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Role of Lean Thinking in Private Equity

by Pete Abilla on June 5, 2010

When a Private Equity firm considers buying a company, the role Lean Thinking plays depends on the stage of the buyout deal. But, Lean Thinking is appropriately placed at the following steps:

  1. Lean and Pre Acquisition Due Diligence
  2. Lean and Post Acquisition Short Term Improvements
  3. Lean and Enterprise Broad Organizational Improvements

Due Diligence

The main questions to consider at this stage are the following 1:

  1. What are the opportunities for improvement in the company?
  2. What degree of waste is present in the company?
  3. If acquired, how much waste could be eliminated and by when?

Post-Acquisition 100 day Plans

Once the company has been acquired, it is imperative that the Private Equity firm and the current management create a short-term and long-term strategy to bring the company back to health – corporate renewal is the ultimate goal.  But, shorter term goals might involve cash flow opportunities 2.

Enterprise Improvements

Once the short-term bleeding has been stopped, then a broader and more enterprise approach to implementing Lean across the organization is appropriate.  It is at this stage where a full focus on the front-lines including training and coaching on the A3 method and how to apply Plan-Do-Check-Act at the lowest levels of the company makes sense.

  1. The pre-acquisition due diligence engagements range from a limited scope that addressed one or two issues to a comprehensive assessment of operations, margins, personnel, and strategic direction at $1 billion plus companies with a number of worldwide locations. Consultants can swiftly exploit and integrate data from the company’s ERP/MRP systems, key performance indicators (KPIs), and quality systems to understand a company’s fundamental problems and opportunities. Due diligence reports address the investment thesis, identify cost-saving opportunities and potential risks, and are often relied on in providing financing. ↩
  2. Post-acquisition assessments typically arise when a sponsor wants a third-party to review a portfolio company’s performance, or a specific, troubling aspect of the company’s operations such as the urgent need to generate cash now, deleverage, or downsize while maintaining or improving margins.  An outside assessment is especially valuable in times like these when there’s a lack of transparency or when there are problems in a company’s corporate or IT systems that are causing scheduling and delivery problems and excessive or inaccurate inventory, among other issues. Lean based assessments are also often used in developing a company’s strategic plan to achieve enterprise improvement targets. Lean methods are based on a structured approach which is based on Lean Thinking, Lean Enterprise, or Lean Manufacturing methods of identifying and eliminating wastes ↩

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