Pockets of Improvement

We had the opportunity recently to give a Lean Enterprise overview presentation to the parent company of a client. The parent company had recently purchased our client, and they were interested in what Lean could do for them. Our client has achieved a 61% improvement in throughput (dollars shipped per employee) over two years through kaizen.
The management team from the parent company had many good questions about what Lean was and how it may or may not apply to them. Perhaps the most insightful question was related to how they could avoid having ‘pockets of improvement’ and make sure improvements hit the bottom line.
This question came up partly because our client had experienced just this situation, with very little bottom-line results visible for the first two years of the Lean Transformation. Our client is a small manufacturer of furniture, offering a wide variety of products, both standard and customer, and producing very low volumes.
While they had seen improvements in all areas of their production and in all products, it took some time for the results to reflect in the financials. This company targeted four improvement objectives for their Lean Transformation. They were 1) quality improvement, 2) inventory reduction, 3) productivity improvement, and 4) lead-time reduction. Aggressive goals were set and achieved in each of these areas. So why did it take so long to see the results?
First, quality improvement was aimed at preventing the reoccurrence of field failures and warranty cost. The year prior to starting Lean there had been disastrous quality problems, and they needed to identify the root causes and put these problems to bed. It was a cost avoidance objective. Even though the objective was achieved and defects in the field were reduced drastically, the effect was to bring quality back to a level before the disastrous quality problems. Although for the following two years the cost of quality went down, the only effect was that they did not take an expense hit for warranty.
Second, inventory is a balance sheet item so the reduction in Work in Process and Finished Goods showed up as change in the asset column from inventory to cash. The actual carrying cost of inventory was also fairly low due to the fact that the company did not borrow from the bank to buy inventory, had a very small warehouse that was owned and paid for, and the fact that wood as a raw material does not have a high risk of obsolescence. While there was a short term savings in carrying cost, it was not a significant impact.
Third, productivity did improve but because the years 2001-2003 were very slow years, the company was not able to take advantage of the increased productivity right away. Some savings were realized by attrition as people left the company and they did not need to be replaced as the remaining crew could do the work needed. However, much of the attrition was in the entry level positions and the senior workers who were higher paid remained. The impact of labor cost reduction was seen in a limited way.
Fourth, lead-time is tracked by very few companies as a financial metric. In some cases lead-time is tied to on-time delivery, which can have a financial component in terms of late charges. Another way that lead-time impacts bottom line performance is by allowing you to capture short lead-time business and increase throughput. When a company can increase capacity and flexibility to respond to a quick turnaround order and gain sales that they would not have had otherwise, this can result not only in the productivity savings but also a larger contribution margin to profits for those quick turn sales.
In the case of this company, this is precisely what happened when their lead-time was reduced from weeks to days. In a tight market the furniture dealers were offering quick delivery and promising short lead-times in order to capture sales. When word got out that this company would reliably deliver custom product even with extremely short notice, sales started to roll in and the productivity gains were realized.
Returning to the question from our client’s parent company about how they could avoid experiencing similar ‘pockets of improvement’ and a delay in seeing the impact of Lean, there was one more part to the answer.
Normally, improvements are focused on Value Streams rather than on scattered products and processes. By identifying and increasing the speed at which you create value through a specific series of processes, you can insure that results hit the bottom line sooner. Because our client was small and had a high mix, we determined early on that this approach would not be practical. Although we identified the Value Streams, the end result was that there were two highly mixed Value Streams, and even these two shared much of the equipment and processes and could not be streamlined separately. Our approach with this company was to start near the end of production and go backwards from process to process, eliminating bottlenecks and improving how they served the customer downstream.
In conclusion, we have found that to create flow in high-mix Value Stream with a lot of sharing of resources, sometimes creating ‘pockets of improvement’ is necessary to keep the improvement effort going. This must be done with a longer-term vision of how these pockets will be linked together to deliver bottom line performance, and management must be able to take advantage of the opportunities that Lean shop presents them.