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How Do We Reduce Costs with Lean?

Michael Ballé
9/1/2009
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Dear Gemba Coach:

This will be a very general and basic question. We build a large product that several weeks to complete. We fabricate some things in-house and others outside. Currently no form of Lean exists. I have been asked to reduce the cost of a product by a significant amount. I believe that lean is the way to go. What are the steps and the sequence that must be taken to start down the road of reducing cost?

I am thinking about starting by creating a value stream map, then working to reduce material handling, and then to reduce setup times. I know we could list every single tool available in the Lean kit, but I am looking for 5 or 6 tools and the order of attack.


A) Fascinating question, if only in trying to imagine what kind of large product takes several weeks to complete. The question provides a good opportunity to examine the fundamental debate about whether to apply the lean tools to every process, or whether to develop the kaizen mind in every employee. I realize that you’re under pressure to deliver quick results, and are in no mood for a lecture on stepping back, taking a deep breath and looking at things differently. I sympathize. However, there’s never a convenient time to have the mindset discussion, so grit your teeth and bear with me.

One way of attacking your problem would be to draw a value stream map of the entire process, identify steps in the process where things could be better, and then eliminate the waste you’ve spotted. You'll find low-hanging fruit right away. And you will learn to use specific lean tools moving forward. This will, however, take several months, even if you do this like a maniac, and will end up in many political fights about who is responsible for what. And you still face the hard truth that at the end of the project you may succeed in fixing parts of it, but won't show a reduction in the total cost because you still won’t understand exactly where the real costs come from. This has plagued many a lean officer in the past.

There's another way of looking at this. In order to reduce the cost of a product, we first need to understand the cost. This would be the basic sensei injunction of not debating what solution to apply (which tool to use where) until the important people involved agree on the problem. Now, understanding the cost in such long cycle is not an easy problem, and, it can be argued, that if you did understand the cost already – you’d have reduced it. Chicken and egg.

So where to start? First, teamwork. This can't be your project alone. You need your team to agree to a basic challenge. Can a core team (manufacturing, engineering, logistics, purchasing) agree to a basic kaizen challenge of reducing the cost of each product by X%? Cost shouldn't be the only parameter. To avoid doing something silly, you'd have to challenge yourself on all three aspects of customer satisfaction: delivering on time, without quality complaints, while reducing the cost. As well as doing so working safely (so no accidents) and with good spirit. The key idea here is that the team of managers commits to the idea that each product will be better than the last one, and in solving immediate problems, we will discover the real costs of the product - the core at the center of the plum to use a lean image.

So the main thing is to start by forming a common ownership of the problem and forging a commitment to the kaizen process. This requires a core team of people involved in the cost of the product agreeing to hard targets, and to the beginning of a PDCA cycle: a firm commitment to a post-mortem ("Hansei" in leanspeak) session at the delivery of every product.

In the first post-mortem session, invite all the key actors (don't forget maintenance, they'll have a lot of interesting things to say about existing products out in the field) to look at the initial project plan (it can be drawn as a VSM to scale with an actual timeline) and examine where things basically went wrong. In long lead-time projects, the total time slippage of the project is usually a good indicator of cost, because of the added burden of overhead and as an indicator of things going wrong. Start by identifying the exceptional costs that occurred in the previous cycle. These exceptional costs are probably the first costs you can reduce if you understand them better. The next step is to "go and see" and try to find ways at the Gemba to trigger alerts when one of these exceptional costs happens, so that you can understand the facts of the costs - and have a good place for the first 'why?'.

Once you get a good handle of what kind of exceptional costs you're incurring, you'll probably find that they are consequences of not-right-first-time. Rework, mis-deliveries, poor planning etc. At this stage, you can start spreading the kaizen spirit by asking every shop floor function to monitor its key points of rework and focus on doing it the right first time. Here the lean tools can be very useful both to get some gains and, as importantly, to understand the shop-floor based costs.

The aim of this first phase is to understand in detail the standard conditions you need to work in so that you can eliminate exceptional costs, and so you can then reduce costs caused by rework and other recurring issues. To do so, every shopfloor supervisor can head a kaizen project, with the appropriate tool, with two missions: one, reduce the costs by using the tool, two: understand what, in our current management practice, generates this cost.

Once the largest shop-floor driven costs are brought under control by keeping operations in standard conditions, confirming each activity to avoid rework and making sure teams are on track with the standard sequence, you can start thinking about process costs. What costs, in your current operations are caused by your technical processes? Do you have many delays because of equipment issues, uncontrolled technical processes, supply chain problems, and so forth? Once we know that operators’ work is in standardized work & with kaizen conditions, we can look at the manufacturing process itself.

The last stage, and obviously where the largest potential payoff can be found, is in engineering. A detailed understanding and resolution of the manufacturing process costs will probably highlight many problems set at the engineering stage - from unnecessarily costly parts (opportunities to simplify the design), to an unnecessary variety of parts (which is a huge burden on the supply chain) and assembly difficulties due to the engineering design (or quality issues due to parts sourced cheaply from unreliable suppliers). Rule of thumb is that two thirds of the costs are set at the design stage, so this is the area of the greatest cost reduction potential. However, experience shows that attacking design issues without first understanding operational and process capabilities opens the way to potentially disastrous "redesign to cost" decisions.

Granted, this is no quick fix. However, you'll probably be surprised at how, at every stage, you get both quick wins and a step in the right direction: more quick wins. This is the beauty of the kaizen approach: it pays now, and it continues to pay as long as you maintain the kaizen spirit. On the other hand, if you hit your processes now with the lean tools, you will get an immediate gain in low hanging fruit, there is no doubt about it, but then you're likely to get stuck in a position where it's difficult to get to stage to further gains, and to a sustainable competitive advantage.

Tools are important. Tools are the entry point in any manufacturing problem. But the real issue is to start with a common ownership of the cost problem, and a commitment to a kaizen process, first from the core team, and progressively from each are supervisor. The tools are the how of kaizen spirit realized in practice.
1 Comments | Post a Comment
Tina Seirup Nielsen September 29, 2009
Even I agree to the approach and areas of potential, I think it is important to mention the potential risk of initiating big scale projects, instead of making cost reduction or waste elimination a part of the way of working.

First of all projects have a more short term focus since they have a natural end and tend to focus on a specific problem, not on the organizations cross functional understanding and behaviour in solving problems, why results in my experience risk being short term. People won't necessarily learn to deal with problems as such, but we will always have problems, just different ones.

In my opinion quick wins are of course nice, but a long term approach pays better off. I think the focus should be on developing they daily leadership style to focus on developing peoples cross functional understanding, as well as their problem solving skills, in this they will over time as a consequence of a greater process and cause and effect understanding, and by knowing how to understand, analyze, deal and follow up on problems - create greater and more sustainable results, than a single project can ever do.

Secondly, a long term approach where a problem solving method is developed as a part of the daily way of working and the behaviour, initiated by top and middle management being the role models, is more accepted in the organization and among the operators, than 'consultant types' coming in doing specific projects, playing 'bezzer wezzers' about other people's areas.