CEO Larry Culp was brought in to turn the industrial conglomerate around. It isn’t easy to change culture at a giant organization, but Culp is trying. And lean management techniques are, perhaps, the most important tool at his disposal.
Culp hosted a “Lean with Larry” event Wednesday to review progress on implementing lean techniques at GE (ticker: GE). Spending an hour and a half on the subject sounds like an engineer’s delight, but financial analysts, and the rest of us, might have to Google terms such as “Gemba” and “try-storming.”
Ultimately, Culp’s goal is to convince Wall Street analysts, investors, and GE employees, that embracing a culture of lean management will benefit the bottom line for years to come.
Lean management’s roots go all the way back to post-World War II Japan, when Edwards Deming introduced ideas regarding continuous improvement as the country rebuilt after the war.
(TM) often gets credit for lean manufacturing excellence. Toyota, of course, was the world’s most valuable car companies—and one of the world’s most valuable manufacturing enterprises—until
(TSLA) market value eclipsed it this year.
That’s why lean is peppered with Japanese-sounding words. “Gemba” is the term for where the value is created. Lean managers go to the Gemba or undertake Gemba walks to understand processes. “Kaizen” essentially means change for the good. It’s the word for continuous improvement in lean circles.
Non-Japanese terms, including waterfall project management and try-storming, showed up Wednesday as well. Try-storming is brainstorming, except ideas are implemented rather than simply being kicked around.
Waterfall project management yielded the day’s most concrete example of business improvement. The idea has to do with changing from a batch-process paradigm to a single-point flow.
“Think about fast food,” said a presenter. She went on to compare the process of making a batch of egg McMuffins at
(MCD) and the process of making a sandwich at Subway. Subway’s process produces more customization and reduces the number of products affected by a single error.
GE has adopted that type of process in its digital-grid business, improving margins substantially over the past year. The business provides software to help customers manage electricity production and usage.
For GE investors, the interest in lean management might bring to mind the so-called six-sigma initiatives backed by former CEO Jack Welch. Six-sigma is another quality system designed to drive error rates to “six-sigma levels.” That’s getting things right 99.9997% of the time.
Culp says six-sigma tools are similar to many lean techniques, but that tool are only half of the story. Having expertise in six-sigmal “almost became a gating factor or litmus test for advancement in the company,” added Culp. “Best of intentions, but we [today] aren’t committed to training as a goal.”
He wants to change the culture and hopes his commitment to lean management will do just that.
There’s a long way to go. GE stock is down about 43% year to date, a far worse performance than those of the
Dow Jones Industrial Average.
The decline has nothing to do with lean management. Covid-19 is the main reason. Commercial aviation is GE’s largest, most profitable business and the pandemic has decimated demand for commercial air travel. The stocks of aerospace suppliers that Barron’s tracks, including GE, are down about 40% year to date, on average.
Investors will hear more about how the pandemic is affecting GE when the company reports its third-quarter earnings Oct. 28. Wall Street expects a loss of 4 cents a share.
Free cash flow, however, will be a bigger deal for investors. GE burned through about $1.7 billion in the second quarter. Analysts expect the figure to come in at about $140 million for the third quarter.
Write to Al Root at [email protected]