Are your off-shore facilitates really less expensive? It all depends on how you are calculating your Total Cost of Ownership (TCO). Your TCO calculation should include all the hidden costs your new strategy will experience over the life of the project. These could include:

1. Extra inventory needed while you wait for your restocking order that is in transit from your chosen low-wage manufacturer. Remember, it is travelling slowly over the ocean a long distance away. (more…)

What’s the value of process improvement? One way to look at it is by examining the reason for having a quality system in the first place. Let’s start by understanding the basics of six sigma, which define the maturity level of an organization’s management system. By that, we don’t just mean just a quality management system, but your entire system of management.

Sigma Levels

• 1 sigma = 67% error rate (or “2 out of 3 transactions are in error”)
• 2 sigma = 33% error rate (1 out of 3 transactions in error)
• 3 sigma = 6.7% error rate (1 out of 15 transactions in error)
• 4 sigma = 0.63% error rate (1 out of 160 transactions in error)
• 5 sigma = 0.02% error rate (1 out of 4,300 transactions in error)
• 6 sigma = 0.00034% error rate (1 out of roughly 290,000 transactions in error)

We define a system as “in control” when an organization’s processes exhibit a “3 sigma” (6.7%) or lower error rate.  If your organization has not defined its processes, effectiveness criteria, and competencies, it’s more likely that you’re at a 1 or 2 sigma level.  In order to achieve the “3 sigma” level, your company must consistently make no more than 6.7 errors per hundred — that’s a 93.3% success rate.

“Improve constantly and forever the system of production and service,
to improve quality and productivity, and thus constantly decrease costs.”
From W. Edwards Deming’s “Fourteen Points”

Are You Operating at a 93.3% Success Rate?

Let’s say you see 60-70% as normal, which is about 2 sigma (66% success). The “delta”, or difference, between 2 and 3 sigma is about 27%. We believe that by adopting a quality process improvement program, you should see your success rate rise from 66% to 93%.  That’s a 41% improvement over your current rate! What organization wouldn’t be interested in that?

Once you hit 3 sigma, your next goal is to improve to a 4 sigma level, then 5 sigma, and finally 6 sigma (which is as close as you can realistically get to “zero defects” in most operations).

Now quantify the benefit.  What is 27 percentage points of success worth to your customers? The cost of implementing a six sigma process improvement program is small compared to the benefits to your customer (and, of course, to your bottom line). Process improvement practically guarantees customer retention, and can lead to customers advocating for you.

But if that’s not for you, don’t implement a quality program. Learn to live with a 2 sigma error rate — and hope your customers can live with it, too.

I think of Lean and Six Sigma as having many similarities and differences. If you see waste happening, you can eliminate it. A lean visual factory helps us to remove obvious waste.  Takt times help us to balance lines, while standard work, total preventive maintenance, and 5S help us reduce variation.

Lean is more than a set of tools, however: it’s about culture, the work environment, and a way of thinking.  Lean works well at the beginning of any quality program, where you want to sensitize the company to waste and teach continual improvement.  Lean is fast, agile, and prepares people for change.

If you are blessed with a high transaction environment and can easily recognize defect data and trends, you can eliminate the defects.  Statistical process control helps us to remove obvious control limit violations, detect instability, and monitor process drift.  DMAIC, DOE, and DFSS help us to filter out noise and methodically remove less obvious waste.

Six Sigma presents a different way of looking at issues and can help your employees get over intractable problems.  Six Sigma works well in the middle of any quality program, where you want to move the company to higher (i.e., world-class) levels of performance.  Six Sigma is sophisticated, technical, and removes performance obstacles.

Both Lean and Six Sigma require discipline, time, and a subject matter expert to deploy and manage. Neither requires a lot of money relative to the cost of poor quality they reduce. Each can eliminate obvious waste and reduce variation, though what is considered obvious or a variation may differ in each program.

Lean and Six Sigma by themselves can play a valuable role in any continuous improvement program, but it’s when they’re used in combination that companies will see the biggest, longest lasting payoffs.

Lean implementations sometimes get a bad reputation.  Some people think of lean in terms of layoffs, or too much of a focus on the lean tools and not enough on the people side of lean, or perhaps it is just a bad lean implementation.  So what is going wrong with your lean implementation?  Maybe you forgot lean accounting.

So Who Needs Lean Accounting?

You do if you think lean is about cutting costs.  That’s because…

“Lean manufacturing does not cut costs; it turns waste into available capacity.
The financial impact comes as you make decisions on how to use this capacity
(and the cash flow from reduced inventory).”
Brian Maskell, President BMA Inc.

Brian Maskell is an accountant who has written a lot about lean accounting.  The main problem with accounting today is that it was developed to address the mass production costing systems of a century ago.  This traditional accounting system methodology is now outdated as we move from mass production to more individualized and custom production, to virtual production and fulfillment, and to lean manufacturing systems that are designed around manufacturing flow and not around manufacturing scale.

Lean is all about economies of flow, not about antiquated mass production concepts like economies of scale.  Our manufacturing base is evolving.  Old line mass production techniques are moving to China, where long lead times from large-batch production runs are aligned with the long transportation times of sea-based shipping.

In order to compete today, one must evolve into higher throughput manufacturing, greater customization, and increased focus on the customers who prefer to have products when they need them and in the quantity they demand today, not months’ worth of stock sitting idle on the factory floor.

In lean accounting, inventory is considered waste, not an asset.  Labor is a fixed cost, not variable.  In accounting terms, your standard costing methods that treat labor and overhead as depreciable costs are damaging to the real understanding of how manufacturers make money.

Do You Use Metrics that Encourage Wasteful Actions?

Metrics like efficiency of labor, machine utilization, purchase price variance, or overhead absorption variance cause actions like building inventory, running large batches, maximizing earned hours, or purchasing large economic order quantities (EOQ) of raw materials.  Lean is not about reducing costs to increase profits.

Profits are an accounting number — businesses run on cash.  Employees and suppliers don’t get paid in profits, they get paid in cash.  Lean produces cash and increased capacity, that once sold, can be turned into profits.

Without an understanding and implementation of lean accounting methods, your lean implementation is destined to fail.  Lean accounting will help you to understand how your direct costing models are out-of-date, how to see and measure the financial impact of your lean improvement projects, and how to translate the increased capacity brought on by lean implementations into cash.

You can’t really implement lean thinking in any organization without lean accounting.

Lean is defined by at least one manufacturer as a philosophical approach to business, based on “satisfying customers by making exactly what they need, with the level of quality they need, when they need it, in the amount they need, while using a minimal amount of material, equipment, space, labor, and time.”

Sounds like the way every company ought to be managed, doesn’t it? Some companies have used lean with great success, yet many companies still don’t use lean principles, aren’t aware of what lean is, and don’t want to get involved with it.

Why is that? Well, what do we know about lean?

Lean Is All About Manufacturing

True, lean is rooted in manufacturing. The best known example of lean is the Toyota Production System, or TPS. Toyota has not limited its lean system to manufacturing, either. They’ve applied it to other functions, which has largely led to its success in lean. They recognize that siloing, or segregating, business functions is a major driver of waste. Yet somehow, siloing persists in business.

Siloing breeds inefficient or no communication. Therefore, siloing is responsible for at least three types of muda (waste) — delay, duplication, and unnecessary motion. Manufacturing has to be coordinated with sales, marketing, accounting, HR, and every other functional area, and vice versa. It wouldn’t do much good to have lean operations in one area and not in the others.

By all means, start small to increase your chances of success. Once you’ve had that first success, it’s easier to farm the concept of lean out to other areas of your business.

Lean Is Hot Now, But It’ll Cool Off

Lean is not a new practice or tool.  Lean has been practiced at least since the early part of the 20th century. Frederick W. Taylor, often called the Father of Scientific Management, wrote “Principles of Scientific Management” in 1911, which became a sort of bible for manufacturers. Japanese manufacturing used, and refined, many of the principles of lean to reestablish itself after World War II.

Based on the success of lean in Japan, it took root around the world, though with limited success. Companies that didn’t have the level of success with lean that Toyota and others experienced didn’t apply its principles holistically, or felt they couldn’t wait for a long-term payoff.

Lean has proved itself around the world for decades, and interest in lean seems to be increasing. For instance, Google Trends shows interest in “lean production” spiking last quarter and a growing interest in “lean management” over the last couple of years.

The Company Will Expect Me To Do More With Less

Lean has nothing to do with increasing the pace of work. Rather, it has everything to do with increasing productivity, coordinating processes, and eliminating waste. The objective in lean is not to speed up work but to even out the flow of work — remove delays and other kinds of waste that we’ve always thought were inherent but aren’t. The company may be looking for increased productivity, but speed does not equate to productivity, or quality.

Lean Advocates Don’t Use The Same Language We Do

Lean comes down to two objectives — increase value and eliminate waste. Every tool and technique, every theory and principle boils down to value and waste. What activities — in the customer’s view — contribute value to your products? What activities, or steps in the process, add nothing of value but raise your costs? Value stream mapping, kaizen, kanban, muda, and all the other terminology isn’t nearly as strange as not improving processes.

Lean Is Time Consuming And Costly To Implement And Maintain

Any time you begin a new (to you) way of doing things, you have to expect that not everything will go according to plan from the outset. However, once you’re past the “break-in period” with lean, you begin to realize its benefits. Lean is identifying and eliminating waste — improving the flow of processes.

Lean is a philosophy that ties together ideas and practices. Lean isn’t expensive tools and equipment. Eliminating waste frees capacity. This, in turn, obviates the need for more office space, more equipment, and more facilities. When done correctly, lean saves much more over a lifetime than it costs to implement. Lean continues to pay for itself.

To summarize, lean is not…

• Just for manufacturing;
• A fad that management will easily pick up and discard;
• Going to force you to do more with less;
• Some obtuse concept practiced by wizards in pointy hats; nor is it
• Costly and time consuming.

Do you have experiences with lean that you’d like to share? Did you have any misconceptions that were erased once you started using lean?

Lean is a way of thinking about quality, your employees, and how you use your resources to deliver your product or service to your customers in the smoothest, most predictable, and easiest way.  Six Sigma, on the other hand, is a process model used to separate common cause variation from special cause variation in order to reduce such variation, which, in turn, improves your process performance.

So, which do you use? Lean? Or, Six Sigma?

When Do You Use Lean?

Lean thinking can be used to reduce obvious waste.  What waste is obvious?  There are eight common wastes that are the most obvious and, therefore, are the easiest to remove from your system.  These are the “low hanging fruit” on your quality tree. Lean can be rolled out relatively easily and implemented company-wide.

Lean is a good starting point for companies looking to build a new quality system.  Lean is fast — small projects can be completed in days, or even hours.  Most Lean projects require little investment beyond people to implement the project.  You can use your regular employees on the project, giving them a little bit of Lean training to get started.

When Do You Use Six Sigma?

Six Sigma is best for problems where the solution is not obvious.  Six Sigma is a five-step process model:

• Design,
• Measure,
• Analyze,
• Improve, and
• Control.

The DMAIC model is how scientists solve problems.  They collect data, apply statistical analysis, and isolate the problem.  Then, they analyze the data until they find correlations, test possible solutions, and solve the problem.

Some Six Sigma projects can take as few as three months, while others require 12 months or more to complete.  Six Sigma requires technical experts (“black belts“) trained in the tools, statistics, and solving problems.  Six Sigma works best on isolated problems and can take years to implement company-wide.

Lean can be used at any point in time but is, perhaps, best used to implement a quality culture of continuous improvement.  Lean is a great starting point for building a quality system, since it’s easy to get started, projects are quick, and results can be obtained fast.

Six Sigma is better after a quality program is under way and employees have become accustomed to improvement.  Six Sigma is better at large-scale, expensive problems that you can collect a lot of data around.  Six Sigma is a mature quality approach that requires discipline, trained individuals, and big problems.

My suggestion is to start with Lean and build an improvement culture.  Then, after years of Lean training, implementing lean projects, and resolving the more obvious wastes in your organization, you’ll be ready for a more mature program like Six Sigma.  Some have now started to call this “Lean and Six Sigma”.

So, it needn’t be a case of “either…or”. Instead, it may be a case of the whole being greater than the sum of the parts. Lean and Six Sigma, apart from one another, are very good quality improvement tools. Together, Lean and Six Sigma are great! (Sort of a yin-and-yang, I suppose.)

Try “Lean and Six Sigma”. Let us know how well it works for you.

Thanks to recent reports across all media (ex., “Toyota’s Slow Awakening to a Deadly Problem“, 1 Feb 2010), we’re beginning to see the enormous scope of the acceleration error that has prompted the recall of millions of Toyota vehicles.

Toyota, a company long considered a paragon of lean manufacturing virtue (hence, its assuming the mantle of “World’s Largest Car Maker” from GM), appears to have a serious defect in many of its highest-selling products. “Unintended acceleration” has resulted in hundreds of accidents (reported so far) and the loss of untold lives. In the last two weeks, Toyota shut down the production lines of some of its most popular vehicles to address the situation.

Could it be, as some have suggested, that Toyota has been “hoist with (its) own petard”? Or, to put it another way, was Toyota done in by the very system designed to make it efficient and prosperous?

Just today (1 Feb 2010), Toyota “officially” announced it had found a way to correct the problem (one that goes beyond replacing or doctoring floor mats), but many people aren’t satisfied the manufacturing giant has found the real solution. And even if it has, it will be a long, long time before Toyota recovers from the damage it has done to its reputation.

Questions abound, including “Why didn’t Toyota conduct a thorough investigation when it first learned of the problem (back in 2007?)”, “Why did the company stay with the ‘floor mat’ explanation for so long?”, and “Why didn’t safety bodies (like the NHTSA) do more when they realized there was a problem?”

Toyota’s TPS system appears to be in need of a corrective action — the question is, “Where?” Is the problem in manufacturing only? Customer service? Marketing? Design & development? Outsourcing? Or, did Toyota get too big for its own good?

Toyota’s not the only organization incriminated in this scenario. The National Highway Traffic Safety Administration doesn’t come out of this situation unbloodied and unbowed. There are allegations that it could have and should have done more to keep the defect, whatever its root cause, from getting out of control.

In a half-hearted defense of NHTSA, they appear to have been ahead of many of their counterparts around the globe. Recalls in Europe and elsewhere followed the recalls in the US. Furthermore, every government body is hurting. There isn’t anything they don’t need — the authority to inspect and recall, or enforce laws; more people; more training; and a degree of autonomy, so they’re not called on the carpet (truly, no pun intended) for doing their job.

No amount of corrective action, though, can begin to make up for the people who’ve already lost their lives. (Interesting how in a situation like this, we tend to say, “Lives were lost needlessly“, when the opposite is true. Too many times, lives have to be lost — often in numbers — before action is taken.)

Lessons we might take from this at this “early” stage? One: corporate management is increasingly susceptible to hubris as a company grows.   Maybe Toyota was afflicted with the same disease financial services caught — we haven’t seen a problem in so long, they must all be licked. Not that corporate “attitude” is the root cause of Toyota’s problem, or even a proximate cause, but the “floor mat” story should have given us all pause to reflect.

Two: nothing can completely take the place of testing and inspection. We have safety standards, regulations, etc., in place in the aerospace and food businesses. For better or worse, more is on the way. Why not make the automotive world jump similar hurdles (i.e., make safety mandatory)?

Three: the best designed, most rigorous systems eventually come apart when they’re not paid attention. CAPAs, like anything else in your Quality Management System, have to be applied continually in order for your company and your system to improve. Toyota has said it in so many ways: “Satisfactory” isn’t.

So, what happened? Your ideas?

(P.S. – Not like Toyota needed more bad news, but now they have a braking problem on the newest Prius. What do you think of that?)

Much has been made about the lean benefits of “5S” — Sort, Shine, Set in place, Standardize, and Sustain — over the years it has been a part of the quality lexicon.  Very little is said about the drawbacks of implementing a 5S system.  5S is an exceptional lean system, in theory.  Where it often falls short is in the execution.  Now, I’m not saying that for every benefit of 5S, there’s a drawback.  As designed, it’s all good.  But like they say, “There are at least two sides to every story.”

The benefits of implementing a lean 5S system are huge.  They include:

• The employer’s concern for cleanliness and worker safety contributing, sometimes significantly, to morale…people take greater pride in their company when the company takes pride in its plant, offices, & people;
• The efficiencies gained by freeing up space, improving layout, and optimizing work flow are enormous;
• The potential for increases in productivity when things are laid out so as to maximize efficiency and turnaround time;
• Less time and motion are wasted when workstation layout is optimized, even in an office setting; and
• A well-run 5S system can encourage employees to think about, and look for, other incremental improvements, or kaizens (“baby steps”, Dr. Leo Marvin* called them) as they go about their daily business.

Read about the Toyota Production System (TPS) if you haven’t already.  There’s much to learn about the benefits of 5S in the TPS story.

The shortcomings of 5S are not in the system itself, but in how 5S is applied.  Most companies that don’t get 5S fall short on the most crucial element of all — sustaining.  To them, 5S isn’t a system — it’s an event.

What they don’t understand is that 5S isn’t a one-time-does-it cure, like a pill or injection for a serious physical ailment.  5S is a system, a cycle.  It’s a habit the workforce gets into, like exercising three or more times a week to decrease the likelihood of a “serious physical ailment”.  The company that doesn’t get much out of 5S probably isn’t incorporating the 5S philosophy in its daily routine.  Perhaps they don’t understand lean thinking.

Clearing everything off of everyone’s desk once a year is not 5S.  Having a place for everything and everything (back) in its place, every day — that’s 5S!

5S is sometimes applied rigorously — to the letter — by overzealous, micromanaging types.  They mistake discipline for tyranny.  Taken to extremes, 5S stifles individuality and creativity, lowering morale and productivity.  (Believe it or not, people aren’t inspired when they’re told, “It has to be this way…or else!”)

Some managers don’t quite get the “standardize” part of 5S, either.  Standardizing is about processes and procedures, not people.  When you say every workstation has to have a uniform appearance, that doesn’t mean you have to rob individual work areas of personality.  Limiting workers to “one or two personal effects, not to exceed a certain size or character”, has nothing whatsoever to do with 5S.

Granted, a small number of coworkers go overboard, with their Beanie Babies and their Star Wars posters, ad nauseam.  But, if my boss said, “Get rid of the hockey puck paperweight…oh, and no baseball calendar”, I’d be much harder to get along with than I already am.  (Ask my coworkers.)

In the effort to optimize work flow, maximize efficiency, and gain productivity, sometimes we forget to “build” breaks into the day.  We can’t possibly keep working at a steady pace throughout the workday, even though our machines and our computers can.  Actually, machines and computers need maintenance and down time almost as much as we do.  People cannot “multitask”, either. (Trying to multitask leads to irritability, sleeplessness, and a greater risk of illness, contributes to short attention span, etc. — as “Yogi” Berra said, “You can look it up!”)

The moral of the story is, “Understand and follow the spirit of the law, not the letter of the law.”  Use 5S as it’s designed and you’ll have increased success and a satisfied workforce.

* “What About Bob?” (1991)

Delivering Global Value and Excellence through Lean and Six Sigma

The ASQ Lean and Six Sigma Conference will be March 8-9, 2010, at the Pointe Hilton Tapatio Cliffs Resort in Phoenix, Arizona.  The theme of this year’s conference is “Delivering Global Value and Excellence Through Lean and Six Sigma.” Register Now

Preceding the conference (on the evening of March 7), the Six Sigma Forum is hosting a reception, at which attendees can meet the keynote speakers: Roger Hoerl, Ronald Snee, Rob Bryant, and Forrest Breyfogle III.

Leaning Out Your ISO 9001 QMS

Chris Anderson from Bizmanualz will be speaking on how to lean out your ISO 9001 QMS to ensure your ISO 9001 QMS is reducing your cost of poor quality.  At the conference, you’ll learn how to use lean principles to:

• Continually improve the effectiveness of your organization;
• Continually improve the capability of your workforce; and
• Reduce your organization’s reliance on procedure documentation.

See how the minimum requirements of ISO 9001 can be met using lean visual management techniques.

Keep those dates (March 8-9, 2010) open!

Why should you implement a lean kanban system?  How can you beat a simplified production system that costs less, satisfies customers more, and takes the headaches out of management?  A kanban is system of signals used in lean to balance the flow of work, materials, and people to get a job done.  Kanbans are used within agile software development, manufacturing, service deployment, construction, and just about anywhere people are implementing lean systems.

Let’s look at the top ten reasons for implementing a lean kanban system.

1. Visualizes your work

A lean kanban translates your production planning into visual kanban boards, kanban cards, or electronic e-kanban signals. A value stream map is used to understand your kanban needs.  Workers can all see what the current production plan is easily and quickly by reading the visual kanbans.

2. Reduces your Work In Progress (WIP)

A Kanban is built by balancing your individual work cells to the pull of customer demand using kanban signals.  Lean balanced flow reduces WIP created by batch sizes that are larger than customer orders.

3. Moves your work along Steadily

A balanced flow is achieved by understanding the takt time or rhythm of customer demand and then adjusting individual work cell batch sizes to achieve the steady balanced product flow.  Your workers jobs are now even, steady, set to a comfortable frequency that satisfies customers and management.

4. Improves your work flow

A steady balanced lean product flow is a great lean process improvement over traditional chaotic systems made of large batch sizes.  The whole system operates together as a team reducing employee stress levels and adding a calm to the organization.

5. Releases your work on demand

New orders trigger the system to produce the next batch.  A balanced system only produces enough products to fulfill customer demand and hence only releases orders on demand.

6. Simplifies your production planning

Your production planning is reduced to adjusting the kanban size as market conditions change.  A steady balanced manufacturing flow sets the order turnaround time eliminating expedited orders and special rush jobs that are the bane of traditional production planning.  In effect, all orders are expedited when you balance the flow to customer demand.

7. Eases your purchase planning

Purchasing becomes balanced with production kanbans and can be simplified even more using e-kanbans that automatically send purchase orders direct to suppliers.

8. Increases your customer satisfaction

The real goal of a kanban is to understand what all customers demand and then focus your production on that customer demand.  When your customers get what they want, when they want it, they become very satisfied customers.  That is the value of a lean competitive advantage.

9. Eliminates your employee confusion

Simplified production planning, simplified purchase planning, and simplified work cells all lead to a simplified system.  Employees can see the simplification and easily understand the flow.  Confusion is virtually eliminated.

10. Minimizes your overproduction risks

Inventory can become obsolete quickly in today’s fast changing marketplace.  A lean kanban will reduce your exposure to excessive older inventory by focusing your production on customer demand instead of production planning.  If you only make what you need then there is little obsolete inventory risk.

Top Ten Reasons for Using a Lean Kanban

1. Visualizes your work
2. Reduces your Work In Progress (WIP)
3. Moves your work along Steadily
4. Releases your work on demand
5. Improves your work flow
6. Simplifies your production planning
7. Eases your purchase planning
8. Increases your customer satisfaction
9. Eliminates your employee confusion
10. Minimizes your overproduction risks