Tag Archives: lean government

Cost Subtraction

Last week, a drive-by a 99 Cent Store (see photo) reminded me of my first real job in an industrial marketing department.  In the 1970’s, one function of this department was to set prices, a task simplified in the early going by the market’s acceptance of whatever surcharges we added each year.   In some years prices were increased twice!  My job was to gather cost data on each product family, and multiply costs times our expected profit to determine a new price.

The basic formula was:          Price = Cost + Profit

There were no reviews of costs – didn’t need to be.  Nobody blinked when prices went up.   In fact, each price increase created an opportunity for distributors to stock up just before the increase at a lower price: more sales for us, at least in the short term, and more profit for distributors.  This was sales’ perpetual motion machine.

Sometime in the early ‘80’s the winds changed; customers in our market no longer accepted price increases.  On the contrary, they began asking for price decreases.  Our first instinct was to object.  We were in denial for about five years thereafter, our salespeople forced to haggle with customers just to avoid an increase.  In the process, we lost customers.   A principle referred to by the creators of TPS as “cost subtractionhad put the customer in the driver’s seat:

Profit = Price – Cost

The phrase “new normal” is used to describe a recent sea change in the world economy.   “Cost subtraction” marked a less obvious sea change in the 1980’s, but one that arguably has contributed significantly to our latter day new normal.   Simply put, the cost subtraction formula assumed that the customer determined the price and that profit therefore required effective cost management.  Organizations that had previously been free to pass along cost increases, now had to find ways to reduce costs.

How did US industry respond?  With outsourcing, off-shoring and leveraging of suppliers.  We purchased larger lots from suppliers to avert their price increases, and then rewarded buyers for “cost avoidance”.  We downsized our workforces and reduced employee benefits.  A company president quipped, “we’ll charge employees for parking spaces if we have to.”  Companies large enough to afford it sought to automate their way out of the dilemma, replacing employees with machines.  These superficial improvements created paper savings while weakening productive strength and emptying cash reserves.  Russ Scaffede, a former executive at General Motors, joked as a Shingo Conference speaker, “All our plants made money, only the corporation was losing its shirt.”

My little company did not have the financial resources to exercise many of these superficial options, which fortuitously led us to the discovery of TPS.   We learned the story behind the cost subtraction principle: that the lion’s share of cost reduction could be found through many small improvements.

Forty years after the cost subtraction sea change, many organizations continue to deny it.  Some are “lucky” companies, still able to price their products or services to cover wastes; others revert to superficial improvements to eke out a profit.  Where does your company stand?  Are you a lucky company?   What are your cost subtraction strategies?  Share a story with us.


5S First?

Some time ago, while speaking at a conference in the land down under, I was taken to task by a participant for suggesting, “5S is usually the first improvement” in Lean implementation.   I had carelessly adopted this posture because, as a consultant I had found that workplace organization was usually the most palatable way to demonstrate improvement on the shop floor.  (I’m not sure of this, but I think the sixth S – safety — was added at U.S. manufacturers in the 1980’s because improved safety was the only thing management and labor adversaries could agree on.)

“That may or may not be so,” my friendly heckler responded, “but just because 5S is easy, should that make it first?”

“What do you suggest as a first step to improvement?” I asked.

“Kanban,” he replied.  “A pull system is the thread that holds everything else together.”

“Pull systems are a tough place to begin,” I offered.  “Maybe it would better for a company to “get its feet wet on something less conceptually challenging.”

“No,” he shot back, “the pull system is where my company started and it’s worked very well, end-to-end.”

I hesitated, then gave a consultant’s non-committal b.s. response: “Where you start may be less critical than just getting started.  No two companies are alike,” a non-answer that ended the question, but was not satisfying either to the questioner or me.

For the next half hour, I pondered his challenge.  I recalled a quote from Hajime Ohba, then General Manager of Toyota Supplier Support Center (TSSC), about doing the right thing:

“True North is the vision of the ideal.  Always do what we should do, not what we can do.”

This seemed to contradict my “do the easy things first” theory.

TSSC had worked with my plant in the mid-90’s to help us better understand “true TPS.”  Mr. Ohba had said to me after his first visit to our site, (I’m paraphrasing) “You have made some nice individual improvements, but you will not receive the full benefit of TPS until you can put them all together.”  He asked us to identify a product line where an improvement was needed.   I picked a small assembly line that had delivery problems, one where we were not betting the farm, and we went to work.  There was no mention of 5S, or kanban, nor any lean ‘tool’ with which we were marginally familiar.

Instead there were many questions:

“Why is that assembly fixture over there?”

“How do you know what to build first?”

“Where do the finished products go next?”

“How long has this machine been down?”

One question frequently led to another.  Sometimes the answers were obvious, and other times we had no answer.

“Why don’t you have the answer?” was the next friendly but persistent question.

They wanted us to watch and think.  It was hard, and I guess it was what we should do.


Back in the land down under, about a half hour later, I caught up to my Aussie friend to apologize.  “I think I headed in the wrong direction today with my comment about 5S.  Consultants like me tend to break TPS into little pieces because it’s easier for us to describe.  Implementing TPS isn’t about 5S or kanban or any other tool.  Sometimes we just ask the wrong questions.“

“Well I still hold that kanban is first,” he replied.

“No worries,” I said.


Standards Part 1

I attended a gathering of healthcare providers recently to participate in a site review and listen to some nice TPS success stories.  During a Q&A session at the conclusion of the review this question came from one of the participants:

“How can we get the docs to accept standardization?”

I smiled at the question, not only because doctors as a group are notorious individualists, but also because they are not so different from any other occupation in their view of standards.   The word “standard” makes people cringe because to many it implies loss of personal choice:

  • Several years ago a program manager at a local defense contractor offered this view of standardization:  “I never liked the idea of sameness. I want my engineers to be creative.”  I snapped back at her with some frustration, “When you’re driving home tonight on the right side of the road, would you consider that “sameness?”
  • On factory floors, where work has been measured (although too infrequently) for a long time, standards have a bad name as well.  A shopfloor employee related to me, “They (the industrial engineer) ‘made up’ a standard when the product was released and it’s been wrong from the start.  Then last year to meet a cost reduction target, they just arbitrarily reduced the labor figure.”
  • My friend Gifford Brown, a former site manager at Ford relates the outcome of a set-up reduction exercise at his plant conducted by Shigeo Shingo (a story for another post) back in the mid-80’s.  In just half a day, working with Dr. Shingo, Ford operators, tool makers and set-up folks changed over a 300 ton press in just 10 minutes, down from a previous standard of four hours.  When Gifford saw this, he ran up to congratulate the Ford team:

“Did you imagine this time-savings was possible?,’ he asked one operator.

“Actually, much of what Dr. Shingo showed us we already had discussed,” the operator replied.

“Then why didn’t you make these changes before now?” Gifford queried.

The answer?

“We don’t set the standards, boss.  You do.”

So there are more than a few reasons for skepticism surrounding standards.  American industry’s track record of time-setting without careful observation and without significant involvement of workers (be they doctors, engineers or machine operators)  has created an almost universal cynicism.  The road to standardization has many obstacles, but the start of the journey is often the hardest because of a legacy system that suggests standards will be forced upon us and will stifle originality.

On the other hand, coming from a musical family long before I got into industry, I understood “standards” to be the great songs that every musician should learn.  They define a level of excellence to which we should all aspire.  I have never heard a blues player complain about sameness because only three or four chords are a standard for blues.  In fact, those standards define the genre and are the basis for creativity.  We establish boundaries within a norm and sometimes stretch that norm to create new standards.  Just as in TPS, the standards for musicians are the baseline for creativity.  Standardization means “reading from the same sheet of music.”

So I responded to the question posed to me at the hospital gathering:

“Doctors worry that forced conformity will impact their ability to care for their patients.  Docs don’t want to be the objects of change.  So, make them the change agents by first finding a few small things on which they already agree.  Dr. Shingo referred to this as “Socrates Secret.”  Then pick some small differences and normalize those.   Every doc will have some preferred practice on which he or she is intractable – don’t go there, leave those objections alone for now.  The first objective is to create a more positive view of standardization itself. “

 In the words of Dr. Sami Bahri

“Do whatever is possible, and the impossible starts seeming more possible. “ 


BTW:  The deadline is fast approaching to take advantage of the 25% discount for the 2012 Northeast Shingo Conference.  Register today!

Acts of God

Several weeks ago in New England, the rants of angry electric utility patrons filled the evening news.  Accusations of greed and incompetence were plentiful as many homes (including mine) were without electricity after a freak October snowstorm. Magnifying the problem was the disparity of service from community to community:  some communities had power restored in just a couple days while others – even adjoining communities – were powerless for almost two weeks.  For those communities, businesses and schools were closed, and municipal services were limited.  The situation was not dire for most, but it was uncomfortable, disruptive, and, in the minds of many, unnecessary.  I was out of town (in a warm climate) for the whole ordeal, but I was smugly complacent that I had purchased a portable generator earlier in the year for just such an occasion, and that my family, at least, would have heat and hot water while the electric company sorted things out.  The storm was after all, I reflected, an “act of God,” and the utilities could not possibly plan for such lopsided service needs.  But then, I had electric power, so the problem was not front-and-center in my thinking.  I was naively sympathetic as I was watched errant utility company officials decry the severity of the early storm.  “Mura,” I thought, “with so many downed power lines, how could they reasonably be expected to bring the power back quickly?”  The utilities had finite resources after all, I thought, so even Herculean ‘round-the-clock efforts were not adequate.

Yet some towns were up and running within hours of the storms passage while others were only just coming back on line by Veterans Day.  How could this be?   A partial answer to this query came to me as I had occasion to travel by car from Boston to Pittsburgh over the Veterans Day weekend: Convoys of utility trucks – dozens and more – traveled the same route, heading home after weeks of mutual aid.  Some were from states as close as Pennsylvania, but many were much farther from home: Kansas, Texas and Louisiana to name a few.  Distance alone would have delayed response from the more distant areas for up to a week.   Some utilities, it appears had more responsive reciprocal agreements than others.  Later stories in the local papers revealed additional delays in even contacting these overflow contractors.   And in some municipalities, no clear authority to remove downed trees had been given to the utilities. Many small problems combined to delay recovery efforts.   And yet there were also examples of good practice, where power was rapidly restored.   Ultimately there was plenty of culpability to go around and also many lessons learned.

Or were they?    The storm has passed, power has been restored, homes are warm again and businesses are open.  But what has been learned?  Deming Prize Winner, Ryuji Fukuda, points out that railway accidents in Japan were prevalent until a concerted effort was made to understand their causes.   What process exists for municipalities and utilities to learn from major events like the October snowstorm?  I guess we’ll have to wait for the next big storm to find out.

How does your place of business handle lessons learned from problems?  Do they feed back to the process or are they considered “acts of God”?   Let me hear from you.


Lean Thanks

The upcoming holiday is my second favorite (after New Years), first because it’s energizing to reflect on things to be happy about, and second because it’s a four-day break.   While I’m thankful for many personal-type things and people, this post will just be for Lean things that I’m thankful for.  Here are a few:

  • The creators of TPS who understood decades before the West that a supplier-first philosophy is not viable, and that employees are not just “human machines.”
  • The hardworking shopfloor employees who, after decades of being beaten down by a bad system, still have the chutzpah to overstep their traditional roles.
  •  Middle managers who take a risk when it’s not personally necessary and often potentially hazardous to their careers to support a fledgling Lean effort.
  •  Top managers who leave their offices and meetings to see the real world.
  •  Engineers that get their hands dirty.
  • Accountants who ask why 5 times about traditional cost accounting.
  • Buyers who know more about the part than its piece price.
  • Marketing and Salespeople who “get it” that just-in-time sells products and services.
  • Material handlers who once were lowest in the pecking order but now are the governors of material and work flow.
  • Maintenance departments who do more fire prevention and less fire fighting.
  • Boards of Directors who consider the value of making products in the regions where they are consumed.
  •  CEO’s who are not slaves to quarterly earnings reports.
  • Businesses and individuals that freely share what they are learning.

This is the short list.  I should add a couple more quasi-personal things: I’m happy to be doing what I’m doing, and grateful for the dedicated and passionate staff at GBMP.

Are there any things you would add to this list?  Let me hear from you.

Happy Thanksgiving.