Thursday, August 14, 2008

Financial problems with Lean

From time to time the dark side of Lean surfaces. On the whole a lot of this dark side is bunk (rubbish), Lean gets the blame for something that isn’t really anything to do with Lean. Though Lean is not without its problems most of the well publicised cases (like karoshi, death by overwork) seems to have more to do with (Japanese) society than Lean itself.

But it hadn’t occurred to me until today that there were also financial problems with Lean, or to be specific, the transition to Lean. The summer issue of the MIT Sloan Management Review has a piece about financial problems (How to Manage Through Worse Before Better) which can afflict companies transitioning to Lean.

Although this piece is about manufacturing companies not software companies I think its worth discussing the reasons and how they might also effect software companies:

• Lean companies hold little or no inventory, so a company transitioning to Lean will reduce the amount of completed work held in stock (not to forget raw materials and work in progress). But this stock is also shown as an asset on the balance sheet. So reducing inventory reduces the value of the company.

• It is not only the transition company which hold stocks, so too do customers. As the company becomes more Lean the lead time for orders will reduce so customer no longer need to order so far in advance and hold buffer stocks. They will adjust their orders, rather than ordering 6 weeks in advance they may order 1 week in advance. Therefore sales will appear to reduce as customer change their schedule.

• Although the Lean will make the company more productive in the short run it is difficult for the company to realise this benefit. It is not possible to reduce the work force during the transition because managers and workers need to co-operate so managers can’t fire workers (well you could, but imagine what it would do to the rest of your change programme).

• Neither can the extra productive capacity be used for new manufacturing because the company is still in transition and it takes time to introduce new products to manufacturing and optimise the system along Lean lines.

So what about software companies? Actually I think they do, perhaps to a lesser degree:

• Software companies don’t hold stock, but work in progress could appear on the balance sheet, it all depends how the company accounts for R&D so this could be an issue.

• Customers might delay orders once they know they can, this depends on your sales model.

• Software companies face the same problem in laying off surplus workers, if anything the problem is worse. Even though most software companies I’ve ever seen don’t have enough people to do the work they are asked to it these benefits won’t show on the balance sheet or cash flow statement.

• Finding work for newly available resources is also going to be a problem. I’ve blogged before about the importance of Product Managers and the idea that The Bottleneck has moved - if you have developers who are more productive you need more Product Managers - so costs will go up!

Actually things might be worse in software development because of the quality issue. A Swiss friend of mine claims that his software company was forced out of business when they adopted TDD and improved quality. It seems many of their customers were buying new versions of the software, and paying support fees, to get bug fixes. Improve the quality, reduce the bugs and why do they need to spend more money?

My reply is always: its not much of a business model if you rely on your customers paying for fixes. But the point here is that during the transition phase you loose the revenue before the benefits kick in.

I’ve not read the second half of the Sloan piece yet so I don’t know how to resolve these issues but I think this analysis is helpful in understanding why companies find it hard to transition.

1 comment:

  1. Mostly agree, though I'd have two comments. First, how the value of code is reflected in your profit and loss statement is not cast in stone: when you account for it as expenses you don't get the same effects as when you capitalize it. There is a choice, although gradually different for suppliers and adopters, service and product. Second, the smaller supplier in-stock value requires other measures, which are plain vanilla: demand management, forecast pipeline, and good-ol' contingency (slack). Prepare to see the software industry's equivalent of overbooking, order book back-log, systemic sensitivity to outages (e.g., people leaving, going on strike) and more. It's not all good that's lean, but that's ok.


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