The Improvement "Trap"

During the past few years, I've attended many insightful presentations given by Michael Bremer while participating in conferences focused on Lean initiatives and performance improvement (most notably at the Association for Manufacturing Excellence's annual conference). Michael has currently authored a book (along with Brian McKibben) titled Escape the Improvement Trap: Five Ingredients Missing in Most Improvement Recipes. I recently met with him, and during our conversation, I asked him to explain just what is the "improvement trap" and how can companies escape it. I'm reproducing his reply here:

"For the most part, companies typically approach the business of improvement in very much the same way their competitors do. They appoint some smart person to lead the effort, and that person finds areas to improve, typically using improvement teams to attack waste and remove obvious non-value adding activities. Meanwhile, the organization conducts its business in the same manner it always has. Performance and efficiency might get better, but they get better in the competitor’s company also, so as a result, nothing much changes. That is the trap.

If an organization wants to break out of that trap, it must look for levers that can truly differentiate the organization from the competition. People laud and strive to emulate the Toyota Production (or Thinking) System (TPS). And it is indeed very powerful -- one of the best improvement methodologies of all time. But when did Toyota start to make lots of money? It was not after 20 years of TPS, although that did provide a solid foundation. Toyota started making the big dollars when they launched Lexus and redefined the customer buying experience for purchasing a luxury car. New value creation rarely gets talked about in improvement programs, yet is one of the most important areas an organization can develop."

Have you worked for a company that has invested much time and capital into an improvement initiative only to ultimately retain (or lose a bit of) the established market share? What do you think of Michael Bremer's point about the importance of new value creation?

True Cost Versus Piece Price in the Supply Chain

Chris Harris is one of the authors of a new book titled Lean Supplier Development: Establishing Partnerships and True Costs Throughout the Supply Chain, and I recently asked him the following questions in an email: "Why shouldn't the decision of where to source a purchased component be made on piece price alone? And, just what is 'true cost' and why should it be considered?

Here is Chris Harris' concise reply:

"The piece price of an component -- the comparison of one supplier’s piece price to another’s -- is typically the driving factor for selection of one supplier over another. But unfortunately, piece price only tells us a fraction of the cost that is actually borne by your organization when sourcing a component. The piece price only takes into account the price for which the supplier is willing to sell the item -- it usually includes the supplier’s manufacturing costs and overhead costs and profit, but it may or may not include factors such as the cost to you, the customer, for transportation of the component to your location and many other concealed costs.

When you evaluate a supplier’s cost, I believe you should always use a true cost methodology. The true cost methodology does indeed consider the piece price as a part of the equation but also takes into account other costs that fall into one of three categories: change costs (the cost of switching from one supplier to another), risk costs (the cost that you can reasonably predict could occur in the course of doing business with a supplier), and ongoing costs (the costs you'll bear during the duration of time that the new supplier is providing you with product)."

What are your considerations when purchasing parts or components? Do you use any type of "true cost" model?

Is Target Cost Management Important?

I recently had a conversation with Jim Rains, author of a new book titled Target Cost Management: The Ladder to Global Survival and Success. I must admit, I began our conversation in quite a blunt fashion by asking him right up front: "Why is target costing even important?" Here is his direct response:

"Target costing is important for a very simple reason. When it is performed properly in any major corporation it sets the stage for constant, consistent, acceptable and predictable levels of profitability. Predictable infers that there is a profit plan; a long term profit plan. All companies need to make money to stay in business, but only the best are able to sustain it forever. Making money must be the bottom line measure for any company’s success, but the real difference in companies that excel in target costing is that they achieve long term profits over a period of many years, literally decades, as opposed to a short term profit horizon.

The main activities of comprehensive target costing are:

• Planning for target cost and target profit.
• Confirmation of the target cost and profit and allocation to main portions of the product.
• Assisting and promoting the activities of target cost and profit and managing them in product planning, development, design and manufacturing preparation stages.
• Achieving the target cost and profit by the activities of all areas of the business.
• Evaluating target costing activities for continuous improvement."

I surely appreciated his response, but it then begged the question: "If target costing is so effective, why aren’t more companies implementing it?" Jim replied:

"This answer is more complicated but in short target costing is not easy. It is almost never easy to be the best at anything. The best athletes in the world at their sport work endless hours to separate themselves from their competition. Long term profitability that is constant, consistent, acceptable and predictable takes a fully dedicated leadership team that knows, follows and embraces the proper corporate strategy for target costing to flourish."

Do work with or know of any corporations that use target costing for long-term profits? Have these corporations been successful?

Lean Doing and Lean Thinking

A recent article over on the ThomasNet news site, authored by David R. Butcher, confirms what a lot of Lean champions have been declaring for many years -- Behavior profoundly changes an organization, not tools.

Capgemini Consulting recently released a report titled Lean for the Long Haul, which surveyed more than 150 executives responsible for leading Lean initiatives, and concluded that behavioral changes are what sustain an effective Lean transformation. What ultimately derails the Lean journey? Resistance to change and a lack of focus/commitment.

Placing a strong emphasis on the implementation of tools and the deployment of specific techniques does have a galvanizing effect as they do get all associates involved and encourage enthusiasm. In addition, tangible results are immediately revealed through waste-reduction efforts. After a year or so, however, sustainability becomes a major issue if routine "Lean doing" supersedes "Lean thinking." Without behavioral change, the initiative will ultimately wither.

Lean initiatives that survive the in the long term focus on:

• Leadership.
• Recognition.
• Strategic Alignment.
• Performance Management.

Has any readers of this blog ever been involved in a Lean initiative that has hit the "plateau" stage because some of the crucial Lean thinkers failed to create the correct culture and have moved on after instituting only the effective techniques?