more customers with more things and be better at it, with less wait time and at lower costs. If people are engaged in making improvements and you can track them, and if in you operations, you have more improvements this month than last month, your costs will be lower. If your improvements are tangible,your costs will be lower and your ROI will be higher.

I take issue with the observation that lean results level off after two to three years. Results actually begin to take off after the first several years. Gross margins will improve a percent or two in the beginning, and a point for every year that you keep it up after that. After year two and year three your velocity really improves, and your return on assets improves.

Those first two years can be really intoxicating. Many of the improvements are very obvious in terms of how the production areas look. That's a tremendous incentive to keep going. In the second year companies start to take on things like kanban systems, creating focused factories, and establishing value streams, and the operational metrics will improve. But you're still not seeing a huge improvement on the bottom line really. There will be some impact from cost reductions, but that's it. When the overhead reductions kick in because of higher velocity and throughput, that's when your margins improve.

Leaders have to have the patience to get through the first two years, and to still be just as committed as they were in year one. They need to be cheerleaders and advocates for everyone who is making changes. Despite the progress, in the third year you will still have people in fairly powerful positions who aren't yet supportive.

Specifically, quality people will be seeing their empire crumble. Procurement's role may be diminished or changing with different work and less of what they may think they should be doing. HR people will be trying to manage a lot of change that they're usually not prepared for. Also, if you haven't changed the focus of your financial people to be more activity-based and less allocation-based -- they don't have to fully embrace lean accounting -- you're in trouble.

Generally, reducing activity will improve ROI. Eliminating waste, or "muda," is just one part of it. There's also "mura" and "muri." Muri refers to overburdening, like loading the production schedule up with more than people can possibly do, for example. Loading up the schedule with the hope that you'll get a fair portion of the target demoralizes people. The alternative is to assign a workload that's less than what's possible then use the residual time to manage unplanned surprises, or to make improvements. Mura is about inconsistency or unevenness. It's tightly linked to respect for people, which many people don't get. You have to have a deep, enduring respect for people to move forward with lean. One way that you respect people is give them consistency of process. This is where standard work comes in.

Standard work is a constant against which people know whether they're succeeding or failing. We're not talking about work standards. Standard work allows people to know immediately if they are doing a good job. No one wants to come to work and do a bad job. They want to do a good job, and leave the workplace better than it is when they arrived. We don't give them a chance to do that if we overburden them with work or fail to define how to succeed. Standard work is a direct reflection of having respect for people.

When a company embraces lean, CEOs have to take an active role. They have to do more than say how things need to change. For example, one aerospace manufacturer that I know of dumped two 40-foot trailers full of product in a pile on the middle of the production floor. It was all scrap. The message, quite memorably demonstrated, was that poor quality would no longer be tolerated.

Leaders have to take out the production monuments. If a huge paint booth is the bottleneck, for example, it has to come out. Even if the alternatives aren't entirely clear, taking out such barriers sends a strong message. Sometimes those barriers include people too.

The leadership message has to be consistent and maintained. It needs to be straightforward, non-negotiable, it must be a challenge, and it has to be meaningful to all stakeholders. Here's one example from a very large organization with a lot of loose ends. There was a big wall between the office and operations. The general manager asked everyone to report how they measure performance in a way that all of the measures, if achieved, would equal zero failures. Such as zero defects, zero missed deliveries, zero design changes, etc. Almost 200 measures were posted on the right side of the wall where everyone could see them. In the middle of the wall was the door to the production area. Over the door the GM posted, "Zero Means Zero." When a metric hit zero, it was moved to the left side of the wall. Over the course of three years, most of those graphs moved to the left side of the wall, and stayed there.

The ongoing commitment of leadership is reflected by behavior change at all levels of the organization. At a local defense contractor, for example, what you see there today is energy and youth in positions occupied mostly based on seniority 10 years ago. These people were always there, with ideas to make things better, but now they're being listened to. They're trying things and, if it doesn't work, trying something else. That didn't used to happen. In the old, command-and-control culture, everyone waited for approval to try anything.

This article was originally posted on leanroi.org

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