• Average Daily COGS = $4,368,000,000/365 days = $12,000,000/day;
• IDS Improvement × Average Daily COGS = 1 day × $12,000,000/day = $12,000,000; and
• Earnings Impact = Average Days COGS × 10% Cost of Capital = $1,200,000.
This straightforward analysis doesn't take into account other potential benefits from relatively small changes in inventory — such as savings in transportation, warehousing and staffing. A well-executed Lean strategy often produces such side benefits.
Connect Lean with what really matters in your organization. Speak the language of business leaders by using metrics they can appreciate. This is the first step to becoming Lean.
DITCHING BAD BEHAVIORS
Some actions of individuals and organizations work against Lean (Figure 2). For example, consider performance appraisal systems. Tying rewards to throughput spurs individuals and organizations to seek to maximize their output. More output with the same (or less) inputs lowers the unit cost of manufactured chemicals because some charges like allocations are fixed. In addition, we get the added "bonus" of minimizing product stock-outs.
Let's pause here. Toyota has said the worst manufacturing sin is overproduction or making product before the needed time. For chemical makers that means running at 100% capacity utilization when not sold out. "Just in case" logic isn't a sustainable Lean strategy.
Before you argue your company wouldn't do that, ask anyone you work with: "What level of supply reliability should we have for our customers?" I'd wager the answer is 100% or 99.9%; maybe some daring soul would say 99%. Then ask: "What's the cost (relative to benefit) of trying to be that good given our current capabilities?" Or "How can we assure that level of reliability?" The most common response is "Add inventory." So, this brings us back to square one. We're in a vicious cycle created by our risk aversion and often-skewed performance systems.
This contrasts with the Lean concept of "Takt" — having our processes make what is consumed by the next process in the right quantity at the right time and at the right quality without generating any waste. In other words, production always should exactly match customer demand. Every manufacturer should strive for this ideal state.
Companies must cultivate the right behaviors and systems from the top down. This is the second step to becoming Lean.
SEEKING COMPREHENSIVE UNDERSTANDING
The chemical industry boasts plenty of people with good analytical and problem-solving skills. Take, for instance, Six Sigma black belts. They've done a good job of optimizing plants, units and processes. But even the most talented black belts and their managers usually have limited visibility of the value streams they seek to improve. Few people in an organization comprehend even at a high level all the activities along the value chain; many don't even remotely grasp what takes place beyond the physical boundaries of their company. Yet, understanding end-to-end value streams is essential. It's impossible to progress toward Lean without some level of sharing. This is a daunting but necessary task. As Jim Womack of the Lean Enterprise Institute says, "For every product or service there is a value stream, the challenge lies in seeing it."
The chemical industry is positioned in the middle of countless long, complex value streams. The constant squeeze between upstream suppliers (e.g., the Exxons of the world) and downstream customers (e.g., the Wal-Marts) creates numerous challenges. Some chemical producers respond by living with reduced profitability and flexibility. Others resort to cost-efficiency and cash-management moves to boost results. But we all know you can't save your way to prosperity. A better alternative is to create effective partnerships along your value streams.