Lean Management offers a truly exceptional approach to leading the organisation to places it’s never been before. With Purpose clarified, you:
- focus to the needs of the customer with earnest,
- bring them more value with less effort,
- grow seasoned problem-solvers who think customer first and tackle problems that matter, every day, in a scientific way.
Purpose and where the organisation is headed strategically is the ultimate tour guide, but there are many case studies that illustrate how Lean leads you to world-class performance, and a chance to sit at the table of global competitiveness (check out Lean Global Network’s official journal: www.planet-lean.com).
It takes tremendous effort, commitment, consistency and dedication to make it work, every day. So, why do it?
The good news is that although Lean is not primarily about cost reduction, there are tangible benefits you can capitalise on that also benefit the bottom line and make Leaders sit up and take notice. So, with the desire to build people to achieve better customer service and products, you can also score on financial gains.
What Drives Unnecessary Cost?
There are a multitude of possibilities to look out for when identifying unnecessary spend in your organisation. If you’re getting to grips with Lean, you will have learned there are wastes evident in every process type as illustrated in the figure below. These wastes ‘steal’ resources and each one comes with its own ‘ka-ching!’
Depending on the wastes most prevalent in your organisation, you could be experiencing losses from various angles including lost sales opportunities, inventory costs, pilfered machine and labour time, excessive material usage and cash flow robbers, to name a few. If you’ve witnessed waste, you have the opportunity to liberate cash by eliminating them.
“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 line…”
Think for a moment about long lead times and how this can choke cash flow and extend financing time (one of the many reasons I love Value Stream Mapping is because of how it exposes this). When you reduce lead times you not only delight customers, but you invariably reduce inventory, and positively impact working capital. This can be significant when you consider the cost of inventory and that of holding it (raw materials, work-in-progress, finished goods, maintenance parts, insurance, auditing of stock, space utilisation, people to manage the stock, interest on financing…). Ka-ching! And there are others:
- Losses associated with not doing the work right first time
- Poor energy and water usage
- Unnecessary temporary labour or overtime to compensate for inefficiencies
- Losing capacity due to breakdowns or idle time
- Transportation costs to move people and things around unnecessarily
- Absenteeism, poor leave cover, high employee turnover
- Unnecessary expediting costs when things get behind
- Not capitalising on recycling, remanufacturing or re-using materials
- Poor inventory management resulting in shortages and/or excesses
- Poor supplier management leading to excessive procurement costs
- Lack of equipment and system standardisation
- Inaccurate bills of materials triggering unnecessary purchases
Lean Management systematically identifies waste in the context of Purpose, finds the source of the waste, and through relentless cycles of PDCA (Plan-Do-Check-Act aka Scientific Thinking) eliminates it. By understanding your key cost contributors, you can connect Lean projects and cost savings and illustrate the very real benefits to be had. The scientific approach brings solid, data-driven root cause analysis into the improvement process and if the experiment is successful, it will improve the chance of sustainability of the change.
The Good, the Bad, and Ugly of Cost Reduction
Steven Bragg, author of Cost Reduction Analysis (2010) explains how it requires significantly more revenue generation than cost reduction to achieve the same percentage profit improvement. By eliminating unnecessary costs responsibly, an organisation can compound gains that keep on giving into the future.
Cost reduction may not be an option–it could be a prerequisite for survival. For example:
- Lost revenue: price reductions driven by the market create a need for cost reduction. Automotive industry suppliers in South Africa (and many other sectors) are constantly under pressure to reduce their prices, triggering formal cost reduction strategies every year. Improvement projects have to deliver on this.
- Fixed costs: high investment in fixed costs means the need to utilise expensive capacity effectively is critical. Industry slow-down can be weathered if cost reduction has prepared the company ahead of time. The company left exposed and unable to sell the capacity could very well close their doors.
- Incremental creep: where there is little focus on cost reduction, costs naturally increase. This could be influenced by inflation, process changes, increasing employee entitlements, or a general complacency for cost in the organisation.
- Complexity: excessive layers of management requiring more levels of control and reporting, mean leaders are disconnected from the heart of the operations. Sometimes this results in precious time being spent on unnecessary activities that do not add value.
Cost reduction is a way to increase profits and enhance cash flow in the short term and can be a driver of long term growth. This is often within the control of the organisation, whereas revenue creation can be influenced by factors beyond your control.
No doubt cost reduction has also been branded with a bad name. The worst form of cost reduction is a blanket approach in crisis-mode, where management enforce an across-the-board percentage cut. This is reactive in nature and invariably destroys value in the following ways:
- Operations are cut to the bone impacting service levels to internal and external customers.
- Managers pad budgets to compensate for future cuts, leading to unnecessary costs and fund allocations.
- Good people move on to greener pastures leaving behind a skills gap.
- Long-term-growth activities are cut such as employee development and investment. The short term benefit creates a long term sacrifice.
Cost reduction is sometimes misdirected and aimed purely at the lower-level employees. The organisation requires support from all staff to achieve true cost reduction strategies and this is best achieved when staff can see the same effort, if not more, being applied in the higher levels of the organisation. Improvement pain is best shared. Another reason why a system’s approach to improvement is favoured, which Lean Management delivers on.
Finally, an investment may not necessarily align with strategic needs but has strong internal support from an individual. Staying focused on the strategic objectives is critical to filter out non-critical, cost driving activities (Bragg, 2010).
Where to Now?
Consider doing a quick-check on your cost contributors. Dig into your management accounts, construct a Pareto graph and zoom in on how you spend money in the organisation. You may be pleasantly surprised by possible leverage points for your Lean projects.
When you initiate improvement projects consider the impact on cost or cash flow the change may yield. Just be sure to keep your eye on the ultimate goal of customer satisfaction and people development.
Check out this Lean Post article for more examples.
Please do let us know how we can assist you in your cost-conscious journey.
Lean Institute Africa CEO Designate 2018
Bragg, S, 2010, Cost Reduction Analysis; Heathcote, R, 2014, Clear Direction
P.S. Mr Furuhashi, Lean Sensei of 21 years to LIA’s Chairman Norman Faull, is running a workshop at our Host Company Nibbly Bits, producer of handcrafted rusks, biscuits, cookies & snacks. The 2-day Enhancing Global Competitiveness Workshop will take place at the Nibbly Bits factory in Wellington on 29 – 30 October 2018. Contact our office at email@example.com or 021 4061477 to secure your place. The workshop is limited to 16 places.