9.19.2006

Is a Lean Strategy Wrong for Your Company?

One of the strangest questions I’ve heard in a long time came from a conference speaker who asked, “Are we doing lean with the wrong companies?”


            That query came from Dr. Daniel Luria, research director of the Michigan Manufacturing Technology Center, an affiliate of the nationwide Manufacturing Extension Program.


            The question is strange because I’ve always believed that a lean strategy can be implemented, and can help, just about any company. So how can there be such a thing as a company that is “wrong” for lean?


            Let me say at the outset that Luria’s presentation, delivered at the recent Management Briefing Seminars in Michigan, was actually an interesting, well-thought out discussion of some surprising findings stemming from research done by the MMTC. And he seemed like an intelligent man raising good questions about what lean efforts can achieve.


            However, as I’ll explain in a moment, I think there are flaws in the way he and the MMTC are viewing lean.


            Luria presented a variety of figures demonstrating significant cost savings MMTC had achieved for its client companies by working with them on lean implementations. No surprise there.


            He then raised a good question: After pursuing these lean implementations, had the companies become more profitable?


            “Our research doesn’t find, typically, that companies implementing lean make a lot more money than those that haven’t,” he answered. “It’s hard to document the financial payoffs to companies. Are they making more money? We often find that they’re not.”


            The next obvious question is, why not? One answer: MMTC works with a lot of suppliers, many making commodity products subject to brutal pricing pressures. So when these companies reduce their costs by implementing lean, “the customers got the vast majority of the benefits,” Luria said.


            He added, “Pricing is extremely important, and lean does not speak to ‘are you getting a good enough price for your product to make money on it?’”


            Luria then got to the heart of the matter: “Being busy matters a lot. Lean creates found capacity. If you don’t find a way to fill up that capacity, all you’re really doing is getting some labor savings. You’ve got to find new work. You’ve got to find a way to do lean, but be busy. Run close to capacity at all times. And find a way to innovate so you’re not as dependent on these commodity products.”


            So far, I’m in complete agreement with Luria. But then, in a variation of the “wrong companies” question, he asked, “Who should do this? It’s the ones in strong product and pricing position who can keep most of the benefits.” He commented that these are the companies that may have the least need for lean.


            There are several problems with this kind of thinking. The first is the implication that lean doesn’t do much good for commodity suppliers. But if you’re getting beat up on price, don’t you want to reduce costs as much as possible simply to stay alive?


            Second, and more important, is the narrow view that lean is only a cost-cutting tool. Lean is far more than that. It’s a business strategy focused on adding value for your customers. And if you apply lean to all aspects of your enterprise – i.e., product development, customer service, sales and marketing – it can help you grow your business and fill that new-found capacity.


            Further, applying a lean approach to the supply chain involves getting beyond one company beating another up on price, and developing partnerships so that both parties benefit from lean improvements. (That’s something that American companies have never done particularly well, but that’s another discussion.)


            I think it’s good that Luria and the MMTC chose to look at whether the companies they helped are making more money, rather than just assuming that they do. But I think perhaps they need to take a broader view of lean and expand the services they offer their clients. They should work with them not just to cut costs, but to streamline and improve product development and other non-shop floor operations so that their clients achieve more than just reducing expenses.


 

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