Some recent data suggests that the U.S. lags in the global race to invest in production technology and research. Since this economic downturn has taken profits away it is not surprising that companies are not investing as much. Many companies are focused on reorganizing and rebalancing to a newer lower revenue. With all this excess capacity there is little motivation to invest in production.
In the last two quarters, investment in equipment and software, key factors in our high-technology industrial economy, fell by 28% and 34%, respectively, at annual rates. Production of industrial equipment has fallen by 21% since its high in 2007, the biggest decline since the 1950s. This contrasts sharply with an investment boom in China, where fixed asset investment already averages more than 40% of GDP and grew by 33.6% in the first half of 2009. India, too, invests nearly 50% more than the United States in terms of the proportion of GDP. In the tough year of 2008, even Germany increased investments in machinery and equipment by 6%.
The US government is immersed in massive policy changes that are bound to ultimately affect businesses. This spending in excess will certainly be paid for in part by businesses. It is unfortunate that much of the money they will likely forfeit will not support them.
The massive stimulus bill in the United States was billed as an investment, but the amount going to infrastructure and industrial investment in areas like alternative energy production, amounts to around 0.5% of GDP in 2009 and 2010. Again contrast this with China, where its stimulus package led to increased infrastructure investment of 57% at an annual rate in the first half of 2009, according to economist Ed Yardeni.
If we want to continue to be a global leader in manufacturing we must change this short term aversion to invest in sophisticated capital goods and technology. This investment is what is needed for new products and technologies to be developed which will spur on the next growth cycle in our economy.
If we are to compete with the rising economic powers, and traditional ones like Germany, we must do better in the short and longer run. We need to think more carefully about how we spend "stimulus" dollars and pay attention to the fiscal imbalances that constrain future investments. We must create anew a policy environment that favors investment in technology and productivity-enhancing processes, which are key not only to manufacturing, but also to improving our quality of life.
Thursday, September 3, 2009
Tuesday, September 1, 2009
Lean Accounting at Watlow Electric
Many organizations are having success implementing Lean practices but very few have accepted lean accounting. Orry Fiume, who led The Wiremold Company conversion to lean accounting in the early 1990’s before retiring, now spends time sharing the virtues of lean accounting at the Lean Enterprise Institute.
Fiume shows how a standard cost-based P&L statement penalizes a fictitious manufacturer for reducing inventory, because the labor and overhead costs associated with the production of that inventory have been deferred to the balance sheet until the year the inventory is sold.
"When we reduce our inventory, or improve our inventory turns -- which is a good thing -- we have to take some of that labor and overhead from prior years that was capitalized on the balance sheet and we have to take it off the balance sheet," Fiume explains. "And the only place it can go is through the P&L."
Unfortunately, those deferred labor-and-overhead costs are buried on a standard cost-based P&L (usually showing up as an unfavorable overhead variance) -- which often prompts corporate brass to question the value of lean initiatives taking place in the company.
While lean accounting can provide a clearer picture of a company’s lean improvements it has been slow to adopt for several reasons.
"Traditional accounting systems reward overproduction, and overproduction is a very common way for manufacturers to make their results look better," Hourselt says.
Hourselt points out that public companies have been particularly resistant to adopting lean accounting, in part because "the world of public [companies] thinks quarterly earning first."
"Until the academic world starts telling the accounting profession that lean accounting is a legitimate way of looking at your financial information, people are going to be reluctant to adopt it."-- Orest "Orry" Fiume
Watlow Electric has found that lean accounting or what they call “value stream management” has given them a better understanding of its cost structure. Ed Grinde, business unit controller for Watlow Electric Manufacturing, offers 9 tips and best practices for implementing lean accounting.
1.Upper management support is critical.
2.Everyone must understand that lean is a growth strategy-not a cost-cutting strategy.
3.Properly identify your value streams.
4.Don't try to attain perfection before setting up your value streams.
5.Keep metrics and methods simple and manual in the beginning.
6.Do not set hard goals.
7.Value stream leaders need autonomy to be "little general managers."
8.Put as much of your costs as possible directly into the value streams.
9.Use the five principles of lean as your criteria to make decisions.
Grinde provides some more insight on these tips in the article worth reviewing in your own organization. These are even good strategies for implementing lean thinking in your organization.
I wonder how many organizations are practicing lean accounting. We will do an informal survey of readers. Send a comment if your organization is practicing lean accouting. If you care to share your experience, include that as well.
Fiume shows how a standard cost-based P&L statement penalizes a fictitious manufacturer for reducing inventory, because the labor and overhead costs associated with the production of that inventory have been deferred to the balance sheet until the year the inventory is sold.
"When we reduce our inventory, or improve our inventory turns -- which is a good thing -- we have to take some of that labor and overhead from prior years that was capitalized on the balance sheet and we have to take it off the balance sheet," Fiume explains. "And the only place it can go is through the P&L."
Unfortunately, those deferred labor-and-overhead costs are buried on a standard cost-based P&L (usually showing up as an unfavorable overhead variance) -- which often prompts corporate brass to question the value of lean initiatives taking place in the company.
While lean accounting can provide a clearer picture of a company’s lean improvements it has been slow to adopt for several reasons.
"Traditional accounting systems reward overproduction, and overproduction is a very common way for manufacturers to make their results look better," Hourselt says.
Hourselt points out that public companies have been particularly resistant to adopting lean accounting, in part because "the world of public [companies] thinks quarterly earning first."
"Until the academic world starts telling the accounting profession that lean accounting is a legitimate way of looking at your financial information, people are going to be reluctant to adopt it."-- Orest "Orry" Fiume
Watlow Electric has found that lean accounting or what they call “value stream management” has given them a better understanding of its cost structure. Ed Grinde, business unit controller for Watlow Electric Manufacturing, offers 9 tips and best practices for implementing lean accounting.
1.Upper management support is critical.
2.Everyone must understand that lean is a growth strategy-not a cost-cutting strategy.
3.Properly identify your value streams.
4.Don't try to attain perfection before setting up your value streams.
5.Keep metrics and methods simple and manual in the beginning.
6.Do not set hard goals.
7.Value stream leaders need autonomy to be "little general managers."
8.Put as much of your costs as possible directly into the value streams.
9.Use the five principles of lean as your criteria to make decisions.
Grinde provides some more insight on these tips in the article worth reviewing in your own organization. These are even good strategies for implementing lean thinking in your organization.
I wonder how many organizations are practicing lean accounting. We will do an informal survey of readers. Send a comment if your organization is practicing lean accouting. If you care to share your experience, include that as well.
Thursday, August 27, 2009
Modern Machine Shop Online & the Most Valuable Lean Resource for Success
Modern Machine Shop is a metalworking professionals’ publication that aims to improve and expand manufacturing by connecting the buyers and sellers of metalworking technology. They recently launched a Lean Manufacturing Zone.
MMS Online’s newly expanded Lean Manufacturing Zone includes both articles and video profiles about machining facilities that are succeeding at lean.
Other resources in this zone include articles on lean-manufacturing concepts such as 5S, setup reduction, value-stream mapping, cells and chaku-chaku—as well as a variety of articles specifically focused on lean in the job shop.
A recent article of interest highlights the lean journey at KLH Industries. Their journey is one where lean fizzled after some initial success.
Company president Ken Heins knew he needed to find a way to make lean stick. He had studied lean, and understood the potential that a commitment to lean manufacturing would have for improving the focus, responsiveness and efficiency of his machining business. The problem was that he couldn’t do it himself. He couldn’t even do it with a group of lean champions around him. For a culture of lean to take hold at KLH, more of the employees would have to look at the workflow as he had come to see it, and integrate an understanding of lean into the way they go about their work.
However, they found the secret to succeeding in changing a company’s culture which is so necessary to sustain lean transformations.
The solution that KLH found is this: Get everyone involved. Instruct everyone so that every set of eyes is trained to look for waste. The parts do not repeat, but the processes do. And who better to see how to improve these processes than the people who interact with them every single day?
KLH also made a number of other important changes to prevent them from fizzling out in the future:
1) pay attention to the little things to sustain commitment
2) create custom shadow boards for machine tools for consistency
3) implement kanban to prevent running out of materials
4) incentivize improvement suggestion and implementation
5) create an environment where failure is acceptable and valuable
I particularly like this last line in the article about the importance of failure and success as a necessary part of the lean process.
The lean journey progresses this way—through both successes and failures. The point of lean is eliminating waste, and no time is wasted that is spent on trying a promising idea.
Some companies and management miss this key point. Lean is about the journey, not the destination. Results will come if you keep your focus on the process to get to the results and not the results themselves.
MMS Online’s newly expanded Lean Manufacturing Zone includes both articles and video profiles about machining facilities that are succeeding at lean.
Other resources in this zone include articles on lean-manufacturing concepts such as 5S, setup reduction, value-stream mapping, cells and chaku-chaku—as well as a variety of articles specifically focused on lean in the job shop.
A recent article of interest highlights the lean journey at KLH Industries. Their journey is one where lean fizzled after some initial success.
Company president Ken Heins knew he needed to find a way to make lean stick. He had studied lean, and understood the potential that a commitment to lean manufacturing would have for improving the focus, responsiveness and efficiency of his machining business. The problem was that he couldn’t do it himself. He couldn’t even do it with a group of lean champions around him. For a culture of lean to take hold at KLH, more of the employees would have to look at the workflow as he had come to see it, and integrate an understanding of lean into the way they go about their work.
However, they found the secret to succeeding in changing a company’s culture which is so necessary to sustain lean transformations.
The solution that KLH found is this: Get everyone involved. Instruct everyone so that every set of eyes is trained to look for waste. The parts do not repeat, but the processes do. And who better to see how to improve these processes than the people who interact with them every single day?
KLH also made a number of other important changes to prevent them from fizzling out in the future:
1) pay attention to the little things to sustain commitment
2) create custom shadow boards for machine tools for consistency
3) implement kanban to prevent running out of materials
4) incentivize improvement suggestion and implementation
5) create an environment where failure is acceptable and valuable
I particularly like this last line in the article about the importance of failure and success as a necessary part of the lean process.
The lean journey progresses this way—through both successes and failures. The point of lean is eliminating waste, and no time is wasted that is spent on trying a promising idea.
Some companies and management miss this key point. Lean is about the journey, not the destination. Results will come if you keep your focus on the process to get to the results and not the results themselves.
Tuesday, August 25, 2009
Good Urgency vs Bad Urgency
The challenge for many leaders of continuous improvement is two fold. First, you must inspire the desire or enthusiasm necessary to change. Second, you must harness this energy in the right direction. To make this change real and combat complacency, the death of many an organization, leaders seek to create a sense of urgency. John P. Kotter, a Harvard Business School Professor and author of A Sense of Urgency, was recently interviewed by Inc.com about leading during a recession.
Kotter believes there are two kinds of urgency -- and, like cholesterol, one is good and one is bad. The good kind is characterized by constant scrutiny of external promise and peril. It involves relentless focus on doing only those things that move the business forward in the marketplace and on doing them right now, if not sooner. The bad kind -- to which many companies have recently succumbed -- is panic driven and characterized by breathless activity that winds up producing nothing demonstrably new.
Kotter advocates using crises like this economic downturn to your advantage when creating a true urgency. He warns that if you use a crisis for urgency it must be managed with clear plans and actions, significant in size, visible, and unambiguous to real business problems.
If you want to tell whether you have bad urgency, Kotter recommends trying the white space calendar test.
There are lots of signs of false urgency. Frenetic activity. Everyone is exhausted, working 14-hour days. One red flag is how difficult it is to schedule a meeting. With true urgency, people leave lots of white space on their calendars, because they recognize that the important stuff -- the stuff they need to deal with immediately -- is going to happen. If you're overbooked, you can't manage pressing problems or even recognize they're pressing until too late.
People think that in urgent situations, they're expected to take on more and more. They're worried about keeping their jobs, so they try to demonstrate their value by being incredibly busy. But the leader should be telling them to do just the opposite. He should say, "I want everyone to look at your calendars. What's on there that doesn't clearly move us forward? Get rid of it!"
In Lean environments change is expected through a constant Plan-Do-Check-Act process of reflection and problem solving. You can always do better and you must strive for True North. To do this you need everyone to make improvements toward your Ideal State.
True urgency is the most important precursor of real change. Seventy percent of change efforts fail or never launch at all, and one reason is that company leaders don't create a sense of urgency around what they're doing.
Kotter was asked about how much attention you should pay to internal issues versus the outside world. His answer in Lean terms is what we call adding value from the voice of the customer.
There should be no meetings that are only about internal matters, without any connection to the outside world. In some way, the outside world always provides the "why" we are doing something.
Many organizations struggle to create the change necessary and many more of them can not sustain the gains of their change. Furthermore, there are many examples of companies picking the wrong sense of urgency and failing. Do you have a true sense of urgency? Does it come from the customer? What does the calendar at your organization look like?
Kotter believes there are two kinds of urgency -- and, like cholesterol, one is good and one is bad. The good kind is characterized by constant scrutiny of external promise and peril. It involves relentless focus on doing only those things that move the business forward in the marketplace and on doing them right now, if not sooner. The bad kind -- to which many companies have recently succumbed -- is panic driven and characterized by breathless activity that winds up producing nothing demonstrably new.
Kotter advocates using crises like this economic downturn to your advantage when creating a true urgency. He warns that if you use a crisis for urgency it must be managed with clear plans and actions, significant in size, visible, and unambiguous to real business problems.
If you want to tell whether you have bad urgency, Kotter recommends trying the white space calendar test.
There are lots of signs of false urgency. Frenetic activity. Everyone is exhausted, working 14-hour days. One red flag is how difficult it is to schedule a meeting. With true urgency, people leave lots of white space on their calendars, because they recognize that the important stuff -- the stuff they need to deal with immediately -- is going to happen. If you're overbooked, you can't manage pressing problems or even recognize they're pressing until too late.
People think that in urgent situations, they're expected to take on more and more. They're worried about keeping their jobs, so they try to demonstrate their value by being incredibly busy. But the leader should be telling them to do just the opposite. He should say, "I want everyone to look at your calendars. What's on there that doesn't clearly move us forward? Get rid of it!"
In Lean environments change is expected through a constant Plan-Do-Check-Act process of reflection and problem solving. You can always do better and you must strive for True North. To do this you need everyone to make improvements toward your Ideal State.
True urgency is the most important precursor of real change. Seventy percent of change efforts fail or never launch at all, and one reason is that company leaders don't create a sense of urgency around what they're doing.
Kotter was asked about how much attention you should pay to internal issues versus the outside world. His answer in Lean terms is what we call adding value from the voice of the customer.
There should be no meetings that are only about internal matters, without any connection to the outside world. In some way, the outside world always provides the "why" we are doing something.
Many organizations struggle to create the change necessary and many more of them can not sustain the gains of their change. Furthermore, there are many examples of companies picking the wrong sense of urgency and failing. Do you have a true sense of urgency? Does it come from the customer? What does the calendar at your organization look like?
Sunday, August 23, 2009
The Eight Wastes of NPD
I am one of those people who believe that there is truly only one reason companies should implement Lean teachings and that is to grow your business. Many may think that there are other reasons but as Eliyahu Goldratt wrote in “The Goal”, the objective is to “make money now and in the future”. There are probably some that believe the goal of business is about customer satisfaction or employee satisfaction but those can not be achieved with out “making money now and in the future”.
For a business to grow profitably there are essentially two elements that are needed: Lean and Innovation. You need innovative products, technologies, and services that people really want. And this all needs to be done with operational excellence to compete in a global consumer driven market.
Many companies refer to the innovative arm of the business as New Product Development (NPD). The application of Lean principles and concepts to efficiently deliver high quality products to market timely with minimal investment is relatively new and therefore limited.
I recently read an article about the Eight Wastes in Lean NPD and thought it was worth sharing. The author debunks the common myths of it won’t work here syndrome and goes on to illustrate how to identify the eight wastes in the NPD process. According to the author the generic definitions of these wastes apply:
1. Motion – frequently going in search of information
2. Transportation – numerous electronic handoffs of information
3. Over Production – poor management drives inefficiencies and overruns of schedule and cost
4. Over Processing – unnecessary design steps, over-engineered products, over-designed, and overly complex processes
5. Waiting – time wasted from a network of dependent tasks along critical path
6. Inventory – build up of unprocessed information
7. Defects – never right the first time, scrap and rework expected
8. Behavioral Waste – underutilized intelligence and intellect
While we are always pursuing continuous improvement by eliminating waste from our processes, Lean is really about learning to “see”. Maybe this will help to illustrate the wastes within the process of innovation which is so important to the goal of growing a profitable enterprise for customers.
Thursday, August 20, 2009
Draw a Pig to Learn the Importance of Standard Work
So you might ask what does standard work and drawing a pig have in common. Well, the activity of drawing a pig can be used to teach the importance of standardized work. I learned of this activity a number of years ago during a standard work seminar. It was described in the AME Target Magazine in fall of 2005 in an article called “Wabash National’s Lean Turnaround Experience..
This activity is simple, no cost, and great for everyone. I often use this activity as a teambuilding exercise to kick-off teaching elements of standard work. Paul Levy, President and CEO of Beth Israel Deaconess Medical Center in
This training is unique in proving a picture is worth a thousand words and the importance of standard work in the elimination of variability from unit to unit. It can be a great ice breaker or team building exercise even if you aren’t specifically teaching standard work.
Tuesday, August 18, 2009
Resources at the Lean Learning Center
Let’s take an opportunity to look at the resources over at the Lean Learning Center. The Lean Learning Center was founded in 2001 by Andy Carlino, Jamie Flinchbaugh and Dennis Pawley to address the gaps and barriers that are holding back companies from successful and sustainable lean transformation. The biggest failure mode of lean transformation is a general misunderstanding of the importance of a holistic lean approach. Implementation often looks like a collection of lean tools, as opposed to a complete solution where all of the mechanisms work together to evoke change. The Lean Learning Center is committed to developing leaders and learners for lean transformation, and delivering the resources and curriculum to help you learn and gain valuable new skills.
At their on-line Knowledge Center you can find a collection of useful materials including:
Primer on Lean Lingo
Collection of articles and industry publications
Lean Progress Newsletter
The primer is meant to give people new to lean a brief introduction to lean language. Jamie Flinchbaugh writes a column monthly in Assembly Magazine called Leading Lean. You can review those articles dating back to 2006 on their website. The associates at the Lean Learning Center continually engage in research in development and you can learn more about this from their collection of published articles. They also publish a newsletter several times a year where they discuss various lean topics from their experience and perspective.
These reading materials are a convenient source for self learning and for sharing within your organization. The Lean Learning Center is a good place to start research on those new tools you want to implement in your organization.
At their on-line Knowledge Center you can find a collection of useful materials including:
Primer on Lean Lingo
Collection of articles and industry publications
Lean Progress Newsletter
The primer is meant to give people new to lean a brief introduction to lean language. Jamie Flinchbaugh writes a column monthly in Assembly Magazine called Leading Lean. You can review those articles dating back to 2006 on their website. The associates at the Lean Learning Center continually engage in research in development and you can learn more about this from their collection of published articles. They also publish a newsletter several times a year where they discuss various lean topics from their experience and perspective.
These reading materials are a convenient source for self learning and for sharing within your organization. The Lean Learning Center is a good place to start research on those new tools you want to implement in your organization.
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