Business as unusual

Posted on 15 Feb 2010 by The Manufacturer

Anand Sharma on how one manufacturer used lean to succeed during the global business meltdown

A multi-billion dollar company.

Forty three manufacturing facilities.

Thousands of employees.

Enter the global economic recession and severe market declines.

Revenues fall.

But for this company, which has elected to remain
anonymous for now, here’s where the story gets interesting.

Sales only fall by around 5%. And earnings for each quarter of 2009 improved by 35% or more over the same period of the previous year. The company even broke its quarterly earnings per share record, twice.

How did it accomplish that? Good question. It wasn’t easy. Changing the direction of any large corporation with so many constituencies and vested interests is excruciatingly difficult. Nobody takes ownership of systemic problems. Every shortfall is blamed on “corporate,” inexorable market forces or, worst of all, the customer. The discipline to uncover process abnormalities and fix them is pretty much non-existent. The problem, in short, is cultural. The
end result: revenues fall, profits evaporate, panic
ensues and costs are slashed with scant regard for
the long term market impact.

Like a lot of multinational manufacturers, this company had been applying lean manufacturing and Six Sigma tools to reduce costs in various areas of the business for a number of years. Kaizen events — highly focused initiatives that pull together individuals from various parts of the organisation to tackle a specific endemic problem — had repeatedly generated some impressive operational improvements. The impact, however, was mostly isolated to a single factory, value chain, or business line. Double-digit cycle time, lead time and labour hour reductions that sounded hugely impressive during the report outs at the end of the week long events never seemed to trickle down to the financial statements.

Like most process improvement methodologies and tools, which tend to go in and out of fashion with changes in management, kaizen events are really a means to an end. They can generate a lot of excitement because participants are finally able to fix and streamline wasteful processes that they’ve had to work around for years. But no matter how successful, a single kaizen event or Six Sigma project rarely has a huge impact on an entire operation or business.

Best results in worst year
Frustrated by the lack of financial results, senior executives at our exemplar company realised that something important was missing from their approach
to implementing lean. Their situation at the time was
no different from that faced by thousands of other
corporations around the world that have grown
successfully by consistently supplying reasonable
quality product to their customers. They had done a
decent job of keeping up with production technology
and good manufacturing practices, but had reached a
sales and earnings plateau that tended to rise and fall
with overall business conditions.

Taking advantage of the financial crisis that was just beginning to materialise, executives stepped back and performed a detailed analysis of the strategic direction of their businesses – highlighting weak spots and identifying strengths and opportunities. They then selected the few opportunities that would have the greatest financial impact on the business, re-aligned their improvement efforts accordingly, and stopped all work that would not have a direct impact those opportunities. In large part these projects centred on being able to profitably fulfill lower volume orders and manufacture more customised and innovative products. Less than a year later, having grabbed market share from their less agile and financially hobbled competition, they have recorded some of the best financial results that they’ve ever achieved, and they did it during the height of an economic downturn.

A company is not lean because it has applied 5S, rapid equipment changeovers, one piece flow, U-shaped work cells, kanban, standardised work, root cause problem solving or any of the many other process improvement tools. A lean enterprise leverages such tools and methods to consistently
achieve financial results that defy the overall market
climate and conditions. Very few companies have
achieved such results on a consistent basis. We can
now add one more name to that select list. Perhaps
it’s one of your competitors.