Chief Financial Officer (CFO) = Lean Architect

Nick Katko recently published a book titled The Lean CFO: Architect of the Lean Management System, and it fully explains why chief financial officers (CFOs) must rethink their traditional management accounting systems. During a recent conversation, I explicitly asked him: "What are the basic reasons why a CFO, who works for a company engaged in a Lean Initiative, must become a Lean CFO?" Here is his complete reply: 

Lean is a money-making business strategy. Companies that adopt a Lean business strategy are successful because they accomplish two tasks very effectively. First, they employ Lean practices everyday, everywhere, all the time. On a daily basis, the Lean company focuses on three tasks: delivering value to its customers, flowing all business processes, and relentlessly eliminating waste. Second, the leadership of the company clearly understands exactly how Lean makes money and communicates the link between Lean practices and more profits to every employee in the business. They understand the economics of Lean. 

The economics of Lean can be explained in basic terms of supply and demand. Let’s look at demand first. By focusing on creating and delivering customer value, the demand for your company’s products or services increase and you command better prices. Financially, this means the growth rate of your revenue should increase compared to your historical growth rate and should be better than industry averages. 

The supply side of the equation focuses on your supply of resources. Your supply of people, machines, and facilities are responsible for creating and delivering customer value. By focusing on creating flow and continuous improvement, the productivity of your resources will improve dramatically. Using Lean practices to create flow means that resources will maintain productivity levels regardless of short-term fluctuations in demand. Continuous improvement practices mean that the productivity of your resources will achieve consistent annual improvements in productivity of 10% to 20%. 

The financial impact of maintaining and improving your resources’ productivity is that the rate of increase in the cost of those resources (i.e. your operating expenses) will slow down and be less than the growth rate of your revenue. The difference in growth rates between revenue and costs means your company will make tons of money with lean. 

So where does the CFO fit into all of this? As CFO, you chart the financial strategy of your company. Whatever the business strategy, you need to project the financial impact of the proper execution of the strategy. You also have oversight of the management accounting system: the measures and methods that are used internally to measure how well a company is performing at any time. How you present the financial benefits of Lean and how you determine how to measure it will be the determining factor of whether a company adopts Lean as the business strategy or thinks of lean as “part” of a business strategy. 

As the Lean CFO, you need to understand the economics of lean so that you can align the financial strategy with how Lean makes a company money. You must make the necessary changes to financial measurement and reporting systems to measure the execution of the Lean business strategy. I believe this is the single most important factor that prevents companies from realizing the true financial potential of Lean. Your ability to translate the language of lean into the language of money will make it clear to everyone in your business why the proper implementation and daily execution of lean practices are necessary. 

As the CFO, you are the resident expert (and owner) of the measurements. It is very important for you to change the financial and operational measurement system so that the measures drive Lean behaviors. Traditional measures, of course, will drive traditional behaviors. That is what they are designed to do. But these traditional measures will obscure and undermine the vital changes required by the economics of Lean. 

If you change to a Lean business strategy, you cannot account, control, and measure it using the old methods. The most important contribution of the CFO is to lead these changes. To go Lean, you must understand how the principles of Lean create the economics of Lean. 

What do you think of Nick's perspective? How does your company measure its manufacturing practices? In your company, has the CFO directly supported or unknowingly hindered the the Lean initiative?


Creating an Organizational Culture Beyond Lean Sigma Tools

Robert Baird just published an interesting new book this month titled The Four Components of a Fast-Paced Organization: Going Beyond Lean Sigma Tools, and I had the opportunity to speak with him about some of the topics presented in the book. One of the questions I asked was: "How do you create a culture of continuous improvement beyond Lean Sigma tools?" Here is his complete response: 

If you look at the characteristics of a successful organization, you will find speed as one of them. Staying ahead and achieving business results at a pace faster than competitors is a distinct advantage. Within Lean, we have some focus on just-in-time, lead time, and on-time delivery, but what are we doing about it? Are organizations focused on improving their organizational speed? We found when there is a focus on speed then industry-leading improvements come with it and people are motivated to keep going, momentum is created, and all employees are engaged to execute the strategy. These are the outputs or effect on an organization when implementing all four of the components -- leadership and mentoring, process design and visual value streams, organization structure for sustainment, and fast knowledge sharing -- of a fast-paced organization. Implementing one, two, or three of the components will certainly achieve results but not the sustained world-class results we are looking for. 

We all want a culture of continuous improvement, learning, and customer orientation and this is what the four components were designed for. Following the implementation steps will inherently develop all of these organizational characteristics. It starts with the Leadership and Mentoring component. The Leaders must be on board first and then each of the other three components are to follow. The Leadership and Mentoring component provides the base which sustains the momentum and starts the culture. Leaders take responsibility for developing people who are trained, motivated, and supported to identify, solve and fix problems. Leaders must empower people to be capable of process ownership. Leaders must guide and support a production system of continuous flow and quality products and service. Finally, leaders must build a learning organization. They are responsible for operational excellence. 

What do you think of Robert's response? Do the leaders in your organization drive the culture? Are there both leaders and mentors in your company?


There are Problems and There are Paradoxes

Information is at our finger tips. We are able to communicate with anyone around the world instantaneously for free. We have specialists in every field who have spent years learning and mastering technical information. Yet on matters most critical for our success and areas where we know we must change (e.g.,the economy, healthcare, the environment), we often struggle to succeed. The same forces at play within society often exist in organizations, families, and even inside ourselves.

I asked Ralph Jacobson, author of the just published book, Getting Unstuck: Using Leadership Paradox to Execute with Confidence, to explain this widespread phenomenon and his understanding why this occurs and what can be done about it. Here is his complete response:

Problems have answers. Humans and organizations are often effective at solving them. But we face issues that are more complex. Many have no easy to implement solutions. They harder we try to fix some of these, the more futile it feels. In most organizations there are stories of, “We first had this same problem 15 years ago, nothing we have done has worked... guess this is just how it has to be.”

That’s an important clue that we are not dealing with a problem that can be solved. Instead, we have a paradox that has to be balanced. The last time most people encountered that word was in a college philosophy class. That’s unfortunate. The reality is that most of the issues that keep us up at night, keep companies from being successful, and societies from making progress is because they are better perceived and understood from the perspective of paradox. And, there are easy-to-use approaches and ways of seeing paradox that can reduce silos, create new pathways for success, help companies succeed, improve leadership, facilitate the implementation of change, and help people sleep better at night.

It is crucial to make the distinction between problems which can be solved and paradoxes that must be balanced. Once the effective solution has been applied to a problem, it ceases. But paradoxes must be balanced, they exist in perpetuity. Once we understand that paradoxes have two polarities that can be both right and wrong at the same time we have a new lens to view the issues that defied resolution. How do you find the critical paradoxes? Look for the tension -- "the heat." Look for issues that defy resolution. Look for things that have more than one good, usually opposing answer. Rather than running away from them or fix them, see them for what they are -- paradoxes.

What do you think of Ralph's ideas? What are some of the paradoxes that are important for your career and the success of your organization?


Global Cultures and Lean Initiatives

This past Spring, Jeffrey P. Wincel and Thomas J. Kull published a book titled People, Process, and Culture: Lean Manufacturing in the Real World. A purchaser and reader of the book, Scott E. from the University of Kentucky, had some questions. He asked: "People, Process, and Culture: Lean Manufacturing in the Real World shows there are many interesting effects that a country's culture has on Lean. This is shown by testing the influence of each cultural dimension. Aren't all these dimensions, however, happening at once? If so, how can a manager use the results specified in the book and take into account all dimensions at once?" I directed these questions directly to the authors, and here is their reply: 

Thanks Scott, this is very true. The multiple dimensions of national culture we examine are operating simultaneously. So they all could be impacting how effective Lean practices are, all at the same time. Our method of testing does account for this. That is, we allow all nine dimensions of national culture (as described in the GLOBE international study HERE) to simultaneously try to predict if Lean practices will be effective in a country. Researchers sometimes call this "competing for variance." Our results try to mimic what's happening in the real world; each of these influences exists, but which ones really stand out as impacting Lean practice effectiveness? We find four. We should note that there are many more aspects of national culture not included in our study, and we hope researchers will build on what we did to explore those. 

Now, what does this mean for managers? At the end of our book, we list the various regions of the world and how they "score" on the four dimensions of national culture that we found impactful. It's a nice table, and it summarizes potential benefits and detriments of having a specific cultural bias. For instance, Latin America scores high on a dimension called "uncertainty avoidance," which is a dimension that increases Lean effectiveness. For managers working in Latin America or working with suppliers in Latin America, they can use this knowledge. High uncertainty avoidance means there's likely a cultural bias for responding to out-of-control signals, valuing structure improvement, and being attracted to routines: each beneficial to making Lean work. We think managers can go to this table and ask themselves, "Are my people generally sensitive to uncertainty?" If yes, then maybe showing them how Lean helps this can bring more effort into making Lean work. 

Our book has many other tables that make this research easy-to-use. So I hope readers can enjoy it, learn from it, and best of all make use of it! Thanks for asking! 

What do you think of Jeffrey and Thomas’ response? As Lean initiatives expand across the globe, what effect do you think local cultures will have on the implementation of Lean methodologies?


The New Human Resources Model

Last week, I spent some time on the phone with Daniel Bloom discussing his latest book titled Achieving HR Excellence through Six Sigma,and I asked him this question: "In the book Achieving HR Excellence through Six Sigma, you talk about the need to create a new model for the HR function based on a proven business problem solving process. Why is the new model needed at this time?" Here is Daniel’s complete response: 

The Human Resource (HR) function of the 21st century is faced with a real dilemma. In most organizations, they function as the organizational firefighters. They constantly present the message that "here is what we do for the organization." The problem is that this approach does not support the HR function being part of the organizational decision process. They must learn the language of business. 

It is our message that this language of business is the TLS Continuum, which encompasses the principles behind Theory of Constraints (TOC), Lean, and Six Sigma. It is through the Continuum that HR can to migrate to a message of "here is what we deliver to the organization." They are more than just firefighters -- they are the key to strategic initiatives being created that propel the organization forward to a new level of overall alignment. We do this through a focus on the customer, the alignment of the total organization, and the enterprise embedded cultural change to one of constant quality improvement. 

To reach the point of HR excellence, it is critical that the organization implement the power of the problem-solving method by identifying the bottleneck that is slowing down the organization by utilizing TOC and then using the Lean toolbox to remove that single obstacle, which moves the organization along. The Six Sigma toolbox is used to establish the standard of work that dictates what steps are needed going forward to complete the process and create safeguards to ensure that the process we have created is creditable, verifiable, and repeatable. 

In one example from our two-day seminar, one group discovered that in the course of hiring a new person for their team, the job description and requisition are reviewed and approved three times by the same person. While this process had existed for many years, no one recognized that this process obstacle was hindering the talent-management function. While it is important to get the document approved, it is also important that the process runs efficiently. The duplication of process steps is not a sign of efficiency. 

What do you think of Dan's statements? Do any readers strive to achieve HR excellence by risking more than others think safe to change the corporate culture?


Toyota Takes Lean to the Bank... the Food Bank

I just read this great article by Mona El-Naggar in The New York Times yesterday. Many large corporations donate money to important charities, such as food banks, all around the world, but Toyota donated something to the Food Bank for New York City that might prove more valuable than a cash outlay -- expertise on how to reduce money-draining waste and improve inefficient processes.

Look at the statistics reported in the article:
  • At a soup kitchen in Harlem, Toyota’s engineers cut down the wait time for dinner to 18 minutes from as long as 90. 
  • At a food pantry on Staten Island, they reduced the time people spent filling their bags to 6 minutes from 11. 
  • And at a warehouse in Bushwick, Brooklyn, where volunteers were packing boxes of supplies for victims of Hurricane Sandy, a dose of kaizen cut the time it took to pack one box to 11 seconds from 3 minutes. 
There have been many books published on the adoption of Lean tools and techniques to the service industry, but this article presents direct and measurable benefits by the immediate application of  tools such as kaizen.

Here's a link to some photographs that illustrate the improvements accomplished.

Please share your thoughts on this article. Many readers of this blog have directed or participated in the application of Lean concepts to service industries -- Do you think the Food Bank for New York City could become a benchmark for other nonprofit anti-hunger organizations?


Lean RFS (Repetitive Flexible Supply) -- A Missing Part of Lean Journeys?

Ian Glenday and Rick Sather recently published a very interesting book titled Lean RFS (Repetitive Flexible Supply): Putting the Pieces Together. I recently had an email exchange with both authors, and I had the chance to ask them about two key assertions that appear in the book:

1. “Existing planning processes used by most companies are fundamentally flawed.”

2. “The original foundation of the Toyota Production System is the least understood aspect of Lean, yet is crucially important.”

These are bold – some would say controversial – statements, and I asked them directly how they justify them. I’m reprinting their entire answer here:

In most companies, the weekly plan or schedule is different every week and then usually changes resulting in firefighting. This makes continuous improvement, agreed standards, and root cause resolution of problems very difficult to achieve and, more importantly, sustain. Planning is based on “economic order quantity” or batch logic that uses three main data sources – the sales forecast, actual production, and inventory levels. If any of these have changed since the plan was last calculated then one gets a different plan. For the plan not to change would require 100% perfect data – and that is NEVER going to happen. Forecasts will be wrong, production will make more or less than the plan, and as for 100% inventory accuracy – who has that?

There is an alternative planning logic – often referred to as flow. It is seen as the logic of Lean and is usually described as focused on achieving greater responsiveness to demand. However, this aspect of flow is the last two steps in a five step process Toyota followed. The initial steps focused on creating stability -- an essential foundation for sustainable continuous improvement, root cause resolution, and the following of standards. The term Toyota now uses to describe this is “heijunka.” It was, however, originally called “patterned production” as it created a fixed repeating plan. This seems impossible to achieve when demand is seen as variable. In steps 1 to 3, this repeating plan gets faster and faster resulting in shorter runs and more change-overs. This flies in the face of conventional thinking on how to improve performance. Using examples and quantified results from Kimberly-Clark and other companies, we show how it can be done and how levels of performance improvement previously thought impossible were achieved.

Is the weekly plan ever changed in your company? Have you ever heard of “patterned production”? In his foreword to the book, Professor Daniel Jones makes the following comment: “This book is the missing link in many Lean journeys.” What do you think of that powerful statement?


Can Lean Be Green?

On May 19, at the upcoming Institute of Industrial Engineers (IIE) annual conference in Puerto Rico, Keivan Zokaei will introduce his latest book, Creating a Lean and Green Business System: Techniques for Improving Profits and Sustainability, which he co-authored with L. Hunter Lovins, Andy Wood, and Peter Hines.

I recently spoke with Keivan about his book, and I asked him: "Why should companies bother incorporating sustainability and 'green' aspects into their Lean initiatives? Here is his complete answer:

Lean and green is not about protecting the planet; it is about protecting your company’s purse. I am encouraged by the proactive approach of a few leading-edge companies for whom going "lean and green" has become a key economic driver. Take elite firms such as Toyota, WalMart, DuPont, Tesco, Unilever, Procter & Gamble, Marks & Spencer, General Electric, and General Motors – all of whom have invested heavily in greening their products and processes during the past few years.

Unilever plans to double revenue over the next 10 years while halving their environmental impact. General Electric aims to reduce energy intensity by 50% by 2015. Toyota has already reduced emissions per vehicle by 37% between 2001 and 2012. Similarly, DuPont committed itself to a 65% reduction in greenhouse gas emissions over a 10-year period up to 2010. In 2007, DuPont saved $2.2 billion through energy efficiency. In the same year, its total declared profits was not much more than $2 billion.

The secret is in a simple yet powerful realization that environmental and economic footprints are aligned. When we prevent physical waste, increase energy efficiency, or improve resource productivity, we save money, improve profitability and enhance competitiveness. In fact, there are often, huge “quick wins," thanks to years of neglect. Today, the “greening industry” movement stands where the “quality movement” stood around 40 years ago. During the past 30 to 40 years, industries realized better quality can be (and often is) cheaper to make. By the same token, going “lean and green” is free – and in fact much cheaper. Lowering our impact on the environment, rather counter-intuitively, means lowering costs. I see the same phenomenon as we have observed in the evolution of our thinking about quality. Those companies who move fastest are the billionaires of tomorrow.

What do you think of Keivan's points? Have any of you incorporated green issues into your Lean initiatives? What have been the hurdles?


Understanding the Whole Enterprise

Last week, I spent some time on the phone with Jerry Harbour discussing his latest book titled The Performance Mapping and Measurement Handbook, and I asked him this question: In The Performance Mapping and Measurement Handbook, you talk about the need to develop performance maps and measures at multiple levels, starting at the higher enterprise level. Why is better understanding of the entire enterprise or the “whole thing,” as it were, so important? Here is Jerry's complete response:

Most organizations do an effective job in the “how to” of performance improvement. Where I often see them falter is in the “what to” improve part of the performance equation. This is why performance mapping and measurement is so important. Performance maps and measures, especially when developed at multiple levels, represent a systematic and objective way of identifying and prioritizing areas for improvement. Sometimes performance gains garnered at the local process level fail to translate into real improvements at the higher enterprise level. A common reason for this observed failure is the presence of unidentified throughput constraints and bottlenecks within the higher enterprise materials flow network. For example, one company implemented a very successful Lean Six Sigma effort at an upstream production site that significantly increased output. Yet at the enterprise level, those gains in productivity could not be realized because an immediate downstream transportation link that connected the production site to a needed export terminal was maxed out in terms of carrying capacity. Because the company couldn’t ship the increased output, it couldn’t sell those newly accrued gains to awaiting customers. Accordingly, the only real result from the company’s local improvement effort was increasing stockpiles of output that couldn’t be shipped or sold. This is why I always advise organizations to first take the time to better understand performance (and especially material flow) at the higher, enterprise-level right at the beginning of any local process improvement effort . As in the presented example, overall, there is very little benefit in making gains or improvements in one part of an enterprise if that gain cannot be realized or “flowed” throughout the entire enterprise.

Do any readers use performance maps? Have any of you run into the types of cross-functional or  hierarchical problems that Jerry describes?


Sustaining Lean = Long-Term Leadership

Just this month, Robert B. Camp published a new book titled Sustainable Lean: The Story of a Cultural Transformation, and I talked to him about some of the topics addressed in the book. Most Lean initiatives begin with noble intentions but often plateau or fail to maintain the gains. It’s commonly known among consulting circles that 80% to 85% of all first-time attempts at a Lean transformation fail, and I asked Robert: Why does this occur? Here is his complete answer:

Lean comes from a culture, originally developed at Toyota, that understands that plotting a strategy requires taking the “Long View” -- looking for the best long-term solution, irrespective of what might be best in the short-term.

Making a decision to launch a Lean transformation is a strategic decision. It is a life-changing transformation, the equivalent of leaving the doctor’s office with the emphatic “lose weight or die.” You can’t perform a Kaizen event or two, any more than you can lose a pound or two, and declare victory. Making the decision to embark on a Lean transformation is making the decision to change life habits, and not just on the shop floor.

What most leaders don’t understand (and, frankly, most transformation experts are afraid to tell them) is that for Lean to work, leaders have to change. Leading Lean is not achieved by hiring a well-known consultancy or appointing a Continuous Improvement Coach -- It is achieved by effective leadership from the top.

Leading Lean means learning about the philosophies of Lean and the tools that issue from them. It means changing the way in which processes are measured and goals achieved. It means being transparent and living the life before you ask others to. It means holding everyone in the organization accountable for achieving expectations. It means a lot of mentoring and coaching and going to see for yourself.

Mostly, leading Lean is about a personal commitment to change.

What do you think of Robert's ideas? Have any of you been involved in a Lean transformation that has stalled or failed because key champions have left the company or the emphasis was solely on tools?


The Best Candidates for a Kanban System?

I had the pleasure of speaking with Steve Cimorelli this month. He recently published a second edition of his book Kanban for the Supply Chain: Fundamental Practices for Manufacturing Management, and I had a lively discussion with him about materials requirements planning (MRP) versus kanban pull techniques and the importance of synchronization.

One general question I asked him was: "Which component parts or products are the best candidates for a kanban system?" Here is his answer:

Kanban works best when applied to parts with stable and repeatable demand. An effective way to quantify stability is to determine the mean (average) and standard deviation of daily or weekly demand for all parts under consideration, then calculate a “coefficient of variability” or CoV (CoV = Standard Deviation / Mean) for each part. Parts with a small CoV have more stable demand patterns than those with large CoV values. Another useful criteria is frequency of usage because frequently used parts tend to be more stable than infrequently used parts. Creating a scatter diagram of these two values on a simple Excel chart, can help you visualize where to "draw the line" on CoV and frequency rules. Finally, ABC class codes, which allow parts to be categorized according to both cost and demand, can add additional perspective to the equation. Many companies find it useful to set CoV, frequency, or other criteria differently by ABC code because A-items have a much higher impact on inventory investment than do B-items or C-items.

What do you think of Steve's advice? What type of parts or products have worked best for you in a kanban replenishment system?


Process Problems -- Just Five Types?

I recently spoke with Kicab Castaneda-Mendez, who recently published a book titled What's Your Problem? Identifying and Solving the Five Types of Process Problems, about root cause analysis and his definitions of process problems. I asked him specifically: "How is reducing process problems to just five types a breakthrough in process improvement? What are the key benefits?" Here is his complete response:

Typically, root cause analysis is taught by explaining a variety of tools that requires users to gain considerable experience before being able to apply them correctly in the proper settings. To provide practice, tools are often taught without context which results in users not knowing when to apply them. A third common condition is when problem solving is taught as a sequence of expansions and contractions, specifically in finding root causes and solutions.

By reducing all process problems to just five types based on the cause, we eliminate the need to search for what the cause is. Since these specific causes can be addressed in time-proven ways, the search for solutions is also reduced. The result is that we can significantly simply process problem methodologies to a three-step procedure:

  • Identify the type of problem,
  • Find the root cause (where it occurs -- we know what it is), and
  • Address the root cause.
We benefit in several key areas: vastly simplified teaching, learning, applying, and mentoring. Because virtually every adult has solved these types of problems using the proven techniques, we can easily create lessons that build on this knowledge without burdensome language. With training time reduced by as much 50% to 80%, students can go through multiple cycles of practice on the three-step procedure on all problem types versus at most one cycle of other methodologies on one problem.

Isn’t that what process improvement is all about: increasing quality while reducing costs and time?

What do you think Kicab's methodology? Do you think all process problems can be reduced to just five types?