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When Lean Cuts Too Deep

Posted By Jeff Moad, November 10, 2011 at 3:11 PM, in Category: The Adaptive Organization

Do manufacturers pursuing lean and other continuous improvement programs run the risk of cutting too deep, of removing not just fat, but also the muscle and bone needed for a healthy organization?

The answer is yes if you believe cereal and snack food maker Kellogg Co. Last week, $12.4 billion Kellogg said it is investing some $70 million in the second half of its fiscal 2010 in order to rebuild its sputtering manufacturing and supply chain processes. In a conference call with investors following the release of its third-quarter earnings, Kellogg President and CEO John A. Bryant blamed the unintended consequences of the company's lean initiative--dubbed K-LEAN--for production, supply chain, and quality problems at Kellogg.

"We did cut too many people from our facilities as part of the U.S. implementation of K-LEAN," Bryant told investors. "As a result of that, we have added more people into the plants this year and are engaging that workforce more effectively going forward...Certainly I think K-LEAN cut too deep in in the U.S. plant network, and we've reversed direction on that and added people back into those facilities," Bryant added.

Bryant also said problems had resulted from Kellogg pushing asset utillization improvement initiatives too hard.

Kellogg's wake-up call came this summer when an inspection by the Food and Drug Administration revealed traces of listeria bacteria at the company's Augusta, GA, plant.

"We sat back and looked at Augusta, got to the root causes within the Augusta facility and took the lessons learned, fixed Augusta, and took it across our broader network," Bryant said. "That resulted in us identifying further opportunities for us to invest in our supply chain. So I think what you're seeing here is our desire to make the right investments to create the supply chain of the future."

The Augusta problems followed recalls of some Kellogg products and reported shortages of its Eggo products last year.

Bryant said the new investments will pay for plant layout improvements, adding staff, expanding training, changing suppliers, and increasing internal testing and auditing.

In the conference call with investors, Bryant wouldn't rule out the need for additional supply chain improvement investments in 2012. The $70 million the company is investing in the third and fourth quarters of 2011 is in addition to $30 million invested in the first half of the year, bringing Kellogg's total cost for reversing the problems attributed to K-LEAN to about $100 million.

The supply chain improvement costs, on top of higher commodity costs, cut Kellogg's third quarter net income by 14% compared to the year-earlier quarter. The company's 80-cent-per-share earnings for the quarter were below the 89 cents that analysts had expected.

Not surprisingly, Wall Street was not pleased. Kellogg shares fell by 7.8% the day the earnings were announced.

"It seems like the more rocks that are turned over, there's more ugly stuff underneath," complained one financial analyst on the call. "And it's amazing that a company like Kellogg with its reputation is actually going through this."

What's your experience? Have you seen lean programs cut too deep?

Written by Jeff Moad

Jeff Moad is Research Director and Executive Editor with the Manufacturing Leadership Community. He also directs the Manufacturing Leadership Awards Program. Follow our LinkedIn Groups: Manufacturing Leadership Council and Manufacturing Leadership Summit


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