Recession or boom, companies need to sharpen their competitive edge by applying Lean Management principles to cost reduction—that is, the elimination of non-value-added activities or waste in the value stream processes.
In the Lean Management philosophy, all activities in an organization are grouped into two categories:
- value-added (VA) activities, and
- non-value-added (NVA) activities.
In the context of Lean Management, VA and NVA activities are viewed from the customer’s perspective.
VA activities are those that bring additional value to products or services. Examples include entering orders, ordering materials, laying foundations, creating codes, assembling parts and shipping of goods to customers. Customers are willing to pay for these improvements that can change the form, fit or function of a product or service.
On the other hand, NVA activities are tasks that do not increase market form or function. Examples are filing, copying, recording, waiting, counting, checking, inspecting, testing, reviewing and obtaining approvals. These activities should be eliminated, simplified or reduced.
By tackling wastes from an end-to-end business process, not only can your company improve the value of its products and services, you can also achieve significant cost reduction, strengthen cash flow and emerge from the downturn with a stronger and more competitive profile.
7 Sources of Waste
There are seven sources of waste in a manufacturing environment. (Learn more about Lean Manufacturing here.)
Studies have shown that in a typical organization, some 90% or more of all activities fall into the NVA bucket.
Although the explanations and examples provided below may be more relevant to manufacturing industries, the concepts can be universally applied to service industries as well.
The seven sources of waste are:
This is the idle time resulting from waiting for materials and information, e-mail queues from customers, delayed shipments, equipment or system downtime and so on.
This results from unnecessary procedures due to undefined customer requirements, lack of effective communication, product changes without process changes, redundant approvals, making extra copies and excessive reporting.
These are errors, scrap, rework, replacements, re-inspection and re-testing. The causes are incorrect data entries, poor quality, weak process control, inadequate training, deficient planned maintenance and customer needs that were not understood.
4. Excess motion
This refers to any movement of people or machines that does not add value to the product or service. Common causes are poor plant or office layout, double handling, inconsistent work methods and poor workplace organization.
This refers to the transporting of parts, materials and files or documents around the plant or office. The causes are poor plant or office layout, widely spaced equipment and workstations, and poor understanding of the process flow.
This happens when you make too much, too early and faster than is required by the next process. The causes include unclear goals, excessive lead times and outdated forecasts.
Tip: You should reduce your batch size to match the rate of demand. Produce exactly to customer demand, not more.
7. Excess inventory
This happens when you have more inventory than is needed for a job. It is important to tackle excess inventory as it has a huge impact on cash flow.
Tip: Review your materials purchasing strategy — where can you buy them at a cheaper price, in smaller amounts and have them delivered to you more frequently?
Eliminate the Waste
The ability to identify waste in your organization is the first step towards its elimination.
The next step is to set up problem-solving teams and enable them to reduce or eliminate the wastes. A common problem-solving technique is the PDCA (Plan-Do-Check-Act) approach. (Learn more about PDCA tools and techniques here.)
Involve your employees in problem-solving or process improvement. If they know that they are an active part of the solution, they can identify sources of waste or savings that you might not be aware of.
Do note that not all waste is of equal importance. You will need to identify the “right waste” — those that have the greatest impact on the business case or bottom line.
For waste elimination to be successful and sustainable, an organization’s senior executives need to adopt a mindset that cutting waste to cut costs is an on-going journey of continuous improvement. It has to be a collaborative effort between management and employees.
A common mistake for senior executives to avoid is to treat waste elimination as another one-off “tool” or quick fix. It is essential to manage waste elimination as a strategic change initiative that is aligned to the organization’s vision, encompassing both cultural and process transformations.
To learn more principles and frameworks of Lean Management and Cost Reduction, please check out the author’s business documents listed on Flevy here.