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.
Conclusion
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 |
|
