Capturing Financial Benefits From Lean Manufacturing

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	Six Sigma Quick Poll Select your comfort level in quantifying financial benefits of projects: Very easy Easy Moderately difficult Very difficult
	Discussion Forum "First, determine what you are spending on your current processes -- documenting where you are (Define and Measure) is key to quantifying any financial benefit. Second, create the new process from the As-Is process (Analyze and Improve) and quantify the anticipated cost reductions from productivity increases, automation, reduction of steps, reduction of time required to perform process (cycle or turn around time), etc. You should also verify this result in the new process -- not just rely on the fact that you think you're going to save the money. Third, control the process to ensure that your financial results are sustainable." Gap Analysis To Financial Success

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erence T. Burton

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.

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, don't 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, G&A 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 P&L and Balance Sheet criteria. The financial organization can add a lot of value in terms of validating benefits.

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're 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.

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, it's 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're 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't figure out how to turn actions into cash flow. Management is also questioning why we should continue if we can't see any value or financial impact. It's 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 isn't 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.

About The Author
Terence T. Burton is President of The Center for Excellence in Operations, Inc. in Bedford, New Hampshire. Mr. Burton can be contacted by email at burton@ceobreakthrough.com or by telephone at (603) 471-0300.