Pop quiz: What's the first thing that comes to mind when you think of lean? If you're like most people, the likely phrase is "cost cutting." That's partly because lean and its quality-obsessed counterpart, Six Sigma, have helped many organizations, especially manufacturers, trim the fat from processes and reduce scrap and rework. Lower costs are the natural result.
But don't make the mistake of viewing lean-Sigma as something to be invoked only when cost cutting takes center stage. Far from it. Done properly, lean-Sigma can — and should — serve as the engine to drive growth in your organization. "It is a misconception that lean is a program to reduce cost," says Terence T. Burton, president of the Center for Excellence in Operations Inc., a consulting firm. "It is true you can use lean to reduce costs, but there is a tremendous growth opportunity as well."
At the simplest level, cutting costs by "leaning out" your processes frees up cash that you can then use for growth — for example, investing in another company or exploring a hot new product or a promising business model. Lean can also be used to improve customer satisfaction. If your response times are short and your cost structure is low, you will be able to turn more quickly to satisfy a changing customer requirement or come closer to achieving make-to-order or even engineer-to-order. Delighting customers and earning their loyalty with service that can't be obtained overseas is a sure path to organic growth.
According to the non-profit Lean Enterprise Institute, lean encompasses "a business system for organizing and managing product development, operations, suppliers, and customer relations." It can apply to businesses of all types, not only manufacturers. Based on Japanese concepts like Kaizen (continuous improvement) and muda (waste to be eliminated), lean places great emphasis on perfecting processes. The lean journey could begin almost anywhere. Generally, a chief executive or other change agent reads one of the many books on the subject, attends a conference, or starts a dialogue with a consultant.
Manufacturing Insights, which tracks the financial performance of 250 global manufacturing companies in a Global Performance Index, found that companies with relatively mature lean processes recorded 68% faster revenue growth over the prior 20 quarters than non-lean companies. At the same time, lean manufacturers enjoyed net profit margins averaging 26% percent higher than profit margins reported by manufacturers that hadn't pursued lean practices.
Jumpstart to Growth
At most companies, lean should precede Six Sigma, according to R. Michael Donovan, managing partner and founder of R.M. Donovan & Co., a lean consulting firm. "You have to start putting some structure into your processes. That's lean. Then you can use Six Sigma to get to the root of your problems." The results of this one-two punch should be significant.
For an average company, lean can reduce the cost to produce by 20% to 50%, the manufacturing lead time by 50% to 90%, and overall cycle time by 60% or more, according to Donovan. Other typical benefits he sees are at least a 50% drop in inventory and a 60% reduction in cost of quality. And though lean reduces costs — done with at least a modicum of competence and a committed chief executive for at least a year — no manufacturer with a survival instinct should stop there.
Money saved can be reinvested in a portfolio of growth initiatives, Donovan says. So while the objective may be to grow the business organically via improved customer service or more innovative product design, growing by acquisition may also be a viable option, provided that the money is there to invest.
Some companies doing lean get caught up in what Donovan calls the "cost savings mentality loop" in which cost cutting overrides all other goals. That's a shame, he adds, given that significant gains are available from using lean to improve throughput. If a company can manage to increase capacity and, thus, sales, its profit margin is sure to follow. That is the message that tends to get through to chief executives, he adds.
"Once you've established a connection between lean and the financial statement, boy, you've got management in your hands," Donovan says. But making that link can be tricky. Unless you're lean guru Jim Womack, that is.
In Toyota's Shadow
For Womack, president of the Lean Enterprise Institute, one need look no further than lean star Toyota Motor Co. to see how lean translates into growth and financial performance. At the end of April, Toyota surpassed General Motors in sales, making it the world's biggest automaker. "For the first time since 1931, someone beat GM," crows Womack, head of the non-profit lean education and research center and co-author of several books on the Toyota Production System (TPS).
"The expectation is that [GM] will recede in the rear-view mirror. Toyota's costs are lower — not due to lower wages — and their selling prices are higher," Womack says. Toyota has had major success with its Prius line of hybrid cars, he adds. The company identified that the cost of Prius technology was not justified for regular drivers, so it set about cutting the cost of the technology in half — via its lean measures. It did so well ahead of schedule and has enjoyed stupendous success ever since. The Prius story highlights all the rich benefits of flawlessly executed lean processes: innovation, reduced costs, and higher profit.
Toyota is clearly an extraordinary example, but one that other manufacturers can — and should — aspire to emulate, according to Womack. "There is nothing conceptually very complicated about what they do. Unfortunately, management of most U.S. companies would rather try something easy that doesn't work than something hard that does work," he says. Getting started with lean can be as simple as doing a few experiments. The lean concept of PDCA (plan, do, check, act) is foreign to many U.S. managers, who also prefer to manage by results rather than by process. But that goes against lean philosophy.
Lean concepts can positively affect financial statements, not only when applied to factory floor processes, but also to the rest of the business. At least half of Burton's lean consulting work at the Center for Excellence in Operations involves companies that need help transforming their product development, sales and marketing, and back-office functions. "If you think about the root cause of manufacturing problems, most don't occur in manufacturing," Burton says. Figuring out how to bring to market higher-quality new products at the right price on a short timeline will drive breakthrough growth.
Lean is particularly helpful in reengineering sales processes, Burton says. There, the trick is to create performance metrics that reward measures that benefit the company as a whole, not just individual salespeople for hitting their goals. "You have to use the right performance measures to make the organization move in the direction you want it to go," Donovan adds. When lean processes are clicking, growth is not far behind.