Note: The previous column laid out the premise that for it to remain relevant, the practice of Lean must conceptually broaden its current Cost-of-Goods-Sold focus to include all wastes associated with Order Fulfillment. This column will explain how a corresponding revision in Lean strategy will be needed to maximize the impacts that can be delivered through this revised focus.
Many of today’s Lean implementations are based on a series of what are essentially isolated Kaizen-based waste reductions projects. In selecting project areas manufacturers typically look at the perceived waste (savings) available, i.e., those areas with more waste reduction potential get a higher priority. While such a project selection approach may actually lead to reduced local waste, this approach is almost always a strategic dead-end. Let me explain.
In replying to one of the comments to the first installment of this series I related the following anecdote I once heard involving James Womack;
While being walked through the factory of a large U.S. aircraft manufacturer Mr. Womack was shown an operation that had just underwent successful Kaizen-based set-up reduction. After hearing about its impact on process operational metrics he asked his guides how the work had improved overall final assembly throughput, i.e., “Had the project shortened airplane lead-times?” After a bit of discussion they replied that the operation that had been worked on wasn't on the overall product’s critical-path so the project hadn't impacted finished throughput. Womack replied, “Then why in the world were you working on that operation!"
This story gets the heart of the issue as to what is needed to have a successful Order Fulfillment-focused waste reduction strategy. The bottom line is that if a project won’t improve Order Fulfillment flexibility—shorten overall product lead-times—don’t do it. Why, because it won’t have the financial impact needed to satisfy executive management. Based on Lean’s roots—the Toyota Production System—however, this finding shouldn’t surprise anyone.
Taiichi Ohno, founding father of the Toyota Production System, was once quoted as saying that in working on manufacturing improvement, “All we are doing is looking at the time line, from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time by removing the non-value added wastes.”
More recently Simon Nagata, currently chief administrative officer (and previously vice president of purchasing) at Toyota Motor North America, was quoted as saying, “Time is the Shadow of Waste.”
So now we know why Mr. Womack wanted to know if the aircraft manufacturer’s project had shortened overall airplane lead-times. Why is this important? Because only when those lead-times go down will Lean projects positively impact big hitter financial exhibits such as pre-built/pre-positioned Finished Goods Inventory; safety-stock Raw Material Inventory; Warehousing, Transportation and Material Handling; etc., etc., etc.
An important point that was brought up in the previous installment of this series is that it is nigh impossible to get CFOs and other accountants to acknowledge continuous improvement-related savings unless they were communicated to them in their language. Based on this you might point out that in accountant-ese there is no word—translate: account—for lead-time. You would be correct, of course. But not to worry; lead-time can easily be converted into a term that accountants routinely deal with, i.e., Inventory Turns, which are the inverse of lead-time. As explained in that preceding article, a lead-time of one month implies 12 Inventory Turns a year, while a lead-time of two weeks implies about 24 Inventory Turns. So the result of cutting lead-times by one-half is that Inventory Turns are doubled.
Based on this relationship, every CFO or accountant that I know would eagerly accept a 10% Order Fulfillment lead-time reduction goal as valid justification for a Lean implementation project. Why? Because that goal can be translated into significant concrete financial expectations and, upon completion a project, its’ impact can be easily quantified. Saying this in another way, accountants will now be more comfortable supporting Lean project work since financial goals can be quantified up-front so that projects can be justified in terms of ROIs and, at their end, impacts can also be easily be quantified, showing whether or not the project delivered the anticipated return.
Again, the important point here is that prioritizing work based on lead-time ties together Lean impacts so they build upon each other and so become more recognizable at the executive level. In other words, Lean projects are no longer seen as a set of isolated local shop floor impacts. Instead, they are seen as strategically impacting Revenue. Reductions in lead-time very directly impact the following executive levels metrics:
- Customer Fill Rates go up, which can easily be tied to reduced lead-times.
- Sales go up—while, by the way, generating both normal and windfall profits—when forecast volumes are exceeded. Why? Because Incremental Sales do not have Overheads allocated to their Cost-of-Goods-Sold figure.
- The need for pre-built/pre-positioned Finished Goods Inventory is lowered, reducing carrying costs.
- Warehousing, Transportation and Material Handling costs go down as less Finished Goods inventory is needed.
- Damage and Rework go down, as Material Handling and product exposure related quality defects are reduced.
- Costs associated with forecast error such as Product Discounts go down.
- The need for Raw Material can go down—if the Order Fulfillment waste reduction is expanded to the supply base—reducing safety-stock carrying charges.
All of these wastes exist in one form or another as standard financial metrics in most companies, giving them both high exposure and immediate validity. All are also related to an increased Order Fulfillment capability which ties the lead-time metric directly to the customer. And isn’t tying performance directly to the customer a good thing! After all, shouldn’t all business operational metrics—in the end—be somehow tied to the customer?
So what’s not to like about lead-time reduction? This leads to the question about how it can be applied as an over-riding strategy for Lean. The answer to this is that Lean practitioners should only work on projects that will increase Order Fulfillment throughput by reducing finished product lead-time. This implies working exclusively on processes that are on a product’s critical-path. And if the anecdote related earlier in this article is true, it would seem that even James Womack would support lead-time reduction as a strategy for prioritizing Lean project work! In this case prioritizing Lean project work just becomes a matter of evaluating critical-path processes for lead-time reduction potential.
One point needs to be made about a product’s critical-path. Critical-paths are moving targets. Why? Because if you reduce the lead-time of a process, that process may no longer be on the critical-path. Correspondingly, this may lead to another process that was previously NOT on the critical-path to now be on it. This is especially true with complex assemblies. So the point here is that a prerequisite to starting Lean improvement work is a thorough understanding of a product’s process flows. This includes documenting the relationship between processes—are they sequential or parallel?—as well as quantifying their lead-times. There will be more discussion on these two points in the fifth edition of this series.
There is one hidden benefit to lead-time reduction that while, not always easily translatable to savings, is real none-the-less. Namely, that when lead-times go down through-put goes up.In other words, reducing lead-times increases capacity without requiring capital investment. For instance, if it used to take you ten weeks to produce “x” number of units and you can now do it in nine weeks, you’ve now got an extra week of capacity to use for more production. Hmmm. Do you think CFOs and accountants might think that a good thing? I can assure you that they do, and this should be considered the icing on the cake in justifying any Next Generation Lean project.
But although a lead-time reduction strategy is easy enough to understand, its’ implementation is not straight forward. Why? Because until recently there hasn’t been a common metric for Order Fulfillment lead-time. What do I mean by this?
Talking to people about lead-time can seem like a discussion held on the 10th floor of the Tower of Babel. Individual perspectives lead to different ideas about what lead-time means. And that high up in the Tower the difficulty in communication isn’t always based just on language but can also include intent, i.e., sometimes people don’t want you to understand what they mean! For instance, when Marketing folks are asked by potential customers to quote lead-times what is the basis for the numbers they provide? Are they in any way related to the “physics of the factory” or do Marketing reps just quote numbers they think are needed to be able to get the order? To answer whether this form of deceit actually occurs or not you might ask yourself how many times have you approached a supplier with a short-fuse order change request only to find out that the lead-time required would be longer than what was included in their initial quote?
There’s another gap that brings out a need for adding a standard lead-time metric to Lean. This can perhaps be best explained by asking the question, “How do you quantify the status of a company’s lean-ness?”
There is currently no straightforward way to answer that question, which often leads manufacturers to the question of wondering both “Are we there yet?” and if not “When will we get there?” i.e., be Lean.
Build-To-Demand is a term often characterized as signifying order fulfillment nirvana, i.e., being able to satisfy an order without the need for pre-built/pre-positioned inventory and/or other types of waste. The shorter a product’s lead-time, the closer a manufacturer is to being Build-To-Demand capable. Here’s the clincher. The closer a company is to having Build-To-Demand capability, the Lean-ner that company is. Think about it. It makes sense. The use of this concept, though, also requires a standard definition for lead-time. It also requires an understanding of what level of Build-To-Demand capability a company needs to be considered Lean? Does it require having a lead-time of only one day; or one hour; or one minute; etc.
The answer is that being Lean is a relative—not absolute—state based on what is needed to give your company a recognizable competitive advantage. So, if all of the other players in your industry have a lead-time of four weeks but your company can satisfy unanticipated orders in only 2 weeks—and customers prefer you because of this capability—that may be what it takes for you to be considered Lean. If one of your competitors, then, reacts to its Order Fulfillment handicap by working to match your two week lead-time, Lean for you might then mean having to further reduce your lead-time to, say, a single week. The point here is that the industry you compete in and the firms you compete against work together to define the level of manufacturing flexibility it takes for your company to have an order fulfillment advantage, i.e. be considered Lean. Lean for one company may be different than Lean for a company in a different industry. By using Order Fulfillment lead-time as your primary metric of Lean-ness you never have to wonder again where you are on your Lean journey. You just compare your current lead-time status to the lead-time that will give you a competitive edge—this defines your lean-ness gap.
I need to bring up a related issue that causes discomfort among current Lean practitioners. Namely, having a solitary focus on waste reduction projects that will reduce a product’s critical-path time. Of course, this directive should not be considered a law. Rather, it should be regarded as a rule-of-thumb. The question then comes up “Why isn’t it important to reduce and/or eliminate ALL waste?” The answer is that while theoretically that is a good idea, practically there are the twin issues of limited resources and diminishing returns that need to be recognized.
Of course, it makes sense to do ANY project that can be projected up-front to meet a company’s minimum ROI threshold. On the other hand, my experience tells me that the vast majority of potential Lean projects that are NOT on the critical-path will have difficulty measuring up to that threshold. In addition, all companies are interested in having their people working on projects that give them the “biggest bang for the Buck.” The vast majority of time, these will be on projects that target critical-path lead-time reduction. I know that this may affect the concept of Lean Culture as total waste elimination, however, having limited resources is a real world restraint and the Law of Diminishing Returns is something must be acknowledged from a practical point-of-view.
With the proper definition for lead-time the following statement is a great way of summarizing how Lean should be thought of under Next Generation Lean, and I invite you to think about it: Build-to-Demand is the Lean end-game.
If you can Build-to-Demand in the lead-time your market demands, you are Lean.
The next article in this series will define in detail what the lead-time metric is and how to use it as a basis for Lean process improvement and further elaboration on what it means to be Lean.