ATTENTION CUSTOM MANUFACTURERS. This demonstrates how lacking and ineffective lean manufacturing is without Theory of Constraints as a focusing mechanism.

PRESS RELEASE: DETROIT (Sept. 28) – Most large manufacturers last year failed to reach their cost-savings targets, despite significant investments in “lean manufacturing,” “Six Sigma” and other productivity programs as part of their overall retrenchment efforts in this tepid economy.  Nearly 70% of manufacturing executives say that their manufacturing-improvement efforts led to a reduction in manufacturing costs of less than 5%, the typical minimum threshold for successful productivity programs.  That’s according to a survey of manufacturing executives conducted in May and June by AlixPartners, the global business-advisory firm.

According to the survey, 36% of respondents indicated that their cost savings due to productivity efforts were 3-4% of total manufacturing costs, while 18% said their savings were less than a paltry 2%.  Fully 14% of manufacturing executives said they didn’t even know how much they were saving through their productivity-improvement efforts.  Yet, illustrating a gap between industry perception and reality, 91% of the respondents described their improvement efforts as “very effective” or “somewhat effective.”…

Jeff Moad from Manufacturing Executive said about the study:

But the study also found that 91% percent of respondents judged their continuous improvement efforts “very effective” or “somewhat effective.” Interestingly the study describes this result as “illustrating a gap between industry perception and reality.” It may, of course, be possible that manufacturing executives believe their companies are getting more out of lean and other continuous improvement programs than cost reductions.

In fact, there are reasons for skepticism about the study’s findings. Besides the small sample size, the survey does not seem to have compared the cost savings and other benefits experienced by companies pursuing lean with those experienced by companies not pursuing lean and other continuous improvement initiatives. Also, the study seems to focus primarily on cost reductions without looking at other benefits of continuous improvement programs such as quality, customer service, and cycle time improvements.

What do you think? Is the tendency to judge lean based mainly on cost savings misplaced? How should manufacturers be measuring the benefits of lean and other continuous improvement initiatives?

Here was my response:

In Theory of Constraints we measure POOGI, process improvement initiatives by considering:

1. Throughput — did T go up? (T is sales minus raw material, outside processing & sales commission typically). Did we uncover capacity and then use that to sell more with the same people and resources? Are we using less or cheaper raw material, outside processing or paying less sales commission?

2. Operating Expenses — did OE go down? (OE are the fixed cost and include direct labor.). Did we really reduce our costs? Did we fire someone (yuck)? Did we reduce the amount of scrap? Did our fixed costs in some way?

3. Investment/Inventory — did I go down? (I is the money we have tied up in the system.) Did we reduce our raw material, WIP or finished goods inventory?

And, of course we want T to go up and for OE and I to reduce. But OE and I can’t go to zero nor would it be good to be that lean. So we tend to focus on T.

And we want that while maintaining or improving due date performance, quality, and lead-times.

I also think that Lean is sometimes applied where the starting conditions for lean to work are not met making it difficult to implement. According to Taiichi Ohno (inventor of the Toyota Production System from which Lean is based), for Lean to improve on-time delivery — the processes, products and load must be stable for a “considerable length of time”. And while this is true in the car industry — who only allow model changes once a year – this is not the case in many custom job shops and machine shops.

Here is an article that Dr Goldratt wrote that I think you’ll find interesting. It describes the evolution of Lean and Theory of Constraints and also the starting conditions required for them to work:

And here is one that shows when TOC, Lean and Six Sigma are used together, they get better results than Lean by itself:

Comments?  Questions?  Suggestions on this topic?  Post them below.

Wishing you success,

Dr Lisa Lang

President, Science of Business

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