Most companies overlook answering this excellent question when they start down the lean path. That’s because, in my experience, roughly 95% of all companies launching lean see it primarily as a cost reduction program. So, they focus on operating costs on the shop floor, emphasizing head-count reduction. They don’t see lean as a strategy, a complete way to run the business. As a result, the vice president of operations will use lean tools to cut costs without making any real changes. The rest of the organization continues to run in a traditional batch mode.
This approach pits parts of the organization against one another and causes nothing but confusion. For example, the operations team will be working hard to level-load the factory while the sales and marketing team works just as hard to bring in big batch orders.
Moreover, as they head down the lean path, the measurements or targets used by the traditional batch company won’t change much. That’s not surprising, as they have become comfortable with what they have used for a long time. A typical list might be:
- Grow sales 4% annually
- Increase gross margin by 0.5 points annually
- Improve the ratio of direct vs. indirect head count
- Increase ROI by four points in five years
Most companies take their value-adding processes for granted.Most companies are familiar with targets like these. This approach basically says, “keep doing what we have been doing, but do it slightly better.” More importantly, these targets are results-oriented. They indicate where we want to be but say nothing about how to get there. How, for example, will you achieve 4% annual sales growth? In addition, few of your employees understand complicated measurements like ROI, so it is difficult to get them all on board working for this goal.
The truth is that all companies, manufacturing and non-manufacturing, are fundamentally alike. They are nothing more than a group of people and a bunch of processes trying to deliver value to a set of customers.
Understanding this fact changes how you look at a lean turnaround and focuses your efforts on a radically different set of targets or metrics. Most traditional batch companies can’t see this. They take their value-adding activities (i.e., their processes) for granted. They assume that they cannot do anything about long setup times or six- to eight-week lead times. Instead, they develop a strategy that persuades their customers to put up with their long lead times.
If you don't change the processes that gave you the results, you are doomed to repeat them over and over. In so doing, they are ignoring the processes that gave them the results they just got. This mindset is dangerous because if you don’t change the processes, you are doomed to repeat the same results (with minor differences) over and over. That’s why lean leaders advise people to always “focus on your processes, not your results.” I’m not saying that traditional batch companies never try to improve their processes. I’m sure they do. It is just that their primary emphasis on “make-the-month” tends to overwhelm any real push to improve their processes.
Focus on Processes, Not Results
Switching to lean requires a total focus on delivering value to the customer, which, in turn, requires that you clearly understand that you must improve your processes. You must see lean as a time-based growth strategy. Every time you eliminate waste from your processes, you reduce the time it takes to do something -- and allows you to be more responsive to your customers and deliver more value.
Adopting lean thinking and practices means competing on operational excellence as your strategic advantage. To do this, you must clearly define what “operational excellence” would look like for your company. This change calls for long-term thinking. The targets you set all have to be stretch goals. You are trying to transition from where you are to something completely different.
Keep in mind that you are trying to change the conversation, and ultimately your culture. If you set targets that don’t shock people and make them say, “are you kidding me, we’ll never be able to do that,” then you haven’t set the bar high enough.
Imagine that your company is turning inventory 3x, and I set a target for operational excellence at 5x. This slightly more challenging goal might make people think they can achieve it by just doing what they are doing now, only a little better. Now imagine instead that I set the target at 20x—this kind of thinking goes out the window! To get to 20x, everyone clearly understands that everything has to change, and they must think outside the box. The whole organization will have to work together to make something like that happen. You can’t have operations trying to level-load while sales brings in big batch orders and have any hope of reaching this target.
Your lean targets should be stretch goals and simple enough that everyone can understand them.Your lean targets not only have to be stretch goals, but they also need to focus on improving the processes. They can’t just be results-focused. As you approach the targets, they should also indicate your competitive gains. Finally, they should be simple enough that everyone in the organization can understand them. Working toward these targets will bring everyone together as a team and, step by step, success on top of success, will change your culture.
A Real-World Example
At Wiremold, we adopted a set of operational excellence targets, which are not only process-focused but generic. I believe that they work for every manufacturing company and, with only slight changes, most service companies. Also, when we acquired a company -- we made 21 acquisitions at Wiremold over nine years -- on the first day, we would give the new management teams the following list of operational excellence targets to focus on:
- 100% on-time customer service
- 50% reduction in defects annually
- 20% productivity gain annually
- 20x inventory turns
- Visual control and 5S everywhere
Of course, when I first announced these targets, everyone would say, “Are you kidding me?” Nope, I wasn’t. But that was the whole point -- we needed everyone on board: sales, finance, IT, operations. And then, we drove these targets forward with an aggressive kaizen effort.
We knew we would be a very different company once we achieved these goals. And our lean transformation was directly aided by pursuing them. Having every value stream leader focus on these goals changed us from a functional to a value-stream organization.
By focusing on process-related targets, we knew that over time the results would take care of themselves.Pursuing these goals put a lot of pressure on the organization, but at the same time, we tried to be realistic. We knew, for example, that you can’t go from 3x to 20x inventory turns overnight. But we knew you could go from 3x to 6x the first year, from 6x to 8x the next year, from 8x to 10x the next, and so on. So, over nine years, we got to 18x inventory turns just before we sold the company.
By focusing on process-related measures, we knew that results would take care of themselves. If, for example, we got to 100% on-time customer service and short lead times, we were confident that sales would grow due to our best-in-class customer service. As a result, we didn’t need to set a sales growth target of 4% per year. Instead, as we approached our service target, sales grew closer to 10% per year. In fact, we doubled in size in the first four years, doubled in size again in the next four years, and were on track for another doubling when we sold the company.
Similarly, although the safety of our associates was a top priority, we didn’t include a safety goal. We knew that hitting the inventory turn, productivity, 5s and visual control goals would drastically improve our safety results. It did, and we reaped the rewards with happy associates and much lower insurance premiums.
Over nine-plus years of using these operational excellence targets, Wiremold achieved the following results:
- cut our lead times from 4-6 weeks to 1-2 days
- more than quadrupled sales
- increased EBITDA from 6% to 21%
- gained 13 points of gross margin
- increased enterprise value by just under 2,500%
So I guess you could say it worked. Still, there will be skeptics. Maybe you think five operational excellence targets are too many. OK, then focus on two: 100% on-time customer service and 20x inventory turns. If you can get both of these going up simultaneously, you will be on track, as everything else will take care of itself.
The most important things are to focus on your processes, not your results, and create stretch operational excellence targets that will change your company and its culture. Getting there is also fun. Good luck and enjoy.
Before you improve your processes, you must first see the problems in your value stream. Learn how to see the obstacles that are holding you back by taking LEI's Learning to See Using Value-Stream Mapping, a go-at-your-own-pace, web-based workshop based on the innovative approach outlined in the landmark Learning to See Workbook.