In the period since the end of the show, Lantech has used its “right-sized” product to grow sales almost back to their 1999 peak. The truly remarkable aspect of this accomplishment is that the packaging industry as a whole continues to slog through a deep recession, with sales across the industry down by more than 35 percent from the peak in 1999.
Lantech has therefore taken the path of Porsche in combining a brilliant set of internal processes with a brilliant set of new—and very lean—product technologies, to create a bright future for an already outstandingly profitable business.
Pratt & Whitney: Lean Thinking in a Terrible Industry in a Terrible Time
We noted in Chapter 8 that the jet engine industry has long been difficult for producers because the amount of physical goods needed to provide a given amount of value to the consumer continually falls. The number of engines per aircraft has fallen from four for the first generation of jet aircraft—the Comet and the Boeing 707—to two on the highest selling current generation products and the amounts of service parts needed per engine hour of operation has fallen steadily from the beginning of the jet age. Through the 1990s, these two trends largely offset the increase in the number of aircraft in operations so that the total sales volume in the industry was stagnant.
However, the industry has now entered a much more difficult era, one with no visible endpoint. By the beginning of 1991—well before the shock of September 11—the hub-and-spoke business model of the major airlines was under severe assault from low cost point-to-point carriers. In addition, disgruntled “road warriors” (high volume business travelers) were rethinking whether the hassle plus the cost of current air travel was worth the benefit. These customers were critical to the hub-and-spoke carriers; in the 1990s high-volume travelers unable to take advantage of special fares requiring advance purchase or Saturday stays accounted for 8 percent of passenger miles but 50 percent of airline revenues. By the first quarter of 2001 they had seemingly gone on strike and have not returned.
The meltdown of the business model plus the new security environment have resulted in the world’s airlines collectively losing $12 billion in 2002, with a number filing for bankruptcy. As a consequence, new orders for large jet aircraft (netting out cancellations) fell from about 1,100 in 2000 to fewer than 600 in 2002, and engine hours of operation (the key long-term driver of demand for spare parts) fell by 5 percent over this same period, the first sustained decline since the beginning of the jet age.
The other half of industry revenues comes from military customers. Given the war on terrorism we might expect the situation here to be different. However, the end of the Cold War and confusion about the military’s needs in the new security regime have actually worked against Pratt & Whitney’s interests.
To take the most striking example, Pratt provides the sole engine option for the F-22 and F-35, 7 the new front-line American fighter and attack aircraft for at least the next twenty-five years. Pratt’s position sounds like an excellent recipe for sustainable long-term sales and profits. Yet these aircraft have come under continual challenge by new views on defense priorities. As a result, the original projection of 750 twin-engine F-22s for the U.S. Air Force (to replace roughly the same number of F-15s) has been steadily scaled back to 276 aircraft as of mid-2003. Meanwhile, orders for the single-engine F-35, to replace the F-16, originally targeted at 3,000 units, are already down to 2,500, with production still four years away.
Thus, the core of the military market for new Pratt engines has been shrinking, with capital investments spread over smaller and smaller production runs. Continuing orders for spare parts for the large number of military engines currently in use is keeping revenues healthy for now but not to the extent of offsetting the distress in the commercial engine business.
So far we have only described the challenges from the market. We need to complete the picture by pointing out that the industry has three competitors for a shrinking volume of large jet engines—Pratt, GE, and Rolls—and none shows inclination to exit. Even worse, from Pratt’s standpoint (but not in the view of lean thinkers), the two lean laggards as of 1996, GE and Rolls, have been energetically copying the operational leadership of Pratt, intensifying competition even further.
Putting this all together, it’s easy to see why Pratt has not been able to grow its top line (its revenues) since the mid-1990s, as shown in Figure 14.5 .
What is remarkable is what Pratt has been able to do with its bottom line by continued application of lean thinking.
For starters, Pratt has continually shrunk its physical footprint, as shown in Figure 14.6 . The billion-dollar room in North Haven, Connecticut ( described on page 174) has been closed, with production moved into a much smaller existing space in East Hartford. The military engine business in Florida has been relocated to existing space in East Hartford as well. And even with these relocations, the footprint of the main Pratt complex in East Hartford has been continually reduced.
F IGURE 14.5: P RATT & W HITNEY R EVENUES , 1992–2002
Source: Pratt & Whitney
F IGURE 14.6: P RATT & W HITNEY M ANUFACTURING N ORTH A MERICA M ANUFACTURING F OOTPRINT
Source: Pratt & Whitney
F IGURE 14.7: P RATT & W HITNEY R ETURN ON S ALES AND R ETURN ON A SSETS
Source: Pratt & Whitney
In addition, capital spending for new equipment has been reduced by buying small, “right-sized” tools with only the capacity and features needed for the job at hand, and Pratt has challenged every new investment using the same thought process. By finding ways to do more with less in every aspect of its business, Pratt has driven its return on assets employed and return on sales steadily upward despite stagnant revenues and severe pricing pressures in its spare parts business (see Figure 14.7 ).
This performance is a remarkable contrast to the last crisis in the aerospace industry, in 1991, when Pratt’s capital heavy business fell immediately into a deep loss 8 and threatened to drag down the parent United Technologies with it. After a decade of lean thinking, spurred by the 1991 crisis, Pratt has been able to weather the loss of volume and prices pressures of 2001–2002 with only a minor drop in its return on sales and assets and its operating profits, as shown in Figures 14.7 and 14.8. To use an aerospace metaphor, this is like flying through a severe wind shear (like the downdrafts in a thunderstorm) with practically no loss of altitude.
Given the long-term realities of the market—distressed customers, large minimum scale requirements for new commercial product programs, and a large number of competitors in relation to the stagnant manufacturing volume—the 150-year-old Pratt may well face the need for another dramatic transformation into a different type of business. This was achieved twice before: in 1925, when it jumped from machine tools to aircraft engines, and in the late 1940s, when it abandoned piston engines for jets.
F IGURE 14.8: P RATT & W HITNEY E ARNINGS B EFORE I NTEREST AND T AXES , 1992–2002
Source: Pratt & Whitney
The most promising strategy would seem to be diversification into the $10 billion overhaul and repair business, where lean thinking can be applied with the same results as in manufacturing. Pratt is already well along the path and recently has been acquiring overhaul businesses around the globe as well as growing its small in-house overhaul business. These initiatives have increased its global market share in overhaul and repair from 1 percent in 1992 to 10 percent in 2002.
Whatever the path to growing the top line of the business, Pratt’s lean practices are providing the operating margin and cash needed to steer a new course .
Beyond Isolated Advances
These are stories of sober success, of companies doing well despite difficult market conditions. 9 They are not the giddy tales often heard during the recent boom, but rather successful keep-on-keeping-on efforts by early adopters (excepting Toyota of course) of the lean thought process we have described. However, they are only meaningful for society at large if many other firms are following them along t
he path. What evidence can we provide that our ideas are being embraced by firms across the economy?
The best measure is also the simplest: the inventories needed in the economy to support a given level of sales to end customers. It is simply impossible to create a lean business or a lean enterprise encompassing an extended value stream without greatly increasing the velocity of value flowing from raw materials to customers and greatly reducing inventories. This is because the essence of leanness is to eliminate time-consuming but wasteful steps and to create a condition in which the remaining value-creating steps occur in continuous flow at the pull of the customer.
F IGURE 14.9: U.S. I NVENTORY T URNS : A UTOMOTIVE AND M ANUFACTURING
Source: U.S. Census Bureau
When we sum the experience of our sample firms along with the thousands of other firms comprising the American economy, using data collected by the American government in a consistent format since 1958, we discover that for a very long time, nothing changed. The level of inventory turns (that is, sales to end customers divided by the total inventories in the manufacturing process including raw materials, work in process, and finished goods) was level for nearly forty years from 1958 into the mid-1990s. Turns moved up and down slightly with the business cycle, but showed no trend toward improvement.
F IGURE 14.10: U.S. I NVENTORY T URNS : M ANUFACTURING , W HOLESALE, AND R ETAIL
Source: U.S. Census Bureau
During this same interval, the trend in inventory turns in wholesale and retail was much worse. It moved steadily downward from 1958 through 1995 in lockstep with the ever-growing variety of products on offer and the need to support each product with inventory. This trend was despite many innovations in information technology, logistics, and retail formats.
And then the needle began to move. The trend is clearest in motor vehicle manufacturing, as shown in Figure 14.9 . This is not surprising given Toyota’s powerful presence in this industry. But a steady improvement trend is apparent in many other manufacturing activities and the rate of improvement appears to be picking up again after the recession of 2001, which, like all recessions, caused a temporary fall in inventory turns. 10
Perhaps more interesting is the upward in trend in inventory turns in wholesale and retail where the simple principle of replenishing small amounts frequently from manufacturers (as explained in Chapter 4 ), instead of prepositioning large amounts of goods ahead of demand on the basis of forecasts, seems to be taking hold ( see Figure 14.10 ).
F IGURE 14.11: U.S. I NVENTORY T URNS : T OTAL E CONOMY
Source: U.S. Census Bureau
When the manufacturing, wholesale, and retail turns are combined, we see a steady increase across the entire economy, as shown in Figure 14.11 .
It is certainly too early to claim victory, but the trend since the initial publication of this volume in 1996 is very promising and we look forward to a leaner future than we could have imagined only a decade ago.
This said, the pace is still too slow! What can we do to make greater progress toward the perfect land of zero waste and pure value we envisioned in Chapter 13 ? What can we do to institutionalize and spur the slow revolution in value creation that we believe is under way?
In fact, we have learned a lot about this question in observing the progress of many companies during the years since the launch of this book and we will devote the remainder of this Epilogue to sharing our new wisdom about the lean leap.
CHAPTER 15
Institutionalizing the Revolution
Revolutions in business practice don’t just happen. There must be an action plan that real managers in real companies can deploy. We therefore presented a step-by-step action plan in Chapter 11 that summarized and condensed the plans of attack of our sample firms. Now we’ll enhance this plan based on direct observation of the change process in a much wider range of organizations over the past six years.
An Enhanced Action Plan
We believe that our original plan is still remarkably sound and we retain all of the steps in the same sequence. However, for many of the steps we have gained additional insights. We will therefore go through our checklist in the same sequence shown in Chapter 11 , adding to each step where appropriate.
FIND A CHANGE AGENT
This first step is as important as ever, but we have discovered in recent years that the typical change agent is evolving as lean thinking spreads. When we began our research a decade ago, a truly inspired and forceful leader at the very top—an Art Byrne, Pat Lancaster, Karl Krapek, or Wendelin Weideking in the position of CEO—seemed to be required to overcome corporate inertia. More recently we have observed a number of lean transformations in companies of different sizes in which the point of origin was mid-level managers and where quiet leadership was effective without need for shouting or theatrics.
But still, a leader—someone who will take personal responsibility for change—is essential. No organization has ever undergone dramatic and comprehensive change without someone somewhere, softly or in a loud voice, taking the lead.
We’ve learned something else about transformational leadership involving a phenomenon often remarked in human political history: Revolutionaries are often poor managers of the new order once it is put in place. Many of the most effective change agents succeed in the long term because there is someone behind them putting a rigorous system of lean processes in place, someone who can take over and push improvement continuously ahead when the change agent leaves or moves on to other issues. This may be the COO behind the CEO or the head of the Lean Promotion Office under the COO or the product line manager reporting to the head of product development or the value stream manager under the plant manager. The key is that someone somewhere needs to turn a revolution into a rigorous system and make sure that everyone understands and follows the new system.
When there is no one there to put the system in place, the higher level of performance usually lasts only as long as the change agent is directly in charge. (We’ve learned this several times from hard experience when a dynamic leader left and the organization quickly regressed to the mean.) So our advice, based on years of experience, is that every organization should carefully team a system builder with each of its revolutionary change agents in order to sustain results.
GET THE KNOWLEDGE
Our view of the second step has evolved as well. When we started our research in 1992, the highest levels of lean knowledge were usually resident in Japanese sensei, 1 often graduates of Toyota or its supplier group, who taught by starting with a simple problem. For example, they identified a multistep process within a single facility, with materials transfers and inventory between each step, and quickly converted the isolated steps to single-piece-flow within a cell. They then went to the next isolated problem—perhaps in the area of 5S or simple pull systems—and solved it. This created a dramatic sense that rapid change was possible while the sensei taught lean thinking and lean methods along the way.
For the sensei, the most valuable aspect of these exercises was not the improvement in performance in a specific process. Rather, it was the raised consciousness of the managers involved in the change process and their enthusiasm for tackling other problems using the knowledge they were slowly acquiring from the sensei.
Behind the stern mask of the sensei, there was a detailed master plan of how all the parts would eventually fit together to create a complete lean production system. But this was not revealed at the outset and became apparent to managers only over time as they learned to see.
The problem with this teaching system, once consultants with no direct link to Toyota and many self-taught managers began to practice it, was that there tended to be no big picture waiting to be revealed. Instead of flow kaizen directed at the total flow of value for a product family, there was only process kaizen, and usually lots of process kaizen, focused on isolated individual steps in many value streams. We coined the term “kamikaze kaizen ” (and the accompanying term “kamikaze Six-Sigma”) to descr
ibe the likely result: lots of commotion, many isolated victories in the great war against muda, widespread initial enthusiasm on the basis of early results, impressive amounts of consciousness raising, and … loss of the war when no sustainable benefits reached the customer or the bottom line.
The solution, which we believe is increasingly accepted, is for firms without access to a master sensei to start consciously at the system level for each product family. This means looking at the big picture, including the most important business needs, and determining the overall plan of march before conducting process kaizen on the individual steps. As we will see in a moment, this is a job for line managers, not for technical advisers who often have reservoirs of specific lean knowledge but who lack expertise in flow kaizen and insight into the most important needs of the business. The value-stream map is an invaluable tool to help line managers along the value stream see the whole, as we will explain shortly.
For firms with access to a master sensei, we have some similar advice. Invest early in systematically writing down the knowledge of the sensei and inquire about the big picture before too many process kaizen events are lined up. This may not be an easy conversation, but we believe a higher-level, system focus by senior managers, as the sensei proceeds with process kaizen, will produce a better result than either approach alone.
FIND A LEVER BY SEIZING THE CRISIS, OR BY CREATING ONE
Our third step is still critical and the reason that recessions are so valuable to firms and society. They create the necessity to seize the opportunity that was always there, by embracing lean thinking. And we know that recessions do at least raise consciousness because sales of our books—including this book—always rise in bad times. But just because there is a crisis does not mean the opportunity will be grasped. The hapless manager we describe on page 251 created a profound crisis for his firm by dramatically reducing selling prices for his durable good. But he soon lost his job for failure to take out the necessary costs through dramatic restructuring of his entire design and production process. For a crisis to be useful, leadership and knowledge must lead to decisive action on the tough issues of excess assets, wrong locations, and excess people.
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