Don’t reduce costs to save costs

saving Dont reduce costs to save costsYeah, I know. That sounds a bit contradictory, but after reading a column by Lonnie Wilson on the Industry Week website, it actually makes sense.

If the title of this article sounds odd, don’t be surprised. The implementation of a lean initiative will teach you about a whole litany of paradoxes. There is the jidoka paradox: Shut down the system so the system will run continuously. There is the standard-work paradox: Standardize the work so you can change it. The production paradox: Slow down the machine so you can speed up the process. And my personal favorite, the Toyota success paradox: Toyota has been very successful because they tolerate failure.

Paradoxes abound and the one about cost reductions is particularly interesting. Most plant managers seek to reduce their operating costs and, regrettably, most of them go about it by implementing a “cost-reduction program.” And guess what? Two predictable things happen.

First, they reduce costs. Second, shortly after all the back-slapping and happy talk about the gains have been completed, and the managers have recalculated their bonuses, all the costs come back and usually with a vengeance.

Predictably, the “smart manager” then will find some “market change” or other external thing to blame for the rising costs. Or maybe, best of all, he or she will have gotten recognized and promoted for the “cost-reduction success” and their “wonderful demonstration of leadership” and will have moved on, leaving someone else to deal with the resultant fallout.

Wilson suggests using a Taiichi Ohno Lean Initative with the argument, “if you don’t implement a ‘cost-reduction program’ to reduce costs, what should you implement?”

Simple. Implement a lean initiative — a Taiichi Ohno-type lean initiative.

What is that? That’s a heck of a question, and I want to distill it to the essence of what its creator, Taiichi Ohno, said. I believe three quotes from him capture the essence and the spirit of his Toyota Production System, and hence lean manufacturing by extension. (All Ohno quotes are from “Toyota Production System, Beyond Large Scale Production,” Productivity Press, 1988)

“Establishing the flow is the basic condition.”

“All we are doing is looking at the time line…..And we are reducing that time by removing the non-value added wastes.”

“After World War II, our main concern was how to produce high quality goods … After 1955, however, the question became how to make the exact quantity needed.”

Flow, Lead Time and Quality

As my clients set about to implement their lean initiative, I ask three coaching questions:

  • What are we doing to get stable flow at takt?
  • What are we doing to reduce lead time?
  • What are we doing to improve quality?

Notice that there are:

  • No questions about costs, not that costs aren’t important;
  • No questions about efficiency, not that efficiency is not important.

Xsaving Dont reduce costs to save costsThe questions are about flow, lead time and quality. If those all get positive responses, my experience has taught me that all other metric generally improve. (See Chapter 5 of my book, “How to Implement Lean Manufacturing,” McGraw Hill, 2009)

I currently am working with a client on a manufacturing cell that is making headrests for Toyota. The cell production is about 3,000 units per shift with 15 different models made in a varying mix. The starting metrics for the cell were this:

  1. Production – 145 units per man day
  2. Quality 4% scrap
  3. Cell availability 96%

We embarked on a lean initiative, implemented the techniques described in my book and after a few weeks the metrics are:

  1. Productivity – 190 units per man day
  2. Quality 1.8% scrap
  3. Cell Availability 98+%

In this case, we made significant improvements by driving out waste in the system and were able to produce more product with fewer people and thereby reduced costs. At the same time, although we really had no items focused on either quality or availability, they synergistically improved. Most of these improvements were achieved through a large number of quick and easy kaizen activities done at the operator level, as our effort engendered new levels of employee engagement as well.

All of the improvements — every one — reduced the cost to produce, yet we did not implement even one cost-reduction idea!

The entire focus has been on “establishing stable flow at takt with reduced lead time,” and the cost reductions flowed like water flows downhill. We got all these benefits and more.

Unfortunately, Ohno also said, “It is all about cost reductions.”

Many folks have incorporated this quote into their paradigm of cost reduction. Unfortunately, their paradigm is normally a litany of projects focused on a lot of local “efficiency” improvements that have some “local” productivity impact but do not translate into overall system improvements. In addition, this paradigm is seldom sustainable.

You see, these cost-reduction ideas fail to focus on Ohno’s paradigm, which is “removing the non-value-added wastes.” And the method Ohno used to remove these non-value-added wastes was to improve the flow, reduce the lead time, all the while maintaining very high product quality standards.

So you see, there are many ways to go about reducing your costs. Not all fall under the lean umbrella. For example, if you want to harangue, threaten and generally intimidate your suppliers so they will reduce their laid-in price and thereby reduce your costs, do that — just don’t call it lean.

Or, if you want to reduce your manpower and lay off a bunch of folks, do that — just don’t call it lean.

You also may implement other cost-savings ideas, such as finding a less-expensive lubricant for your machinery or a better way to dispose of your hazardous wastes. All of these things you can do, and they, too, can be called “cost reductions” — just don’t confuse them with a lean initiative.

However, if you want to make a facility leaner and make it a better money-making machine that is a more secure workplace for all, then focus on creating:

  1. A high-quality product that is made with a process that has,
  2. Stable flow at takt, with
  3. Ever-reducing lead times.

Then you will be implementing a lean initiative, and guess what? You will get the vast majority of those hoped-for cost reductions, and you will also get improved quality, improved up-time, lower employee turnover, improved employee morale, accelerated employee engagement and dozens of other simply wonderful benefits.

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