How do I know if my company needs to invest in a lean transformation?

A: The question isn’t challenging to answer, but the answer can be challenging for any CEO who feels that his company isn’t doing as well as can be expected. Even when a company seems to be successful, there will be room for improvement. I have written a number of articles about companies that have experienced 50% to 300% increases in productivity and profit through the implementation of lean thinking. Each of those companies reached the decision to pursue lean in a different way, so there is no canned answer, but there are indicators that you can look for that will help you determine if there are opportunities for improvement that are worth pursuing.

First of all, look at what you are currently measuring. Are you just measuring profit or are you measuring the value that is created by every person in your organization or the value of every labor hour that is worked to create the revenue number? If you are tracking performance indicators, do you share them throughout the company? Are the indicators understandable by you alone or can every person in the company translate them into something meaningful at their process? If your staff cannot translate the data into something meaningful they can’t do their own self-measuring to see if their improvements are making a positive impact on the outcome. Profit and other global measurements are meaningless at the saw, or customer service, or accounting, or packing processes. If you can’t quantify your measurements at the user level, you are measuring the wrong things.

Let’s begin with some, hopefully, known factors. You should have a standard unit of measure. What does a “unit” mean to your people? Is a unit equal to a piece, or are different pieces fractions or multiples of a unit? For instance, if you build a lower double with decorative end panels and a solid back panel to serve as an island, does that piece carry the same “unit” value as a standard lower double? Determine your “unit” of measure so there will be consistency in the reporting and tracking of data.

You know the price you charge the customer for the piece they purchased. Once you determine a unit of measure you can assign a revenue amount to that unit and total the daily/weekly throughput. I prefer to measure daily and report weekly. Measure daily so you can respond quickly to negative trends and track weekly so you can share that information across the organization. With the total daily throughput value it is easy to calculate the revenue per hour worked. Revenue per Labor Hour (RPLH) gives you a measurement that is meaningful to every person in the company. Everyone needs to know the value they create for the company so they can determine if their improvements are leading to the company objective. With this simple value-creating measurement you can begin to apply lean thinking to the processes that create value and measure results.

It is time to go to gemba (where the work gets done). Focus on: the process itself, interactions within the internal customer/supplier chain, interferences/interruptions, set-up, the locations of things that the process owner uses in the process, where materials or information come from, and where they go. You are looking for the Seven Deadly Wastes. Eliminating waste improves productivity, which will improve profit.

When will I begin to see improvements through lean?

A: If you and your leadership team are fully committed to engaging all of your staff in the transformation process, improvements should begin immediately.  We always begin by training all of the staff in basic lean principles so everyone understands what to expect and their role in transforming the company. It is important for everyone to see that lean isn’t threatening nor is it rocket science that can’t be understood and applied by all. 

The first tool we employ is Workplace Organization or 5S.  Organizing the individual and team workspaces removes waste and increases productivity without requiring any additional effort on the process-owner.  We then focus on connecting internal customers and suppliers to create flow and reduce inventory.  This frees up space for future growth, or as one shop employee noted to a group touring their facility, “The freed up space is where we are going to put our competition.”

The most extreme case of immediate results that I have experienced was a large company that was part of an international organization. The headquarters had been subsidizing the plant for several years and corporate leadership was on the verge of closing it.  The shop had notoriously poor on-time delivery performance and was continually working overtime to try to keep up.  Work-in-process was so vast that the shop literally looked like a warehouse with a little manufacturing going on inside of it. Long story short, Lean Thinking was so readily received and implemented that the shop was profitable and 100% on-time after the first month of their journey.  That doesn’t happen with every transformation we facilitate, but it demonstrates what is achievable.

Are there ways to finance lean transformation? 

A: There are a number of options for funding a lean transformation that won’t strain your limited cash flow. Becoming lean is a journey, but you don’t have to wait months to see results. You will see the cash flow increase when the current resources begin producing more value at the same or lower cost.

Almost every state has an Economic Development Corp., or similar organization, that has funds available to help defray the cost of training and the lean process. Also, a number of community colleges offer Workplace Development programs that have funds available to help with training. Another option is to partner with a company in your area so you can share the cost. The most important factor for you to keep in mind is not to look at the lean transformation process as a “cost.” Look at it as an investment that will deliver immediate results and a payback far exceeding the investment that you will be making. If your revenue hasn’t increased at least ten times more than your investment within 12 to 18 months, you engaged the wrong consultant.

With staff of 12 and $1 million sales, will lean benefit?

A: Lean thinking is equally applicable to small shops as well as large shops, and both in the factory and the office. One of the measurements I use to determine the impact lean is having on improving company operations is revenue per direct labor person or revenue per direct labor hour, whichever is most meaningful for a particular shop.  Based on the information you provided, your revenue per direct labor person ranges from about $90,000 to $100,000.  That isn’t too bad, but it can be considerably more when lean thinking is applied. Every process has waste embedded in it that is currently going unnoticed and untapped.  The embedded waste has become part of the process and therefore is assumed to be the norm.  Once you understand how to identify waste and eliminate it, you will wonder how you could have been so blind to it for so long.

My shop builds mostly custom product. Does lean apply?

A: Lean is not product focused, it is process focused. Every product, custom or otherwise, goes through a series of repeatable process steps. It is the process step that you will be applying lean thinking to, not the output. You also can apply lean thinking to the engineering and design phases of product development, which would have a positive effect on your output.

If we are successful with  lean we do we reduce staffing?

A:  As Lean Thinking kicks in and the staff becomes actively engaged in making continuous improvement part of their daily culture, you will find that there are too many resources for your current demand. This is an opportunity to enhance the transformation process. People freed up can be used to improve other processes, thus setting the stage for increased sales, which should be pursued parallel to the internal improvements. Whatever course you wind up taking, remember the reason for the lean journey is to build a stronger, more productive organization.