Leanovations E-Lean Newsletter Articles

Eliminating Wastes Is Not Just About Cost Reductions

Recently Leanovations met with a company who felt they were doing lean pretty well. So when we asked them to tell us how they were doing it, they spoke about their Labor cost reductions programs over the last few years by focusing on eliminating wastes, including some employee layoffs. It must be asked, is this company really doing lean pretty well?

So how many of you reading this article right now feels your company is doing Lean well because you are focused on labor cost reductions? Or better yet, how many of you are part of a company which is focusing on your lost revenue opportunities because you are not attacking your wastes. I ask this question a lot; my experiences lead me to believe that probably less than 5% of companies focus their Lean efforts on "lost revenue opportunities" versus focusing on labor cost reductions.

Labor is one element of your total capacity in your company, and capacity is your total time today to produce something, which includes the value added time and non-value added time (or wastes) in your processes. The cost of capacity can be calculated in various ways depending on the company's financial philosophies and operational situation. Some may count just the cost of labor and/or overhead costs. Others will look at the impact on inventory, and still others may count the impact on output (growth opportunities). Some may look at a combination of the 3. In addition to these tangible or quantifiable costs, there will be other, intangible costs. The biggest among these is likely to be the ability to provide the new profitable service levels your customers demand.

At Leanovations we recommend companies look at reducing any non-value/wastes as "Lost Revenue Generating Opportunities" along with minimizing asset risk - such as inventory, rather than a straight labor cost reduction program. We promote Lean as a "Growth Strategy", not a "Cut and Slice" cost reduction process. Organizations need to develop a culture that wants to attack wastes to create new capacities and employee skills to grow profitably, not to reduce labor costs. In order to create new capacities and skills we teach organizations how to identify and eliminate waste from the total value stream. By doing so we promote the revenue generating opportunities a company has created with this new capacity and the ability to "work on" the business by eliminating wastes, therefore we do not make the focus on labor cost reductions.

We teach companies that on average a manufacturing company charges anywhere from 3-5 cents a second for manufacturing time (which equates to $108 - $180 / Hour) and we teach that for every second we can save by eliminating wastes provides opportunities to grow the business. We also teach that if a company takes this additional capacity to go after new business, the only cost to generate new profits is basically material cost as the employees, equipment and facility costs are already on the financial books.

Those companies, who are utilizing Lean as a cost reduction program and not a revenue generating opportunity, do not understand Lean or the importance of engaging the employees to create employment stability. Companies focused on cost reductions will quickly lose the employee involvement required to create new capacities to grow and to develop a Lean Learning Culture throughout the organization. Employees usually relate cost reduction programs to potential layoffs, rather than companies who see Lean as a cultural process where the employees are engaged to eliminate wastes to free up capacity to grow the business profitably ensuring employment stability.

If you are interested in improving profitable growth and employee morale please contact Leanovations at info@leanovations.com or visit our website at: www.leanovations.com .