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Ask Art: Is there a formula to predict or evaluate the success of a lean implementation?

by Art Byrne
March 21, 2017

Ask Art: Is there a formula to predict or evaluate the success of a lean implementation?

by Art Byrne
March 21, 2017 | Comments (4)

This is a great question with many implications. Most people need some way to define success numerically; but what are the right metrics to look at? The ultimate goal for anyone running a business is to increase enterprise value. This still leaves you with the question of “as compared to what?”, and even then, the question remains: is it good enough? Or, should the result have been even higher if I did a better job on my companies’ lean turnaround?

I recently spoke with a lean thought leader and a business school professor who are creating a mathematical formula that can tell CEO’s what to expect from their companies if they make the switch from batch to lean. The thrust of this effort is finding a tangible way to answer the number one hurdle to getting more companies on the lean journey, which is: “How do you get the CEO’s interested in doing this?” I applaud their effort but it scares me a bit, as I don’t think you can reduce this important work to a mathematical formula with any precision. And in fact, this could backfire if it leads companies to expect a certain result that they don’t achieve. Above all, guaranteeing results is not merely an impossible task, but a misleading one. At the end of the day how you go about becoming lean is most important.

I met with the management team of a very successful industrial company that wants to take their lean efforts to the next level after 8 years of practice. So far, they have followed the (unfortunately) traditional path of thinking that lean is mostly a cost reduction program. They say all the right words, but then they showcase the annual cost savings from their “operating system” year by year, which only highlights the cost reduction mentality. I told them that the numbers look impressive in the annual report, but the ability of any company to collect this type of savings numbers with any accuracy is suspect. Not only the numbers themselves, but where did they come from? Was it from lean efforts, or from traditional tricks like closing plants or big capital spending? Whatever the case, and even if by some wild chance the numbers are accurate, the focus on cost reduction is still the wrong emphasis in my opinion.

The better approach is to focus on a few key operational excellence goals that, if they are achieved, will drive the future results and ultimate enterprise value of the company. The ones we used at Wiremold were:

                             100% On Time Customer Service

                              50% reduction in defects - - each year

                              20% productivity gain - - each year

                              20x inventory turns  [we started at 3x]

                              Visual Control and the 5S’s everywhere

Yes, these were all stretch targets but that was the whole point. We wanted/needed to change the conversation. We needed everyone to start to think and act a different way. We wanted everyone to focus on the customer and create a learning environment. We ran the company on these five key targets. We met every week to discuss progress by every value stream leader against these goals. We never tried to track our cost savings. We never did an ROI analysis before making rearrangements in the plant. We just focused on progress on these five goals.

After 9 years we more than quadrupled sales, increased operating profits by 13.4 times and increased enterprise value by 2,467%. That was nice. But are these the right measurements to focus on? I would say no; they are just results. Our focus was on the customer. To serve the customer better we reduced our lead times from 6 weeks to 1-2 days. That let us provide better customer service and gave us a significant strategic advantage over our competitors, who still had 6-8 week lead times. We did this by focusing on setup reduction. Machines that used to changeover 3 times per week were being changed 20-30 times per day. Customer service went from 50% to 98+%. Inventory turns, a major focus for us, went from 3x to 18x, freeing up lots of cash and space and taking working capital/sales from 22% to 6.7%. Gross profit increased by 13 points. All driven by our focus on the five operational excellence targets shown above.

In my recent book The Lean Turnaround Action Guide, I shared comparisons of what a company would look like in key financial areas such as sales, margin, inventory turns, productivity and enterprise value, over five years, if they stayed as a traditional batch company instead of making the switch to lean. I used a very healthy batch company as the base line. We then take it step by step through a lean conversion and show the results after five years. I was quite conservative in the lean case, as we did much better at Wiremold, not to mention many other lean companies that have done better as well. Even so the comparison after five years is strikingly better for the lean company. These impressive results indicate what you should expect to achieve with lean in most key financial areas. And yet, even the best recorded set of results still won’t reveal to you what is truly possible with lean. That’s because there is no “ultimate”; there is only continuous improvement.

That’s why no equation will ever fully capture the value of lean, and why you should never rely too heavily on one. Try to get away from the traditional approach of focusing on results. Focus instead on stretch targets that you can measure and that if achieved will drive your future results to levels that you would never even dare dream of in your batch state.

The views expressed in this post do not necessarily represent the views or policies of The Lean Enterprise Institute.
Keywords:  strategy,  sustainability
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4 Comments | Post a Comment
Justice March 21, 2017
1 Person AGREES with this comment

Hi Art,

Thank you for this post.  My Lean mentor helped me see how stretch targets for measurable performance help with the Lean culture change by forcing teams to confront the limitations of their current tools or approaches.  Choosing appropriate targets seems like it could take a fair bit of reflection and inquiry.  How did your team at Wiremold to arrive at the performance targets you shared in the post? How long did it take?

Regards,

Justice



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art byrne March 23, 2017
4 People AGREE with this reply

Justice, yes, picking the right stretch targets is very important and so you should be careful what you pick. At the same time don't make it a never ending process. I have seen companies spend months and months word smithing their strategy and key targets and in the meantime nothing is getting done. Pick things that you can measure eaisily and will have the most impact on the future results of the business. Don't pick results, for example "grow earnings 8% per year. Pick the things that if you acheive them will deliver the most value to your customer and understand that the results will follow. Focus on improving your processes not your results. At Wiremold I brought the five key operational excellence targets with me when I came as I thought they would deliver the most value. As a result, although my team and I did do a little wordsmithing we didn't really spend a lot of time on this. We just focused on the doing part. Art.



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Chet Marchwinski March 22, 2017
2 People AGREE with this comment

I’m posting with permission a question that Samuel Selay posted in my newsfeed after I shared this column on LinkedIn. He wants to know:

“What would be the key metrics in a non-manufacturing organization who's also looking to increase enterprise value?

“I'm referring to 100% On Time Customer Service, 50% reduction in defects, 20% productivity gain, 20x inventory turns, and 5S’s everywhere that Art cites. Art is repeatedly successful in his approach in manufacturing environments using these metrics, but are there a set of metrics that can be used in service environments in a broad stroke? I agree with your remarks, but feel that they should be tailored in each industry. For example safety is critical in some service industries such as healthcare or distribution and not relevant to others such as law or software development. I may be rambling, but there are some industry established KPIs.”



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art byrne March 23, 2017
3 People AGREE with this reply

Chet/Samuel, thanks for your question. I agree with the concept that a companies operational excellence goals will be slightly differen depending on the industry you are in. I don't have any set examples but every one has customers so 100% on time customer service works just about everywhere. Productivity and quality goals also cover any business. I would also suggest that visual control and the 5s targets we had are relevant to any business. Inventory turns would be important to distributors and retailers but not so much for hospitals where paitient outcomes are probably at the top of the list. You just have to look at each business and determine what are the 5 or 6 stretch targets that if acheived woul drive their enterprise value to the highest level. Art.



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