Historically, the American auto industry was blessed with demand, which meant overflowing order books and in turn excessive inventory. They could afford holding huge non-moving inventory without breaking a sweat. The Japanese car manufacturers, on the other hand never enjoyed this luxury. They were much smaller startups with limited cash reserves. This was a vital differentiator that drove Toyota to look for innovative means to compete by boosting efficiencies in all its activities. Taiichi Ohno, the father of Lean manufacturing at Toyota, was handed the complex task of looking for ways to make Toyota more competitive, which led to the birth of the Toyota Production System, or Lean Manufacturing as we know it today!
In today’s context, globalization has played its part in creating intense competition. Industries no longer enjoy protectionist barriers that were once the order of the day. While this brings with it huge opportunities, it also brings a whole new set of threats. Price wars and product dumping are rampant worldwide. While anti-dumping and anti-trust laws play their part in creating a level playing field, they alone are not adequate to protect the industries – a more pro-active approach is needed. Take the example of the pharma industry; Indian API manufacturers, which at one point enjoyed an undisputed cost advantage, are today entangled in a bitter price war with Chinese competitors. In terms of quality, the Chinese APIs are on-par with their Indian counterpart while maintaining a significant cost advantage, thus causing shifts in customer loyalty. Another example is the automotive industry; intense price pressure has made, in several cases, Chinese imports more price competitive than parts locally made thus threatening the very survival of several tier-1 and tier-2 suppliers. The writing is clear on the wall, if companies don’t cut costs rapidly, and look for ways to ‘Lean’ their operations, their days are simply numbered.
Let us now explore how lean thinking can save industries. Lean, simply put, is war on waste. This means anything that does not add value must go. This begins with learning product features (New Product Introduction through Lean Approach – NPILean) i.e. Eliminating any and every feature that customers don’t perceive as value adding and are unwilling to pay for. Take for example, consumer electronics; over the years, companies like Apple have taken the lead in systematically eliminating components from their products while enhancing features and customer value perception dramatically, be it the iPod or iPad or the MacBook Air series of laptops. All this means that Apple today makes better products with superior features that the customers perceive value in, while eliminating components and features that the customers are indifferent towards. This translates to lower costs and superior margins as compared to competitors.
Beyond the realm of product design, Lean finds its place in manufacturing and service delivery. In order to apply lean, one needs to start by asking the question, from the time sales order is generated to the time invoice is raised and payments collected, how can the lead time be reduced through elimination of wasteful activities? This can be achieved only if the entire organization functions like a well oiled machine with each department and individual working in perfect harmony and in sync with the overall customer demand rate, which is also known as ‘takt’ time or the heart-beat of the organization. Think of the organization as a water hose with products/services akin to water flowing through the hose. Now all the inefficiencies such as process complexities, equipment breakdown, long changeover times, defects & rework, product returns and field failures act as flow inhibitors that block the hose. As a result, inventory begins to pile up everywhere; in many cases, building up of inventory is also a conscious decision because it is perceived as a safety net to avoid stock out situations. But lean thinking classifies inventory as a liability and not an asset going against the grain of traditional accounting principles. This is because inventory carrying cost is a wasteful expense that eats into the firm’s profitability. Too, inventory often means value added products lying around without generating cash flow for the company.
Finally, Lean in supply chain is the last but most vital ingredient that ensures efficiency throughout. A company can never become lean if its supply chain is ‘un-lean’. This is because any inefficiency or variation within the chain will trigger what is called a ‘bull-whip’ effect, which simply means an amplification of variation throughout the chain. A true Lean organization ensures that its entire supply chain, both upstream and downstream is tuned for just-in-time operations. When parts arrive sooner, they will lie around as excess inventory costing the company dollars, and if they come later, they will cause delays in downstream activities. Thus if the supply chain is not synchronized to manufacturing flow, it is going to cause unnecessary variation ultimately causing the entire system to fail.
All this leads to one simple conclusion. Lean is no longer a mere management jargon but a quintessential survival tool. Every organization irrespective of its size and scale of operation must look at ways and means to eliminate waste and become lean. The benefits thus accrued if passed onto the customers will not only boost customer loyalty but also result in competitive advantage for the companies and in turn for the entire nation.
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