Lean Did Nothing to Change the Business

Lean did nothing to change the trajectory of the Dr Pepper Snapple Group.

There are well published studies showing that transformations fail well above 50% of the time. Of those that succeed, I believe do so in spite of using productized solutions like lean.

A Real-Life Example

It doesn’t take much to unravel a lean story and find the true underlying causes of successes.?One such case is DPS (Dr. Pepper Snapple Group.)?Someone offered this story to me as an example of lean's effectiveness and how its implementation improved productivity by $250 million.?(See the WSJ article for detail: how-dr-pepper-cuts-costs-and-keeps-cutting)?

The $250 million cost savings averages to $62.5 million a year (4 years leading up to the 2016 income statement).?That is a mere 2.6% of their 2016 operating expenses.

However, reviewing the financials, productivity improvement is more like an opportunity cost.?One example of improvement offered in the article was product changes on syrup processing lines. Did change-over reductions increase throughput??Not very likely given the information in the article, analyzing the financials, and knowing about the partnering agreements DSP had with Coca-Cola and Pepsi; these offset operating and distribution capacity to Coca-Cola and Pepsi.??In addition, nothing is mentioned about how much capacity DSP had throughout its facilities before implementing lean.

The journalist who wrote the piece asked some good questions.?Those concerning marketing and capital expenditures are threads easily pulled. They reveal the CFO clamping down on costs.?In fact, the CFO who was interviewed for the article mentioned his Zero-Based budgeting approach.?For those who are not familiar with Zero-Based budgeting, each year every department must start their budget at zero.?Any expenses added must be justified. Even those just to turn the lights on.

An initiative improving efficiencies and operating effectiveness can help with a productivity strategy.?But making that initiative the focus doesn’t make it a strategy.?At best, it is a distraction.?An example of a productivity strategy would be to bring capabilities in-house before having to react or forced to by outside forces. Saving time and money doesn't rise to the level of strategy. You must do something with them that your competition can't or won't.

Strategy

Two of the key factors that drive the flavored beverage market are taste and distribution.??Annual reports between 2011 and 2016, the same time period of DSP’s lean implementation, quote the CEO on what strategy DSP intended.?In short, get the brands in front of the consumer.?For example, the strategy listed on pg.6 of 2016 annual report was to Build our brands, Execute with excellence, Rapid Continuous Improvement. The last strategy point was actually 3 paragraphs about their distribution network and 1 paragraph, 2 sentences, about RCI.

“The LRB industry is highly competitive and continues to evolve in response to changing consumer preferences.?Competition is generally based upon brand recognition, taste, quality, price, availability, selection and convenience.” – 2017 Annual Report, pg. 8

Strategy is what happens regardless of a company’s intentions.?Not many company's compare what they intended to do with what actually happened. Looking at that 2011 - 2018 period, one could argue that the strategy was to window dress a cash-cow, sell it, and therefore cash out.?KGM (Kuerig Green Mountain) bought DPS for $18.7bn in 2018.?Shareholders from this merger received a special dividend of $103.75 per share.?

Who Really Benefited?

The board of directors approved a steady buy-back of shares during the lean implementation years, increasing earnings per share from 2.96 to 5.89.?Pre-merger, 3rd qtr. 2017, DPS bought back 905k shares.?There were still 183 million shares outstanding at the end of 2017. ($103.75 x 183 MM = $18.99Bn reward for shareholders)

I see no evidence that lean helped improve DPS in either its intended strategy or its observed strategy.?I’m convinced some good things took place under the RCI program but nothing that could not have been accomplished with other, more focused initiatives.?The RCI certification program had a goal of every employee earning a certificate by participating in an improvement event.?

There are two problems with this goal. The first is finding enough things to work on that are meaningful to the company and the employees; mind you that employees were taken out of their jobs to participate on an improvement event.?The second is residual value of the certificate. Once every employee has a certificate, what is the certificate worth??It won’t be recognized outside of the company.?Did employees get raises or bonuses for their improvement efforts??The shareholders did in 2018.

Employees are capable of making significant improvements but when it is done using a productized solution like lean, the focus on strategy or the purpose of the organization is always lost.?In fact, in most cases lean efforts do not change the direction or viability of the company.

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