Why is it that the companies where traditional accounting thinking dominates and high machine utilisation is the order of the day are always the same companies with excessively high inventories and long production lead times?
Think of one of your single piece flow cells. Are all the machines in the cell highly utilised? Of course not. The only machine in a single piece flow cell that is fully utilised is the bottleneck machine. All the other machines in the cell are under utilised. This is exactly what facilitates flow. As soon as you try to fully untilise all the machines in a cell, single piece flow becomes impossible. You are then back to the very situation that existed before you set up single piece flow: no flow, high inventories, long lead times.
So, high machine utilisation impedes flow. And when flow is impeded, material accumulates. And when material accumulates, work in process inventories skyrocket. And when work in process inventories skyrocket, lead times get very long.
Traditional accounting thinking that insists on high machine utilisation drives the wrong behavior. It drives up inventories which depletes the company’s precious cash reserves. It also increases production lead times which robs the company of the chance to delight customers with short lead times and world class delivery.
Driving high machine utilisation is outdated thinking. Pursue it at your peril.
I’m letting Gugu go early on Friday, my wife said. Why, I said. I just can’t stand to see her sitting on our couch (sofa), my wife said. Well, has she finished all her work, I asked. Yes, my wife replied. So, what’s the problem, I asked.
Gugu is our domestic worker (or maid). She is employed to clean and tidy our house and wash and iron our clothes (one of the perks of living in South Africa is that we enjoy a standard of living far above that of our equivalent income earners in most of the Western world). Gugu is an efficient worker and frequently finishes her work early. She will then make herself a cup of tea and sit on the couch and read a magazine. This irks my wife. She is frustrated when she sees Gugu idle.
Don’t laugh. We react similarly when we see workers idle in our factory. We get so uncomfortable that we will do anything to keep them busy. How often do you find production has dumped a glut of excess labor into an assembly cell? So instead of a perfectly balanced cell using three operators, you find seven operators falling over each other trying to get more work out. What is the problem with this you might ask. Three immediate problems come to mind: Firstly, even if the total output is increased, the productivity per person usually drops which actually increases the unit cost of each assembly. This is even before one has costed for the increased risk of defects due to deviation from single piece flow. The third problem with keeping idle operators busy in this fashion is that it actually hides spare labor capacity. When operators are busy, we believe we have no spare capacity. However when operators are idle, the spare labor capacity is visible and therefore more likely to be used productively elsewhere.
So the next time you catch your domestic maid asleep on your recently purchased dark leather sofa, don’t admonish her for not keeping herself busy. Congratulate her for completing her work timeously, and find some other value adding work for her to do like filing, cooking or spring cleaning the garage. Similarly when labor capacity becomes available on the factory floor, don’t squander it. Instead, measure it, make it visible, and use it productively. If all else fails, seat all the idle operators on a “reserves bench” and call Sales to the floor to show them that you need more orders to keep your people busy.
Consultants irk me but Lean Six Sigma consultants irk me even more. I can’t help feeling that all they have done is hijack some of the Lean tools to dress up their skeletal fad with a little meat to make it more appetizing to their statistic-phobic clients.
The more I grow to understand Lean, the more I see that it mixes with Six Sigma no better than oil with water.
Six Sigma is about statistics. Lean is about people.
Six Sigma is about historical data. Lean is about current facts.
Six Sigma is about sitting behind a computer. Lean is about going to the gemba.
Six Sigma is about reducing variation. Lean is about reducing the timeline.
Six Sigma is a tool. Lean is a philosophy.
Six Sigma is an method. Lean is a set of principles.
Six Sigma is about teaching people to do statistics. Lean is about teaching people to think.
As Freddy and Michael Balle have so poignantly put it: “At the end of the day, although a lean plant is easily recognizable, no one has ever seen a Six Sigma plant”.
Many companies begin their Lean journeys by setting up a few manufacturing cells (some even with a semblance of single piece flow) or changing the plant layout or filling the factory with charts and whiteboards. Cost reductions (often achieved through the reduction of labor) are then offered as evidence of their Lean achievements. Whilst these efforts are well intended (and even commendable in some cases), they are not Lean.
Lean is often misunderstood to be a cost reduction exercise. Lean is actually a growth strategy. It works by freeing up labor, machines, space and cash (through reduced inventories). Freed up labor and machines creates spare capacity. This spare capacity allows for sales growth at increased profitability (the labor and machinery is free). Freed up cash can then be used to buy more machines which can be located in the freed up space and operated by the freed up labor. This creates even more capacity which allows for further sales growth.
Lean is about doing more with less. So, if you are doing Lean, your sales should be going up and your inventory should be coming down. The single metric I therefore like to use to assess a company’s “leanness” is inventory turnover (calculated as sales divided by inventory). If your sales (the top number) are going up and your inventory (the bottom number) is coming down then your inventory turnover will be climbing steadily, indicating Lean success.
If you were required to move a library from one building to another (and retain the precise order of the books on the shelves), how would you go about it? Would you make a human chain of school children between the buildings and pass one book at a time from child to child? Or would you unpack the books from the book shelves into boxes; carry these boxes to a truck; load these boxes onto this truck; drive this truck to the neighboring building; offload the boxes from this truck; carry these boxes into the new library; and unpack the books from these boxes onto the new book shelves?
If any of you are not convinced that “single piece flow” is faster than “batch and queue”, take 9 minutes to watch this demonstration.
Don’t you just hate reaching for the toilet paper after a visit to the loo and discovering the empty cardboard core of the toilet roll? You’ve just run out of toilet paper. A frantic glance behind you reveals that there is no spare toilet roll on the top of the cistern. What follows is a delicate (occasionally naked) crab-walk out of the bathroom, down the passage, to retrieve a fresh toilet roll from the linen cupboard, followed by an equally awkward return leg before you can complete proceedings.
Why are you once again finding yourself in this predicament? Because there is no spare toilet roll on the cistern. Why? Because no-one replaced the spare when it was last promoted from the cistern to the toilet roll dispenser? Why? Because it was not obvious that it needed replacement.
Here’s my counter measure: Make it obvious that it needs replacement. I haven’t had to perform the crab walk since.
Following a recent Lean Accounting seminar in Johannesburg delegates were left feeling that, in order for Lean to be successful in their companies, a paradigm shift in how they think about accounting was required. One of the most counter intuitive ideas presented was that you do not need to know your product cost.
Product cost is typically considered necessary for one or more of the following reasons:
- To set product price;
- To value inventory;
- To identify which product to target for cost reduction efforts.
Brian Maskell argues that product cost is unnecessary in each of these instances:
Firstly, price is related either to what the customer is prepared to pay for your product (ask any salesperson) or to the perceived value of that product to the customer. It is not related to product cost.
Secondly, Lean companies buy from local suppliers and get them to deliver frequently. They therefore carry little inventory. Accuracy of inventory valuation is therefore less important for these companies. Before the age of personal computers inventory was valued by a number of methods that did not require product cost. These methods are GAAP compliant and available if required.
And finally, there is no need to target a specific product for cost reduction purposes. Costs are taken out of the business not out of the product. A R1m cost reduction is an extra R1m on the bottom line, regardless of which product is targeted.