Getting most out of what you already have
By Kim Do-won
The current macroeconomic picture makes accelerating and sustaining operational improvement an urgent priority. Manufacturers’ margins are under pressure. Commodity prices have been rising drastically, which means that supply chain risks from factors such as fuel costs are increasing. Meanwhile, the earthquake and tsunami in Japan have underscored the constant threat to supply chains from natural disasters.
Manufacturers need to manage their costs more efficiently, protect their supply chains more vigilantly, and innovate more rapidly. That means jump-starting lean efforts for programs that have generated only modest results and turbo charging those that have yielded big wins but have not yet achieved their full potential. Manufacturers need to find ways to migrate to the more mature levels of lean.
Companies typically progress through three maturity levels as they improve performance, build expertise, and enjoy the resulting benefits.
At the first level, companies should learn the basics. Entry-level lean practitioners are primarily seeking to eliminate waste in production. Their objectives typically include efficiency gains, cost reductions, improved quality, shorter lead times, and greater flexibility. Companies at this level understand the key lean tools and apply them at local factories but not consistently across the plant network. Through quick wins, they can typically achieve cost savings of 5 to 10 percent, for an immediate impact on the bottom line. Sustaining improvements over time and applying consistent standards across the network are the key challenges that companies must address in order to progress to the next level.
Implementing a lean production system is second level. Companies at this stage are among the top players in their industry. They are moving toward an integrated lean-production system that involves the whole manufacturing network. As a result, they can reduce value-adding costs (that is, all manufacturing costs except for raw materials and other inputs) by 10 to 15 percent, while cutting waste virtually to zero.
Companies at level three have a complete view of their non-value-adding costs. They have devised and implemented advanced techniques such as product segmentation and production & inventory strategy, as well as disciplined sales and operations planning (S&OP).
The optimal production processes have been identified and leveraged using advanced tools such as bill of process (BOP). Most plants and overall equipment efficiency (OEE) levels meet global best-in-class standards. Manufacturing is a key contributor to funding growth.
Moving from one level of lean to the next can be difficult. However, organizations at all levels can create significant value by a continued focus on lean. Recently, we’ve observed that many companies trying to get beyond level one or two have begun implementing shorter, more targeted and effective lean programs. And many at level three are deploying a broader range of advanced techniques.
But the problem is the expenditure. Managers today are working in a cash-strapped and resource-starved environment. The macroeconomic forces that lie behind that environment are likely to only intensify over the near term. Then how do we make it to go forward to the next level?
We’ve found that in many companies, an existing lean program ― whether relatively basic or advanced ― is an underdeveloped resource. Manufacturers that already have effective programs in place can move to an advanced level of lean by using more sophisticated tools, such as sales & operations planning, product segmentation and production and inventory strategy, and bill of process. But this is not easy for managers and they would face the challenges of cross functional alignment.
Then how do we find unrealized potential? For managers considering whether to embark on this journey, we suggest asking the following three questions. "Has the company improved productivity but remained dependent on capital expenditures to hit improvement targets?"; "Are best practices identified in individual areas but then not effectively leveraged across the organization?"; and "Has the company really succeeded in creating a sustainable culture of continuous improvement?"
We can find new tools by first asking those key questions. Then you could unlock their potential and deliver big value without large scale expenditure. Building a new system might be helpful but you still have the chance to take advantage of what you already have.
Kim Do-won is a partner and managing director of Boston Consulting Group (BCG).