Viewpoints: Sustain Lean During the Recession
We've all now learned one more time that stable growth is hard to achieve in modern economies. The lure of financial fiddles to garner shortterm windfalls is very strong, and the will of politicians to nip bubbles in the bud is very weak. Then, when the bubble bursts, regulators—like generals preparing for the last war—put controls in place to prevent the disaster that has just occurred, not the next one. My bet is that the folks who thought up the credit default swaps, collateralized debt obligations, and—my favorite—synthesized collateralized debt obligations that fueled the last boom/bust are now sailing their yachts on some tropical sea, thinking up the next lucrative boom. And I wouldn't bet against them. So I'm afraid this recession won't be the last, and it is clearly highlighting a major challenge for lean organizations, which is to protect their problem-solver employees through the cycle.
It also challenges them as they try to defend the problem-solving relationships built over time with downstream customers and upstream suppliers. The temptation in any crisis, of course, is to go back to point optimization, in which it is every person and every firm for itself.
So how does a lean enterprise think about protecting itself and its people in this recession and the next one that is sure to come? Here is a short list of ideas:
- Rethink recruitment policies to create a pool of entry-level temporaries who can be a buffer in severe downturns (defined as those where the survival of the enterprise dictates lay offs). Gradually convert temporaries to permanent employees—who can be protected through practically any conceivable downturn—as they prove their fit with the organization's problem solving. The alternative is to fire people, often starting with higher-paid employees with more seniority. This sends the message that loyalty doesn't count, and squanders valuable team skills.
- Create company-wide bonuses for all employees, based on profitability, to adjust wages through the economic cycle and defend core employees from layoffs. Most firms still have all-or-nothing compensation for everyone except the executives on a bonus plan.
- As the lean transformation proceeds, convert physical inventories into cash, but keep an inventory of cash to buffer the firm during the down cycle. From the standpoint of modern financial thinking, this seems sub-optimal. But firms with stable cash reserves can keep new programs on schedule, and will surge in the upturn as competitors who delay or cancel new projects fall behind.
I realize that these steps work best if undertaken well before the bubble bursts. So what do lean enterprises that have recently transformed themselves but have not taken these steps do to get through the current crisis?
Take back work from suppliers that are not going to be part of the core supply group going forward, to defend jobs in the company. This need not disrupt relations with the remaining suppliers, if it is clear that the firm will be working on a continuing basis with fewer but more-talented suppliers in the future.
Look at every product and its value stream to see how it can be offered more efficiently by leaving out wasted steps and unnecessary expense. Careful targeting of waste can support price reductions that will capture additional sales, so there will be no need to reduce the number of employees.
The very last thing to consider is the one thing managers seem to embrace most readily: cost cutting. This means leaving out steps and features that actually create value from the perspective of the customer, and removing employees who are actually needed to get the job done right using the current process. The hope, usually wrong, is that the customer won't notice.
This last expedient is the one I most fear, because it is likely to be justified in the name of "lean." To avoid the need for cost cutting, I hope that every would-be lean enterprise will assign someone to develop a "recession A3 report" that carefully reviews the background situation. The critical step in the A3 process will then be to develop a set of countermeasures that can protect the organization and its people through the current recession, while laying the ground work for a sustainable lean enterprise in the future.
This article was first published in the March 2010 edition of Manufacturing Engineering magazine.