Turn waste into wealth: how to find cash in every corner of the company 9781938548451, 9781938548468, 9781938548475, 9786468600, 1938548450

Table of contents :
Cover......Page 1
Copyright......Page 7
Contents......Page 8
Dedication......Page 12
Foreword......Page 14
Part One: Lean Purpose......Page 18
1. Mountains of Money......Page 20
2. Lean......Page 23
3. The Lean Journey......Page 24
4. The Lean Transformation......Page 26
5. Lean’s Good Numbers......Page 28
6. The New Cost Reduction Frontier: Using Lean to Cut Administrative Waste......Page 31
7. How to Enhance Your Culture with Lean......Page 35
8. Change from Problem Hiding to Problem Solving......Page 38
9. The 10%-80%-10% Population Rule......Page 40
10. How to Identify a Naysayer......Page 42
11. Ours Not to Reason Why, Ours But to Waste and Die......Page 44
Part Two: Lean Principles......Page 48
12. The Eight Deadly Sins of Waste......Page 50
13. The Leadership Rules of Lean......Page 52
14. Lean Transformations Are Not Pain Free......Page 55
15. LEAN Does Not Mean Less Employees are Needed......Page 57
16. Never Tie Headcount Reductions to Lean......Page 60
17. Continuously Grow with Continuous Flow......Page 62
18. Customers Will Not Pay for Non-Value Activity......Page 64
19. Accounting for Lean......Page 69
20. How Traditional Accounting Promotes Accounting Waste and Costly Behaviors......Page 72
21. Don’t Employ Purchase Price Variance......Page 75
22. New Lean Rules for Capital Expenditures......Page 77
23. You Can Teach an Old Dog New Tricks......Page 80
24. What and Why to Benchmark......Page 84
Part Three: Lean Process......Page 86
25. The Five Whys: Too Much Pigeon Poop......Page 88
26. Standard Work Is the Gold Standard......Page 90
27. TAKT Time is Money Time......Page 92
28. She Walked from San Diego to St. Louis in One Year and Never Left the Factory Floor......Page 94
29. The Blue Parts Cart: Or, Minutes Mean Big Money......Page 96
30. Don’t Blame Manufacturing: Three Days Process Time, Eighteen Weeks Lead Time......Page 99
31. A Hospital without Waste......Page 103
32. Don’t Cherry-Pick Lean Tools......Page 109
33. Kaizen......Page 111
34. Kaizen Event Rules......Page 113
35. Lean Trumps Six Sigma......Page 116
36. The Problems with Kanban......Page 119
Part Four: Lean Profits......Page 122
37. The Lean Profit Formula......Page 124
38. Lean Distribution......Page 129
39. The Wallet......Page 130
40. The High Cost of Carrying Inventory......Page 134
41. Cross-Functional or Dysfunctional: There is No Choice......Page 139
42. Waste Mapping: Where to Deploy Value Streams......Page 142
43. Strategy Deployment......Page 145
44. Using Strategy Deployment to Save the Shad (A Metaphor)......Page 147
45. The Difference between Strategy Deployment and Policy Deployment … and Why It Matters!......Page 150
46. The Dees and Rees......Page 153
Appendix A. The Lean Horizons Lean Sustainability System (LSS)......Page 156
Appendix B. The Lean Horizons Wealth Creation Process......Page 159
Appendix C. Lean Horizons Benchmarking......Page 161
Index......Page 162
About the Author......Page 166

Citation preview

Praise for Turn Waste into Wealth “I have been a passionate advocate of Lean for over twenty-five years. Based on my experience as a Life Member of the Shingo Prize Academy, the ex-Chairman of the Board of the Shingo Institute, and the only Wall Street professional who is also a ‘Champion’ of the Association for Manufacturing Excellence, I can say with confidence that Mark DeLuzio’s insightful book is an essential addition to the world of Lean. It is concise, punchy, and illuminating. Importantly, Mark communicates precisely the difference between Lean tools and Lean culture, a nuance missed by many Lean experts. His book is a blueprint for CEOs in any industry who want to turn certain waste into inevitable wealth.” — Clifford F. Ransom II, President and Founder, Ransom Research, Inc., “The Way of Lean Investing” “I know something about Lean. In fact, I wrote a book about my experience as CEO of the Wiremold Co., where we used Lean to quadruple the company’s size and increase its enterprise value by 2,500 percent in ten years. Mark DeLuzio’s Turn Waste into Wealth is an absolute ‘must read’ for transformative managers around the world.” — Art Byrne, CEO (Ret.), Wiremold Company, author of The Lean Turnaround

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Turn Waste into Wealth

“Mark DeLuzio presents advice and tips on Lean management that his company used in their unique approach called the Financial Process Optimizer, enabling us to dramatically reduce the lead times and cycle times in our closing and forecasting processes. This provided us with a powerful competitive edge while also building the foundation for a Lean continuous improvement culture throughout our South American finance operations.” — Carlos Zarlenga, Chief Financial Officer, General Motors South America (GMSA) The author’s words match his methods: hard hitting, simple, direct, and to the point . . . in very compelling short chapters, the purpose, the principles, and the process are explained, and the resulting profits of Lean are delineated. — BOOKLIST (Barbara Jacobs)

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TURN WASTE INTO WEALTH HOW TO FIND CASH IN EVERY CORNER OF THE COMPANY

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Turn Waste into Wealth

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TURN WASTE INTO WEALTH HOW TO FIND CASH IN EVERY CORNER OF THE COMPANY

MARK C. DELUZIO

M AV E N H O U S E v

Turn Waste into Wealth Published by Maven House Press, 4 Snead Ct., Palmyra, VA 22963 610.883.7988 • www.mavenhousepress.com. Special discounts on bulk quantities of Maven House Press books are available to corporations, professional associations, and other organizations. For details contact the publisher. For information about subsidiary rights (translation, audio, book club, serial, etc.) contact [email protected]. Copyright 2016 by Mark C. DeLuzio. All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise) without either the prior permission of the publisher or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923; 978.750.8400; fax 978.646.8600; or on the web at www.copyright.com. While this publication is designed to provide accurate and authoritative information in regard to the subject matter covered, it is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. — From the Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations This book is an independent publication and has not been authorized, sponsored, or otherwise approved by any of the companies mentioned in the book. Library of Congress Control Number: 2015938502 Hardcover ISBN: 978-1-938548-45-1 ePUB ISBN: 978-1-938548-46-8 ePDF ISBN: 978-1-938548-47-5 Printed in the United States of America. 10 9 8 7 6 5 4 3 2

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Contents

Foreword by Jeffrey J. Fox................................................... xiii Part One: Lean Purpose 1. Mountains of Money.................................................... 3 2. Lean.............................................................................. 6 3. The Lean Journey.......................................................... 7 4. The Lean Transformation............................................. 9 5. Lean’s Good Numbers................................................ 11 6. The New Cost Reduction Frontier: Using Lean to Cut Administrative Waste................... 14 7. How to Enhance Your Culture with Lean.................. 18 8. Change from Problem Hiding to Problem Solving.... 21 9. The 10%-80%-10% Population Rule.......................... 23

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10. How to Identify a Naysayer........................................ 25 1 1. Ours Not to Reason Why, Ours But to Waste and Die....................................................................... 27 Part Two: Lean Principles 12. The Eight Deadly Sins of Waste................................. 33 13. The Leadership Rules of Lean.................................... 35 14. Lean Transformations Are Not Pain Free................... 38 15. LEAN Does Not Mean Less Employees are Needed..... 40 16. Never Tie Headcount Reductions to Lean................. 43 17. Continuously Grow with Continuous Flow............... 45 18. Customers Will Not Pay for Non-Value Activity....... 47 19. Accounting for Lean................................................... 52 20. How Traditional Accounting Promotes Accounting Waste and Costly Behaviors....................................... 55 21. Don’t Employ Purchase Price Variance....................... 58 22. New Lean Rules for Capital Expenditures................. 60 23. You Can Teach an Old Dog New Tricks..................... 63 24. What and Why to Benchmark................................... 67 Part Three: Lean Process 25. The Five Whys: Too Much Pigeon Poop.................... 71 26. Standard Work Is the Gold Standard......................... 73 viii

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27. TAKT Time is Money Time...................................... 75 28. She Walked from San Diego to St. Louis in One Year and Never Left the Factory Floor............... 77 29. The Blue Parts Cart: Or, Minutes Mean Big Money.................................................................. 79 30. Don’t Blame Manufacturing: Three Days Process Time, Eighteen Weeks Lead Time................ 82 31. A Hospital without Waste.......................................... 86 32. Don’t Cherry-Pick Lean Tools................................... 92 33. Kaizen......................................................................... 94 34. Kaizen Event Rules..................................................... 96 35. Lean Trumps Six Sigma.............................................. 99 36. The Problems with Kanban....................................... 102 Part Four: Lean Profits 37. The Lean Profit Formula.......................................... 107 38. Lean Distribution..................................................... 112 39. The Wallet................................................................. 113 40. The High Cost of Carrying Inventory...................... 117 41. Cross-Functional or Dysfunctional: There is No Choice................................................................ 122 42. Waste Mapping: Where to Deploy Value Streams... 125 43. Strategy Deployment................................................ 128 ix

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44. Using Strategy Deployment to Save the Shad (A Metaphor)........................................................... 130 45. The Difference between Strategy Deployment and Policy Deployment . . . and Why It Matters!....... 133 46. The Dees and Rees...................................................... 136 Appendix A. The Lean Horizons Lean Sustainability System (LSS)............................................................ 139 Appendix B. The Lean Horizons Wealth Creation Process...................................................................... 142 Appendix C. Lean Horizons Benchmarking..................... 144 Index................................................................................. 145 About the Author.............................................................. 149

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Dedication

To my sons, Army SGT Scott DeLuzio (Operation Enduring Freedom, 2009–2010) and Army SGT Steven DeLuzio (Operation Iraqi Freedom, 2006, and Operation Enduring Freedom, 2009–2010. Killed in action August 22, 2010, Afghanistan) and all the other American heroes to whom we owe our liberty.

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Foreword By Jeffrey J. Fox

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very executive has heard of Lean, although many confuse Lean with kaizen, Six Sigma, and the Toyota Production System. Many managers believe Lean is only used to reduce the costs and waste in manufacturing, when, in fact, the highest return on investing in a Lean transformation often happens in administration-heavy organizations. Lean is the modern way to run any organization. Jack Sprat’s definition of lean is “little or no fat.” Fast forward from Jack and his wife: Lean is about eliminating whatever is unnecessary in the doing of the work of the enterprise. Lean is about fewer mistakes, fewer doovers, less time, less labor, less human effort, less space, fewer defects, less capital, less inventory – less extra anything. Lean is about getting to the simple of it. xiii

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But as Gustave Flaubert wrote in 1851: “It’s no easy business to be simple.” Thus, Mark DeLuzio’s fast, readable, mind-opening book on turning waste into wealth. Mark’s take on Lean is simple, understandable, and . . . actionable. He makes Lean easy business. You can read any chapter – nearly any sentence – and get an instant idea on how to improve your organization. In addition to Mark’s bulletproof bona fides, what distinguishes this book in the field of Lean is that it’s written by a day-to-day practitioner, not an observer, not an academic. (Mark and his team are working around the globe helping clients make or save millions of dollars per year.) The book is a metaphor for Mark’s view of Lean: to the point, economical, no unnecessary words, no time wasted reading textbook stuff. You can drive heavy machinery reading this book . . . and end up with a lot less machinery when you’re done. It’s telling that one of Mark’s major contributions to the U.S. practice of Lean – Lean accounting – is a radical departure from his education, training, and financial management experience. First as a Certified Management Accountant, and later as the Chief Financial Officer for Jake Brake (a Danaher Company), Mark was a traditional accountant. However, while leading the xiv

Foreword

first Lean transformation at Danaher (and the first in the United States), Mark pioneered his innovative Lean accounting. If your company uses purchase price variance, or uses machine run-time as a productivity metric, or looks at capital investment the old-fashioned way, or has traditional accountants minding the beans, then this book is for you. Actually, this book is for you if you want to turn waste into wealth. — Jeffrey J. Fox

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Part One

Lean Purpose

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1 Mountains of Money

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oney – cash – is lying around everywhere in companies. It’s piled to the ceilings in warehouses and on shelves, hiding in plain sight as inventory. It litters administrative offices, disguised as incorrect invoices, late billings, incomplete forms, input errors, sloppy requests from salespeople. Cash, lots and lots of cash, lurks and languishes in the countless places a customer’s order can hide as it crawls from order entry, new product development, production and shipment. Big money sits in customers’ lobbies waiting for the sales calls to start. Tons of money walks away as employees at all levels walk hither and yon into the canyons of the company. The King Midas mines are nothing compared to the treasure lost in the inefficient production and delivery of goods and services. 3

Turn Waste into Wealth

All that cash is retrievable, gettable, bankable, available for re-investment and dividends. Be they manufacturers, insurance companies, financial institutions, hospitals, retailers, all good companies understand this opportunity. Thus, they embark on an endless journey of turning waste into wealth. Good companies, under wise leadership, are true alchemists: they turn time into gold. Time wasted, time lost, becomes cash lost. They do this in every nook of the organization, in every process, with every piece of paper, e-mail, and activity. These good companies continuously, relentlessly improve everything they do to increase shareholder and stakeholder returns.

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DHR: Steady Growth Valued by the “Street” – $16.1 Billion Annual Revenues. An investment of $100 in DHR stock on 12/31/1990 was worth $8,854 on 12/31/2014 compared to $623 for comparable S & P 500 Investment.

Danaher Corp. vs. Comparable S & P 500 Companies

Shareholder Return

Lean Purpose

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2 Lean

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ean is a mindset, or way of thinking, with a commitment to achieve a totally waste-free operation that’s focused on your customers’ success. Lean is achieved by simplifying and continuously improving all of your processes and relationships in an environment of trust, respect, and full employee involvement. Lean is about people, simplicity, flow, visibility, partnerships, and true value as perceived by the customer. Lean liberates operating cash to fuel profitable growth, to accelerate ROIs, and to create value for your investors, customers, employees, and suppliers.

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Getting Started

3 The Lean Journey

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he Lean journey is the endless pursuit to identify and remove waste from every process in the organization. On the Lean journey your organization’s culture changes from waste acceptance to relentless waste eradication. Those on the Lean journey know that waste exists everywhere, and that the reduction of waste in one area often exposes problems and waste in other areas of the organization. Change is no longer a scary threat. In a Lean company change is accepted as the norm. Kaizen events – process improvements – are welcomed as opportunities to grow the company.

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Lean companies measure performance in new ways. In the world of Lean you measure by the minute, by the hour . . . not by the week or the month. The time to make something, to produce something, or to process something is reduced 30%, 40%, 60%, or more. Lean is adopted at the top, but driven from the bottom. Lean is driven by the people who do the work, who are closest to the problems. Everyone is trained and empowered to identify problems, to find the root causes of problems, and to solve the problems when they are first detected, when the problem is happening. Lean leaders are coaches and teachers. Lean leaders lead the organization as if their only power is that of persuasion and example. Lean leaders never intimidate. A Lean journey is truly a voyage from waste to wealth.

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Getting Started

4 The Lean Transformation

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ean is a never-ending journey to eliminate all waste, errors, bottlenecks, dysfunctions in your organization. A Lean transformation is that journey from the present state to that moment when every person in your organization understands and embraces the notion that eliminating waste leads to wealth. In a Lean transformation people change how they think, believe, perform. In a Lean transformation the customer clearly sees your organization providing greater value, superior service, true, attentive, action-oriented listening. In a Lean transformation every employee takes off their company hat and puts on the customer’s hat, and then works enthusiastically and tirelessly to give the customer exactly what they want, precisely when they want it, with a value that considerably exceeds the selling price. 9

Turn Waste into Wealth

In a Lean transformation revenues go up, costs go down, margins and profits explode, innovation rules, productivity multiplies, competitive advantages strengthen. A Lean transformation builds a winning culture that turns waste into wealth.

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Getting Started

5 Lean’s Good Numbers

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our Lean journey milestones can be measured. Lean outcomes must be measured. Lean leadership should expect significant, enterprise-wide improvements. A well-conceived, well-executed Lean transformation will result in the following: • Quality improvements: External quality as seen by the customer; internal quality such as reworks, rejection, redos, supplier quality. Quality should improve by a minimum of 50% per year outputs. • Productivity is outputs divided by inputs, such as parts produced per hour. Productivity increases should be 2% per month, or 28% per year on a compounded annual basis the first year.

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• Sales per associate should grow by 30% per year or more in the first two to three years. • Floor and office space should be reduced by 50%– 70% in one year. • On-time delivery to customer request should exceed 98%. • Inventory should turn fifteen times per year within the first two to three years. • Supplier base should be reduced by 50% within the first two years. • Profits should increase by 100%–200% by year three. Accurate outcomes can be developed for individual organizations in any industry. Your investment in lean should provide a twenty to thirty times ROI over the course of three years.

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Lean Purpose

Lean Manufacturing Case History Brake Manufacturer Category Dates

Before Lean Post Transformation Transformation Year 1

Year 10

Sales Rev

$65 million

$200 million

Headcount

550

575

$118,000

$350,000

240,000 sq ft

240,000 sq ft

$270

$800

2X

25X

18%

99%

85 Days

2 Days

75,000 defects PPM

4,500 defects PPM

4%

31%

Revenues per Associate Floor Space Revenues per Sq. Ft. Inventory Turns On-Time Delivery Lead Time Quality Net Operating Profit

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6 The New Cost Reduction Frontier Using Lean to Cut Administrative Waste

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lthough widely accepted for improving procedures on the factory floor, the fact that Lean can dramatically reduce waste in administrative functions is less well known. Administrative costs dwarf manufacturing costs. As a percentage of revenues, administrative costs are two to ten times greater than direct production costs. (Production can be manufacturing a part, making a TV commercial, baking donuts, harvesting apples, and so on). Consider administrative costs to be any cost not associated with marketing, selling, or manufacturing. Thus, accounting, clerical, legal, tax, insurance, utilities, management salaries, order processing, document processing, IT, human resources, and so on are all administrative costs. 14

Lean Purpose

Administration has various names: front office, back office, central office, white collar, bureaucracy, overhead, and G&A (general and admin costs). Administrative functions, unlike production processes such as turning a lathe, are typically invisible. Transactions and improper direction may lie deep within databases, policies, or software. For example, the root cause of late shipments may be due to a poorly engineered customer demand oversight process. Flaws in product design, weak forecasting, cumbersome forms, redundant paperwork, endless approval systems are examples of administrative waste. Lean administration reduces waste, errors, processing time, and back office delays. Back office problems are particularly common in an organization’s accounting and finance functions. Back office problems are endemic in insurance, banking, and paperwork-generating industries such as residential real estate sales. Every company is undoubtedly losing money in its back office, or whatever the administrative function is called. Mis-billing, late billing, and non-billing cost industry millions of dollars a day. Late ordering of fresh seafood robs $1,000 from the restaurant’s evening revenues. Mis-ordering the correct grade of cement delays the building completion by two 15

Turn Waste into Wealth

days, causing $200,000 in lost time. Mis-forecasting part requirements triggers a line shutdown or expensive, expedited emergency shipments. Mis-handling insurance escrow accounts costs the mortgage bank millions of dollars a month in redundant mailings, overnight express mailings, unnecessary interest payments. Getting it right the first time, and every time, is the most worthy of wealth-creating missions. White collar waste is the white whale of opportunity for companies that deploy Lean administration.

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Lean Purpose

Lean Case History Diversified Industrial Company Accounts Receivable Optimization Every outstanding receivable is your money in someone else’s bank. Every late billing delays payment. Every mistake on a customer invoice requires costly revisions, delays payment, and irritates the customer. The lack of standard work means the same mistakes can happen again and again. In less than forty-five days, using the Lean administration toolset, a $50 million company generated millions of dollars in cash. Category

Before Lean Post Lean Administration Administration

Dates Days Sales Outstanding Past Due Receivables Accounts Receivable Headcount

Year 1

Year 10

100

38

$3,000,000

$250,000

1.0

0.3

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Turn Waste into Wealth

7 How to Enhance Your Culture with Lean

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truly Lean culture is a competitive advantage. For many companies in fast-changing industries Lean makes survival possible. Here are the steps to take to transform your organization’s culture into a Lean culture:

1. Leadership must believe in Lean and commit itself to making the Lean journey.

2. Demonstrate respect for all people. A cultural groundwork that rewards and stimulates continuous learning, celebrates personal pride in job performance, and drives innovation is the linchpin to Lean success.

3. Conduct a comprehensive, unbiased assessment of the company’s current structure, leadership, 18

Lean Purpose

culture, and strategy. Lean consultants are usually needed at this point.

4. Develop a change management plan that’s understood by everybody in the organization and that insures a successful execution of company strategy.



5. Find or create leaders who believe in Lean, understand Lean, and who can develop people.



6. Get everyone in the company to act as if they own the company. People must look in the mirror every day and proclaim, “This is personal. I’m not going to let a competitor outperform me today. Today I will make this company more competitive.”



7. Help the organization adopt the language of Lean. Everyone should be comfortable using common terms such as continuous flow, waste of motion, kaizen, standard work, in everyday conversations.



8. Never stop communicating the progress of your Lean journey.



9. Create reliable, repeatable processes that deliver sustainable breakthrough outcomes including increased profitable growth, impeccable safety, reduced costs, improved quality, and faster, on-time delivery. 19

Turn Waste into Wealth

10. Measure performance, and make sure that performance is based on sustainable, repeatable processes. 11. Reward good performance. When your organization becomes a Lean organization, waste will decline and wealth will accrue.

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Getting Started

8 Change from Problem Hiding to Problem Solving

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roblems are money-making opportunities. Problems lock out profits and cash. Lean is the key to unlocking the wealth. Problems solved by Lean result in improved economics. Lean is based on discovering and fixing problems. Discovering and uncovering problems is not simple. Problems can masquerade as acceptable ways of doing things. Problems can be so entrenched that companies learn to live with them and don’t recognize the dysfunctional behavior as abnormal. A manager told a Lean consultant that his plant had no problems with hydraulic oil leakage. Yet before they took a tour of the facility everyone had to don rubber boots because the floor was slick with leaked oil. After 21

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fifteen years of living with leaked oil, the problem had become an accepted norm. Problems can be hidden by employees who believe their job is dependent on making the organization work despite the waste, errors, do-overs, re-work. Office cleaners love paper-filled companies. Accountants love bedeviling new tax laws and regulations. Inspectors of all types exist because products are not correctly made 100% of the time. Generally when you hear employees say there’s no problem, there is a problem. There are always problems. On display, or in the dark, there are always problems. Solve problems at the lowest level in your organization. Root out the root causes. Remove the root cause and remove a barrier to wealth creation.

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Getting Started

9 The 10%-80%-10% Population Rule

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n an organization undergoing a Lean transformation, 10% of the population will be pro-Lean leaders. Those leaders exist at every level of the organization. In the same organization, 10% of the population will be anti-Lean leaders. These are the naysayers, the idea killers, the enemies of Lean. Naysayers exist at every level of the organization. The remaining 80% of the population are followers. They follow influencers. Pro-Lean leaders are influencers. Their message is positive: worker empowerment; more company money for training, R&D, rewards; happier customers; a stronger company. But that message is a picture of the future. Naysayers are also powerful influencers, and their message is grounded on the immediate, the now. Nay23

Turn Waste into Wealth

10%-80%-10% Population Curve • Positive leaders • Change agents • Future state



• Want leadership • Follow leaders • Willing workers

• Negative leaders • Fear mongers • Protect status quo

10% 80% 10%

sayers flame the fears of the followers: job losses, new work skills required, dislocation, relocation, wrenching, painful change. Followers fear change. They prefer the status quo, often to their peril. They don’t want to know about problems, and they abhor the necessary bitter pills and surgery required to solve the problems. Left alone, naysayers will sway the 80%. They will scuttle a Lean transformation. Wise leadership must turn naysayers into positive Lean influencers or remove them from the organization.

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Getting Started

10 How to Identify a Naysayer

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ay means no. A naysayer says no in a 1,000 ways. The naysayer opposes, denies, or blocks. He or she is negative, a pessimist, a cynic, a wet blanket, a sky of black clouds. The naysayer is sneaky, or bold, or both. The naysayer wants the Lean transformation to fail. He or she wants to maintain the dysfunctional wasteful status quo. If you hear the following, you will hear a naysayer: • “Lean won’t work in our culture.” • “We already did Lean.” • “We are as Lean as we can get.” • “Lean is for manufacturing companies, not us.” • “We’re too small for Lean.” 25

Turn Waste into Wealth

• “We’re a high-volume, low-cost manufacturer. We don’t need Lean.” • “We’re a custom-order company.” • “We have too many products, too many skills, for Lean to work here.” • “We’ve been running the company for years. Those Lean consultants know nothing about our business. What can they bring that we don’t know?” • “Our customers won’t accept any changes as to how we do business.” • “We’re crazy to pay those lean guys a penny, let alone their huge fees. We’ll never get our money back.” If you hear the naysayers, don’t listen to them. Don’t give in to them. Get rid of them.

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Getting Started

11 Ours Not to Reason Why, Ours But to Waste and Die

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oo often employees obediently follow a company policy or practice because “That’s the way we’ve always done it.” One tenet of continuous improvement is to regularly question the prevailing wisdom, to shake up the status quo, to challenge the company’s myths and beliefs. You must think objectively, be fact-based, in order to change and improve. Assume nothing. Look at the rationale, the facts, the data, the legacy thinking that underpin every company assumption. The company was new to Lean, and leadership was eager and open-minded. The company made plastic blow-molded truck boxes. The truck boxes were piled to the ceiling all over the plant. There were hundreds of stacks of boxes. 27

Turn Waste into Wealth

When asked about the towers of boxes, the plant manager explained that after the molding step, the boxes needed to cool down and cure for forty-eight hours. After the forty-eight-hour cooling period the boxes were moved to the next manufacturing process. “How long have you been making the boxes this way?” The lean consultant asked. “Before I arrived, for sure. At least ten years,” the plant manager answered. “Can we take a look at the engineering study, any documentation that states why each box must take fortyeight hours to cure?” There was no documentation. And two days later the company engineers determined that a box would cure in twenty minutes. Production was shut down until the mountains of cured and curing truck boxes were exhausted. Inventory was reduced by 80%. Floor space was reduced by 70%. Single-piece flow was now possible by combining the assembly operations with the molding operations. Quality was improved by 90% because defects were detected immediately and corrected on the spot. Past-due backlog was eliminated. On-time delivery, defined as the customer’s delivery request date, was improved to 98%. 28

Lean Purpose

Challenge the unchallenged. Ask the unasked. Any practice or policy that’s three or more years old may be ancient history. Beliefs are beliefs, not facts. Especially not Lean facts.

Lean Case History A $3 billion biotech company needed to significantly increase drug substance testing, speed up product development, and improve overall lab productivity. Using Lean principles and tools, within six months the biotech company: • Increased overall productivity, as measured in tests per lab technician, by 50%. • Increased productivity by 50% on 75% of tests. • Freed up $200,000 of equipment. • Sped up drug development by 25%. • Reduced sample prep time by 66%.

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Getting Started

Part Two

Lean Principles

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12 The Eight Deadly Sins of Waste

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iblical writers focused on human failings. Lean focuses on corporate failings. Wise leadership knows these sins are ever present, sometimes hiding, sometimes invisible, often in one’s face, and always intent on sucking out cash, weakening balance sheets, and diluting profits. Wise leadership constantly makes all employees alert to the eight deadly sins, and continuously exorcises these sins with Lean. Here are the eight deadly sins of waste:

1. Waste from unnecessary motion. Having to get up to reach a part during assembly, or walking down two halls to the printer, are wasted motions.



2. Waste from inventory. Slow-moving inventory, idled work-in-process inventory, stockpiled inventory, obsolete inventory all vacuum up cash. 33

Turn Waste into Wealth



3. Waste from over-production. Endlessly running a machine or process simply to make the machine “more efficient,” instead of running it to reflect customer orders or demand, leads to extra maintenance costs, unnecessary downtime, unsellable inventory.



4. Waste from defects and errors. Defects cause scrap, damage, disposal, rework, warranty claims, penalties, dissatisfied customers. Errors cause do-overs, mis-billing, long response times, lost customers.



5. Waste from transportation. Transporting product, parts, or documents throughout the plant or office adds no value to the end user.



6. Waste from walking and waiting. Walking is nonvalue-added. Waiting means flow is interrupted.



7. Waste from over-processing. Over-engineering a part, over-polishing, over-sanding, or asking for irrelevant or redundant data on a form waste time.



8. Waste from unused human creativity.

Those closest to the problem have the best solution ideas. Watch for waste. Waste is evil. Commit no sins.

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13 The Leadership Rules of Lean

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ise leadership is critical to an organization’s business success. Wise leadership is absolutely necessary to transform a company from waste and dysfunctional behavior to wealth. Leaders exist at every level in an organization. As a leader, here’s what you must do to insure a successful Lean transformation:

1. Understand that Lean will not happen without invested, committed leadership.

2. Actively participate. Plan to personally be on several kaizen team events per year. 3. Learn Lean in depth.

4. Make Lean a permanent business way-of-life. Lean is not a “program of the month.” It’s not a 35

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management fad. Provide a vision of a future state where your company’s culture encourages everyone to work every day to eliminate waste.

5. Provide resources and infrastructure to support Lean, to insure that the Lean journey will be highly successful. 6. Never stop communicating about every detail of Lean – every success, every dollar saved.

7. Make sure that kaizen events take place in every function in the company – in the back office, in the supply chain, on the factory floor, in the accounting office, in new product development, and in research and development. 8. Do not delegate the responsibility of driving Lean to staff positions. You must take personal responsibility for your Lean transformation. 9. Insure that resolving the waste problem is the responsibility of the people doing the work. Also insure that your company has a standardized process for solving problems.

10. Create a blameless environment – problem-finders and mistake-makers should not have to worry about repercussions. You need everyone’s buy-in. Focus on the process, not the people. 36

Lean Principles

11. Lead in challenging the status quo. Everyone will follow that lead.

12. Encourage and reward risk-taking and innovation. Support risk-takers who fail. 13. Push people to think and take initiative to change things, to improve, to get rid of waste.

14. Educate people that change is expected to happen at all levels in the organization.

15. “Lead the organization as if you have no power.” — Gary Convis, former Executive VP of Toyota Motor Engineering & Manufacturing North America 16. Over and over, tell your organization: “Follow me, and we’ll figure this out together.” 17. Don’t jump to conclusions or solutions. Size up the situation. Get facts. You cannot offer constructive opinions and solutions unless you have personally observed the problem. 18. Keep asking why and why not.

19. Show respect for every single person, regardless of job, status, or personality. 20. Provide motivating incentives.

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14 Lean Transformations Are Not Pain Free

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Lean transformation – turning the organization’s waste into wealth – requires tough, wise leadership. There will be camouflaged snake pits, granite-hard habits of waste, and anti-lean saboteurs. Lean is like a comprehensive medical physical. Lean discovers illness, pain, symptoms, curable diseases, and healthy starting points. Lean diagnoses ailments and provides cures. Lean exposes naysayers, people who will fight to maintain the status quo, to protect their patch, to derail improvement initiatives. Exposing naysayers is good. Leadership must not let naysayers continue to contaminate the organization. Naysayers are waste-makers, not wealth-makers, and must go if they cannot be turned into believers. 38

Lean Principles

Lean finds internal hurdles and problems. Lean does not create problems, as detractors often whisper. Problems can’t be solved until they are identified, diagnosed. Problem-identification mobilizes leaders to act responsibly, quickly, purposefully. The solution to a problem can be a necessary dose of bad-tasting medicine, or surgery, extraction, excision. Leadership must administer the medicine. As it is for athletes, so it is for the business organism – no pain, no gain.

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15 LEAN Does Not Mean Less Employees Are Needed

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ecause organizations have misused Lean, using Lean tools solely to reduce headcount, it’s not surprising that various employee groups believe LEAN is a four-letter word, an acronym for less employees are needed. A Lean transformation often surfaces excess, or redundant, employees. This reality can reinforce Lean’s negative reputation if leadership does not properly manage organizational dynamics. One of the principles of Lean is to respect all individuals. Wise leadership respects all people, and knows that without employee buy-in a true transformation to wealth creation will not happen. Honest, ethical, straightforward leadership must level with the employees. They must admit that it’s possible that some jobs may be eliminated, but only if there’s a downturn in the business climate, not because of Lean successes. 40

Lean Principles

Leadership must introduce employee-retention policies that are consistent with the people-first tenet of Lean. To deal with potential job reductions, good companies do the following: • Provide proactive, cross-functional training for the development of a multi-skilled workforce. Engineers can be trained to be sales people, receptionists trained to be customer-service reps, waiters trained to do maintenance, and so on. • Encourage employees to change, to grow, to be flexible regarding job descriptions, work locations, workdays, and work hours. • Foster a continuous-improvement mindset, personally and professionally. • Use cross-functional teams so that potentially adrift employees can make new contributions. • Use Lean-created resources and money to grow the business and provide new work opportunities. • Create cross-job movement opportunities through natural attrition. • Reduce or eliminate temps and seasonal hires. • Deploy people to full-time improvement teams. • In-source activities where it makes sense. 41

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• Offer incentives for early retirement. • Provide out-placement assistance. • Create job opportunities through voluntary separation. Good companies fight to avoid layoffs and terminations, but they must be able to deal with adverse economic or business conditions. A successful Lean transformation is tied to contributing employees, not to fewer employees. Lean leads to growth and jobs. And jobs is a good fourletter word.

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16 Never Tie Headcount Reductions to Lean

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“

ff with their heads,” is for the Queen of Hearts to say, not chief executives.

Too many companies mistakenly embark on a Lean journey with the primary objective of reducing headcount. This always results in a rocky journey. The underpinning philosophy that makes Lean such a wealth-producing business practice is that process improvement comes from the people closest to the process, and that’s true for every process and practice throughout the enterprise. Transforming a company culture to Lean thinking and Lean action depends on rock solid trust between leadership and employees. A Lean transformation depends on asking employees for improvement ideas, and 43

Turn Waste into Wealth

then getting and implementing those ideas. If employees relate headcount reduction to Lean, they will keep their ideas to themselves and continue doing their jobs the wasteful way. Sooner (usually much sooner), not later, the CEO will recognize the folly of using Lean to reduce the number of employees. The lasting consequence is that he or she will lose the trust of the employees and will never regain it. The damage is irreversible. Ultimately there will be a headcount reduction. One person will be cut loose – the CEO. Never tie headcount reductions to Lean. That head could be yours.

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17 Continuously Grow With Continuous Flow

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ean experts often say that the most important outcome of a Lean transformation is to create continuous flow. Flow is the non-stop movement of a part, or a product, or a piece of paper, or an order, or an invoice from one part of the process to the next. In manufacturing, retailing, banking, steel making, insurance, and countless other industries, the goal is one-piece flow, where the product moves from customer order to customer delivery without stopping. One-piece flow reduces stockpiled inventory parts, reduces labor, improves quality, shortens delivery lead times, frees up desk and floor space, eliminates the high cost of obsolete inventory, and speeds reimbursement time. Flow is also a marketing weapon. In flow, each product is built to specific customer orders. Flow production 45

Turn Waste into Wealth

mirrors market demand. If the customer orders a specific product, that’s the only product produced. If the customer doesn’t order the product, the product doesn’t get made. Customers get what they want, and get it when they want it. These happy customers reorder. The opposite of flow is push. Push is making products in batches independent of customer orders. Push-made products or documents usually end up as stockpiles of inventory – piles of money – squatting on shop floors and in the back office, or rotting or rusting in warehouses, or sitting on shelves taking up money-making space. Don’t push. Go with the flow. And watch the wealth flow in.

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18 Customers Will Not Pay for Non-Value Activity

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n a wickedly competitive industry, where pennies decide sales, one aluminum die-caster’s manufacturing process required grinding off a metal seam that ran along the part. The costly grinding process interrupted flow. The die-caster’s competitor was not charging for the grinding process because customers didn’t want to pay for grinding. The die-caster employed Lean practices and identified seam-grinding as non-value, even though the company had been using that process since its inception. They eliminated seam-grinding through a product redesign, reducing total labor cost and improving overall lead times. Those pennies turned into big revenue dollars. 47

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A small company opened to offer customers fabulous sandwiches. With just a bit of fanfare, customers trickled in. The sandwiches were fabulous, but customers had to wait fifteen to twenty minutes from the time they ordered until they walked out the door. Customers don’t want to pay for unnecessarily slow sandwich making. The store owner was frustrated and worried. Customers said they loved the sandwiches and thought the prices were fair, so why were the customers not returning? The owner and his adequate staff were so engrossed in slicing meats and cheese; in using only the perfect-size pickles and peppers; and in stacking, cutting, and wrapping the sandwiches that they were unaware of the prep time, which was unacceptable customer wait time. A Lean consultant was a customer. The Lean consultant asked the harried owner if he would like some Good Samaritan advice on how to double, triple, quintuple production and thus quintuple revenues? In fifteen minutes the Lean consultant reduced the sandwich-making time by 70% per sandwich. One person took the customers’ orders, as opposed to order-taking by whichever worker was free. Errors due to different interpretations of what the customer ordered or to illegible handwriting were eliminated. Remakes were eliminated. 48

Lean Principles

Instead of one person making a single sandwich, and walking all over the kitchen to different places to find the turkey, then go to the slicer, then find the correct mustard, then dig out the proper bread, wait for the guy in front of the bread slicer to finish, then slice the bread, and so on, the Lean consultant created a continuous flow production line. The sandwich-making tasks were sequentially aligned, from bread selection to wrapping. Each worker was assigned one task, such as adding condiments, and situated at one place on the work counter. All the ingredients needed for each task were placed at the counter position where the task took place. The customer’s order was placed on a work plate and moved down the counter, enabling each worker to quickly perform the correct task. Every task was standardized, even to the detail of placing three sliced pickles horizontally on the ham sandwich. If something went awry and slowed the flow, the problem was immediately discovered and solved. One worker was available to replace depleted ingredients. Racing around to find another block of provolone was replaced by “I need more provolone.” The same worker took the wrapped sandwiches and proceeded to the customer. 49

Turn Waste into Wealth

This simple system did more than speed up the sandwich-making. It optimized inventory. There were infrequent stock-outs of ingredients. There were no longer pounds of unused food to be disposed of. The new system was true pull – the workers literally pulled the exact ingredients voiced by the customer. The fabulous sandwich store became the fast and fabulous store. Whether you’re selling die-casts, sandwiches, bank loans, or tree-pruning services, your customers don’t want to pay you for your inefficiencies, red tape, or under-trained personnel. Wasted time, errors, extra steps are non-valueadded.

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Lean Principles

Lean Machine Case History A $100 million contract manufacturer was taking four weeks to change over molecule production, dangerously threatening capacity and sales growth. Using Lean principles, the contract manufacturer: • Reduced changeover time from four weeks to one week. • Reduced the changeover variable cost by $500,000 per change. • Increased manufacturing capacity by 38%. • Avoided a $40 million capital investment. • Reduced the waste per changeover by 90%.

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19 Accounting for Lean

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ccounting for Lean is the new and correct way to manage and measure the various metrics of true performance. Traditional accounting practices were developed for batch and queue environments. Batch and queue is a non-Lean practice. Batch and queue is a push system, be it in manufacturing or in administration. Traditional accounting practices promote dysfunctional non-Lean behaviors. Such non-Lean practices include: • Measuring and rewarding purchasing professionals on purchase price variances (PPV). This practice encourages buying at unnecessarily high volumes to get quantity discounts, and purchasing lesser-quali52

Lean Principles

ty components and services simply to get the lowest price.

• Using absorption variances as a measure of manufacturing performance. This practice encourages over-production to avoid negative variances.

• Using standard costing and variance analysis, which hide trends in actual costs. Beating a standard cost that may have been wrong at the outset may lead to dysfunctional behavior.

• Defining indirect labor as part of overhead. This triggers wasteful functions such as time cards, classifying labor costs, reporting, and tracking data, all of which are unnecessary and should be eliminated.

• Using traditional capital expenditure accounting, which does not consider Lean practices such as TAKT time, equipment speed adjustment, required process capability to meet quality standards, and change-over time or continuous flow requirements. Deploying accounting for Lean, and getting rid of traditional accounting, will: • Stop the building of unnecessary inventory.

• Eliminate long production runs that don’t reflect actual customer demand. 53

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• Stop misguided lowest-price-based purchasing. • Broaden the options and thinking before investing in new capital equipment. • Provide accurate full product costs. Traditional accounting, designed to count every penny, to be exact, to save money, actually costs money. Traditional accounting is a cluster of non-value activities that generate wasteful, costly, dysfunctional behaviors. Accounting for Lean is smart management and must be part of your organization’s Lean transformation.

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20 How Traditional Accounting Promotes Accounting Waste and Costly Behaviors Old Fashioned Accounting Promotes Non-Lean Outcomes Absorption Variance

Building of unnecessary inventory

Reluctance to Change Encourages continuous Over Equipment machine utilization Reluctance to stop machine to perform necessary maintenance Compensates Buyers Buying excess inventory To Seek Purchase Price to get quantity discounts Variance (PPV) May compromise quality and delivery to get cheapest price

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Direct/Indirect Labor Ratio

Uses direct people for indirect purposes



Minimizes true importance of indirect labor activities

Direct Labor Variance Analysis

Encourages using low-cost employees regardless of proper skill set



Paying on piece rate encourages building unnecessary inventory



Compromised quality due to poor workmanship

Overhead Variance Analysis

“Favorable” variances disguise and mask negative trends

Traditional accounting is anti-Lean. For example, the cheapest price for a bearing, the cheapest gallon of paint, the cheapest laptop – which is the goal of purchase price variance – could produce disastrous results. The cost of 100% of motors failing because of low-price, poor-quality bearings is catastrophic. Encouraging continuous machine utilization, regardless of customer demand, is dumb. Running a machine 56

Lean Principles

mindlessly to produce parts is like buying a new car and driving aimlessly around the neighborhood twenty-four hours a day to get “auto utilization.” Traditional accounting increases costs. Accounting for Lean is modern management.

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21 Don’t Employ Purchase Price Variance

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t’s common for purchasing professionals to be measured and compensated for achieving favorable purchase price variances (PPV). A favorable PPV is when parts, supplies, materials, and services are bought below target pricing. If the vendor’s price is $1.00 and the purchasing agent gets it for $.95, there is a favorable $.05 PPV. Rewarding purchasing people to buy products solely at the lowest price is dumb. Seeking favorable PPV encourages dysfunctional, non-Lean behavior. One way some purchasing personnel avoid unfavorable variances is to buy in high volumes to get quantity discounts. Quantity discounts do lower the unit price for each item, but this practice promotes the building of excess (and eventually obsolete) inven58

Lean Principles

tory. The final cost of obsolete inventory can exceed the total value of the initial inventory investment. Using PPV as a performance tool also raises the real and acute risk that the purchasing people will source parts from the lowest-priced vendor simply because the vendor offers the lowest price. The business world is littered with the bones of companies that regularly bought components and parts solely on low price. The lowest price for a piston or gasket or lawn care service or security system is to build the product without the piston or gasket, maintain the facilities without cutting the grass, or not protect the premises. Buying the lowest-priced product can be the highestcost behavior. Resultant costs in warranty claims, lost customers, reduced property value, and increased insurance premiums will bankrupt the company. Seeking favorable PPV without considering supplier quality, after-sale service, technical support, delivery integrity, lead times, and product defects is anti-Lean. Buying the wrong parts and products is an error that, if ignored, can have huge negative consequences. PPV is a performance tool. It encourages bad performance. 59

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22 New Lean Rules for Capital Expenditures

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raditional budgeting requires that capital equipment investments provide a targeted payback, a rate of return. If you plan to buy a $100,000 computer system, that purchase has to pass some kind of hurdle rate analysis such as return on investment or net present value – some capital return method. Financial considerations should be part of the capital expenditure decision thinking. But in a Lean environment there are other considerations, other rules, that must be considered.

1. The equipment must be able to meet the TAKT time for future requirement.



2. The speed of equipment must be adjustable, able to accommodate varying customer demands. 60

Lean Principles



3. Can the old, existing equipment be modified, upgraded to meet demand, thereby postponing or negating the need for new capital investment?



4. The new equipment must have the required process capability to meet quality standards.



5. The equipment must be flexible, correctly sized, easy to fit into the existing cell design.

6. The equipment must not interrupt continuous flow or cause bottlenecks.

7. What will it cost to service and maintain the equipment over the life of the equipment?



8. Will specialized training be required? How much will that training cost?



9. Is there another piece of equipment somewhere in the company that can be redeployed to do the job?

Traditional, non-Lean accounting focuses on maximizing equipment utilization. Maximizing utilization usually results in over-building of parts and expensive, stockpiled inventory. Traditional accounting stymies, even kills, many Lean transformations with its outdated focus on outdated 61

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manufacturing systems and its outdated focus on outdated, non-value-adding activities and metrics. Update your accountants and teach them to help lead the Lean transformation.

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23 You Can Teach an Old Dog New Tricks “

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his old machine is a dog,” the plant manager complained. “We need to stamp 30% more parts and this dog is stuck at 480 per day. We need 625 or we lose the customer. At $20 a part, if we can’t ship what they want, and they switch to a competitor, we lose $12,500 a day in revenue.” “What do you suggest?” the company president asked. “To increase capacity by 30% we need to buy a modern stamping machine.” “How much money?” the president asked. “We need $350,000. And we better move fast. The customer’s Lean consultant is visiting in six weeks. Besides, this old dog has been stamping parts for twenty years. Get the moth balls.” 63

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“To get our money back on a new machine we’ll have to raise our price by two dollars,” the president noted. “When they see the new machine, two bucks is nothing,” offered the plant manager. Six weeks later the new machine was ramping up to make 625 parts per day. The old machine was still running. The company president proudly showed the new $350,000 machine to the customer’s Lean consultant. After watching the machine in action, the consultant asked to see the old machine. The consultant noticed that 90% of the part-making cycle time on the old equipment was dedicated to moving the cutting die to and from the part. The machine did not create value, did not create a sellable part, until the cutting die met the rolled steel and stamped the part. For 90% of the cycle time, the die cut air, not metal. Cutting air is not creating value. (Note: In Lean, moving the cutting die to and from the part was waste – unnecessary motion.) The consultant asked the supplier’s process engineer if the space between the die and the steel could be shortened, thereby reducing wasted travel time, wasted time cutting air. The engineer said he could reduce the unnecessary die travel time and accelerate the stamping cycle. 64

Lean Principles

The old machine’s capacity was increased by 40%–60%. (Note: In Lean, not having asked the process engineer for his ideas to improve productivity was a waste of human creativity.) The company president was sheepish. “Guess I blew $350,000,” he said. The Lean consultant responded, “Every part of a business, even capital equipment, can be continuously improved. And we can’t accept a two-dollar price increase because you cut air. Cutting air doesn’t cut it.” After the consultant left, the president spoke to the plant manager. “Old dog, huh? Methinks there’s another old dog around here who needs to learn a new trick or two.”

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Lean Case History A multinational construction company used twelve different “local” manual payroll processes. Late entries were driving up costs and endangering net operating profits. Using Lean principles, within three months the construction company: • Reduced payroll processing costs by 30%. • Reduced payroll lead time by 80%. • Improved quality compliance from 71% to 99.7%.

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24 What and Why to Benchmark

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ow good you think your company is matters not. How wonderful you think your products, service, and people are matters not. How fabulous you believe your sales force, deliveries, processing time, advertising, and packaging are matters not. The only opinion that matters is your customers’. Your customers deal with lots of companies in and outside of your industry. Customers constantly compare every single thing you do to the best companies with whom they do business. If you’re thrilled with 95% on-time deliveries, and the customer gets 100% on-time deliveries from the local pizza joint, you are not in first place. If you’re the biggest koi in a fish pond, you’ll be devoured by the smallest orca in the ocean. 67

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Being better than your competitors is not good enough. You need to be as good as the best, regardless of industry. If you’re a manufacturer, compare your customer service to the best online retailer. If you’re a rescue and emergency provider, compare your training, procedures, and responsiveness to an elite military rescue team. Consider what your customers want. Do they want speed, cleanliness, hot, cold, strength, safety, anonymity, privacy, tech service? If so, then compare your organization to the world’s best at providing speed, cleanliness, hot, cold, strength . . . The conservative and modest approach is to assume, admit, accept that you’re not world class. Benchmark against the best. Set performance goals to be the best. Use Lean to become the best. Best is better than better.

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Part Three

Lean Process

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25 The Five Whys Too Much Pigeon Poop

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o solve a problem you must first uncover the root cause of the problem. To uncover the root cause of a problem use the Lean rule of Five Whys – you have to keep asking why. Five Whys is the root-cause-discovery magic formula (okay, sometimes six or seven whys are needed). The Five Whys help you discover: • Why the error was made.

• Why the problem happened. • Why the system failed. • Why it takes so long.

• Why the error keeps happening. • Why the error wasn’t detected. 71

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Here’s an illustration of the Five Whys in action: Problem: The car won’t start. Five Whys

Answers

1. Why?

The battery is dead.

2. Why?

The alternator is not working.

3. Why?

The alternator belt is broken.

4. Why?

The belt was beyond its service life and had not been changed.

5. Why?

The maintenance schedule was not followed.

Possible Solution: Strictly adhere to the maintenance schedule.

Here’s another illustration: Problem: The Washington Monument is disintegrating. Five Whys

Answers

1. Why?

Cleaning with harsh chemicals.

2. Why?

Lots of pigeon poop.

3. Why?

Pigeons eat spiders.

4. Why?

Spiders eat gnats.

5. Why?

Gnats are attracted to artificial light at dusk.

Possible Solution: Turn on the Monument lights an hour after dusk.

Why-why and it’s bye-bye to pigeon poop. 72

26 Standard Work is the Gold Standard

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tandard work is a detailed, consistent, repeatable method of how to perform a service, process a claim, prune a vineyard, or make a product in the most efficient way. Standard work is a Lean tool that details the process in each value-adding step and insures that each step is performed the best way and exactly the same way every single time. Standard work is the backbone to a successful Lean journey. Without standard work there is no continuous improvement. Standard work is the baseline from which the company continuously moves to better best practices. Standard work is one of the most important and effective waste-reduction tools in lean. However, it’s also the least-used tool. Although essential to continuous improvement, standard work is not used because it’s diffi73

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cult to establish. There are three cornerstones of standard work: TAKT time, standard work sequence, and standard work in process. Standard work generates a plan that includes the proper staffing, methods, and equipment necessary to achieve best practice performance. Lean consultants are often needed to craft standard work blueprints for crucial processes. There can be no improvement without a basis or standard. Standard work starts the wealth-making process.

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27 TAKT Time Is Money Time

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AKT time is the cadence, the rhythm, the beat when a company is making things. TAKT time is the rate at which the exact amount of product must be made in order to meet customer demand. If the work sequence to produce a product, or document, exceeds the TAKT time, then flow is interrupted, on-time delivery is reduced, inventory builds, costs go up. TAKT time is calculated by dividing the available daily time to produce by daily unit product demand. If the available time is 450 minutes and the daily demand is 450 units, then TAKT time is one minute. That means the company must make one unit every sixty seconds. If the company doesn’t make the product in one minute, the production cadence is interrupted. Interruptions always raise costs. 75

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A production center without standard work is like an orchestra without sheet music. A production center without TAKT time is like an orchestra without a conductor. All instruments must work together, at the same beat. TAKT time is a crucial part of standard work. Standard work is a crucial element in reducing waste.

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28 She Walked from San Diego to St. Louis in One Year and Never Left the Factory Floor

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he company makes electrical components. The machine operator is a woman who spends her workday assembling parts. Let’s call her Kay. Prior to a Lean solution Kay routinely walked from here to there to fetch parts, to bring the parts to her assembly machines, to deliver the parts to the next operation, to find tools and maintenance supplies. Kay walked and walked. Based on careful pedometer readings, measuring her every step in a ten-day test period, Kay walked 1,549 miles in one year. San Diego is 1,549 miles from Saint Louis. Kay walked close to three quarters of a mile every hour (1,549 miles divided by an annual 2,000 work hours). Even if she ran at Olympic gold medal speeds, Kay spent seventy minutes a day, every day, walking and not work77

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ing. Every second she walked was a second she did not make a part, and every unmade part was unmade money. If Kay’s total direct cost was $30 an hour, then her employer, the electronics-part maker, paid her $35 every day just to walk around. If Kay worked 250 days a year, her endless wandering to find things cost her employer a wasted $8,750 per year. The machines were moved. The necessary parts were placed adjacent to Kay’s work bench. The tools were labeled and organized for instant access and usage. The parts were now in an economically efficient, continuous, one-piece flow. Kay’s walk time was reduced by 98%. Instead of walking five to six miles a day, she now walks about 100 feet a day. Her production rate is up 75% per day. Based on the selling price of her company’s products, Kay’s cell now generates an additional $1,200 in revenue per day. Kay’s operation is immensely more profitable and truly lean. But poor Kay. She had to join a gym.

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29 The Blue Parts Cart Or, Minutes Mean Big Money

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he parts cart, like all of the carts on the factory floor, was on wheels to facilitate and speed loading, reloading, moving, interchanging. The carts were colorcoded to reduce or eliminate errors in part-loading and properly locating machines. The parts cart was neatly parked next to a yellow-painted floor strip, fifteen feet from its dedicated machine. Every twenty minutes the machine operator walked to his parts cart, got what he needed, and returned to his machine. Thirty to sixty seconds max. The Lean consultant that the company had recently engaged said hello to the machine operator. After a few minutes, without saying a word, he walked to the parts cart and wheeled it fifteen feet further away from the 79

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machine. The parts cart was now thirty feet from the operator. The operator gave the Lean guy a quizzical look, but continued to perform his job. The Lean consultant returned forty-five minutes later. The parts cart was now parked next to the machine. No more thirty-second trips between machine and cart. The machine operator pointed to his head, said “Duhuh,” and gave the consultant a big, smiling thumbs-up. No giving orders. No telling what to do. No notices. Just a clever way to encourage a worker to think for himself, to make an improvement, and to get total employee buy-in. The company moved its forty part carts next to their host machines. Eliminating the part cart trips saved each operator three minutes an hour, or twenty-one minutes per shift. Twenty-one minutes a shift, with five shifts a week, for fifty weeks, saved 5,250 minutes a year, or eighty-sevenand-a-half hours per year per machine operator. With forty operators the company saved 2,700 wasted part cart hours. At $100 per machine-hour the company saved $270,000 per year. Thirty to sixty seconds max is a small amount of time, but a big pile of money. 80

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After the machine operator received a nice greenbacks bonus, everyone in the factory started looking for other ways to turn waste into wealth.

Lean Case History The company’s competitor delivered 50% faster. The company was piling up obsolete inventory. Production was spread in three locations. Workers traveled long distances within the company. Spare parts were sold for less than cost. Brand reputation was threatened. After a fifteen-week Lean intervention, the company: • Eliminated 18,000 square feet of space. • Reduced inventory by $600,000. • Reduced worker in-house travel distances by 90%. • Reduced delivery lead time by 43%. • Increased revenues by $1,200,000.

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30 Don’t Blame Manufacturing Three Days Process Time, Eighteen Weeks Lead Time

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he company manufactured large, heavy-duty gearboxes. The company always quoted an eighteenweek delivery date. The company’s sales force did essentially no forecasting, but bellowed to the heavens as the long lead time often drove customers elsewhere. Sales were declining. Because the company had been making gearboxes and quoting eighteen weeks delivery for over forty years, management was deaf to the complaints from customers and the sales force. Occasionally, rarely, the company deviated from its eighteen-week self-imposed schedule and made and shipped a gearbox in three days. When asked how that was possible the plant manager shrugged and said, “I skip the red tape.” 82

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Obviously, if the company could build and ship one gearbox in three days, it could build two. The Lean consultant took two trips. The first trip was from the shipping dock to the factory floor to the raw material pallets and up the order chain to the point the order was received from the customer. The second trip was accompanying a new order as it meandered through the company. The first trip was a short one. The Lean consultant discovered that the manufacturing process to build a gearbox was superb, Lean, fast. No wasted motion. No waiting around. Skilled, trained workers. There was no waste. The metal cutting chips were collected and sold. The cutting oil was filtered and recycled. The second trip revealed an inherited and passeddown administrative process that was excruciatingly archaic, redundant, and slow. Each order was treated as if it came from a completely new customer. Each customer had to pass a credit check, including companies with AAA credit ratings that had been customers for twenty years. Each order stopped at seven different desks for seven reviews, approvals, and new information. The orders were pushed down the line, not pulled. Vacations, sick days, holidays stopped order processing, stopped continuous flow. 83

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By using Lean tools – value stream mapping and visual management – for 90% of the orders, the company was able to reduce lead time by sixteen weeks. Now orders were sorted into four categories, prioritized, then rushed to the factory. Order Category

Priority

1. Existing Customer/ Existing Product

Straight to production

2. Existing Customer/ New Product

Insure marketability, insure profitability, then produce

3. New Customer/ Existing Product

Qualify customer, then produce

4. New Customer/ New Product

Qualify customer, insure marketability, insure profitability, then produce

Existing Customer/Existing Product orders were processed, built, and shipped in four days. Since existing customers and existing products represented 80% of the orders, for 90% of the orders overall lead time was reduced to two weeks. New Customer/New Product orders were often surprises from the sales force. Voice-of-the-customer feedback, forecasting tools, and training sessions were implemented to reduce lead time from eighteen weeks to a target of six weeks.

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Sales of gearboxes immediately began to grow. Price discounting and customer dissatisfaction plummeted. Now there was no red tape to skip. Lead time is wasted time. Wasted time is wasted money.

Lean Case History A global aerospace and controls manufacturer with over 100 legal entities in thirty-five countries paid $12,000,000 for its annual Sarbanes-Oxley review. Using Lean principles and tools, the company reduced second-year costs by $1,300,000 with a Lean-designed roadmap for year-after-year continued cost reductions.

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31 A Hospital without Waste

W

orldwide, the medical industry has fabulous doctors, amazing technology, dedicated, selfless nurses, committed volunteers, and excellent executives. Yet speak with any hospital CEO, even at the best-managed hospitals, and you’ll quickly conclude that these institutions, in total, may make up the most wasteful, archaic major industry in existence. Waste, unnecessary redundancy, errors of all kinds all the time, mis-billing, miscommunication, and endless patient wait time are all hallmarks of hospitals. The error-driven, waste-driven numbers in U.S. hospitals are stunning. • Every year there are 98,000–100,000 deaths due to preventable errors. Preventable! 86

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• Eighteen percent of hospital patients are injured during their stay, often incurring life-threatening injuries. And all of these injuries require additional medical and hospital costs. • It’s estimated that there are 15,000,000 incidents of medical harm each year. All preventable. All incurring attendant unnecessary costs. • There are as many as forty wrong-site, wrong-side, and wrong-patient medical procedures performed every week. All preventable errors. All mistakes driving up costs. The cost of medical errors is at least $29 billion per year. But this is chump change compared to the waste in administration and operations management in the healthcare industry. Various experts report that administrative waste is at least $315 billion a year. And, ironically, poor segregation of hospital-generated waste such as body fluids, medicines, tissue, etc., wastes millions of dollars a day. Preventable waste, millions of dollars a day, exists everywhere in hospitals. Why is such a talent-laden industry so dysfunctional? The answer is that many hospitals don’t practice Lean. 87

Turn Waste into Wealth

There is an exception. And the exception dramatically makes the case that hospitals should immediately and completely embrace Lean and begin a Lean journey to reduce costs and to enhance patient outcomes. An eye hospital in Madurai, India (let’s call the facility ABC), constantly uses Lean principles to speed patient flow and enhance hospital throughput. When a patient visits the hospital without an appointment, that person gets a diagnosis that day. If the person needs surgery, the procedure can be scheduled for the next day. In one benchmark year, ABC performed 581,000 outpatient consultations and 91,000 surgeries, for a total of 672,000 intensive patient interactions. To put this output into context, an eye hospital in the Netherlands (let’s call this facility XYZ) did 140,000 consultations and 14,000 surgeries, or 154,000 patient interactions. (Both hospitals provide world-class medical care.) ABC doesn’t have excess capacity. Excess capacity is non-Lean. ABC measures everything, continually seeking to safely speed up patient flow. Patient registrations are completed in five minutes. Vision diagnostic tests take ten minutes. Doctors perform eight surgeries per hour, or one surgery every seven-and-a-half minutes. ABC doesn’t have excess staff. Excess staff is nonLean. ABC has 985 employees, which translates into 682 88

Lean Process

patient interactions per employee per year. In contrast, XYZ Hospital has 400 employees, which translates into 385 patient interactions per employee per year. ABC’s Lean game plan:

1. Detailed, constant data analysis. Management studies the numbers to predict incoming patient flow by the month, week, day, hour. Based on the data, staffing is scheduled to handle 1,500–2,000 patients per day.



2. Standard work. Every diagnostic test, any test, is performed the same way by every specialist. Surgeons train and practice to perform cataract surgeries the same way. Tight standards make it easy to spot outlier problems and immediately find and eliminate root causes.



3. Task delegation. Even surgeons are tasked to do just one kind of operation. From the bottom of the organization to the top, every employee knows what their priority task is.



4. Continuous flow. Refinement of flow – moving all patients without stopping – is a constant activity. Any idea that speeds flow is considered. For example, surgical flow was enhanced when the time between the end of one operation and the 89

Turn Waste into Wealth

start of another operation was reduced from five to ten minutes to fifteen to twenty seconds. The flow idea was simple and elegant. The hospital put two operating tables, instead of the traditional one, into each operating theater. This enabled the surgeons to start a new operation without stopping flow. (Note: ABC’s record of error-free surgeries is as good as the best-performing U.S. hospitals.)

5. Visual management. The flow plan is designed so that it’s immediately visible when demand exceeds prediction. Any employee who sees a problem in the flow signals colleagues in other departments to provide immediate help.



6. Time reduction culture. Any idea from any employee that reduces waiting time is implemented. Any technology that reduces lead time is adopted.

ABC Eye Hospital believes that practicing Lean enables the organization to fulfill its mission of affordable eye care to anyone. ABC treats 70% of its millions of patients for free, or for whatever small amount the patient can afford.

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At ABC innovation need not be some big discovery or new piece of equipment. Any change that improves time management to better serve patients is innovation. Using two operating beds per operating room, as opposed to one bed, is truly innovative. Compare the Ratios

ABC Eye Hospital

XYZ Eye Hospital

Employees

985 400

Doctors

150 40

Consultations

581,000 140,000

Surgeries

91,000

14,000

Patient Interactions per Employee

682

385

Surgeries per Doctor

607

350

Hospitals can reduce waste. Lean is a more effective health-cost-reduction tool than any government decree, law, or regulation.

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32 Don’t Cherry-Pick Lean Tools

D

oes knowing how to use house-building tools – hammers, saws, levels, nailers, pipe cutters – make you a quality house builder? For example, suppose two houses are built at the same time and same place using the same materials and tools. When completed, one house is demonstrably of better quality and value. The higher-quality house had bettertrained workers with a mindset of better workmanship. Just knowing how to use the tools doesn’t insure quality. Even if you were an expert with tools, could you build a house without a plan, a blueprint, a crystal clear vision of the final structure? And does expertise with one tool, or one set of tools, bias the tool user? Why is it that advertising agencies believe that every marketing problem is solved with ads 92

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and commercials? Why is it that back surgeons favor the scalpel over exercise and acupuncture? The old maxim is true: if your only tool is a hammer, then every problem looks like a nail. Many companies fail at Lean by selecting the wrong tools or by not being adequately trained in the proper use of the tools. Selecting the right Lean tools for the right purpose and knowing how to use them effectively is key. A Lean transformation will not be optimal if shortterm, one-time wins are your measure of success. For your Lean transformation to positively impact your overall culture long-term, your entire enterprise must embrace the need to constantly identify and eliminate all waste and to continuously improve every single process in your business. The master craftsperson knows all the tools in the toolbox, and expertly knows how to use every tool. So, too, must lean leaders know all the tools and principles of Lean.

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33 Kaizen

K

aizen is the Japanese word for continuous improvement (kai means change and zen means for the better). In the world of Lean, kaizen refers to a philosophy, a series of activities, even a single event, aimed at continuously improving each and every value stream in the enterprise. In various forums kaizen involves all employees, from the machine operator to the receptionist to the CEO. Kaizen is an amazingly effective Lean methodology used to reduce waste, reduce errors, reduce time, and improve all processes. Kaizen as a business mindset, or as a unique event, depends on the participation of all employees to create productive change. The underpinning driver for kaizen is the belief that no matter how well your enterprise is doing today, it can 94

Lean Process

always do better tomorrow. Kaizen reflects a healthy dissatisfaction with the status quo. Your Lean transformation is well underway when everyone in the organization believes they are in the daily and relentless pursuit of the elimination of waste from every business process, with the ultimate goal of providing world-class quality, delivery, and service to your customers at the lowest possible cost, thereby providing repeatable, sustainable, profitable growth. Kaizen must become a way of thinking.

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34 Kaizen Event Rules

K

aizen is about compressing time and getting rid of waste and impediments to continuous flow. Properly planned and conducted kaizen events insure continuous improvement in every part of the company. Here are fourteen kaizen event rules for success:

1. Leadership must physically participate in kaizen events.



2. Kaizens are typically five-day events.



3. Benchmark results against world-class companies, regardless of industry.



4. Respect others. Try to understand each other.



5. Throw out traditional concepts and tired thinking.



6. Keep an open mind to any change. 96

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7. Don’t accept excuses.



8. Don’t seek perfection.



9. Correct mistakes the moment they are found.

10. Think, be creative. Don’t rely on investing more money to solve the problem. 11. See problems as positive, as chances to exercise your brain, not your wallet. 12. Ask “why” five times. 13. Leave titles and egos at the door. Everyone on a kaizen team is equal. 14. Totally believe that there is no limit to continuous improvement. Kaizen is can do!

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Lean Case History A major pharmaceutical company needed to allocate and redeploy 15% of its in-lab quality control resources to new test protocols. Using a kaizen approach, in two weeks the company: • Reduced processing time by 40%. • Reduced QC testing headcount by 30%. • Redeployed all redundant employees to new testing jobs.

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35 Lean Trumps Six Sigma

S

ix Sigma is a problem-solving tool. Lean is a problemsolving toolbox. An organization-wide Lean culture should be built around Lean principles and not around a toolset such as Six Sigma. Most waste-related company problems can be solved using simple Lean tools. Six Sigma is appropriate for 5%–10% of defect-reduction challenges. Lean is easier to learn, easier to deploy, and is faster and lower-cost than Six Sigma. Lean principles and techniques can be used by every employee. Lean encourages input from all people in the organization. That’s not the case with Six Sigma, which requires highly trained specialists. Sigma is the eighteenth letter in the Greek alphabet and is used in statistics to indicate standard deviation. Six Sigma is a complex statistical methodology for im99

Turn Waste into Wealth

proving quality by reducing process defects and errors. Six Sigma was popularized by Jack Welch when he was CEO of GE. Due to Jack Welch’s prominence, Six Sigma gained a reputation it doesn’t deserve. Six Sigma practitioners use data to make decisions on how to minimize process variation. In-company practitioners, sometimes called Green Belts and Black Belts, require extensive training in statistics and data analysis. When defects are the result of coincident, but different, variables in a process, Six Sigma can yield amazing results. Six Sigma is expensive and requires lots of problemsolving time, often six to nine months per project. Six Sigma projects are run by highly paid operatives. Whereas Lean gets input and buy-in from all employees, Six Sigma doesn’t. In fact, macho titles such as Black Belt breed elitism, which is antithetical to Lean. Six Sigma is the classic hammer that sees every problem as a nail. For example, using Six Sigma to optimize single minute exchange of dies (SMED) is a multimonth process, with attendant staff and high implementation costs. Conversely, a one-week kaizen event will end with an 80% reduction in machine change time and will be wholeheartedly adopted by the people who run the machine. 100

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Whereas Lean identifies non-value steps and processes and removes any interruption to continuous flow, starting with Six Sigma creates the danger of improving a process that shouldn’t exist in the first place. Six Sigma can be an effective tool, but its applications are narrow. Six Sigma works well in a Lean transformation, but the key is to use the right tool, for the appropriate problem, at the right time. Lean, not Six Sigma, is the big picture.

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36 The Problems with Kanban

K

anban is a popular lean tool. Too popular. One problem with kanban is that it’s easy to use, and thus it’s often used too early in a Lean transformation. If it’s used prematurely, the enterprise forgets that its imperative is to relentlessly pursue the achievement of flow. In fact, kanban is an admission of the organization’s failure to create continuous, one-piece flow. Kanban can be effective, but only if it’s used for the purpose for which it’s designed. A common misunderstanding is that kanban is an inventory-reduction tool. It’s not. Kanban increases inventory. Kanban is a logistical, math-based planning tool, and it’s best used to signal inventory movement in a pull system. 102

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Kanban’s origin is a reflection of how supermarkets manage shelf inventory. When a customer goes into a supermarket with the purpose of buying one box of cereal, two cartons of milk, and three pounds of chicken, that customer buys one box, two cartons, three pounds. The customer buys exactly what he or she wants, no more, no less, and does so on the day he or she shops. The supermarket reacts to those purchases and replenishes the stock. Kanban is the Lean tool that triggers the supermarket (or the vending machine servicer, the rental car leaser, the furniture store owner) to more accurately understand demand and have product available. As with all proven Lean tools, there’s an important place for kanban. But if it’s introduced too soon, or too broadly, problems may occur.

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104

Part Four

Lean Profits

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106

37 The Lean Profit Formula

P

roducts and services should be priced-to-value. Products should not be priced to hit a target gross margin percentage, or to cover production costs plus an added margin. Value is the dollar return the customer gets from the product. Once the market price is established, the Lean company produces the product or service at the “lowest” cost (and continuously works to lower that “lowest” cost over time). Old Formula Cost + Desired Profit = Selling Price

Lean Formula Market-Based Selling Price – Cost = Profit

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Pricing-to-value is a marketing tool that creates optimal prices and ensures satisfied customers. Lean is a set of tools and principles and attitudes that enables enterprises to make and deliver products and services with the least amount of waste and lowest costs. Seventy percent of a product’s manufacturing cost is a direct function of the product design. Although harder to see, service companies share the same dynamic: design drives costs in operations. Lean companies start to eliminate costs in the design process. Pricing-to-value generates price premiums of 10% or more. Lean reduces manufacturing or processing costs by 20% or more (cost reductions of 50–80% are common). Old Formula

Manufactured cost per unit

$12.00



+ Target Profit

$3.00



= Selling Price

$15.00

Lean Formula

Selling price to value

$17.00



– Lean manufacturing cost

$9.00



= Profit

$8.00

Lean it. Value price it. Bank it. 108

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Lean Case History How GE Used Lean Administration to Generate $216,000,000 in One Year! General Electric’s Consumer Finance Division makes money by providing credit facilities to its retail customers. To illustrate: The jewelry retailer sells a $5,000 necklace to a consumer. To induce the sale, the retailer offers the customer the option to pay for the necklace on credit, to pay over time. The retailer opens a “house account,” or “store account,” for the customer. Or the retailer gives the consumer a store-branded credit card. Whatever the arrangement, the consumer agrees to pay for the $5,000 necklace, with interest, over a period of time. GE Consumer Finance is the actual, invisible provider of the credit, of the $5,000. When the retailer sells the necklace on credit, GE immediately reimburses the retailer, say $4,950, and then collects the $5,000, plus interest, as the consumer pays the monthly bill. Thus a big money-making driver for GE Finance is to sign up good retailers, and to provide those retailers with a sales-creating credit ability as early as possible. 109

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It was taking GE Finance sixty-three days lead time from receipt of a retailer’s application to approval. During that sixty-three days GE Finance lost sixty-three days of interest-generating revenue per retailer and, in too many cases, lost the retail customer to a competitor, thereby losing that revenue source for years, or even forever. During those sixty-three days GE also did not get revenue from the sale of its lucrative credit card approval and processing machines. During those sixty-three days GE’s salespeople wasted countless hours of valuable, high-cost selling time and incalculable hours of customer-relationship capital defending the sixty-three day lead time. GE Finance engaged Lean Horizons Consulting to implement Lean throughout the division. Using Lean Horizons’ proprietary Lean tool, Value Stream Mapping for Information (VSMi), GE teams were able to track every step and movement of the retailer’s application within the sixty-three day lead-time period. A detailed credit-application-to-approval value stream map identified internal hurdles, bottlenecks, bog-downs, redundant 110

Lean Profits

procedures, and red tape. GE leadership mobilized cross-functional teams that identified root causes and attacked the problems. GE associates were given limitless power to make changes. Root cause problems were put on public display. The teams made one amazing discovery. The process time to actually read, evaluate, and approve a retailer’s credit application took one hour. One hour of processing time. Sixty-three days of lead time. No previous protocol, policy, or procedure was sacrosanct. No fiefdom ruled. No egos. The crossfunctional teams slashed waste everywhere. The sixty-three-day approval lead time was reduced to one day. By eliminating sixty-two days of lead time, GE Finance put these points on the board: • Financed consumer purchases increased 44%. • Credit approval rate increased 24%.

• Incremental revenue growth in the first year was $216,000,000. Lean administration always reduces lead time and improves the organization’s speed-to-value. 111

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38 Lean Distribution

A

pplying Lean principles to distribution will make a dramatic, positive impact on your bottom line. Leadership should expect the following results: • Warehouse space reductions of 20–35% • Forecast accuracy improvements of 15–40% • Material cost reductions of 5–15% • Process lead-time reductions of 60–80% • Enterprise-wide inventory reductions of 7–22% • On-time delivery improvements of 10–26%

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39 The Wallet

T

he average annual carrying cost of inventory is 20%–40% of the dollar value of the inventory. If a company has $100,000 of inventory on the floor, on a shelf, in a warehouse, in a shipping container, in a drawer, it costs 20%–40% to carry that inventory, or $20,000– $40,000. The cost of holding inventory comprises many factors. These cost factors include: • Cost of money to finance the building of the inventory • Storage space • Insurances • Property taxes 113

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• Theft • Obsolescence and disposal • Damage • Moving equipment • Pallets • Energy (to keep ice cream cold and greenhouse flowers warm) • Water (to keep the angelfish and guppies swimming) • Food (to feed the livestock) • Labor After you pay your suppliers for materials, and after you pay your production workers, and after you pay for processing time, and after you pay for tools, oil, rags, gloves, and utilities, you have $100,000 worth of inventory. And after you build the inventory, you have to reach into the company’s wallet and pay to insure that inventory, to store it, to keep it solid or liquid or cool or hot or dry or moist, or to fence the yard, or pay for a guard service. The more inventory, the more it costs to keep it. The longer it takes to sell the inventory, the more it costs to 114

Lean Profits

keep it. The longer it takes to sell the inventory, the longer it takes to get the cash to pay the suppliers and workers. The Lean consultant and a senior leader of the company were walking through the factory. “Why is there so much inventory on the shop floor?” the Lean consultant asked. “Simple. Some of our customers order at the last minute, with no warning, and we must have available product.” And, “Some of our customers order black widgets at one time, and white widgets at another, and we have to be ready.” And, “Our sales people say they can’t sell green widgets unless we have them in stock.” And, “One of our suppliers is in Thailand and their lead times are so long we have to stockpile their parts.” And, “Our finance guys allocate absorption overhead costs into each production unit. So the more we make the more profitable we appear based on traditional management accounting.” And, “We wait until we get enough orders to fill a truck and reduce shipping costs.” And . . . and . . . and. The Lean consultant asked the senior leader for his wallet. Surprised, the leader handed over his wallet. The Lean 115

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consultant put the wallet on top of a pallet of inventory. He continued on his tour. The leader hesitated, looked at his wallet, moved to catch up to the Lean consultant. “Just a sec,” said the manager. “I’m not sure I should leave my wallet out in the open back there.” “Why not?” the Lean consultant asked. “Because there’s money in the wallet.” “Inventory is also money,” the Lean consultant said. “If you’re okay leaving company money on the floor, why are you not okay leaving your money on the factory floor?” The senior leader got the message. Got his wallet. And got going on ways to put the inventory money back into the company’s wallet.

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40 The High Cost of Carrying Inventory

I

nventory is money. Inventory is raw material, vendorsupplied components, cans, labels, bottle caps, container contents, cardboard boxes, partially built products, finished products waiting to be purchased. Companies transform cash into inventory. Companies must spend money while holding the inventory before it’s sold. The cost of carrying inventory can be difficult to accurately calculate. The annualized cost of carrying inventory generally ranges from 20%–40% of the dollar value of the inventory. (There are situations where the cost of carrying inventory can reach 70% +, such as, for example, the storage, security, and associated costs of holding rare earth metals.)

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Thus, if the company invested $100,000 to produce the inventory, the company will spend $20,000 to $40,000, on an annualized basis, to carry that inventory. The total cost of having inventory comprises several sub-costs. The sub-costs include:







1. The cost of capital invested to produce that inventory. To determine the cost of capital, or cost of money, requires a complex calculation. It includes the rates on borrowed money, bond debt, cost of equity.

2. Storage costs. Inventory can be stored in owned or rented space. The cost per square foot is a carrying cost. If needed, air conditioning, heating, lighting, refrigeration, etc. are additional storage costs. 3. Obsolescence. The cost of obsolete inventory is generally calculated as the original cost of the inventory plus the total carrying costs plus disposal costs. Obsolete inventory can sometimes be sold as scrap for pennies on the dollar. The cost of obsolete inventory often exceeds the original cost of the inventory. 4. Disposal costs. Disposal costs are a function of the inventory composition. It’s more expensive to dispose of paint than food. 118

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5. Theft.

6. Security. If needed, security can include sophisticated locks, fences, security personnel, guard dogs, video systems, and such.



7. Insurance premiums.



8. Property taxes. Many communities tax inventory and do so in various ways.



9. Labor costs. Labor to physically handle, move, relocate, load, and unload inventory is a direct cost.

10. Permits and licenses. Certain types of inventory, such as weapons and ammunition, require permits to hold and sell product. 11. Inspections, fines, penalties. Certain inventories are regularly inspected. Deviations from regulations can result in fines and penalties. These costs are a direct result of holding inventory. 12. Measurements and reporting. Certain inventories, such as restaurant liquor and gasoline for retail sale, require the seller to spend money to measure and report. 13. Damage and deterioration. Damaged inventory must be replaced, rebuilt, repaired. 119

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14. Equipment deterioration. Trucks, forklifts, shelving, measurement and monitoring devices – any capital equipment tied to inventory – are costs that should be allocated to that inventory. 15. Transaction and administrative costs. Transaction costs, depending on the complexity of the transaction, range in cost from $45–$150. Inventory admin generates purchase orders, quality checks, supply chain inspections, check cutting, and so on. The chart below outlines useful annualized carrying cost approximations: Cost of money

3%–5%

Storage costs

1%–3%

Obsolescence

14%–10%

Labor 2%–4% Transactions 2%–4% Damage/theft 3%–4% Insurance 1%–3% Taxes 2%–3% Other 2%–4% Total Carrying Costs

20%–40%

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Building inventory requires cash. The expense of holding inventory is a direct hit to company profits. Building, or stocking, only what the customer wants is the first step in reducing your high cost of carrying inventory.

Lean Case History A $9 billion manufacturer’s European-based unit was competing in a mature market with high-cost manufacturing. Working with Lean Horizon Consulting’s Strategy Deployment team, the company crafted breakthrough objectives vital to growth and survival. Based on a twelve-week strategy deployment exercise, the client experienced the following in Year 1: • A 23% increase in revenue, or 20 million Euros. • The addition of 44 new dealers. • A 60% reduction in order process lead time. • Alignment of compensation incentives to growth objectives and individual performances.

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41 Cross-Functional or Dysfunctional There Is No Choice

C

ross-functional teams are essential to a successful Lean transformation. Cross-functional teams comprise players from all relevant company departments. The membership of a cross-functional team is not determined by rank or title. Important membership criteria include close proximity to the problem, openness to change, and objective, common-sense thinking. Even enterprises that earnestly want a more efficiently functional organization stumble at the task. One retarding factor is that wasteful activities have existed for so long that they have become the company’s way-of-business-life. Another factor is a human one. Too often, powerful executives, for various reasons, don’t want to give up power, don’t want to cede territory. Some leaders love 122

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their fiefdoms. Such leaders put personal agenda ahead of the corporate good. Look at your company. Are you functional or dysfunctional? Efficiently Functional

Dysfunctional

Cross-functional teams

Silos

Democratic decision process

Hierarchical

“I’ll do it”

“Not my job”

Employee involvement

Autocratic commands

Employee empowerment

Ideas disregarded

Open communication

Need to know

Embrace change

“We have no problems”

Share data and info

Black box

Candor encouraged

Repercussions

Practice Lean

“Lean is a fad”

Total Lean culture

“We do kaizens”

Waste seekers

Problem hiders

Practice benchmarking

Insular

On-time deliveries

Late, under-filled deliveries

Optimal inventories

Bloated and obsolete inventory

Get it right the first time

Constant do-overs

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Efficiently Functional

Dysfunctional

Quantitatively measured improvements

Good enough

Accounting for Lean

Traditional accounting

Sales and marketing oriented

Product or engineering driven

Tolerate innovation missteps

Careers at risk

Simple Bureaucratic Above market and industry Lower quartile/quintile performance performance Naysayers leave

Naysayers stay

Voice of the customer Leadership disconnected from customers Happy, fun work environment

Clock watching

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42 Waste Mapping Where to Deploy Value Streams

T

he Lean world emphasizes the phrase value stream mapping. It’s part of the Lean lexicon. But effective value stream mapping is preceded by waste mapping. Waste mapping is the deliberate, detailed, step-by-step, skipping none, identification of all processes, activities, and physical items that are impediments to continuous, uninterrupted flow, regardless of how tiny or seemingly insignificant the blocker may be. If, in the current way of doing things, a worker walks to a printer instead of scanning documents to be copied, the waste map will spotlight “waste by walking.” If there is just one extra unit of inventory, or document, stopped, even for thirty seconds waiting for the next processing step, the waste map pinpoints that waste-by-waiting moment. 125

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A waste map shows where the problems are located: the current state. A waste map leads to value stream mapping, which is the foundation for a plan to create continuous flow. Waste mapping uncovers all the blockers and dams and bottlenecks that interrupt continuous flow, be it the production of a part, the processing of an insurance claim, the scheduling of an MRI exam, or the cleaning of a hotel room. When waste mapping is executed expertly, the organization gets a visual map that shows precisely where flow is being needlessly stopped or slowed. The map puts a bull’s-eye on all non-value work regardless of how carefully the problem tries to hide. The waste map sets up value stream mapping. The value stream map identifies for the organization where and when other effective Lean tools, such as kaizens, should be deployed to excise problem root causes. Value stream mapping can be used in any start-to-end manufacturing, service, or business process. Value stream mapping can be used to: • Simplify the process. • Reduce the time from concept to commercialization to cash. • Shorten the time from customer order to cash. 126

Lean Profits

• Accelerate data input to analysis to decision making. • Speed the time from supply-chain purchases to material acceptance to vendor payment. The waste map shows the current inefficient state. The value stream map governs the future waste-towealth, continuous-flow improvement plan.

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43 Strategy Deployment

S

ooner or later every good management turns to strategy deployment to improve their company. Strategy deployment is a simple approach to growth management. Strategy deployment is the process by which senior management systematically eliminates waste from the business . . . and achieves breakthrough performance. Strategy deployment aligns resources to a roadmap pre-determined to insure success combined with the governing principles of waste elimination. Strategy deployment attacks the waste, the impediments, that prevent the achievement of breakthrough performances. Strategy deployment starts with a crisp, short, totally understood strategy. An example of such a strategy is Winston Churchill’s galvanic WWII charge to Eng128

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land’s Royal Air Force: “Bomb the bridges and be back safely by dawn.” The strategy of bombing the bridges was to slow the German armies, allowing Great Britain to rearm and fortify against invasion. Strategy deployment was the allin focus and alignment of pilots, planes, targets, maps, fuel, armaments, airfields. Anything that slowed the flow of pilots, planes, and fuel was relentlessly eliminated. Sooner or later all good management teams use strategy deployment to rocket their enterprises from waste to wealth. Great managements get there sooner.

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44 Using Strategy Deployment to Save the Shad (A Metaphor)

O

rganizations must create flow where it doesn’t exist.

Problem identification: Not enough members of a species of a wild New England shad can efficiently and freely swim upstream to spawn. There are blockages in the river. The consequence is the accelerating rate of extinction of a valuable commercial fish. Strategic goal: Save the shad from extinction and bring back 100-year-old populations. Breakthrough objectives: Increase fish count from 100,000 per year to 10,000,000 per year in three years. Strategy: Clean the river – from mouth to source – of all artificial and natural barriers prohibiting the shad from 130

Lean Profits

getting to their end destination on time. If any artificial dams cannot be dynamited, build fish ladders around the dams. (Fish ladders, or fish steps, are structures built around immovable barriers, enabling fish to swim and leap around dams on their voyage upriver.) Strategy deployment: • Construct a waste map of the entire length of the river. The waste map identifies and locates every artificial dam, every fallen tree trunk, every beaver lodge and dam, every errant boulder, every pile of trash, every discarded truck tire, every blocked feeder stream . . . every thing, every activity that impedes or slows or diverts the continuous flow of the river . . . the continuous flow of shad. • Craft a clearing plan aligning and focusing resources: investment, people, machines, and timetables required to meet the breakthrough fish-flow objectives. • Organize cross-functional teams dedicated to specific clearing tasks, such as the removal of all beaver dams. • Agree on annual improvement priorities (AIPs) for each team responsible for clearing dams, boulder slides, trash, and other targeted impairments. 131

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Waste mapping shortens process time (the time to clear the river). Waste mapping reduces lead time (increasing the speed of shad getting to spawn). Reduced lead time improves the product quality (the amount of sellable fish). Reduced lead time cuts costs, improves delivery, and enhances production safety. Results: A value stream is created. The value stream is the ultimate, sustainable, continuous flow of shad from spawn to catch the cash.

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45 The Difference between Strategy Deployment and Policy Deployment . . . and Why It Matters!

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trategy deployment involves working on the business: determining those three to five breakthrough objectives that when achieved will change the enterprise forever, and for the better. Policy deployment involves working in the business: driving the daily, tactical execution of those key performance indicators necessary to accomplish the breakthrough objectives. Thus, the first difference between strategy deployment and policy deployment is that strategy deployment determines the appropriate, winning policy deployment. Effective Lean leadership distinguishes between these two management imperatives to best align people, capital, resources, and tasks across the enterprise . . . for both 133

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a three-year horizon and for a single-minute exchange of cutting tools on the factory floor. Strategy deployment is about building processes that generate sustainable, repeatable, predictable performance improvement results. Policy deployment is about learning how to make the processes work and how to continuously improve on the work. Strategy deployment is about initiatives the company has never done before but, if executed successfully, will cause ten, twenty, fifty times improvement in economic performance and shareholder returns. Policy deployment involves everybody in the organization – every single employee from the CEO or chef to the lathe operator or dishwasher – each and all obsessed with meeting key performance indicators on a daily basis. Strategy deployment is timeless – evergreen. Policy deployment is timed – hourly, daily. Strategy deployment is about the “what” and the “why.” What must the company do to transform and win? Why is the transformation critical to survival? Policy deployment is about the “how”: how to execute, how to get it done. Strategy deployment is the responsibility of a relatively few people richly armed with input and ideas from employees, customers, suppliers, stakeholders. Policy de134

Lean Profits

ployment is an individual or small-team responsibility, involving every single employee. High-performance companies differently define and deliberately distinguish between strategy deployment and policy deployment. In high-performance companies everyone knows the breakthrough objectives. And everyone knows what he or she must do every day to make those objectives happen. Strategy deployment plus policy deployment underpin world-class economic performance.

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46 The Dees and Rees

T

here are countless English words that start with the letters de and re and with the sounds dee and ree. Words such as derision and revision abound. Good words. Helpful words. No issues. But in the Lean world, de and re are often waste-warning words. De-burr, or rework, or delay are synonyms for waste problem. A product recall is big money. Late delivery is an upset customer. Detangle suggests a complicated mess. Here are some of the words of waste. How many can you add?

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Lean Profits

Dees • Debride

• Deform

• Delude

• Debunk

• Defuse

• Denial

• Deburr

• Degrade

• Derail

• Deduct

• Delinquent (as in accounts receivable)

• Detoxify

• Recall

• Redraft

• Reschedule

• Reclean

• Re-engineer

• Retrain

• Redesign

• Refinish

• Rework

• Redo

• Remake

• Rewrite

• Deduction • Defile

• Devalue • Deviant

Rees

Look and listen for these “uh-oh” words. If you hear them, see them, or say them, investigate. Look for a waste-causing problem. Then solve the problem. Turn waste into wealth.

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138 Turninto Waste into Wealth Turn |Waste Wealth

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Appendix A The Lean Horizons Lean Sustainability System (LSS)

T

he goal of modern managements, those dedicated to eliminating waste and creating wealth for all stakeholders, is to create a Lean culture, a Lean environment that relentlessly drives sustainable results. The way to create such a culture is to institute the Lean Sustainability System (LSS). The Lean Sustainability System is the vehicle for teaching managers at all levels of the organization how to insure that Lean survives and thrives. Some organizations are startled to discover that big, early successes from Lean don’t replicate. First-year kaizens deliver great results, then start to degrade. New additions to the management ranks don’t fly the Lean flag. Old problems reoccur. Lean tools are not used in every part of the organization. The organization can’t execute to achieve breakthrough objectives. 139

140 |Waste TurnAinto Waste into Wealth Turn Appendix Wealth

To reinvigorate organizational discipline, and to purposely and enduringly embed Lean into the culture so that it passes to succeeding generations of managers, smart companies adopt LSS. LSS is a comprehensive methodology that produces managers who: • Effectively lead without commanding or demanding. • Respect all people. • Ask instead of tell. • Listen to any and all associates’ ideas. • Get actually, totally involved. • Participate and get their hands dirty. • Eliminate reprisals. LSS subject content includes training leaders on: • Leadership roles. • Behavior when a problem is visible. • Structured problem solving. • Problem definition and root cause analysis. • Solving problems once and forever. • Change management. • Standardizing kaizen methodology. 140

Appendix A

• Implementing standard work. • Facilitating eye-opening SWOT analysis. • Crafting right-sized staffing models. • Developing a multi-skilled workforce. • Creating a culture that protects on-boarding processes. • Succession planning. • Building and executing Lean training programs. Lean creates wealth. The Lean Sustainability System sustains wealth creation. The Lean Sustainability System is an innovation of Lean Horizons Consulting and is trademark-pending.

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142 Turninto Waste into Wealth Turn |Waste Wealth

Appendix B The Lean Horizons Wealth Creation Process

L

ean Horizons leadership designed the vaunted Danaher Business System. The Lean Horizons Wealth Creation Process is a significant advance on DBS.

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Appendix B

The Lean Horizons Wealth Creation Process* A Proven Approach to Get Repeatable, Sustainable, Profitable Sales Growth Leadership commits to a Lean transformation.

 Objective, fact-

Craft strategy.

 Strategy

Plan to win.

100% employee involvement to get rid of waste.

 Developing

based customer and shareholder research data collection.

strategic goals.

breakthrough objectives.

 Waste mapping.  Value stream

deployment.

 Cultural

 Developing

Isolate all blockers to continuous flow.

mapping.

Identify all wasteful activities, functions, processes.

Create economic value.

 Customer and

enhancement.

stakeholder satisfaction.

Relentless pursuit of waste.

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Remove the blockers.

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Appendix C Lean Horizons Benchmarking

L

ean Horizons Consulting has a proprietary benchmarking research program. The benchmark population includes the following companies among others: Danaher, Parker Hannifin, Tyco, Stanley Works, SPX, Black & Decker, The Toro Company, Crane Company, Pentair, Snap-on, NR, Cooper Industries, Hubble, Roper Industries, Teleflex Incorporated, Textron, United Technologies Corporation, Ametek, Carlisle Industries, Emerson, Harsco Corporation, Illinois Tool, Ingersoll Rand, and ITT Industries.

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Index

10%-80%-10% rule, 23–24 A accounting for Lean advantages of, 53–54 accounting, traditional disadvantages of, 52–53, 55–57, 61–62 accounts receivable optimization case history, 17 administration, waste in, 15–16 administrative costs, 14–15 administrative process case history, 82–85 assumptions, questioning case history, 27–29 B benchmarking, proprietary corporate users of, 144 benchmarking, reasons for, 67–68 budgeting, traditional, 60

C capital expenditure, 60–61 carrying cost of inventory, 113–15, 117–21 cross-functional teams, 122 D data analysis to predict flow, 89 distribution effect of Lean on, 112 dysfunctional vs. functional, 123–24 E employees flexibility of, 41–42 equipment, upgrading case history, 63–65 F Five Whys, to find root causes, 71–72

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Turn IndexWaste into Wealth flow, advantages of, 45–46, 89–90 functional vs. dysfunctional, 123–24 H headcount reductions, avoiding, 43–44 hospital, Lean, 88–91 hospitals, errors in, 86–87 I innovation, 91 inventory, cost of, 113–21 K kaizen, 94–97 kaizen approach case history, 98 kaizen events, 7 kanban, limitations of, 102–03 L leadership, 35–37 lead time, reducing case history, 109–11 Lean, 6 and jobs, 40–42 steps to achieve, 18–20 Lean journey, 7–8, 11–12 Lean manufacturing case history, 13 Lean Sustainability System (LSS), 139–41 Lean transformation, 9–10, 38–39, 93 N naysayers, 23, 24, 25–26, 38

P parts, relocating case history, 77–78, 79–81 payroll processes, streamling case history, 66 people-first tenet, 41 policy deployment vs. strategy deployment, 133–35 price-to-value, 107–08 problems, hidden, 21–22 process, streamlining case history, 48–50 process, unnecessary case history, 47 product design, cost of, 108 productivity, improving case history, 29 profit formula, Lean vs. old, 107, 108 purchase price variance (PPV), 58–59 push, 46 S Sarbanes-Oxley review, 85 savings, of manufacturer case history, 121 shareholder return, 5 Six Sigma, limitations of, 99–101 standard work, 73–74, 89 strategy deployment, 128–29, 130–32 strategy deployment vs. policy deployment, 133–35 T TAKT time, 75–76

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Index task delegation, 89 time, reducing case history, 51 time reduction culture, 90 V value, 107 value stream mapping, 126–27

Value Stream Mapping for Information (VSMi), 110–11 visual management, 90 W waste, 33–34, 136–37 waste mapping, 125–26 Wealth Creation Process, 141–42

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About the Author

M

ark DeLuzio is the CEO of Lean Horizons Consulting. Prior to founding Lean Horizons in 2001, he was Corporate Vice-President of the Danaher Corporation, where he was the principle architect of the vaunted Danaher Business System, the primary reason for that company’s decades-long, world-class performance. Mark is the pre-eminent thought leader in the Lean industry, noted for numerous Lean innovations, including the design and implementation of the first Lean accounting system in the United States; Value Stream Mapping for Information; pioneering the linkage of strategy deployment to policy deployment; waste mapping; and the Lean Horizons Lean Sustainability System. Mark was mentored by Toyota’s Autonomous Study Group, which was created by Taiichi Ohno, the father 149

150 |Waste Turn Waste into Wealth Turn into Wealth About the Author

of the Toyota Production System. Mark’s mentoring included several study missions to Japan, where he implemented various aspects of the Toyota Production System in world-class companies. In 2007 Mark was inducted as a Life Member of the Shingo Prize Academy (essentially the Lean Hall-ofFame). He is a popular speaker sought by corporations, conferences, and noted higher-learning institutions such as MIT’s Sloan Business School, Northwestern University’s Kellogg School of Management, and the Rensselaer Polytechnic Institute. Mark is on the board of Directors of Hillenbrand Inc. (NYSE). He holds both a BS in Marketing and a BS in Accounting from Central Connecticut State University. He has an MBA in Operations Management from the University of Hartford. He is a Certified Management Accountant (CMA) and holds a Certificate in Production and Inventory Management (CPIM). Mark is a Gold Star Parent. Headquartered in Glastonbury, Connecticut, Lean Horizons has offices in Europe, Asia, Mexico, and South America.

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