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Cost Savings Elusive for Lean-Leaning Manufacturers

October 19, 2011
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(Reuters) - Lean manufacturing principles, widely touted by companies as an effective way to eliminate waste and boost the bottom line, often do not achieve targeted cost savings, according to a study released Oct. 5.

Analysts at New York-based consulting firm AlixPartners LLP found that about 30% of companies surveyed achieved a 2010 goal of cutting at least 5% of manufacturing costs by employing lean practices such as those championed by Six Sigma, Kaizen or Value Stream Mapping.

Nearly half the 100 executives surveyed were targeting savings of 5% or more. The majority of executives reported savings in the 1% to 4% range, which AlixPartners views as being below the optimal range.

In addition, nearly 60% of the executives surveyed do not expect they can sustain at least half of the savings they did make over the long term.

The results of the study could raise eyebrows in a business community where several executives and managers consider themselves lean-manufacturing loyalists, clinging to their status as a Six Sigma Black Belt or a Kaizen master.

So-called lean principles have grown in popularity over the past four decades after companies including Toyota Motor Corp., General Electric Co and Motorola pointed to these programs as a key driver of continuous improvement, not just cost cutting.

"Most companies don't apply lean principles in a way that gives them the most potential bang for the buck," AlixPartners Managing Director Steve Maurer said in an interview. Maurer said companies do not typically set aggressive enough targets, and lean programs are often viewed as a "checklist" of do's and don'ts in a narrow corner of the business rather than a broader way to run an entire company.

The firm did not disclose the names of the companies it surveyed but said they included an array of global manufacturing firms spanning the automotive, consumer products, industrial, aerospace and defense, and other sectors.

The survey, completed in June, comes at a critical time for American businesses. Facing the threat of increasing globalization, further economic uncertainty and more stringent regulations, many capital-intensive companies are taking a conservative approach to investing and hiring even though they are profitable and reporting positive cash flows. Analysts who credit lean manufacturing philosophies for leading to significant change at small and large companies are quick to caution observers to not throw out the principles simply because some companies fail to properly implement them.

"Where lean programs are properly executed, long-term benefits to market share and profitability have been substantial," said Alex Blanton, Clear Harbor Asset Management senior analyst covering capital goods companies.

He said the trouble with a study like the one that AlixPartners did is that it may be viewed as too narrowly focusing on cost cuts as the predominant sign of success.

Blanton said Caterpillar Inc. is a modern example of a company that has relied on lean manufacturing to overhaul the entire business culture.

"Long-term cultural change should be the No. 1 priority," he said. "I see that as the biggest reason the surveyed companies are not getting the results they expected or could be getting. And such change is essential if lean benefits are to be sustained."

Issues such as on-time delivery, quality and inventory reduction should also be key motivations, according to the AlixPartners study and Clear Harbor's Blanton.

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