I’m neither a doctor nor an immunologist, so I’m not going to cure COVID-19 or tell you how lean can keep your employees safe. Such macro questions are beyond my scope. Moreover, the COVID-19 doesn’t make any distinction between how you run your company. It will infect your people whether your company runs lean, or whether it works in batches. My main goal here is to help you view this unprecedented crisis as a compelling opportunity creating the incentive for companies to convert to lean.
I’ve been implementing lean in various companies and countries since the beginning of 1982, and have found that companies who are able to emerge strongly from recessions are invariably long-term winners. They are able to leverage any advantage that they have developed over their competitors during that recession into an unbeatable advantage.
Toyota, for example, emerged successfully from the 1979 oil crisis despite operating in a country that had to import all its oil. Most people attributed Toyota’s success to its just-in-time approach to running their business. At that time almost every company operated in the traditional batch mode, so this was something new.
The publication of books such as The Machine that Changed the World and Lean Thinking by Jim Womack and Dan Jones eventually helped the world understand the power of a complete lean enterprise. And yet CEOs resisted—and still do—the shift from “batch” mentality to one fueled by lean. Few CEOs can overcome the resistance to lean, especially when the economy is good and the company is making money.
In my experience, the best time to make the lean conversion is when times are tough. The company faces a crisis, everyone knows that something must be done, and overcoming normal resistance is slightly easier. Because of COVID-19, this is exactly the situation that most companies find themselves in. I can’t think of a better time to implement lean.
EMERGE STRONGER BY CONVERTING TO LEAN
Implementing lean during this pandemic will allow many more companies to emerge from this economic crisis in far better shape than they were in before. In fact they will emerge much stronger than if they just tried to ride it out by making small changes to their existing batch approach.
The structural shifts needed for lean will create significant gains. In my experience, the traditionally run batch company organized into functional departments starts out with 25-40 percent excess people, compared to a lean company doing the same work. This results from the long lead times and excess movement required to make things in a batch. The traditional batch company can’t see this and would deny that it is true as they only know one way to look at this.
Additionally, their standard cost accounting system recognizes none of this. I saw this at the first company whose board I joined as an operating partner in the private equity business. At the first board meeting, management said that because its direct labor cost was only nine percent, we should look elsewhere for cost reduction. I objected, arguing that direct labor costs were closer to 30 percent. When they finally shifted from standard cost accounting to lean accounting, they came back and said, “Well Art, you were wrong. Our direct labor costs are not 30 percent. They are actually 35.” Think about that. You can make a lot of wrong moves when you can’t understand what is right in front of your face.
These types of structural costs are rarely challenged in good times, and really add up. The typical batch manufacturer uses almost twice the floor space of a similar lean company. Just going from 3x to 10x inventory turns will normally free up half of this floor space, which will in turn lower your overhead costs, and make you emerge from this downturn as a stronger competitor. As an example, when I first got to Wiremold, steel was our major raw material. We carried about four months worth at any time. It was everywhere. We got that down to one to two day’s worth despite our steel supplier being more than 300 miles away, and our receiving six to eight truckloads of steel a day. Our overall inventory turns went from 3x to 18x, freeing up more than 50 percent of space and lowering our overhead costs.
To put the shift from traditional batch to lean in better perspective, I’ve found that a typical kaizen improvement event lasting one week will generate the following results:
- Cut lead time by 90 percent
- Reduce staffing from 10 to 5
- Reduce inventory by 70 percent
- Reduce floor space by 50 percent
- Reduce defects by 60 percent
- Reduce travel distance by 90 percent
- Cut setup time by 90 percent
CREATE ONGOING IMPROVEMENTS BY EVERY PERSON EVERY DAY
Lean is something that you “learn by doing” step by step, kaizen by kaizen, as opposed to the traditional approach of some big planning or capital spending program. It happens every day by every person in every corner of the workplace. This means that lean is not only not capital intensive, but will be an ongoing major cash generator as inventory is reduced and space is freed up constantly.
I have seen the kaizen results shown above repeated over and over again. At Wiremold we consistently achieved a 90 percent reduction in setup time during a one-week kaizen no matter what type of equipment we were working on. Think of the efficiency and freed-up capacity that this creates. When I was a Group Executive at The Danaher Corporation we once went from 14 people to 3 for the same output during a 3-day kaizen. The low hanging fruit is everywhere.
If the results are this good and don’t require big capital spending why wouldn’t you want to make the shift to lean? Maybe in a growing economy you can hide behind the old adage “we’re too busy to get better now, maybe later.” But times are not good. Now is the time to make the change. If you still can’t see this maybe we need to replace you with someone who can.
Despite the loss of life and economic devastation caused by COVID-19 there is perhaps a silver lining. The crisis should help a lot of companies overcome their built-in resistance to change. When the company is threatened you can’t just keep doing what you have been doing and hope for better results. You have to change, and lean will get you major change quickly. The results speak for themselves. This downturn should help you overcome the concrete heads in your own organization and get on the lean path. Building back better than you were before will give you sustainable competitive advantages for the long haul. Lean is a time-based growth strategy. The opportunity is now, don’t blow it.