Sorry, But Lean Is About Cost Reduction… | Rob van Stekelenborg | LinkedIn

“It seems to be popular these last years and more recently to explicitly state that Lean is not (only) about cost reduction or cost cutting. See the recent posts by Mark Graban or Matt Hrivnak. So let me be somewhat controversial in this post (which I think is allowed to spark the discussion) and drop a bombshell: I think Lean is about cost reduction.”

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Michel Baudin‘s comments:

I know that much of the TPS literature is about “reducing costs,” but it never includes any discussion of money! Ohno is even quoted as saying “Costs are not there to be measured, but to be reduced.” On the face of it, it makes no sense, because cost is an accounting term intended to represent the monetary value of all the resources spent to achieve a result.

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The Goals That Matter: SQDCM | Mark Graban

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Blog post at Lean Blog : “Today is the start of the 2014 World Cup, which means much of the world will be talking about goals.I’m not really a soccer, I mean football, fan but I’m all for goals. In the Lean management system, we generally have five high-level goals. These were the goals taught to us in the auto industry, where I started my career, and they apply in healthcare.”


Michel Baudin‘s comments:

As I learned it, it was “Quality, Cost, Delivery, Safety, and Morale” -(QCDSM) rather than SQDCM. I am not sure the order matters that much. The rationale for grouping Quality, Cost, and Delivery is that they matter to customers, while Safety and Morale are internal issues of your organization, visible to customers only to the extent that they affect the other three.

They are actually dimensions of performance rather than goals. “Safety,” by itself, is not a goal; operating the safest plants in your industry is a goal. In management as taught in school, if you set this goal, you have to be able to assess how far you are from it and to tell when you have reached it. It means translating this goal into objectives that are quantified in metrics.

In this spirit, you decide to track, say, the number of consecutive days without lost time accidents, and the game begins. First, minor cuts and bruises, or repetitive stress, don’t count because they don’t result in the victims taking time off. Then, when a sleeve snagged by a machine pulls an operator’s hand into molten aluminum, the victim is blamed for hurting the plant’s performance.

Similar stories can be told about Quality, Cost, Delivery and Morale, and the recent scandal in the US Veterans’ Administration hospitals shows how far managers will go to fix their metrics.

To avoid this, you need to reduce metrics to their proper role of providing information an possibly generating alarms. In health care, you may measure patients’ temperature to detect an outbreak of fever, but you don’t measure doctors by their ability to keep the temperature of their patients under 102°F, with sanctions if they fail.

Likewise, on a production shop floor, the occurrence of incidents is a signal that you need to act. Then you improve safety by eliminating risks like oil on the floor, frayed cables, sharp corners on machines, unmarked transportation aisles, or inappropriate motions in operator jobs. You don’t make the workplace safer not by just rating managers based on metrics.

In summary, I don’t see anything wrong with SQDCM as a list. It covers all the dimensions of performance that you need to worry about in manufacturing operations, as well as many service operations. Mark uses it in health care, but it appears equally relevant in, say, car rental or restaurants. I don’t see it as universal, in that I don’t think it is sufficient in, for example, research and development.

And, in practice, focusing on SQDCM  easily degenerates into a metrics game.

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Lean Handbags and Micro Failures | Mark Graban

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Blog post from Mark Graban at Lean Blog :

“I enjoy reading the magazine Inc. for my interests in startups and entrepreneurship. There are often examples and case studies that directly reference Lean thinking or just sound like Lean and Kaizen with another label…”


Michel Baudin‘s comments:

Well run businesses are always good reading, even if their stories are usually embellished. Starting the design of fashion accessories from a market price or organizing to allow chefs in a restaurant chain to experiment with new dishes, however, just sounds like good management, not examples of “Lean Thinking.”

I have never found much depth in the contrasting of “Margin = Price – Cost” with “Price = Cost + Margin,” maybe  because I have never worked in a cost-plus business. Commercial manufacturers usually do not have the power to set prices this way. Perhaps, the Big Three US automakers did have that power in the 1950s, and Toyota didn’t.

In Tracy Kidder’s 1985 documentary book House,  a Boston lawyer hired a local contractor named to build a house in the suburbs. The contractor rigorously calculated the costs of the materials and labor, tacked on a 10% profit, and presented a bid with no wiggle room. It was not intended for negotiation, but the lawyer just had to wrangle some concession out of the contractor.  The culture clash between the two makes great reading, but also throws light on how “cost-plus” works in practice.

The equation “Margin = Price – Cost” is based on the assumption that Price and Cost are characteristics of the same nature, both attached to each unit of product. It is true of Price: whenever a unit is sold — in whatever form and however it is financed — it has a unit price, and it is not ambiguous.

Unit cost, on the other hand, is the result of allocations among products and over time done in a myriad different ways, with different results. By shifting overhead around, managers make the products they like appear cheap, and the ones they want to kill appear expensive. Once the “expensive” products are terminated, the same overhead is spread among fewer survivors, thus making new ones unprofitable, and the death spiral ends only with closure of the factory.

Instead of the simplistic  “Margin = Price – Cost” for each unit, a sound economic analysis of manufacturing considers the flows of revenues and expenses associated with making a product in given volumes over its life cycle, and sometimes a product family rather than an individual products with, for example, some products given away as free samples to promote the sale of other products.

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