The lean league

The lean journey requires continuous improvement, and long-term trends in inventory turnover serve as an ideal measure of it. In our 'leanness' research (featured in the book Best Practices in Lean Six Sigma Process Improvement – With Telling Evidence from the Leanness Studies ), we've plotted and scored the trends of at least 15 years for, currently, 1,330 global companies. All are inventory-intensive – mostly manufacturers, but also distributors and retailers – and, for access to their financial records, all are necessarily publicly-held. In our scoring scheme, a positive 10-to-50-year trend scores two points; the same but with a lapse in the past five years scores one point; where there is no clear trend, zero is scored; a negative 10-or-more-year trend scores minus 0.5; while recovery from a bad trend scores plus 0.5. In 2003 the database included 94 UK companies, whose collective leanness score was second highest among nine global regions. In 2008 we could find only 77 companies that met the 15-year longevity requirement, and their composite score was much lower. Here, we take a closer look at the data, which show the fates (not-always-bad ) of the missing UK companies along with some surprising, often wrong-way, trends in the lean quest – both in the UK and globally. Varying fortunes of leanest companies In 2003, the average long-term inventory score for the 'UK 94' was 0.95. In 2008, for 17 fewer companies (some newly added but many more no longer in the database), the score sank to 0.55. In seeking reasons, we backtracked and found 32 UK companies that were present in the research in 2003 but absent in 2008. They are listed, with scores, in table 1. The average score for the 32 was exceptionally high: 1.06. By the long-term inventory-turnover metric, many of these no-longer-public companies were among the world's leanest. The first 16 on the list had improved their inventory turnover – a marker of shorter lead times and quicker, more flexible customer response – for at least 10 years. Only the last three on the list had negative trends. As attractive candidates to be acquired, merged, or privatised, most of the 32 were absorbed, not dissolved. Unless their acquirer or merger-partner squelched the value obtained, these highly lean business units may have continued generating wealth and serving their customers admirably. Or some may be helping their new parent or partner to stave off a bad fate. Auto parts makers Lucas and Echlin are cases in point. Both were acquired by companies that had their own many prior years of improving inventory turnover. Lucas, in the 1980s, was commonly thought to be among the globe's lean (then called just-in-time) elite. In 1996 Lucas merged with Verity, and in 1999 LucasVerity was acquired by TRW Automotive. Unlike at least 35 other automotive suppliers active in the Americas and the UK, TRW has not yet fallen into bankruptcy. The Lucas acquisition surely has helped TRW retain its solvency and continue its many-year trend of increasing leanness. Echlin's acquirer, in 1998, was Dana Corporation, whose lean operations have long been a standard-bearer among US-headquartered automotive suppliers. Even so, Dana is among the many car-parts makers that filed for bankruptcy. That was in 2006. But, aided by the customer-side and financial benefits of sustained leanness, Dana emerged from bankruptcy in February 2008. Prior to their acquisitions, both UK manufacturers had been improving their inventory turnover, since a clear low point, at an annual rate of 3.4% – at Lucas for 18 years and at Echlin for 15 years. The UK companies have contributed to continuation of those trends: TRW, now joined by Lucas, has improved its turns for 34 years; and Dana, with Echlin, for 28 years. So, what happens to the best lean companies? They tend to survive, even after bankruptcy or, in the UK anyway, they get acquired. How about other countries? We checked the US and Japan. For them, companies falling out of the database (acquired, merged, privatised or dissolved) between 1998 and 2003 did not have better scores than remaining companies. Thus, something is happening in the UK – not all bad – that is different from other regions. In another way, the UK is similar to other regions. Companies that stand out as being lean tend to be global/foreign-owned. That stands to reason. Stiff competition goes with global operations, and survival in that milieu pushes companies to seek out and inhale best lean practices. Comparative lean For a single company, fortunate circumstances can sometimes deliver a high-scoring lean trend, and vice versa. Any such bias washes out for groups of companies. Table 2 shows leanness/inventory scores for nine regions, some made up of multiple countries for the sake of a reasonable sample size. What stand out are the worsening scores in all regions except Japan. In view of lean's inroads throughout industry, and in some services, too (eg, hospitals), the negative trends are puzzling. And since lean is based mostly on low-cost simplifications that deliver quicker, more flexible, better quality response to customers, the declines are unwelcome. As for Japan, its score, lowest by far for years, lately has been rising. (Nevertheless, Japan has 61 companies with worsening – minus 0.5 point – trends, and for 30 of them inventory turns have declined more than 50% in the past 10 to 20 years, lean icon Toyota included.) After nearly two decades of economic stagnation, Japan's manufacturers have finally become more open to inventory-shrinking measures such as outsourcing, shuttering plants and redundancies. Some of Japan's past reluctance to do so surely was societal – the lifetime-employment ideal. In continental Europe and in some developing countries, laws more than culture make it difficult and costly to reduce employment. In the UK and the US such laws are weaker. Moreover, our freewheeling financial systems encourage short-range disruptive changes (often bad), but dynamic response to globally competitive influences (often good). Capacity reduction is comparatively quick. Net results have been harmful to manufacturing, which has lost both talent and investment capital. Regarding talent, many professionals working in the City of London or on Wall Street have become wealthy at a young age. So the best young minds have sought university degrees in finance and accountancy rather than science and engineering. At the same time, financial institutions became enormously profitable. Capital has flowed to financial businesses and away from manufacturing. As US President Obama put it, "40% of corporate profits have come from the financial sector, while the sectors that actually make things are held back". And manufacturing migrates, to Eastern Europe, Asia, and elsewhere. What next? Currently the UK portion of the database includes nine companies scoring minus 0.5, and 18 scoring two points – 10 of the 18 with improving trends spanning more than 20 years. They are BAE Systems, BPB, Carclo Engineering, Coats, IMI, John Lewis, Molins, William Morrison, Pilkington, Spirax-Sarco. Of the 10, retailer John Lewis Partnership has the most impressive trend: upward for 28 years at an average annual rate of 2.8%. The John Lewis group may deserve the same kind of accolades for lean management as H&M, Zara, and Wal-Mart have been getting. Manufacturers could learn a lot about lean supply chains from these and a few other standout retailers. The leanness research indicates that most manufacturers concentrate energies on lean in operations. They tend to neglect other lean pathways, not only in supply, but also via standardising component parts, and reining in end-product proliferation. The shape of the inventory trend lines also merits attention. The trends are erratic for BAE, IMI, Molins, Morrison and Spirax-Sarco. This points to unfinished business in the lean journey. An erratic trend jerks suppliers and freight carriers, raising their costs and lowering their performance. Worse, it equates with too much inventory in some years (cut prices, mount a promotion) and too little in others (put customers on back-order – and watch some of them defect to a competitor). But bear in mind, there can be a good reason for being un-lean. For example, a company dependent on a storable commodity may be wise to load up on that inventory in a year when the price is low, and shrink it in the next. Chemical companies, such as ICI, are sometimes in that position. ICI deserves mention for its many-year upward (though erratic) trend, especially since chemicals is among the four lowest scoring of 35 industry sectors in the leanness research. ICI was acquired by Akzo Nobel in 2006. Trend lines in table 3 show immediate beneficial effects for Akzo of that acquisition. By way of contrast, Toyota's 15-year worsening trend is included in the exhibit. Maintaining an improving long-term, non-erratic inventory trend line is a high form of world-class excellence, one that gives greater attention to lean in the supply channels. It requires exceptional collaboration among production, marketing, purchasing, and finance – extended to customer and supplier partners. The leanness research shows manufacturers in the UK, and in all other global regions, to be deficient in this pursuit. Enterprise viability and preservation of jobs may depend on the correction of this chronic deficiency. Based in the US, Richard Schonberger was a practising industrial engineer, then a university professor in management information systems and operations management. Currently, he is director of the Global Leanness Studies and the World Class by Principles international benchmarking project.