Well, for starters: you can expect big gains in almost every area. Most traditional managers asking this question will understandably focus on financial gains, and your profits will increase, but there are far more important gains to realize. For example, you will see large improvements in customer satisfaction, employee morale, and company culture. And while the traditional “make-the-month” company views these results as minor or secondary effects, the lean company treats these numbers as much more important than short-term income or revenue. They understand that these are the changes that ultimately drive the long term financial results and most importantly enterprise value.
Let’s start by defining the traditional “batch” company in order to better understand the big gains made possible by switching to lean. I consider a traditional batch company to be one that is organized into functional departments. For a manufacturing company, this means putting similar machines together. All the stamping machines, for example, or all the drilling machines, or the injection molding machines, and so forth. A service organization might organize operations around specialty skills or functions. A hospital, for example, has cardiac surgeons, cardiac PAs, cardiac nurses and cardiologists—but no individual is in charge of overseeing the value steam of everything related to the business of the heart.
Most companies consider this normal—nothing to see here! The reality, however, is that this structure produces enormous waste, creating a huge opportunity to enjoy gains by simply removing this structural waste. In my experience of more than 30 years implementing lean in numerous companies, I’ve found that the traditionally organized batch company has the following characteristics:
- 25%-40% excess number of people
- 5x-6x excess inventory
- 40%-50% excess space
- Long lead times (6-8 weeks)
- Persistent quality problems
Few traditional batch companies would agree with this. Many companies may in fact be growing and doing well financially, and admitting that this type of opportunity existed would be too embarrassing. Nonetheless, it must be pursued. This opportunity is there every time. Removing the waste that is hidden by a batch approach creates the enormous gains that lean companies enjoy.
Traditional batch companies tend to take their value–adding activities for granted. Their existing structure forces them to batch how they make things, and is exacerbated by the fact that they have long setup times. They justify this by saying, “It has always been like that. There’s nothing we can do about setup times.” This leads to huge losses in terms of squandered time. If it takes three hours to change over a machine that needs to be changed three times a week, you essentially lose a whole day of production every week (on a one shift operation). More importantly you create long lead times (6-8 weeks) that your customers are forced to deal with.
Traditional bosses tackle this problem with a solution of…bigger batches. Which drives excess inventory, which leads to excessive floor space to store all the stuff you don’t need in the first place and extra cost just to move it around and keep track of it.
But what if there were another way to see and to tackle this problem? At Wiremold we consistently reduced setup time about 90% during a one–week kaizen. This never cost much—you can’t spend much money in one week. We took a rolling mill from 14 hours to 6 minutes, a 150–ton punch press from 3 hours and 10 minutes to 1 minute, and injection molding machines from 2.5 hours to 2 minutes.
Batching leads to lengthy lead times by requiring a long time for parts to travel from one functional department to another—with stops for “resting” in some work-in-process warehouse along the way. When you have a 6-8 week lead time you might not detect a quality problem until long after it occurred. This makes it extremely difficult to find a solution to any defects, which means that your quality problems will reoccur frequently. Not to mention that you might have 6-8 weeks of defects in the pipeline.
So what can happen when you make the switch to lean? Consider Danaher Corporation’s Jake Brake division, where I was the group executive, and The Wiremold Company where I was the CEO. Jake Brake makes engine retarders for diesel trucks, and Wiremold makes raceway and fittings and other electrical products. Both were union shops. Jake had the UAW and Wiremold had the IBEW.
Wiremold Jake Brake
1991-2000 1988-1999
Sales growth 4.2x 3.4x
Income growth 6% to 21% 4% to >30%
Inventory turns 3x to 18x 2x to 25x
Lead time 6 weeks – 2 days 12 weeks -2 days
Customer service 50% To 98% <20% To 99%
Both started with the same opportunities that I’ve outlined above. Both followed the same approach to making the switch to lean, with extensive senior management involvement and kaizen activity. Both formed kaizen teams with an equal number of hourly and salaried employees. Both stressed 5S activities, and cleaned and painted the shop and machines as they went along. Both put a major focus on customer service, setup reduction and increased inventory turns.
Both were early adoptors—in fact creators—of lean accounting, which led them to abandon traditional standard cost accounting approaches. Mark DeLuzio drove this at Jake Brake, while Orry Fiume led this at Wiremold. This new method provided superior information enabling good decisions, and stopped incentivizing all the things we were trying to get rid of with lean. A good example comes from one of my portfolio companies in the private equity business. One company we worked with used a standard cost system that reported their labor cost as a mere 9%. When we switched them to lean accounting we could see that the actual labor cost was 35%. Hard to make good decisions when your financial system is giving you bad information.
These companies illustrate the importance of focusing on the customer and respecting your people. Dramatically lowering inventory turns produced drastic reductions in lead times and excellent customer service. It also freed up lots of cash and floor space that they could reinvest in new products and growth. The kaizen approach at both companies got everyone involved and created a totally new culture. Because they understood that converting to lean is all about people, they got everyone involved, teaching them how to recognize and remove the waste.
All of this work enabled them to deliver more value to their customers, which was their main focus and the real driver of their financial success.
For additional information on what type of results you can expect from switching to lean I refer you to my Shingo Award–winning book, The Lean Turnaround Action Guide. This tells the story of a traditional batch company that was acquired and then turned around using lean. It starts with a five–year financial forecast of the company in its batch state. Sales are growing at almost 4% annually, margins are improving, productivity is increasing and inventory turns are rising. By most standards this seems to be a successful growing company.
We then acquire and take the company through a five–year lean conversion. As a result, sales growth rate doubles, EBIT margin increases by 5.2 points, inventory turns spike from 3.5x to 11x, and sales per employee rises from $105,000 to $131,000. More importantly, after 5 years, the enterprise value in the lean case is $1,003.0 million (that’s just North of $1 billion) vs. $416.7 million for the batch case—which comes out to 2.4 times higher. This is despite the lean company performing at a lower level than the Wiremold and Jake Brake examples above.
SUMMARY
The functional structure of most traditional batch companies hides a tremendous amount of waste that the lean management approach will exploit. The financial gains that result can be staggering, but they will only happen if you focus on your processes and not your results. Delivering more value to your customers and respecting your people are the key drivers. Lean is in fact a time based growth strategy. It is not a cost reduction program or some manufacturing thing. Lead from the top and get everyone involved and you will have great success.
