Applying lean principles for SMEs

Posted on 16 May 2022 by Joe Bush

Supply chain disruptions and component shortages over the last few years have led many to suggest that lean principles may be going out of fashion. However, Tim McLean, Managing Director of TXM Solutions and author of Grow Your Factory, Grow Your Profits, speaks to The Manufacturer about how lean principles (often thought of as the domain of larger organisations), can help SMEs as they grow.

Lean principles were developed in the 1930s by Toyota and, as such, have typically been presented to SMEs from the perspective of a large OEM. The entire ethos behind process improvement, lean and Six Sigma principles (certainly for larger organisations), has always centred around cost reduction. However, while important regardless of the size of your business, this isn’t the issue keeping SMEs awake at night.

Tim has over 25 years’ experience, working with over 100 SMEs all over the world, and predominantly their raison d’être is around growth. However, as he explains, the issue for SMEs in this regard is rarely related to lack of orders, but rather their inability to manage the complexity of their business as it scales.

Lean Manufacturing

“SMEs lack the underlying strength of their business processes and don’t have strong systems for managing and developing people. As a result, the owners of the business end up overwhelmed, and get stuck on the day-to-day.

“The issue is the same the world over; visit any country and you’ll find a multitude of businesses turning over £5-20m, but not so many turning over £100m+. The reason is not a lack of sales, it’s more they simply can’t deliver them.”

The truth is that knowledge of manufacturing is not essential to starting a manufacturing business; you simply have to know your product and be able to build an effective strategy in order to sell and market it. As such, early-stage business owners will tend not to be focused inwards on their factory operations; quite understandably, their attention will be on client development and sales.

However, issues begin to occur when the business reaches the point where knowledge of managing operations is not up to the scale of the operation that exists. “It’s then that the business begins to grasp at solutions like deploying more software,” Tim adds. “Software doesn’t fix processes; software automates processes. If your underlying business processes are dysfunctional, adding software will just increase the chaos.”

SMEs – diseconomies of scale

The idea of economies of scale is that as a business gets bigger, overheads are spread over more revenue and margins go up. However, with many SMEs the exact opposite occurs, as Tim explains: “I’ve had conversations with SMEs who’ve told me that they’re doing twice as much business as they were five years ago, but in terms of the bottom line, they actually made more money when they were half the size.”

Essentially what occurs with diseconomies of scale is that variable and fixed costs grow faster than sales and profit margins decrease until eventually the business starts making a loss or runs out of the cash it needs to fund growth. This happens because, as businesses grow in size they grow even faster in complexity. As a result, it becomes harder for management to know what’s happening in the business and to keep control; costs rise, mistakes get made, efficiency falls and profits evaporate.

TXM Solutions aim to help SMEs (and businesses of all sizes) change their processes so they can deliver on time and free up business owners. Achieving this combination means the business can grow very rapidly. “We’ve had businesses that have had 300% growth in ten years; we just enable them to fulfil their potential. We help them put in place the underlying processes that are going to enable them to deliver shorter lead times, greater throughput and lower costs, and be able to manage a larger workforce effectively.

“We use tools from the lean toolbox combined with very experienced manufacturing people; almost all of whom have held previous factory leadership roles. Via the combination of manufacturing understanding, ability to influence people, change management, and the knowledge of lean, we offer a solution to help people really develop their manufacturing capability to match the aspirations they have for their business.”

Evolution of lean

As mentioned previously, lean principles began with Toyota in the 1930s, however, there is a misconception that the story of lean both starts and ends there. Lean principles are always changing and evolving, and Toyota certainly didn’t have their own epiphany in Japan and invented a system that we are now all following; they learned these methods from somewhere.

A deeper dig into the annals of history will show that Toyota studied people like Henry Ford, who himself learned how to establish a mass production line by observing an abattoir chain butchering cattle, and realised that a car could be assembled in the same way. “Lean is the collective knowledge of 250 years of industrial progress,” Tim continued. “Yes, Toyota has refined it but there’s now discussion around how lean moves forward and responds to digitalisation?”

He added that a business could invest in a machine that features the latest IoT technology, sensors, AI and machine learning; with a digital twin that replicates the machine offline. However, if that machine is not deployed correctly then the business could end up with exactly the same outcome as the legacy machine that has been replaced.

New technologies are coming and as manufacturing plants are renewed and software systems are upgraded then these new technologies will inevitably start to be deployed. The question is not around whether the technology will be available, it is more around what the manufacturer does with it once it has been deployed.

Henry Ford
Toyota studied people like Henry Ford, who himself learned how to establish a mass production line by observing an abattoir chain butchering cattle, and realised that a car could be assembled in the same way

“This is where the lean concept of the value stream (the idea of looking at a business from its customer backwards), is enormously powerful,” adds Tim. “It’s about reengineering processes to give us shorter lead times, better flexibility and lower costs. We’ve taken lean this far with what we’ve got, it’s now about how we can innovate further and enhance the process flow of the business by adding technology?

“If you look at the organisations that are the real disruptors, that’s what they’re doing. They’re actually looking at the customer value in detail, and then asking how they leverage technology to give the customer something that they can’t get at the moment?”

Tim explains that a classic example of a reengineered process can be found in customisation. Businesses that run CNC machines, for example, find that very small production batches are an issue if setup times are lengthy; a major problem if the customer wants something different every time. “Maybe the answer is metal 3D printing,” he continues. “Then suddenly, I reengineer the constraints around casting, forging or machining, and making batch runs are a thing of the past. The efficiency of making one is the same as making 100.”

Recent challenges for SMEs

There have been some underlying trends taking place within the manufacturing sector that have undoubtedly been accelerated due to the coronavirus pandemic. Twenty years of outsourcing, purely based on unit costs, has begun to be replaced in the last six or seven years, as organisations have started to look at the total cost of ownership of sourcing goods from Asia. Labour costs have risen rapidly in that part of the world, particularly in China, so businesses have started to consider the whole reshoring question.

In addition, if an organisation’s critical goods are coming from the other side of the world, then they are very vulnerable if a complete outage in the supply chain occurs, such as COVID. The pandemic brought that home to everybody, and how to manage supply chain risk has become paramount.

Tim explains that while reshoring is happening, it is more of a gradual process rather than a significant wave and is based around two key trends. The first is that reshoring is only being considered once product liefcycles come to an end. “As new product iterations are introduced, it’s then that companies are asking where their supply chain vulnerabilities are,” he adds. “Within current models it may well cost too much to change where parts are sourced. But as a new model comes online, there may be the opportunity to source more locally.”

Secondly, customers are become more demanding; they want shorter lead times and customisation options. If a product is coming from the other side of the world, or even via an external supplier, it can often involve the manufacturer locking-in a lead time that makes them uncompetitive. If more elements can be brought in-house, then time and inventory can be reduced.

Tim concludes: “Change is hard; organisations need to realise that, have patience and provide the resources to drive that change. Implementing lean will unlock the potential of your business. Dramatically shorter lead times will enable you to respond quickly to customers. Lower inventory and costs free up cash so you can invest in innovating and marketing your business.

“Empowering your team will enable the business leader time to focus on where your business is going rather than being stuck in day-to-day firefighting. If you own or work in an SME that’s struggling to grow then you need to take action.”

Tim McLean, TXMTim McLean has spent more than 20 years in operational and general management roles and has extensive experience in both Project Management and Process Improvement. Since establishing TXM he has built a strong reputation for his high-quality project management and extensive lean supply chain expertise. He started out in the 1980s implementing TQM techniques such as control charts and design of experiments before graduating to lean manufacturing consulting.

In recent years Tim’s interests have focused on the implementation of Value Stream Maps. He has successfully assisted customers to eliminate waste by improving flow, implementing pull systems, providing the stability of quality principles, and preventing overproduction and waste. These have been applied in both greenfield and brownfield sites.