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How Do I Plan for the Long Term?

Michael Ballé
1/11/2012
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Dear Gemba Coach,

I don’t know how to plan for two or five years out. As a plant manager, my requirement is to be able to look at the next 12 months. And to do this I rely on guidance from a familiarity with lean policy deployment. Yet I worry that my skills in leadership are lacking because I don’t have a clear sense of how to conduct this long-term planning. How do I look ahead for the long term?

If you’re asking whether you need a long-term Vision to succeed at lean transformation, I believe the answer is … no. What you do need however is a clear North Star. Let me explain.

Recently I was on the shop floor with a company that manufactures industrial equipment. Over the past five years they’ve doubled their volume without increasing headcount or investment. Yet their lean transformation has produced mixed results. Among the many positives: they’ve reduced their price (it’s a transfer price) by 4% to 5% per year, and improved quality dramatically. They’re getting something right, obviously, which shows in the EBITDA figures. Yet these advances have produced new problems. With the demand increase their customer lead-time has been growing steadily and they have failed to respond to date. The benefits of higher demand have made them reluctant to challenge the organization to reduce lead-time.

They have what might be called a good lean problem. They persistently and steadily deployed a lean quality policy (applying many elements of jidoka and flow), deployed a lean cost policy (through engineering work and flow – though not leveling), but are balking at deploying lead-time reduction. In other words, although they have learned the hard way that increasing customer satisfaction in quality and cost pays, they’ve not naturally applied this to lead-time as well.

When we investigated this problem more deeply we uncovered an important belief: their senior executives couldn’t accept the idea that working hard on quality and cost had actually boosted their market share (from less than 40% to over 65%) and increased sales. They were suspicious of this because most of their market visions have been proved false in the past turbulent years. So they were skeptical that their dogged work had delivered.

The Fab 5

The best reply to your question that I can think of can be found in George Koenigsacker’s book Leading the Lean Enterprise Transformation. He states clearly that you get spectacular result if you simply seek to:

  • Reduce accident rates by 20 percent each year
  • Reduce errors and customer complaints by 20% each year
  • Reduce lead times by 50% each year until you get to daily production cycles
  • Grow enterprise productivity by 15% each year

And this is what the North Star is about. There are five fundamental performance drivers that must improve whatever the circumstances, which are:

  • Quality
  • Lead-time (both to customers and internal)
  • Cost
  • HR development
  • New products

That’s all there is to it. Your enterprise will be transformed, and your results will be dramatic if you learn do what it takes to develop your firm’s capability to hit George Koenigsaecker’s numbers every year by applying:

  • Visualization of processes to reveal problems
  • Problem solving and kaizen to increase every individual’s capability
  • Process capability by adopting and maintaining smarter standards.

The interesting thing about building the company’s vision around such a North Star is that it doesn’t require a crystal ball. You don’t need to know whether the market is going to boom or bust. You don’t need to anticipate that your best engineer is going to defect to your main competitor. You don’t need to worry about what new thing politicians are inventing to stop us all from working serenely. You use the vision the other way around. You set yourself to reach these targets every year for the next ten years – taking into account market circumstances. THAT is the vision.

Once you’ve committed to these goals, and have found a sensei to help you learn the lean tricks to move forward on visualizing processes and developing people’s autonomy in Problem solving, then the long-term vision emerges as a result of facing the challenge. More often than not, results appear before the long-term strategy is set. When people see the incredible payback (of the two companies I know well who started lean this January, one has already saved $1 million in labor costs and the other has doubled its cash) they then commit further to the approach. After a couple of year of facing the Safety Quality Lead-time Productivity New Products challenge in turbulent market, PDCA cycle after PDCA cycle, usually a long-term strategy emerges as senior management learn to draw the right lessons from their markets. This makes further transformation easier.

Lean and Sales

There are three main barriers to adopt the North Star approach. Firstly, many managers simply can’t see how working on the five drivers will actually improve their financials – they can’t believe that waste in their processes could amount to millions of dollars. Secondly, they don’t believe that such changes are possible in the current context of their company. Thirdly, they rarely have the management gumption it takes to stick with 20% improvement per year BY developing people, not just WITH developing people.

I have to confess I’ve often been puzzled by the first point myself until I figured out that it’s not about the Process, but about the PRODUCT. The essential link here is between lean activities and sales. One thing we know is that sales are driven by:

  • Market share (the bigger, the better)
  • Reputation of the product

That’s not surprising, if we look at it from the customer’s perspective. We’re all loss averse and in choosing a product, more often than not, we make the safe choice. The dominant product on its market is a fairly safe choice: we’re surrounded with people who’ve made the same purchase. The product reputation is the other indicator we have about the product’s value (usually, we don’t know much about the product itself, we’ve got other things to worry about, so hearsay is as good an indicator as any other).

So, if you reduce quality complaints by 20% every year, if you reduce customer lead-time by the same amount every year, and if you keep a fair (market based) price – chances are your reputation will increase, which leads to greater market share, more sales and so on. Oddly, in my experience the early improvements in EBIT don’t come from cost reductions per se, but from sales increase. Similarly cash gets better quickly as lead-times (and inventory) are reduced, which helps with delivery performance, and, again, more sales. As a rule of thumb, half the lead-time, twice the growth.

The staggering amount of waste carried in costs of rework and overproduction usually becomes visible in the second year as people better understand the implications of the lean activities they’ve carried out so far. By and large, it’s much easier to carry out a lean transformation if you’ve already done one simply because you KNOW (as opposed to hope) that by following the North Star, results will come.

The second barrier is that people don’t believe the company can change its own culture. For instance the managers of the industrial manufacturer struggling with lead-time don’t believe they can get sales, production, logistics and purchasing to talk to each other sensibly in order to fix the causes of long-lead-time.

This is the beauty of the pull system. Once you’ve committed to pulling, issues will crop up one at a time and you can progressively build the working relationship across functions. By committing to reducing lead-time by 50% (or even 20%), and adopting JIT tools, you’ll uncover problems that involve each of the actors and force them into aligning on one simple objective: customer delivery on time (of only good products).

So, here again, don’t worry about the overall vision. Aim for 100% on time delivery and pull! The vision will clarify itself as people learn to solve problem after problem.

Yes, I am saying that you don’t need a long-term strategic vision to transform your company. You need to commit to improving Safety, Quality Lead-time, Productivity and Product development and then scratch your head with your teams and roll up your selves and GET IT DONE.

When I first studied lean I repeatedly ask the Toyota engineers working with a supplier to give me their roadmap, their Ariadne’s thread so that I understand what they were doing. They didn’t have one they kept telling me. They solved problems as they appeared. I now believe them. They didn’t have a preconceived idea of what problems they would encounter. They were committed to the North Star and to keep digging at it by kaizening problems away. Forever.

Which is the core issue. We might not need a “vision”, but we do need relentless commitment to achieving the North Star challenges through repeated kaizen, whatever the circumstances. The market crashes, and volume plummets, use the down time to do kaizen. The market booms and volume skyrockets, hire the people you need to keep doing kaizen. Improve. Improve again. I’m willing to be that as you do this you will develop a real long term vision, but the real difficulty is refining our understanding of the challenges year after year, and never dropping the kaizen ball.

The information about this is all around. It’s in Lean Thinking. It’s in George Koenigsaecker’s book. It’s in every workshop conducted by Orry Fiume. It’s in The Gold Mine and The Lean Manager. The real difficulty is recognizing it as we read it. We are so conditioned to the traditional worldview of strategic vision followed by execution that it’s hard to buy into the idea that improvement, year after year, will deliver massively more than the Grand Plan. Physician: heal thyself. Lean expert: have faith in lean thinking!

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