Lean Alone No Longer Cutting It
IndustryWeek.com
Competition requires deeper and quicker cost reductions.
By Tonya Vinas
Oct. 25, 2005 -- Manufacturers and lean gurus speak frequently of lean transformations as journeys, tapping this oft-used metaphor to convey that embracing lean requires a holistic and ongoing approach as opposed to managing events or projects.
The journey includes pitfalls and setbacks, but up to now, most of those have been internal: convincing upper management of lean's long-term worth, forcing a painful review of inefficient practices, and leading reluctant employees to new thinking and action.
But now, we've reached a point where the pitfalls and setbacks are out of manufacturers' control: skyrocketing costs for raw materials and services (i.e., transportation, health-care benefits), China's advantage via its doctored currency, and the emergence of low-cost labor locations that offer quick cost-cuts that are more easily understood and appreciated by equity shareholders and the Wall Street community.
It's a dicey time for manufacturers that have spent the past five to 10 years on the lean journey. They and their top-level executives are finding that lean alone is not enough. The cost cuts that derive from lean process improvement are not delivering savings deeply enough or quickly enough.
Consider these findings from the 2005 IW/Manufacturing Performance Institute Census of Manufacturers:
A whopping 92% of the 550-plus U.S. plants responding saw their raw material and/or component costs increase this past year. Only 5% enjoyed a decrease.
Excluding raw materials, per-unit costs increased for about half of the surveyed manufacturers, a finding made more significant when considering that material costs ranked a median 50% of cost of goods sold for the plants. That means that for half the manufacturing plants out there, half of the bills that they pay have gone up--and these are things that don't even end up in the customers' hands, so it's difficult to pass along these costs.
Which brings us to transportation, energy and employee benefits. Considering the latter alone, the median increase in the cost of providing health-care insurance rose 12% this year over 2004, and close to 30% of the surveyed plants were forced to reduce these benefits.
While the survey did show improvements in important metrics such as return on invested capital, cycle time and first-pass yield, it also showed that fewer plants are using lean as their primary improvement methodology, and 22% have no primary improvement methodology, up from 14% reporting the same in 2000. This is validated further by a reported decrease in training.
What's happening here? It could be several forces combined. Lean guru James P. Womack, presenting at an IW Webcast on Oct. 19, said "program fatigue" may be part of the answer, meaning that manufacturers have realized that programs aren't what lean is about but rather culture change, so lean efforts are less outwardly showy but still are pervasive.
This indeed could be part of the answer. But I think also happening is a demand for immediate cost cutting that lean doesn't always provide. Sometimes kaizen events result in immediate savings, but in the face of the increases these companies are facing, kaizen-derived savings are, again, probably not deep enough, especially with the allure of incredibly cheap labor in China.
Additionally, I have had manufacturers tell me that they've actually had to reverse some lean gains as a result of more materials and components coming from overseas. For instance, some that had been able to eliminate inspections of incoming supplies have had to re-institute them because the offshore suppliers are indeed cheaper, but their products are of a lesser quality than domestic. Also, I've seen manufacturers that have had to increase inventories of raw materials because the delivery of offshore supplies is less reliable than domestic.
Here and there, manufacturers are dealing with this using new ideas that fit into lean thinking, such as the concept of trade payables, whereby a third party owns inventory from the time it leaves a supplier until it's pulled for production. This way, manufacturers can order extra from overseas suppliers but can still keep their inventories low. What I am wondering, however, is if manufacturers aren't coming up with these ideas quickly enough.
Think about it. U.S. manufacturers did not embrace the Toyota Production System (TPS) with loving arms. True they are all in love with TPS now, but life-threatening competition was what forced them to see the beauty in this wallflower. And once they did, productivity zoomed.
We're seeing the same dynamic in the management-union relationship: It has taken Delphi's bankruptcy and GM's bedridden financial status to make the auto unions realize that their retirees are going to have to pay more than $10 for prescription co-pays.
Considering all of this, I urge manufacturers not to forget about lean but also, not to be lulled by it. If what Womack says is true, that lean is becoming wallpaper rather than a centerpiece, then that's a good thing. Now manufacturers can focus on this unprecedented competitive environment and come up with new solutions. Perhaps it's time to view local health-care providers as suppliers and demand the same lean performance out of them as suppliers of raw materials; or perhaps it's time to review cost-of-customer or develop a product mix that is less cyclical.
I'm not sure what the answer is for each manufacturer. But I do know that heralding lean improvements just doesn't have the same awe-inspiring ring that it used to. Lean isn't going away, and it shouldn't. But times are calling for more than process improvements; they are calling for in-depth reviews of all aspects of your enterprise and your sector. Don't abandon the journey, but start looking around a little more.
Think of manufacturing as the road. For the most part, U.S. manufacturers have made travel more efficient by smoothing out the road with lean. Now, if they keep staring at the road, they aren't going to see coming obstacles, and they aren't going to notice things along the way that could make the journey even smoother.
Tonya Vinas is managing editor of IndustryWeek. She is based in Cleveland.
