Thursday, July 21, 2011

Lean Six Sigma revisited, part 1

Introduction

This is not your typical lean six sigma (LSS) blog. It’s not a rah-rah marketing message from some consultant trying to make a living. If you want that, there are thousands of other blogs you could read; this post is about revisiting LSS, its meaning, purpose and future. I detail my concerns of both lean and six sigma as deployed by many companies today and then I give my recommendations for improvement. 

This post is the first of two parts, in this part I will explain the reason why LSS doesn’t fit with an efficient company structure and also the foibles of lean manufacturing. In the second part I’ll discuss six sigma and my recommendations for management.

Line and Staff
 
Companies typically have some kind of “line and staff” organization. The “line” is the group primarily responsible for the operations of the company. In a manufacturing company this group would be the Manufacturing department and probably the Sales and Design departments. The “staff” group is responsible for supporting the line and includes Accounting, HR and IT. The staff group typically reports to someone at the top of the management team (e.g. the CFO). (In ISO 9001 process-speak: the line represents the Customer-Oriented Processes and the staff represents the Supporting Processes.) The line’s purpose, fundamentally, is to execute the strategies of the company with the support of the staff. These strategies often include goals and objectives measured in terms of months and years. In a relatively good company everyone knows the targets (e.g. sales growth, profit, customer complaints, etc.) and they do their best to meet the targets.

One way that a company tries to improve this situation is by adding a group responsible for “continuous improvement”. This continuous improvement group is usually your friendly neighborhood LSS team. So how does this group actually fit into the line and staff  structure of the company? Typically this group has a separate reporting structure from the rest of the company, an additional line reporting directly to the CEO. This is to show the “importance” of the group to the remainder of the company. This importance is also usually shown by spending a lot of money on outside consultants, doling out tremendous internal marketing (hats, banners, stickers, stuffed animals, etc.) and grand pronouncements of fundamental change in the organization. This activity may be further promoted with public announcements, customer presentations and large gatherings of people from various plants/locations/countries to promote the company’s good intentions. What is the goal of all of this hoopla? TO SAVE MONEY. LSS, when implemented in various ways, aims to save money. But do the management of these companies and the practitioners of these methods really understand their meaning? And do these methods really save money?

Lean Manufacturing

Lean is an adaptation of the production-side of Toyota’s management system, known as TPS. TPS is a part of their management system; it is not the entire system. That is a key factor to consider. Toyota is not successful because of TPS. Toyota is successful for a variety of factors, one of which is TPS. TPS at Toyota operates within an overall management system that is driven by a company culture. This company culture was developed over many years as a reaction to the absolute devastation of Japan during WWII and the Japanese national culture. I lived there for more than three years; Japanese culture is unique in the world. The combination of national culture, re-building from nothing and the support of American business consultants (outlined in The Puritan Gift) led to the success of Toyota and other Japanese companies. It is wrong to believe that TPS was the main factor in Toyota’s success. It was a part of it but certainly not the main part.

To try to recreate Toyota's success most companies, supported by well-paid consultants, do lean training and start marching down the road of continuous improvement. Their consultants may actually coordinate their projects or they may do it themselves. Either way, they fully believe that this is the path to cost savings. They’ve been told by their consultants (who are trying to make a living) and the authors of many books (who are also trying to make a living) that this is the way that it is done. This is the path that many, many companies have taken to more efficient operations and significant cost savings. Nobody tells them that TPS is only a part of the success of Japanese companies. Nobody tells them that these tools are backed, primarily, by a very different national culture from most other countries. Think about this. Have you ever visited a Japanese company’s manufacturing location in another country? I’ve visited several Japanese automotive OEM and Tier 1 companies in various countries; I even worked at one for a short time. What is one thing that is common for all of them, regardless of the country? There are Japanese people everywhere, mostly managers and engineers. Japanese companies know that the only way to implement their operations in a foreign country is to manage it as if it was in Japan. If lean manufacturing, or any other Japanese idea for management, was so easy to implement then why do Japanese companies run their foreign locations in this way? Because the CULTURE is the primary reason for their success and they know that. They pay an unbelievable amount of money to have Japanese people on the ground in their locations because they are not only transferring technology and knowledge to a foreign country, they are transferring their CULTURE. Lean was not developed in a vacuum and it cannot be deployed in a vacuum. Anyone who says otherwise is trying to sell you something.

So does lean, when implemented as in most companies, actually save money anyway? Let’s look at some common measures of a lean project’s success: reducing people, freeing up floor space and reducing inventory. Reducing people is an easy one, just rearrange the machines, add some additional work to a person or two and voila! Immediate “headcount reduction” and cost savings. Project closed, kaizen finished, happy ending. But, did you actually fire that person that you reduced? Probably not, you know that if you fire them that it will de-motivate the remaining workforce. So you found something else for them to do, maybe on that new line you are building…if you are building a new line. Otherwise, that person can do something else. But unless you can immediately put that person to work on some valuable activity, an activity where you would need to hire someone to do it, then you didn’t save any money by removing them from the production line.

How about freeing up floor space? That’s an interesting metric, “our project freed 2 sq meters of floor space” or something similar. This freed space is gleefully converted into currency/sq unit and fed into the cost savings measurement. The calculation is based on the building lease amount per sq unit or something similar and you have some nice tidy cost savings. But how are you actually saving any money? Empty space does not add any value to the company. Until you put something valuable into the space and use it, there is no benefit to the company at all. Did your Lease Company or bank agree to lower the monthly payment on the property by an equivalent amount? Freeing up space by itself saves absolutely no money.

Reducing inventory actually has some hard cost savings behind it. When I worked in LSS I would tell people to go out to the warehouse and see the piles of money sitting there. All inventory represents a cost to the company that has not been recovered from the customer by selling the product; just big piles of money, sitting in a warehouse. Anybody would want more of that money in the company coffers rather than having it sitting there doing nothing. The risk here is not directly financial but the indirect cost of reducing inventory too quickly. You are probably familiar with the analogy of the boat and the water. The water represents inventory and as long as it is high then the boat just sails along happily with no problems. However, as the water level/inventory level is reduced all sorts of rocky protrusions such as bad quality, machine downtime and inefficient process start to crop up and risk grounding our happy ship. Once the ship hits those rocks all of the savings from reducing inventory, and then some, is spent in expedites, scrap, rework and customer complaints. Reducing inventory levels is the LAST thing you want to do as an improvement activity. Fix all of your other problems first (including TS and customer audit findings) before you even think about lowering your inventory in any significant way; to do otherwise leads to a big risk for your company.

Summary

Companies typically implement lean without any understanding of its place in the success of the company that created it. They also track their progress using ambiguous or outright bogus cost-savings metrics. In this situation, the only people who come out ahead are the consultants and the authors. They promote and sell this mindset to managers who want to find an  easy way to fix their problems. But there are no easy ways to fix problems. The members of the line are responsible to find and fix the problems, not rely on some outside group (internal or external to the company). I'll discuss six sigma and my recommendations in my next post.