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Lean Manufacturing: Fat Cash Flow
Interview with Clifford F. Ransom II, Vice President, State Street Research, Boston
by Dr. Robert Hall, AME Target Editor

This article recently appeared on the Superfactory web site.
To view it there, please click the following link: Superfactory Article

Cliff Ransom is one of two or three stock analysts whose understanding of lean manufacturing gives them an edge analyzing manufacturing companies. Now and then Cliff participates in a shop floor kaizen event himself.

Q: Analysts are sometimes blamed for managements taking a short-term quarter-to-quarter view when they should follow a long-term vision. What's your view?
A: Stock analysts frown on companies with no long-term plan or vision. Managements do, sometimes, use analysts or "the market" as an excuse because they are clueless about how to induce better performance from their companies. Short-term grandstanding for the market is a desperate attempt to look good, but it is usually obvious to competent analysts. However, as stock analysts, our ultimate customers are stockholders, so we have a fiduciary responsibility to take an investor's view of a company. If a company's forward plan has no financial promise, we may recommend selling the stock, or most likely we will just avoid buying it. If that recommendation depresses a company's stock value, managements can't easily obtain new money. Occasionally, we make our opinions known to management, but they don't have to listen.

Q: Does putting the customer first interfere with returns to stockholders?
A: Long term it should not. The voice of the customer is critical to success, so analysts want to see a company listen to customers. However, in the long run, satisfying customers has to also satisfy investors. Giving products and services away might please customers, but not investors. Incidentally, the stocks of truly lean manufacturers appear to outperform those that merely have a good quality program. Lean ones do better than Baldrige winners. By regularly doing more with less, and doing it well, they have a great formula for financial success, a cash flow machine.

Q: Do you track many lean manufacturers?
A: No. Very few companies have advanced with lean manufacturing until you can see the results financially --- perhaps one or two percent at best. Another two-three percent are "getting there" ---OK but not outstanding. Another 10-15 percent mostly "just talk lean." The majority, 80 percent or so, don't even have the buzz words straight. Unless I see three pieces of evidence, I do not consider a management to be serious about lean manufacturing. 1) They must proclaim that they are becoming lean. They can call it whatever they want, but intentions must be boldly stated in a vision that everyone can understand. 2) They must tie compensation to lean systems. You are not becoming lean if you reward people for doing unlean things. 3) They have to drive the company with lean metrics --- time and inventory measures. You have to persist to see results. You won't see much change in the financials for 12 to 18 months, sometimes longer. Clearly, confirming the sustainability of superior performance takes much longer --- years. Most managements waffle around, make only a half-hearted attempt, and never get rid of the inconsistencies in their own leadership.

Q: What do you look for in a manufacturing company?
A: Investors prefer to see rising returns on their money. While there are various way to measure that, I look for cash flow. Next to inventory measures, cash doesn't lie. A company can generate cash flow in more ways than becoming lean. For instance, an aggressive, successful product development program may do it. But I like to look for great lean performers because it's a winning strategy to generate cash. In a plant, I use a five-page checklist, looking for details from 5S and safety onward. My list is similar to that which a manufacturing person might use. However, within five minutes I can tell whether a company is serious about manufacturing excellence. Do I see oil drips? Safety hazards? Machines stopped awaiting repair? Poor lighting? If you think you might not like working there yourself, lean is all talk. If they are pursuing lean vigorously, people are involved, and it shows. Performance measures are on display, people are driving toward improvement goals, and the evidence of problem solving is all around. Working there might be enjoyable. Then I look for inventory. If it isn't on the floor, do they have a stash somewhere? If the inventory is not decreasing, the company is not into lean manufacturing.

Q: How do you compare companies?
A: If they only tell me that they are better than they used to be, I'm unimpressed. If they only say that they have increased inventory turns from ten times to 20, I am unimpressed. I want to see managements comparing themselves with the best ---with UPS on delivery or L.L. Bean in distribution ---and making a serious run at operating perfection. They have to have tough goals and use rigorous, audited measurements to judge whether they are meeting them. Comparing companies remains a bit of an art. One must consider the situation of each case, whether affected by strong seasonality, global sales, and so on. I wish I had a benchmarking database of the world's best in each category, but I don't. If I can see that a company is a long way down the curve driving for perfection, I don't worry about numerical comparisons. That company's operations will outclass most competitors and it will probably be a cash machine.


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