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Michael Balle

Michael Ballé: Lean is about better managing costs, not cutting costs

By Michael Balle, co-author of The Gold Mine and The Lean Manager - Last updated: Monday, December 7, 2009 - Save & Share - Leave a comment

The fundamental insight is that in any cost structure there is a kernel of costs which are common to all competitors in terms of materials, components, labor, equipment, overhead etc. and then around these costs, an additional layer of costs which are due to the firm’s operational method – waste, in the lean sense (costs you incur unnecessarily because of things we don’t know how to do, poor planning decisions and wasteful activities this generates). “Lean” is lean in the sense that it tries to progressively take the unnecessary costs out of the system. Lean usually approaches cost management with the three following steps:
1. solve quality and delivery problems (non-value to customers and rework costs)
2. reduce lead-time (which will improve delivery, cash and reveal “waste” in the system)
3. shave the costs down as they appear

For instance, an industrial company assembling in a high-cost country from global sourcing has first worked on its shipping department to figure out why, considering the amount of finished product inventory, they couldn’t deliver on time to their distributors 100% of the time. At first, it appeared that 1) there wasn’t enough personnel at the shipping are and that there weren’t enough finish products in stock to be able to ship, so they started by adding one temporary worker and MORE finish goods inventory in order to ship 100%. But then further analysis revealed there was 1) plenty of stock but not of the right products and 2) by better sequencing the material handling work there were in fact too many operators in the shipping areas. So the company started reducing both inventory and labor, while maintaining its 100% shipping performance (this didn’t happen overnight – the result of much head scratching and experimenting over a year).

As the company struggled with shipping it also realized it had the wrong finished product stock because of delivery problems from the production area, so it’s started applying the same “lean thinking” there, and found out that there were both rework issues on some products which delayed delivery to the finished goods warehouse, as well as some glaring planning inconsistencies.

While it tackled difficult production issues, the company also realized its component warehouse was full of dead stock which had not rotated for more than a year. By starting a program to investigate a few crates every week, it cleared much of it, and got to the point were it could shut down the external warehouse (and stop paying for rented space there). By thinking it through, the procurement department came to the conclusion that since the company received a container of parts from China every week, rather than have As one week, Bs, another and so for, it could try to mix-load the containers better in order to get smaller quantities of all components weekly (as opposed to monthly or by monthly). This took some more head-scratching, but once in place had the dramatic effect of lowering component inventory by a full third – and liberating cash that made the company cash positive for the first time in ten years.

In the warehouse, the company used this stock reduction to close the top layers of the component racks. By doing this, it realized it no longer need the big forklifts which reached all the way to the ceiling, but could make do with the smaller machines – and so it returned the large forklifts to the leaser, this reducing costs further… And so on.

All these actions are about better cost management. Trying to get to the same result with cost cutting actions just backfire: reduce forklifts without reducing the need for forklifts and you just create an other problem. Cost cutting is the pillowcase syndrome: squeeze one end, it bulges somewhere else.

Managers like the cost cutting approach because they can be “take charge” managers and force their staff to cut costs. This rarely ends well for the company as a whole. Better managing costs by taking away the cause of the cost, however, cannot be done without engaging people or against it. In the previous case, the company’s personnel had to learn how to manage it’s shipping area better (lots of people resistance initially), manage its production better (many technical difficulties), manage its procurement better (the ERP would not let it do it), etc. These changes could not have been forced on people. They had to be involved in understanding the problems and finding solutions.

There are two key pillars to lean management: continuous improvement and people engagement. Trying to do one without the other is like trying to build a table with only the left legs and ignoring the need for the right hand legs: it simply won’t stand for long. Indeed, some managers have been known to willfully confuse lean for mean (cost managing versus cost cutting), mostly because they don’t master the lean techniques required to both get the cost improvements and empower people, but such confusion basically stems from a misunderstanding of what the lean movement stands for. The key to lean is that to better serve customers with better products and better service, managers need to teach their staff to improve their own processes by solving problems every day and think more deeply about how they do their own work.

If you have practical questions regarding lean implementation, please join me on the <a href=”http://www.lean.org/balle/”>Gemba Coach</a> column on <a href=”http://www.lean.org/”>lean.org</a>

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