“Why should I go lean?” That question, or the negative version of it, has been raised on a number of occasions. Maybe you are dealing with either or both of those questions right now. Hopefully this article will help you decide.
The owner of a small custom cabinet shop that I visited recently has been challenged by the negative version of that question for some time. I don’t know if my invitation to his plant was intended to help him develop the answer or if it was to validate his perception that the company is already as “lean” as he can make it.
There’s more to lean
He pointed out all of the latest and greatest technology and he boasted about how cross-functional his staff was so they could float with the work load. Both of those areas are commendable attributes, but I look deeper than that when assessing whether a company is lean or not. As we walked through the disconnected departments and around all of the clutter of work in progress, samples, cancelled orders, and other distracting debris, I saw opportunities for improvement that are far more important than cross-training and sophisticated CNC equipment.
A lean company employs technology as needed to create flow and eliminate waste. A lean company also cross-trains staff in critical skills so there is an adequate pool to draw from as demand dictates, not as a matter of course for following jobs through the plant. Since neither of those was apparent I don’t consider that the company fits the lean model that I have been promoting through these articles for the past 15 years.
In my follow-on conversation with the owner we talked about measuring success and some improvement opportunity indicators. His only measure was profit. Profit is not a bad measure, but it is difficult to track and evaluate on a daily or weekly basis. I shared how the lean transformation at Joe’s Cabinet Shop was progressing and how we were measuring improvements there.
One measure, Revenue Per Labor Hour (RPLH), was of particular interest to him. I asked him what their RPLH was. He did a fast calculation and came up with a number of $218 per direct labor hour. That was an impressive number, but what assumptions was it based on? He said the total hours were based on a regular 40-hour work week times 52 weeks per year times the current number of production employees. Revenue was interpolated based on the assumption that the current trend would continue for the year. Both of those assumptions are fraught with error so the RPLH number was a guess at best and could hardly be compared week to week for analyzing trends or measuring the results of improvement initiatives.
Rather than condemn the process used to arrive at the number, let’s assume that the number could be right. Are there any conclusions or further assumptions that could be drawn by comparing the RPLH from this company to Joe’s? When we started the lean transformation at Joe’s their RPLH was about $130. RPLH is currently about $160 with a goal of $172 by October. Joe’s number is calculated weekly comparing the actual hours worked to the revenue generated in that week. With Joe’s number so much lower than the other company, does that mean that Joe’s transformation is not achieving success? Is the other company so good that they don’t need to make improvements? The answer to both questions is no.
Since the selling price of an item is comprised of many factors that can be regionally and competitively influenced, comparing Joe’s to Bill’s (to differentiate the two) would be comparing apples to oranges. They may both be in the same business, but not in the same market. Joe’s company is in a very competitive market while Bill’s company has little competition in their region. Joe operates at a lower margin, so comparing his RPLH to the other company wouldn’t be much of an indicator of continuous improvement opportunities or of progress towards an objective.
The only way to determine progress is to continually compare current state to an established baseline and evaluate the resulting trend. At Bill’s company managers can’t determine if improvements have been made or a goal is being achieved until periodic profit reports are created through the accounting process. That means that weeks or months can go by with no definitive indicator of progress.
Should Bill go lean?
So, back to the original question, “Why should Bill go lean?” Bill told me that he doesn’t want his company to get any bigger. Additional revenue isn’t a motivator for him. Even if revenue isn’t a motivator, delivering a quality product on time, at the lowest cost, and with the least aggravation is. He can accomplish that by eliminating the waste and process interferences that are preventing maximum utilization of his current resources.
Maximizing resource utilization doesn’t necessarily mean that Bill will have to bring in more business to fill the void. He can reduce the internal lead time by holding orders in queue longer and increase the velocity of work going through the same resources. He can still continue to quote long lead times or he can pass along the increased efficiency and productivity to the customer in the form of quicker turn around. Holding work in queue longer and increasing the velocity of work through the process is a good safe guard against the inevitable last minute changes by the customer.
Whatever the decision, Bill will be able to increase profit while maintaining the same level of business through a reduction in the cost of quality, and interest expense for carrying inventory longer than necessary. Bill will also see his RPLH increase because less non-value-adding labor will be going into the product.
Should you take your company on the lean journey? The answer should always be - yes! Improving the way you do business, reducing lead time to be more competitive in your market, reducing cost, increasing profit, and creating a more employee-friendly company should be objectives that you strive to achieve, but never quite attain. Applying lean thinking is the only way to move towards those objectives and effectively measure results along the way. Shouldn’t you be on the lean journey?
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