MASS MANUFACTURING ON A DIET by World Bank Russia

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MASS MANUFACTURING ON A DIET – INTRODUCING LEAN PRODUCTION IN RUSSIA

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CARL WATT Poor management of quality and of production in general is one of the main reasons why businesses in developing countries have difficulty linking into global value chains. With this in mind, the Private Enterprise Partnership for Europe and Central Asia (PEP-ECA) has chosen to focus many linkage-supplier development efforts specifically on developing knowledge in the market of Lean Production (LP), a modern management philosophy and set of methods for low-cost factory improvement. LP helps suppliers clean up their production areas, cut back on waste of time and materials, and become an agile organization responsive to customer demands. For example, some of our Russian clients have seen work in process inventories reduced by 400 percent, and a 500-percent decrease in the time required to respond to customer orders. This SmartLesson will review the conditions and implementation strategy that have made it possible to introduce and demonstrate advanced Lean Production methods in Russia in a short time and for relatively little investment. Why Lean Production? Lean Production, also known as the Toyota Production System and “just-in-time” manufacturing, was developed by the Japanese car maker in the years after the Second World War when working capital was scarce. It uses methods such as reducing equipment downtime and rearranging work area floor space to minimize redundant movements and eliminate overproduction. A good recent example is the global office furniture company Steelcase, which has adopted Lean Production as part of its overall sustainability efforts. The company saw efficiency improvements of 40 percent, a reduction of production time from 8 days to 3.5 hours, and a decrease in finished goods floor space of 85 percent. At its heart, Lean Production focuses on educating and empowering worker teams at all levels to make improvements to eliminate waste of all kinds. 1 A process that does not waste time or resources has to be done right every time, and Lean Production is therefore a quality improvement tool as well as a cost reduction method. Waste reduction also has a positive effect on environmental impacts as well. Because lean methods focus on low-cost, incremental, and continuous improvements, they are very appropriate for industries in developing countries. Also, many global customers require that suppliers start to implement lean methods to ensure the lowest possible production costs. 2 The main barrier to adopting Lean Production is lack of experience with the process among local companies in developing countries. This is where IFC can intervene. Lean Production fits into both the Value Addition to Firms (VA2F) and Sustainability business lines, as it not only improves the overall competitiveness of manufacturing enterprises but also increases the efficiency of their use of resources. Launching Lean Production in Russia With automotive production booming in Russia, the ability of IFC to offer local supplier development became important to differentiate the IFC investment offering. In the course of a financing program for Ford Motor Company’s car factory in St. Petersburg, Russia, IFC attracted a donation from the U.S. Government for work with potential Russian suppliers to Ford. The “Automotive Component Supplier Project” was the IFC Private Enterprise Partnership’s first foray into Lean Production. IFC helped Russian automotive supplier clients come out of 70 years of isolation to meet their commitments to Ford Motor Company for low-cost, high-quality production. As a result of the project, three out of four client suppliers were able to sign production contracts with Ford. In 2005, IFC received a donation from the Government of Austria for a project called “Volga Automotive Project” to demonstrate quality and efficiency improvements in cooperation with Zavolzhski Motor Factory (ZMZ), located on the 1 2

See PEP-ECA film “Factory Kaizen” which shows the process of working with a team of workers. For an explanation of Lean Production, see “Lean Thinking” by Womack and Jones, or check their Web site: www.lean.org

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Volga River near Nizhny Novgorod. ZMZ is a unit of the large Severstal Avto Group of companies, and it also contributed significantly to the project for consulting services. PEP-ECA decided to work with a large company for demonstration projects on Lean Production for the following reasons: • • • •

Working with a prominent group like Severstal helps to ensure the nationwide impact of a demonstration project, because the training and experience flow down to the company’s many local suppliers. The experience of such a prestigious company has more national impact than improvements at a small firm. Severstal/ZMZ is in good financial condition and is able to provide funding for improvements suggested by the project. Many small firms in Russia are unable to make even small investments, so the demonstration effect is not strong. This was a lesson learned in the Ford project. Severstal Avto is very much a potential client of IFC’s investment side.

Together with the project’s co-funding partner, the Severstal Avto group, we selected three ZMZ supplier companies for Lean Production demonstration work. This lesson focuses on our experience with the Cheboksari Aggregate Factory (ChAZ). ChAZ is a traditional mass production factory producing cast metal products for the automotive and agricultural sectors. It has more than 8,000 employees and is located in the Chuvash Republic of Russia (Chuvashia)–one of the “frontier regions” of Russia where incomes are well below the national average. ChAZ needs to improve its production management in order to meet growing competition in its markets. From many aspects of Lean Production, we chose to focus on “Kanban”⎯a production system used to reduce work-inprocess (WIP) inventory without investing in expensive computer systems. Accumulation of large amounts of inventory between production steps is one of the biggest wastes of traditional mass production and is a typical problem in former Soviet countries. This made Kanban perfectly suited for the LP demonstration project. Go Local! The project found a local partner company dedicated to the lean production concept and hungry to demonstrate its abilities. The Kioda company is based in Moscow and has about 10 employees. No one is older than 40 in the firm. With modest funding (ChAZ partly contributed to it), we still managed to have at least 30 consultant days on site, which includes all the consultant expenses. Choosing to work with the local consultants, we effectively helped to open a new market segment for Lean Production in Russia. It was very important for us that these consultants would not go their separate ways after the project, but are already a viable commercial entity providing sustainable impact. Having work done for an IFC client, in turn, had a very important positive impact for the local consultant. The company gained new experience, since it had not previously worked in the automotive or foundry industries. Such a contract for in-depth work was simply not available to Kioda without the Do not assume this is easy. Russian Lean subsidy of the IFC project. ChAZ management, as well as Production Consultant Andrei Gavrichenkov management in many other large manufacturing companies in (Kioda), working at a factory office with old Russia, had no clear idea of what Lean Production is, how to traditions. implement it, or what it might do for the company. It was only funding visiting local consultants to give lectures for one or two days. ChAZ certainly did not believe that local consultants had anything substantial to offer. So in addition, the consulting company gained credibility through working with IFC. We have seen our partner consultants from the Ford project using examples from the project in their training and marketing materials for years. But the most important aspect of using the local consultants was that the project delivered. One of the project’s other clients has spent two years with Japanese consultants on site and still has not fully implemented a Kanban supply

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system 3 . While the Japanese consultants were probably technically more experienced and knowledgeable, the local consultants better understand the unique situation in Russia and are better able to explain to management the changes needed. Cleaning Up the “Mess-Production” Kanban is one of the more difficult lean tools to implement, because any problems arising in the process immediately impact the rate of production. Thus, we needed to choose a simple product in a small and well-defined production process for demonstration and pilot purposes. The product chosen was a cast spacer for automotive clutch systems (see picture 1). Using this product for the demonstration reduced the factory risk, since it is a minor part of the overall factory production, and if a few hours of production are lost due to implementation problems, there is not a large financial impact on the client. Production of this item is also localized in a few areas and does not mix with other products. That helps keep the story simpler.

Picture 1. This clutch spacer was the object of the demonstration of Kanban at ChAZ.

With the availability of management support and consultant time, the team was able to follow the standard route to Kanban very rapidly. First, we identified one area of inventory accumulation. This was a permanent pile of 4,200 castings at the start of the machining operations line, and is shown in pictures 2 and 3.

The main reason for such a pile is that each shop is getting production orders for the month, but they are not coordinating how they fill the orders. Often, the pile of 4,200 did not contain any of the castings needed for the current customer order. The spacer machining line often used to have to process the spacers that were sitting in WIP inventory while waiting for the right spacers for a customer order. This is typical in mass production. Pictures 2 and 3: Some 4,200 castings that were waiting for processing before the “Kanban” implementation reduced it to 1,000 units.

Today, this no longer happens. The team created a simple working algorithm (a Kanban system) which allows the final machining shop to create orders itself from the upstream shops, bypassing the centralized system. Long discussions and negotiations were held with the upstream casting shop, which likes to make big batches of castings. Finally they agreed that they would make castings only according to the orders they get from the machining shop. In the end they

To learn more about Kanban, refer to “Kanban for the Shopfloor”; visit www.productivitypress.com. Additional information on Lean Production can be accessed at www.leanenterprise.org

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had to admit that using the new “just in time” system was easier than the old way of dealing with constant complaints from the machining shop. In two weeks the ChAZ team had the system up and running. Over 3,000 castings have been eliminated from the permanent inventory of the factory–an inventory reduction of 75 percent. (The long-term goal is to reduce the excess to zero.) So, inventory levels are down at the ChAZ warehouse and the customer can lower inventory levels, because now he knows that the right spacers will be available when needed. Less inventory also has tremendous impact on the environment, for less inventory means that less material is needed for production, less metal is to be melted, and less energy is used. Environmental savings go right to the bottom line. On-time delivery is also a big marketing plus, and ChAZ will likely see increased orders, now that its competitiveness has been improved. Finally, the Master Scheduler at the plant has pointed out that working with less inventory is also easier in addition to being more profitable. The Bigger Picture While the project affected the work of only about 30 people out of ChAZ’s total workforce of 8,000, the company estimates that the total benefits of the changes being implemented will be around US$40,000 a year. This is a pretty good return on the US$25,000 investment. But more importantly, it provided a vivid example of the Lean Production potential to the rest of ChAZ and to other factories. The demonstration has not been lost on ChAZ management, and during the recent IFC appraisal visit, the director of production showed that he is rapidly trying to use the same methods to reduce inventory in a very large production area. Finally, IFC’s access to ChAZ factory management allowed us to learn that there was interest in financing for expansion. This led to contacts being established with IFC’s investment side. Is There a Future for Lean Production in IFC’s Advisory Operations? In our developing markets, it is common to find manufacturers with sloppy work areas and piles of inventory in the shops. Any of these companies can benefit from Lean Production. Lean can also be applied to large companies or SMEs 4 IFC advisory services on Lean Production can become “just-in-time” assistance to assist in their struggle to become more agile, “green,” and competitive. PEP-ECA’s projects have demonstrated that Lean Production has significant impact on the client companies. Our next challenge is to ensure that the demonstration projects have national impact by including additional activities directly into the design of future operations. These components should specifically aim to spread the work we do to a wider number of firms. Activities can vary, from “on-site” seminars, to building capacity of local consultants that will go on to work with a wider range of firms, to creating and disseminating training films.

About the Author Carl Watt is Operations Manager, Industrial Supply Chain Development, Private Enterprise Partnership (CEUEP). Prior to joining IFC, Carl Watt worked for 16 years for Rockwell International Corporation, a U.S.-based multinational. In the 1990s he managed Rockwell’s work in Russia on the cockpit for the IL-96M/T passenger jet. Part of that work included starting production of electronics in Russia. From 1999 to 2001 he managed the implementation of Lean Production at Rockwell’s Collins Air Transport division. He holds a certificate from Rockwell as a “lean master.” In 2002 he joined IFC to manage the Russian Automotive Component Supplier Development Project, and later managed the Volga Automotive Project. Approving Managers: Tania Lozansky, General Manager, and Ivan Ivanov, Senior Operations Officer, CEUEP. DISCLAIMER IFC SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/smartlessons or contact the program at smartlessons@ifc.org. 4

See: Lean Manufacturing for the Small Shop, by Gary Conner published by www.sme.org

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