Oxymorons: More Food for Thought

Continuing my new blog series about some of the oxymorons imbedded in the “traditional” manufacturing world …

Time card

Just to remind you: an oxymoron is a figure of speech that combines contradictory terms.  We hear these all the time in common speech, things like “exact estimate” or “deafening silence” or “definite maybe.”

Today’s example:  Labor Efficiency

Here is one definition of Labor Efficiency from the internet:

 Labor efficiency is a measure of how efficiently a given workforce accomplishes a task, when compared to the standard in that industry or setting. There are several different ways to measure labor efficiency, depending on the type of products and services being produced, and the end goal. Companies periodically assess efficiency along with other characteristics to identify weak points in the labor force and determine where they have room for improvement, with the goal of improving the overall quality of goods and services while keeping costs down.

One typical way to look at Labor Efficiency is to compare the time actually required to produce a given product or service with a “standard” or “usual” time required. If the workforce is producing products and services faster than the usual rate, it is operating with high efficiency. The thinking is that production time, and costs, are both being reduced. So far so good.

The definition of the standard time is usually subject to an interpretive definition. Who defines the standard time and exactly what is included in the standard work time? Here are a few examples:

  • Is set up (or change over) time included in the standard time?
  • Is the time producing scrap included in standard time if the yield rate is known?

Time studies are usually done to define the standard time, but as the above examples show, the definition of “work time” can be different.

When calculating Labor Efficiency, it’s typical to include what Lean people would consider waste (change overs, scrap) in the definition of work time because if change overs are “good” or scrap is less, then the Labor Efficiency variance will be positive.

But there are 2 things that are inefficient about using Labor Efficiency as a performance measure.

First, it takes a long time to get the information and it’s usually difficult to ascertain exactly why the variance was positive or negative. Labor Efficiency is usually reported monthly or possibly weekly at some aggregate level (department or whole plant). This level of reporting makes it very almost impossible to understand what really happened.


Second is the myth that Labor Efficiency somehow is an indicator of costs increasing or decreasing. If a manufacturing department has 5 people in it, and today they work one shift and are 50 % efficient and tomorrow work one shift and are 50% inefficient, the salaries paid each day are the same.

Lean companies want something entirely different from their people. I heard Jeff Liker speak a few months ago and he summarized it quite well. He put it this way: a lean company considers its people an appreciating asset and wants its people at all levels to do the following:

  • Understand the needs of the customer
  • Think
  • Solve problems
  • Make improvements

This means people need the right performance measures to identify and solve problems. It’s not helpful for a Lean company to look back and know that last month Operations created an unfavorable Labor Efficiency variance. The Lean company wants to know the exact reasons why there were problems with change over, scrap, rework and downtime.

Finding problems creates opportunity. Daily and weekly lean measures of quality, flow, delivery, lead time and productivity will focus a workforce on understanding the needs of the customer, because any problem in any of these areas prevents them from meeting customer needs. And the frequency and timeliness of reporting make it easier to identify the root causes of problems, which makes it simpler to solve problems.

So here’s the oxymoron:  you become “efficient” by eliminating Labor Efficiency as a performance measure and implementing Lean Performance Measures.

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Grasp Your Lean Vision and Move Ahead

A Vision is a deep dissatisfaction with what is, and a clear grasp of what could be. If we have vision, we will always have unfinished agendas“.

The Revd John Stott CBEI  look for ideas where ever they present themselves. You might think it’s rare for a theologian to contribute to the progress of Lean thinking and methods. But I recently read this quotation from the Rev. John Stott that shed some bright light on why some companies succeed with their Lean journey. The Reverend Stott died recently after serving his central London parish for 62 years at All Souls, Langham Place, a very successful Anglican (Episcopal) church.

Deep Dissatisfaction

In the early days of Lean there was much talk about burning platforms. The meaning of this is that for an organization to go through the traumatic change required to think and operate Leanly (if there is such a word) they must have a life-threatening crisis. I was never very satisfied with this answer and even less satisfied when I was told we must “create a crisis” so Lean can move ahead.

This approach suggests that Lean is only viable or necessary when there is a potential catastrophe. In reality Lean change and improvement is required for almost all organizations from government to healthcare, education, manufacturing, and service industries. Nobody just pulls Lean out of a hat when a crisis occurs. For Lean to succeed the leadership of an organization must have a “deep dissatisfaction” with the wasteful ways of their business and their lack of widespread continuous improvement. This applies even if the company “seems” to be okay. The best time to work hard on Lean transformation is when the company is doing well and making progress. Not when there’s a crisis.

Clear Grasp of What Could Be
On the contrary, it is vital that the company leadership has a vision for just how great our organizations can become if we let the people work together for radical improvement; company-wide and long-term. Our leaders must have a clear grasp of what the company could be like;  a powerhouse of Lean change and improvement. They must then act upon this vision consistently for many years.

Unfinished Agendas
Lean is not something you implement. It’s not something you get done, then move on to the next thing,  No, Lean is a very different way of doing business. Lean is about relentless continuous improvement; a constantly unfinished agenda. To be successful with Lean we must nurture this unfinished agenda as a living, breathing part of the company.

I have often seen companies take their eye off the ball because they get focused on the needs of the shareholders, the board, or Wall Street. I have also seen companies that refer to Lean change as a project. This sounds like it is something we do for a while, and then move on to the next thing. Actually, this is just traditional management by another name.  It’s not a deep dissatisfaction or a clear grasp of Lean. There are also many organizations that are “doing Lean” by employing Lean champions or VP’s of continuous improvement. But the leadership team have their minds on other things.

Fortunately I have also been privileged to work with some company leadership teams that are deeply dissatisfied with their current business and have developed a clear vision of what their company can become. They act upon this vision relentlessly through hands-on work and commitment.

While the Rev. Stott was not referring to industry when he spoke of how vision works,  he might as well have also quoted the Proverb that “without a vision the people perish.” The best Lean leaders know this. With a radical Lean vision there is no where your company can not go.

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The End of the World?

mayan-prediction“Doomsdayers” have been predicting the end of the world since the beginning of time. The last time I recall was when the Mayan calendar ended sometime in December 2012.  Nothing happened! And last time I checked, we are all still here.

People passionate about standard costing often talk the same way, believing that somehow a company using standard costing would go haywire or simply implode if standard costing went away.

But, there’s another side of the story.

Recently I’ve been working at a company in Oklahoma that has made a commitment to Lean Accounting. They are in the process of getting Lean Accounting set up, and they recently made one bold move.

On May 1, 2014, they went into their ERP system and set labor and overhead rates to zero.  They effectively turned off standard costing for labor and overhead, while at this point material is still kept at standard.   Lo and behold, the company is still there – I can confirm this because I was there last week. The building didn’t vaporize, nor did the employees turn into zombies.

This month, they are going to capitalize manufacturing costs onto the balance sheet with a simple journal entry, which eliminates a few days from their month-end close. The people who do customer quotes are happy; they like not having to figure out the labor time of each order.  Instead they use a hurdle rate to determine if an order meets minimum profitability requirements. They believe this will allow them to accept orders which in the past would have been deemed unprofitable because standard margin was too low.

Turning off standard cost is possible in any company, no matter how large or how small it is. It is just a matter of the vision and willpower of the leadership in the company.

For a long time, standard costing was the only game in town.  We know it’s been used historically in manufacturing companies to keep track and analyze operating performance, profitability analysis and inventory valuation.

We now know Lean Accounting offers a better way to do all of this.   Read the details in my recent blog series “Debunking Standard Cost.”

Part 1- The pathway to eliminating standard costing. http://blog.maskell.com/?p=1161

Part 2- How to approach materials costs.  http://blog.maskell.com/?p=1237

Part 3 – How to approach labor reporting.  http://blog.maskell.com/?p=1323

Part 4 – The simple way to make it happen.  http://blog.maskell.com/?p=1342

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