Art Byrne: Lean from the CEO’s Perspective, the Lean Turnaround Answer Book

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My guest for Episode #505 of the Lean Blog Interviews Podcast is Art Byrne, who was a guest back in Episode 158 about 12 years ago — we discussed his book The Lean Turnaround.

Today, we're discussing his new book, The Lean Turnaround Answer Book, an edited compilation of his “Ask Art” columns published by the Lean Enterprise Institute.

Art Byrne has been implementing Lean strategy in various U.S.-based manufacturing and service companies, such as Danaher Corporation, for more than 30 years, including The Wiremold Company, which he ran for 11 years. He retired as an Operating Partner at the private equity firm J. W. Childs Associates L.P.

In this episode, Art revisits the podcast after twelve years to discuss his new book, The Lean Turnaround Answer Book, an edited compilation of his “Ask Art” columns from the Lean Enterprise Institute website. Art shares his extensive experience implementing lean strategies across various industries, including his notable work with Wiremold and his role in private equity at JW Childs Associates. The conversation also covers Art's motivations for writing his books and his continuous efforts to disseminate lean knowledge, addressing the practical challenges and questions that arise in Lean implementations.

Art elaborates on the essence of Lean principles, emphasizing the need for a fundamental shift in organizational philosophy and strategy. He recounts his experiences in transforming companies through Lean methodologies, including detailed anecdotes about reducing setup times, managing inventory, and improving operational efficiency. Art highlights the significant impact of lean on organizational performance, customer service, and financial health. The discussion also touches on the challenges of aligning traditional cost accounting with lean practices and the importance of engaging the finance department in the lean journey. Overall, Art's insights offer a comprehensive guide to Lean implementation, reinforced by real-world examples and practical advice.

Questions, Notes, and Highlights:

  • Tell us about the book and how this one came to be…
  • Cost accounting and inventory?
  • Orry Fiume – “Real Numbers” book
  • The strategic value of setup reduction?
  • How was Lean utilized in your private equity work? How was your role different as a PE partner?
  • Looking for companies with a certain Lean potential? What factors are you looking for?
  • Best Lean turnaround story? More likely a smaller PE company than a large public company?
  • But Lean is not the default management approach for manufacturing? Higher than 10 years ago?
  • Boeing – did they forget what Shingijutsu taught them?
  • The problems caused by “make the month”

The podcast is brought to you by Stiles Associates, the premier executive search firm specializing in the placement of Lean Transformation executives. With a track record of success spanning over 30 years, it's been the trusted partner for the manufacturing, private equity, and healthcare sectors. Learn more.

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Episode Summary


Automated Transcript (Not Guaranteed to be Defect Free)

Mark Graban:
Well, hi everybody. Welcome to the podcast. I'm Mark Graban. Our guest today is Art Byrne. He's a returning guest.

Mark Graban:
He was here with us back in episode 158. That was twelve years ago, if you can believe it. Art, and I can barely believe it back then. We discussed his book that was new at the time, the Lean Turnaround. And today, we're discussing his newest, latest book, the Lean Turnaround Answer Book.

Mark Graban:
It's an edited compilation of his ask art columns that were published on the Lean Enterprise Institute website. Art has been implementing lean strategy in various US-based manufacturing and service companies such as Danaher Corporation. He's been doing this for more than 30 years. He was at the wire mold company that he ran for eleven years, and he's retired as an operating partner at the private equity firm JW Child's Associates LP. But Art's still busy with the book and other things.

Mark Graban:
So welcome back to the podcast. How are you, Art?

Art Byrne:
Fine, thank you, Mark. Nice to be with you.

Mark Graban:
That's good to have you back. Tell us a little bit, if you would, about things that you're still actively involved with in trying to help people with lean.

Art Byrne:
Yeah, well, my objective really, in writing a book the first time was really to just pass on the knowledge that I had gained over all the years, because, as you know, those of us that have been very involved in leaning, we all learned it from somebody else. And so the fact that they helped us, you always feel like obligated to pass on that knowledge. So I wrote the first book, The Lean Turnaround, and that went over pretty well. We sold a lot of books and got a lot of questions. And the main question I got from that book was, well, gee, this is great, but how do you really do this stuff?

Art Byrne:
Yeah, because there's a lot of theory and you say, well, here's a theory of lean and whatever, but how do you actually do it? So that prompted the second book, which is called The Lean Turnaround Action Guide. The Lean Turnaround action guide is really like a case study. It's a lean implementation. We took a company, a traditionally run company with five years of financial forecasts and history, and then we step by step converted it to lean.

Art Byrne:
And then in the end, we showed what the financial history looked like five years later under lean, which was obviously quite different. But it was a, I thought a good example, if you wanted to see how would you go about this? This was really just the way that I've gone about it pretty much everywhere. And so it's a very good case study and that in turn, generated other questions, of course. And fortunately, Lei, the Lean Enterprise Institute, gave me some space on their weekly lean post to answer those questions.

Art Byrne:
And I've been doing that for about eight years or so, and I had over a hundred. I had 100 articles on the Lean Post and seemed to have a pretty good readership, and we did a few webinars and got big attendance and that kind of thing. And so when they asked me to stop, I said, well, gee, I don't want all this knowledge to go away. We've got a lot of articles here. And so we selected 70 of the articles, and we organized them into a book, which we now call the Lean Turnaround Answer Book, which is actually being published today for the first time.

Art Byrne:
It's been in Kindle form for. For a week and a half, but today was the publishing date.

Mark Graban:
Congrats.

Art Byrne:
A good day for us to talk. Yeah. And it really, I think, answers just about every question, normal question about lean that you could imagine. You know, it's an article form, but it gives you answers to a lot of things. We've organized it into sort of five sections.

Art Byrne:
One is the lean fundamentals, because you need to understand what those are to have any chance at doing this, because lean, to me, is sort of, it's not some manufacturing thing or whatever. It's more of a philosophy and a strategy, how to run your business, but you need to understand what those fundamentals are before you can even attempt this. And then we have a second section on lean management, which we get a lot of questions on that kind of thing. And then how do you implement it is another section. And then what's the organizational structure that you need?

Art Byrne:
Because if you think of it, really, organizational structure creates a lot of the issues and problems that companies have. If you're organized in a functional way, the waste that that creates is enormous, but nobody can see it because that's the traditional way to organize a company. It's a traditional way to do it. In manufacturing companies, for example, the way that we fundamentally organize it is by type of equipment. So all the punch presses are in one department and all the drilling machines are in another department, et cetera.

Art Byrne:
It seems like somebody decided that machines are happier if they're right next to other machines just like them, but, of course, for making the product that makes no sense whatsoever.

Mark Graban:
Right. For flow, right? Yeah.

Art Byrne:
And so we have a whole section on that structure. What's the structural changes needed to implement lean? And then there's kind of a catch all section on some other thoughts and things. That didn't fit into the other sections. So things like lean accounting, which people overlook, but if you don't switch to lean accounting fairly early on in your lean journey and you try and go with the traditional standard cost accounting, traditional standard cost accounting fights everything that you're trying to do in lean, you know, you're trying to get rid of inventory.

Art Byrne:
Standard cost accounting loves inventory, you know. And so there's some other things in that section that are kind of fun or interesting, like, you know, can you use poetry for lean? And people will say, what are you crazy?

Mark Graban:
Did you say poetry?

Art Byrne:
Poetry?

Mark Graban:
Yeah, I want to make sure I heard you.

Art Byrne:
Yeah, yeah. And it's just a fun story about one of the companies that we acquired when I was running wire mold. And, you know, we bought this company and we were doing the first Kaizen events. And during the event I went out in the factory and we had this huge area of work in process inventory. I mean, these were racks 30ft high in the air and 50, 60ft long.

Art Byrne:
Millions of dollars sitting in there and work in process inventory. So I went out and I hung up a sign on every rack and I said, parts hotel closing, this rack comes down by and I put a date and then I went to the next rack and a month later I put another sign, parts hotel closing, blah, blah, blah. So as I'm walking back, a lady pokes her head out of this little office and she said, hey, you, what are you doing? My people are all upset. And I said, oh, do you run?

Art Byrne:
Are you in charge of this area? And she said, oh, yes, I am. She had on this sort of funny hat and I, I guess she was pretty well known in the plant because you always wore these different hats and whatever. She was very outspoken about everything, said, oh, well, great, come with me and I'll show you what I want you to do. And I took her back and I showed her the signs and I said, look, every time I want you to take these racks down and get rid of this inventory because it's all waste.

Art Byrne:
And every time a rack comes down, I want you to send me my signature so that I know it came down. Yeah. So she said, she looked at me and she said, well, okay. And so a month later I was at the plant doing another Kaizen and she came up to me and she hands me my signs. Here's the sign.

Art Byrne:
And then she hands me a poem and her name was Barbara and she called herself Dame Barbie and her merry men. And King Arthur had, King Arthur had ordered this inventory to go hey. And so it was a kind of fun poem. And I said, barbara, thank you. That's great.

Art Byrne:
That's really great. And she looked at me and she said, well, you know, we're not done. I said, what do you mean? And she said, well, I gave you a poem. You got to give me a poem.

Art Byrne:
So I said, okay. And I went in the cafeteria before the wrap up meeting on Friday, and I wrote a poem about the Parks hotel. So at the meeting, I read her poem, and I read my poem. Well, this went on every month for about eight, nine months. But in the end, we freed up something like two and a half million dollars worth of inventory and 20 or 30,000 space that we could use for other things.

Art Byrne:
So it was just an article or a story about, you got to have fun with us. You gotta kind of enjoy yourself as you go along.

Mark Graban:
Yeah, I'm trying to picture. Was this. This was like a heartfelt poem, like an ode to inventory. It wasn't some sort of, like, Limerick thrown in your direction with some. With some.

Art Byrne:
No, she. She, you know, she kind of got it. And then I wrote the parts hotel, which talked about all the inventory, sleeping there. And we put our parts, and we take great care of our parts. We let them sleep for a long time.

Art Byrne:
Sometimes they rust and all this kind of thing.

Mark Graban:
It's more like the parts have an apartment lease. They're there for months, not days.

Art Byrne:
But in a way, it got the point across to everybody in the business that, hey, this is really wasteful. We need this money for new equipment. We need this money to invest in new products. And instead, it's just sitting here in a big pile of inventory, sleeping. You can say, well, that sounds a little nutty, but it was very effective in this particular case.

Mark Graban:
And at the same time, as you were setting this target for closing the hotel, I'm sure they realized their goal was not to find a different place to store the parts.

Art Byrne:
Oh, no.

Mark Graban:
This is where I'm sure machines were being moved into cells and other changes that would actually improve flow, right?

Art Byrne:
Absolutely. All that stuff was going on at the same time. And I asked at one point, somebody, I said, well, how did Barbara reduce all this inventory? They said, oh, everybody's afraid of Barbara. And so whenever we took inventory out, she just said, it can't come back.

Art Byrne:
So they didn't want to cross her. And so that's how it came down. But we made a ton of money doing that. Yeah.

Mark Graban:
And for those who, I want to ask one follow up question about the cost accounting and inventory. And you can check my understanding if I don't have this right. But is it fair to say one of the problems is running the machine, cranking out more parts, even if they're going in the inventory from an accounting standpoint now, the cost per piece seems lower. Is that one of the dysfunctions?

Art Byrne:
Well, yes, yes and no. It's basically, let's just say that we have, under absorption accounting, you're absorbing the overhead costs based upon either man hours or machine hours. So let's say machine hours is pretty common.

Mark Graban:
Yeah.

Art Byrne:
So let's say that we have ten machines needed to make part a, and we come in today and one of the machines is not working. So that means we can't make any part A's today. Nothing. Nothing we can sell. But the accounting department says, oh, run all the other machines full blast.

Art Byrne:
So now I'm making nine other parts. I can't sell anything. And so all I'm doing is stacking up inventory. But I'm also getting absorption hours off of these machines and running these parts. So the absorption hours are taking the overhead and moving it up into inventory so it doesn't hit this month's p and l.

Art Byrne:
So from an accounting point of view, the accountant say, hey, we had a really good day. From an operation point of view, I said, wait a minute, I didn't make anything that I can sell. Yeah, but accounting says, oh, no, that was good, you did a good job. And so what happens is that people understand this fairly quickly, and the guys that are running these functional departments, they understand that as they get near the end of the month, if they haven't made their, they're looking at absorption hours, they're not looking at the customer, they're just looking at absorption hours. And they know what parts in their department have the most absorption hours.

Art Byrne:
And so when they get near the end of the month and they're short of absorption hours, they don't want to get yelled at, so they start making parts that have the most absorption hours. We don't happen to have any demand for those parts, by the way, but make absorption hours, and so the month will look pretty good and everybody will be very happy. So, on the one hand, you know, with lean, we're trying to get rid of the inventory because it's hiding the waste. And over here in the finance department, we're mad at you if you start dropping inventory, because when you drop inventory, the overhead that was thrown up in there before starts to come out. And today's overhead has no place to be absorbed.

Art Byrne:
And so you're getting a double shot of overhead. And so the finance department, while Lean is being implemented and good things are happening that the finance department screaming its head off, you got to stop this. This is crazy. Our earnings look terrible. Our cash flow looks pretty good, but our earnings don't look too good.

Art Byrne:
So they're all upset, even though you're doing the right thing. So if you don't change the accounting fairly early on, you're just going to have a battle with a finance department. For a long time, we had that experience. We had a lot of companies come visit us at wire mold in particular. And they'd go home and a number of them would start their own lean conversion and they were making good progress.

Art Byrne:
And then about a year later, they'd call us and they'd say, can we send our CFO and a few of his people to see you for a week? Because they're all upset and they just don't understand. So we had to. So we would say, okay, yeah, send them over and we'll see if we can straighten them out. But, you know, otherwise, if you, what they, what they're looking at from their absorption point of view and what's really going on are completely different.

Art Byrne:
And besides, in my opinion, absorption accounting is something that it can't be understood by humans. And it tries to create standard costs for every product out to four decimal points. And if you ask people in the business how many believe that the standard costs are actually correct, no hands will go up. I've tried this many, many, many times in different presentations I gave. Nobody believes the standard cost, but the finance department believes them.

Art Byrne:
And people set their prices based upon standard costs that aren't correct, which means either you're going to leave money on the table or you're going to overprice the thing and you're going to lose market share just because your standard costs were wrong.

Mark Graban:
And Orry Fiume was your CFO at Wiremold, is that right?

Art Byrne:
That's correct, yeah.

Mark Graban:
So you and Orry were on kind of the leading edge of not just identifying these dysfunctions, but figuring out how to better align accounting and finance with lean and operations, right?

Art Byrne:
Thats right. Orry was a unique finance guy and that hes very good strategic thinker as well. And he wrote one of the better books on lean accounting called real numbers with a lady named Jean Cunningham. Used to be the CFO at a company called Lan\tech. And I think that was very helpful to a lot of companies.

Art Byrne:
And it's funny, I'll tell you a story about Orry. When we first. When I first got to wire mold and we started doing Kaizen, the first, very first Kaizen, I had all of my senior executives on one team or another. I think we had four teams at Shingijutsu there. And I said, Orry, I want you to be on the setup production team.

Art Byrne:
Well, you know, he's the finance guy and he's. He's a. But I'm the finance guy. I don't know anything about. I don't know anything about setup reduction.

Art Byrne:
Ori, I want you to go on the team, but all right, we're going to close the books this week. No, no, no. And then auditors are coming in to start the annual. No, no, no. You gotta get on the team.

Art Byrne:
So he finally get up, goes out, and he goes on this team, and it was a setup production team. And they went from 90 minutes set up time to five minutes over the course, of course, of one week. That was pretty normal for us, by the way, at Warren Bull, our average setup reduction result after a one week setup reduction, Kaizen was a 90% reduction at wire mall, any kind of equipment. Anyway. Orry, of course, is still the finance guy, and he decides to keep track.

Art Byrne:
He says, if you're going to reduce setup time, it's got to be capital intensive. We're going to spend a lot of money. So he kept track the whole week. How much money did we spend to go from 90 minutes to five minutes? I think it was $100.

Art Byrne:
And so because he was such a good strategic thinker, it dawned on him right away that, boy, if we can do this and it doesn't cost us money, think of the strategic. The strategic impact on the business that setup reduction is going to have. Right? And so he became my best disciple, if you will. I mean, he really helped everybody else get on board.

Art Byrne:
He just understood it. And yet I've seen over and over, I've seen people see something like that and just say, well, that was interesting, but I don't know what it means, and we're not going to do it again or whatever. But think about, while we're on the subject of setup reduction, just think about how strategic that is. And no one would ever think about that. So let's just take an example that we have two companies, a and b.

Art Byrne:
They buy the same exact equipment from the same vendor, and then they compete against each other. The only difference is company a, who's the market share leader, takes 1 hour to change over his equipment, and company B who's sort of coming from behind. They figure out for hardly any money how to change the machine in 1 minute. And then you just have to ask yourself, well, okay, if that's the case, who has the lowest cost, A or B? Well, obviously the guy who can change it in 1 minute is going to have much, much lower cost.

Art Byrne:
First of all, he can run the machines for 59 minutes more than the other guy can. Then you say, well, all right, let's say they can only each afford 1 hour of changeover time a day based upon their demand, etcetera. So then you ask the question, well, who has the best customer service? Well, obviously B has much better customer service because a can only make two different products a day on the one, the product before the changeover and the product after the changeover. Whereas b, he can make 61 products a day, right.

Art Byrne:
The one before the changeover plus 60 changeovers. So all we did was reduce setup time. Didn't cost us a lot of money. Reduce setup time. Now I've got the lowest cost and the best customer service.

Art Byrne:
To me that's pretty strategic. It's not some fundamental manufacturing thing. It's not a cost reduction program, et cetera. And so we, you know, but you would never call in the security analysts and say, hey guys, we want to talk to you today about strategic thing called setup reduction. They think you were nuts.

Art Byrne:
I mean, they just think you're completely crazy because people don't understand. They don't understand the value of lean. They don't understand what it does for you. They don't understand what it does for you from allowing you to be a time based competitor, etcetera, etcetera. All of which comes from simple things like setup production.

Mark Graban:
So I want to come back and ask you a little bit more about the book art, but I'm curious to explore a little bit about your transition from being a CEO to working as a partner in private equity. How did your role change or how was lean utilized in private equity? Were you trying to convince CEOs to care about things like setup reduction or what? I'm just curious how your work impacted.

Art Byrne:
Things in a way it didn't change at all for me. But you're correct. At Wiremold we bought 21 different companies. So I always had to convince the new CEOs why to do lean and how what we're going to do that kind of thing. So moving into private equity at the time, J.W. Childs had about, I think we had about 17 or 18 different companies in the portfolio.

Art Byrne:
And I became chairman of four of them. Now, as chairman, my basic role was to implement lean in the companies I was responsible for. I wound up having to fire about three or four of these CEO's because I couldn't get them to come along with it, really. You can't wait. The private equity business, we're trying to triple our.

Art Byrne:
Trying to triple our investment in about five years. It doesn't always happen, of course, but you have to have some target. I can't wait for these guys to come along and get on board with lean, then with the rest of the companies, my role was to try and help them understand lean and to get them started. So I spent some time, not a lot of time, but, you know, I did some Kaizen events with some of the other companies and that kind of thing. And so the role was really kind of the same, you know, showing people doing Kaizen, getting companies to do this stuff.

Art Byrne:
And, you know, like, we had a company that made suits, Joseph Aboud was the name of it. And they had. They. I went there. They were in Fall River, Massachusetts, and one of the only plants left in the United States that actually made clothing.

Art Byrne:
And I went and they said, well, I said, how long does it take you to make a suit? Well, they said, six weeks. No, no, we want the one day suit. So trying to teach them how to do the one day suit, that took. That took some time and whatever, but we got things like that to happen in very different kinds of companies.

Art Byrne:
And so it had a big impact, and not always from me being there all the time, but I was sort of the initiator, if you will. Now, in the companies I was chairman of, I did spend a lot of time, I attended a lot of Kaizens and really pushed really hard to get these guys to do what they should do. We had one company that was in, actually the first company I was chairman of was a company called the Celta. They were in the filing business. And this is hard filing.

Art Byrne:
Lever arch files and hanging file folders, we know in the US as Pendeflex or just Manila file folders, those kind of things. Of course, that was an industry that was declining at about 4% per year because, you know, laptops and iPhones, people were storing their stuff on their laptops or on their iPad, and they weren't using hard filing as much anymore. And even there, where that business declined 4% a year for all the time we owned it because of lean, we were still able to get three and a half times our money back when we sold that business. Yeah, because we were able to do things, we were able to stay ahead of the curve. We were able to consolidate.

Art Byrne:
We were able to close factories. I think we freed up. Something like this was about a $1.1 billion business when we bought it, but it wasn't making too much money. And in the end, we were making, we were down to just the european portion of it, but we were making money. We were doing quite well in a business that was declining just because of lean.

Art Byrne:
I think we freed up over $200 million worth of inventory, 2 million space, et cetera, et cetera, all through different kaizens and things that we did. And in that particular case, the biggest factory in Europe was in Poland. And every year we had a, what we call the president's Kaizen, and we had John Chiles, who was the head of JW Childs. We had myself as the chairman of the Esselte. We had the worldwide leader of Esselte who was based in the United States.

Art Byrne:
And we had the european president of Esselte all present for a whole week doing Kaizen on the shop floor in a factory in Poland. So this sent a tremendous message, of course, through the business that, hey, were serious about this, were going to spend our time on the shelf floor. You better pay attention and get on board with this. And they did a really tremendous job, I thought.

Mark Graban:
Yeah, and I know there are some private equity firms that seem to have a lean based approach for how they want to help create value with the company. I imagine theres a certain profile or formula. I'm not asking for exactly what the formula is, but looking for companies that might be undervalued by a more traditional financial view, where a lean thinker would see potential in transforming operations, transforming the management system.

Art Byrne:
Well, I don't know for sure, but I think a lot of the, I mean, most of the private equity companies are basically a bunch of finance guys, and they've traditionally been that way, and I think they're still mostly that way, but they've learned to go find somebody who's nose lean and hire them when they need them in certain companies, that kind of thing. Yeah, I think that's more the model that you're going to find if you looked at that. But yeah, I would get involved. For example, when we're looking at a new company, I would be part of the due diligence, and part of that was just to go look and see and walk around the factories. And I could give you a pretty good idea right off the bat what was possible here for example, if you look, I look at a company, traditional company, that turns its inventory three times.

Art Byrne:
To me, that's a goldmine. Just that fact alone is a goldmine because it tells you a lot of things. In my experience, a company that turns its inventory three times, for the most part, has 25% to 40% too many people, has five to six times too much inventory, has 50% too much space, which is, of course, where they store all the inventory, has long lead times and has periodic quality problems because of the batching that's done and the inability to. When a quality problem pops up, it's hard for them to solve it because it happened six weeks ago. How do you solve that?

Art Byrne:
And so you just look at a company that's turning inventory three times, and you should be able to make a lot of money by turning that company around. It's going to be a lot of cash flow. At Wiremold, we found that when we bought a company, we could pretty much always get our cash back in about three years because almost all of these companies were turning inventory about three times. So we could get a lot of it back from inventory. You could get some of it back from improving the margins and some of it back from growing the company.

Art Byrne:
So we knew going in that if they were turning it three times, we could get that to six times at the end of the first year. We could get it to eight times at the end of the second year, et cetera, et cetera, et cetera. And so it was just something that, it gave you a lot of confidence when you bought something. It gave you a strategic advantage on how much you could bid for the company if you had to bid against other people, because you had this cushion, you had this enormous cash cushion of all this wasteful inventory that you could just pick up and use. Yeah.

Mark Graban:
So, with all of that potential and with those benefits, when a company goes through a lean transformation, is it fair to say that lean is still not quite the default management system, even in American manufacturing companies?

Art Byrne:
Oh, I would say by far.

Mark Graban:
By far it's not.

Art Byrne:
By far it's not. If you asked me ten years ago, I would have said that only maybe 15%, 20% of the companies even have thought about lean or tried it. Today, I think that number would be much higher. It might be 50% or whatever. But if you ask how many of those companies are successful at becoming a lean enterprise, I think the number drops down to about five to 7%.

Art Byrne:
Not many become successful. The reason for that is almost every company that thinks about lean from a traditional point of view, they just look at it as a cost reduction program. Their basic approach to it is, this is going to be what we do for cost reduction. They don't change anything else. The sales force is out still selling big batch orders and giving volume discounts and all that kind of stuff.

Art Byrne:
Everything else is in the batch. They just want to reduce costs. And if that's your approach to lean, you're not going to be very successful, because with lean, everything has to change. You don't change everything, you're not going to be very successful. I'll give you an interesting example.

Art Byrne:
When I first went to wire mo, one of my first questions was, what percentage of our shipments go in the last week of the month? Pretty normal question. And for a batch manufacturing company, that applies to everybody. And the answer in Wiremold's case was 50%. I said 50%.

Art Byrne:
We're going to. We're going to try and level. We're going to try and level load the production in the factory. I ship 50% in the last week of the month. That's true in almost all batch manufacturing companies.

Art Byrne:
You're going to find something similar to that. It might not be quite 50%, but it's going to be 35, 40% in the last week of the month, because it's, everything is being batched. And that means, think about that. If I ship 50% in the last week of the month, I have to be staffed to do that after be. But I'm overstaffed the other three weeks, right?

Art Byrne:
I'm massively overstaffed the rest of the time in order to deal with this 50%. So my next question, of course, was, well, why are we shipping 50% in the last week of the month? Doesn't make any sense at all. When we looked into that, we found that it was our sales terms. Our sales terms were forcing, were forcing our.

Art Byrne:
Where we sold mostly to distributors, forcing our distributors, electrical distributors, to order in the last week of the month because they got an extra 2% cash discount if they paid by the 10th day or the month following. So they basically, the last week of the month, they're going to get 45 day sales terms. And the electrical distribution business in the United States, like most distribution businesses, they're fairly low margin, three to 5%. So the 2% cash discount, that was a big deal. They all wanted to grab it.

Art Byrne:
So everybody ordered that way. So I just said, well, we can't do that. I can't deliver value to these customers with these sales terms. What we did is we changed. We actually had a 5% cash discount.

Art Byrne:
The industry was at two. And I said, all right, we're going to go out to everybody and we're going to give them a choice. You can keep the 5%, but you gotta give us, you gotta pay us twice a month order and pay us twice a month. And we'd like you to, you know, and, or you can go to the industry terms at 2% and do it the same way. But when right now you're getting 5% from us, you're gonna get two if you stay where you are.

Art Byrne:
Of course, everybody changed. Everybody changed. They wanted the 5%. And so now our incoming order rate was, was pretty, pretty flat, right? I mean, it a lot, but it wasn't enough because they still ordered, they still ordered off their MRP system.

Art Byrne:
So when they ordered, they'd order three or four months worth all the time. So everything was, the orders came in like this. Very lumpy. Yeah. And so then we went back out to this, to the distributors, and we said, look, we delivered to you once a week and in some cases a couple of times a week.

Art Byrne:
If they were a big customer, we had set up a sales route, I mean, a delivery system where if I would tell you, Mark, look, your truck is going to come on Thursday, every Thursday between noon and 02:00. And we were very good at doing that. So then we could go back to the distributors and say, hey, you know, you carry four months worth of our inventory and yet we deliver to you every Thursday between twelve. Why do you want to carry? That's a big waste.

Art Byrne:
Why do you want to do that? Yeah, we were able to convince a lot of the distributors to just tell us what you sold every day and we'll have it on next Thursday's truck and your inventory. We would drop your inventory from four months down to maybe we'll get it down to three weeks or maybe a little less. And then we want you to take some of that money that we just gave you and add back extra skus of ours that you weren't carrying before.

Mark Graban:
Yeah.

Art Byrne:
And the people who did that, the distributors did that. Their sales went up of our products went up by about 10% and their profit on our products went up by 20% because they became known as the guy in their area who always had the odd wire mold products and stuff, even though they didn't have very many, they always had the one you wanted. And so, you know, it was a sort of two step process, but that leveled out our, our demand and leveled out our production. And guess what, nobody else in the electrical industry did it? Yeah, because they were batch guys.

Art Byrne:
They liked to do it in big punches.

Mark Graban:
Well, and I'm sure it didn't take long to prove to the distributor with a lean production system that you could reliably make those deliveries. They didn't have to have the just in case buffer inventory.

Art Byrne:
Right. They were pretty skeptical, so it took them quite a while.

Mark Graban:
Yeah. But, yeah, when you talk about sales incentives and lumpy sales and give a quick example of how prevalent this would be. 25 years ago this summer, I joined Dell Computer, which had amazing flow through the factory. It was not a batch operation. It was very much single piece flow.

Mark Graban:
Software installation would be the slowest step in the process. A pc could flow through in a couple of hours. They had great flow, but they had also conditioned their customers to wait for the end of quarter discount. The natural demand for computers was probably very level, and they had this enormous hockey stick effect that was really detrimental. And that's why I don't like to label them a lean company, even back then when they made their computers.

Art Byrne:
Yeah, well, I remember years ago, I introduced Boeing to Shingijutsu back in the early 1990s, and they became a very big client of Shinji jitsu. And I remember going out there, and I gave a speech at Boeing one time, and at the time, and this was, they had, like, about 800 of their management people in the room. And I said, look, the aircraft, the airplane business, in terms of seat miles and the number of passengers, it's a steady. It's been a very steady. It's a very steady business.

Art Byrne:
It grows at, like, two or 3% a year. It has been for a long, long time. But your business is very cyclical. Your business is up and down and up and down. And the reason for that is your lead time is 14 months to make an airplane.

Art Byrne:
14 months. I said, you've got to change that. You've got to get it done. I think my target for them was six weeks. You got to get it to six weeks.

Art Byrne:
And of course, I'm sure they all looked at me like, who's this idiot? And then Shingijutsu showed them how to make a 737 less than a week. I think they got a moving line going, and those kind of things happening at the time. So once you do that, it changes what's going on in your business. It changes the way the customers look at you.

Art Byrne:
It changes everything. But people like you say, the Dell example is a good example. And think about the automotive companies. For years, they would just build inventory, build inventory. And then they, then they'd have these big sales discounts.

Art Byrne:
So the customers and the distributors, the dealers, they learn, don't buy anything until they offer the big discount. And then it would just repeat. The cycle would repeat. Yeah.

Mark Graban:
And it was not only the customer incentives, but I remember it was the salesperson incentives were higher at the end of quarter two. But back to Boeing, though, I mean, it kind of begs the question with events of recent years and with executive changes, did they. I'll say it, this might not be the nice way to say it, but did they forget everything Shingijutsu taught them? We might just be speculating, but.

Art Byrne:
Well, yeah, it's a little speculation, I guess, but, yeah, I would say not. Maybe not all of it, but a lot of it. And I can say this because the last couple of years I visited, I made a couple of visits to Spirit. Spirit airplane. Spirit, of course, used to be part of Boeing and had gone through the Shingijutsu training when they were part of Boeing.

Art Byrne:
And when I got there, that had all disappeared, completely disappeared. And, you know, I was able to actually get them back doing some lean stuff to start to try and do that.

Mark Graban:
Yeah.

Art Byrne:
Because they had gone off into just traditional approach to things. And then, of course, Boeing, Boeing, I don't know. But from what I've read and whatever, if you think about it, one thing that Toyota taught us years ago was the automotive company's main mantra was never stop the line. Toyota came along and said the way the quality and the way to low cost is stopped the line. Boeing had been taught stop the line by Shingijutsu.

Art Byrne:
And of course, a lot of their problems recently seemed to be they were pushing don't stop the line again. And they were having these, what they call travelers, where it was supposed to be installed in Station B, didn't get installed until some place way afterwards. And of course, they didn't have the tools and the expertise of how to do it. And so they wound up with a lot of these problems. So I can't really just say fundamentally that Boeing stopped doing that, but they did a bunch of other stupid things, I thought, in terms of they moved their headquarters from Seattle near the factory to Chicago, then they moved it to Washington, DC.

Art Byrne:
That's a knotty place to run anything out of. And then, of course, they outsourced the Dreamliner. They basically outsourced the Dreamliner, and they had all kinds of delays because their outsourced partners couldn't do what they said they were going to do. So even bringing that plane online, they had all kinds of problems because of the outsourcing, which is something they had never done before. You can point a lot of fingers at executive decisions they made.

Art Byrne:
But I think a lot of those go back to the concept of what I call make the month. Most companies, traditional companies, run on make the month. I have one of the articles in the new book is what happens when make the month meets lean? Are they compatible? Of course they're not.

Art Byrne:
They're not compatible at all. But if you're going to run things on make the month, think about what you're doing. It takes three weeks for most of these companies to close the books at the end of the month. Then they're going to have a big review of what happened last month. So they're always looking backwards.

Art Byrne:
They're not looking forward. They're looking backwards at something that already happened. And of course, you can't do anything about something that already happened. Trying to run the company forward looking at something that already happened. It doesn't make any sense, but it makes sense to them, I guess.

Art Byrne:
I know. At GE, my first introduction to lean was my first general manager job at General Electric. And we just created a small kanban system between myself and another factory that was also. This was in the lighting business group. And this other factory was my supplier.

Art Byrne:
What we did is we just bought a truck. They were about 45 minutes from my plant and they were supplying these little arc tubes that went into the high intensity lamps that we made. We bought a truck and we created kanban carts for these little arc tubes. They were pretty expensive little parts. And we just said, look, the truck will come every morning.

Art Byrne:
We'll give you the Kanban cards that we use yesterday and you bring them back tomorrow. That's all we did. And my inventory dropped from 40 days to three. And their inventory went from probably 60 days. They had a huge room full of these arc troops to zero.

Art Byrne:
They were making these in the furnaces so you couldn't shut down the furnace. So they just made the ones that came back on the Kanban cards every day and brought them back the next day. So we dropped inventory dramatically. But no one in GE cared because it was all nothing but make the month. No one cared about inventory or cash flow.

Art Byrne:
It's just make the month. And so we didn't get any patents on the back for that. But what we saw was, gee, as we dropped the inventory, look at what else happened. Our customer service got better. Our cost went down, our quality got better.

Art Byrne:
Our employees were happier. The shop flow was neater and cleaner and therefore safer. We had all this whole list of things that occurred just because we were able to reduce the inventory and still give really great customer service. Right. So I just said, you know, look, wherever I go from now on, I'm going to try and learn more about this lean stuff and use that to run any company because it's just a no brainer when you think about what happens.

Art Byrne:
And yet the make the month companies, they don't learn that. They can't learn it. It's just too difficult. If you go back and say, what happened to Ge? Well, a lot of things happened to ge.

Art Byrne:
They got into the credit corporation and a bunch of other things, and then things changed and we had the financial crisis, and so a lot of things hit them at the same time. Same time. 911 really knocked out their aircraft engine business for a while. So a lot of pressure. There's lots of things that happened to gE, but to me, fundamentally, the drive for make the month was something that was a real negative thing for GE overall, because when you push people that hard for that one thing, they're going to make a lot of decisions that aren't very good for the business longer term, but they're pretty good for make the month.

Mark Graban:
Yeah.

Art Byrne:
And over time, you pay a price for that. And I think when you look through the different businesses of GE, certainly in the power business, they made a lot of decisions near the end on make the month that will hurt them for the next ten years. And you can't just point to that one thing, I don't think. But certainly in my mind, a big factor of why GE went from the sterling example of how to run a company to where they had to break the whole thing up.

Mark Graban:
Yeah. Now, of course, the last five years, GE brought in Larry Culp, formerly CEO of Danaher, to work on the lean transformation at GE, as we've been able to discuss a little bit with some GE people here on the podcast. But Art, really want to thank you for talking today. Hopefully I asked you questions that you didn't address in the lean turnaround answer book. Might be fun to not answer the same questions over and over.

Art Byrne:
Well, I think a lot of those things are covered in the answer book because, as I said at the beginning, I think the articles in the lean turnaround answer book pretty much cover every question that someone could have about lean. You know, organizational structure, lean fundamentals, management changes, management structure, all of those kind of things are covered. And so a lot of the examples I gave you today, they're going to find them in the lean answer book.

Mark Graban:
Well, you probably do get asked the same questions pretty frequently by different businesses. I'll encourage the readers to go check it out. The lean turnaround answer book. And maybe if somebody does have a question that's not addressed in the book, maybe I can invite you back later this year. Art, if there's some fresh questions, that'd be fine.

Art Byrne:
I enjoy answering those kind of questions because that's really how people learn. That's how Lean gets implemented in the first place, is you're learning something new. I always think of lean as nothing but a series of leaps of faith into the unknown, right? Yeah. Because every time you change things, you move machines around and create a new cell in the back of your mind.

Art Byrne:
There's always the question of, well, what if this doesn't work well?

Mark Graban:
But when we can rely on the experience of people like you who know what happens when you take the leap that'll give people more confidence in a leap of a decision based on some proven past results. How's that? And some principles that we know apply.

Art Byrne:
That's correct. That's correct.

Mark Graban:
Well, I hope people will again check out Art's latest book, the Lean Turnaround Answer Book. The lean turnaround is still read very widely. My wife's CEO gave her that book two years ago to read. We listened to it together on a long relocation trip on audiobook. So the lean turnaround is still out there and highly recommended as well.

Mark Graban:
So, art, thank you again for being back here on the podcast. Really appreciate it.

Art Byrne:
Mark, great to see you again, and thank you for having me. Okay.


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Mark Graban
Mark Graban is an internationally-recognized consultant, author, and professional speaker, and podcaster with experience in healthcare, manufacturing, and startups. Mark's new book is The Mistakes That Make Us: Cultivating a Culture of Learning and Innovation. He is also the author of Measures of Success: React Less, Lead Better, Improve More, the Shingo Award-winning books Lean Hospitals and Healthcare Kaizen, and the anthology Practicing Lean. Mark is also a Senior Advisor to the technology company KaiNexus.

2 COMMENTS

  1. You should let him know that his new book is under Art Bryne instead of Art Byrne, so it isn’t on his main profile.

    By the way, I’m currently enjoying the Audible version of The Lean Turnaround.

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