Go Lean

It's time for the chemical industry to embrace this production strategy.

By Adam Russell, Eastman Chemical Co.

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Ask anyone in the chemical industry "What is Lean?" and you'll get a variety of responses. Lean's application in discrete manufacturing is well known; it even has won a role in non-manufacturing industries such as healthcare. However, most people in the chemical industry haven't seriously considered Lean's strategic advantages for the processes right around them. Many chemical companies dismiss Lean as a low-level improvement activity because they don't appreciate its power and value. We must make the case for Lean more clearly and broadly.

Convincing chemical companies to embrace Lean isn't enough. They must effectively deploy it. So here, we'll examine five critical factors for success:

1. Paying attention to the measures that matter in your organization.
2. Ditching behaviors that undermine optimization of the overall value stream.
3. Seeking comprehensive understanding of the needs and activities throughout the value stream.
4. Getting out of the mental rut and not limiting yourself by the way things always have been done.
5. Focusing on what you can do right now but never stopping to strive for perfection.

Many Lean initiatives start out on the wrong foot because they don't directly relate to measures important to the company.

Properly starting Lean begins with examining and understanding the company's (or business unit's) strategic aspirations and financial goals. I often hear Lean practitioners communicating their goals in terms of percent value-added. (I've done plenty of that myself.) The value-added metric isn't inherently bad — but chemical makers don't relate to it. The metric they understand and accept is money. That's a strong reason why Six Sigma has become the cornerstone of process improvement efforts inside chemical companies over the past 10 to 15 years.

You can express one conventional Lean metric, inventory days supply (IDS), in the form of money. IDS basically measures how long a company could serve customers if it stopped production immediately. Lean companies tend to carry less inventory — because they've built in the capability and controls to function effectively on less inventory and still serve customers' needs.

Let's compare the IDS of three chemical companies — Dow, Eastman and Celanese — to that of Toyota Motor, long considered the gold standard of Lean. Using information derived from each company's annual report, we can easily determine IDS via: IDS = (365 × Inventory)/Cost of Revenue. The three chemical companies in 2010 carried 18 to 28 more days of inventory on average than Toyota (Figure 1).

This matters because shortening the cash cycle (e.g., turning cash back into cash) can generate a significant financial windfall. To see the potential impact, let's examine a hypothetical situation. Suppose Eastman Chemical implements a Lean strategy that reduces its overall IDS by one day. In 2010, Eastman's annual cost of goods sold (COGS) was $4.368 billion; we'll assume 10% for cost of capital, which is a conservative number (some studies place the cost as high as 40–50% [1]). So:

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