Is lean for you? Scoring its potential value for your business

Eliminating waste is never a bad thing, but if you’re already running lean, you may not need to pay for high-priced consultants to tell you what you know.

Lean manufacturing techniques originated at Toyota Motor Corp. in the 1960s, although arguably the roots can be traced to Henry Ford’s assembly lines from 50 years earlier. The Toyota Production System (TPS) has as its objective the elimination of all waste, be it wasted time, material, space, or money. By the early 1990s, the term “lean” was being applied to the collection of tools and techniques created by the TPS and its apostles.

Over the succeeding years, lean has taken off in a number of directions, and many consulting firms and management gurus sell lean as the ultimate key to effective business management. It has been elevated almost to the status of a religion.

But is it right for all businesses? The answer is that lean certainly has benefits to offer all businesses, even in the service sector; however, the potential for gains varies widely based on the characteristics of the business.

I am not a lean consultant, so I have no management techniques to sell, neither am I a lean expert. However, I have been involved in the implementation of lean as an executive at two manufacturing firms. My belief is that virtually any company can extract benefits from the lean philosophy and tool kit. But I also feel strongly that it is wise to consider the potential value to the business before jumping into the deep end of the swimming pool.

Lean consultants would have you believe that every company can achieve fabulous gains from lean implementation. That simply is not the case. In some situations, it’s true, and lean can be the savior of an otherwise-doomed business. In other situations, the costs of the lean consultants will far outstrip the lean benefits.

Here is a method to score the potential of lean manufacturing techniques to improve your business. There are two scales to consider: 1) The nature of your business, and 2) the current “leanness” of your business.

The nature of your business
Lean pays the biggest dividends for businesses with high inherent complexity—a lot of part numbers, operations, stages of production, people required, spikes in demand, and so on. Lean also helps the most for businesses that have to deal with global rather than purely local competition. Table 1 (at end of article) rates businesses on a 10-point scale that expands upon these themes.

As an example, I score Toyota’s automotive business at about a 17 on this scale. By contrast, I score the business of refining oil at about a 5. I’m not suggesting that the oil-refining business has nothing to gain from lean, but the relative impact of lean, expressed as percent improvements in efficiency leading to real bottom-line gains, will be less in oil refining than in a business such as automobile assembly. (Note, however, that a lot of dollars flow through an oil refinery. A small percentage increase in efficiency could be worth big money.)

Your current “leanness”
So let’s say your business is a 15 on the scale in Table 1. Lean techniques should work very well in your type of business, and have a significant positive influence on performance. But perhaps you are already lean, and don’t even know it. In Table 2 is another scale with just six critical points that you can use as a quick guide to judge how lean your business is. (One important caveat: Every industry is different, and the characteristics listed will be fundamentally different for different industries. My perspective is rooted in plastics and rubber molding and toolmaking, and so the standards listed here are shaped by that perspective.)

Conceptually, the fewer resources you expend to extract the same bottom line profits, the leaner you are. Resources include working capital, fixed assets, time, space, people, and money. However, lean is not just resource minimization (by that measure, the leanest business is one with no business at all), but resource effectiveness. Lean is focused, therefore, not just on reducing resources, but on making the most of the resources employed.

If your business scores in the highest categories on both scales, run don’t walk, into lean implementation! If your business scores high on the potential scale but low (which is good on this reverse score scale) on the leanness scale, you are probably already using lean, whether or not you call it that. Don’t stop now; keep it up. This self-analysis also can help to direct your efforts to the part of your business that will provide the most benefit from additional lean manufacturing implementation.

Obviously, this article is a gross simplification of what could be a detailed and time-consuming (and expensive) assessment of the potential benefits of lean. Nevertheless, this methodology can be a useful tool to get a rough idea of where your business stands. 

Carlton Harris is president of ATS LLC, a U.S.-owned sourcing and manufacturing company with offices in the United States and Shenzhen, China.

1. Inventory. The lower your inventory, the leaner you are. Divide your annual cost of goods sold (COGS) by your average inventory level over the same year. This is your number of inventory turns. Compare it to the inventory turns of your competition, if you can obtain that information. 2. Quality. The more consistent your quality, the leaner you are. Divide the annual dollar value of total rejects (total internal rejects + total external rejects) by annual sales. This is a good measure of the total rejects generated by your manufacturing process. External rejects are much more costly than internal, and should be less than 10% of total rejects. 3. Logistics. The less distance you have to move your product or work-in-process from place to place before you sell it, the leaner you are. For your average product, measure the total distance in feet or miles it has to move from when it enters your business as raw material and components until it leaves as a sold product. 4. Space. The less space occupied to generate sales, the leaner you are. Measure the total square feet occupied (owned and leased) by your business, including manufacturing, warehousing, office, etc. Include space under roof and outdoors, but do not include unused land (open outside space and parking areas). Divide annual sales by this figure. 5. People. The fewer people required to make your product, the leaner you are. Divide your annual sales by your total workforce, expressed as full-time equivalents (FTEs = exempt employees + paid nonexempt employee hours/2080 hours/year + consultants + full-time outsourced services) to get sales per FT employee. 6. Profits. Most of the measures above relate leanness to sales. Ultimately, profits and the cash flows they drive are what really matter. Divide your operating profit (earnings before interest and taxes) by sales to derive your operating profit margin (OPM).