Establishing Your Lean Strategy
Many of today’s Component Manufacturers are considering some measure of Lean implementations. Most are based on a series of what are essentially isolated Kaizen-based waste reductions projects. In selecting areas in their operations, a CM will look at the perceived waste (savings) available; those areas with more waste reduction potential get a higher priority. While such a project selection approach may actually lead to reduced local waste, this approach is almost always a strategic dead-end. Let’s look at an example.
This past year I toured an operation outside our industry that had just undergone successful Kaizen-based set-up reduction. After hearing about its impact on selected process operational metrics, I asked how the work had improved overall final assembly throughput, i.e., “Had the project shortened lead-times?” After a bit of discussion, they told me they saw specific reduction in the process/area but not on the overall product’s finished throughput. My thought was, “Then what did you really accomplish!”
This showed me the heart of what is needed to have a successful Lean program-focused waste reduction strategy focused on the whole operation. The bottom line is: if a project won’t improve overall order/product lead-times—don’t do it because it won’t have the financial impact needed to meet company objectives and ultimately improve profitability. Based on Lean’s roots—the Toyota Production System—however, this finding shouldn’t surprise anyone.
Taiichi Ohno, founding father of the Toyota Production System, was once quoted as saying that in working on manufacturing improvement, “All we are doing is looking at the time line, from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time by removing the non-value added wastes.”
So why is this important to know if a project has shortened overall lead-times? Because only when those lead-times go down will Lean projects positively impact big hitter financial exhibits such as pre-built/pre-positioned WIP/Finished Goods Inventory; safety-stock Raw Material Inventory; Warehousing, Transportation and Material Handling; etc., etc., etc.
If you are considering a Lean project, or believe you should 2017, develop a strategy on how lead-time reduction can benefit you. It is important for component manufacturers to prioritize work based on lead-time that ties together Lean impacts so they build upon each other and thus become more recognizable and not a set of isolated local operational impacts. Lean should be seen as strategically impacting Revenue. Reductions in lead-time directly impact the following company metrics:
- Customer Fill Rates go up (the ability to take on additional work), which can easily be tied to reduced lead-times.
- Sales go up—while, by the way, generating additional profits—when forecast volumes are exceeded. Why is this? Incremental Sales do not have Overheads allocated to their Cost-of-Goods-Sold figure.
- The need for pre-built/pre-positioned WIP/Finished Goods Inventory is lowered, reducing carrying costs.
- Warehousing, Transportation, and Material Handling costs go down as less Finished Goods inventory is needed.
- Damage and Rework go down, as Material Handling and product exposure-related quality defects are reduced.
- The need for Raw Material can go down—if the Order Fulfillment waste reduction is expanded to the supply base—reducing safety-stock carrying charges to the CM.
All of these wastes exist in one form or another as standard financial metrics in most companies, giving them both high exposure and immediate validity. All are also related to an increased Order Fulfillment capability which ties the lead-time metric directly to the customer. Tying performance directly to the customer is good thing! After all, shouldn’t all business operational metrics—in the end—be somehow tied to the customer?
So what’s not to like about lead-time reduction? This leads to the question about how it can be applied as an over-riding strategy for Lean. The answer to this is that CM’s should work on projects that will increase Order Fulfillment throughput by reducing finished product lead-time. For CM’s, a prerequisite to starting Lean improvement work is a thorough understanding of a product’s process flows. This includes documenting the relationship between processes—are they sequential or parallel?—as well as quantifying their lead-times.
There is one hidden benefit to lead-time reduction that, while not always easily translatable to savings, is real none-the-less. When lead-times go down, through-put goes up. In other words, reducing lead-times increases capacity without requiring additional capital investment. Think about it this way: if it used to take you 10 weeks to produce a component order and you can now do it in 9 weeks, you’ve now got an extra week of capacity to use for more production. And in today’s tough hiring environment, you did not have to hire additional staff. This applies through the whole process, quote to order to design to production and delivery.
Although a lead-time reduction strategy is easy enough to understand, its implementation is not straight forward.
Have you ever sat in a meeting with your team discussing lead-time and it felt like you were on a floor of the Tower of Babel? Individual perspectives lead to different ideas about what lead-time means. For instance, when your sales team are asked by potential customers to quote lead-times, what is the basis for the numbers they provide? Are they in any way related to what has to happen to process the order, or do sales reps just quote numbers they think are needed to be able to get the order? Now ask your designer what lead-time means and you find a completely different understanding. Ask yourself how many times have you approached a supplier with an order change request only to find out that the lead-time required would be longer than what was included in their initial quote? This gap brings out a need for adding a standard lead-time metric to Lean. This can perhaps be best explained by asking the question, “How do you quantify the status of a company’s productivity level or lean-ness?”
Just-In-Time (JIT) is a term often characterized as signifying order fulfillment utopia, i.e., being able to satisfy an order without the need for any design-time, pre-built/pre-positioned inventory and/or other types of waste. The shorter a component order’s process lead-time, the closer they are to JIT capable. It requires a CM to understand what level of capability a company needs to be considered Lean. Does it require having a lead-time of only one week; or one day; or one hour; or one minute; etc.?
The answer is that being Lean is a relative—not absolute—state based on what is needed by a CM for a recognizable competitive advantage. So, if all of the other players in your industry have a lead-time of 4 weeks but your company can satisfy unanticipated orders in only 3 weeks—and customers prefer you because of this capability—that may be what it takes for you to be considered Lean. If one of your competitors, then, reacts to its Order Fulfillment handicap by working to match your 3 week lead-time, Lean for you might then mean having to further reduce your lead-time to, say, 2 weeks. The point here is we all compete in an environment that defines the level of manufacturing flexibility it takes for your company to have an order fulfillment advantage, i.e., be considered Lean. Lean for one company may be different than Lean for a company in a different industry.
An issue that some “Lean” people struggle with is, having a solitary focus on waste reduction projects or one method that will reduce a product’s critical-path time. One course of action/strategy does not fit everyone. The question then comes up, “Why isn’t it important to reduce and/or eliminate ALL waste?” The answer is that, while theoretically that is a good idea, practically there are the twin issues of limited resources and diminishing returns that need to be recognized.
I have worked with several component manufacturers this past year who were interested in having their people work on projects that give them the “biggest bang for the buck.” The vast majority of time, these will be on projects that target faster production of components, etc. The change in strategy is to think of the whole company, from order to delivery and what you can do to reduce that time. As you finish up your goals for 2017, consider how you will reduce lead-time in the bigger picture, not just in single projects. 4Ward Consulting Group is here to help you just as we have with numerous component manufacturers this past year.
With the proper definition for lead-time, you can shorten your JIT processes and order lead-time your market demands.
Ben Hershey is the CEO of 4Ward Consulting Group, LLC, the leading provider of Lean Management and Manufacturing Consulting to the Structural Component and Lumber Industry. A Past President of SBCA, he has owned and managed several manufacturing and distribution companies and is Six Sigma Black Belt Certified. Ben has provided consulting to hundreds of Component Manufacturers, and is highly recommended throughout the industry.