The key word here is strategy, understanding that lean is above all else a full-fledged and comprehensive approach to operating an organization. I’ve found that most people view lean as “lean manufacturing” and consider it as mainly a cost reduction program. I’d be willing to bet that more than 90% of the companies that start down the lean path do so in order to cut costs. They see lean as a bunch of tools that you can pull off the shelf when needed to help solve problems. They are invariably wedded to the traditional manufacturing belief that companies compete primarily on cost.
This misguided assumption can be found in the standard cost accounting systems that are employed by almost every traditional manufacturing company: practitioners spend a lot of money in overhead costs trying to determine an exact cost for every SKU, out to four decimal places. These are then used to set the prices of their products by applying a margin of, say, cost plus 25%. They do their best to allocate all their costs into their products. Because this is very difficult to do, these companies wind up with a cost basis for each product that just about no one in the company, other than perhaps the finance gang, believes are accurate. As a result, it becomes very easy to overprice some products while underpricing others. Not to mention that the whole exercise is a waste of time and money in the first place, because the reality is that prices are set by the market—and the market doesn’t care about your vaunted standard cost system.
But what if this traditional approach is all wrong? What if competing on time were a much more effective approach. What if the traditional thinking that costs will go up as run lengths are reduced is not true and in fact costs decline? What if instead of costs going up with increasing investment in quality or increasing product variety they actually go down? We have all heard the old saw, “time is money” but we don’t seem to be able to link that to strategy.
Back in 1990 George Stalk Jr. and Thomas M. Hout of The Boston Consulting Group, after over ten years of research, wrote an excellent book titled, Competing Against Time: How Time Based Competition is Reshaping Global Markets. They looked at the impact of reducing time in production, new product development, distribution and sales. Their basic conclusion was that “the company that is able to set customer’s expectations for choice and response time very quickly dominates the most profitable segments of demand.” I did some work with George Stalk around that time and always bought into his theory.
We have some very good examples that prove the power of this approach. FedEx, for example, competes on time and reliability. You can go to the US Post office and mail a first-class letter for 51 cents with high reliability that it will get where it is going in 2-4 days. Or, you can go down to FedEx and pay around $13 to get it there tomorrow. Why is the line at FedEx longer than the one in the Post Office? Or think about Amazon, which competes on speed and a mantra to get the customer what they want when they want it. Walmart has overtaken Sears, Kmart, J C Penny, Montgomery Ward, and other big traditional retailers, based on speed and efficiency.
Ok, so that’s all nice to hear… but what if you’re sitting there with 6-8 week lead times, and thinking of moving your production to China or Mexico to cut costs at the expense of making lead times even longer? How exactly how are you supposed to compete on time? Oh, yeah, why not build more inventory? That’s the ticket. If you do it right you can have very short lead times to the customer, right? Well, probably not. I’ve seen this play before and it never works. Increasing inventory increases your costs (more significantly than your standard cost system can tell you) and it all depends on having the right stuff in stock. And, eight-week lead-times (more if you source from China) force you to build to a forecast and the chances of guessing right that far out are very low. So, now all you have done is created higher costs, longer lead times and lower customer service. Nice job.
Now think about lean. It wasn’t called lean back then but it was the things that were going on in Japan (mostly at Toyota) that got Stalk and Hout thinking about the concept of competing on time in the first place. Why? Well, with lean the main focus is on removing the waste in your own operations in order to deliver more value to your customers. Every time you remove waste you shorten the time it takes to do anything. If, say, your setups fall from 3 hours to 2 minutes, you will have removed a great deal of waste; and you will have also freed up capacity, lowered your costs, improved your quality and drastically shortened your lead times from say six weeks to two days. If your competitors are still at 6-8 week lead times you should be able to leverage your new 2-day lead time into increased market share. Even better, you should be able to do this without cutting prices. Customers will pay for speed.
Imagine you are running a factory in Northern Michigan. It is winter and very cold outside. A truck just backed into one of your overhead doors, the one out of which you ship most of your products. Your plant is getting very cold very fast and you need a replacement. The first two companies you call say they can get you the door for $800 in three weeks. The third company, using something they called lean, can get you the door in two days for $1,200. What are you going to do?
When we first started implementing lean at The Danaher Corporation I was a Group Executive. One of the eight division Presidents reporting to me was a guy named George Koenigsaecker. George ran The Jacobs Engine Brake company (Jake Brake) and my office was in the Jake Brake factory. George and Jake Brake took the lead in introducing lean to Danaher. From the very beginning George and I both saw lean (it wasn’t called that back then, 1986-87, it was The Toyota Production System or TPS) as the greatest strategic weapon we had ever seen. We knew that it would allow us to drastically lower our costs, free up space, improve quality, lower inventory and compete on time which at the end of the day was the whole point of doing it. Jake Brake was a union plant, the UAW, but look what happened:
JAKE BRAKE RESULTS
Revenue $65M $220M
Headcount 550 575
Floor Space - Sq Feet 240,000 240,000
Inventory turns 2x 25x
On Time Delivery <20% 99%+
Productivity Brakes/Man Hr. 3.0 35.0
Lead Time 85 days 2 days
Operating Income 4% >30%
Development Cycle 72 Months 16 Months
Many people will look at these results and see nothing but cost reduction. Sure, we got a lot of cost reduction. But that is always a nice side benefit of our main thrust: competing on time. This strategic approach is what grows market share and then earnings. As I moved on to be the CEO at The Wiremold Company, we focused on removing the waste so that we could deliver more value to our customers by competing on time. We introduced QFD (Quality Function Deployment) for new product development at the same time we started lean, and cut our product development time by about 75%. We value priced our new products and often were able to gain share at much higher prices than our competitors because of the reduced installation time our products saved the electrical contractors that our competitors did not.
At Wiremold, we increased enterprise value by just under 2,500% in a little over 9 years, and started working with our electrical distributors to deliver more value to them by teaching them how to compete on time as well. We delivered to them weekly but they held 3-4 months of our inventory. We worked with them to rely on our deliveries to cut their inventory back to around three weeks. This gave them cash and freed up space, i.e. delivered value to them. We then convinced them to use some of this cash to broaden the number of our SKU’s that they carried (they still were getting a reduction of about two months of our inventory). We also told them to stop ordering from their MRP system and just tell us what they sold every day and we would put it on the next truck. Those who did became known in their market place as the one who always had the biggest array of Wiremold products. So, they not only cut out about two months of our inventory but they saw sales grow about 10% and earnings on our products grow about 20%. Competing on time worked for everyone.
Stalk and Hout were right: competing on time is the right way to go. Implementing lean is the best way to be able to do this as every time you remove waste you shorten the time and resources to do something. Lean is not a cost reduction program. Although you’ll get plenty of that as a side benefit, it is strategic. Using lean to compete on time creates unfair competitive advantage. Have at it.