ADVANCING THE ADOPTION OF ‘LEAN’ IN CANADIAN SMES

It is not a crisis – at least not yet – but numerous Canadian SMEs need to get with the lean program before it’s too late. The authors visited 18 firms and though they found that lean practices were wanting, they were able to turn their findings into recommendations that manufacturing managers everywhere can implement to make their operations lean.

Containing product cost is a matter of business survival. For example, in the summer of 2006, a Finnish pulp & paper giant with a plant in Port Hawkesbury, Nova Scotia, dominated the provincial news with its cost structure challenges. The plant, a major employer in this rural provincial region, had been on lockout since December 2005. Faced with an impending permanent plant closure deadline, the union agreed to a 10% wage rollback and a freeze on future wage increases in June 2006 as part of the rescue plan for a plant whose profitability had been marginal at best for the past ten years. The company is not saved yet, with company officials demanding power-rate decreases from the provincial utility before it will consider reopening the mill. Sadly, there is no guarantee that the same scenario will not be played out again in the future.

Avoiding such a doomsday showdown is obviously a preferred management alternative. And an approach that is frequently promoted to ensure cost containment and competitiveness is the pursuit of lean. Originally developed in the Japanese auto industry by Taiichi Ohno, lean production (originally referred to as Just-in-Time or JIT) is a euphemism for the Toyota Production System (TPS). As our understanding of this automotive production system has grown, so has our appreciation of its complex, systems perspective. We can, for example, identify a number of critical elements & techniques that comprise lean, including six-sigma quality, visual display, defect prevention, one-piece flow, Kanban, setup time reduction, quality at source, just-in-time supply, preventative maintenance, value analysis & value stream mapping, etc. Lean encompasses all of the above practices (Womack, Jones and Roos 1990) but in varying degrees of importance and intensity, based on key environmental considerations including the type of manufacturing process used and the product’s inherent design.

But lean as an operating philosophy and system also incorporates how these separate elements fit and work together to achieve continuous improvement in productivity & quality, waste reduction (broadly defined) and high levels of workforce engagement. This higher-level philosophy is sometimes referred to as “lean thinking” (Womack and Jones 1996; Liker 2004). Others have referred to it as the “DNA of the TPS” (Spear and Bowen 1999). Lean thinking requires managers to recognize both the appropriate emphasis placed on individual lean elements (e.g. one piece flow) as well as how they all work together as a system to achieve long term waste reduction and continuous flow improvement.

Lean manufacturing has been successfully applied in a variety of sectors and operating environments from the high volume, high standardization segment to the local bespoke manufacturers engaged in low-volume, high-variety business environments. It has even had notable application success in service-based businesses. Lean has become the dominant paradigm of operations management practice and the benchmark firms use to assess the efficiency of their operations. Since lean has application in virtually any setting, and our understanding of the components and systems associated with lean have been well documented and broadly disseminated for over 15 years, we would anticipate that Canadian manufacturing firms facing the formidable threats of price constraints and global competitors would be well advanced in their pursuit of lean. Our study identifies if this is, in fact, the case among Canadian Small and Medium Enterprises (SMEs), and, more specifically, what conditions are driving lean adoption and what organizational characteristics are allowing it to succeed. We spent time with 18 firms, with our discussion and questions with management focusing on their efforts to adopt and implement lean using, among other things, a lean scorecard (Exhibit A) to measure their lean progress. We also included a small number of large firms in our study to have a better sense of SME relative progress.

Observations

In the interest of confidentiality, the names of the specific companies participating in the study appear as numbers. We note the broad cross section of firms in our data set with size varying from 50 to over 1000 employees and stock-keeping units numbering from 30 to over 3000. Below are some critical observations and lean initiating factors we noted during our firm visits.

1. Lean practices are alive and well but vary dramatically from firm to firm, and are generally a very recent initiative

In all the companies we visited, we found, without exception, that many elements of lean were in place. Not all the firms were pursuing these productivity-improvement activities under the lean rubric (e.g., company 18) and, in some cases the lean practices had been only introduced within the last couple of years. In other cases, the firms (e.g. company 1) have had a long history of adopting modern management practices, including extensive involvement in the quality management movement of the 1990s. However, we did not see evidence in any single firm that all of the lean practices were being deployed. While all the firms were focusing their efforts on improving plant efficiency, even in the most progressive firms on the lean journey, we saw room for significant improvement.
Having said that, our visits indicated dramatic differences between companies in the extent to which lean was being broadly employed, the pace at which it was being introduced and the length of time of lean’s deployment. In some, lean has had a very short history (e.g. companies 3, 6 and 11) or is just being considered (e.g. company 18). In fact, most of the firms on our study had pursued lean activities only within the last 3 years. Some were stimulated to do so as part of a comparative analysis of plants within the corporate umbrella after the plant in question had been acquired (i.e., company 4) or as part of the plant-to-plant internal benchmarking exercises (i.e., company 1). Others were doing so as a result of recent pressure on marketing/sales from key customers to meet ever-stringent delivery times.

Regardless of why the firms in question pursued lean, their efforts appeared to be, in all but 1-2 cases, a very recent phenomenon. This very recent pursuit and deployment of lean practices comes despite the well-documented existence of lean knowledge. It is our belief that the slow and steady decline in the Canadian dollar relative to the US currency that lasted until January 2002, had the effect of providing a protective shield for manufacturing firms that delayed these firms from pursuing an operational efficiency agenda in a more aggressive and proactive manner. A common theme across a wide variety of firms we studied was that lean was being adopted in response to margin erosion in export pricing as the Canadian dollar rose in value or due to the increasing presence of import products in a marketplace where passing on price increases was problematic.

2. Lean thinking is a rare commodity

In contrast to the rather universal efforts at deploying lean practices, only on rare occasions (e.g. companies 1, 13, 16) did we encounter true lean thinking. In many cases, we observed firms that continued to examine improvement initiatives against some form of standard payback or Return on Investment (ROI) method using benefits analysis that was highly restrictive. In essence, the prevailing accounting system and existing project approval process was an impediment to advancing lean implementation. In another case, the firm saw little need to rethink 40 days of lost annual production resulting from major changeovers between product lines because enough spare capacity existed (company 5). Lean thinking would have viewed the extra capacity as a non-value added waste that meant the plant was 20% overbuilt. We witnessed a similar phenomenon at company 17 where low first pass yields meant that capacity at the initial process stages greatly exceeded actual demand requirements. Only three firms in our mix (less than 20%) showed clear evidence of moving lean from a series of shop floor practices to a way of management thinking. We are also reasonably confident that several other firms were in the process of embracing lean thinking but there was just not enough historical evidence to suggest that it had been fully engrained into the firm’s culture and way of thinking.

3. A competitive environment and exposure to an international market was a common condition in all firms

All the companies we visited were either exposed to the threat of import substitution, competed in an international market place, competed against other firms within the corporate umbrella, had a major product in a declining global market (e.g., company 15), or faced the constant threat of technological obsolesces (e.g., company 16) or local substitute products (e.g., company 18). There was a clear indication that all the firms needed to improve because their products could be replaced by alternate product offerings and/or their export market share could be lost if the product’s cost structure could not be reduced. Only one firm had a truly unique product that could not be easily replicated but even this firm’s management still believed that improving operational efficiency would be important because of constraints to future growth and the need to provide the principal owner with a reasonable return on investment.

But the extent of this external environment threat was not directly related to the pace of lean implementation. We saw firms who clearly depended on export markets for their very existence (e.g. company 9) but who had yet to fully embrace lean as a means of sustainability. In contrast, we also saw firms whose exposure internationally was not nearly as high (e.g. company 17) but who were nonetheless committed to a lean improvement approach. Export orientation and global markets, by themselves, did not fully explain why companies were pursuing lean. It may have been a better predictor when differential trade barriers were in place. Today, with international trade becoming ever more liberated, international competition and exposure is a sine qua non of business.

4. The Canadian dollar has become a real cause for concern

Not all of the firms we visited indicated that the high value of the Canadian dollar was a critical issue, although none of the firms thought it to be a positive force. Some firms added only a small labour component during their manufacturing process, were benefiting from the dollar’s strong purchasing power on some critical inputs and/or sold into the Canadian markets where the impact from the Canadian dollar’s strength was not as critical. For them, the Canadian dollar was not a critical concern, although none were “standing up and cheering” about the dollar’s rise.

For most, however, the high Canadian dollar was viewed as a critical threat to their future existence. The rising dollar had stripped away any comfort level in their operating margins and had heightened the urgency of their efforts to improve operating efficiency in order to survive. In addition to a rising Canadian dollar, a number of firms have also seen a substantial increase in the price and availability of raw materials. For firms that have not successfully transitioned to a niche market, the benefits of pursuing lean was viewed as critical for providing some short term breathing space, although we do not see lean as a panacea or guarantee of long term survival. For a large number of firms, the exposure to export markets in combination with the Canadian-dollar strength had become a very powerful incentive to improve operational efficiency and lean, with its emphasis on reducing cost by eliminating non value-added activities, was a powerful approach.

5. The greater the level of product niche orientation, the slower the recognition and adoption of lean practices

In several firms we visited, the product was in a relatively unique position. The company had positioned itself to avoid much competition, the products were unique enough to enjoy very substantial margins and the Canadian dollar’s negative impact was modest. In these companies (e.g. company 9), there did not seem to be enough “pressure” for anything other than modest efforts at improving production efficiency. In these companies, we found the greatest divergence from lean thinking, often associated with the desire to run larger batch volumes to gain production efficiencies. These firms saw production setup times as being fixed and believed that the best production strategy would therefore be to run larger batch quantities to minimize lost machine capacity from a changeover and/or defined their key performance metric as almost exclusively centred on meeting a production target, both of which are the antithesis of lean thinking. In contrast, lean disciples view setup time as waste and are aggressive in pursuit of ways and means to eliminate changeover/setup times. And by doing so, lean firms find that the production of small lot sizes becomes both feasible and economic. Lean thinking firms also focus almost exclusively on customer oriented performance metrics such as on-time delivery and returns.

6. The presence of a process improvement engineer was critical to the pace of lean implementation

With only three exceptions, all the firms we visited employed some form of a “process improvement” engineer. We had expected lack of internal expertise to be a real impediment to lean implementation, but were pleasantly surprised that many of the firms had recently hired industrial engineers to “clean up plant inefficiency”. Some of these engineers had lean training in other larger companies where lean had been practiced since the 1980s. Others were recent graduates in Industrial Engineering from well-known Maritime Universities. In some cases, these key personnel were hired specifically to implement a lean program and they were making rapid progress. In the cases where we did not see this talent in place or where this key resource existed but was no longer actively involved in shop-floor improvements, the firms were pursuing lean practices but at a very modest pace, often relying upon external consultants to guide the efforts.

7. Sustaining momentum is enhanced by verification

We were surprised at how few companies documented their successes on a project-by- project basis, displayed them for everyone to see and used them as evidence to promote further commitment to pursuing lean. These scorecards do not have to be complex – in fact, the simpler the better. We are grateful for the permission granted by one firm – one that did an excellent job of celebrating success with a lean project – to allow us to provide an illustrative example as shown in Exhibit C. We saw this simple audit as clear & concise and note the reinforcing impact that celebrating such a success can have in terms of a rollout strategy to other areas on the plant floor, as a form of justification to senior managers that pursuing lean is worth the effort and as a tremendous boost in morale with front line employees. Our experience with understanding effective change management suggests that firms hoping to see sustainable momentum in their lean efforts should be more visible and celebratory of project successes by measuring and sharing the positive outcomes. Existing visual displays on the plant floor should extend well beyond short- term performance targets to include project successes that highlight customer-oriented performance metrics. In addition, we were impressed by at least one company’s efforts (i.e., company 1) at ensuring that the performance metrics used were reliable, consistent accurate and credible.

8. Top -management awareness and understanding of lean’s scope varied

dramatically

Just as we saw a varied intensity of lean effort, we also witnessed a wide variance in lean understanding and exposure to management education. Some managers were very conversant with the literature, had developed their own library of materials, had settled on a particular management text or reading that resonated and attended a variety of management educational seminars. Others tended to be narrower in their thinking and were more comfortable with industry trade shows and the latest industry and sector specific technology. Others were just in the process of learning about lean. The greater the exposure to the management literature and readings, the more we saw evidence of the transition from lean practices to true lean thinking.

9. Lean application beyond the factory floor is virtually non-existent

We found that while the companies were pursuing, to varying degree, lean practices within the confines of the manufacturing plant, its dissemination to administrative personnel and processes within the firm and to supply-chain partners upstream and downstream was extremely limited. This was particularly evident in the almost complete absence of parallel improvements in the supplier communities’ approach to business (exceedingly long pipeline inventory and delivery times for raw materials and component parts, lack of vendor managed inventory (VMI), non existent direct-to-floor materials delivery & cross-docking, infrequent supply shipments, etc.). This is partly the responsibility of the manufacturing firm itself but is equally indicative of the lack of customer orientation on the part of suppliers. There seemed to be too many attempts at creating “islands of excellence” on the manufacturing plant floor but not enough extended & integrated supply-chain thinking.

Efforts in this area are hindered by a general lack of an integrated information system between manufacturers and suppliers. Most firms we visited worked from a simple Material Requirements Planning (MRP) information system that was not conducive to anything other than a paper-based information sharing process with their key suppliers. Although firms realize the need for technological integration with their suppliers, this was not seen as an immediate lean priority (e.g., company 16). Some firms were attempting to roll out lean concepts to their own internal administrative processes but it was being met with considerable resistance and we are not confident in its immediate success.

Recommendations to manufacturing management

Based on these observations, there are a number of recommendations that should be adopted by manufacturing managers to help increase the pace of lean adoption and stave off the kind of doomsday showdown described in the opening case vignette.

1. Realign and visually reinforce performance objectives
In some of the firms, a key performance metric that was driving management efforts was output volume based (i.e. did we meet our daily production targets?). This approach is not well aligned with customer-driven objectives nor is it consistent with a lean mentality. We believe that management needs to start from the basis of what matters most to customers (e.g. lead time, quality conformance, on-time delivery, customer complaints), establish internal performance measures that are either surrogate or direct measures of these customer-oriented objectives, set targets and action plans for meeting and exceeding these performance outcomes and continuously monitor & visually display actual performance so that everyone in the plant can see how they are doing. Some potentially useful display mechanisms include closed circuit television monitors, large illuminated display boards and graphical representations of current and future performance objectives.

2. Create a permanent environment of pressure
While all firms in our study were moving forward with lean implementation efforts, we were surprised at how recent these efforts were in getting started and, in some cases, how limited the efforts were in intensity. If practitioners only wait until the pressure to improve is so intense that it becomes a case of do or die, we fear that many will not be able to improve rapidly enough to stave off international competitors and, therefore, run the risk of seeing the manufacturing facility close entirely with the ensuing loss of all employment. In many of the areas we visited, these plants were critical for the survival of the small local communities and, therefore, the plant’s health becomes a political issue, not just an economic one.

We believe that managers need to continuously nurture and reinforce a culture of continuous improvement, perhaps through setting both near and longer-term productivity and quality objectives and matching these objectives with a consistent and mutually supporting performance reward system. For example, we only saw one case of a productivity sharing/profit sharing reward system in place despite well-known and long-standing management education support for the concept.

3. Extend lean to administrative processes and the extended supply chain
We were rather surprised to see how little lean had migrated to the firms’ external suppliers and to other internal administrative processes. In some of the firms we studied, it would be best to concentrate on implementing lean as a broader firm-wide initiative. For example, in one company, the pre-manufacturing administration (design approval) was becoming a key bottleneck in achieving customer-oriented objectives on lead time. The “squeaky wheel” in many cases was not the external supply community but rather internal legacy administrative processes.

For others, enhancing the external supply linkages was a more pressing issue. This lack of migration was due to the relatively recent implementation of lean on the plant floor and a manual and/or dated technological infrastructure that made it difficult for upstream and downstream linkages to connect. A number of firms did realize the need for extending lean outside of manufacturing and identified it as a future initiative, once other major lean objectives within manufacturing were achieved. World-class companies are rapidly linking upstream and downstream supply chains through integrated information technology (IT). The few firms that were extending lean thinking were also undergoing company-wide enterprise resource planning (ERP) implementation initiatives and, as ERP systems contain best-of-breed practices, the opportunity to identify waste in administrative processes and extend lean thinking outside of manufacturing will naturally present itself.

4. Read, experiment and learn from others
Our final recommendation to practicing managers is a simple one: read and expose yourselves to a much greater level of current and best practice management thought. Manufacturing managers need to set aside reading time on a regular basis to continue to upgrade. There is a wealth of useful information sources including trade publications (e.g., Target Magazine), management oriented academic journals (e.g., Business Horizons, Harvard Business Review, Ivey Business Journal), textbooks of interest (e.g., Good to Great, Lean Thinking, The Toyota Way), and educational material from professional associations (e.g., Association of Manufacturing Excellence (AME), Lean Enterprise Institute). Manufacturing managers need to become far more active and innovative in trying out new operating process ideas and providing key personnel with the financial support to participate at lean conferences where knowledge and networking can provide the spark for improvement.

In a number of cases, we visited non-competing companies near to each other and although each was pursuing lean, very little lean interaction and knowledge transfer was taking place between them. We recommended that managers take plant tours of neighboring facilities as well as take advantage of the tours offered by consortia in the surrounding regions. Although managers may not think that visiting a plant in a completely different industry is of any utility given their “unique” situation, our site visits show that the opposite is true. For example, one company (i.e., company 10) highlighted many different ideas they took directly from a plant visit of another company in a completely different industry and of a much larger size. Such visits allow managers to see first hand innovating and working solutions to more common lean problems. By directly copying ideas obtained from such tours, managers may prevent allocating time and resources to deriving similar and, possibly, less effective, solutions entirely on their own.

Finally, we would be remiss if we did not acknowledge that our research on lean adoption would have been of little value if the firms who participated had not been as open and co-operative with us. It is they who are trying to improve manufacturing competitiveness in an extremely difficult environment. We truly thank them for the time they spent with us, and the information they willingly shared. We can only wish them every success as they try valiantly to improve their processes and their plant productivity & quality.

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