Cost and inventory reduction, right target?

Lego_022aWaste and costs reduction has almost become the definition of Lean for many people as well as an irresistible lure for most executives and managers.

Yet costs and inventory reduction, is this the right target?

In the various definitions proposed by Lean theorists, including Jim Womack, priority is given to identifying and creating value for customers. Using just needed resources is only a way to achieve this while seeking a competitive advantage. Reducing costs and make savings is only a corollary effect of this achieved frugality, not a prime objective.

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Why this obsession about waste / costs?

Lean has long been considered being something for operations: Production, Logistics … as its first name “Lean Manufacturing” could suggest. Indeed, first attempts and successes happened in the workshops and warehouses, on shop floor.

Operations guys have little leverage to create value for the customers. Conversely they can improve almost infinitely operations seeking to be more efficient, to speed up the flow or to reduce defects.

These improvements, synonyms of savings, quickly raised management’s interest in order to justify related expense of these initiatives with ROI and reap the “promised” gains.

However, most of the time these approaches do not produce the expected measurable results and generate frustration among actors although they often see dramatic improvements at their level .

Frustrations, failures, how is this possible?

First one must understand that local initiatives are often disconnected from the purpose of the organization / company. They “improve” activities or processes without a prior validation about their system-wide usefulness and contribution to the higher objectives of the organization / company.

The most disappointing case is to have improved a doomed process or one being itself a waste. In such a case, time and resources were consumed in vain. Deadly sin.

In a less extreme but frequent case, time and resources were consumed to improve a marginal process, which will be insignificant to the overall performance, despite the fact it looks spectacular in situ.

Second, one must remember that the cost and/or inventory reductions necessarily face an absolute limit, which is zero. Once there is no more spending and/or any inventory, this is the end of “continuous” improvement and ironically… an optimum.

Of course there is a practical limit before zero, from which the activities can not proceed satisfactorily neither for customers nor for other stakeholders. But this practical limit > zero only reduces the overall potential of cost and/or inventory reductions.

In contrast, sales growth is virtually unlimited. Although productive resources are saturated, it is always possible to provide new, additional value added services, such as express delivery, personalization, premium services, etc.

But this lever, far more powerful and faster to implement, contrary to general belief, is rarely used.

What alternatives to achieve success?

Those who embraced Lean Management understand that all improvement efforts must be aligned with the purpose of the organization / company, i.e. the need for improvements is derived from the Goal, strategic objectives and necessary conditions to achieve strategic objectives.

Therefore, Lean is only conceivable top-down, from the strategic intent to shop floor actions. Then, for people to apply coherently tools and methods, instead of locally cherry-picking any good looking idea, top management must dictate the needs to cover or better, communicate in transparent manner strategic intents and the cascade of necessary conditions to achieve high level objectives, thus the Goal.

Once these necessary conditions known, operators can measure the gap between the desired state and the current state and work to reduce this gap, on relevant topics and perimeters.

This communication is done using Hoshin Kanri and A3 reports when remaining in the traditional Lean framework, or using Goal Tree if open to add some Theory of Constraints’ tools.
Both are perfectly combinable.

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