8
Value versus waste
LEANING THE ENTERPRISE

The world of business is the world of traditional businesses— in our parlance, the world of Non-Social Enterprises, or NSEs. Much as we’d like it to not be so, you and we recognize that social enterprises, at least at this point in the evolution of economic systems, represent but a rounding error in the sum of all the commerce that is done in the United States, much less globally.

But even when we accept for the moment that not every business is out to change the world for the common good, it’s still fair to ask, Why aren’t more NSEs at least modestly socially responsible? The simple answer is that most businesses think it costs too much.

■ UNLOCKING THE SEVENTH PARADOX
Eliminate waste and focus on value to achieve operational excellence and gain mission leverage.

Traditional businesses are right. The cost of the common good is real. As the traditional wisdom goes, doing the right thing squeezes your bottom line. Do you want to use environmentally safe, fairly traded, humanely produced raw materials? Your cost of goods sold will go up. Pay your employees 114a living wage, provide first-class benefits, work reasonable hours? There goes your labor budget. Produce in America, or closely monitor human-rights policies of offshore manufacturers? Too expensive; say good-bye to shelf space at Wal-Mart. Give money to the community and encourage employee volun-teerism? Less profit to reinvest in growth. Operate from green, built-to-last facilities? More up-front costs.

So yes, most NSEs are inherently averse to socially re sponsible business practices for a “good” reason. This reason is baked right into the DNA of the underlying double-entry accounting method, which demands that every possible cost, especially the cost of doing the right thing, be externalized. Keep the environmental cost off the books by pushing it onto future generations or indigenous peoples. Keep the labor cost down by pushing it onto the families of workers. And so on. You get the picture.

It doesn’t have to be this way, of course. Great minds have been hard at work devising entirely new methods of corporate reporting that give credit for internalizing the cost of social good, thereby incenting companies to do the right thing or, at least, to not do the wrong thing. This point is made by Marjorie Kelly and David Korten:

We take great hope in this kind of thinking. If for no other reason than its own survival, society is finally waking up to the realization that the real cost of business can’t be pushed off of the corporate financial statement forever. When this is finally and inevitably understood, it will be a good day for the planet and all the peoples and species that populate it.

Even within the limitations of the existing rules for financial reporting, there is a considerable and growing realization that the cost of doing the right thing is eventually, and often very quickly, returned to the company with the foresight and vision to do so. This is why, quite independent of the social enterprise movement, more and more NSE companies even without a common good purpose, understand that being good is good for shareholder value. These companies have noticed that ethically produced, environmentally respectable products command better pricing, that humanely treated employees are more effective, that corporate citizenship creates more loyal customers, and that doing the right thing mitigates risk.

Enter Lean

It is against this backdrop that we now turn our attention to the subject of the actual day-to-day operations of a social enterprise and how you can (and must) aspire toward a world-class level of operational excellence. Our inspiration for this topic is the concept of Lean manufacturing, a name that is usually traced to a description of the Toyota Production System in a 1990 book by James P. Womack, Daniel T. Jones, and Daniel Roos, The Machine That Changed the World: The Story of Lean Production, and further developed in Womack and Jones’s landmark 1996 work, Lean Thinking.²

“Lean manufacturing” is a slightly misleading phrase in that it applies equally well to nonmanufacturing environments, 116for example, retail and service businesses. For our purposes, we prefer to simply call the entire idea Lean. It’s one of those words that works as an adjective (as in “That’s a great Lean technique!”), as a verb (“Now that we’re Leaning the shipping and receiving department, we need to start Leaning the offi ce.”), and as a noun (“Wow, this place could really use some Lean!”).

At the heart of Lean thinking is a simple core principle:

Since Womack, Jones, and Roos first popularized the no -tion of Lean, millions of words have been written about it, hundreds of thousands of hours of training conducted, and thousands of miles of production lines transformed. What is beautiful about it as an operating philosophy is that it is simple enough to be understood by every person in every organization and simultaneously complex enough that there is no limit to how Lean an organization can get.

To understand Lean, let’s use the living example of Greyston Bakery. The core of Greyston’s business is making the chocolate fudge brownies that go into Ben & Jerry’s ice cream. An ice cream this amazing can only be made with amazing brownies. To make a brownie worthy of the ice cream it goes into, Greyston purchases the best all-natural ingredients, which include flour, sugar, cocoa, soybean oil, and vanilla. Greyston employees check the ingredients for quality. They meticulously measure each ingredient and in a specified manner, blend all the ingredients just so. Then they deposit a certain amount of the mixture on a tray at a certain temperature, with the same amount on each tray, and bake it at a specific temperature for a specific 117amount of time. They cool the baked product under controlled temperatures and then cut it to a certain size and pack it at certain temperatures.

Everything we just described makes the brownie better, which makes the ice cream better. Ben & Jerry’s is happy to pay for it.

But Greyston needs to do a great deal more along the way in order to make its brownies. The cocoa, flour, sugar, soybean oil, and vanilla need to come into the plant. They need to be received, weighed, counted, and stored. They need to be moved from storage to the bakery floor. They need to be unpacked. Something needs to be done with the bags and cartons these ingredients came in. Once everything is mixed together, the mix needs to find its way to the baking pans. The baking pans need to go into the ovens. They need to come out of the ovens.

None of these activities contribute to a better brownie. Ben & Jerry’s has no reason to want to pay for them. If Greyston could eliminate them altogether without hurting the product or slowing the production line—and with proper Lean attention, it almost could—it would get no complaint whatsoever from the customer.

Other activities happen at Greyston as well. Someone sells. Someone receives the receivables and pays the payables. The furnace filters get changed, and the bathrooms get cleaned. The payroll taxes get filed, and the health plan enrollment forms stay up to date. None of these activities make a better brownie either. But if they don’t get done, no brownies can be made at all.

Through Lean eyes, Greyston’s operations, like those of any enterprise, are easily classified into three groups:

• Value-added activities: Activities that tangibly add “form, fit, or function” for the customer. These are activities for which customers are ready and willing to pay.
• 118 Non-value-added activities: Activities that add nothing to the customer’s experience of the product or service. Customers have no interest in paying for such activities.
• Non-value-added but business-essential activities: Activities in which customers have little interest but that are necessary parts of doing business for you and your competitors.

Remember, anything that does not add value is waste, which must be eliminated. In the Greyston example, as in any Lean company, the non-value-added activities must be attacked and driven out, and the non-value-added but business-essential activities must, at the very least, be minimized.

In most of the core literature about Lean you’ll find variations on a simple list of seven types of waste that were first identified in the Toyota Production System, documented by Womack, Jones, and Roos, and restated by dozens of others since then. These forms of waste and their causes are shown in the following table.

The seven kinds of waste

Over a long enough period, and all other things being equal, eliminating waste is a matter of life and death. The Lean company puts more energy into value-added activities—creating 119better products that lead to happier customers. The Lean company puts less money into non-value-added activities—saving money that can lead to better prices, a better bottom line, growth capital, or all three. The non-Lean company gradually loses ground to the Lean rival and eventually doesn’t make it.

Ultimately, the Lean company will (at least at the level of its operational approach) have the potential to be a much more responsible company than its non-Lean counterpart. True Lean disciples won’t settle for conveniently externalizing waste nor the cost thereof. Lean is about eliminating it altogether. Waste is waste, no matter its form. Wasted raw materials, wasted energy costs, wasted square footage, wasted transport cost, wasted human potential, toxic leftover waste— they all have to go.

If that isn’t a beautiful, socially responsible idea, we don’t know what is.

■ PRACTITIONER’S TIP
Lean is one of the most socially responsible things you can do.

It’s not that Lean, as widely practiced today, evolved from any advanced sense of social responsibility or anything resembling such. No, it came about simply as a means of improving quality, raising margins, reducing capital costs, and enhancing customer satisfaction—altogether, as a tool for gaining and maintaining a competitive advantage and, ultimately, for improving shareholder value. But the law of unintended consequences sometimes turns to the advantage of the common good, and this is such a case. Imagine a world where every business is completely Lean, and you’ll be imagining a world where no excess costs are being dumped off the corporate financial statement onto the planet, people, and community.

Lean will contribute to any company’s well-being. For your social enterprise, we would argue that it is even more essential. You have a high calling. At the level of the marketplace in which your enterprise operates, Lean will help you compete. And unlike your competitors, Lean or not, you cannot even consider the option of externalizing the true costs of doing business, at least if you intend to remain true to your common good commitment.

As the leader of a social enterprise, you are shooting for a different value proposition altogether. You must deliver value for your customers or else they will go somewhere else. Anything that’s not adding to that value is waste, from a customer perspective, and must be eliminated. But you are simultaneously delivering value to the common good as a whole, and anything that’s not creating that kind of value is also waste and must also be eliminated. Complicating matters further, waste of the first kind might actually be value of the second kind and vice versa.

■ PRACTITIONER’S TIP
For social enterprise, anything that detracts from mission is also waste.

You’d better be able to sort out what’s waste (and what’s not) and drive it from the system. You’ve got your work cut out for you, so you’ll need some tools.

The Lean Tool Belt

The actual set of Lean tools that will help you drive both business waste and mission waste from your enterprise has yet to be invented. Your enterprise must invent them for itself because your enterprise is different from any other. Any Lean technique that is not invented inside your enterprise will not stick.

Anything that we or anyone else might offer is a set of approximations. As Rebuild’s mentor in Lean thinking over the last several years has been quick to point out, Lean is a very specific philosophy that is carried out by a very generalized set of tools that each company must customize for itself. Some tools focus on increasing speed, others on reducing cost, and others on improving quality, while all of them seek out and eliminate waste.

At Rebuild, the working definition of Lean (lifted from so many different sources that no one remembers which ones) is “Getting the right things to the right place at the right time in the right quantity, while minimizing waste and being flexible and open to change.”

We must warn you that Lean will succeed only with a complete top-down commitment from the leader of the enterprise. It is not a shortcut, a trend, or a silver bullet. For a social enterprise, it represents a total commitment to not externalizing waste and to eliminating it altogether. It means placing customer value and mission value at the center of everything that the enterprise does. And it means constant, relentless change that will energize some people and scare the daylights out of others. (See chapter 6; hire the kind it will energize!)

■ PRACTITIONER’S TIP
Lean is simple. But first, it’s complicated.

To simplify the complicated part of Lean, go out and spend a few dollars on some of the resources that are readily available. Lean is a workbook lover’s, diagram-and-flow-chart junkie’s dream. Google “Lean manufacturing” to find dozens of quick and easy hands-on tools to help you turn our generalizations into tools you can work with.

A handful of Lean tools exist that any social enterprise will benefit from, whether manufacturing, retail, or service businesses. (We’ll use the language of manufacturing companies, since that’s what Rebuild and Greyston are, but the concepts are universal.) They are

• Value-stream mapping: Diagramming the value-added and non-value-added flow of all that you do
• Kaizen: Gaining wisdom from change
• 5S: Removing the clutter under which waste hides, by sorting, stabilizing, shining, standardizing, and sustaining

Learn to use these Lean tools and you’ll make great strides.

Value-Stream Mapping

Value-stream mapping is the core Lean process that precedes all the others. For a traditional business, it is a matter of identifying, measuring, diagramming, and flowing all of the tasks, both value-added and non-value-added, that bring the product all the way from raw material to the customer’s hands. For a social enterprise, value-stream mapping also involves every activity that adds to or detracts from mission delivery. The process uses a simple but specific language and set of symbols to represent various aspects of the value stream. It places equal emphasis on identifying where value is created and identifying where it is not. It starts with a description of how things are now (often called the “current-state map”) and then progresses to a description of how things should be in a world where waste has been eliminated (the “future-state map”). The gaps between current and future state become the focus of a continuous series of Lean projects.

Value-stream mapping can be done at the macro level of an organization as a whole or at the micro level of a division, 123a department, a product line, or even a single manufacturing line. Consider using it at a micro level first to produce immediate gains that will create belief and buy-in. Then roll it back to a macro view to identify priority targets. And then start knocking off the priority targets at a midview level for the long haul.

Some key concepts will come up time and time again in value-stream mapping. They are stated here from the perspective of a manufacturing environment but, with minimal modification, apply equally well to service and retail enterprises as well:

• Avoiding batch and queue production (which inevitably creates overproduction) in favor of continuous flow
• Using cellular thinking, which shortens production lines and sequences and replaces them with discrete, interchangeable, movable production functions
• Reducing changeover time by rethinking design and machine sequence issues
• Taking on the discipline of a FIFO (first in, first out) system to avoid obsolescence, waste, and deterioration

Kaizen

Lean is full of wonderful Japanese words like hejunka, muda, and our personal favorite, poka-yoke. Let’s concentrate on perhaps the most important, Kaizen. This is a combination of two terms: kai, which means “to change,” and zen, “to gain wisdom from doing.” Put them together, and you’re talking about gaining wisdom from change.

Kaizen picks up where your value-stream mapping left off. In the mapping process you identify the gaps between the current state and the idealized future state. Those gaps become grist for the mill of an endless series of incremental, worker-led improvements. What makes this process Kaizen, not just kai, is the emphasis on constancy that is implied by continual wisdom 124gaining. In other words, the process that was just improved is now exposed as something that can and should be improved again, and what is learned in improving it can also be used to improve dozens of other processes.

As the leader of a social enterprise, you may particularly appreciate the democratic, grassroots nature of Kaizen. To carry it off, you must respect your workers’ abilities to spot problems and be willing to release their innate capacity to fix them. Your emphasis is on making small improvements all the time, which will accumulate to become large systemic changes. You must focus on the improvement, not the source. A good idea for a small change recognizes neither rank nor hierarchy. All that matters is the change, the waste it drives out, and the further wisdom it produces.

Lean companies reject the traditional thinking of “if it ain’t broke, don’t fix it” and replace it with the Kaizen philosophy of “do it better, make it better, improve it even if it ain’t broken, because if we don’t, we can’t compete with those who do.”³

Only a company with a healthy culture can produce a bountiful Kaizen harvest. If you are unwilling to be the kind of leader who creates an atmosphere of honesty and humility where everyone can freely admit problems, if your ego precludes a collaborative environment where value is placed not on the source of an idea but only on the idea itself, or if you are not personally passionate about producing value for the customer and the common good, Kaizen cannot succeed.

If you embrace Kaizen, it will help you create the healthy culture you crave.

5S

5S derives from a Japanese concept of housekeeping. The fundamental idea is that waste hides beneath clutter and can be eliminated only when the clutter is removed. 5S is a systematic 125way to remove clutter and keep it from reappearing so that inconspicuous waste becomes exposed to the light of day. Here are the steps you will take in that process, whether for an area, a department, or a whole plant:

1. Sort everything out into three groups: what you will retain, what you will return elsewhere, and what you will get rid of.
2. Stabilize whatever you will retain so that, in the words of your mother, there is a place for everything, and everything in its place.
3. Shine the entire area with a deep clean. You’ll be amazed what it does for attitudes, for your ability to spot mal functioning gear, and for worker safety.
4. Standardize/systematize schedules and systems of regulation to maintain the stable and shiny state you’ve created.
5. Sustain the culture through enforcements, consequences, and reinforcement.

The Lean Social Enterprise

Remember, you’re not just a manufacturing, retailing, or service company in the widget business. You’re in the business of widgets and the common good.

Your mission delivery might be harder to Lean than your core business processes if for no other reason than that your mission is probably more subtle, qualitative, and difficult to measure. It may even be counterintuitive to want to Lean it. For example, many social enterprises (including both Greyston and Rebuild) deliver their missions by employing people. You might worry that Lean will make you so efficient as to require fewer workers, thereby reducing your mission delivery.

That’s a terrible trap you must avoid. Your enterprise cannot succeed without relentlessly focusing on customer value.

■ PRACTITIONER’S TIP
If creating customer value conflicts with mission delivery, improve mission delivery.

Rebuild Resources’ core process is to take in the raw material of recovering people who want to put their lives back together and produce sober people who are capable of holding a job and becoming self-sufficient. For Rebuild, success means that someone gets a job elsewhere and leaves Rebuild. It also means that Rebuild loses a good worker, which wreaks havoc with production.

A few years back, Rebuild reviewed its mission delivery results and noticed that, over the course of time, people were getting stuck and not leaving the Rebuild program long after they were ready because it was too comfortable for them to stay. Rebuild set out to Lean its program side. It set a limit on the program length, which gave people a firm deadline by which they had to find a job. It added all sorts of coaching and job-search training to give people the tools with which to move on. It created an evaluation process that let them see their progress at every step. And most importantly, it created an orientation process at the front end so that they would understand from day one that their main job was to leave.

It was no coincidence that Rebuild was doing all of this at the same time that it was getting deeply into Lean work on the production floor. And a funny thing happened. Despite higher turnover, Rebuild created more value for its customers because the workforce became more vital, engaged, and committed. And it created more value for the community because Rebuild placed many more graduates.

One of the core premises of this book is the need to take social enterprises to scale so that we can collectively create the 127common good on the massive scale these times require. If we cannot get our “little” social enterprises to operate at the highest possible levels of quality, productivity, efficiency, and customer value, they will remain just that: little social enterprises, spread all across the land, tapping little markets of sympathizers and fighting merely to sustain themselves.

That’s not what the authors signed up for. We’re pretty sure it’s not what our readers signed up for either. Scale enterprises require scale thinking, and that means competing with the best traditional businesses in our industries.

■ PRACTITIONER’S TIP
Scale thinking requires a fierce commitment to operational excellence.

We leave this topic with an anecdote from Darell Hammond that sums it all up:

And it was a humbling moment in time to say that the systems and the processes have to be as great and as 128significant as the people, that if anything ever happens to you it can outlive and scale beyond what one person is capable of doing.⁴

Darell Hammond is not a small man. But he is Lean.