Stop Using Lean to Cut Costs

Welcome to CFO.University’s transcript version of Andrea Jones’, CFO Ed Talk?, Stop Using Lean to Cut Costs. Andrea advises CFO’s to start using Lean to increase revenue, and stop using Lean to cut costs. She provides a clear-cut model and real-life case studies to drive her points home.

Enjoy. Learn. Engage.

Here is Andrea.

Imagine this scenario, your company didn’t make its earnings last quarter, and you as the CFO have the unenviable task of bringing those numbers to your leadership team. Everyone’s going to start talking and pretty soon someone will come up with the idea that you need to cut costs. Maybe you’ll even decide to use Lean to cut costs in your company. Well, you wouldn’t be alone. A recent headline from CNBC states, Coke goes Lean to cut 1200 jobs as part of an $800 million cost savings plan. Today, so many companies use lean to cut costs, that Lean has become a four-letter word in many organizations.

Several years ago, a company that I worked for would constantly reissue Lean mandates to cut costs and cut jobs. Well, it doesn’t have to be this way. Interestingly, when Jim Womack popularized the term Lean in his 1991 book, The Machine that Changed the World, he was referring to how Toyota would produce products with little to no waste while adding value to the end customer, and revenue for the company.

The DAER Model

Now, if you’re as profitable as you would like to be, maybe you don’t need to read the rest of this talk. But for the rest of us, there’s a way that you can use Lean to not only cut costs but to increase revenue in your company. This is the DAER model. It stands for Define; define the problem or the issue in your organization that you’re looking to address. Collect some data around that issue to really figure out what’s happening. Then Align your team to that data, make sure that everyone understands the issue and further is aligned also in what they need to do about fixing it. Next, Execute to that plan. And finally, realize the Revenue that comes from your efforts in this area.

Case Study – Debottlenecking the Production Process

Consider the following case study. A manufacturing company had a stated six week delivery lead time. Well, they weren’t making that lead time and they were concerned. So, when I ask them, what is your actual average lead time? They really didn’t know. So first, we had to collect some data. After we collected this data, we found that their lead time was actually seven weeks, on average, not six. But the interesting thing about the data was that no matter what you say about Lean and touching the product, needing to change the form, fit or function, in order for each touch to be, quote, value-add, they were actually spending 75% of their time in production doing nothing. The product was just sitting there waiting, nothing was actually happening. So, it really didn’t matter what they were doing when they touched it, as you can see, in the green bars on the chart to the right. The red bars signify the 75% of the time that the product was sitting around doing nothing. Well, once we had collected and showed this data to the team, everyone jumped on board and was very aligned to the problem. Then we had to come up with what we were going to do about that. We decided to use a Pull System. A Pull System takes the theoretical constraint of a system, in this case, when the machine would actually produce the product, which is the large green bar toward the end of the chart, and pulls everything in toward that step. So, we didn’t have to do anything ahead of time. We didn’t have to worry about all the other steps. But we would pull things over towards that step. Everybody was aligned to this and we moved ahead towards execution. The way we executed was by adding a buffer, a Kanban in Lean terms, in front of that machine. So, while the machine was running, there would be four pieces of production staged in front of it. Soon as it was done, it would move off, pull the next one on, and everything would move up a spot. An open spot was the indication for the upstream steps to get ready for that piece of equipment. The program was designed to stage the materials and put everything in front of that equipment.

Find the rest of Andrea's lesson on Lean for CFOs at CFO.University. Here is a direct link Stop Using Lean to Cut Costs 

Watch Andrea's CFO Ed Talk? or listen to the Podcast Here!

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