Saturday, April 24, 2010

Can 'Lean' Fire Back on Your Business? Potential Pitfalls in Implementation.

Recently I came across some news/discussions which stumped me and motivated me to examine the topic in detail. 'A leading tractor company couldn't fulfil its customer orders because it did not have enough inventory owing to lean manufacturing.'
But before we reach any conclusions, lets go in detail. The company reaped the benefits of Lean during the recession period as its decline in bottom-line was lower than other companies. It was when tide was turning, the company miscalculated. The demand rose faster than they had anticipated. Other firms with unsold inventory were clearing up while this company was turning its customers away. And the blame was put on Lean, which is not a person, not an organisation but just a concept.

So what is amiss in the whole episode? First we need to clarify the premises on which Lean gained prominence. As the consumers became more demanding, competition increased and so the customer choices (as the car became available in colours other than 'Black Ford Model T'), the old model of large batch size production became ineffective. Long-term forecasts became unreliable, large inventories rotted in stores and companies lost money.

Then entered 'Lean'. A customer oriented approach where you give what customer wants and produce only what he wants. Reduced cycle times and flexibility were key goals. To achieve them it became pertinent to reorganise and streamline value chain, eliminate wastes, empower employees and collaborate with suppliers. All these are good for business and in no way undermine it.

A common mistake is to equate Lean with inventory reduction. Inventory has to be looked in a strategic way. At one end its locked up capital, has high associated costs and risks of obsolescence with changing customer preferences. At other end it has strategic importance in terms of absorbing production ups & downs and buffer for variation in customer demands.

Now coming to tractors. Are they same as mobile phones where you need a new model every month to survive in market? Does the product configuration change drastically? Is the product life cycle as short as a laptop model? If the answer is 'No' then it would not hurt to keep some inventory. One might argue against it citing inventory as waste. But here its a strategic trade-off. Protecting customer base is more important and lost sales are more costly than inventory costs.

But does this strategic decision violates the basic tenets of Lean? Answer is 'No' as Lean is all about 'giving customer what he wants'. Just because 'Inventory' is mentioned as one of the 7 wastes, does not mean that it is to be eliminated at all times. Inventory has been and always be a strategic tool. Reduce it to save money. Increase it if required to protect your customer base. Especially when economy is coming out of recession and demand is bound to jump.

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