Lean – not just a cost-cutting exercise

August 23, 2012

In this article, we will take a closer look at the drivers of projects. Contrary to the opinions of a lot of people, cost-cutting is not the ultimate objective of Lean. You should focus on growth instead because Lean will then better contribute to the company's long-term objectives and thereby become an issue for the whole company.

The company's two goals

Seen from the owners' perspective, most companies have two main goals:

The first is growth. By virtue of the fact that the company grows and increases market share, it becomes more valuable and more robust. The usual method of growing is by introducing successful new products, buying up competitors and using effective marketing methods.

The next goal is profitability. If the company is profitable, its value increases and the profits can go towards dividends or investment. The aim here is to create margin so that the profit per sold unit is as high as possible. The way towards increased profitability is usually via cost savings in the organization and bought-out items.

These two goals are obviously closely connected. By increasing growth, greater profitability becomes easier to achieve. It is estimated that a dollar of increased growth is twice as valuable as a dollar saved.

Is Lean only based on savings?

So the company's goals are growth and profitability. In what way does lean contribute to these?

With lean we concentrate on reducing waste, creating efficient solutions and increasing productivity. Therefore, we have to work mainly with the second objective – i.e. to lower the cost of goods sold and thus increase profitability. This is obvious – or is it?

I believe that the lean initiative must work towards both goals – i.e. both cost-cutting and the drive for growth. A lean project that is solely seen as a cost-cutting exercise will always take second place for top management.

Reduced costs are naturally always of interest, but measures that are considered to be capable of creating growth carry better leverage and, therefore, enjoy a different level of focus. If Lean is seen as a cost-cutting exercise, it will fall under the jurisdiction of production management, but will not be a major issue for top management. This is unfortunate because top management's support is essential to achieving the long-term approach necessary for the lean process. Lean will become a set of tools that production work with, but never a part of the corporate culture.

Five ways to use lean as a growth strategy

To start seeing Lean as a strategy for the entire company, the focus must, therefore, be shifted from pure cost-cutting to a "cost- and growth hunt". Here are five examples of how this change could be possible:

Firstly – improved quality. Lean improves quality, and improved quality means satisfied customers. Improved production quality is achieved using the lean method Jidoka, i.e. processes with built-in 100% inspection, and Poka Yoke which means mistake-proof production i.e. fool-proof methods that make it easy to do things the correct way. Kaizen, i.e. an effective improvement and a welcoming attitude towards exceptions will then lay the foundation for ongoing continuous improvement.

Secondly – lead times and reliable delivery. Lean improves the dependability of delivery and reduces lead times. In this way, fast deliveries can be promised, and adhered to, which is an order winner. By working with lean throughout the supply chain, you reduce the risk of disrupted supply due to shortfalls. Implementing TPM and making reliability the responsibility of the entire production organization you reduce the risk of delivery delays due to breakdowns.

Thirdly – Faster product introduction. Lean product developments and projects get products out to the market faster, with fewer faults. One example is the introduction of lean in product development and the projects department. This involves breaking down customer benefits and business sense to aims and key indicators for the project. Partial deliveries are tracked on a daily and weekly basis, and all deviations are used as input into continuous improvement. Faster product introduction with fewer errors can result in a significant increase in growth.

The fourth example – More effective selling. Lean can be introduced into the marketing- and sales organization. Charting progress, visualization, and automation creates a more effective sales organization that interacts with customers and other organizations in an improved way. Examples can be streamlining the quotation process and faster reaction to customer queries.

Finally the fifth – lean frees up resources for growth. Lean is about creating "lean" solutions (do not demand resources). Resources that are freed up should primarily be used for activities that promote growth. Perhaps an employee who previously worked in production could be used for technical sales support The employee responsible for telesales whose job has been automated can make customer visits and produce increased sales. Reduced inventory releases capital that can be used for long-term investments.

By Oskar Olofsson