Lean Manufacturing and Your Bottom Line

By Phillip Blackerby

 

 

Introduction

By implementing these techniques, manufacturers can typically:

 

 

By implementing the Lean techniques, and achieving those performance results, a manufacturer can increase gross margins as much as 30 percent, and increase effective manufacturing capacity up to 30 percent, without more investments in plant, equipment or labor costs. This means you can make more gross profit on the things you make, and you can apply that higher profit rate to a higher volume of production!

 

Are these claims extravagant? The fact is that manufacturers all over the world—large, medium and small—are implementing Lean Manufacturing and achieving these results. Probably some of your competitors are marching down the Lean pathway.

 

For example, a 94-person machine shop in Arlington, Texas, saw $500,000 per month in billings as a "stretch goal." After implementing Lean techniques, they cut their workforce to 67 and billed $500,000 a month routinely! Lead time fell 87 percent, and value-added per employee increased 175 percent. More importantly, they stayed on an aerospace original equipment manufacturer’s (OEM) vendor list while thousands of other vendors were cut; later they picked up more work and expanded their work force to 85 over the next few years.

 

Using lean manufacturing just to reduce head count (click for more information) is rarely the right thing to do, but it was necessary in this case because (a) 80 percent of the company's business was with one customer (never a good situation!) and (b) the company was rapidly exhausting its cash. A better alternative would have been to apply its new, higher gross margin to an even greater level of sales. By launching a marketing initiative at the same time as it launched its lean initiative, new sales would have appeared, sopping up the company's newly-found excess manufacturing capacity just as it emerged. Profits, in both percentage and absolute dollar terms, would have shot up even more significantly.

 

Some companies continue their lean journey over a long term, and consistently generate two percent productivity improvement every month. Compounded, this rate of improvement translates to a 400 percent improvement over six years!

 

 

 

  • Increase productivity up to 30%
  • Reduce work-in-process (WIP) inventory up to 90%
  • Reduce space requirements up to 40%
  • Improve quality up to 80%
  • Reduce lead time up to 90%

 

 

Lean Outcomes and Your Bottom Line

Let’s examine what these results mean more closely:

 

Productivity is easy to see. An increase in productivity means you create more manufacturing capacity without having to add more labor or machines. You can produce more with what you’ve already got. Productivity increases because people stop doing things that add no value to the product, like looking for tools and parts, setting up machines on-line, waiting for work, transporting work from station to station, overproducing, etc.

 

WIP is a form of inventory. Inventory is inherently evil, because it adds to cost, but not to value. Reducing WIP means:

 

 

 

  • You reduce inventory, giving you a one-time permanent increase in cash flow.
  • Working capital needs drop, so you borrow less from the bank at 10-14% interest.
  • You don’t need a place to put WIP, so space requirements decrease, at $8-12 per square foot; those savings may not be money in the bank, but it means you can expand production without moving, or consolidate scattered sites.
  • No one will trip over the WIP, so injuries, damage, scrap and rework decrease.
  • The parts don’t become obsolete, so sunk production costs aren’t wasted.
  • The WIP no longer rusts, cures, tempers or gets dirty, so production is easier, quality is better and customers are happier.

 

 

 

Overall, annual inventory carrying costs are about 25% of the inventory value.

 

Space requirements fall in part because you have less inventory on the floor, but also because your machines are closer together, work areas are more compact and less room is dedicated to walkways and storage. Space savings may not directly accrue to the bottom line, but if you feel cramped now, you won’t have to move to a new plant as soon, saving moving costs, down-time and aggravation. If you have additional facilities off-site, you may be able to consolidate, and eliminate some cost. The Texas machine shop discussed above converted an inventory storage area to an employee break room, contributing to a reduction in costly turnover!

 

Quality is a given today. OEMs don’t accept less-than-perfect products, and don’t order from sub-par producers. Lean Manufacturing techniques result in products that meet quality standards, and at less cost for inspection and rework. Those involved in Six-Sigma, ISO 9000 or other quality programs will find that Lean Manufacturing is a valuable adjunct to those efforts; in many cases, Lean Manufacturing makes your quality program easier to implement.

 

Lead time is the total time between customer order and product delivery. Henry Ford said: "One of the most noteworthy accomplishments in keeping the price of Ford products low is the gradual shortening of the production cycle. The longer an article is in the process of manufacture and the more it is moved about, the greater is its ultimate cost." (1926).

 

Cutting lead time has several benefits:

 

 

 

 

Gross margin is the difference between net sales and cost of goods sold, including both labor and materials, divided by net sales, and expressed as a percentage. A successful manufacturer will have a gross margin of at least 60%; this money will then be used for sales and marketing expenses (advertising, sales commissions, etc.), general expenses (rent, utilities, insurance, etc.), administrative expenses (management salaries, consulting, accountant and legal fees, etc.), interest on long-term and working capital debt, taxes, depreciation of plant and equipment and, of course, profit.

 

By implementing Lean Manufacturing techniques, a manufacturer creates additional manufacturing capacity. Management can choose what to do with this capacity: it can slough it off to reduce cash outlays, or it can increase sales to sop up the excess. Most companies do some of both. Whichever choice is made, gross margin increases.

 

A higher gross margin opens up new strategic choices that a company may have never considered before. With a higher margin, a company may:

 

 

 

 

 

  • Develop new products, tap new markets
  • Reduce prices, capture market share
  • Invest in productivity improvement
  • Invest in technology, training
  • Pay employee bonuses
  • Harvest the business
  • Buy tax-free bonds
  • Get off the grid
  • Pay a dividend
  • Pay off debt

Lean manufacturing is not about doing more with less; it’s about doing less with less. Most manufacturers measure their lead time in weeks, but they can measure the actual amount of time spent producing a product in minutes. Typically, actual production time is less than five percent of the total time a product spends in the plant. The difference between actual production time and total lead time is a symptom of the wastes in a plant.

 

Lean Manufacturing recognizes eight types of waste, and the Lean Manufacturing techniques help manufacturers find and eliminate these eight wastes:

 

 

 

 

None of these eight wastes involves the addition of value (form, fit or function) to the product. Lean manufacturing does not focus on making the value-added functions more efficient; it focuses on eliminating, streamlining, simplifying, reducing or integrating the non-value-added functions. It fixes the 95 percent of the factory’s lead time that is waste, not the five percent devoted to production.

 

 

 

 

  • Overproduction of work in process
  • Waiting
  • Transportation of parts/materials/tooling
  • Non-Value-Added processing
  • Excess finished inventory
  • Defects
  • Excess people motion
  • Underutilized people

"We’re already pretty lean; we laid off three guys just last week!"

None of these eight wastes involves the addition of value (form, fit or function) to the product. Lean manufacturing does not focus on making the value-added functions more efficient; it focuses on eliminating, streamlining, simplifying, reducing or integrating the non-value-added functions. It fixes the 95 percent of the factory’s lead time that is waste, not the five percent devoted to production.

 

Lean Manufacturing Techniques

So what are these magic bullets that comprise Lean Manufacturing? Fifteen basic techniques help manufacturers eliminate the eight kinds of waste:

 

Awareness training is the first step in the Lean Manufacturing journey. A good awareness-building training course will introduce management and workers to the key concepts, the eight wastes and the basic tools in the Lean toolbox, and provide them a vocabulary for discussing manufacturing improvements within their teams.

 

Value Stream Mapping (VSM - click here for more information) is a basic planning tool for identifying wastes, designing solutions and communicating concepts. This graphic language helps the management team:

 

 

 

 

 

  • Identify each value stream;
  • Describe the entire value stream ("current state") in a way that is easy to see;
  • Measure inventories, flows and constraints;
  • mIdentify opportunities for improvements;
  • Describe how the value stream will function after implementing the major solutions ("future state"); and
  • Describe an implementation plan that will move the company from the current state to the future state in a rational manner.

The order in which the remaining tools are implemented will depend on the company’s implementation plan, and will vary depending on a specific plant’s needs.

 

Standardized work is a process of documenting and standardizing tasks throughout the value stream. Most companies have "native lore," or undocumented ways each machine works and each product is made. Some operators do it one way; others another. The result is product variability, high training costs, downtime due to absenteeism, and managers who don’t understand why products don’t get to shipping. By standardizing work throughout the plant, products are replicated precisely, regardless who makes them, training costs are reduced and cross-trained employees can substitute for each other.

 

5-S workplace organization and standardization eliminates all the clutter ("Sort"); organizes each workplace for maximum efficiency ("Set in order"); cleans the workplace ("Shine"), inspecting equipment as it is cleaned; establishes "Standards" for workplace tools, inventory and processes, ensuring a continuous state of readiness; and establishes cultural norms to "Sustain" the workplace standards every day, indefinitely. The first three steps are fun and easy; the last two are more difficult and more valuable.

 

Visual controls are visual signals that give each operator and manager the information needed to make a right decision. They may be simple: lines delineate walkways; color coded waste bins; graphic instructions at each work station. They may be more sophisticated: "andon" lights show the status of each machine; asymmetrical parts can be assembled only one way; "Are you sure…?" warnings before deleting computer files. Visual controls reduce training requirements, overcome language barriers, increase safety and prevent variability and defects.

 

Mistake proofing is a series of techniques that prevent quality problems from emerging ("poka yoke"2 "avoiding inadvertent errors"). When parts are asymmetric, and fit together only one way, an operator cannot assemble them incorrectly; a kill switch prevents boxed products from running off the end of a conveyor; only right-sized products can fit through a screening process.

 

Plant layout techniques focus on eliminating transportation waste. Machines in a production sequence are linked together; resources needed for production are close-at-hand. A better layout reduces movement of people and resources; reduces WIP; improves product flow and communication among operators; and maximizes the capacity of machines, floor space and material handling systems.

 

Teams become self-managed. Lean value streams abandon traditional command-and-control systems, and even hub-supervisor team structures, in favor of self-managed teams. Nominal supervisors become facilitators, negotiating between the team and upper management. Managers learn to earn trust; promote and reward participation and "almost rights;" sell rather than tell; share ideas rather than control information; and provide training and systems that help operators complete work successfully. Workers seek out cross-training; actively participate in teams; propose ideas and take risks; make decisions and mistakes; share responsibility for implementing changes; and support continuous improvement as a cultural norm. Self-managed teams improve camaraderie and morale, and keep the organization aligned and focused on shared strategic goals.

 

Teams are where the cultural change generated by the Lean journey is most evident. As Lean concepts permeate throughout the organization, a profound culture change will occur: long-term patterns of behavior are disrupted, relationships are adjusted, values are re-examined, and value is redefined. This cultural change will cause conflict and disharmony, until new values and norms are established, accepted and practiced. A manager must be alert to these changes, and take action to deal with the issues that come up. Key elements for success include ongoing and personal commitment by the CEO and the entire management team; training and support; recognition of champions; tolerance for experimentation and pilot-testing; regular and frequent communications that share information organization-wide; multiple communication channels up and down the hierarchy; one-on-one attention to participants in disruptions; respect for people’s rights and experience; and empowerment at the lowest appropriate level.

 

Point-of-use storage puts small amounts of parts, supplies and tools at each workstation. This approach eliminates trips to and from central inventory storage areas and tool cribs, and keeps workplace clutter away. It gives operators a sense of beginning and ending to work, and helps the organization develop just-in-time supply systems.

 

Quality at the source places responsibility for meeting customer specifications and standards at each point of manufacture. To start, companies measure, communicate and reward high quality at every step in the process. They give each operator the training, tools and documentation to produce a quality product, and to inspect it against the specifications and standards. Managers empower subsequent operators to detect and reject non-standard products. Ultimately each manufacturing step is designed to make non-standard production virtually impossible. Even where human factors present opportunities for failure, process and product designs detect abnormal situations and intervene to prevent errors, to "mistake-proof" the process. When implemented fully, the value stream may completely eliminate non-value-added inspection and rework steps.

 

Total productive maintenance (TPM) goes beyond preventative maintenance, to optimize the operation of equipment. TPM brings together maintenance personnel, engineering staff, management and machine operators in a process to document and analyze machine performance, identify the root cause of performance issues, implement corrective actions, establish communication channels among all four parties, and empower all participants with a shared responsibility for equipment performance.

 

Set-up reduction (quick changeover) techniques can reduce down-time due to product changes by up to 90 percent. It allows the value stream to devote a greater percentage of time to actual value-added production; quality improves and scrap falls as fewer trial processes produce fewer defects; and the value stream gains flexibility; as the cost of set-ups falls, changeovers can occur more frequently, and products can be produced more to customers’ schedules than to machine schedules.

 

Batch size reduction is closely related to set-up reduction. As set-up times are reduced, the optimum economic order quantity (EOQ)—or batch size—may also be reduced. Smaller batches can get through the production process more quickly, reducing WIP and its carrying costs, and increasing throughput. Quality problems appear earlier, and consequent rework needs are smaller. Batches can be reduced to reflect customer order patterns, reducing finished goods inventory and related carrying costs.

 

Cellular manufacturing uses the "Leanest" batch size—one-piece-flow—where each operator makes one product and passes it directly to the next operation. With a carefully designed and calibrated work flow, cellular, or "flow manufacturing," can eliminate virtually all WIP and its carrying costs. Inside a U-shaped manufacturing cell, operators can move easily among steps, regardless of the production sequence. Creating a cell requires grouping functions based on the machines and other resources required; measuring the process time for each step ("cycle time"); sequencing the steps for efficiency; recombining steps to balance production station times; and designing the cell.

 

Pull manufacturing is a higher-level implementation of cellular manufacturing, where the pace of production is determined by the customer demand rate ("Takt3 time"). When you know how the rate at which customers demand a product, you can design the manufacturing cell to produce products at precisely that rate, with small, controlled inventories between each work station. A product "pulled" from the small finished goods inventory at the end of the cell sends a signal ("kanban4") that a product has been withdrawn. The last operator then pulls a nearly-finished product from the previous inventory, processes it, and replenishes the finished goods inventory. By pulling that nearly-finished product from the previous inventory, the operator sends a signal to the previous operator that a nearly-finished product has been withdrawn. That operator then pulls a less-complete product from his previous inventory, processes it, and replenishes his subsequent inventory. This continual pull-and-replenishment process repeats back-to-front throughout the cell. The overall effect is that products are produced only when customers demand them, and they are produced without backlog, at the same overall rate that customers require them. This approach eliminates overproduction waste, and controls WIP at a maximum level, just enough to fill the product pipeline throughout the manufacturing cell.

 

 

 

 

 

Lean Manufacturing Techniques

A recent development is the "Lean Office." With a few word substitutions, Lean techniques may be applied to front-office (management, marketing, sales, human resources, etc.) and back-office (accounting, purchasing, payables, receivables, etc.) operations: for "product," substitute "decision;" for "inventory," substitute "backlog."

 

Opportunities for improvement may be as great in the office as on the factory floor, particularly at points where the office functions interact with plant floor personnel. An easy way to gauge the potential is to compare the portions of overall lead time attributable to office and plant floor functions. More precise measures can come from the VSM process.

 

 

 

 

 

Lean Manufacturing is about eliminating eight key wastes from throughout the manufacturing process. The Lean Manufacturing toolbox includes 15 key techniques. The journey begins with awareness training and value stream mapping. Implementation should begin with the foundation tools: standardized work, 5-S, visual controls and plant layout. Then proceed to the more difficult: mistake-proofing, teaming, point-of-use storage, set-up reduction and batch reduction. Ultimately implement the more complex tools: quality at the source, total productive maintenance, cellular manufacturing and pull manufacturing. In time you will create the Lean Enterprise.

 

The Lean journey has no destination; it is a journey of continuous improvement. Along the way you will learn new things about your company, about your products, and about your suppliers, customers and competitors, adding to the richness of your business.

 

The Lean Enterprise will be a much more valuable company. It will have higher profit margins, and be able to choose its own strategic destiny. It will have almost no inventories, giving it the flexibility to respond to changes in customers and markets. It will grow, because it has the competitive advantage of a short lead time, and the financial resources to invest in new products and processes. And it will keep improving at an ever-faster rate, because it embraces continuous improvement.

 

 

 

 

 

 

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.

 

 

 

 

 

1Phillip Blackerby is a Principal with Blackerby Associates, Inc., Phoenix, which helps organizations transform into high-performance enterprises. Blackerby Associates are experts in management and organizational development, and provide a single source for organizational transformation services. Mr. Blackerby has provided consulting services to manufacturers and others for over 12 years, and developed training programs for manufacturers and consultants at the National Institute of Standards and Technology. He managed finances, process improvements and planning systems for government agencies in Texas and Washington, D.C. He earned a Master of Public Affairs degree from the LBJ School at The University of Texas at Austin, and a bachelor’s degree in economics (honors) from Brown University, Providence. He has three daughters and dotes on his two grandchildren. Mr. Blackerby may be reached at 602-908-1082, Phillip@BlackerbyAssoc.com, or the web site: www.BlackerbyAssoc.com.

 

2Japanese: poka 「ポカ」(also poke「ポケ」): inadvertent errors; yoke「ヨケ」: from yokerie「除けりえ」: to avoid.

 

3German: der Takt: beat; pulse; cycle; stroke.

 

4Japanese: kanban「看板」: signal; sign; signboard; poster.

 

 

 

 

 

 

Summary

Using Lean Manufacturing to Reduce Head Count

 

Lean Manufacturing techniques help manufacturers eliminate waste. Lean boosts a manufacturer’s gross margins and increases effective manufacturing capacity. These bottom-line improvements enable the company to make new strategic choices.

 

Lean Manufacturing will root out the eight wastes and help you to re-think every aspect of your business. It need not stop at the factory floor; much of the potential improvement may be in office operations, and in the interface between the office and the plant floor.

 

As you proceed down the Lean path, the entire culture of your organization will change. People will begin to work in self-managed teams, and workers and managers will find new roles and new ways of relating to each other. Everyone will be both individually and collectively responsible for product quality, cost and timeliness. Everyone will look for ways to improve the company. Everyone will participate in the rewards of success.

 

The Lean path is rewarding, but it is not an easy or a short path. The rewards can begin to appear quickly, but they require positive action. The company that fails to implement Lean will find itself falling behind, as competitors pass it by. More than a survival skill, Lean Manufacturing is a way to face and overcome the pressures of global competition.

 

 

 

Lean Manufacturing techniques help manufacturers eliminate waste. At the National Institute of Standards and Technology, Lean Manufacturing is: "A systematic approach to identifying and eliminating waste (non-value-added activities) through continuous improvement by flowing the product at the pull of the customer in pursuit of perfection."

 

 

 

  • The faster you convert orders to cash, the less working capital you need, reducing that 10-14% loan at the bank.
  • Faster throughput—the primary way to reduce lead time—means you have less WIP lying around, and therefore lower inventory carrying cost.
  • Faster throughput may allow you to order raw materials just-in-time, further reducing inventory carrying cost.
  • Faster throughput may allow you to quit tracking the status of some orders, and turn off parts of your enterprise resource planning (ERP) system, saving data entry time and computer system costs.
  • Faster delivery to customers can be a significant competitive advantage in some markets, allowing you to gain market share.
  • Faster throughput gives customers less time to change their specifications, orders and minds.

Lean Manufacturing Definitions

Lean Manufacturing Outcomes

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Updated June, 2017