Lean transformation is a proven, highly effective strategy for increasing enterprise value. Based on the revolutionary principles of the Toyota Production System, Lean describes a problem-solving approach and organizational culture change that drives continuous improvement. Its focus on identifying and eliminating waste has the ability to maximize efficiency in organizations of all types and sizes.
While many organizations have turned to Lean to create an adaptable environment that values continuous movement and improvement, successful implementation of the methodology has proven to be a difficult task. Recent studies show that failure rates for Lean programs range between 50 percent and 95 percent.
The reasons transformations fail vary from a lack of employee engagement to inadequate management to poor cross-functional collaboration. More often than not; however, points of failure can be traced back to the same root cause: an incomplete or inaccurate understanding of business opportunities prior to Lean implementation. Company leaders often become caught up in simply “doing” Lean rather than using Lean to turn their strategy into action and cultivate a culture of customer satisfaction and employee motivation. This traditional approach effectively sets limits on the improvement potential of the organization, sabotaging the transformation before it even begins.
To launch a successful Lean transformation that significantly increases enterprise value, organizations must overcome these common barriers to a change initiative. It requires a meticulous diagnostic approach to implementation that identifies existing strategic improvement opportunities and constructs a customizable roadmap for achieving results. Companies should consider four phases.
Phase I: Data Capture and Preparation – An effective diagnostic should be a business-minded assessment; not an academic exercise for tactical Lean zealots. The approach must replicate the attitude and mentality of a prospective new business owner. That means using real data and taking nothing for granted.
Phase II: Current State Assessment – The current state assessment is arguably the most important part of the diagnostic. This is where organizations can rapidly and systematically uncover the improvement potential their business. During this assessment, each business function in the end-to-end business process is analyzed to identify waste and improvement opportunities. It’s intended to be a team-based exercise, putting the pen in the hands of the people who actually do the work. And it doesn’t take place on a computer screen or a conference room wall; it’s a “go-see” process that takes place where the work is done.
Phase III: Strategic Option Evaluation and Selection – During this phase of the diagnostic, the team determines which strategic options for pursuing the identified goals are viable. The requirements and impact of each option are evaluated, and new breakthroughs are defined. The team then looks at the possibilities and makes a commitment to what they will do. The ability to thoroughly evaluate and then choose strategic options puts the expected benefits, costs and plan of action clearly in focus for the entire company — before any action is taken. This provides an important opportunity to assess the level of appetite and commitment that exists within the business to make it happen.
Phase IV: Benefits Hypothesis and Report – The final phase of the diagnostic is a comprehensive report that summarizes the key outputs and findings from each of the prior three phases. It is essentially a record and reference of what the team found, what they committed to do, how they plan to do it, and what they expect the results to be.
Below are two examples of how large-scale companies are leveraging this approach as a powerful springboard for a successful transformation.
Enterprise-level: To ensure the viability of its business into the future, a _____ based $1.5 Billion International organization needed to reduce costs across all areas of the organization, as well as maximize its share in an increasingly competitive market. Company leaders also sought to develop the agility and enduring improvement capabilities that would allow them to adapt and diversify into new markets, technologies, and geographies.
Beginning the Lean journey with a comprehensive enterprise assessment allowed this enterprise to rapidly identify the waste contributing to its elevated expenses and decreased efficiency. Strategic options for increasing enterprise value were identified, including lowering the price per unit to achieve cost parity in the market, reducing pre and post-planning lead time to improve customer satisfaction, and funding future growth with savings created by reducing operating expenses.
The immediate impact of the strategic options decided upon the organization’s executive team was determined:
- Project delivery lead time target set to reduce by 30 percent, allowing completion of 5 additional projects within the current year, resulting in business growth
- $9M in upfront savings through reorganization and restructure
- Procurement lead time reduced by 50 percent, with 20 percent less cost in major capital items and a 30 percent reduction in support services cost
- Productivity gains ranging from 15 to 35 percent in value streams within scope
Having completed a successful enterprise assessment, the organizations was able to continue through to the next stages of its Lean journey. As a result, its cumulative annualized cost reduction is expected to be in excess of $100M by the end of the three-year transformation effort.
Business unit-level: An $80 Million tier one automotive facility with a 1 million-square-foot main plant location wanted to lower overhead and operating costs, as well as improve working capital. Company leaders wished to sell their existing plant to another manufacturer, and reduce the footprint of their new facility design by 25 percent.
The organization’s Lean enterprise assessment uncovered significant business opportunities surrounding lead time, inventory, supply chain, decision-making, quality and organizational structure. In each area, the team was able to identify waste and quantify the potential benefit of eliminating that waste.
Strategic options for pursuing these opportunities were chosen, and the immediate impact was determined:
- $8.8M in incremental sales, generating a $1.5M increase in EBITDA
- Annual costs reduced by $4.1M
- $2M improvement in working capital
- Stock turns increased from 15 to 43
- Lead time reduced 5 to 6 days — a 50 percent improvement
- Scrap reduction of 3 percent
- New facility footprint reduced by one-third
- Direct productivity increase of 20 percent
- Revised make-versus-buy principle to inform sourcing decisions
A diagnostic approach to Lean implementation provides unparalleled, upfront insight into the capabilities of your business, and has the power to reveal huge opportunities you may be missing — and help you understand how to pursue them, achieving results you never thought possible. Built around the business challenges and time constraints inherent in a fast-paced acquisition, this approach uniquely equips organizations to overcome the minefield of potential failure points that often impede a transformation.
Jon Armstrong is Executive Vice President at Simpler Consulting.
