Value Advantage of Being Lean

"Many business owners associate the subject of “lean” strictly with manufacturers. Today, however, businesses in all industries — including service businesses — can benefit from the implementation of lean principles to eliminate waste in all areas of their operations and increase the value of their companies in the process. On this edition of “Deal Talk,” Jeff Allen speaks with Colin Baird, vice president at Sullivan-Curtis-Monroe in Los Angeles, about what lean is and why business owners need to look seriously at process improvements that can help strengthen their balance sheets while adding value to their organizations."

Questions Answered For You

  • Can lean be applied to other sectors, other industries, and not just on manufacturing?
  • How can lean principles help elevate the value of a business?
  • What is the real difference between how a lean and a non-lean manufacturer sees business value?
  • When does a business owner typically call a management consultant for help?
  • How long does it take for a lean manufacturing agency to conduct its assessment of a business?

"By looking at understanding value through the customer's eyes, we're actually able to create efficiencies and opportunity."

- Colin Baird

Key Takeaways

  • Applying the lean principles means “stripping back various layers of the onion” to discover opportunities that could improve your business. It involves looking at three essential business aspects: people, process, and profit.
  • The lean principles are helpful tools in identifying waste in a process, and could be applied not only to manufacturing businesses but also to any business that involves a process.
  • From the lean manufacturer’s perspective, being non-lean does not necessarily mean that something is wrong with the company. Many great non-lean organizations make plenty of money without necessarily looking at the lean principles. Using these principles, however, helps businesses define their company’s value and improve their people, process, and profit.
  • Leaders could make a difference in improving their operations by actually going to a place where things happen, which is called the ‘gemba,’ and watching for themselves what operation actually looks like from that standpoint.
  • If you’re looking into selling your business, you would like to fine tune your processes first to increase its value.

Read Full Interview

 


Jeff: Selling your company to a lean manufacturer, how lean manufacturers and companies of all kinds look at value and what that can mean for you. For answers to these and other questions, you've come to the right place.

From our studio in Southern California, with guest experts from across the country and around the world, this is Deal Talk, brought to you by Morgan & Westfield, nationwide leader in business sales and appraisals. Now, here's your host, Jeff Allen.

Jeff: Welcome to the web's number one content source for small business owners committed to building a business for eventual sale. Here on Deal Talk, it's our mission to provide information and guidance from our growing list of trusted experts that you and all small business owners can use to help you build your bottom line and improve your company's value.

Mr. Colin Baird is a management consultant with Lean Synergies International. You can call them LSI for short.  and a specialist in the area of risk management. He also provides Kaizen Training to chief executives and is a regular contributor to Chief Executive Magazine. Colin, welcome to Deal Talk. It's nice to have you.

Colin: Jeff, thanks a lot for bringing me on board to have this conversation. It’s something I'm very passionate about and I'm glad to have an opportunity to talk a little bit about lean, what it is, and how lean manufacturing organizations might look at an acquisition.

By looking at it [business] through those customer's eyes, we're able to significantly remove the barriers to the excellence that might cost wasteful activities in the first place.

Jeff: Absolutely. Let's get right into it. First of all, Colin, what in fact, is lean? Many of us, i.e. those who have heard of it associate it with manufacturers, but for those of us who are not in the factory sector, what is it?

Colin: Lean is effectively a way to look at how your customers see your business and the products that you actually market, or sell goods and services. So it's a way of basically stripping back various layers of the onion to see where there are opportunities to improve my business that I might otherwise not understand. So we really take a look at it. We do a deep dive looking at how you specifically do things, and what you do, and why you do them. And we work with teams to basically have the teams help us understand where the wasteful activities are that drive loss. It's often lost on an income statement because it doesn't necessarily show up.

 

Jeff: You hit on really the key term there which is waste. I had always just assumed that lean was kind of a process if you would, but from what you're saying lean is more than just an operational process.

Colin: Lean really is looking at three different things: people, process, and profit. Profit usually follows as a result of process, which is usually driven by people who have to do various things related to methods, and machines, and materials. So by looking at those various methods, those various machines, and those various materials and how they actually flow through the supply chain, we're actually able to get a really, really good understanding of where the waste is. And that waste can be anything from moving something too often, to carrying too much inventory, to safety problems, defects in the operations, overprocessing things. There's just a whole host of areas where lean really, really drives a lot operational improvements which hopefully you can get on board with prior to the time you make an acquisition or the time you make a sale.

 

Jeff: Can lean then apply to other sectors, other industries, and not just on manufacturing? Could it actually be used to apply to a whole sphere or environment of businesses?

Colin: It's a great question Jeff. I'll give an example. I have an accounting firm that uses the lean principles to improve their efficiency. This is an accounting firm basically selling services throughout the community. And if there's a process involved, that's really where lean is going to really capture the opportunities for improvement. So it doesn't matter whether you're selling services, whether you're selling physical part. If there's a process that's involved with driving your activities to drive proper loss, you need a tool to help you do that.

 

Jeff: And you mentioned people, process and profits, profits and loss there just a moment ago. It really does connect, doesn't it, with value?  If the proper steps are taken to make these improvements become lean, if you would, these lean improvements we're talking about, you really could in fact drive value, couldn't you, for your company, and elevate that value to a level that you probably haven't seen before.

Colin: Yes. From our perspective, if we were making an acquisition of an organization, we would be looking at value through what the customer is actually asking the particular agency or business to sell for them or create for them. So by looking at understanding value through the customer's eyes, we're actually able to create efficiencies and opportunity. And when we look at value, we look at the actual time or cycle it takes to actually do something. And by looking at it through those customer's eyes, we're able to significantly remove the barriers to the excellence that might cost wasteful activities in the first place. We're really looking for the root causes behind failures and how do we improve those failures, so when a business is sold, there's more standardized workflow, there's more standardized work within the operations, which from a person who's selling a business it's exactly what they want. They want something that is the “McDonald's” method, the “McDonald's” operation. Something that's smooth and operates efficiently because there are standards that are in place that they know where to look and make things better.

 

Jeff: Let's talk about this then in a little bit more detail. Colin Baird joins us, by the way, management consultant with LSI. We're talking about selling your company, and in this particular case we're using to a lean manufacturer, selling your company to a lean manufacturer really is an illustration of this idea of lean and how you can improve value by putting these certain lean principles into action in your business. And Colin has provided us with an outline  of a presentation. Colin, let's talk just a little bit about it -- selling your company to a lean manufacturer and how lean manufacturers look at value. You gave us kind of a taste, looking at it through a customer's eyes. Can you take us through what an acquisition looks like from an acquiring agency's lean manufacturer's perspective? You've got Company A, which is the acquisition target. And then you've got Company B, which is the company that is looking to buy Company A.

Colin: Sure. From our perspective -- which is, we've got an organization that we're looking to acquire, we would be doing, during the due diligence phase -- which we would like to do very early on in the transaction, not just 60 or 90 days, or 120 days out -- but  for the person who's really looking to maximize their business, what we're looking at is how well are you maximizing your business? So we bring to the due diligence process the opportunity to look at a deep dive into the operations of your organization. How do people, process and profit all integrate? What are the areas within your organization where we can actually significantly improve the efficiency of the company? You don't necessarily look at it as a strategic acquisition, although it might be, we're looking at what  it is that you do. What is it physically that you do each day that your customers pay you for? And how much time do you spend doing things that your customers pay you for that you don't want them to pay you for but they still have to because there's loss in the business itself?

During that due diligence phase we identify, or a lean manufacturer would look at the organization, the acquiring entity they're trying to acquire, and basically look at things like how long it takes you to do something specific. That could be making a part, it could be looking for information within a system. So if we see, as an agency making acquisition, if we see there's loss in your organization, we're going to mark that down as far as value is concerned. In other words, physically mark down the value of the company a little bit. Because we know by making the acquisition where you can actually fine tune it and bring those values up, which means that the person who's selling the business isn't going to make as much as the person who's acquiring it because we see it a little bit differently.

 

Jeff: Okay. Are you working really then on behalf of the acquiring company? Is that what you're talking about?

Colin: If you want to look at this from the perspective of a person who's not a consultant if you're looking at a perspective from a person who's buying a business, we're looking to basically... not we but the organization should be fine tuning these things before they make the sale. It could be on either side. If you're selling the business, of course, you want to maximize your benefits. And if you're acquiring the business, you're going to do the opposite. We're looking at either side.

 

Jeff: Colin, talk to me a little bit about the assessment period when you were gone and you've done all of these observations, your due diligence. How long does this take, and when you're finished what do you do with the results?

Colin: The process typically to assess an organization depends of course on the scale and size of the company itself. But normally you see a one-to-five-day turnaround as far as assessment, and that can be anywhere from literally eight hours in an organization when you get a relatively shallow dive and look at something all the way to an organization that allows us to do a really, really deep dive. Of course a lot of it depends on the cooperation between the buy side and sell side. From the sell side perspective there are certain information they won't want to disclose because there have to MBA's in place so that people know where the lines and the boundaries are. So that can limit some of the assessment and how deep you want to go on it. But from the perspective of actually getting started usually you're looking at anywhere from one day, five-day due diligence phase.

If you're selling the business, of course you want maximize your benefits. And if you're acquiring the business, you're going to do the opposite.

Jeff: You touched on something a short time ago that really caught me and I think this is something that our audience would probably catch on and like to hear a little bit more from you, and that is that lean manufacturers are going to likely offer less than a company that is not lean because they're looking for certain efficiencies and they're looking for value, and looking at it from a different perspective aren't they? In all honesty if you're not operating really up to their standards or you're not running lean so to speak really, you could in fact be getting less in terms of what you'd like to in a price for your company.

Colin: Absolutely. From a sell side, what a seller should be very concerned about is, “How efficient really are we?” and “How far away are we from our exit?” Are we three months away, are we a year away, are we five years away? If you're five years away from an exit that's an ideal time to start fine tuning your organization, and do a deep dive, and start looking at those areas within the business where there's opportunity to maximize your value on exit. If you're just a few months away, there are certain things you can do to make your organization look good, but you're still might be putting lipstick on a pig. So what you're really trying to do is find a maximum amount of time where you exit so that you can really look deeply at these operational issues that a lean manufacturing agency might look at from an acquiring side. And those are going to be areas like we move things around too much, we carry excess loads of inventory, how much inventory should we be carrying, what is this particular assembly line, or what is this particular operation entail? Those are the things that you need to start asking yourself. The question from the sell side, "What's the buyer going to really think when they look at my business? Do I really want to show them this? Because this may not be an area that I want them to see too much of because I'd like to fine tune it before I sell this organization." And that's where having another set of eyes, having somebody outside the organization, or somebody inside the organization that's been kind of chirping at you ear for many, many years, "We need to fix this. We need to fix this." And that could be a machine that creates bottlenecks within your operations which of course can create large, large losses as far as inventory levels, and as far as defects and things like that.

What are our defect rates? How often do we produce parts that we can't sell because all your laborers baked into those parts that you've just made that you now have to either rework or scrap. What do our scrap rates look like? Can we do better? What's possible? And that's where that second set of eyes or third set of eyes, having somebody do that assessment process with you, sitting alongside you says, "Here's some things to consider." So if you're on the sell side you really want to have somebody like that on your team because on the buy side they'd be nuts not to have somebody like that on the team.

 

Jeff: Great conversation, and we're going to have more of it with Colin Baird. He is an expert in the area of risk management, and specializes in an area that many non-manufacturers may not have a lot of knowledge of and that is in the area of lean. In fact, you just heard him say that lean manufacturers are going to pay far less than non-lean manufacturers would be for an organization, and they're only happy to do that less than the value that you believe that you could get elsewhere. Why is that important to you? Obviously, you want to get as much money as you can for your company. And we're going to continue this conversation so you can try to get more information, get your arms around this to find out how it can help you. I don't care if you're making widgets, making cars, stereo equipment, diamonds, pancakes, it doesn't make any difference. Our conversation with LSI's Colin Baird continues when Deal Talk returns after this.

If you'd like to share your knowledge and expertise on any subject related to selling businesses or helping business owners improve the value of their companies, we'd like to talk with you about joining us as a guest on the future edition of Deal Talk. Interested? Contact our host Jeff Allen directly. Just send a brief email with "I'd like to be a guest" in the subject line. In a brief message include your name, title, area of specialty, and contact information, and send it to jeff@morganandwestfield.com, that's jeff@morganandwestfield.com.


Selling your business may be the most important business transaction you'll ever undertake so don't go it alone. Work with an organization that has made it their business to sell businesses and that's all they do. Morgan & Westfield at 888-693-7834. At Morgan & Westfield we know that selling your company is not something you should take lig0htly. It can be a stressful, difficult, even emotional process. That's why it's important to work with a team whose one and only specialty is selling businesses throughout the United States. And Morgan & Westfield will help you every step of the way. From helping you plan your exit strategy, to preparing a comprehensive appraisal, and locating the right buyers. Without the right team behind you, you could be leaving money on the table. So don't leave your most important business transaction to chance. Call Morgan & Westfield for a free consultation at 888-693-7834, 888-693-7834, or visit morganandwestfield.com.


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"Lean is not about cutting people. Lean is about improving people using the ideas and the talents that people have, those people who work on the floor, who add the physical or mental value, emotional value to a product, use the talents of those people to uncover what are the barriers to this company's excellence."

Jeff: My name is Jeff Allen. You're listening to Deal Talk. And my guest today Colin Baird, management consultant with LSI. And we're talking about this idea of lean manufacturers and how they see value, the value that they see in companies, why they're willing to pay far less than the value you expect to have in your company. I guess my next question would be, ”Are there lean manufacturer that are out there preying on manufacturers that aren't lean in order to just simply get the best deal out there in the marketplace?”

Colin: Yeah, it's a great question and I hate the word prey because prey has a lot of different connotations of course Jeff. But in the world that lean manufacture traditionally work in, we are looking for those opportunities to significantly improve those acquisitions. Because we know that once we've made the acquisition, if we've actually done a good job of due diligence phase from the acquiring perspective, we're probably going to need less real estate to operate the organization. We'll probably going to need less labor cost. We'll probably be able to actually drive down the cost to the customer to pass those along if that's one of the strategic objectives that is required to capture the market share. A lot of times lean manufacturers have less traditional banking costs because their throughput rates are much, much higher. So there are so many advantages from the perspective of... Once you're selling the business, these are things you want to have. You want to have high throughput rates. You want to have low levels of inventory so that inventory return is high. And of course you want to keep your labor costs down. So if we see, for example, on an income statement, if there's a lot of overtime going on we might have to question why. We may not ask the question. We might just keep it to ourselves. That's an opportunity without cutting jobs. That's not what lean is about. Lean is not about cutting people. Lean is about improving people using the ideas and the talents that people have, those people who work on the floor, who add the physical or mental value, emotional value to a product, use the talents of those people to uncover what are the barriers to this company's excellence. And once you start combining the people and the process and getting them working together to make things better, what you find are those wasteful activities are barriers to the excellence of the organization yet they don't necessarily show up on the income statement until you start breaking those barriers down.

 

Jeff: Excellent points. Very, very good answer, and it comes back around to what you talked about and outlined at the top of the program, people, process, and profits. One leads to the next, to the next. And it's getting the best out of your human capital. And so I think that's very, very well said on your part Colin and I appreciate the clarity on that. Going back, let's take a step backward a little bit and let's talk about or non-lean friends, the non-lean manufacturers and I think we could probably out there make an assumption that probably includes a fair number of the manufacturers that are out there in the manufacturing sector today that ardently and they could probably stand to make some improvements. How do they see value? What is the real difference between how a lean and a non-lean manufacturer sees value, those non-lean guys who might be willing to pay a little bit more for a company that is not lean?

Colin: I think from the perspective of looking at value probably the best thing that I've seem to explain that was Milton Friedman was an economist who won a Nobel Prize back in the 70's and he basically said the purpose of a corporation was to serve its shareholders. On the flip side of that, the lean thinking would be the purpose of the corporation was to create a customer. And what does that mean as far as creating a customer, how do we do that? We look at that through values. What does physical value mean to an organization? Value is based on time, how much time is spent doing something within the organization that drives waste. And so from the lean perspective, a non-lean manufacturer, and there's a lot of them. And it doesn't mean they're doing something wrong at all. This is not a critique of someone who's not lean because there's a lot of great non-lean organizations that make plenty of money and they don't have a reason for necessarily looking at the lean principles. But for those organizations, it really wants you to focus on making your organization better. They want to improve their people, their process, and the profit. It's kind of a holy grail of what defines value for a non-lean manufacturer.

 

Jeff: Colin, does your organization go out and meet with companies that may have an interest in finding out what this lean thing is all about and making changes before they have any kind of notion possibly to even list their company for sale before they're interested in an acquisition?

Colin: It's a great question. When does somebody typically call a management consultant for help? My experience has been if there's an acquisition pending, we certainly want to know what can I do to improve my business. But if there's no acquisition pending a lot of times what has to happen there's a crisis. Something triggers a crisis, something going on within the organization where something bad has happened. It could be the bank has called in some debt, there have been some covenants that have been violated, that is when organizations are more ripened, more apt to make a change. And that is typically what we see within the organization.

And I think the answer to your question is, is that typical of an organization or management consulting firm to go in there and take a look at that type of improvement opportunity. And I think that most lean consultants they would say that is what they do. We don't necessarily just focus on the M&A side. It's really about making organizations better and out making America better if you will if you want to go really broad on it. It's really about turning America into what she's capable of doing, making it so that we can actually compete. Because we bring work back from China all the time because the lead times and going back and forth China are insane. And it's the same thing with information. You buy a very expensive information system and it doesn't put the information where you want it at the right time. That's inefficient, that's loss. So it really doesn't matter whether it's a product that's got to go to China and comeback, or whether it's information and has to go a server, and it gets lost and all of a sudden you're looking for the information and you're going, "What happened to my time? It's all gone?"

I think the answer to your question is, the big picture is mostly manufacturing consultants are going to say they would love to do the assessment to help you look at those opportunities for improvement because any lean guy wants to keep working. He really wants to help you be there for the long haul.

"I think the best advice I ever got when I first got in the lean world was the value of a video camera."

Jeff: Can you leave us with a few solid nuggets of advice, those of us who are looking to maybe make some improvements. And maybe we're not exactly sure where our organization stand. We think we're pretty efficient. Maybe we've narrowed our payroll down and we have our A-team on the floor. And we've been profitable for a long time. Now revenues are fantastic. But is there a place to look? Is there something that our listeners would be able to do right now to kind of do a, if you would, kind of at least a crude self-assessment of their own organizations before they were to call a company like yours for example?

Colin: Absolutely. I think the best advice I ever got when I first got in the lean world was the value of a video camera. Today we have the ability to look at things on a much different level under a very microscopic basis. And that doesn't mean you're filming your employees' faces as they're _________ apart down the line. But what it is is this taking and looking at production lines, how does the material flow? Does it flow well? Does it get stuck in a buffer or an inventory level where it just stays put or is it slowing? So the video camera today, we have the ability to actually take that video camera. And everybody's got an iPhone. I use an iPhone in my consulting practice. Literally I'm in the production line using my iPhone watching people do things. You don't need to hire a lean consultant to do that. The nice thing is you go and make yourself a movie and start looking at it, and working with your teams to help them tell you what's really going on there and then working directly with your teams on those things that are creating barriers to their _________.

I'll tell you what, the information that's available to teams, they don't need to hire lean consultants to do what I do. They really don't. What they really ought to be doing is taking video cameras with their teams walking through their facility and watching how things work in action, whether you're in an office environment, whether you're in a manufacturing environment, whether you're in the distribution environment, it doesn't matter. That iPhone today has the ability to break information down on such a microscopic level. We can literally watch people's hands and whether they're using one hand or two hands. Obviously, ‘two hands’ is more efficient than one hand, but if they can only use one hand because the part isn't presented properly you're not going to see them unless you go home and watch it on a videotape.

I think the best thing that I've discovered in this crazy world of lean is the value of what we do with information today, not on a Spreadsheet, but by actually going to a place where things happen, what we call the  gemba and watching it for yourself. That's the biggest area where I see leaders can really make a difference in improving their operations.

 

Jeff: And it really is interesting to see the footage that you take on your camera. You say iPhone, I happen to have an Android. I'm not taking exception to anything but I'll go ahead and I'll use the one that I have. I'm sure your iPhone probably does a better job. But going through and when you see things on video it's amazing how looking at it through video is almost like looking at it from a different pair of eyes. It really is and it's really interesting.

Colin, this has been just an absolutely wonderful conversation. If people are interested maybe in finding out more about you, or if we have a business owner or two out there who might be interested in contacting you to talk about their business and how it is that you might be able to help them improve their operations there how can they get in touch with you?

Colin: Probably the fastest and the quickest way is just to call me on that iPhone and that iPhone number is 661-332-0382. I live with my iPhone probably like a lot of other people. You can also reach me via my email address which I will give out. It's cbaird@lsicg.com. You can also go to the LSI website which is lsicg.com, and you can find out a little bit more about what we do.

"Value is based on time -- how much time is spent doing something within the organization that drives waste."

Jeff: Colin Baird, wonderful discussion. We appreciate all the time that you've given us today and we look forward to possibly having you back on a future show. Would you like to come back?

Colin: I would love to Jeff. Thank you very, very much. It's a great opportunity, a wonderful audience, and the topic's very near and dear to my heart so thanks for the opportunity to speak to you. I appreciate it.

 

Jeff: Very good. Colin Baird, there he goes. He's a management consultant with LSI. We enjoyed having him. We hope that you enjoyed the discussion as well. Tell a friend about Deal Talk, won't you? In addition to morganandwestfield.com you can find us on iTunes, Stitcher, and Libsyn. Deal Talk has been brought to you by Morgan & Westfield, a nationwide leader in business sales and appraisals. Learn more at morganandwestfield.com. Thanks so much for listening once again, my name is Jeff Allen. I look forward to talking to you again.

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