iSixSigma

Capturing Financial Benefits from Lean Manufacturing

Once upon a time there was a company who decided to implement Lean manufacturing. They hired a large prestigious consulting firm who created the grand strategy and trained everyone in lean thinking. Significant operating improvements were identified. It was all documented in a report two inches thick. Teams were launched, a lot of activity took place and everyone was feeling good about the new initiative. Unfortunately, however, while management appreciated the effort, they were underwhelmed and disenchanted with the teams’ bottom-line results. Does this sound like your organization? If it does, you are not alone.

Lean postmortems reveal a familiar root cause for this situation: Organizations are quick to adopt the religion and methodologies of Lean manufacturing, Six Sigma and other improvement programs. They also have great intentions as they drive the organization to think about value-added, customer focus and the need to quantify results. What often gets lost in the excitement of deploying Lean manufacturing is the discipline involved in tying activities to clearly defined and auditable financial results. A good example of this is the engineer who justifies a major capital investment on a cycle time reduction or labor savings in an area where there is already excess capacity. It’s just not real from a bottom-line perspective.

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There are several lessons that can be learned about achieving breakthrough results. These lessons work well and help organizations translate transparent intentions into visible financial results.

Lesson 1: Pick Your Battles Carefully

Build a direct link between the Lean strategy and the daily improvements being pursued by the teams. Make sure that projects pass the litmus test up front in terms of real financial benefits. Finally, do not try to solve “world hunger” – use Pareto analysis and chunk off the opportunities with the highest bang for the buck. Keep these initiatives short and focused.

Lesson 2: Hire Your Accountants

Manufacturing often treats these people as public enemy #1 but they understand the bottom-line factors such as revenue dollars, labor rates, gross margins, fixed versus variable costs, inventory costs, variances, general and administrative expenses, and the like. These measures become critical in translating process improvements into bottom-line results. Teams should be able to relate operational improvements to these profit and loss, and balance sheet criteria. The financial organization can add a lot of value in terms of validating benefits.

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Lesson 3: Define Project Selection Criteria

Experience shows that documenting and reinforcing financial guidelines early on in the Lean manufacturing engagement will help standardize expectations about what is or is not a good improvement project. This practice will also help to prioritize actions and how to best use limited resources.

Lesson 4: Use Stage/Phase/Gate Reviews

Every project should have a well-defined implementation plan with timetables, responsibilities, milestones and deliverables. The worse thing an organization can do is to allow teams to flounder on for months. At a minimum, weekly meetings with a steering committee should take place. Make teams accountable for execution and results. If they are not getting it, change the approach. Remember, continuous improvement is not really continuous; it is a series of discrete improvements with well-defined beginning and end points.

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Lesson 5: Showcase Results And People

Businesses should create a visible company dashboard or storyboard that outlines the overall Lean strategy, current projects, results-to-date, and recognition for top performers. This builds positive momentum, fosters some healthy competition, and demonstrates that Lean is about generating results for everyone – the company, its customers, employees, suppliers and other stake-holders. The use of visuals also drives home the fact that Lean manufacturing is the acceptable standard of conduct. Change is not in addition to your normal job, it is your job and a condition for employment for everyone. Either we improve or our competition does it for us. You are either part of the solution or part of the problem.

For many organizations, Lean manufacturing has become a lost opportunity. Management believes in it, their customers are demanding that they do it, but they just can not figure out how to turn actions into cash flow. Management is also questioning why we should continue if we cannot see any value or financial impact. It is not the end of the world when organizations have to go back to the drawing board and reconfigure their approach. In fact, the companies who are best at Lean manufacturing have done this several times. A trip back to the drawing board is a good thing. Stop what is not working. Return armed with lessons learned and fortified with a renewed perspective from your financial organization. This approach always delivers the real bottom-line results that senior management demands and should expect.

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Comments 3

  1. Gaurish Kerkar

    Thank you Terence for a nice insightful article

    Q -> Does TOC add value in the 1st Lesson?

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  2. Tony Heath

    What a clear and on point article. I work in healthcare service world and this article gives me new ideas. I’ve done some excellent projects in which I have failed to document savings. Having realized that this is my fault, I need specific help like this.

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