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Blackerby Associates

Using Lean Manufacturing to
Reduce Head Count






Not-for-Profit &

Companies that use lean manufacturing just to reduce head count have limited their opportunity to profit

Lean's primary effect is to uncover "hidden" capacity in a plant; that is, a lean plant can produce more product with the same resources than a "traditional" plant. Thus, the lean plant has a higher gross margin (net revenue less cost of goods sold, as a percentage of net revenue).

By reducing head count, the company recognizes only a part (the labor and scrap rate portions) of its higher productivity, but it leaves excess machine and space capacity on the plant floor. The smaller leaner company is therefore applying only a part of its higher margin against its current sales base.

A better option is to apply all of the company's higher margin to an even higher level of sales. When a company launches a lean manufacturing initiative, it should simultaneously launch a marketing initiative. With management commitment and good scheduling, both initiatives should mature at the same time, and new sales will show up (just) in time to sop up the newly-uncovered excess manufacturing capacity. The message of this marketing initiative might be faster lead times: "Competitors quote 3-4 weeks lead time; Lean Inc. can now deliver in 3-4 days!"

An enterprise-wide approach to lean transformation looks at the entire Profit & Loss statement, not just labor costs.