Home Services About Lean Contact Us Articles Employment

The New Standard in Operating
Turnarounds: Lean Thinking?

By J. W. Henry Watson   

The company was in crisis. It had mediocre products, poor quality, old capital equipment, too many workers, no cash, and no prospects for external financing. To survive it had to generate cash through cuts in working capital, improve quality, and dramatically increase productivity--all while spending little or nothing on capital equipment. A tall order.

    In the book Lean Thinking, published by Simon & Schuster, James P. Womack and Daniel T. Jones describe how Taiichi Ohno and Eiji Toyda devised a turnaround strategy for Toyota Motors in the early 1950s that allowed the company to do the things it had to do to survive--and to do them within the constraints it faced. That strategy revolutionized manufacturing and now promises to do the same in services and distribution.

    Another Womack and Jones' book also with Daniel Roos, titled The Machine That Changed the World, popularized the term "lean production" to describe The Toyota Production System; lean because it continuously does more and more with less and less. The 1990 book reported on the findings of a $5 million MIT study that examined most of the world's major automobile assembly plants. The study showed the very large advantages accruing to companies that effectively implement lean production methods compared to those (Nissan, for one) who do not. In productivity, for example, the advantage was about two to one. The study's findings have stood up under a barrage of criticism. The book sold more than 400,000 copies and was translated into eleven languages.

    I believe that Lean Thinking, which buries the notion that lean production is only about making cars, is destined for perhaps even greater success. It makes an effort to apply lean thinking to virtually every aspect of business and to virtually every type of business. An important difference from their 1990 book is the emphasis on implementing lean thinking at so-called "brownfield" sites--by definition a place where turnaround professionals are likely to find most of their clients.

Eliminating Muda

    The essence of lean thinking is the optimization of the entire enterprise through the systematic elimination of waste (muda in Japanese). In manufacturing, waste includes inventory, scrap and rework, unnecessary motion and waiting, over-capacity and over-production, excessive maintenance, and excessive material handling. This sounds pretty mundane, but it incorporates things such as "one piece flow," the notion that demand should pull supply through the system, and numerous other concepts that are quite alien to mass production's traditional batch-and-queue processing systems.

    Implementing lean thinking methods is not easy. Management and workers have a natural resistance to radical new ways of thinking and doing things, especially when the new ways are counter intuitive. Taiichi Ohno of Toyota, the intellectual developer of lean thinking and its most committed (some say ferocious) implementer, is fond of saying: "Common sense is always wrong." Lean methods do defy common sense. (At Caledonia Group, we know clients are beginning to get it when they become angry and outraged.) Implementing lean thinking concepts also requires someone who has done it before. You can't hold a book in one hand and implement lean methods with the other.

    The advantages of lean methods, however, can be truly astounding. For this reason, lean thinking concepts deserve serious attention by turnaround managers.

    Those familiar with the automotive industry are well aware that lean production launched Toyota on a path of rapid growth and increasing efficiency. Toyota has stayed on that path by continuing to aggressively refine and exploit lean ideas and methods and by encouraging its suppliers to implement lean methods. Today, it is among the most admired companies in the world and arguably the most imitated.

    By the early 1980s, Toyota had become so efficient and so resilient to recessions that many other car companies, first in Japan and later in North America, were forced to adopt lean production methods. Ford's turnaround in the early 1980s is attributed in part to effective implementation of some lean methods. When GM, Chrysler, and Porsche found themselves in deep trouble earlier in this decade, they too moved aggressively toward lean production, and today credit it with playing a major role in their spectacular turnarounds. European car companies, recently feeling for the first time the direct competition from companies using lean methods, are also moving to lean production.

    In Lean Thinking, Womack and Jones cite an MIT study that found in 1994 that the average U.S. car plant lagged Toyota in productivity by 35%, had twice as many defects per car, and had 69 inventory turns a year, compared to Toyota's 248. (If the Big Three car makers had increased their inventory turns to Toyota's level in 1994, they could have freed up more than $100 billion in working capital.) In the supplier base, the differences are even greater. Toyota's tier one suppliers, for example, have only five defects per million, compared to the U.S. average of 260 defects per million. This information is not as discouraging as it may seem. U.S. performance in 1994 was far better than five years earlier, and the gap has narrowed significantly during the past two years.

Five Turnaround Case Studies

    Womack and Jones describe Lean Thinking as a how-to manual for implementing lean methods throughout the enterprise and in a wide range of industries. The book includes five detailed case studies with the first three in the U.S.: Pratt and Whitney (jet engines), Wiremold (electrical components); Lancaster Technologies (stretch-wrap systems); Porsche (auto manufacturing) in Germany; and Showa Manufacturing (a job shop that makes boilers) in Japan. These are among the most compelling turnaround cases ever published.

    All five companies were in desperate trouble and were transformed into profitable industry leaders, while operating under constraints similar to those faced by Toyota in the early 1950s. Their successful recoveries provide convincing evidence that lean ideas and methods should probably be the centerpiece of operational turnarounds.

    Why are lean methods more likely to be considered by troubled companies than by profitable ones? Some years ago, Taiichi Ohno said that companies making even a modest profit never adopt lean production methods, while "nearly bankrupt companies implement lean production to the fullest, knowing they won't lose much even if it fails." There's simply no getting around the fact that many companies today, like Toyota in the early 1950s, often adopt lean production because all other options for staying in business have simply run out.

What is Lean Thinking?

    There is no brief definition of lean methods that quickly illuminates what it encompasses, especially to those with little familiarity with it. Perhaps the lack of a brief definition is one reason it took more than 30 years for lean ideas to be widely adopted outside of Toyota. Womack and Jones condense the key elements for eliminating waste into five concepts: specify value, identify the value stream, flow, pull, and perfection.

    1. Specify value

    Lean thinking starts with specify ing value. If you don't know what customers value, there is bound to be waste, and the way to find out what customers value is to enter into a dialogue with them. This step is the least controversial but, often results in major advances. For example, Wiremold, a middle market manufacturer of electrical components, found that their customers (electrical contractors) placed a high value on ease of installation and appearance. Their program to design (for the first time) ease of installation and improved appearance into their products soon resulted in a significant competitive advantage.

    2. Identify the value stream

    Next, one identifies the value stream by mapping out every individual step involved in the process of physical production and order-taking. This step forces management to switch their attention from departments and processes to specific goods and services. It also focuses attention on every step of the production process instead of just the part handled within a firm. Every action is then categorized by whether it adds value or not. For example, waiting, material handling, wasted motion, transportation, and scrap and rework, add no value. Anything that does not add value is waste. Some waste can be eliminated forthwith. The turnaround at Pratt and Whitney provides an example. Mapping of the value stream revealed that titanium and nickel ingots for its jet engine parts, produced two tiers up the supply chain, were often so large that 90% of the material was wasted in the machining process. Right-sizing the ingots dramatically reduced costs.

    3. Flow

    Eliminating remaining waste requires improving operations that is achieved using flow, pull, and perfection. Consider flow, also known as synchronous manufacturing. A process flows when all of the essential steps needed to get a job done [are] in steady, continuous flow, with no wasted motions, no interruptions, no batches, and no queues. Flow generally means organizing production in cells that include operations normally distributed across several departments, and operating each step in the process at the same rate. Here, the resistance rises substantially because it means that traditional high technology mass production systems are out, which also means that capital intensity and automation fall. No "lights out" factories here.

    Pratt and Whitney provide a wonderful example. The company was grinding turbine blades for its jet engines with an $80 million custom-made German grinding system. The system was ultra high-tech with robotic material handling systems and used virtually no direct labor. In converting to lean production, the system was scrapped and replaced with a much simpler one costing $12 million. Each cell in the new system had eight standard, three-axis grinding machines and two wire EDM machines. Actual processing time rose from three minutes to 75 minutes but work flowed the entire 75 minutes. The space used was cut 60%. Batch size was cut to 1 from 250. Inventory was cut by more than 99%. Changeover time was reduced to 100 seconds from one day, and all-in grinding costs were halved. The final result: total cycle time was reduced to 75 minutes from 10 days. The inventory reduction paid for the capital investment. Economies of scale were eliminated. The new system was a key element in transforming Pratt & Whitney from among the walking dead to the world's low-cost producer of jet engines. The change exemplifies the concept of radical improvement (kaikaku in Japanese)--just what the turnaround manager and the troubled company need.

    Lean Thinking makes a real contribution in developing the concept of kaikaku. The bulk of the literature on lean methods emphasizes continuous improvement, but the ability to make an initial quantum leap in efficiency and quality is not well articulated. It's the ability to achieve rapid one-time improvements that has increased the relevance of lean thinking in turnaround situations.

    The elaborate monuments such as the original grinding system at Pratt that are highly complex and minimize labor input at all costs, are the hardest problems to fix. Many such systems were installed at GM in the 1980s at a reported cost of $50 billion. Most cannot be employed in lean production, and many are being scrapped. The recent disaster at Foxmeyer's new distribution center appears to be in the same vein. In the Foxmeyer case, the start-up was a nightmare and the company turned out to be beyond reorganization.

    4. Pull

    At its simplest, pull means that no one upstream should produce a good or service until the customer downstream asks for it. When flow has been implemented, each unit in a cell only makes another part when the next unit needs it. No more batches and no more waiting. When coupled with properly implemented flow, lead times are slashed. For years, Toyota has delivered specially ordered cars in a week, compared to an average of at least 70 days for typical U.S. producers. Pull cuts inventory sharply, and results in production that matches demand. The book provides two excellent mini cases on pull that deal with both distribution and manufacturing in an integrated way.

    5. Perfection

    The pursuit of perfection (kaizen in Japanese) is the final important element in eliminating muda or waste. It is a bit less relevant than kaikaku (radical improvement) for the turnaround manager because it really becomes important after the crisis has passed. Still, the improvements quickly add up. The book gives an example of a specific part made in a U.S. factory. Seven rounds of kaizen efforts during a three-year period increased parts per employee per shift to 600 from 55 while using only half floor space. Capital spending: $1,000. Perfection, however, is not easily achieved. Toyota still has much progress to make and only recently applied lean thinking to its U.S. service parts operation. Sometimes a little encouragement helps. Thus the Big Three now routinely cut supplier prices over the life of a part with the expectation that kiazen exercises will keep the supplier profitable.

Smashing Inertia

    The book rightly emphasizes the importance of smashing inertia to get started and provides a gripping example at Porsche. Porsche was the most distressed company among the case studies. In 1993, production had fallen to 14,000 units a year from 50,000 a year in 1986. 'When Porsche first began to seriously address its problems in early 1992, its losses were more than 10% of sales and rising fast. The balance sheet was a disaster. If it had been an American firm, it would have been in Chapter 11 and struggiing to get DIP financing. Porsche's German turnaround manager, inspired by the Machine book, turned to Japanese experts on lean thinking as the only viable alternative.

    On arriving at Porsche in the fall of 1992, the senior Japanese teacher (sensi in Japanese) demanded to be taken immediately to the engine assembly plant. On entering this cathedral of German craft production, he asked loudly, "Where's the factory? This is the warehouse." 'When he was assured that he was indeed in the engine assembly area, he insisted that drastic improvement activity begin immediately. The first step was to get rid of the mountain of inventory. He demanded that the wooden shelves holding the inventory be chopped in half and handed a circular saw to the chairman of Porsche and ordered him to personally saw every shelf in half. The result: in-process inventory was cut to seven days from 28 days.

    It's common (though not for turnaround managers!) to be skeptical of the benefits of radical inventory reduction. The benefits do, however, go well beyond reducing working capital and space requirements. Inventory hides problems. Cutting inventory is like draining a lake. All the junk at the bottom becomes visible and can be dealt with.

    The great strides Porsche has made since 1992 in implementing lean production methods have indeed brought it back from the dead. Productivity doubled, defects in supplier parts declined by 90%, in-process time for a car shortened to five days from six weeks, and parts inventories were cut 90%. What is more, two new products were developed in three years. Previously, Porsche took seven years to develop a new product. Perhaps most incredible to those who know and love Porsches, the new models are relatively easy to service.


    At this point, you may be tempted to say enough fairy tales from another management guru. But claims for originality by the authors of Machine and Lean Thinking are refreshingly modest. Also, Caledonia Group's direct experience supports the claims made for implementing lean methods. The authors are not the creators of lean thinking, but simply excellent reporters and researchers. (They do consult, but their consulting work is not featured in the book.) The methods they champion have steadily improved for 45 years and now account for a significant and rapidly increasing share of world manufacturing production. Lean thinking is also behind the current logistics revolution in distribution. There is even a trend to implement lean thinking in law firms.

    The authors are quite sensitive to guru backlash and are careful to distinguish lean thinking from reengineering, for example. They make a compelling but understated case that reengineering is a botched mutant of lean thinking.

    The book, in emphasizing seriously troubled companies to illustrate the improvements that lean methods can achieve, tends to leave the impression that lean methods are adopted only by companies on the brink of collapse. In fact, profitable companies of all sizes are embracing lean thinking. The Big Three, for example, are pushing lean production fairly successfully through their supplier base, even as they continue to improve their own implementation efforts. The book is also some what sketchy on many of the nitty-gritty details of implementing lean methods, particularly in businesses outside the manufacturing sector.

    Overall, a careful reading of this book should convince you that lean thinking is not a passing fad. Rather, it is a uniquely powerful tool for improving the balance sheet and bottom line of virtually any business. For a troubled company with a clear reason to exist (that is, it has an asset or product with more value when employed in the business as a going concern than otherwise), lean thinking may provide the key to quickly returning it to viability.

J. W Henry Watson, a management consultant, is a principal of Caledonia Group Inc., a national consulting firm that provides a broad range of corporate recovery services. Mr. Watson, who holds a PhD in economics, was formerly on the faculty of the University of Chicago Graduate School of Business.
The Journal of Corporate Renewal
December 1996
  Copyright 2011 - Caledonia Group Inc.