Day 269 – Lean Chops and Blind Faith (continued)

          When my last company decided to go lean, they were determined to do it right. The lean project came down as a mandate from the private equity group that bought our company. This group had a heavy engineering background. Their strategy was to buy companies that were doing well in their markets—operating profitably and enjoying a respectable share of the total market—but that also had considerable opportunities for improvement. The equity guys would then begin to tweak these opportunity areas to add value to their acquisitions. They had so far done quite well with this approach.

          In my company they thought they had found an ideal combination of niche products that were well received in their respective markets, but which could be produced much more efficiently. This represented to them a very real opportunity to increase production, lower costs, increase profitability, and bump up their market share in the bargain. It all made perfect sense on paper. The execution blew them up. Why? They started in the wrong place and their timing sucked.

          If their timing hadn’t sucked, it probably wouldn’t have mattered where they started. They still would have gotten significant gains in all the areas that interested them. They started with the production end. They wanted to increase manufacturing efficiencies and boost production.

If they had started at the other end of the production line, they would have looked at their sales estimates and come to the realization that they were entering into a period when boosting production was folly. Sales were going to be flat. We already knew this from the cyclical nature of our business. Realizing this might not have stopped them, but they would at least have tried to tweak the demand before they tried to tweak production to satisfy it.

The Field of Dreams approach to marketing only works if you are building something really, really cool.

Instead they took what I like to call the “field of dreams” approach to increasing sales. That is “if you build it, they will come.” I guess you have already figured out that this only works in the movies. They did not come. In fact sales actually declined, and by a significant amount, due to unforeseen externalities at work in the marketplace. This just made matters worse.

          Selling a lean project downstream is almost always a difficult undertaking. The reason for this is that the people in the Gemba, the people who make stuff, believe in their hearts that a lean organization is going to have fewer employees. They know that some people are going to lose their jobs. It would be nice in the Gemba, where value is added, to think that the people who were going to lose their jobs would all work in the offices, where value is often subtracted. Gemba goons know better though.

They have all been through the implementation of countless examples of managerial ideas. They know that some otherwise useless director with too much time on his hands or some prima donna executive is going to want to measure product cost before and after the implementation of the brilliance du jour, and they are going to want the unit costs to go down. That they will measure product costs in an antiquated accounting model that does not understand or accommodate lean results will matter very little. When they have done their comparison, and realize that unit costs have not declined, they are going to want to trim production staff.

This may in fact save money, but it is not a very good way to get production staff to buy into a lean project. No one wants to work overtime implementing a system that eliminates their job. To do so runs counter to the very powerful instinct for self preservation. To do so would be unnatural.

          The lean believers will tell you that this is not how it is supposed to work, and, indeed, they are right. Lean is not about trimming head-count; it is about eliminating waste. When you use lean principles to figure out how to do something in less time with less material, you are supposed to redirect the saved effort into something else that adds value. There are two reasons for this. First and foremost, the objective of lean methodology is not to save money. It is to grow and prosper the company. You don’t want to just be doing the same thing with less effort. You want to be doing more with the same effort. The second reason I’ve already stated. Once you start losing heads as the result of an initiative, the poor slobs in the Gemba, who are way smarter than you give them credit for, are going to balk. Your efforts will be for naught.

What you usually want to happen is for deliveries to increase so that you are producing more with the same effort that used to produce less. This presupposes that your sales are going to increase. If your sales are not going to increase, due say to a cyclical downturn or unforeseen externalities, then your efficiency gains haven’t actually gained you anything. Your costs are exactly the same. The only difference is that the now more efficient production staff is finishing their work early and standing around waiting for the end-of-shift whistle to blow. At this point there is only one way out of the dilemma your lean project has created. I think you know what that is.

          When you do a lean project, it doesn’t matter what the gurus and consultants say about lean not meaning you are going to trim head count. They have to say this stuff to get everyone on board. They may want to mean it, but they also know how it really works. They know it only really works like they say it does when there is plenty of pent up demand to absorb the extra production. The production people know this too. That’s why they are a hard sell. The reality is, always, when sales are flat and management wants to get lean, the first thing they ask when you come to them with an idea for a gain in efficiency is, “How many people can we lose?”…the first thing…every time.

This is why you need to start at the end. Everything needs to start with a sales forecast that you can trust. I’ve never actually seen one of those—not a published one at any rate. A real, trustworthy sales forecast would be the most useful document any business could develop. It would make all the other decisions a business has to make so much easier. Virtually everything goes back to sales—everything important anyway. Decisions about inventory levels, materials and supplies purchases, staffing levels, capital investments, borrowing needs—all these depend on sales forecasts. The more accurate the forecast, the better the decisions are going to be.

The trouble is that no one in management ever wants to see a realistic sales forecast. If you give them one, they will ask you what it would look like if you pumped it up by, say 10%, or if you skewed the mix in favor of higher margin products, or if you added a new and as yet undeveloped foreign market. A sales forecast is never as good as management wants it to be, and no matter what you take them they will try to improve on it by making you quantify their wishful thinking. Then, when they finally get it where they like the way it looks, they publish it and proceed to base all their bone headed decisions on it because, well, it’s in writing, isn’t it?

          So this is what our new private equity group did. They started tweaking production to support a bogus sales forecast. They invested millions of dollars and thousands of man hours into upgrading and revamping our production lines. They had budgets for everything, and everything was coming in under budget. The various work groups were reporting quantum gains in time and through-put. We were all waiting for the money to start pouring in. It didn’t though because sales fell off. They fell off a lot.

          The production staff started looking at the finished inventory stacking up all over the place. They are not stupid. They know when inventory starts stacking up that money is not flowing in. They know that their wages are paid in money, not inventory. They know when heads are going to have to roll to keep the directors in Porsches and Jaguars. They know when the company is about to be forced into an old-fashioned kind of lean exercise—the kind where Gemba guys do not pass go and do not collect $200. So they did what production people everywhere do when confronted by the prospect of no more work. They slowed down. All the touted efficiency gains evaporated almost overnight.

The vice-president of operations and corporate lean champion had to step down. He’s the guy that my boss, Bill, threatened if he ever saw him at a stop light he would yank him out of his truck and beat the shit out of him. When he left he said, “Production is broken. I thought I could get a handle on it, but I couldn’t. It’s broke, and I don’t know how to fix it. I’m out of ideas.”

Well production wasn’t broken. It was working exactly as you would expect it to work based on the compensation model in place. Shop floor workers got paid for producing products up to the point they were producing the amount the company could actually sell. After that there were no real incentives for them to produce any more because the company didn't want or need any more. When it had all the products it could sell the company would start cutting people loose. The production staff was perfectly capable of monitoring the finished goods inventories and adjusting their output accordingly. Production wasn’t broken. Management was broken. In my experience this is almost always the case.

There is an old saw in the army that is instructive about their philosophy of training: “If the student has failed to learn, the teacher has failed to teach.” This was probably truer back in the day when grunts were grunts and soldiers were cannon fodder. A military instructor only had so much material to work with, and he had to teach them or else. ‘Or else’ meant unacceptable casualty rates. In today’s army it’s probably different—especially when you’ve got a bunch of teenage fighters sitting in a big room in Kansas operating lethal drones in Iraq and Afghanistan via remote control. I could be wrong, but I like the old saw.

I think it’s a good philosophy. The burden is on the teacher to train the student. It works better in the military where you can depend on really big and abusive drill sergeants to provide the proper motivation. I think it also should translate well into business practice. If the employee has failed to perform, the manager has failed to manage. There is the problem of proper motivation, but sound compensation plans go a long way to providing the necessary incentives.

Management needs to shoulder the performance burden. When the company falls on its face, management needs to suffer the consequences—not the production staff. When management makes bone-headed decisions, management needs to be thrown out on its ass. Everyone knows this, or seems to. You will often see a manager or two dismissed when things go wrong. BP CEO, Tony Hayward, is just the most recent of newsworthy examples.

These are just sacrificial lambs though. They are scapegoats offered up to appease the marketplace. They do not represent the real carnage of their failures. The first casualties, the most numerous and long-suffering victims of management induced downturns, are always from the Gemba—the place where shit happens.