Ask Art: Is Lean a Good Cost-Reduction Program?

No, lean is much broader than that. Lean is strategic. The philosophy behind it will allow you to create a complete business system focused on delivering more value to your customers by removing the waste from your existing processes. Every time you eliminate waste, you shorten the time needed to respond to the customer and become a better supplier. As the best supplier, you should be able to gain market share and grow. That’s why I think of lean as a time-based growth strategy.

Not only does removing the waste from your current operations shorten the time, but it also vastly lowers your costs. For example, why should it take a bank three weeks to respond to a simple loan request when the touch time labor to process the application is only 15 to 20 minutes? The cost reduction opportunity is on a similar scale. Huge! Any decent lean implementation will have the side benefit of significant cost reduction.

Unfortunately, dramatically lower costs (which, again, are but side benefits) cause people to see lean as a cost reduction program. In my experience, up to 90% of all companies start down the lean path primarily to reduce costs. They miss the main strategic advantages that lean provides, which helps to explain why less than 10% of companies that seek to become lean fail to do so.

Discovering the ‘Greatest Strategic Weapon’

When I was one of the first two Group Executives at the Danaher Corporation in 1987, we introduced lean at several of my group companies (including Jacobs Vehicle Equipment, aka Jake Brake) with the help of the Shingijutsu consulting company from Nagoya, Japan. These consultants were all ex-Toyota executives who had worked directly for Taiichi Ohno, the father of the Toyota Production System), implementing lean in Toyota’s supplier network. Jake Brake President George Koenigsaecker and I spent a lot of time with the consultants on the shop floor when they were in town. They taught us how to reduce setup time, create flow, improve quality, and implement pull. These changes led to massive capacity increases, which we converted into cost reductions.

Those results were certainly a good and necessary start. But George K. and I never thought of them as mere cost reductions. On the contrary, our reaction was, “Wow this is the greatest strategic weapon we have ever seen.” And it was. While costs came down dramatically, our biggest gains were, in fact, our newly found ability to cut lead times from months to days, vastly improve our quality, and become a trusted and valued supplier to all our customers. 

Indeed, before we started lean, we faced a pending disaster with one of our biggest customers, Cummins Engine. They were fed up with our long lead times and unreliable service and warned us they might start making engine brakes themselves. After lean helped us cut our lead times and become reliable, they dropped their internal efforts. Whew!

Shingijutsu never explicitly taught us anything about the strategic aspects of lean; they always focused on the shop floor. Even so, once we understood the impact removing the waste from our operations had on our customer service and lead times, we were hooked on the strategic implications of lean. Moreover, we saw that these superior approaches outweighed — by far — any cost reductions we got along the way. 

That insight accelerated our commitment to leverage the shop floor waste removal by changing everything. We recognized the urgency to apply lean to everything we did: how we sold, did product development,  treated and thought about our people, and did our accounting — becoming lean everywhere just made sense.

Companies who see lean as merely a cost reduction program will realize none of these vital advantages.

Companies who see lean as merely a cost reduction program will realize none of these vital advantages. Instead, they usually pick a problem area and use lean tools to reduce costs. Then, if they do cut costs there, they may look for further improvement by seeking savings at another bottleneck area or product line. Their focus will be entirely limited to the shop floor. Moreover, they will respond to any issues that arise by sliding back to their old ways of doing things, which will reverse any gains. And their continued foundation of archaic operational practices will result in a flurry of excuses as to why they can’t change things.

By limiting thinking about lean as no more than cost reduction, companies also restrict its use to the shop floor and ensure a limited application of these fundamental ideas. The sales force will hold onto outdated terms and practices that force half of every month’s shipments into the last week of the month. Monthly sales quotas drive them to hunt for big batch orders, which they obtain through price discounts that wreak havoc with the shop floor. So, the company will still base production on a forecast, with the shop floor run by MRP systems. As a result, batch production and excess inventories will continue to be the norm. 

This limited — and wrong — understanding of lean is why most companies that start down the lean path to reduce costs are unsuccessful.

I have seen many companies that claim to have been doing lean for 10 years and yet still turn their inventory only three to four times annually. Impossible. Especially when lean practitioners consider inventory the “root of all evil,” hiding all your waste.

This limited — and wrong — understanding of lean is why most companies that start down the lean path to reduce costs are unsuccessful. They focus on “make the month” and won’t invest the time or money to get better. Also, they fail to sustain any lean gains they make, don’t get every employee on board, and make no real cultural change. They can’t see the strategic aspects of lean at all and would mostly argue that lean is not strategic. And of course, if you tell a traditionally run company focused on cost reduction that to be lean, everything must change (sales, accounting, product development, computer systems), that will be a showstopper right there.

Making a Direct Comparison

Let’s look at how a broader understanding of lean provides more enduring benefits than simply cutting costs. Consider two companies (A and B) that have the same equipment and sell similar products to the same set of customers. Company A takes one hour to changeover its machines while Company B, using lean and without a lot of capital spending, can change its equipment in one minute. Both companies work only one shift and can afford only one hour per day for a changeover. So:

• Who has the lower costs?
• Who has the best customer service?

Company B has the lowest cost. It can produce for an extra 59 minutes per day with the same workforce while carrying less inventory and requiring as much as 50% less space, which they had mainly used to store the inventory).

Surprise! Company B also has dramatically better customer service. After all, Company A can only make two different products per day (the one before setup and the one after the changeover), while Company B can make 61 (the one before the setup plus 60 setups). This capability enables Company B to respond immediately to the customer while cutting lead times from weeks to days and lowering inventory.

And that’s simply the benefits of setup reduction: by going from a one-hour setup to a one-minute, we got the lowest cost and best customer service. So is lean looking a little more strategic now? 

If you think about lean as only a cost reduction program, you will miss out on the much more impactful strategic benefits that lean offers.

How about reducing the wait time in a hospital emergency room from two- to three hours to less than 15 minutes? What if you could underwrite a life insurance policy in five days instead of 40-plus? Yes, costs come down, but the strategic gain is far more consequential. If you think about lean as only a cost reduction program, you will miss out on the much more impactful strategic benefits that lean offers. The hard part is that lean requires a fundamentally different way of thinking about your business. You must change your culture and get everyone to commit to the new approach. Even so, the gains in market share, top-line growth, and customer loyalty will far outweigh any cost reductions. Lean is a lifelong journey, not a short-term fix, but the gains will be well worth it.