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.”…
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: https://www.velocityschedulingsystem.com/standing-on-the-shoulders-of-giants-by-eliyahu-m-goldratt/
And here is one that shows when TOC, Lean and Six Sigma are used together, they get better results than Lean by itself: https://www.velocityschedulingsystem.com/theory-of-constraints-lean-and-six-sigma-tls-better-results-together/
Wishing you success,
Dr Lisa Lang
P.S. FOR CUSTOM JOB SHOPS ONLY: What to improve your scheduling? –> Velocity Scheduling System Coaching Program.
I heard a talk a few years ago where the subject was; Lean is very difficult. Most companies that try fail and most that think they are successful are delusional. That got me thinking. After nearly 30 years of working with and consulting with Lean & TOC & Six Sigma & whatever else, I believe that there are 5 basic reasons for the failure and delusion.
1. The primary focus must be on people and culture change. Toyota develops people that happen to make cars. Minimal benefit occurs if the focus is on (Lean, TOC, etc.) tools and techniques.
2. Management must have a vision of where the company is going and how Lean, TOC, etc. is an integral element in helping to get there. Just doing any initiative because “it’s the thing to do” is a recipe for failure.
3. The Management/worker relationship must change in some specific ways. Many managers feel that it’s a shop floor thing and as long as they tacitly support it, they can continue doing what they have always done
4. Management must deal with resistance and also may have to correct some fundamental business practices. These inhibit progress if ignored.
5. All involved must follow through on commitments and actions. It is too easy to push working on the business in the rush to get product out.
We now sit down with the management team of a company and discuss these issues prior to going on the shop floor
For emphysis T, I, OE as key measurement, we repeat and repeat to establish the module into people’s mindset (less chance to insert it into their decision processes in China, Taiwan also Hong Kong).
Those who in-charge to make strategy and tatics are used to apply their experience while facing critical time …..then things become complicate:
1.Experience told them cut direct labour headcounts for instant (paid salary by day, week, month) labour cost saving (terribly they treat it as OE down wrongly). The board support them for resolving short term finance figures. The peak season is ahead the skill direct labour (workers and operators) will become the manufacturing process constraint and foresee immediate cost huge to pull them (even new recruitment cost so too) it may eat back all previous cost saving by cut headcount plus premium return.
2.Experience also tell them how to jump up for Sale amount by offering attractive price and never try to consider calculating Throughput. I tried to formulate a group of sales people last Friday on this hopefully they can ask more questions than just sit back to count how much gain / loss on their commisions.
3.TOP management seriously awared the critical situation then decided to cut “I” by 30%-50%, in this project we are meeting the grant challenge. All the people in the industires / manufacturing sites are less idea on bank business and the financing scales especially in these areas after good GDP growth.
I just share my working situation with you and other TOC friends for firming thoughts and improvement.
Keep in contact!
All the best, Joseph
When I hear stories of outlandish lean achievements, I always want to see the ‘beef’, but it is often lacking because reality and perception are out of balance. Those folks don’t like to chart their KPI’s because they are usually hiding from the truth.