Matt Hrivnak

Kaizen: There's always another future state

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Filed under Lean, Lean Stocks

Since I am very active in the market, particularly with equity options and around earnings, it is very important for me to always get the most up to date information and to maintain a well-rounded macro outlook.  Every weekday, one of the outlets I turn to for this is Bloomberg Surveillance; both the television and radio versions.  I tune in because they have the best guests (from academia to hedge funds to the banks) and they cover the widest breadth of topics.  They also have the most knowledgeable and well-connected hosts in longtime stalwarts Tom Keene and Mike McKee (and I am not just saying that because Tom Keene is also a former RIT hockey player and alum).

This morning, as to the routine, I was tuned in and enjoying the commentary and earnings coverage.  And then it happened (you may need to sit down).  While covering the Caterpillar (CAT) earnings release, Mike McKee uttered one of the most blasphemous and suffocating phrases known to the continuous improvement world:  Lean is cost cutting.

When he made the comment, McKee was reading commentary notes directly out of the earnings release that quoted Caterpillar Chairman and CEO Doug Oberhelman, and was simply trying to relate the topic to the audience.  The exact quote from Oberhelman in the release: “We can’t control the business cycle, but we continue to drive improvements in our business. We’re implementing Lean to drive improvements through our businesses and executing our Across the Table initiative with dealers to improve our market position, service performance and value to customers.”

While the comment was innocent enough, it is an overarching theme that you hear time and again from those that are truly disconnected from the process of continual improvement.  In the wrong circles (e.g. a board room), it’s a dangerous thought and it that may very well lead your operational excellence initiatives down the drain.  Cost cutting comes with the connotations of reducing head count, giving more work to those still employed, buying cheaper (lower cost at the expense of quality) raw materials, and cutting corners.  These are all negatives. I do not know of one successful lean deployment that was thought of as a cost cutting measure.

It’s a fact that lean does result in lower costs, particularly operational and material usage costs, but it is not the driver.  Lean is about company growth, not about cost cutting and reduction.  Think about Oberhelman’s quote:  Lean will allow you to “continue to drive improvements” and “value to customers.”  The goal of lean ultimately ensures companies the satisfaction of addressing the customer’s exact wants by providing them highest quality goods–at the lowest possible cost, with the shortest lead time, and still striving to improve these metrics on the next order. Achieving such goals is much easier said than done because it requires a fundamental cultural commitment from the entire company.  Caterpillar did a pretty good job of trying to explain lean today.

In the glossary of terms within the earnings release was this: “Lean — A holistic management system that uses a sequential cadence of principles to drive the highest quality and lowest total cost to achieve customer requirements.” Somehow, in the world of finance, that definition gets shortened to “cost cutting.” This hinders the overall acceptance and implementation of lean.  This is 2015, we are twenty-five years past the publication of The Machine That Changed the World.   We should be past this point.

Spreading the true essence of lean has been our goal from the beginning and it will continue for years to come.  You can ask any manager which of these they’d prefer and the answer is always the same, the latter:

Supply your customers with a lead-time of 4 weeks, a production cost of $100, and a 5% possibility of a defect; or,

Supply your customers with a lead-time of 1 day, a production cost of $70, and a <0.10% possibility of a defect.

But when managers investigate the methods that get to that point, the short term thinking and middle-manager mentality takes over.  The discussion immediately turns from ‘what is going to satisfy the customer the best?’ to ‘what’s going to make our numbers look the best on our internal metrics and receive the most applause on the next earnings call?’  Business is about doing what’s right for the customer.  Remember, the customer pays the company’s bills and employees, not the employer.  Lean is about optimizing this relationship by reducing the waste inherent in the current state process.  Shigeo Shingo (1909-1990) noted this while trying to describe this very topic in his writings about his work with Toyota, “When you buy bananas all you want is the fruit not the skin, but you have to pay for the skin also. It is a waste. And you the customer should not have to pay for the waste.”

Does the customer care that you had to ship Product A from the manufacturing floor to storage and then back to the floor for processing?  Of course they don’t, and they really don’t want to pay for it or wait the extra time for their order to be delivered because of the delay it causes.  One does not fix this with cost cutting.  It’s done with a holistic review and improvement of the entire value stream through continuous improvement.  The results? The customer being provided with the value they deserve.

In the right mindset, lean is powerful.  Lean has legs.  Lean has the right tools to propel companies towards excellence:  jidoka (built-in quality), kaizen (continuous improvement), buy-in at every level, value stream thinking, proper identification of waste, just-in-time, single piece flow to takt time, SMED, 5S, poka-yoke, supermarkets, pull systems, kanban, heijunka, standardized work, gemba walks, job instruction training, kata, OEE, etc. Which one of those tools says to you cost cutting? That’s right, none.  Reduced costs are a welcome by-product of all those initiatives.

There will never be another company that can replicate The Toyota Way to its very core, but any company that tries to implement the same tools and culture, I applaud.

In full disclosure, I do not currently own any Caterpillar shares or options; however, I may reconsider now that I know their dedication to lean is strong enough to reference it in an earnings release at the risk of being singled out as “cost cutters.”

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Comments (1) Posted by matt on Thursday, October 22nd, 2015

Filed under Economics, Lean, Lean Stocks

Questions people often have:  What are the long term effects of Lean Manufacturing?  What does Lean Manufacturing do for a company?  What are the benefits of Lean Manufacturing? How can I engage management and stakeholders so that Lean is taken seriously? etc.  I guess the proof really is in the pudding.  People can deny it all they want, but Lean works.  This simple post, showcasing three stocks that have all had been significant in the progression (and in a lot of cases, regression) of manufacturing principles and techniques, tells the story.  In the chart below, I’ve overlaid the following stocks, Toyota (NSYE:  TM), Ford (NYSE:  F), and General Motors (NYSE:  GM) for the comparison of their performance over the past 30+ years.  Now, when you compare stocks, they are graphed by % gain over time, allowing you to see the real difference in the stocks. 

Look at how GM (BLUE LINE) remains rather flat, while Ford (YELLOW LINE) makes some gains and then retraces, and then, then look at Toyota (BLACK/RED LINE), who makes consistent gains, retraces ever so slightly, and then makes bigger gains, and so on.  That consistency and longterm growth is what all Lean companies are striving for; that is why you implement Lean.  Seriously, look at the difference in % gain (which essentially shows you what % you would have made on your money if you invested it at the time this chart began):  Toyota topped out at 9,500%!!!, F topped out at 1,200%, and GM barely cracked 200%.  It’s even more stimulating to see that at the present time (far right side of the chart), GM and F are both close to being a wash.  Well, in reality, you might have even lost money due to inflation, the time value of money, opportunity cost, etc.  And then look at Toyota at the present time, if you’d put money into this stock in 1974, you would be up a mere 6,500% – not bad for an automaker stock!!  This is always a good chart to show to anyone that doubts the significance of Lean Manufacturing and the exceptional company that Toyota has been, and will continue to be in the future.  An even better chart is this next one, which shows the difference in these stocks over the past 10 years. 


If you would have invested in Toyota 10 years ago, you’d have made 95% on your money, almost doubling it, assuming you still held it today.  In fact, at one point you could have sold it at the high time in early 2007 and made ~165% on your money.  And then there’s Ford and GM.  If you would have put your money into either one of these companies 10 years ago, you’re looking at losses of up around 60% for GM and 65% for Ford.  When the times got tough, Toyota started to diverge from F and GM, and both of these graphs illustrate this point perfectly. 

 I’m a fairly active trader always willing to make investments in companies just making the transition to Lean.  Now, a lot of companies do not come right out and say it, but you can sometimes find this information through press releases or news coming out of publicly held companies, either by information you gain from your trading company or by using a resource like (which is where this chart was generated!).  Not only are Lean Manufacturing companies worth working for and doing business with, they are also very much worth a little piece of your portfolio.  Cheers!

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Comments (0) Posted by matt on Tuesday, April 22nd, 2008