My thought process on initiating lean manufacturing in small and emerging organizations

         Lean is achieving “more with less.” That is, making more production with

given resources or increased efficiency or achieving with less cost.

      Lean manufacturing system can be understood by relating to a human body. If the person is lean means general understanding is that he is free from unnecessary FAT in his body, hence free from unnecessary side effects like BP, Pain in joints, laziness, and the person is perceived as healthy, more flexible, and active.The same way if the organization is lean means, it is free from unnecessary fats like high inventory, high rejection, high breakdowns or line stoppages factors, etc  which leads to more flexible in delivery, less lead time , low cost of manufacturing and free flow of communication ( This is the way I introduce lean to new forums in my consulting workshop).Hence making the organization ( across all functions), extended supply chain system, any functional units (like machining, assembly, painting) need to be lean for increased efficiency, low cost, quality at first time and reduced lead time.

Lean is not a tool for cost reduction or cutting manpower or increasing efficiency alone, it is a culture building process or way of thinking and running a day to day business activities.When the lean is understood only as an application of tools like 5S, SMED, Visual management, poke yoke, it results in short-term impact in a particular cell or unit on a short time basis. It becomes difficult to sustain. Most of the organizations are keen on learning the tool and applying without understanding the big picture of linking with business objectives or culture building process.

Any lean initiative must start from CEO or head of the organization and more importantly, it has to be linked to the business need or goal.Moreover, lean should not be driven as separate initiative without linking with the business / functional objectives.When we drive as a separate initiative under one lean champion, lean efforts will be continuing as long as the champion is intense and driving as long as the entire team is undergoing a lean period in production or sales. Once demand /volumes pick up, the lean initiative takes back seat as it is perceived as EXTRA work for the organization.That is the reasons a few organizations are not taking the lean-to next level from grand inauguration ceremony and except few improvements on housekeeping and visual systems. 

In my consulting role, I am insisting lean implementation when there is full conviction from CEO, and there is a compelling need for driving efficiency, improving the bottlenecks for business growth and management agrees to work with us minimum six months to 2 years.
In some organizations, we failed to bring the momentum when the leadership team looks at lean initiatives as a quick remedy for their inherent problems.

To summarise, key ingredients I used in all lean initiatives are

1. Form cross-functional team
2. Involve CEO in reviews
3. Develop Business / Functional KPI's which are important for business / CEO to drive
4. Educate the team to see the waste in the system through VSM workshop or interviewing process
5. Make priority list along with the team to focus on waste elimination
6. For the identified waste, apply suitable lean tools starting from housekeeping (2S), Visual management, SMED, Best Maintenance practices, Daily work management like tracking hourly, daily output/quality issue tracking and reporting
7. Create forums for review meetings with operating team, cross-functional meeting among heads and weekly review meeting with CEO or business head
8. Review, Update KPI and tracking 

Becoming a lean organization is not a one-time event, it is a continuous journey.

Why sustenance is important in workplace?

In most of the organizations, we can hear one common phrase “we have already implemented this initiative, but not continued or this will not work here”

Why do people come to conclusion as “no initiative will work in their workplace?". The reason is lack of consistency in implementation. 

In today’s internet world, there is not much ignorance of knowledge and know-how; it is only lack of consistency in implementation.

How this inconsistency will affect individual & Team?

When you implement some initiatives, not consistently follow it and eventually drop it, you are giving a subconscious message to yourself and team that you are not sensitive to results or incapable of execution. This inconsistency will impact the confidence of the leader at an individual level and encourage mediocre performance at the team level. The next time when you think of new initiative, old memory reinforces you about failure or low confidence pulls you down from taking action.The root cause for all consequence is inconsistency in implementation.

 So, in personal and organizational level, if you take any initiative, be sure that you are consistent in your implementation even though you are relatively slow in taking a decision. Ultimately your consistent actions push up your confidence and your consistent actions inspire others to follow. This is one of the traits of leadership, i.e. consistency in thinking; talking and doing.You are meant to be a leader for others!!!!

What should you know about your business breakeven point?

As we are working with SME's on improving profitability, one familiar pattern we are observing in most of the organization.

Even though, the team puts effort to maximize the plant utilization as much as possible by producing all SKU's(varieties) and at the end of the day profitability is in red or not as per desirable percentage.

This type of scenario is prevalent in a manufacturing system which follows "High Varieties, low volumes, and dedicated or fixed facility." (Sometimes the team struggles to maximize the output due to forecasting error, changeover and priority clashes)

In those manufacturing system, being busy with increasing production output alone is not going to help on maximizing the profitability. The business head must know in a given cost structure, what is the minimum production output must be achieved?Moreover, what must be the right product mix so that avg selling price is higher to cover up the cost?

In above complication, the breakeven analysis would give clarity to the business head on the three front

What the minimum production we need to target is?
What should be avg selling price target
What product mix will ensure the desired avg selling price?


Even if the business head is not financially literate, as a business head, he must know the break-even point of his / her business and its significance on strategic and daily management decision-making process.


Break Even point is the indicative reference beyond which only you would make a profit after discounting your fixed cost and variable cost.

For example, if your break-even point is 10 T / day, that means, you are making a profit only if you produce more than 10 T / day.Till 10 T/ day, your revenues are compensating your fixed and variable cost only as there is no profit.

Hence, Breakeven point is a function of your fixed cost or overhead expenses and your average selling price of all varieties and your variable cost.

Academically, the breakeven point can be calculated using the following formula.


Breakeven Point   =                                       Fixed Cost 
                                 ------------------------------------------------------------
                                 (Avg Selling price per unit - Avg Variable cost per unit)


For example,

Your fixed cost = Rs 2,00,000 per month

Your avg selling price of all varieties = Rs 25 / Tonne
Your avg variable cost of all varieties = Rs 22 / Tonne

Hence your break-even point is = 2,00,000 /(25-22)/1000 =66 T

That means, given above cost structure, you would make a profit, only after you produce/ sell beyond 66 T.

Now, having understood the formula for arriving breakeven point, how will you use this KPI for improving your business performance?

1.Relook into your fixed cost elements for cost reduction through waste elimination and administrative controls
2.Relook into  your product mix rationalization or price increase in specified product lines so that avg selling price would go up
3.Relook into your variable cost elements for cost reduction through waste elimination techniques

once if you know your business break-even point, you need to ensure you are meeting that BE point at any point of time or maximize your selling effort more than BE point so that you make your business profitable.

Relook into your business cost structures and understand your break-even point for better monitoring and control your business performance!

Why must continuous Lead-Time reduction be the focus for a Business head?

From customer's perspective, Lead time is the time taken between customer placed the order for product/service and the time the customer received the product/service.

This lead time may be further broken down into supply lead time, manufacturing lead time, distribution lead time and so on.Those classifications are internal to the organization, and the business head must focus on to reduce the overall lead time continuously.

Why lead time reduction is an essential focus for the business/business head?

Lead time reduction is important from four perspectives.

1.Working capital & Finance perspective

2.Triggering sales & operations teams towards growth performance

3.Operational Efficiency perspective 

4. Customer's perspective

Let us understand from each perspective.

1.Working capital & finance perspective:

When the product/service order fulfillment lead time is more, the expenses incurred to cover the product/service till getting payment from the customer will also be more. The business gets the cash only when the product/service is sold to a customer and converted as cash.

For example, if the lead time is six months, business will get the cash only after six months. Till such time, the business has to fund for all the expenses like salary, material procurement, and other overheads, etc .that is working capital is required for six months..(Pl ignore, advance payment, credit times, payables, receivables, etc. as those are all tactic arrangements by the business)

If the business team reduces the lead time by three months, working capital required only to fund three months expenses.

Hence, if you have high working capital, one of the causes and solution approach would be a LEAD-TIME reduction of your order fulfillment.

2.Triggering sales & operations teams towards growth performance:

Typically entire organizations' speed depends on the PULL.For example, If lead time is six months and the order execution capability of 6 months, say one crore, then the organization can make only two cr as sales turnover annually. Based on the execution capability or capacity of the organization, the sales and marketing function also behaves and operates. Once the lead time is reduced by 50 %, say by three months, then organization capability is also increased to 4 cr as sales turnover. The point is when Operations engine pulls more, the other parts of the organization also pull more from the market or customer.

The business head responsibility is to understand this behavior and must focus on lead time reduction.If your organization sales turnover is stagnant, one of the reasons could be high lead time and complacent in the organization.

3.Operational Efficiency Improvement 

When the lead time is high compared to actual value addition time, it means, your product/ service is held up in the value chain as waiting or delay. This results in accumulation of inventory in the form of WIP, which sometimes leads to rejections/ rework, making the communication complex, storage, handling, manpower deployment and so on.

Also, your strategic decision on supply chain leads to high lead time in getting the raw materials and high lead time in reaching the customer .Typically when the lead time is high; it brings all the inefficiency or wastes in the system. When the lead time is low, it brings flexibility into your production system as you can move from " Build to stock" to "Build to order."Also, the change in your production system will reduce your inventory and its derivative wastes in the system.

If you are struggling with low efficiency in your operations, one of the causes could be high lead time

4.From customer's perspective :

In today's fast-moving lifestyle, the customer does not want to wait, and he is willing to pay more for quick delivery than negotiating and followup with your team on delivery dates.Less the lead time, more customer's satisfaction and there is possibilities of further business partnership.If the lead time is high and non-negotiable, there is a possibility of your customer move to the competitor.

In essence, as a business head, your continuous focus must be on reducing the lead-time either in supply chain or operations or distribution. 

This focus will give tremendous benefits in terms

1.Capability to increase sales turnover

2.Reducing the cost of the product

3.Reducing the working capital

F

Proven Practices of Project Management in New Product Development

Most of the SME organization has a challenge on the new product development  viz

1.Developing the product sample on time

2.Meeting the quality requirements

3.Meeting the customer's price expectation

Even though new product development is more of technical oriented and organization specific, study shows that more than a development of the product, management of the development process plays a critical role in developing the new product on time, best cost, and best quality.

Some of the project management principles, tools and techniques and processes can be adopted in new product development, and we have seen significant success in different industries

some of the project management practices in NPD

1.Fixing Key Performance Indicators (KPI's) for each product development once order confirmed by customer

2.Depending upon the product development type, complexity, define MILESTONES / TOLLGATES 

3.Define FUNCTIONAL DELIVERABLES of all cross functions involved in the product development

4. Review the product development status w.r.t MILESTONES/ TOLLGATES along with the cross-functional team

5.Track the KPI's and make the people accountable and also involve the TEAM at the early stage of the development 

It is essential now to make management process for new product development if you would like to deliver on time, with best cost and quality.

Relook at your new product development process!!

How SME's transformation are different from large size organization transformation?

SME 's are mainly different from large size organization based on the investment and sales turnover they make. Even within SME's , there are further classication as micro, small and medium size organization.

Recently Govt of India proposed to redefine SME's based on their annual sales turnover, replacing the current definition that relies on self declared investment on plant and machinery

According to the government’s new definition, businesses with revenue of as much as Rs5 crore will be called a micro enterprise, those with sales between Rs5 crore and Rs75 crore will be deemed as small and those with revenue between Rs75 crore and Rs250 crore will be classified as medium-sized enterprises. 

The above classification clealrly differentiates large size organization from SME's from turnover point of view.

However, apart from sales turnover, there are some other charactersitisc distingusihes the SME's from large size organization.

1. Most of the SME's are supplying to large size organization either as Tier 1 or Tier 2 vendor
2. Adding value to product with partial manufacturing content or assembly
3. Mostly scope is limited to manufacturing only
4. No banddwidth to design / development / procuring material at own identified source or reengineering on product design and material selection
5. Not much bargaining power on pricing 
6. Not much affordability to get the right talent and developmental efforts

Given the above context of SME's, the business transformational efforts are mainly on

1. Ensuring profitability or sustaining profitability through business process reengineering

2. Helping to stabilise the organization for sustainable growth by twisting business model and people engagement initiatives

How to maximize profitability in SME organizations?

Most of the SME organizations can be classified as either Tier 2 or Tier 3 level vendors to OEM. Those organizations are adding value to the final product either by way of partial manufacturing or manual content addition in the material. That is mostly the scope of the SME’s restricted to manufacturing or assembly and may not have much leverage on design, procurement aspects on the value chain.In some organizations, value addition is limited only to the manual work.

Unlike large size organizations, SME’s does not have the bandwidth to design and development of the product, RM selection and procurement, process planning and manufacturing, Assembly and Testing on its own.If the scope of SME’s on revenue is relatively smaller than large size organization, how can SME’s maximize the profitability?

Given below some of the proven methods from our experience with SME’s and the critical aspects of each method.

1. Increasing the volume 

2. Increasing the variety and customer’s base

3. Cost optimization from P&L analysis  

4. Rationalizing the product mix or portfolio  

5. Vertical integration  

6. Looking for premium products or market

7. Looking for premium processes

1.Increasing volume:

       One of the typical methods of increasing profitability is doing more volume as it covers up the overheads and there is a possibility of maximizing profitability.The prerequisite for increasing volume of a given customer’s product is the price and quality expectations to be met consistently.Most of the organizations are working internally on quality improvements, delivery plan adherence, and price optimization so that they can approach the customer for 100 % share of the business. Since the demand is a function of external parameters, there is a limited scope to increase the volume beyond a certain level.

2.Increasing the variety and customer’s base:

       One of the favorite ways of increasing the sales turnover, in turn, profitability is by expanding customer’s base and get more orders of the similar product family. For example, if SME’s has modern machining facilities, it looks for different customers and product range to maximize the revenue and profitability.

The advantage is that it helps the organization not to get into the risk of dependence on one customer and also helps the organizations to serve the different product varieties and customers to get more visibility in the market.The downside of this approach, over a period, managing multiple customers with multiple varieties leads to operational inefficiency issues.Most of the organizations fail to plan well and ended with operational issues like more changeovers, higher cycle time, higher WIP's, quality issues, lack of focus on time deliveries low productivity.However, for some organizations with better operational team and practices, this method turns out to be a better method of maximizing the profits

3.Cost Optimization from P&L Analysis:

This is an all-time workable solution, proof from recession or unfavorable external environments. Irrespective of existing customer’s base, volume, product mix and variety, some SME organizations are continuously working on waste elimination, re-engineering the process and identification of opportunities to save the cost of P&L analysis.For example, one of my known organization regularly saves 3-5 % in its conversion cost every year irrespective of volume or external condition only through continuous improvement programmes and finding opportunities to cut down the unnecessary expenses.

Another advantage of this methods, the organization develops the culture of cost consciousness as a way of life.

4.Rationalizing the product mix or portfolio:

This method is mostly last options or impossible options by SME organization as they are vendors to OEM customers and they can not influence on changing the product mix or portfolio.However, wherever the organization supplies directly to end customers influence to choose the right product mix as it maximizes the profitability significantly.

It requires active accounting and cost deployment practices, wherein the organization can precisely know the cost of goods sold for each product mix.Accordingly, the management decides the product mix be continued or dropped.

In one of my client, when we did products costing and selling price analysis, we came to know the some of the product ranges, the organization is making losses as the cost of manufacturing outweigh the selling price. The management took timely decision to drop some of the low-end products, thereby could able to release the capacity for the higher end as well as to increase the profitability.

5.Vertical integration:

One of the common practice prevailing in most of the SME’s over a period, after stabilizing the basic process and get the customer’s confidence, they get into vertical integration as a natural growth.This expansion gives growth and profitability advantages to the organization.

For example, an organization specialized in forging or casting is expanding the horizon to machining and assembly.

This method is workable once the organization establish themselves with the basic process and have a financial and technical bandwidth to expand vertically.However, this method requires continuous reevaluation of product cost and sales realization.

6.Looking for the premium product or new market:

One of the possible option for SME organization to look for premium product lines or new market whereby it enjoys the premium.It calls for expanding the marketing effort to find to find the niche or premium product lines and customers.

7.Looking for the special process:  

Rare and ultimate option for SME organization to get into the special process to enjoy the premium as this must be the entry barrier to others.

In today’s competition and free market environment, the organization can be healthy only by generating sufficient cash reserve through profitability.It is the business head or CEO's prime responsibility to revisit the model continuously!!