What It Takes For Lean to Deliver Bottom Line Results
Part Two: Tactical Issues
By David Kwinn
Presuming you can sell the extra product lean can enable you to build, several tactical issues need to be addressed to ensure your financial results improve. For example, a kaizen event may remove WIP from a line, but the event is really not finished until the kaizen team has found a way to make sure that the inventory impact will be properly recognized on the books.
Lower Inventory and WIP: Is inventory off your books as well as off your lines?
As a result of single piece flow, quite a bit of WIP should be eliminated from a production line. The value of this WIP should be calculated as soon as it is eliminated, and it will be a one-time reduction in baseline inventory. The number may not be large for many businesses, and it will only be reflected in the bottom line if the supply chain is synchronized with production so that inventory is only booked into plant inventory close to when it is used in production. A line will look lean with little WIP, but there won’t be any benefit to the bottom line if the same inventory that used to be on the production line is moved to bins and shelves somewhere else in the plant. The way suppliers provide raw material to the lines is a key to seeing savings in the bottom line. With regard to finished goods, a key to seeing benefits is shipping just in time for customer requirements so that warehousing and staging are minimized.
Higher First Pass Yields: Does you cost system reflect the benefits of reduced rework?
Making something right the first time is obviously valuable, as rework is pure waste. Even worse, rework may miss defects that later result in warranty claims when defects end up in the field. To measure the value of increased first pass yields, there needs to be a baseline of what the yields were before lean deployment compared to what they are after. The yields should, over time, correlate with warranty rates. Lower warranty rates can be captured as cost avoidance. Cost avoidance may not turn up in the bottom line directly, but as a result of manufacturing improvements such as error proofing, there should be less rework, which should mean that the labor content in a product should go down. When this happens, the standard cost should be adjusted to capture the savings. If not captured in the cost system, the savings may turn up as a variance. The variance may have other offsets and not be recognized in the bottom line as a lean savings, so it is important to make the cost system reflect reduced rework as soon as it is achieved.
Less manufacturing floor space: How are you going to benefit from the space you save?
One of the easiest improvements lean can achieve is to reduce manufacturing floor space. Space is saved by removing excess raw material from the line, limiting the space for work in process, moving operators closer together, shortening conveyor lines, and optimizing layout patterns. In order to see the value of the reduced floor space in the bottom line, there must be a cost offset:
Can the space saved be sublet? Perhaps the space can be fenced off and rented to another business or used by a supplier for consignment inventory.
Can unused space be consolidated and vacated?
Can freed space be used for a new product or the addition of new lines that otherwise would require renting new space?
If space is sublet or otherwise released, then the space saving must be reflected in the calculation of the overhead applied to existing product lines so that the space savings can be reported accurately in the future.
In order to see lean savings in the bottom line, the accounting community must plan to account for the lean savings achieved. Perhaps the most important key to lean savings is defining the targets upfront, along with what will be done with the savings. The following is an example, which can be converted to revenue and margin dollars:
Example of Lean Goals and Objectives
- Increase productivity 30% to meet growing demand after the recession without adding new headcount.
- Improve throughput 30% to expand sales to new customers with no margin erosion.
- Shorten lead times by 25% to pick up business currently being lost when customers go to a competitor when product is not available for shipment for their requirements.
- Reduce finished goods inventory by 40% and WIP by 70%, resulting in lower carrying costs.
- Improve first pass yields by 50% as a result of reduced rework. Reduce warranty by 30%.
- Reduce manufacturing space by 40%, which will permit consolidating two manufacturing facilities.
Once these objectives are developed and presented to the organization, all questions can be addressed and a foundation can be built for buy in and continuing success. Behind each of these goals and objectives there should also be a contingency plan to cover any shortfalls. Status of lean benefits needs to be an integral part of the monthly operations review. Plant management has to own the attainment of lean goals. The attainment of lean goals cannot be delegated to a lean team that may try to build support at the grass roots level without full buy in from the top. Employees are much more likely to engage in the lean process if they understand the strategic drivers behind the tactics they are deploying. The tracking process for potential lean savings is crucial to success, and with diligent accounting efforts, lean should deliver the benefits expected.