The Recipe for Slaughtering Industry Profitability...just add Lean Six Sigma!

In an organization, it does good things...but across a whole
industry, the bottom line may end being up a bit different...
In one of my reflective moods during another 14 hour flight, I turned my attention to something that has bothered me for a while but that I have not really thought about in depth until 10,000m over the Pacific.

For a long time, I have understood that Lean Six Sigma doesn't add value so much as reduce costs (let's set aside DFSS for now) - a distinction which at once is obvious, subtle and yet missed by so many people. It is a methodology you use to increase profitability, but in itself, it does not create anything special; rather, it eliminates things that are not special, necessary, useful...or reduces variation that is harmful.

Now, no one can argue that any organization that has introduced a well managed Lean Six Sigma initiative has reaped great benefits: it works, it's reproducible and can be tailored into just about any environment. The benefits are there on the bottom line for everyone to see.

But let's ponder what happens when this goes further. What happens when Lean Six Sigma adoption extends to a few companies...and then to an entire industry? And I turn your attention specifically to the logistics and transport sectors.

Years ago, the Danish conglomerate AP Moller Maersk led the way in applying Lean Six Sigma thinking to the shipping and logistics sectors, starting from the late 1990s and accelerating rapidly from around 2005. The programmes that were initiated truly led the industry and in large part contributed to the company able to maintain an edge in efficiency that lasted for a long time (and in many ways is still maintained). These programmes impacted every aspect of the business: back end processes from accounts payable to bill of lading creation were streamlined, vessel operations were made vastly more efficient and the way containers and ships themselves were made became aligned with what the pioneers in Lean Six Sigma manufacturing were doing. Whilst in most instances Maersk does not jump onto new ideas as a leader, it was a sectoral Lean Six Sigma pioneer and left others in its wake...initially.

But then what always happens...happened. Competitors got wind of things. They quickly started to understand what Maersk was doing, why and how. They commenced poaching many of these Lean Six Sigma trained individuals, who then started their own Lean Six Sigma programmes. Some did well at it, some didn' least not initially. But after a while, the gap closed. Sure, Maersk still has cost leadership in many cases...but it's nowhere near as far ahead as it used to be. And from what I have seen in this sector, it generally becomes harder for you to pull ahead than it is for the competition to catch up.

And guess what? With more transport capacity than cargo, with more logistics players coming onto the scene...WHACK! Rates go down. Everything from shipping cargoes to warehousing to consultancy. Your costs may be lower...but so are everyone elses. Quite often, revenue per activity has gone south and total revenue may have decreased to boot.

What Lean Six Sigma ended up doing is to help cut the total revenue per activity, as costs were removed from the entire sector and the savings then passed on in full - or more - to customers. 

Everyone ended up shooting themselves in the foot. What started off as a commercial advantage for one company then became a smaller advantage for a larger number of firms... and soon became an industry norm: best practice for one company transformed the benchmark standard practice for everyone. And in the absence of other factors, when everyone's costs are lowered but the available business remains the same as new competitors arrive on scene, then the inevitable happened. On average, margins end up roughly where they were (with some luck), but per unit/activity revenue dropped. What has effectively happened is that the industry has taken a closer step to commoditization at a lower base.

Please understand, I am not saying Lean Six Sigma did this exclusively: there were and are many other factors in play here. But what I have seen up close and personally is that Lean Six Sigma went from a competitive edge for some companies into benchmark best practice for the sector...and no one is making more money now because of it.

Food for thought, I pondered as I looked at the dinner menu and detailed annual report data for a company which, when you read through it and the accompanying whining explanations from the business unit CEOs, was living proof of how tough conditions are.

There has to be a solution - and I'll see if I can come up with something in the future.

For now, please take one lesson out of this...that when everyone starts doing the same thing, continuous improvement will soon need to take a back seat to innovation.