Why do we need to discuss making the business case for lean?
Dear Gemba Coach,
I saw the invitation to your October 10 webinar on Making the Business Case for Lean. I wonder why we even need such a discussion. Isn’t making the business case a fundamental competency for any manager or executive leading a lean transformation? Why do you even need to discuss it?
Granted, maybe the term “ROI” is not the best choice – I’ll try to clarify what I see on the Gemba and what I have in mind. I was talking to a group last week about “lean strategy deployment” (the topic of Pascal Dennis’ great Getting the Right Things Done) and it was obvious the group was confused about whether we were discussing deploying a lean strategy (e.g. a strategy crafted with lean thinking) or a strategy for deploying lean (e.g. deploying a lean program). The distinction is not trivial.
Many companies that I know have a traditional strategy; and they also try to deploy lean tools. Or the other way around. I was graciously invited to visit the Porsche plant in Stuttgart early on this week, and fear I may have irritated my guests by suggesting they were deploying a lean strategy in a non-lean way. I observed that they were doing tremendous lean work on reducing work content for every car, but there was little sign of Gemba activity on the line (kaizen happened in meeting rooms, they explained).
In any case, at the end of the strategy deployment talk, a lady shared her experience with lean. She’d been a lean officer for a large American company, had fully invested herself in the lean effort and believed she really understood what lean was all about. And yet management still closed the plant. Now, I’ve not come across this company’s lean work, so I have no opinion on how “lean” it is. But I know a number of lean consultants who chose to do so after something similar happened to them. The question to be asked is why do plants that make lean headway and realize savings still get shut down?
Don’t Show Me the Money
I believe that framing this issue as one of savings dooms one to lose the argument in the first place. Any lean officer worth his or her salt knows how to calculate savings, but the issue is that savings – no matter how large - are simply not that convincing to senior management. One of the best plant manager/production manager teams I know has continuously lean-ed its plant and delivered a 3% to 4% transfer price reduction per year every year for the many years I’ve known them, while improving their contribution margin and reducing inventory, most of it through operator driven shop floor kaizen activities and engineering involvement in kaizen. How lean can one get? Apparently not enough: when the plant manager retired this summer, corporate, in its wisdom, named the plant’s financial controller plant manager over the head of the production manager. The savings alone were just not that convincing (or else we’d have to assume that savings are produced by finance?).
The retired CEO of another company I know has been just as frustrated by the failure of others to see lean strategy as more than savings. He got into lean because of a large world-wide lean program pushed by the holding company with a top-notch consultancy. They ran 14 16-week projects with an internal lean team to aggressively attack cost and then … simply stopped. The savings were impressive, the management team agreed, but the projects were not helping them solve their company’s deep challenges. They feared they were damaging the common trust relationship they had worked hard at building up with their workers.
In the end, they didn’t abandon lean, but switched to the orthodox method of working on the Gemba with a sensei and started pulling their factory with short, operator-focused kaizen events to solve spot ergonomics, quality and productivity issues that appeared as the water was reduced in the lake. Five years later, even though the CEO retired when the company was taken over by a U.S. competitor, the three plants are still continuously evolving, still improving workstations, fixing quality issues and reducing it’s supply chain lead-time. The point is the CEO himself says that the savings, even with big numbers, simply didn’t convince any one on the leadership team they should change their way of thinking.
This is what the webinar and follow-up workshop will address: lean officers generally know how to calculate “savings” (although how do you calculate savings from 5S?), but although the ROI of such programs (savings versus the cost of the lean activities) might be good, top management seldom jumps up saying “I must understand this lean stuff, and start devising a lean strategy for my company.” And yet that is precisely what is needed for lean to become transformative. The French car OEM PSA has had huge lean programs both in manufacturing and engineering, but it’s still shutting down its large historical plant in Aulnay – whilst Toyota in Valenciennes (same country, same labor rate, same culture) is investing in increasing capacity. There is our real challenge.
The CEO’s Perspective
So how come savings are not convincing? I’ve been discussing the issue with CEOs for the best part of a decade and what they tell me is that:
- Savings may look impressive, but it’s often hard to see the impact on the bottom line – so many other factors and events occur in a company, that lean efforts, even when successful, tend to get lost in the noise. I look monthly at the business results and operational indicators of several companies I coach, and it takes us three to four years to get a feel for the cross impact of events versus internal factors on the numbers shifting up or down.
- Savings are not that believable. I just had a case of this when a business unit manager presented to his CEO a cost reduction of 6 to 11 percent across product lines, and the CEO just looked at him doubtfully – “are these real numbers?” he asked. I’ve seen what the guys do at the shop floor level, so I tend to believe the BU manager, but still, I can see the problem. The CEO was not involved in any of the initiatives himself, has not theory to explain the cost reduction, and just can’t get his mind around the numbers – they don’t fit with his worldview of the business, and can’t be explained through traditional financial control.
- Savings are rarely sustained. I mean swear to me that as you return to the Gemba a few weeks after a workshop, you’re not holding your breath wondering whether any signs of the improvement will still be there.
Two Approaches Explained
My basic argument is that as long as lean thinking is not adopted by management and as long as it keeps being driven by a staff group of lean specialists, it can’t be transformative no matter how impressive the savings shown on the PowerPoint. I may be extreme here, but I do believe that as long as the lean initiative is a staff-driven program, it’s not much different from a classic Taylorist program with lean labels - and I’m not dissing that, it can still deliver 3% to 4% compound productivity, but it’s not transformative. To be transformative, lean thinking has to be taken up by the CEO himself or herself and then driven through the line to transform the people. I’m not claiming any originality in this – it’s how I’ve been taught by my father who was an automotive supplier CEO and what other CEOs say, such as Wiremold’s Art Byrne in his wonderful book The Lean Turnaround.
I’m not claiming either there is no place for a small staff lean office – of course there is, as lean expertise is essential to support line manager’s efforts at kaizen and teach them how to use the tools correctly. But the drive should come from the top through the line in order to not just change shop floor practice according to lean policies, but to change policies according to the discoveries occurring in kaizen events. As John Shook splendidly put it, lean is about learning to learn.
I understand that some people might be upset by this message, and I think it’s great if we can have some controversy back in the debate to stir things up. I’m not claiming any universal answers, I’ll just bear witness to the work I see in companies I know in order to compare experiences with participants. In the webinar and workshop, I’m essentially going to distinguish a savings “ROI” approach to lean and a company-value, financial (sales, cash, EBIT and capital expenditure) approach to lean transformation. I hope you’ll all enjoy the talk, and more importantly, all disagreements are more than welcome!