1 Lean Transformation: A Business Case Lean Transformation: A Business Case Noel Nightingale 2 Lean Transformation: A Business Case Pressure Exists From Investment Community For Companies To Grow Earnings 3 Lean Transformation: A Business Case Earnings Growth Can Be Accomplished Through: - Sales Growth ? Organic (New Products & Markets) ? Acquisitions - Margin Growth ? Increased Prices ? Reduced Costs A Lean Enterprise Affects All of These Strategies 4 Lean Transformation: A Business Case BUT: ? Return on Invested Capital Is Critical (ROIC) ? Invested Capital Reflected In: - Inventories - Fixed Assets: Plant & Equipment - Goodwill A Lean Enterprise Manages Invested Capital 5 Lean Transformation: A Business Case Outline ? The Business Case ? Lean Assessment ? Lean Assessment Results ? Summary 6 Lean Transformation: A Business Case Company Summary ? Multi Billion Dollars In Sales ? Twelve (12) Separate Major Businesses ? Forty (40) Operational Plants ? 12,000 Employees ? Eight (8) Different Countries ? Nine (9) Million Square Feet In Facilities 7 Lean Transformation: A Business Case LEAN TRANSFORMATION: A BUSINESS CASE 0 0.5 1 1.5 2 2.5 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 YEAR Sales Earnings ROIC R E L A T I V E P E R F O R M A N C E 8 Lean Transformation: A Business Case Relative Performance: 1992 to 1995: Sales Growth: Organic Earnings Growth: Leaning Out Operations ROIC: Balance Sheet Management 1995 to 1999: Sales Growth: Acquisitions Earnings Growth: Follow Sales At A Lower Rate ROIC: Initial Growth Followed By Deterioration 9 Lean Transformation: A Business Case LEAN TRANSFORMATION: A BUSINESS CASE 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 YEAR R E LA TI V E P R I C E Share Price DJA 10 Lean Transformation: A Business Case Share Price 1992 to 1995: Share Price Growth Parallels General Market 1995 to 1999: Market Rewards Higher Growth Rate With Share Price Increase Beyond Market Trend 11 Lean Transformation: A Business Case Metrics Inventory Turns: ? Varied From 3.4 to 7.0 ? Not Measured At One Business On-Time Delivery: ? Varied From 70% to 99% ? Not Measured At Two Businesses 12 Lean Transformation: A Business Case Issue ? Successful Growth Strategy - But At What Cost To Maintaining (Or Not Maintaining) A Lean Enterprise? 13 Lean Transformation: A Business Case Outline ? The Business Case ? Lean Assessment Results ? Summary ? Lean Assessment 14 Lean Transformation: A Business Case Future Lean Enterprise Current State GAP Lean Assessment Transformation Plans 15 Lean Transformation: A Business Case Lean Assessment Process Initial Contacts Kick-off Meetings Site Assessments Gap Analysis Consensus Meetings Transformation Plans Each Major Business Top Management Step 1 Step 2 With Top Management and Each Site Management Step 3 40 Sites Throughout World Conducted by Lean Assessment Team Step 4 With Top Management Step 5 Created By Each Major Business Step 6 16 Lean Transformation: A Business Case Process Benefits ? Objective identification of Gaps in each major business ? Knowledge and understanding of what it takes to improve business performance – What is causing the gaps? – Transformation Plans and Resources necessary to close gaps ? Opportunity to develop consensus on priorities 17 Lean Transformation: A Business Case Criteria for Assessment Team Selection ? Cross functional, diversified team to include: - Accounting - Customer Service - Engineering - Human Resources - Info Systems - Materials / Purchasing - Manufacturing - Quality - Sales / Marketing - Optional: Customers / Suppliers ? 30% of participants to be hourly ? All Shifts to be represented ? Minimum 10 participants / maximum 30 18 Lean Transformation: A Business Case Assessment Elements ? Element 1: Quality ? Element 2: Management Process ? Element 3: Lean ? Element 4: Leadership/Communication ? Element 5: Schedule Performance ? Element 6: Data Integrity ? Element 7: Customer Service ? Element 8: Supplier Base Management ? Element 9: Safety ? Element 10: Education/Training ? Element 11: Distribution (optional) ? Element 12: Program/Project Management (optional) 19 Lean Transformation: A Business Case Element 1: Quality 1 2 3 4 5 1) The Quality System is certified and registered to ISO 9000 and/or QS 9000 standards 2) Total Cost of Quality goals are documented, have visible measures, and are achieved through aggressive cost reductions in Appraisal and Failure costs. 3) Customer requirements are clearly defined, understood by all relevant personnel, and are directly linked to improvement initiatives. 4) Non-conforming material is captured by closed loop systems with immediate containment, root cause analysis, and implementation of corrective action, preventive action, and error-proofing. 5) Advanced Product Quality Planning (APQP) process is in place and is rigorously followed. Flow Diagrams, Control Plans, and Process FMEA’s are maintained by cross-functional teams. 6) A Design for Manufacture/Assembly process has been institutionalized to improve time-to-market, reduce product cost, and optimize product quality. RATING: 5. Process excellence, Institutionalized (100%) 4. Validated process, Implementation in most areas(75%) 3. Consistent process, Partial implementation (50%) 2. Process being developed, Beginning implementation (25%) 1. No formal process in place, No implementation (0%) Systems & Controls: Evaluate the following systems and controls using the rating scale (1-5) to indicate the process maturity and implementation status. If rating is split, use the lower score. Rating 20 Lean Transformation: A Business Case Element 1: Quality 1 2 3 4 5 Performance Indicators: Evaluate the following performance indicators using the rating system outlined with each statement below 19) Defect rates: 1= dpm is not measured or tracked 2= dpm > 10,000 3= dpm < 10,000 4= dpm < 1,000 5= dpm < 100 20) Process Capability 1= Cpk is not measured or tracked (key characteristics) 2= Cpk < 1.0 3= Cpk 1.0-1.33 4= Cpk 1.33-1.66 5= Cpk > 1.66 21) Cost of Quality 1= COQ is not measured or tracked 2= COQ is measured but not routinely tracked 3= COQ is measured with no signs of improvement 4= COQ shows downward trend 5= COQ is meeting targets Rating 21 Lean Transformation: A Business Case Element 1: Quality Comments and Observations: Record any specific comments or observations related to this element (ie: strengths, weaknesses, opportunities for improvement) 22 Lean Transformation: A Business Case Data and Analysis Flow Individual Assessment Individual Assessment Individual Assessment Individual Assessment Individual Assessmen t Individual Assessmen t Individual Assessmen t Individual Assessment Individual Ratings (Shredded After Input) Individual Comments Site Data Site Data Site Data Major Business Data Summary by Site: ? Summary by Element ? Pareto Analysis ? Summary of Comments Summary by Major Business 23 Lean Transformation: A Business Case Develop Transformation Plans Root Cause Analysis UNDERSTAND MEASURE Define the Process ?Inputs ?Outputs ?Interfaces Define Current Metrics ?Measurements ?Calculations ?Frequency Baseline Current Capability ?Historical or Typical Performance Identify Improvement Opportunities ?Brainstorming ?Pareto ?Critical Path Define New Metrics ?Measurements ?Calculations ?Frequency Define Aggressive Goals ?All Metrics ?Multi-Year Engage Improvement Enablers ?Capital Plan ?Facility Plan ?Training Plan ?etc... Track Progress ?R/Y/G/B Tracking REPEAT CONTROLIMPROVE 24 Lean Transformation: A Business Case Lean Assessment: Fact Sheet ? 24 Weeks To Complete ? 12 Elements In Assessment ? 229 Questions In Assessment ? 611 Assessments ? 140,000 Data Points ? 2 Members In Lean Team – Used 10 Trained Facilitators 25 Lean Transformation: A Business Case Outline ? The Business Case ? Lean Assessment ? Lean Assessment Results ? Summary 26 Lean Transformation: A Business Case Lean Transformation Consolidated Gap Assessment Ratings (Average all Businesses) 012345678910 Distribution Le a n Prog/Project Mgmt Ed ucation/Training Customer Service Supplier Base Mgmt Leadership/Communication Summary Score Data Integrity Quality Schedule Performance Mgmt Process Safety Rating (0-10) Average Rating : 4.1 27 Lean Transformation: A Business Case Major Observations Strong Culture to Deliver ? Responsive to customer delivery requirements ? Culture well developed to put out fires/work around/circumvent systems --- lack of focus on good planning ? High Level of Waste in Manufacturing ? Machine downtime, set-up times, inventory management, process controls, flow, work arounds, inaccurate data, etc. ? Innovation Process is Very Weak ? Weak Project Management skills to get product to market ? Supplier Base Management Process Weak ? Supplier expectations set low for cost reduction, higher quality and improved operations ? Lack of Effective Communication and Employee Development ? In too Many Cases Employees are Poorly Informed and Received Little Feedback on Their Performance 28 Lean Transformation: A Business Case Lean Transformation Consolidated Gap Assessment Ratings (Average all Businesses) 012345678910 Distribution Le a n Prog/Project Mgmt Ed ucation/Training Customer Service Supplier Base Mgmt Leadership/Communication Summary Score Data Integrity Quality Schedule Performance Mgmt Process Safety Rating (0-10) Average Rating : 4.1 29 Lean Transformation: A Business Case Safety Categories 0 1 2 3 4 5 6 7 8 9 10 Continuous Imp Risk Mgmt Training Systems R a ti ng (0 -1 0 ) ? Safety is the highest scoring element for nearly all businesses. Credit the Corporate-wide DuPont training initiative for this achievement. 30 Lean Transformation: A Business Case 3 Low Scoring Questions Safety # 12 Employee perception surveys are used to formulate improvement plans; results are communicated back to employees. # 14 Safety recognition is integrated with the business recognition process and includes such techniques as positive reinforcement, awards, and Senior Management “Thank you”. # 15 Total Recordable Injuries: 1= TRIR > 10, 2= TRIR < 10, 3= TRIR < 6, 4= TRIR< 3, 5= TRIR < 2. 31 Lean Transformation: A Business Case ? Lack of clearly defined processes for New Product Development and Advanced Product Quality Planning -need more focus on process controls. ? Having ISO Certification is not enough. Quality Categories 0 1 2 3 4 5 6 7 8 9 10 NPD Process Control Continuous Imp Systems R a ti ng (0 -1 0 ) 32 Lean Transformation: A Business Case 3 Low Scoring Questions Quality # 20 Process Capability (key characteristics): 1= Cpk not measured, 2= Cpk<1.0, 3= Cpk 1.0-1.33, 4=Cpk 1.33-1.66, 5=Cpk > 1.66 . # 16 Suppliers are actively involved in product development, process control and continuous improvement activities. #19 Defect rates: 1= dpm not measured, 2= dpm>10,000, 3= dpm < 10,000, 4= dpm< 1000, 5= dpm<100. 33 Lean Transformation: A Business Case Customer Service Process is not understood by many employees. Communication beyond the Sales and Marketing groups is a frequent issue. Employees do not feel connected with their customers, nor do they clearly understand customer expectations. Customer Service Categories 0 1 2 3 4 5 6 7 8 9 10 Response Feedback Customer Focus Sales R a ti ng (0 -1 0 ) 34 Lean Transformation: A Business Case 3 Low Scoring Questions Customer Service # 16 Response Time: 1= Response time to customer requests are not tracked, 2= Requests responded to in over 24 hours, 3= Requests responded to within 12 hours, 4= Requests responded to within 4 hours, 5= Requests responded to within 1 hour. # 8 Lost customers are interviewed and results are reviewed, documented and communicated to appropriate employees. # 12 Performance measures and service standards apply to all employees within the company that make customer response timely and effective. 35 Lean Transformation: A Business Case ?A void in education/training is a sore spot for nearly all employees. ?Budgets have been cut significantly. Basics such as development planning, training needs assessments, and new employee orientation have been dropped in many cases. Education/Training Categories 0 1 2 3 4 5 6 7 8 9 10 Planning Employee Devel Systems R a ti n g (0 -1 0 ) 36 Lean Transformation: A Business Case 3 Low Scoring Questions Education/Training #14 Development Training Hours (annual, not including mandatory): 1= not tracked, 2= average < 10 hours per employee, 3= average 10-30 hours/employee, 4= average 30-40 hours/employee, 5= > 40 hours/employee #10 A knowledge database system for capturing, archiving, and accessing lessons learned exists and is used by employees. Technical solutions, corrective actions, and error-proofing techniques are captured by this database. #5 The quality of training programs is routinely assessed and curriculum improvement plans are developed and implemented. 37 Lean Transformation: A Business Case Outline ? The Business Case ? Lean Assessment ? Lean Assessment Results ? Summary 38 Lean Transformation: A Business Case Conclusions ? Acquisition Strategy Resulted In Overcapacity In Plants, Equipment And People ? Business And Operational Processes Are Not Lean Nor Are They Focused On Delivering Value To Customers ? Management (At All Levels) Is Neither Aware Of Nor Trained In Lean Principles 39 Lean Transformation: A Business Case The Challenge ? Lean Enterprise “Value Delivery” To Customers And Stakeholders Does Not Exist ? A Transformation To Lean Is Mandatory ? Time Is Of The Essence 40 Lean Transformation: A Business Case Major Actions In Transforming To Lean ? Businesses Restructured ? Management Restructured ? Training Instituted 41 Lean Transformation: A Business Case 0 0.5 1 1.5 2 2.5 1990 1992 1994 1996 1998 2000 2002 YEAR Sales Earnings ROIC R E L A T I V E P E R F O R M A N C E Lean Transformation Phase 42 Lean Transformation: A Business Case R E L A T I V E P R I C E 0 1 2 3 4 5 1990 1992 1994 1996 1998 2000 2002 YEAR Share Price DJA Lean Transformation Phase 43 Lean Transformation: A Business Case Theme ? ‘Lean’ Is Critical To Success Of Any Business Growth Strategy ? ‘Lean’ Applies To Invested Capital ? ‘Lean’ Is A Way Of Conducting Business Which Must Be Embraced Throughout An Enterprise From Top To Bottom 44 Lean Transformation: A Business Case Thank you Noel Nightingale