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Lean as a Competitive Advantage
By Eric Parlin

Today’s headlines often mention the outsourcing of jobs to China and India, as American firms try to offset their labor costs by using less expensive labor available in Asia. Lack of regulatory oversight and relatively inexpensive raw materials add to the allure of closing down domestic operations and relocating to Asia. Equally daunting for many firms is the frequency of customers pulling contracts and re-sourcing component purchasing to the Far East.

This move can often be the death-knell for smaller Tier 1 and Tier 2 companies in the United States. As this process continues to gain momentum, many lawmakers are now involved, demanding protectionary tariffs on imports and seeking to make the cost of doing business with China and India too high for U.S. firms.

An interesting aside to this whole process is the movement by Toyota and other lean firms to establish and grow their manufacturing presence within the United States. What is the difference between Toyota’s move to make more cars here and other companies’ desire to make as little as possible domestically? Ultimately, that difference can be expressed in one concept – lean.

Lean is a concept that has been around for nearly a century in its present form, yet many companies still view it as a “flavor of the month” program. Successful firms like Toyota have taken lean to heart, infusing its concepts throughout the organization, from the top down. This effort requires a major shift in thinking for many executives, and is a departure from some of the traditional methods and metrics for manufacturing.

No longer should a company measure cycle time, only Takt time. Huge inventories of finished goods and raw materials are replaced by JIT production and smaller, more frequent delivery of raw materials. Long assembly lines, with multiple complex machines are replaced with small work cells, specializing in rapid changeovers and flexibility to meet customer demand.

Lean is also applied to areas within the company outside of just manufacturing. Every area of the company is analyzed to identify ways to improve all of their processes. Examples of this work outside of the manufacturing arena include streamlining new product development, improving the employee hiring and training processes, and reducing the steps in a customer’s billing cycle. As a result of these changes, product quality, customer satisfaction, and corporate profitability all improve.

A telling study of the results of these changes is in the auto industry. On June 1, 1987, Toyota’s stock closed at $25/share, GM’s stock closed at $85.25/share, and Ford’s stock closed at $91.75/share.

Fast forward to June 1, 2007 and the closing prices are vastly different. Toyota closed at $122.94/share, a 392% appreciation. GM closed at $30.50/share, a loss of 64% of its value, while Ford closed at $8.35/share, a loss of 91% of its value.

The root of this marked change is in the profit statements. Over the last four quarters, Toyota had a net income of $13.3B, while GM lost $2.52B and Ford lost $11.47B. Additionally, for the first time in history, Toyota outsold both Ford and GM in the United States during the first quarter of 2007.

Are all of these results due strictly to Toyota operating a more lean operation than either Ford or GM? Absolutely not, but they are some of the best indicators available for comparing firms in the same industry with markedly different levels of lean in their operations.

So how does this apply to a typical firm, whether the firm is in manufacturing or not?

The onus to change has to come from a legitimate desire to make the company more effective and competitive in their market. Any process within the firm that impacts customers should be looked at for value-added (VA) activities versus non-value-added (NVA) activities. Once that analysis is complete, an action plan to eliminate the NVA is developed and the appropriate tools are used to eliminate the waste.

The process does not occur overnight, but can begin quickly, with rapid improvement activities like Kaizens as a start. As the firm achieves success, the leadership team needs to build upon that success and leverage it in the market place. As examples, can the firm offer a shorter lead time on orders through the efforts of lean? Can the firm offer mass customization of their product line without incurring significant inventory? Can the firm develop lower raw material costs by partnering with vendors and spreading lean outside the four walls of the firm? Every one of these activities contributes to increased profitability and happier customers.

Everyone can implement processes to identify non-value added activities within their processes. From manufacturing, to banks and hospitals, the techniques can be applied.