» » next post - Tom Ehrenfeld: Can you teach the lean ideal of respecting people without actually bullying them?
« « previous post - Mike Rother: Lean Ain’t Just Cost Cutting
Orry Fiume

Orry Fiume: lean as a long-term strategy

By Orry Fiume, - Last updated: Sunday, December 20, 2009 - Save & Share - Leave a comment

The primary reason why managers think lean is a program to reduce costs is because over the past 20 or so years, companies have been hearing about its various implementations (JIT, etc.) in the context of “eliminating waste”. There is an implicit, if not explicit, understanding that eliminating waste equates to eliminating costs (i.e., cost cutting). However, at The Wiremold Company we understood that the real reason for adopting lean was to create sustainable competitive advantage…and that is strategic. If a company cannot differentiate itself from its competitors, the only thing it can do is compete on the basis of price. But if a company has superior customer service and product quality, along with a steady stream of product innovation, then price becomes relative to the benefits and value it is delivering. On the other hand, it doesn’t do a company much good if it can only achieve differentiation by incurring higher costs. We must be able to improve service and quality while lowering costs.

Lowering costs, however, was a long-term goal. Moreover, we defined cost as “a lower percentage of sales”, not in absolute dollars. This aspect of performance was also defined as better asset utilization and higher cash flow. In every organization, some portion of the overall capacity (both machine and people) is consumed by activities that don’t add value for the customers. Some of these are externally mandated (e.g., filing tax returns), but most are not. Our process focused on unlocking this capacity by eliminating non-value adding activities that were not externally required, so that we could grow the business without adding new capacity. In this way, cost expressed as dollars stayed relatively fixed, but declined as a percentage of sales. As a result, we added more than 13 percentage points of gross profit over a ten-year period. Some of this came about through “cost reductions” (see Michael Balle’s examples of eliminating warehouses and fork lift trucks).

Most, however, came about through actualizing productivity gains. (Note: productivity gains do not automatically reduce costs, they just free up capacity.) The actions that management had to take to actualize productivity gains include (1) selling more without adding people or machines, (2) reducing overtime, (3) holding on to attrition and (4) in-sourcing some of the work that was being out-sourced. In a good lean implementation, annual double-digit productivity gains are possible for many years, so the company will probably have to do all four of these things every year…as we did.

The question that Robert Austin raised, “How do we assuage fears of cost-cutting in times of crisis?”, with cost-cutting clearly meaning layoffs, is an important one. At Wiremold we address this issue by giving all employees a specifically worded guarantee: No one will lose employment as a result of productivity gains. This guarantee did not mean that we could not reduce overtime, hold on to attrition, fire someone for poor performance, or even reduce the size of the workforce in a crisis for the sake of survival. It did mean that in the normal course of events, people could feel safe participating in process improvement because any gains achieved would not cost them their jobs. Even when productivity gains outpaced our ability to actualize them, there were no layoffs. We used that excess capacity to step up our improvement efforts.

So what about “in times of crisis”? In the event that there is a significant amount of excess capacity that will not be needed in the foreseeable future, the proper way to reduce the size of the workforce is through early retirement programs. Yes, there is a cost to this, but there are costs to layoffs that most managers ignore. In the U.S., for example, there is a multi-year “tail” on state unemployment insurance premiums since they are based on “experience”. The big benefit of an early retirement program is that it allows long-term employees to retire gracefully and avoid the trauma that comes with the radical change that lean creates, while allowing newer employees without years of conditioning in non-lean practices to participate in creating the new culture.

Art Smalley makes some interesting points. He talks about a friend that spent most of the first year of a lean transformation listening to employees’ reasons for being reluctant to cooperate. This is important, and our experience over the course of 20 acquisitions has shown that employees do not trust what management says. They ask, “Will there be layoffs?” Management says “No”, then bang!–two weeks later there are layoffs. Employees also tend to interpret the statement “improve productivity” as “work harder”. The reality is that you can’t have annual double-digit productivity gains without making the work easier to do. My personal experience is that people are not afraid of change, but they are afraid of the unknown. And as leaders, we are terrible communicators (and often lack credibility) when explaining why lean will be good for everyone. Which leads to another issue.

At some point, employees will begin to understand what lean is about. They will see their own skill base increasing through participation in improvement events and working in cells/teams that require them to perform multiple tasks instead of just one. At this point they will start to ask “What’s in it for me?” In my opinion, the answer to that question is profit sharing. Not “gain sharing”, which is subject to management manipulation, but true profit sharing. In this way, as the implementation of the company’s lean strategy shows success, everyone shares in the results of that success.

So, how can company leaders avoid the temptation to “cut costs”?

-Understand lean as a long-term strategy to gain sustainable competitive advantage
-Focus on freeing up capacity to “finance” future growth
-Give an employment guarantee regarding productivity improvements
-If downsizing is necessary, do so through early retirement programs
-In the short-term, focus on the cash flow benefits of lean

This last point can’t be over-emphasized in the “times of crisis” that Robert Austin refers to. In an economic downturn, it’s not “profit” that keeps a company in business but cash flow. In 2001 when the dot-com bubble burst, both our sales and profits went down. But cash flow was up 21%. Remember, “profit” is an opinion based on a set of accounting rules, but cash is a fact.

Post to Twitter

Share this post...Tweet about this on TwitterShare on Google+Share on LinkedInBuffer this pageShare on FacebookEmail this to someonePin on PinterestShare on Tumblr
Posted in Uncategorized • Tags: , , , , Top Of Page

Write a comment

*