Ask Art: Why Do Most Companies Think Of Lean as Just a Cost Reduction Program?

In my experience, more than 85 percent of the companies that start down the lean path do so primarily to reduce costs. In both manufanturing and non-manufacturing, the traditional management approach emphasizes being the low cost producer. Cost reduction is a core strategy and usually a major part of the annual budget.  

Manufacturing companies and service companies pursue this in different ways. Manufacturing companies focus their efforts on the shop floor, aiming to lower cost through capital spending for automation. Few traditional manufacturing management teams believe you can get much cost reduction without big capital spending. Service type companies, on the other hand, often approach this issue by creating the next computer program to get more automation. Most of the time they are simply unknowingly automating the waste. 

A great example of the mindset here comes from an MIT professor that I know, who teaches classes to senior executives. He will write the following three things on the board: 

PRODUCTIVITY 

INVENTORY 

LEAD TIME 

He then asks them to relate these themes to their operations. Not surprisingly, they spend more than 90 percent of the time talking about productivity and ignore the other two. 

Think Beyond Tools

This speaks to the basic mindset for the traditional executive, who hears that company X or company Y got great cost reductions from something called lean. They then become interested, and want to learn more. Could this help them cut costs, and become more productive? After looking into it, they find certain lean “tools” that they could apply to their own operations, and off they go. By focusing solely on the lean tools they can apply to the shop floor they never consider lean as a strategic approach. Even they succeed with this limited approach they will achieve some limited gains; but the rest of the company will continue in its traditional “batch” (not flow) state. All the batch systems and thinking will continue, and as a result they will never become a lean company. They will remain stuck in the tools state of lean and miss the strategic implications completely. 

Let’s consider a simple example: Company A starts down the lean path. This company is traditionally managed, and organized into functional departments according to machine type or specialty activity. Things are produced in batches based on a forecast, relying on an MRP system. Their lead time (and that of all of their competitors) is and has been six weeks for as long as anyone can remember.  

They produce their highest volume product with eight operators, in eight different departments, which are spread all over the factory. When converting to lean, they bring in some outside expertise, establish the takt time for this product, create a percent loading chart, and then establish their first one-piece-flow cell. The new cell still has eight operations, but now requires only three operators to produce the same volume, and can drop off a finished product every six minutes.  Management is very impressed. Going from 8 to 3 operators is a 62.5% productivity gain. They say, “I guess this lean stuff really works.” Of course, they are missing the main point completely. The 62.5% productivity gain is nice, but because of their preconceived mindset, it actually hides the key strategic gain here. Reducing their lead time from six weeks to six minutes is the real gain here. This gives them a serious competitive advantage over their competitors, who are still at six weeks. They should be able leverage this into gains in market share and faster growth—the results from which will overwhelm the productivity gains. 

Seek Strategic Advantage Through Shorter Cycle Time

As another example I once helped a small jewelry manufacturer, making mostly rings of gold and precious stones, reduce an eight-week cycle time to a two-day cycle time. The gains were more than time: in the 8-week cycle time they made all the rings in batches of 100 and stored them in inventory. The new 2-day cell still made rings in sets of 100; they now made them according to a mix of the last 100 rings ordered that day. Orders that came in today could be shipped the next day, and didn’t have to go into inventory at all. The management, in this case, unfortunately, could not grasp the strategic implications of this change. I’m sure however that you can. 

Consider a service company that just loves new computer programs and see them as the answer to all problems. I was helping a life insurance company that was taking 48 days to underwrite a life in response for a request for insurance (this was a problem). They sent all the incoming requests for a quote to an outside service company that would load them on a computer as a first step. This added 3-4 days to the process before they ever saw them. Then the case managers who worked alongside the underwriters would spend about 45 minutes entering each application to another program so that all the data was there in case they got the business. As their hit rate on quotes was only 16 percent, most of this effort was a waste. 

Then of course they had another program tracking of the status of the quotes in their system so that they could respond to the insurance agents who were constantly calling in to find out where in the 48-day process their requests stood. This was a total waste—it only existed because it took them 48 days to underwrite a life. During our first kaizen I asked the team, all of whom were underwriters, case managers or managers of these departments: “How long does it take to underwrite a life when all the information needed was present?” Well, they didn’t know. “We never thought about it like that.” I asked them to guess. They said 2-4 hours. We went on the floor and timed 10 cases. It took between 9 and 12 minutes each. We rounded it up to 15 minutes. That meant an underwriter, who was a skilled individual earning $120-150,000 per year, should be able to underwrite 150 lives per week. I asked how many they were doing now. The answer was 15. Yikes! 

We created a cell with 1 underwriter and 4 case managers, and got to where the underwriter was doing 88 lives per week—a 487 percent productivity gain. And, more than 50 percent of the cases were quoted in less than 20 days. As in the manufacturing cases, although the productivity gain was impressive, the real gain here was the reduction in lead time. While lowering it to below 20 days was a great first step, the more important gain was that it revealed a clear path on how to get to 10 days, a gain that would have provided significant competitive advantage. Once again, the implications of this went completely over management’s head.  

From Cost-Cutting to Strategic Management

We shouldn’t be surprised at all that most companies approach lean as a cost reduction program, when it really is better understood as a time-based growth strategy. Status and ego are important factors in any management hierarchy, and if realizing big productivity gains is an important measure in your company, then that is what people will strive for. If the management approach is “make-the-month” then cutting cost is probably the ticket to success. No one wants to take the risk of losing status by rocking the boat or calling past/current practices into question. Doing so doesn’t work well when in order to become a lean enterprise “everything must change.” If you have been rewarded and promoted for doing something a certain way for the past 20 years it is unlikely that once exposed to lean you would suddenly say, “gee, everything we have been doing is no good.” Certainly the boss doesn’t want to hear that. It could be risky to your career. As a result, stick with what got you here, productivity gains. If lean can help with that, let’s try it. So it shouldn’t be a surprise at all that most people just see lean as a cost reduction program rather than the strategic management approach that it really is.