Walt Thrun, author, academician, consultant, and practitioner from Tulsa, Oklahoma gives insights into the inherent weaknesses of Lean manufacturing, and Lean accounting systems. Thrun argues that while many lean concepts are valid, lean by itself is not a solution to the profit challenge faced by manufacturers. "What is required is a comprehensive integrated management system where lean concepts are just one integral part of the system when used in conjunction with the Theory of Constraints."
Such an integrated system is the basis of Thrun's latest book entitled: Maximizing Profit: How to Measure the Financial Impact of Manufacturing Decisions.
If lean was as effective as it is touted to be by its proponents, why are so many manufacturers singing the Leaners' Lament…..
They told us that this thing called "Lean"
would make our profits grow
so we've delighted customers
but not our CFO
Is Lean for the benefit of the customer or producer?
One of the primary tenets of lean manufacturing is that it is all about the customer, i.e., the customer is considered to be the primary constituency of the producer and so the producer is expected to enhance the wellbeing of the customer above other stakeholders.
Lean proponents suggest that the interests of the producer and its owners are secondary. Let's examine their argument which is really about the chicken and egg phenomenon where the customer is the egg and begins the process.
Granted, the egg may have been the genesis, i.e., a basic need of the marketplace may have been determined and met but what happens if we have an unhappy and/or underfed chicken? The cycle would immediately cease.
When and where should a plant begin the Lean process?
The lean proponents would also have us believe that the proper initial step in the lean process is to identify existing customers with existing products that the firm would like to keep and lean those products and associated processes.
Now let's examine that logic. If we are really serious about identifying and eliminating waste in our plants we need to first determine if those customers and products represent both strategic and financial benefits to our core business. We really can't nor should we be expected to be all things to all customers. (You would be amazed at some of the pitiful arguments that I hear from producers that they must accept any business that the customer requests. It is estimated that over 90% of producers are involved in making things that do not fit into their production system. "Fit", means enhancing the profit objective. Making things that don't fit is the single largest source of waste in our plants.)
If we lean first before making the basic determination of whether or not a particular segment of business adds to the health and wellbeing of the chicken, then we will end up…..
learning how to do the wrong things better!
By the way, I define "wrong" things as those decisions and actions that restrict our ability to increase profitability and in many instances they can be very subtle. Let me list seven such "wrong" things which I call the seven deadly sins of manufacturing. Each of the following seven issues should be addressed and eliminated from plant operations before any lean initiatives are begun.
| 1) | Using overhead absorption as a criterion for success in any way. |
| 2) | Focusing on gross profit margins even if Activity Based Costing was used to establish product costs. |
| 3) | Focusing on total facility utilization. |
| 4) | Focusing on cost minimization. |
| 5) | Focusing on revenue maximization. |
| 6) | Developing make-or-buy decisions by comparing a part's total standard cost to make it with the vendor's proposed price to supply it. |
| 7) | Using the incorrect unit of measure to express the capacity of their facility. |
Lean initiatives should be prioritized according to the producer's constraints.
Lean accounting systems
Then there are those who would suggest that a plant should expedite the installation of a lean accounting system to capture the financial tracks associated with operational lean activities. Consider, however, that perhaps the plant has leaned products and processes that shouldn't have been in the plant to begin with. Now then, what would such a reactive system tell us?
Any accounting system must be proactive and flag those products and processes that restrict financial opportunities.
There are several very basic items that can be spotted in an accounting system that should alert us that a particular system should be discarded from consideration. For example a system should be removed from further consideration if it:
| 1) | considers fixed cost per unit or total cost per unit if the total cost includes any cost that is a function of time and not the production activity level. There is no such thing as fixed cost per unit! |
| 2) | does not recognize that it is impossible to make a valid product decision based on that specific product's price/cost relationship. |
| 3) | does not recognize that it is a much greater sin to have excess/idle inventory than to have excess/idle capacity. |
Are these thoughts anti lean?
Heaven forbid that I would be considered to be anti lean. But lean in and of itself is not a solution. It is but one integral tool to be used with the Theory of Constraints in an integrated management system for manufacturers.
Such an integrated system has been available for several years.
I would urge each of you to obtain a copy of: Maximizing Profit: How to Measure the Financial Impact of Manufacturing Decisions. (Productivity Press, 2002)
Many of you may have seen this book on Amazon or Barnes & Noble but because the word Lean wasn't in the title it didn't capture your attention.
Let me list three suggestive titles that describe the contents of the book and could have been chosen that contain the term lean.
1) The Art of Knowing When and Where to Lean Using TOC
2) Contemporary Performance Measures for the Ultra Lean Manufacturer
3) Lean Not Into Your Own Understanding
The above were used for workshop titles based on the book's contents.
Consider the following partial reviews for the book.
"Texts on Engineering Economy, Operations Research, and recent works that stem from The Goal and Theory of Constraints are in the same arena as Maximizing Profit. In short, I think that one would have to read lots of other books and spend some time on the job to get what's in Walt Thrun's book."
"The material is both technically sound and complete. Walt has been student, practitioner, consultant, and teacher. His ability to see his subject from all these perspectives is apparent."
"In summary, I think Walt's book refines the thought process and closes the loop on the strategic planning facets of Theory of Constraints and Lean Manufacturing."
H. Lee Beard, PE, CFPIM, President Tulsa Region APICS
And the following is from a leader in the Lean community:
"Only someone with the author's background could see through typical misapplication of standard cost, activity based costing, equipment utilization and gross margin decreases accompanied with net profit increases. We in the Lean Manufacturing world are not usually able to explain these phenomenon's."
"It is incredible how the synergistic effect of optimization technology can increase profits so dramatically. Those of us involved in lean thinking have known for years that traditional accounting was flawed but this book removes the clouds and allows us to see our way clearly to greater profits."
H. David Paris, C.P.M., CFPIM, CIRM, Lean Consultant.
(David has conducted two hundred Lean 101 classes in the past three years
plus has supervised over one hundred Lean events.)
Qualifications to write such a book.
Authors' work history includes 20 years as both Controller and Operations Manager for several large manufacturers including Anaconda, Pepsi-Co., and the J.I. Case Company.
Teaching experience includes 15 years teaching the book's contents to both undergraduate and graduate students. In fact just retired from full time faculty position this past May.
Lack of Lean
Within the past several weeks the Productivity Manager of a large global manufacturer contacted me and said that they had purchased over 50 copies of the book for all their top managers and were ready to incorporate the integrated management system in total into their operations. He asked if I would travel to their headquarters to help with the implementation. We exchanged several e-mails as he was describing their anticipated benefits from the system. It was interesting that they felt that the book offered exactly what their company needed to elevate themselves above their competition and the term lean was never mentioned as part of the solution.
One of two things, i.e., either they had tried lean and it hadn't addressed their financial opportunities, or they did not consider that lean would or could address those opportunities.
My motivation
It should be apparent by now that I have a passion for excellence in the manufacturing segment of our economy because our standard of living is so closely tied to the present and future success of the U.S. industrial sector.
My passion is directly attributed to stakeholders that will be directly effected by our manufacturing excellence. These stakeholders are called grandchildren.
Walt Thrun 918-341-2850
