In this and the next few blogs in this series, I will be exploring how FLOW is the key to making money in lean companies, and that flowing everywhere – and I mean EVERYWHERE – is something lean CFO’s and other lean leaders should always strive to do.
Let’s start with some basic understandings: many companies take what I call the “easy approach” to implementing lean practices. They focus only on the actual manufacturing process steps and pay little attention to the rest of what it takes for the company to create and deliver value to the customer. Sometimes this happens because a company is new to lean and there are not many employees who have practical lean experience. Or perhaps there is an existing functional organization structure that creates cultural or political issues, which cause people to think lean doesn’t apply to them.
Whatever the reasons, as the Lean CFO, if you see your company is defining lean too narrowly – applying it only to the actual manufacturing process – then it’s up to you to lead the organization to an understanding how to implement Flow everywhere.
Why do you have to do this? Because to generate sustained productivity improvements of 10-20% annually, all demand must flow not only through every production value stream but also through support and administrative business processes as well. Moreover, it’s important to do this early in your company’s lean journey so the “easy approach” to lean does not become imbedded in your company’s culture. The “easy approach” to lean overlooks how the manufacturing support functions interact with the actual manufacturing process and the implementation of Flow & Pull in all office processes.
Over the course of the next few weeks, I’ll be examining Flow in two main areas: in Manufacturing Support and in the Office. Together, these broad areas cover most of what the Lean CFO cares about. Making these areas Flow will net the company dramatic improvements in productivity and will ensure the company is making lots of money.
Let’s begin with the processes that support manufacturing.
Manufacturing Support – Some Background
Traditionally-run companies harbor a distinction between “direct” and “indirect” labor. Typically, direct labor includes the people working on making the product and indirect labor includes all the other manufacturing support functions. A standard product cost is driven off of direct labor, so the focus is on reducing the direct labor content of the product to lower the standard cost. All indirect labor becomes part of the overhead rates, so it gets spread out among all products.
Sometimes this traditional thinking is used when identifying your order fulfillment value streams. Don’t let your company fall into this trap! Make sure everyone in the company clearly understands the definition of a value stream.
Value Stream Defined
A production or order fulfillment value stream (lean principle 2) is defined as the entire sequence of work required from receipt of a customer order to delivery of the product, done at the proper time. Thus, the value stream includes the value-added production process steps to transform the raw materials into a finished product as well as all other necessary activities required to support these value-added process steps.
In my work with customers with BMA Inc., we often use a schematic to show this. The forward-pointing arrow represents Flow.
This means that what is traditionally called “indirect labor” (quality, maintenance, engineering, scheduling, purchasing and material management) should be integral to your company’s value streams. If it helps you understand, you can think about it the other way around: If these necessary activities do not occur at the proper time, then Flow is interrupted.
Lean companies must determine how to incorporate all these activities into value streams so they do not inhibit Flow. There are two ways to do this: move the people doing the work into the value stream or move the work itself into the value stream.
In our next blog, we’ll take a look at how to do this with each of the manufacturing support functions: Quality, Maintenance, Procurement, and Planning & Scheduling, I’ll give you some ideas from my experience with how to keep these essential functions from inhibiting Flow.