Principles for Real Manufacturing Transformation

By Bill Waddell

We need to face the 1,000 pound gorilla in manufacturing: Lean has not consistently driven significant bottom line improvements for most companies. Looking past the hype from industry magazines, vendors, and companies themselves, it is clear that, while many factories may look lean, real progress in terms of productivity, lower costs, and higher profits is usually local and incremental.

Consider Delphi: Winner of 24 Shingo Prizes for their “lean” plants, but bankrupt. While they blame their lack of success to external and ‘legacy’ factors (and in the next breath, ask for government protection and union concessions), their productivity, competitiveness, and cash flow were not improved much by their lean looking plants. Delphi learned the hard way that making factories look like Toyota’s factories does not result in performing like Toyota.

So how do we go beyond “looking lean” to achieve significant business results?

Drucker’s Lesson About Real Transformation

Sixteen years ago, Peter Drucker’s article, “The Emerging Theory of Manufacturing”, appeared in the Harvard Business Review. That is probably about the right incubation period for the rest of us to catch up to his thinking. Drucker points to four principles that defines what’s needed for real transformation, and establishes the critical role of the chief executive. These principles are:

1. Integrate the factory into the total value stream
2. Instill a statistical quality focus across the entire company
3. Implement a completely new accounting model
4. Treat the entire business as a system

From the Lean Executive’s perspective, Drucker’s four principles of manufacturing transformation are a framework for leading what we call “Lean Enterprise Transformation” (LET). These principles distinguish between “looking lean” and what it takes to achieve significant, sustainable improvement. Below is a summary of Drucker’s principles and how they apply to LET. Before embarking on a company’s lean journey, reading Drucker’s original article is strongly recommended – it is well worth the time.

1. Integrate the Factory into the Total Value Stream
   

   This is where most lean efforts fail. Many chief executives fall into the trap of delegating their LET and limiting its scope to operations. Drucker described this limiting view as treating the factory as a group of machines – isolated from the rest of the business. It’s critical to realize up front that LET is a company wide change initiative involving every business function. Taiichi Ohno, one of the driving forces behind the Toyota Production System, described it this way:

   “All we are doing is looking at the time line, from the moment the customer gives us an order to the point where we collect the cash. And we are reducing the time line by reducing the non-value adding wastes."

   We refer to this all inclusive view as “from call to cash”. Every activity in the business is either on the time line of the value stream, or exists to support it. This “call to cash” view forces the scope of the LET to expand to include the entire business.

   What’s the role of the chief executive with looking at the entire value stream? Success requires working closely with each functional and process leader to ensure that they support the overall process – not just a portion of it. The chief executive is often uniquely qualified to help each piece of the business understand how it should support the entire value stream.

2. Instill a Statistical Quality Focus across the Entire Company
   

   Philip Crosby was correct when he wrote Quality Is Free in 1979: The tools of six sigma and SPC are not merely tools for the factory floor - they are core principles that govern process design across the enterprise. A statistical quality focus for all business processes assures that defects and their resulting costs do not infect the business.

   No company can succeed with a narrow manufacturing ‘cost of quality’ mindset. Fundamental quality principles must be second nature to the senior executive, with appreciation for how they apply across the business.

3. Implement a Completely New Accounting Model
   

   Drucker foresaw the need for a completely new accounting model to support LET. Traditional accounting methods generate misleading - even factually incorrect data – and muddy the real business situation. For example, a traditional cost accounting model often puts an inappropriate emphasis on “direct” labor, arbitrarily allocated fixed costs, and nonsensical cost variances. Explaining these abstract metrics consumes valuable staff time, while providing little insight about the business. They do not reflect defects as significant cost drivers; they do not quantify the total impact of sourcing decisions; and they often encourage waste (for example, creating false incentives to build inventory). Realizing true cost reductions requires an accounting model that accurately reflects and predicts the impact of business decisions on profitability.

   Senior management must be aware of the shortcomings in traditional accounting methods, and understand the need to implement a new accounting model that supports good decision making. Implementing this new approach to accounting can only happen with direct and knowledgeable senior executive leadership.

4. Treat the Entire Business as a System
   

   A company cannot simply make things and throw them at the market. No matter where the manufacturer fits into a supply chain, they must understand that they provide a comprehensive solution – not just a product - to their customer. The physical output of the factory is just one element of this solution. Packaging and delivery methods, delivery time frames, customer ordering and billing methods, aftermarket service and support, and the information accompanying the product all make up the solution the customer expects.

On a GM suggestion web site, a customer commented: "…the GM package is made up of dealer sales, dealer service, GM warranty department, and GM customer service. And when the consumer has a problem, all these departments conveniently separate from one another leaving the end user with . . . a full time job trying to get something done" This is hardly unique to GM. Customers expect the entire “solution” – in this case the vehicle and the dealer experience – to be defect free. This has played a large part in Dell’s success: Every aspect of their business is tightly integrated into a consistent, planned package of products and services.

LET is only possible if the company’s definition of the customer solution is accurate, consistent across functional areas, and market driven. Only the senior executive can lead the effort to define the entire system of processes and functions needed to deliver a complete, defect-free customer solution.

The Lesson in a Nutshell

Transforming manufacturing must go beyond the “looking lean” approach of implementing a few improvements on the factory floor. Drucker’s four principals are a framework for achieving transformational change; stated in terms of lean enterprise transformation, they are:

1. A view of the total value stream “from call to cash”
2. Apply a quality approach with all business processes
3. Redefine the accounting model
4. Create a consistent understanding of the customer’s view of the entire solution

This can only be achieved with the direct, knowledgeable leadership of the chief executive. Without that involvement, significant improvement is not likely.

Many executives are unwilling to step up to this challenge. It shakes the foundations of their education and experience; but what separates Harley-Davidson, Toyota, and Danaher is not what they do on the shop floor - it is the leadership and knowledge of their senor executives. They reap the extraordinary profits that come from leading their industries because they had the courage to drive their organizations in a non-traditional manner.

What’s the First Step?

Often, the first step with LET is an executive education program: An independent facilitator leads senior staff (including Finance, Sales, R&D, Engineering, Operations, and Human Resources) through a Lean learning process (see www.LEANlibrary.com for examples of typical reading assignments). Bi-monthly review sessions are held to discuss (and argue!) how these lessons apply to the entire business. Within a few months, senior management inevitably creates a knowledgeable, agreed upon implementation approach for their LET. This added step of executive education goes against the urge to leap in and generate immediate results, but it is vital to success. It ensures that the initiative begins with a broad, cohesive approach to lean transformation, and is not limited to the factory floor.

In the end, managing LET is not much different from other organizational change efforts. The speech John F. Kennedy planned for Dallas included, “Learning is indispensable to leadership.” Of course he was right. The chief executive must be the leading lean thinker in the company. Only then can he tackle the 1,000 pound gorilla of just “looking lean”, and drive significant bottom line improvement.

Bill Waddell is a LEAN Affiliate and president and founder of Best Manufacturing Practices. Over the past 20 years, he has worked with a variety of large to mid-sized companies including recent engagements with Copeland Corporation, resulting in the Emerson Electric President's Award, and with United Defense, resulting in their Aberdeen plant winning the U.S. Navy’s Best Manufacturing Practices Award. Bill also played a key role in the turnaround efforts at Cincinnati Microwave and McCulloch Corporation. His experience includes working with Maquiladora plants in Mexico and with offshore plants, particularly in southern China.

Bill is the author of a number of articles on virtually every aspect of lean. He is a co-author of “Rebirth of American Manufacturing” and is currently working on a book with Hiroyuki Hirano, Japan’s leading authority on lean manufacturing and industrial engineering.