The Lean Enterprise Institute’s webinar “A Wall Street View of Lean Transformation” drew thousands of attendees online and over 200 questions that we didn’t have to answer with our guest, Cliff Ransom, a Lean Thinker and President of Ransom Research, Inc., an independent equity investment research firm. We selected questions that best represented the main themes of what you wanted to know and submitted them to Cliff. The follow-up Q & A with Cliff follows:
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Cliff Ransom
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Q: If your company is NOT growing, how do you do lean, sacrifice earnings per share (EPS) and still satisfy Wall Street?
A: If your company is not growing, Wall Street will treat you as if you are already dead, so undertake the lean journey. You really have nothing to lose.
Q: Why do you think Wall Street does not “get it”? We’ve been on this lean journey for a long time. Shouldn’t they recognize the benefits by now?
A: It is a mystery to me, but I suspect that the reason has to do with Wall Street being governed by metrics defined by Generally Accepted Accounting Principles (GAAP), and they really have little visibility into the key motivators of business success: customer satisfaction, attention to the voice of the customer, safety, delivery, and quality.
Q: If lean is so good, why haven’t more companies embraced it?
A: In the presentation, I dedicate four entire slides to bullets about why few customers “get it.” Foremost among them are: no sense of urgency; fear of change, any change; and comfort with the status quo.
Q: You mentioned that Wall Street is clueless about lean metrics. But how are inventory turns interpreted from financial reports for Wall Street?
A: The best analysts understand inventory turns and working capital management. The great bulk of them, however, are fixated with EPS.
Q: In terms of key performance indicators (KPIs), how should return on assets be linked to lean principles?
A: Set a return hurdle for your business after benchmarking it against world-class achievers, and then create the conditions, processes, resource allocations, and timetables to get there.
Q: I, like others, struggle to show the impact of lean on our traditional business financials. Would you please explain in more detail the metric of “cash conversion greater than 100% of net income”?
A: The calculation is derived by dividing the free cash flow by your net income.
Q: Does the size of the company dictate how easy or hard it will be to implement lean?
A: No. Although, it may be easier to start experimenting in a large company, even a small company, however, can use hoshin kanri [strategy deployment].
Q: What are the signs of a good lean culture? What should we look for? What should we focus on to achieve it?
A: A good lean culture permeates every aspect of the enterprise. You should be able to identify key elements at every level of the enterprise: manufacturing, supply chain, human resources, accounting, sales and operations planning, customer service, etc. Look for concrete, specific, visible occurrences. Ask them to tell you stories.
Q: Please talk about the importance of people in the development of a self-sustaining culture of continuous improvement, employee empowerment, and respect for employees.
A: People are paramount. Always remember Toyota’s first admonition: respect for the individual.
Q: What steps should we take to get started implementing lean principles in a service industry? We don’t “make” anything, but I know we could benefit from lean.
A: Service industries offer an increasing array of examples and role models: hospitals, educational institutions, research laboratories, call centers, etc. Get involved in meetings organized by the Lean Enterprise Institute, the Shingo Prize, Association for Manufacturing Excellence, the Lean Accounting Summit, and start networking. Hire a consultant with experience in service applications.
Q: I see all the transactional muda in facilitating kaizen events in government organizations. Have you noted metrics for lean efforts in government that correspond to those in the private sector?
A: The key is to find the appropriate metrics and start tracking them. Each case will differ, but someone experienced in the government arena can work with you to determine the right standards for your particular application.
Q: What are your thoughts about lean in healthcare?
A: Paul O’Neill, ex-Treasury Secretary and once-head of Alcoa, believes 50% of all work in healthcare is nonvalue-added. I think the number is way higher. Start somewhere simple, like in the pharmacy or accounts receivable, before you attack clinical practices (and the egos of doctors!).
Q: What is the best way to implement the changes needed to switch from a GAAP approach to a value-stream financial approach in accounting?
A: I doubt that you can devise plain English financial statements without professional help. Particularly adept practitioners, in my opinion, include Brian Maskell, Orry Fiume, or Mark Deluzio.
Q: What role does the HR function play in advancing lean implementation? What are some best HR practices?
A: If people are integral to lean, then HR is a vital hub. I see huge applications in compliance, recruiting, hiring, on-boarding, training, retention, and firing.
Q: You said you can walk through a plant and tell if it’s a good plant in 30 minutes and if management knows whether or not it’s a good plan in 60 minutes. How can you tell? What are the signs?
A: This question asks me to distill nearly 20 years of expertise into a few sentences, but use the following mantra: “Look up, look down, and look around.” Look up at the lights to see if they are bright and clean. That will tell you tons about safety. Look down at the floor: is everything shadow boxed? Is there a place for everything and everything in its place? Is there extra WIP? Are there loose bolts, paper, grease, or cigarette butts on the floor? Look around: you should be able to stand in the middle of an operation and have “flow” be obvious.
Q: I find what you do an interesting intersection of operations and financial analysis. What in your background and education has prepared you for this work?
A: Well, 45 years of studying history, especially financial history. It is worth noting that, other than a brief period in the late 1970s and early 1980s, when I owned and operated a number of small businesses, I have not been an operating type, “just” a financial services type.
Q: How long (how many years) before you get to capital expense reductions in the lean journey?
A: Immediately. I did a one-week kaizen ten years ago with [consultants from] TBM and Shingujitsu that allowed MascoTech to avoid expanding the walls of a plant and buying a piece of production equipment that cost $18M new. Two years ago, I participated in a kaizen activity at Wabtec that leaned out the flow through a locomotive paint shop and avoided a multi-million dollar capital expenditure budget item.
Q: Do you have a position in any of the stocks you mentioned?
A: You can assume I own most of them, but let me stress again: there is no way for me to tell individuals what or when to buy or sell. Even in my institutional practice, I don’t use the traditional “buy-hold-sell” mode of Wall Street because each portfolio manager has a unique style to meet unique sets of needs.
Q: Does a lean transformation threaten innovation?
A: No. Lean should foster innovation. Indeed, lean may be critical to innovation, as lean companies understand the voice of the customer.
Q: Are unions counterproductive to lean?
A: No. One of the premier archetypes of lean transformation in the late 1980s and early 1990s was the Jake Brake division of Danaher. Jake Brake was, and is, a UAW shop.
Q: I know lean must be led from the top, but with the small to medium manufacturers in our region, most are owned by holding companies and the local executives are overshadowed by the investment boards that don’t support lean. What is the hope for these companies?
A: Start doing lean locally. Your successes will eventually be recognized by your upper management. At the very least, you will have set a track record that will allow you to impress your next bosses.
Q: How would you address the issue of blanket PO items inventory reductions? When on the income statement will it show a loss of assets?
A: I don’t understand this question. If it relates to a concern about the charge to the P&L under GAAP accounting when inventory is liquidated, stress the cash flow benefits and just do it.
Q: What is the most poisonous operational metric to a lean conversion?
A: There are dozens of them. Just focus on the ones that are driven by quality and delivery to start.
Q: Do you have examples of success in process industries, such as chemicals or pulp and paper?
A: Yes. Look at what lean did for Alcoa in aluminum or study Market-Based Management (MBM) at Koch Industries, which is not quite lean but which is at least analogous.