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Ask Art: How Should I Re-invest the Gains from Kaizen?

by Art Byrne
February 8, 2019

Ask Art: How Should I Re-invest the Gains from Kaizen?

by Art Byrne
February 8, 2019 | Comments (2)

You should take every opportunity to leverage all the gains you will get from removing the waste from your operations in order to deliver more value to your customers. An aggressive kaizen approach is the best way to remove waste; many of the gains you get will come from your kaizen efforts. I strongly believe that a successful lean implementation requires a no layoff policy in order to get everyone on board. And so you will have to find ways to “actualize” the kaizen gains, particularly when it comes to contributing ideas on how to remove the waste. For example, if you do a flow kaizen and go from needing 10 people to 5 in order to do a particular job, what you do with the 5 people who are freed up will determine the net gain you get.

"The whole movement to lean using kaizen activity allows you to remove a great deal of waste and deliver value to your customers. If you do the right things with the excess resources you free up, you can then leverage your gains far more dramatically."If you are the owner or CEO of a company your ultimate measurement is how much enterprise value you created. Increased enterprise value benefits all your stakeholders; shareholders, employees and the communities in which you do business. The only way to increase enterprise value is to deliver more value to your customers than your competitors can, over long periods of time. Adopting lean as your strategy is the best way to do this. Focusing on removing the waste will allow you to compete on time which in turn will lead to market share gains and faster growth than your competitors. The efficiencies that result from removing the waste will allow you to grow earnings even faster than sales. I have witnessed a number of cases where the best company in an industry might have only 30-40% of the sales but more than 80% of the earnings.

Using lean and kaizen to compete on time gives you unfair competitive advantage for sure; but if you are smart about how you reinvest the gains from your kaizen activities you can extend your advantage. So let’s explore a few of the areas that will give you the most leverage. They fall under six categories:

     INVEST IN NEW PRODUCTS

     PURSUE MEANINGFUL ACQUISITIONS

     LEVERAGE SPACE FREED UP FROM KAIZEN

     GROW YOUR PEOPLE

     INSOURCE WORK

     CREATE A MOONSHINE SHOP

INVEST IN NEW PRODUCTS

Growth is the most important driver of enterprise value so why not start there. Removing the waste and drastically reducing your lead times will provide growth for sure but if you can also be the new product leader in your industry you will get a big multiplier on your growth. Traditional, batch companies typically turn inventory 3-4x annually. This means that there is lots of what I call “sleeping money” just lying around on the shop floor. The lean company, with a target of 20x inventory turns can convert this wasted money into cash that can be reinvested in new products. In addition to the funds that are freed up, if you introduce QFD (quality function deployment) as your product development approach in your lean turnaround you can cut your development time by 50-75%. More importantly, the QFD approach is a coordinated approach internally and uses the “voice of the customer” in all new products by getting the customer involved very early in the development process. This substantially increases the success rate of new products as you are already certain that you are developing something that the customer wants. The “voice of the CEO” is a lot less accurate.

The productivity gains you get from lean will also allow you to invest in more product development engineers. Your total headcount might not change too much but a higher percentage can be shifted to new product development. At Wiremold we always felt that if we could keep the competition always chasing our new products we would always be the market leader. And don’t get me wrong, these don’t have to be earth-shattering new developments, just a steady stream of innovation. Always faster and “better than” the competition. 

PURSUE MEANINGFUL ACQUISITIONS

Lean is the perfect tool for acquisitions. Reducing inventory and boosting growth and productivity produce the cash and following a lean strategy provides a clear plan of action and lowers the risk. Adding the right acquisitions broadens your base and increases your growth and enterprise value. The main difference between this and creating new products is that acquisitions are unpredictable. You can’t control when the right company might become available or if it does that you will be the winning bidder. As a result, although you want to be constantly on the lookout for new acquisitions, investing in new products, which you can control, should come first.

At Wiremold we did 21 acquisitions over 9 years, funded mostly by cash we freed up from inventory as our turns increased from 3x to 18x+. Our standard work for an acquisition was to start running kaizens the very first week after the financial closing (or as close to that as we could). We explained to the acquired company, as part of our due diligence process, that this would be our approach so there were no surprises. Even so it was always shocking to them when we showed up, put together a couple of kaizen teams using mostly their people and were moving equipment around by noon of the first day. The results were always dramatic by the end of the week and left the new employees with no doubt about what they should expect going forward. For the most part this approach, which lowered inventory, reduced lead times , lowered costs and improved market share, allowed us to recoup all of our cash from a new acquisition in roughly 3 years.

LEVERAGE SPACE FREED UP FROM KAIZEN

Going from 3x inventory turns to 15-20x turns should free up about 50% of your floor space. This is where the unnecessary inventory was lying around sleeping. Holding on to this space requires some discipline: in most companies, empty space seems to very quickly attract many things that you don’t need like excess inventory. But this is very important space for you to accommodate growth without having to invest in new bricks and mortar. So, make sure you rope it off in some fashion. We found that putting in a basketball court or similar employee space kept the junk out. In one of our Wiremold acquisitions we bought a company that had 50,000 square feet of space, did a bunch of kaizens and eventually consolidated it into another facility using only 4,000 square feet. Oh, and by the way, sales had doubled by the time we moved to the 4,000 square feet.

GROW YOUR PEOPLE

In my experience, before starting kaizen most traditional batch companies have somewhere between 25-40% excess people. The lower the inventory turns the higher this number will be. CEOs will reject this estimate. This is not true in "my" company but I think it is certainly in the ball park. Their batch state, functional departments and excess inventory pretty much dictates this. It is why it is so common for kaizen teams to be able to reduce headcount on a specific product or operation by 50% in the course of one week and then do it over and over again. Back when I was a Group Executive at Danaher Corporation one of my group companies, Jake Brake, was able to get a gain of 29% in the number of engine brakes per man hour every year for the first five years as just one example.

I have always believed strongly that people are your greatest resource. They are the only asset you have that can appreciate over time. Management has a tremendous responsibility to make sure that happens. You simply can’t lay them off. So what should you do with the people freed up from kaizen?

There are many options here but let’s start with one question. Who should you take out in the case where the kaizen team reduced the number of people needed in a cell from 10 to 5? The manager of that area will predictably offer up the five worst performers. You want to do the opposite. Take out the best performers. And, if possible, give promotions to several of them so people won’t be afraid of kaizen. Cross train all of them in other skills. Put a couple in your Kaizen Promotion Office so that they can work on removing more waste on a full-time basis. This will do two things. First, it will force the remaining 5 to step up their game (and believe me with a little ongoing help they will). Next it increases your flexibility, as you now have five trained operators who could step back into that area to help if someone calls in sick. It also moves you one step closer to having the type of flexible workforce that lean requires. 

INSOURCE WORK

Most traditional companies are quick to outsource work whenever they can. The lean company, as you might expect, will do the opposite. There are probably a large number of things that are already being outsourced but this may create problems with lead time or perhaps quality. Kaizen by kaizen you are freeing up a lot of people, so why not create a new line and insource the work? This will allow you to improve quality and shorten your lead times. If in our kaizen example above we went from 10 people to 5 needed to do the work, and used 4 of them to set up a line to insource some other work, what would be the labor cost for this new line? I would argue that it is zero as we were already paying these people to do another job that we proved was waste so we added no new cost to insource the work. Your CFO may not agree with me but we would still actualize the gain from the prior kaizen that requires 5 less people.

CREATE A MOONSHINE SHOP

The traditional company is wedded to the belief that productivity gains require capital spending—big capital spending in fact. And when they do spend they tend to overinvest, and wind up with excess capacity. Most outside vendors build equipment to satisfy these needs. Speed and capacity tend to be the main design criteria. The time it takes to change over the machine is secondary if it is considered at all. Equipment speed trumps flexibility.

With lean of course the opposite is true. Rapid changeovers and maximum flexibility are what matters. The lean company will quickly learn that it needs to develop an in-house capability to quickly make small, flexible machines or be capable of making alterations to existing equipment. This we call a “moonshine shop” and it is a staple of any good lean organization. It will be staffed by existing people freed up from kaizen in other areas. A good example here is the one-piece-flow wave soldering machines that we built in-house at Wiremold's China plant. These were small, inexpensive devices that replaced a couple of large commercial wave soldering machines that could only be run in a batch and required lots of moving of pc boards to and from these monsters. Our one-piece-flow machines on the other hand could be put right in the cell (every cell had one) such that we could populate the board, solder it and then assemble it right into the product.

SUMMARY

The whole movement to lean using kaizen activity allows you to remove a great deal of waste and deliver value to your customers. As Taichi Ohno says, Present Capacity=Work + Waste. If you do the right things with the excess resources you free up, you can then leverage your gains far more dramatically. Investing in new products, acquisitions and of course your people will put you out front and keep you there. Don’t waste the gains.

 

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2 Comments | Post a Comment
Jean Cunningham February 08, 2019
2 People AGREE with this comment

Art, as always you are right on. I get this question so often that I offer the Lean Profit Model as a way to help us think about how Lean affects all the levers of economic value creation. It is the taking action with the capacity creation that is too too often the missing component.  Mike DeLuca will be teaching a course on this at LEI to help with this thinking. 

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art byrne February 08, 2019
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Jean, thanks for your comments. I'm glad you enjoyed the post. Your right, traditional thinking always seems to get in the way, especially with the finance team.To them you only get savings if you fire someone so having a no layoff policy with lean is confusing. The idea that removing the waste frees up capacity doesn't seem to occur to them. The fact that you are trying to double in size with the same number of people and same or less floor space seems so absurd that it gets dismissed as well. I often use the example of a product with a 6 week lead time made in the traditional batch way [i.e. functional departments] where looking at TAKT time of 60 seconds and a percent loading chart shows that  if we put it in a cell we only need three people. That's about a 63% productivity gain. Well that's great and people get that but when I ask what is the strategic gain here know one knows. The fact that the lead time went to 3 minutes from 6 weeks is not understood at all. This shortened leadtime of course can be used to gain market share and actualize your kaizen gain way beyond just going from 8 to 3 people. You will need all of them to handle the new volume.

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