You Do The Math

A couple of guys named William - Trudell and Carreira - recently wrote a new lean book called "Lean Six Sigma That Works" and, while I haven't read it, I suppose it's a good one.  The part of the review I found troubling, however, was where it said "six sigma can be awfully complex with formulas that might resemble those used to make rocket fuel.  However, Trudell noted proudly, their upcoming book does not have a single equation in it."

Now I don't have any idea what the mathematical equations for rocket fuel look like, but I have a passing familiarity with those underlying six sigma.  In fact, since six sigma is just another term for six standard deviations - three to each side of the mean, actually - it is a little difficult for me to fathom how they can explain six sigma without any math.  It seems a little bit like publishing a cookbook with no recipes in it because they would only confuse the readers.

If we have reached the point at which we have to keep math out of manufacturing because managers can't understand it, or can't be troubled to read anything with an equation in it, I suspect the lean battle has pretty well been lost.  "Lean Six Sigma That Works" without knowledge of the basic statistics of manufacturing is a contradiction in terms.

I suspect that a fair number of Superfactory readers wholeheartedly agree with the above.  Many are well versed in the mathematics of quality and inventory management.  Sadly, however, I tend to get a big yawn or complaints that folks can't see the relevance when I preach about the kind of manufacturing mathematics that sabotage lean - the kind of math with '$$$' in front of all the numbers.  Truth be told, those numbers are more important than the six sigma numbers.

Take a minute to glance over the latest financial release from Stanley Furniture.  Some readers may recall that I wrote about their commitment to lean several months ago.  The second quarter financials from Stanley look pretty grim on the surface - sales down 7% from a year ago, while earnings dropped by over 23%.  In fact, Stanley had a very good quarter in the face of softening demand.  Their costs actually came down nicely and had the numbers been calculated under lean accounting principles rather than the 1923 vintage numbers driving public accounting and Wall Street, their outstanding lean efforts would be apparent.  Unfortunately, the wretched accounting methods of the past paint a picture 180 degrees from reality, and the price of a share of Stanley stock dropped accordingly.

Digging a bit deeper into Stanley shows that the 23% drop in earnings equates to $3.1 in lower profits.  The $3.1 loss in earnings is actually an indicator of improvement.  It is the result of a 15% drop in Stanly inventories since last year - most of it coming in the last quarter.  The reason Stanley appears to be less profitable is that all of the overhead costs that have been pumped into ridiculous inventory values are coming out as a result of their lean effort, and Stanley's books are finally reflecting the expenses that accounting hid in the inventory accounts in the past.

It is important to note that Stanley's cash flow improved during the quarter, but "As a result of improving processes and reducing lead times, production levels decreased more sharply than the sales decline particularly in the second quarter and led to lower margins due to the under absorption of factory overhead costs."

Although taking 15% of the inventory out is great, there is still much more to do before the Stanley swamp is fully drained.  That means there will be more quarters of weak earnings and more pressure from the investment community to stop the flow of earnings blood.  Th easiest way to avoid the earnings beating would be to take the opposite course - build inventory back up.  Just as reducing inventory artificially hurts profits, building inventory artificially pumps profits up.  Sadly, Wall Street does not seem to understand this.

Everyone who is pushing lean must be very well acquainted with the arithmetic behind the Stanley situation.  Your accounting system is so convoluted that "improving processes and reducing lead times" leads "to lower margins due to the under absorption of factory overhead costs."  Lean will hurt your company's profits. 

The struggle with lean success is due in many respects to the fact that the manufacturing folks and the upper managers speak two different mathematical languages.  I can assure you that everyone in the executive suite understands the $$$ numbers from Stanley at a glance.  They have no problem seeing how lean drives short term profits down, yet they need folks like the two Williams to dumb down the six sigma math in order to make the book readable for them.  On the other side are the many lean practitioners who see manufacturing and six sigma math as intuitively obvious - the benefits of lean need no explanation - but they are oblivious to the math of accounting.

Both sides need to go back to arithmetic class for it to work.  Senior management has to stop reading books that "have not have a single equation".  Lean folks need to revisit Cost Accounting 101 and understand how the money system works.  Until that happens, those of us in the lean community are doomed to blame lean failures on lack of leadership, while senior management blames a lack of middle management willingness to change.

Comments

[ed]

The math problem exists in general. Unfortunately, once working, a lot of people will refuse to spend the time to learn and understand something unless it can be reduced to a powerpoint slide or a good anecdote.

[Ellen Weber]

Kevin and Bilol, Thanks! You raised an excellent issue here, and while I have a somewhat different view of the use of math in programs such as Lean and Six Sigma ... to run a business successfully, I was thrilled to see this topic laid out so well for discussion.