Home > Community> Gemba Coach> Why do we need to discuss making the business case for lean?

Why do we need to discuss making the business case for lean?

Michael Ballé
9/28/2012
Permalink   |   9 Comments   |   Post a Comment   |  
  |   RSS

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!

 

(Learn more about the business case for lean at a  free webinar on October 10, 2012, and in-depth at the full-day workshop on November 6. –Ed.)

 

 

 

 

9 Comments | Post a Comment
Michael Bremer October 2, 2012

Michael,

I'd suggest not using the term 'lean strategy' as it further muddies the waters.  I'm not promoting our last book (Escape the Improvement Trap," but it is devoted to the subject you discuss in this post.

Most organizations do an average job of implementing lean, it is not a disaster nor is it elegant.  The companies they compete against do something very similar.  So the end result is everyone gets better, but nothing much changes from a competitive perspective.

Part of the problem deals with value creation for customers. Pretty much the same thing happens with business strategies. Most companies have an Ok, strategy, but it is not elegant, it is not very different from what their competitors are doing.  The end result?  Nothing much changes in the market place.

I have written a number of things on savings and the problems with using that as a metric.  So will not reiteriate it here...but would be happy to share if you want a copy.  

Here is a brief recap of our thinking on this subject.

Most organizations do not realize they are merely average, not exceptional, in terms of their improvement maturity and resulting ability to gain market share on their competitors.  We simply need to decide upon a metric.  It’s a mathematical fact there will be a 50/50 split in terms of improvement maturity for any given industry, with most gathered near the mean.  Why?  Companies learn and adopt the ‘lean tools’ pretty much the same way their competitors do it.  They appoint some smart person to lead the effort. That person finds things to improve, typically using improvement teams to attack wasteand remove obvious non-value activities.  Meanwhile the organization does its business, pretty much the same way it always has.  Things get better, butthey get better in the competitors' companies also, so as a result nothing much changes. That is the trap.

If an organization wants to break out of that trap it needs to look for levers that can truly differentiate from the competition.  There are five ingredients that get underutilized in most improvement recipes.  The most effective organizations (Levels 4 & 5) in terms of improvement maturity reflect the following characteristics:

1. Customer Value

How it should work: Value creation should drive improvement. Sounds obvious, but many organizations do not have a clear value proposition that drives key improvement actions. If the Value Proposition is not clear & accurate, nothing else that follows will be crisply aligned.  Leadership is responsible for the development of a value proposition that will make a meaningful difference to the organization. There are a series of practical steps to make this happen. But only a small handful of companies in any given industry will do them well.

How it does work: Most organizations define value from an internal perspective.  They do not understand the frustrations experienced by their customers and there is a tendency to believe “our company” is much better than the other companies in our industry.  Companies typically look to do a little bit better this year, whatever it was they did last year.  Richard Rummelt wrote a book expressing a very similar thought in “Good Strategies/Bad Strategies.’  His conclusion was most organizations have mediocre ‘me too’ type strategies that provide little focus and they executive their strategies in an average mediocre fashion. For most organizations what they do is Not Elegant, nor is it a Total Disaster, it is pretty much average.

2. People Engagement

How it should work: Leaders create an engaging environment where people can do their best work; an environment that fosters and facilitates collaborative innovation and execution of the best known way to do work. Leadership truly respects people and they develop people’s critical thinking skills & abilities.  This is the most under-utilized resource.

How it does work: People are afraid to suggest changes to their boss, because they might be seen as trouble makers. Or if they make a suggestion the organization does not make it easy to test the idea. So the next time this person has an improvement thought, their reaction is, "I don't have the energy or time to try doing another one of these improvement things." It would seem obvious that a primary responsibility of leadership is to create an environment where people can do their best work. Few organizations operate this way.

3. Key Metrics

How it should work: Focus on the vital few, meaningful metrics for the current environment; avoid drowning in irrelevant details. Metrics provide visual, rapid, and meaningful feedback at all levels to people inside the organization. So people constantly learn how to do a better job of adding value.  If the overall value proposition is not clear, metrics cannot possibly be better than average, relative to the competition.

How it does work: Most organizations measure functional departmental performance. The belief is if the pieces of the organization maximize their component piece, somehow the organization will do well overall. So you end up with Sales trying to maximize their piece, operations the same, etc. It does not work, yet that is how most organizations still operate today.

4. Process Thinking

How it should work: Process improvement efforts should maximize cross-functional process performance and foster deeper process understanding. The current state of a process is viewed as an experiment, and the capability is constantly improved to more reliably deliver value without waste.   Deming talked about the subject of Profound Knowledge many years ago.  Unfortunately that type of thinking does not permeate most organizations.

How it does work: This is where most companies start when implementing an improvement methodology.  But the leadership team does not truly think from ‘process’ perspective.  They manage the business trying to optimize functional department performance.  In most organizations this is the land of improvement tools, the Director of Improvement Programs starts here and finds waste to eliminate. But that person does not own or manage the above ingredients. Most organizations end up with isolated improvements, they do not maximize the creation of new value.

5. Executive Mindset

How it should work: This is the glue that holds these ingredients together and provides focus.  If leadership is loose on any of the above items (and most are), the company will not rise to the top of its industry in a sustainable fashion.  Elite companies work very hard to make the invisible, more visible: Key strategies, process performance, standard work, critical thinking skills/abilities, etc. The leadership team constantly hones their ability and the ability of their associates to better see.

How it does work: Leaders talk about lean methods, but they operate using traditional thinking.  They manage through financial performance (a lagging metric), try to optimize component pieces of the organization (departments) and they focus on using improvement tools to get better.  But they don’t really change the way they manage the business.

Michael Ballé October 3, 2012

Hi Michael,

Thanks for sharing your thoughts - I've amazoned the book and look forward to reading it,


Best, Michael

Aristide TANOH October 10, 2012
Thanks for this session! Really interisting
Irene Johansen October 10, 2012

Thanks very much for your insights.  The webinar was particularly useful for us, in that it raised many questions to investigate and provided a lot of common sense insight.  I have a question that we tried posting at the webinar, and that I will now ask here, at greater length with a little more background detail:

I am an administrator taking Lean certification training, and my colleague is the Evaluations Manager here.  We are a Primary Care Network; that is to say, an association of family physicians in a particular geographic area (one of 42 PCNs in Alberta) who's basic customer value proposition is improving quality of life.

In everyday terms, that means the four "pillars" of our Board's vision:

Improving access to care (getting patients "attached" to a family doc, and availability of 24hr access to primary care);

Improving quality of care through access to other health professionals in the patient's medical home, led by the family physician in a collaborative care model (in our PCN, a large seniors population translates to a lot of services for seniors, for example);

Access to helpful health information and programs (health promotion); and

Assisting our physician members in keeping their practices going efficiently and effectively - a tough proposition in a (medical) world where specialists are king. We call it "sustainable family practice" and it's important because we have a high burnout rate in family practice, which reduces access, etc.

My colleague and I agree that the CEO buying in and practicing the gemba to connect high level concerns with the "shop floor" is essential to the success of any Lean transformation, and believe the tools are here to effect some wonderful improvements in how we serve our patients and improve their quality of life. Our question is this:

How do we as mid-to low level "operators" convince our "CEO" (Executive Director and senior management) that adopting these practices and thinking are worthwhile in our context?  I also believe we have more than our management to convince: we have to convince our doctors too, as they are the "CEOs" of their independent practices. Team effectiveness training is just being instituted at the practice level.

Any thoughts?

Thanks!  ij

michael Ballé October 11, 2012

Wow - really tough question. The long and short of it is I've - so far - not come across a mid-level manager able to convince their CEO, it has to come from the CEO.

One reason is as a mid level person you can see all the waste around you, but it's hard to express it in a way that speakes to CEOs (as in, to their wallet).

Let me try to take this and think it over and answer as a Gemba Coach column?

Thanks for the kind words on the webinar :)

Ronnie Davidson October 12, 2012

Good morning Michael.


I gave a talk on Lean Accounting in Pietermaritzburg [South Africa] and joined in the factory visits with you.


Your webinar on Wednesday raised and answered some good points particularly around the financial returns that drive boardroom strategies.


It is for this reason that my focus as a lean coach in South Africa is built around the work done by Brian Maskell in his books -"Practical Lean Accounting 2nd edition" and "Lean Business Management Systems".The argument is that traditional accounting measures and standard costing actually work against lean and companies need to change their metrics to measure the value being released by lean improvements and move to value stream costing for better decision making.


Art Byrne and Orry Fiume are also big supporters of these concepts.


I look forward to hearing your comments.


Regards


Ronnie.

Michael Ballé October 12, 2012

Hi Ronnie,

I still kick myself that I didn't get to see Alan Paton's study in Pietermaritzburg - I'll just have to get back there.

As you know, Orry is one of my senseis, and no one can beat his - and Art Byrne's - experience in becoming lean, not doing lean. So I follow him blindly on most points but, personally, I have to admit I'm struggling with the lean accounting stuff, mostly because I struggle with accounting period.

My experience has been you first need to prove your case within the existing finance structure, before starting to change that. If and when, as in Orry's case, the CFO ges involved with lean as a strategy, then they'll make changes ont ehir own, and they can connect with the lean accounting movement. But before that happens, the issue I believe is to demonstrate business results in the current measurement system, if not you have opend a second front: not only lean (change your way of thinking about your business), but lean accounting as well (go against accounting practice). Tall order!

 


Cheers, Michael

Ronnie Davidson October 16, 2012

Hi Michael,


Absolutely concur. If the CEO and CFO do not buy in it will flounder.


In Maskell's work the metrics strees the importance of determining the increased "free" capacity from lean improvements and the increased top line returns generated from selling more product. 


It all fits elegantly together to show CEO's and CFO's that it is really not just about cost saving but increasing shareholder wealth through growth strategies.


Regards


Ronnie

James Gao November 1, 2012

Hi Mike,

It is a great topic that a lot of people in the real world can relate to in their continuous improvement initiatives.

 

In your slide #17, you said: Savings don’t translate at budget level. What do you mean by "at budget level"? Does it mean cost savings don’t normally translate into the financial reports executives see and thus they don’t see a connection between the savings from shop floor and the corporate financial reports, which the CEO perhaps has to present to shareholders?

 

Thank you for your valued time!

 

James