Why Lean Is Not A Good Cost Reduction Strategy

Written by lean consultant Bill Waddell.

I am rarely the first lean consultant my clients hire.

I do, however, expect to be the last one they hire.

I typically work with companies that have been at lean for a number of years but are frustrated by a lack of results. The big question I get is why they can’t see the cost savings they know they have made through their various kaizen, Six Sigma and rapid improvement events.

The first question I ask is whether they have laid anyone off. When the answer comes back ‘no’ I tell them the most likely reason for not seeing any cost savings is that they haven’t really saved any money.

This typically comes as a shock to people – especially their lean coordinators and others who have put a lot of time and effort into eliminating waste and have the metrics to prove it.

The problem is that lean is not a cost reduction strategy.

Properly applied, lean principles will not reduce spending much at all. Lean is aimed at enhancing the top line – sales – not the total spending line.

Lean Model 1

The problem with this approach is that most of the costs boil down to payroll.

You can use lean tools to eliminate the need for material handling, quality inspection and dealing with quality problems, or the waste of administrative paperwork, data entry and other non-value adding tasks.  But if you don’t lay off the people doing those tasks, you haven’t really reduced costs -just moved them somewhere else.

Oh, you can in-source some work, reduce utility costs and normal employee attrition will lower the waters somewhat, but these are usually nickels and dimes.

Of course, if you do lay the people off, you aren’t really lean, are you?  You’re not going to get the benefit of your most powerful resource when you use lean techniques as a headcount chopping tool.

The goal is not to reduce spending – since to do so means sacking valuable people – but to convert people’s time and effort from wasteful activities to value adding ones – activities customers will pay for.

Lean Model 2

When people are kept on the payroll, and converted from performing wasteful tasks to value adding ones, that means you:

1. Have additional capacity – the ability to produce more product with the same cost base;

or

2. Are able to build more value into each product you sell for the same cost – which means you can charge higher prices since you are delivering superior value.

Either way – growing the number of items you sell with the use of the ‘free’ capacity, or commanding higher prices as a result of providing superior products as a result of the great value add per product – the results of your lean efforts are going to show up on the top line – sales.

Of course, if the sales folks and accounting are not part of the plan they won’t know how to identify and price the thing and turn the conversion of waste to value into sales growth.

At any rate, don’t look for lean to do much for your bottom line if you don’t have a plan in place to have it first help your top line.

See more articles by Bill Waddell at the Manufacturing Leadership Center.



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