Cash flow vs. cost reduction

Cash flow vs. cost reduction

I've been involved in Lean/KAIZEN™/Six-Sigma/Continuous Improvement for almost twenty years. During the first "phase" of my career, I thought I was learning about Lean. Then, ten years into my journey, I met my mentor. It was then that I truly began to understand what Lean really is.

There were many lessons that he drilled into me.  Most, I can still repeat in my sleep.  Some, as with what happens with age, have been lost (or at the very least, shuttered deep in my brain).  One which continues to haunt me as I work with leaders across different industries and environments, is the understanding that Lean is all about cash flow, not cost reduction.

Many organizations, even many mentors/consultants, strive today to reduce costs.  They are using Lean tools, without the full understanding of Lean business practices, to achieve this.  This is traditional leadership, using a new set of tools under the same old premises that put them in their current position.  It is not a Lean transformation.  How is this happening?

The focus is on cost reduction, not cash flow.  Remember Ohno's quote "All we are doing is looking at the timeline from the moment a customer gives us an order to the point when we collect the cash."  The second half of his quote discusses how they are eliminating waste to achieve this.  That second half always gets the focus, not the first half.  Yet, it is the first half that is the primary goal.  If you are looking at cost reduction only, it is comparable to looking only at muda while ignoring Muri and Mura.  It is all about cash flow.

While cash flow can be improved through cost reduction, there are many other ways to improve it as well.  One simply needs to remember SQDCM - Safety, Quality, Deliver, and Cost with Morale (or, as some prefer, "with morals").

Improved Safety

Improving safety improves cash flow.  How much money is spent on health care costs, workers' compensation costs, lifetime injury benefits, short- and long-term disability costs?  These numbers make all Safety and HR Managers cringe with fright. 

Improving safety, meaning, eliminating risks before they become realized, reduces cash out, thereby improving cash flow.  Improving safety reduces lost time, thereby allowing an organization to produce more consistently and effectively with staff, thereby improving cash flow.  Failing to act on known safety issues (especially when the cost of safety improvements is weighed against "potential" injury) cuts costs, which someone will inevitably suggest, but it does not improve cash flow.  At best, it maintains the current cash flow.  This looks great on a financial statement, but only until someone is injured.

Safety requires long-term thinking.  There are too many short-term 'excuses' that will allow an organization to rationalize or justify not allocating money to safety concerns.  This does not improve cash flow, it only accomplishes cost reduction, and even that is only short-term.

Improved Quality

Everyone wants quality.  They just want it cheaper!  Improving quality improves cash flow.  It really is that simple.

With higher quality, organizations have less rework.  Less rework means more product through the first time, more people toughing more product less.  People are providing value, rather than having to inspect, diagnose and repair.  This means more product through faster for more customers.  Hence, it improves cash flow.

Higher quality also reduces warranty returns.  This improves customer satisfaction, which, in turn, improves repeat customers, as well as new customers (through reputation).  With less returns, organizations aren't tying up valuable employees with incoming freight, customer paperwork, product rework or replacement, and customer time delays.  Not to mention, valuable manufacturing space isn't consumed by a Rework/Return Department. 

Think of manufacturing like retail.  There should be a revenue per square foot calculation, including a goal and an actual.  When space is utilized by non-revenue-generators, the cash flow is reduced!

Improved Delivery

I've proven this myself.  Take a quality product with high cost and high price in a competitive and dying market.  Improve the delivery to near 100% on-time and shorten the Lead Time window, while maintaining quality, cost and price.  The result?  Increased sales of 30% year-over-year.  With the improved delivery, costs were reduced (less inventory holding cost, less obsolescence), but the focus was not on cost reduction, rather cash flow.

When you can improve delivery exponentially, you are achieving exactly what Ohno was saying - reduce the timeline from order to cash.  Improving delivery performance builds reputation.  Building reputation improves customer satisfaction and, thereby, customer referral.  Building customer referral increases sales.  Even if you don't focus on cost reduction, increasing sales while maintaining costs accomplishes what?  Increased cash flow.

Improved Cost

This is not to say that reducing costs isn't necessary.  It is.  Markets are more global now than ever.  Costs are important.  However, cost-cutting won't make organizations successful in the long-term. 

A report recently surfaced that stated long-term companies used to be 75 years or more.  Now that number is 15 years or more.  Why?  Organizations today are failing to effectively prepare for the long-term.  The short-sighted cost-cutting techniques are weakening organizational structure needed for long-term growth.  Even the shift to "cost reduction" has really become a simple play on words.  It is old-school "cost cutting", rebranded to sound less mean.

Organizations pursuing a Lean business model don't have to focus on cost reduction.  By focusing correctly on Safety, Quality, Delivery and Morale, the organization will naturally reduce costs.  If the delivery window is shortened through improvement, there is no need for high levels of inventory - cost reduction.  If the product is made right the first time - cost reduction.  If the workplace is safer - cost reduction AND cost avoidance.  Cost reduction is a natural "effect" from the correct "cause" actions of improvement.

Improved Morale

Let's not forget the importance of Morale.  Morale is vital to the improvement curve.  Engaged employees work easier, work better, work smoother (some might say faster), and smarter (some might say cheaper).  Engaged employees are more focused.  They surface ideas for additional improvement.  They become active participants in the success of the organization.

I recall reading about NUMMI many years ago.  Most people are aware of NUMMI today.  It was the joint venture in California between GM and Toyota, Toyota's first foray into US manufacturing.  The Toyota leadership recalled the GM Union workers.  They used the same staff, but Toyota's business model, focused on team engagement and KAIZEN™.  It was driven by morale.  Many of those GM leaders involved at NUMMI claimed later that what worked at NUMMI didn't work anywhere else in GM.  Why?  The Union was the same.  It was the LEADERSHIP.  That core built on SQDCM, not cost-cutting, or cost-cutting today disguised as cost-reduction, to improve cash flow.

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