People are not often bold enough to give details of improvements they claim came from a lean implementation. When they do, I find lean did nothing to change the trajectory of the business.
Dr. Pepper Snapple Group Case In Point
When they do, it doesn’t take much to unravel their story and find the true underlying causes of successes. One such case is DPS (Dr. Pepper Snapple Group.) Someone offered this story to me as an example of how lean is effective and the implementation improved productivity by $250 million. (See the WSJ article for detail: How Dr Pepper Cuts Costs and Keeps Cutting.) The CFO, Mark Ellen, said their “lean” journey began in 2011.
The $250 million cost savings averages to $62.5 million a year on average (4 years leading up to 2016 statement). That is 2.6% of their 2016 operating expenses.
However, looking at the financials, productivity improvement looks to be opportunity cost, at least in part. Did change-over reductions increase throughput? Not very much given the information in the article and knowing about the partnering agreements that DSP had with Coca-Cola and Pepsi; offsetting operating and distribution costs. Two of the key factors that drive the flavored beverage market are taste and distribution. In addition, nothing is mentioned about the true capacity that DSP had throughout its facilities as it was implementing lean.
The journalist who wrote the piece asked some interesting questions. Those concerning marketing and capital expenditures are threads easily pulled, revealing the clamping down on costs. In fact, the CFO who was interviewed for the article mentioned his Zero-Based budgeting approach. For those who are not familiar with Zero-based Budgeting, each year every department, site, and division must start their budget at zero. Any expenses added must be justified as to its legitimacy.
Confusing Strategy and Productivity Improvement
An initiative improving efficiencies and operating effectiveness can help with a productivity strategy. But making that initiative the focus doesn’t make it a strategy. At best, it is a distraction. An example of a productivity strategy would be to bring capabilities in-house before reacting to outside forces.
Reading the annual reports between 2011 and 2016, the same time period of DSP’s lean implementation, the CEO spells out what strategy DSP intended. In short, get the brands in front of the consumer. Strategy (pg.6 2016 Annual Report) build our brands, Execute with excellence (3 para. of distribution network and 1 para., 2 sentences about RCI).
“The LRB industry is highly competitive and continues to evolve in response to changing consumer preferences. Competition is generally based upon brand recognition, taste, quality, price, availability, selection and convenience.” – 2017 Annual Report, pg. 8
Strategy is what happens regardless of a company’s intentions. Looking at that 2011 – 2018 period, one could argue that the strategy was to window dress a cash-cow, sell it, and cash out. KGM (Kuerig Green Mountain) bought DPS for $18.7bn in 2018. Shareholders from this merger received a special dividend of $103.75 per share. There were 183 million shares outstanding at the end of 2017.
The board of directors approved a steady buy-back of shares over the same period increasing the earnings per share from 2.96 to 5.89. Pre-merger DPS bought back 905k shares in 3rd qtr. 2017.
No Evidence Lean Contributed to Their Success
I see no evidence that lean helped improve DPS in either its intended strategy or its observed strategy. I’m convinced some good things took place under the RCI program but nothing that couldn’t have been accomplished with other, more focused initiatives. Ellen set up a certification program with the goal of every employee earning one by participating in an improvement event.
The problem with this goal is finding enough things to work on that are meaningful to the company and the employees. Once every employee has a certificate, what is the certificate worth? It won’t be recognized outside of the company. Did employees get raises or bonuses for their improvement efforts? The shareholders sure did in 2018.
Employees are capable of making significant improvements but when it is done using a productized solution like lean, the focus on strategy is always lost. In fact, in most cases employees’ efforts do not change the trajectory of the company. For more information on how productized solutions are often misleading: Lean… Just Another Productized Solution
