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Here are 11 ‘Lean’ techniques that can drastically increase business profitability
Have you done everything you can to make your business more efficient but still haven’t reached the level of profitability you think should be achievable?
Probably you’ve undertaken a top to bottom cost review to identify expenses you can cut. Perhaps you’ve even used zero-based budgeting to force all your managers to scrutinise everything they spend money on from scratch.
You may well have achieved good results from all this work. Yet it’s still not enough.
If so, it may be time to apply ‘Lean’ techniques to the way you design and run your business. You’ll find that there are ways to improve business profitability that don’t rely on the traditional cost cutting approaches that you have been working on so far.
Lean is a philosophy that is closely associated with Japanese manufacturing giants like Toyota — although it originated in the US in the first half of the 20th Century, if not earlier. Lean practices have since spread around the world from the manufacturing sector to service businesses and government departments.
In contrast to conventional cost cutting, Lean improves quality and reduces cost by eliminating activities that don’t create value for customers and ensuring that processes are designed for zero-error quality. By uncovering huge amounts of inefficiency that traditional cost cutting approaches leave hidden, Lean can open up drastic improvements in efficiency.
The direct and indirect costs of hidden inefficiency can be shockingly high. For example, staff turnover is pure waste — it generates no value at all for customers. And it’s eye-wateringly expensive — I estimate £15k just to replace a junior staff member.
Yet most of this cost is hidden because it manifests as wasted time and lost productivity. Nobody tries to measure it and there’s certainly no line item in your management accounts for ‘time wasted due to staff turnover’. If it’s considered at all, staff turnover is brushed off as an inevitable ‘cost of doing business’.
Traditional cost cutting would demand that you haggle with your recruitment agency over their fees. In contrast, a Lean approach would eliminate the waste at source by doing a better job of retaining staff.
From this you can see that capturing the full potential of Lean requires companies to change their mindset. Lean demands that we do things differently, not just more cheaply. In the Appendix to this article I have summarised the thinking behind Lean philosophy in more detail.
Meanwhile here are 11 common inefficiencies and the Lean techniques you could use to eliminate them:
1: Poorly organised work flows that waste staff time
Poorly organised workflows are one of the biggest hidden productivity killers.
‘A bad system will beat a good person every time.’ W. Edwards Deming. [1]
On a poorly laid out production line workers spend time walking around fetching tools or components when they could be doing productive work. In badly designed hospitals, nurses waste large portions of their shift fetching medicines or consumables from storage. Instead, everything a worker will need for their shift should be stored very close to where it will be used.
Most business managers wouldn’t be happy to see production workers standing around doing nothing — they pay their staff to work. Yet they overlook staff who are walking back and forth to no useful purpose because they look busy. So they fail to notice that what their staff are doing is a total waste of time.
Even in service businesses, where processes are mainly digital, poorly designed workflows can be a major drain on productivity. Failure to optimally sequence workflow steps is a common problem — most notoriously when staff are held up waiting for approvals by managers. As a result, staff have to jump back and forth between projects or are simply unoccupied for extended periods.
Changeovers are a particular type of process that can yield dramatic efficiency improvements. Changeovers are everywhere. For example, any business that makes a physical product, from engineering firms to food manufacturing businesses to pharmaceutical companies, needs to adjust the setup of its production lines when it switches from making one product to the next.
Improving changeover processes to de-bottleneck them and speed them up brings at least two key benefits:
Expensive capital equipment can be used more intensively, raising output without adding to fixed operating costs.
By speeding up changeovers you reduce the minimum economically viable size of production runs. This in turn reduces the amount of inventory your company holds and makes you better able to respond to rush client orders — boosting sales and customer loyalty.
To identify ways to improve the design of a process, convene everyone who works on the process from start to finish and have them map all the stages of the workflow. Use a whiteboard or, much better, a pin board and cards. Then scrutinise the process for ways it could be streamlined.
For example, are any process steps redundant or duplicated? Can some steps that currently run sequentially be carried out concurrently instead? Identify the bottlenecks that slow the process and find ways to unblock them.
2: Executing processes manually when they could be automated
Using technology to automate processes is usually better than relying on manual work — even when the automation technology appears at first sight to be expensive.
Most egregiously, writing things down by hand leads to all manner of errors caused by incorrect transcription, unclear handwriting and so on. Purchase orders, invoices, job specifications, goods delivery notes and many other documents will be prone to error if handwritten. One error often leads to a cascade of costly follow on problems, such as re-work and dissatisfied customers.
The close cousin of writing things down by hand is using spreadsheets. Excel is a wonderful invention — but not for running business processes. The average spreadsheet contains numerous data entry and formula errors that are fiendishly difficult to find once they are in place. Moving from paper to spreadsheets digitises a process but it doesn’t defend against errors.
The lesson is to automate whenever it’s practical to do so.
3: Absence of systems to standardise best practice
“Eighty-five percent of the reasons for failure are deficiencies in the systems and process rather than the employee. The role of management is to change the process rather than badgering individuals to do better” W. Edwards Deming [2]
Many processes can’t be automated. And humans are prone to making occasional errors. To deal with this, businesses should acknowledge that people make mistakes from time to time and design processes in a way that anticipates and mitigates that risk.
Manual steps can sometimes be designed so that it’s impossible to carry them out incorrectly. Petrol filling stations offer a classic example — the nozzle of a diesel pump is designed to be too large to fit into the opening of the fuel tank on a petrol vehicle.
Often you can’t design work steps to be fault-resistant. In these cases, have your smartest front line staff investigate the best way to carry out the key processes they are responsible for, document the methods and train all your employees to follow these standard best practices. By eliminating variation you should be able to ensure that tasks are carried out the best way every time.
Best practice can be reinforced by other techniques. For example, on a production line, tools can be colour-coded to prompt the worker to select the right tool for each task. Policies to enforce tidy desks and clutter-free work areas reduce the incidence of things being lost.
To sum it up — when employees make mistakes these are often blamed on ‘human error’. Yet many human errors are really symptoms of an underlying lack of standard best practices. Happily, management action can radically reduce the incidence of such mistakes.
4: Redundant processes that could be eliminated
We often carry out work steps simply because we always have done, without stopping to think whether the activity is still necessary. Here are a few examples:
Multiple quality checks at different stages of a production line. Workers often quality check during the normal course of their work anyway and there is usually a final quality inspection at the end.
Commissioning internal reports to investigate things that are not material or where the decision-maker never reads them before taking decisions.
Management approvals where it would be perfectly acceptable to delegate decision-making authority (e.g. on decisions with less value at stake).
Sending letters or documents by post when they are also sent by email — something that happens surprisingly often.
How to identify any redundant processes in your organisation and eliminate them?
Simply bringing together everyone who works on a single value activity (e.g. a production process) with the purpose of mapping all the stages of the chain on a white board can often reveal the existence of redundant work steps. By combining insights with their colleagues, employees are often able to spot poor processes that went unnoticed when they were working on their own.
5: Failure to design products for low cost
Product designers often place the most focus on the benefits that a customer will obtain from using their products. It’s not surprising — these benefits are a crucial driver of the customer’s purchasing decision. Without a compelling USP, the customer may not buy.
Yet focusing on customer benefits alone will not guarantee that the product generates an attractive profit for the producer. To achieve this, a designer needs to build low cost into their design. This can be more complex than it appears.
Here are some issues to think about:
Has the product been designed to use the cheapest materials and components possible, consistent with meeting the specified level of performance and reliability?
Is the product quick and easy to manufacture or assemble? Are there any complex steps that could be made simpler? Could any groups of components be delivered pre-assembled by a sub-supplier? Overall, has the product been designed with error-free production in mind?
How many different component parts does the product contain? Has this number been minimised? What are the implications for inventory storage costs and for the complexity of the logistics to deliver materials and parts to the production line?
Where you offer a product in different models or variants, have you used a platform strategy that shares components and minimises the number of different assembly procedures?
Does the design incorporate any highly specialised components that leave you with a single supplier dependency? Are the risks around that dependency acceptable? Is there a lower risk alternative?
Is it quick and cheap to train your workers to manufacture or assemble your product or do they need lengthy and expensive training? If your workers need highly specialised skills, will this give them excessive power in wage bargaining or expose you to unacceptable costs or risks if staff leave the company?
There are many trade-offs here. Good product design is an iterative process by which your design team experiment to find the solution that offers the best combination of trade-offs for your unique company circumstances and objectives.
6: Information and communication silos
Within many companies, employees form strong bonds with their team members and departments develop their own distinctive culture and ethos. This can be very good for staff retention and for collaboration within departments.
Yet there can also be a downside — the development of silo mentalities and habits that separate business units from one another. Employees gradually interact less with colleagues from other departments around the firm. There’s no bad intention at work here — it’s just human nature.
When silos build up, it can result in customers receiving a poor service:
Coordination between different parts of a firm becomes deficient, leading to delays in delivering results for clients or mis-matches between what clients expect and what the firm delivers.
Information isn’t shared that could improve customer outcomes. For example, different teams fail to share feedback from customers that could be used to improve the product or service.
On top of that, when information and insights fail to flow freely around a firm, staff may not learn as quickly and develop their skills as effectively as they otherwise would.
In response, managers need to constantly push back against the development of silos in their business. This begins with the senior executive management setting a ‘one firm’ culture of collaboration. Line managers can incorporate cross-departmental collaboration into annual performance reviews to reinforce the message.
7: Unplanned staff turnover
When one of your employees leaves and you hire a replacement, the true cost of the process is eye-wateringly high.
I estimate that replacing even a relatively junior hire can easily cost you £15,000.
But you won’t find this figure anywhere in your financial reports. Most of the cost is hidden.
Your largest direct expense is usually a recruitment agency fee. Yet this will only account for a minority of your costs. Your main expense is simply wasted time and lost output.
Where does all this waste occur? Here are some key areas:
Reduced productivity from the departing employee during their notice period due to loss of motivation. Reduced output from remaining staff due to task handovers and other disruption.
Staff time to prepare for and conduct interviews and share feedback. Even in a small business, each candidate might be interviewed by 5-6 people (including management). And your company will likely interview numerous candidates before making a hire.
Onboarding time for the new hire with HR and IT.
Onboarding time for the new hire with their team. The team head needs to introduce the new hire to team systems, strategy, goals and culture.
Time for the new hire to network with important contacts in other departments around the organisation.
Below par productivity from the new hire in their first weeks as they get up to speed on systems and products, establish relationships with clients etc.
So if re-hiring is costly, how can you reduce unplanned staff turnover? Here are a few golden rules:
Take a genuine interest in your staff. In an appropriate way, find out a little about them as individuals. Ask them about things they are interested in and motivated by.
Managers often assume that staff are motivated by money above all else. In fact, most staff are very motivated by the sense of achievement that comes from completing important work effectively. So clear obstacles out of their way and give them what they need to do their job.
Make it clear that you value their contribution. Celebrate their wins.
Give them appropriate training and mentoring, so they see your firm as a place where they can grow personally and professionally.
These are simple things that cost a little each time you do them but can save you a lot of money in the long run.
8: Allocating work to staff whose skill level doesn’t match the task
Are all your staff working on tasks that are appropriate to their level of skill and experience? If you don’t match tasks to employees with the right know-how, you will risk one of two problems:
If you assign a task to someone who is too junior or lacks the necessary level of training, they may make a mistake, which can be costly. To mitigate this risk they might require an abnormally high level of supervision, which is a poor use of the time of your senior staff.
If you assign a task to someone who is overqualified for the job (or if you fail to delegate your own tasks effectively), this is simply a waste of your company’s money.
Matching tasks to appropriate staff is not easy. It requires foresight in your hiring processes and careful planning of your workflows. To enable you to better manage your use of staff, try to avoid peaks and troughs of business activity through the year and take steps to minimise unplanned staff departures.
9: Over-specification of equipment, products or services
Be careful not to over-specify when purchasing. It’s easy to load needless costs onto a business by ‘gold plating’ what you buy. Here are three areas to focus on:
Plant & equipment: When you buy equipment, you want it to meet your future needs as well as your present ones — it will last for years and you can’t be sure what the future holds. But try to avoid systems that boast far higher performance than you need (speed, precision etc) or have features you’ll never use. For applications that aren’t mission critical, consider buying pre-owned equipment.
Inventory: Your products come with specifications regarding performance, reliability and so on. You set the prices you charge your customers accordingly. Make sure you’re not paying for raw materials or components that far exceed the specifications you need to deliver the promised performance.
Services: Once again, check you’re paying for what you need and not more. For example, what level of IT support do you need to run your company efficiently? If you outsource functions like HR or marketing, do you need to pay for the benefits you would obtain from using a full service agency or would a good freelancer meet your needs at a much lower cost?
Sometimes it can be hard to persuade managers to trade down to less highly specified purchases. It can help to run some calculations of how much money you could save. If the impacted department could keep the savings and spend them on something more useful they might be more enthusiastic about making the change.
10: Avoidable breakdown of equipment or IT systems
“Beat horses, and they will run faster—for a while.” W. Edwards Deming. [3]
Businesses suffer two common types of equipment failure:
Production equipment breakdowns.
IT system outages.
These kinds of failures can usually be explained by one of three causes:
The equipment was bought for a cheap price and it isn’t reliable enough for the purpose to which it is being put. In other words, the breakdown was caused by a bad purchasing decision.
The equipment has not been properly maintained. Even good quality, reliable equipment needs scheduled maintenance to operate reliably and safely.
The equipment was being used for a purpose it wasn’t designed for, by someone who wasn’t adequately trained to operate it or by a trained operator who ignored proper procedures.
Equipment failure can be very costly — you lose output and your expensive staff stand idle while it’s repaired. Catching up on lost time can result in overtime payments and raises the risk of quality defects in the finished product. Staff are frustrated and demotivated. In a worst case, your firm may miss a deadline for a client delivery.
How to reduce the incidence of unplanned equipment downtime?
Buy equipment based on its estimated lifetime cost of ownership, not its headline purchase price. Buying cheap equipment is a false economy if it’s a mission-critical system and it doesn’t have a stellar record for reliability. I’ve argued against buying systems that are over-specified, but buying systems that are under-specified (e.g. regarding reliability) can also be a big mistake.
Have equipment maintained according to the recommended schedule. In the case of IT systems, pay to have adequate support on hand. If you are concerned you might be over-spending on IT maintenance, compare the cost of support against an estimate of the full costs of any unplanned downtime to help you take a balanced decision.
Schedule work for staff who are appropriately trained. Create a culture whereby compliance with company standard best practice is embedded throughout the organisation.
11: Optimising the performance of individual teams at the expense of the firm
“To optimise the whole, we must sub-optimise the parts” W. Edwards Deming [4]
Company managers often assume that for teams and staff to perform at their best they must be offered financial incentives related to targets. The targets that naturally suggest themselves are the ones that — in management’s thinking — are most relevant to each department or team.
Thus sales teams are incentivised to win new customers and generate more sales, purchasing departments are incentivised to buy cheaply, production departments are incentivised to keep product fault rates low, R&D departments are incentivised to accelerate new product developments and so on.
And so companies fall into a trap — they create balkanised incentive systems. Each department shoots for its own targets regardless of the impact on the wider business or the customer. Different parts of the business pull in different directions and the performance of the firm is compromised.
Let’s consider some examples that make the point clear.
Incentivising sales teams to maximise sales
This is a default policy at most companies but if the firm is approaching its maximum production capacity it will not be a good approach. The best option would be to prioritise sales of higher margin products and sales to important customers.
Instead, sales staff will keep booking every sale they can. This will result in lost profits (orders for lower value products displacing those for higher value ones) and lost customer goodwill (orders from low priority customers delaying orders from key accounts).
Seasonal promotions are a variant on this theme. They may well add to total annual sales but they disrupt your production and distribution networks and may not add to profits. Workers earn overtime payments during peak periods and stand idle at slack times. Overburdening your workforce at peak periods increases the risk of product faults and equipment breakdowns. It also causes stress and damages morale. Producing in advance and holding excess inventory also has a cost.
Incentivising purchasing departments to minimise procurement costs
Another common default policy is that purchasing departments should find and select the cheapest supplier. Yet buying on price is not always the right option:
If your company’s reputation with customers is based on charging a premium price for an ultra-reliable product, your purchasing decisions must take that on board.
If you run a just-in-time production and logistics network and your customers expect 100% on time delivery, can you be sure that the cheapest supplier will always be able to meet your needs?
Letting down a big customer with a product failure or late delivery can have serious knock-on effects for their business and their customers. Any savings you make from lowest cost purchasing can quickly be eroded by the loss of a few unhappy buyers or a surge in warranty costs.
The key lesson here is that optimising individual parts of a system can be counter-productive. Companies should avoid handing out potentially clashing incentives department by department. They should instead form a judgment about what would be best for the company as a whole and then incentivise everyone around those objectives.
Discovering the right way to incentivise departments across a firm is often an iterative process because different scenarios all have knock-on effects. The process will usually involve trade-offs, which management must evaluate carefully.
The optimal solution may well involve some departments or teams to sacrificing some element of their own performance for the greater good of the company. Getting everyone on board with such a system requires deft leadership at the top of the organisation.
Appendix: A short summary of Lean philosophy and practices
There are ways to improve business profitability that don’t rely on traditional cost cutting. Lean is a primary example.
Many people who have heard of Lean associate it with large Japanese manufacturing enterprises like Toyota. Toyota developed its Toyota Production System between 1945-70. Its philosophy and processes have been documented in books like The Toyota Way [5]. The term ‘Lean’ was coined in a 1988 article about Japanese manufacturing [6].
Japanese manufacturers did indeed grow from humble beginnings to global leadership by applying Lean principles with spectacular success. Yet they were capitalising on insights that were present in industry and academia in the United States in the pre-WWII era and which arguably originated much earlier.
One of the forefathers of the Lean movement (and of related philosophies like Total Quality Management) is W. Edwards Deming (1900-93) [7]. Deming was a US academic who was posted to Japan after the end of the Second World War. His principles became very influential in Japanese industry. I have included quotes from Deming that illustrate aspects of lean thinking throughout this article.
If you would like to learn more about Lean, an excellent place to start is Lean by Andy Brophy [8]. It provides a comprehensive but very readable introduction to the subject.
Lean is a philosophy as much as a set of techniques. Applying Lean techniques to make your business more efficient is more complex than simply cutting costs. It often requires you to change business processes. It certainly requires you to adjust how you think about managing costs.
To be most effective, you need to engage all of your workforce in Lean programmes. Lean works when you delegate much more authority to workers at coal face — it is they who should take the lead role in identifying and solving problems. Lean thrives in a culture of open collaboration. It requires teamwork and a focus on the system not the parts.
In return, Lean can deliver more benefits than traditional cost cutting while boosting workplace morale rather than undermining it. The problems that Lean techniques can uncover often lie hidden from other attempts to improve performance. The consequence is that, once you do uncover those problems, the pay back from fixing them can be large indeed.
Lean tackles the ‘three Ms’:
Muda (waste). According to Andy Brophy, the time companies spend adding value to a product or service is often as little as 5% of the total time spent on the process. Another 35% is often spent on what Brophy calls ‘value-added enabling’. These are steps that are essential in order for the process to be completed successfully, such as quality testing or essential support activities (HR, finance etc). Finally, as much as 60% of process time is often spent on activities that are inessential and add no value. A key tenet of Lean is to cut the time expended on these wasteful activities to as close to zero as possible.
Muri (overburden). Poor planning and badly designed processes often place demands on staff or equipment that go beyond their normal capacity. This can create costly knock-on problems (product quality defects, equipment failure, output delays). Lean calls for work to be evenly scheduled and matched to the company’s productive capacity.
Mura (variation). Lean calls for companies to design processes based on empirically observed and measured best practice (which can of course evolve and improve over time). Standard best practice should then be followed consistently. Lean sees any variation from the standard as a problem because it undermines quality and efficiency.
A central concept of Lean thinking is to make workplaces transparent. Lean regards the discovery of problems as good news, because it creates the opportunity to fix an underlying failure such that it won’t happen again. This philosophy is the polar opposite of practice in poorly functioning workplaces, where problems are seen as evidence of failure.
In such environments, employees and managers focus on blame avoidance/ apportionment rather than on process improvement. They consequently hide problems rather than report them. When problems do come to light, they apply quick sticking plaster solutions to deal with the symptoms rather than investigate and remedy the underlying causes.
A final key difference between Lean and traditional cost cutting is that conventional thinking regards all costs as bad. Lean differentiates between good costs (those which create value for customers) and bad costs (which are superfluous and wasteful).
Thus Lean is not really about ‘cost cutting’ at all, but rather about eliminating waste and inefficiency. Lean processes seek to incur only those costs that create value for customers and which customers would consequently be willing to pay for.
[1] See https://deming.org/quotes/. [2] See https://quotefancy.com/w-edwards-deming-quotes. [3] See https://deming.org/quotes?sf_paged=3. [4] See https://quotefancy.com/w-edwards-deming-quotes/page/2. [5] Liker, J. K. (2004) The Toyota Way: 14 Management Principles from the World's Greatest Manufacturer. McGraw-Hill Education. [6] Krafcik, J. (1988) Triumph of the Lean Production System. Sloan Management Review, Vol. 30, Issue 1. [7] For a good profile of Deming and his work, see https://www.bl.uk/people/w-edwards-deming . [8] Brophy, A. (2013) Lean: How to Streamline your Organisation, Engage Employees and Create a Competitive Edge. Harlow, Pearson Education Limited. For Andy Brophy’s profile and more about his other publications, see https://www.lean2innovativethinking.com/.