A Conversation with Art Byrne in Tokyo
I met Art Byrne in Tokyo in October 2011. He had long since retired from Wiremold, but in his own words, he had not been “successful” in retirement and had joined a Boston-based investment capital firm called J. W. Childs Associates as a managing partner. This firm bought companies and then sold them at a profit. Byrne’s role there was to improve production to increase the value of the company, and his secret weapon was kaizen.
Byrne initiated change from the top, as he did at Wiremold. He moved into the chairman’s chair of some of the acquired companies, making kaizen a mandatory requirement. This role gave him a unique track record of building shareholder value through the use of kaizen in a succession of companies. It also gave him a special understanding of what the role of top management should be in the transition to kaizen. Byrne led portfolio managers on a tour of Japanese factories in Japan, enabling them to see some successful examples of kaizen in action. Such ‘benchmarking’ trips to Japan are very popular. We at the Kaizen Institute have been offering this service to our clients for a long time.
Since Byrne’s home is in Tokyo, I had the pleasure of visiting him for this talk. I wanted to find out how things had gone at Wiremold since we last spoke. Byrne gave a summary of all the improvements that had been made from the time he arrived as CEO in September 1991 until the sale of the company in July 2000.
- Flow time reduced from 4-6 weeks to 1-2 days.
- Productivity increased by about 162 percent.
- Gross earnings rose from 38 percent to 51 percent.
- Machine change times increased from 3 times a week to 20-30 times a day.
- Stock turnover went from 3 times to 18 times.
- Customer service increased from 50 percent to 98 percent.
- Sales increased from 100 million to 400 million.
- Working capital as a percentage of sales fell from 21.8 percent to 6.7 percent.
- Operating income improved 14.4 times.
- The value of the venture increased from 30 million to 770 million.
Imai: How can you explain the increase in sales volume?
Byrne: In the time I’ve been at Wiremold, we’ve acquired 21 different companies, and half of the increase in sales volume has come from those acquisitions and half from internal growth.
Imai: Did you use kaizen in the companies you acquired?
Byrne: Every company that we acquired – many of them were small companies, some of them were just product lines – we immediately went to kaizen. We started doing kaizen from the first week we were there. We wanted to show the employees in the new companies we acquired that our culture was to eliminate waste through kaizen. We wanted to show them that even if they didn’t like it, they had to work for it. It was very useful to do it that way. We left no gray areas to disturb our new colleagues.
Imai: As a top manager, what was your role in the kaizen work?
Byrne: When we acquired these companies, we always had a standard procedure. I would go to this company right after the acquisition and get all the new consultants together, introduce Wiremold to everybody, give a couple of hours of lean training, and then after lunch I would start the first kaizen run. People were kind of shocked by that. But when you see the CEO of the parent company on the shop floor for the rest of the week doing kaizen and helping to move the equipment, taking part in the improvement, it has a positive effect on many employees.
When many companies buy a company, they analyze it for about six months and then decide what to do. Our way of looking at it was to come in on the first day with kaizen and lean and start working immediately. We already knew what we wanted to do, and it brought us tremendous gains and allowed us to get the money back quickly. Indeed, in many cases, after three years, all the money we had paid was back. From then on, we used the additional cash flow to buy the next company. The process was a recurring “gift that keeps on giving”.
Imai: This sounds like a good preparation for the work you’re doing now at J. W. Childs. Can you describe your role as managing partner?
Byrne: What that means is this: I would stick to my specialty, which is manufacturing. When we look to buy a company of this nature, I do my due diligence; go visit the company, go visit the factory and decide whether it makes sense for us and how much we are willing to pay. Then, if we can buy it, I become the chairman of the board of the company. My role is essentially to represent Childs and work with the management teams to improve the company. We only buy these companies to sell them, not to keep them. So we’re looking for some pretty big improvements in a relatively short time frame.
Imai: Can you give an example?
Byrne: One of the companies that we initially took on was American Safety Razor. When we came in, the company wasn’t doing any kaizen and wasn’t really interested. I had to really push as a board to get the company to do it, and I was able to get a good lean agent in charge of production. The combination of the board’s push and the lean agent in the business allowed us to make very good progress in the company in about three years. We generated a cash return of $65 million that was freed up from working capital, we increased gross margin by six percentage points, our on-time delivery and service rate went from 80 percent to 99 percent, and we did everything on time to the end. Our productivity increased. I can’t remember the exact figures, but when we sold the business, we got back 3.5 times our investment.
Imai: You repeatedly say that kaizen gives financial results. Has anyone followed your example?
Byrne: When we were at Wiremold, many people heard about us through articles and books. Including your book Gemba Kaizen and they said, “We want to do this.” So we opened the door for factory visits. We felt that we had to help these people, because a lot of what we had learned in Shingijutsu had come from walking around and seeing what others were doing. These trips started to take a lot of time. We had to run the company and we had other improvements to make. We wanted to help, but at the same time we knew that if there was no CEO involved, no company would come back and implement it. So I said: ‘Let’s make a simple rule. You can visit us, but only if you come with your CEO. Without him, you cannot visit Wiremold.” All the trips came to an abrupt halt as if cut with a knife. That’s exactly what happened.
Imai: We always see the same problem. The top management doesn’t seem to be ready to implement kaizen, even though the benefits are very well known. Why don’t they do it?
Byrne: Lean is really something that’s easy to understand conceptually, but it’s hard to do. First of all, CEOs often don’t understand the basics. To do it, you have to make some pretty radical changes in the way you do business. All your internal employees will object to that. Let’s say you’re a CEO and you have a staff of eight people, and one day you say, “Okay, we’re going to stop doing everything at high speed, in big batches, we’re going to go to single piece flow. We’re going to have a 15-20 percent annual productivity increase, we’re going to free up a lot of space, we’re going to reduce our inventories, and we’re going to dramatically shorten our flow time and increase our market share.”
This may sound nice, but it is very scary and threatening for your staff. For example, they keep stock for a reason, because without stock they cannot serve the customer well. They have been doing this kind of thing for years in a certain way and they are convinced that there is no other way. They believe that if they don’t stock, there will be a big problem, so they are opposed to the idea. They tell the CEO who works in manufacturing that it can’t happen. The sales and marketing person doesn’t even want to hear the word inventory reduction. In reality, he is pushing for more inventory. The finance person keeps a standard cost accounting system and shudders at the thought of not making a big batch every month to fill the empty hours.
Even when you show them an example, they don’t believe it. Let’s say you are the CEO of a company and you say to the manufacturing people, “You know, I was in Art’s factory and I saw them switch to another product in a minute with the same machines we have. I want you to do the same.” They will think you are crazy, but then they will tell you all the reasons why they cannot do it. Even if you are the CEO, you cannot win the argument. Because now you are telling the people who are doing the work to do what they believe is impossible after 20 years of experience. Your only option is to show them how to do it. Unfortunately, often CEOs don’t know how to do that. So they give up and the setting is still two hours.
Imai: Many companies say they are lean, but they are not. That’s what General Motors people say and believe, but I don’t think they are lean, they are thick!
Byrne: I believe that when General Motors and Chrysler restructured, they only restructured financially, they didn’t change production. They kept the good parts, they got rid of the bad parts. But they didn’t do much for the good parts in the sense of changing the way work was done, to eliminate waste. The thinking and the focus was along the lines of “what is the cost of labor?” “can I negotiate with the union for a two-tier wage system?” “can I move the business overseas?” and so on. The company has a new CEO but the management is the same in many ways. The same way of thinking and the same way of looking. So I don’t understand how suddenly a company can become great.
Perhaps the biggest challenge for an organization that wants to move to lean is the lack of objective criteria for what to measure in order to increase the chances of getting better in the future. You cannot manage the past, it has already passed. Manage what you do better in the next quarter and next year. If you compare what Toyota does with what General Motors does, this is very clear. Toyota works for waste elimination and a kaizen culture, whereas General Motors is more focused on financial engineering and pleasing the unions. The other reason is the dedication of the top management. For example, has the CEO of General Motors ever practiced kaizen? For a company to be successful and more profitable, lean must be the number one priority for shareholders. Top management that does not see this enormous opportunity to make the company more profitable is failing.
Imai: The twenty-first anniversary of the joint venture between Toyota and GM was held at the NUMMI plant in California. A senior GM executive was invited to the production area after the party, but politely declined on the grounds that he did not have time. And this was after the plant had achieved the highest reputation of any GM plant.
Byrne: I have a theory: Most top managers become dense as they move up the organizational ladder. And the reason for that is that organizations are pyramidal. The value-added work is at the bottom, and so when you take someone out of the value-added work, you’re less aware of what’s going on, because you’re distracted from what’s actually being done. Then the people below you try to protect themselves from the bad news. So bad news doesn’t usually go up, only good news comes up. And the CEO says “everything is fine”.
I was intrigued by Byrne’s comment that companies lack objective criteria for being lean and asked him to name a few that he uses as a CEO. He explained that they would undoubtedly be different in other industries, such as banking or healthcare, but the criteria he uses at Wiremold should apply to every manufacturing company.
Legal reporting obligations aside, the company was essentially managed according to five lean metrics. These were all forward-looking measurements, aimed at improving where the company was going, as opposed to the traditional approach of wasting time reviewing where the company had been. Most companies “manage results”. Thus, they spend a lot of time looking backwards. Wiremold never wasted time with a monthly financial review. The business was divided into six value streams, each representing a product family and managed by a value stream manager.
Byrne and his staff met weekly with value stream managers. They each reported on their progress in five key measurement groups. Discussion centered around issues that were directly relevant to the tasks to be done; talking about past issues was considered a waste of time. Indeed, there was a large digital clock in the meeting room and each presentation was limited to 10 minutes.
The five measurement criteria they use are:
- Customer service percentage. This was a percentage based on the time between when an order was received and when it was delivered to the customer. For stock orders, the benchmark was 24 hours. For customer orders, it was based on the time agreed by the customer at the time of the order. If a material passed through the central warehouse, the value stream manager was responsible for customer service until it was delivered to the customer.
- Productivity. Although Byrne prefers to use units per worker hour, this was not used at Wiremold because of the large product mix, but instead sales per employee. The target was ambitious; each value stream manager was expected to improve by 20 percent per year.
- Quality. Defects were identified throughout the company. The target was again difficult: a 50 percent reduction in the number of defects per year. The strategy was to always work on the top five defects. Once one of them was solved, the company moved down the list. Byrne pointed out that companies often fail to achieve 50 percent, but in quality performance, and with a reduction of about 40 percent per year, they beat companies with more mediocre targets by far.
- Stock turnover. Increasing stock turnover from 3 to 20 is a long-term goal. Many managers initially believed this was impossible. As mentioned earlier, during Byrne’s tenure the figure was 18.
- 5S and visual inspection. A 5S inspection team visited all areas, including offices, every two weeks and communicated the results to all employees. Winning teams received a banner to celebrate and free coffee and donuts for a week. Visual control was constant in the production area and quality and productivity charts were displayed in visible places.
Byrne summarized his comments as follows:
Byrne: We had five metrics. If that’s all you use as lean metrics and that’s all you’re doing is always focusing on them, improving them and achieving these stretch goals, you have to get better. If someone says, “but five is a lot to measure, I want to measure less,” I would suggest they focus on two metrics, customer service percentage and inventory turnover. If these are going up in the same direction, everything is going well. Your productivity has to be better, your quality has to be better, cleanliness and other things have to be better so that both of these things improve at the same time.
Imai: How would you apply these criteria to a major manufacturer like General Motors?
Byrne: I wouldn’t change these measurements too much. In the case of General Motors, company productivity can be measured much better by the number of cars per worker hour than we do at Wiremold. So the same measurement should be applied to General Motors. There is no difference in the measurement. If the company produces something, not much change is needed, unless it is a life insurance company or a hospital. In those cases, the metrics may change a little bit. The most important thing for General Motors is for the company to convince the union to work together. Management and the union are so far apart, which is often very difficult to do, but it’s interesting, Wiremold had a union, and I did the real kaizen work with Shingijutsu at Jacob’s Engine Brake. They had the United Auto Workers (UAW) union. We said, “Look, we’re going to treat the union like people; we’re not going to treat them like a union.” The automotive managers treat union workers as if they are a different creature. I think this is a big mistake. Both sides are wrong. The union was very tough here, but the management was weak. So you have to treat the union like people and make the whole company understand that everybody is going to benefit from this. That really helps. These five metrics can be applied to any manufacturing company. If you really focus on them and set ambitious goals, you will get better.
Art Byrne’s repeated successes with kaizen in different companies have confirmed my belief that kaizen is a reliable system for improving the overall performance and value of a company when top management adopts the right approach. Art’s experience suggests some baselines for CEOs to follow a similar path. To summarize them, to achieve success with kaizen, a CEO should
- Define the lean company strategy.
- Be a practical leader and a lean “bigot”.
- Make it clear that all employees must adopt a kaizen culture.
- Be quick and decisive to activate the urge to heal immediately.
- Go to Gemba and show employees at all levels what to do.
- Adopt measurements based on stretch goals, even if they are not achievable in the short term.
- Be ready to change everything the company has done in the past, even if there is a certain resistance and many reasons can be given for why this will not work “in our business”. Focus on simple, objective criteria that define a path to better performance, not on measurement systems that analyze the past too finely. Acquire the best available lean expertise and continuously learn from others. Above all, CEOs must make companies better at what they do best. Value is added at Gemba, not in the CEO’s office. Anyone who does not actively try to improve the way they add value is a waste.
Ultimately, we can only hope that more leaders will be inspired to act accordingly.
