Can Lean Six Sigma Principles and Techniques Help Company Turnarounds?
Lean helps companies do what they do, only better. Companies as diverse as professional services, retail, non-profit, government, and healthcare can benefit from Lean. It is truly amazing how the core principles and techniques are so universally applicable.
Our typical client is seeking to improve some area of their business; increase throughput, reduce overtime, speed up fulfillment, etc. Most often, we work with successful companies that seek external expertise to help with these specific areas. However, in recent years as our reputation and successful client network has grown, we have been engaged to play a key role in company turnarounds.
These turnarounds typically require faster changes – there is always a strong sense of urgency. I am happy to state that indeed Lean and Six Sigma principles and techniques are highly effective when applied to a turnaround situation, but there are some additional factors that must be considered. In this article, I describe two turnaround examples – one that went very well and one that didn’t. Then I will share what we learned from these two examples if you unfortunately find yourself in a turnaround situation.
The most recent and successful turnaround client (we will call X) is owned by a private equity firm and was purchased as a spin-off from a much larger corporation (called a ‘carve-out’ in private equity terminology). As part of the spinoff, the former parent company agreed to produce some finished goods products and other resources for up to 3 years, after which X was responsible for establishing their own manufacturing and distribution capabilities. X developed a network of tolling manufacturers and third-party logistics (3PL) warehouses and transportation partners to produce and distribute their products for a business-to-business sales channel.
Fast forward two years after the private equity (PE) firm purchased X and it was struggling with customer complaints, poor on-time delivery, and a growing order backlog that was fueling more customer complaints while also consuming cash. Customers were threatening to fire X. The stage was set to “bring in the consultants” and turn this performance around before the quarter’s end in 8 weeks! This is nothing close to the typical pace for a Lean continuous improvement project!!
Assessing the business’ current state, is still the first step. We followed our Lean Supply Chain assessment process of meeting and interviewing the team, listening to the problems they are experiencing, and gathering data to develop a model of the business through Value Stream Mapping (VSM). VSM and additional analysis identified the constraints and quantified the current operational flow of the business at a high level. With customer complaints, poor OTIF (orders delivered on time in full) and a growing backlog as our focus, we identified areas to target that included customer service operations, warehouse and logistics operations, and inventory management. The big difference with a turnaround is there is NO patience for incremental improvement – we must make rapid changes ASAP! The positive thing about this is everyone shared this sense of urgency.
However, this immediate, short-term need meant we had to segregate improvement ideas into two dramatically different buckets: 1) brute force to do what it takes to make the numbers with focus and urgency, and 2) medium-term sustainable process and system improvements that correct the core problems that got them into the ‘hole they had dug’. Lean Six Sigma and Supply Chain techniques helped identify both brute force actions and medium-term actions.
The difference of this turnaround from our typical customer project engagements is we met twice daily in a ‘war room meeting’ to focus on the core measures and what everyone was doing each day to ‘brute force’ improve the numbers. This approach, using focus and high urgency, is not sustainable for long term, but for a shorter defined period it can effectively rally and focus the troops and generate rapid results. This was critical for the PE firm owners because they needed to achieve their financial targets every month. It also bought time for the business to address the medium-term process and system related issues that were the true culprits causing the performance issues. Lean tools like process flow mapping were highly effective at identifying process and system issues that needed to be changed. Standard work procedures and training documentation locked-in and sustained the improvements. As the company’s performance improved in the short term, there was more confidence placed in the medium-term improvements. This turn around project was a winner!
Now for company Y. Also owned by a PE firm, company Y was previously family owned and managed for many years, and was successful. After the acquisition, the PE firm needed to cut costs quickly to pay for the debt placed on the company. This company also was coming off a surge in business during the pandemic and sales were shrinking to normal (pre-pandemic) levels. However, inventory was both bloated but also not the right inventory as consumer preferences were quickly changing. In this case, there were no dramatic failures to repair, but change was still needed.
Similar to example X, we began with an assessment and identified areas for improvement which included key performance measures/scorecards, sales and operations planning, quick changeover, improved warehouse layout, and optimized inventory management. We were tasked by the PE firm to work with the current management team to implement our work, however, we had been told it was not likely that team would survive intact. There would be management cuts, so everyone was thinking about survival.
Another difference from X, is the current management team did not have a shared sense of urgency. There was a (not unfounded) belief that the business was fine and it was the debt placed on the company that was the problem. Consequently, they had a strong resistance to change and thought their way of doing business was the best way. “We’re fine, let’s wait it out until the consultants leave.”
We started by working with the management team to develop Key Performance Metrics, department by department. These metrics (scorecards) are used to quantify performance and drive accountability, and drive other Lean Six Sigma and Supply Chain projects. Next we identified the importance of implementing quick changeover to reduce set-up time and scrap. We were comfortable facilitating these improvements, as they are common among our clients, yet we struggled with company Y. We had difficulty getting the buy in and the necessary resources from the management team. We attributed much of that to the background that the management team probably knew their jobs were in jeopardy, but we trusted the PE firm had our backs to help nudge them along. Anyone familiar with Lean will see that this is a ‘push’ not a ‘pull’, which is a recipe for failure.
The first clue we were going to have a problem occurred when we learned the management team met separately with the PE leadership and convinced them the Key Performance Metrics weren’t needed. We were encouraged to continue with the other efforts and let the metrics / scorecards come later. With hindsight, this should have resulted in a re-assessment of our objectives and position, but we soldiered on. BIG MISTAKE!
We worked on several other improvements that we believed would be significant, but we still struggled to get buy-in from the management team and we didn’t seem to be connecting well with the PE firm, either. As a result, our effectiveness was muted. It didn’t take long operating like this until we and the PE firm determined this was not a good fit and the engagement ended.
So… two PE owned firms in need of a turnaround, one worked out very well and one didn’t. Lean Six Sigma and supply chain management were useful for identifying issues and opportunities for both, but there were other key factors that differed. Here is what we learned:
- Shared Urgency is Paramount: A genuine need for turnaround must be recognized and felt by all stakeholders. The team must let go of “business as usual”. Company X had it, company Y did not.
- Management Buy-In is Essential: The management team must believe improvements are necessary and accept that they are partially or completely responsible for the poor performance. Failure to buy-in is an early “red flag” that must be addressed. Even without a turnaround, for any Lean Six Sigma implementation to be successful, the management team has to buy-in that improvements are needed. Company X bought-in; Company Y did not.
- Who Selects the Consultant Matters: When the management team chooses the consultants, it often leads to greater commitment. For company X, themanagement team chose us; for company Y the PE firm brought us in.
- Effective Communications is Critical: Turnarounds need consistent, more frequent, and highly transparent communications to ensure everyone clearly understands the status and there is accountability for actions and results. Side conversations with hidden agendas don’t work.
- Clear Authority: In the case of the PE firm’s vision and decision making and the company’s management teams’ influence, it’s very important to understand each dynamic and deal with it openly. Especially if key management personnel feel like their job is at risk, it creates conflicts of interest around ultimate authority and can be compounded unless communication (prior bullet) is highly effective. For company X we never interacted with the PE firm; with Company Y we met with the PE firm separately from the management team.
- Embrace Metrics: Key performance metrics are crucial for quantifying performance, driving accountability, and ensuring Lean principles take root. Ignoring them is a recipe for failure.