Financial benefits of lean improvement

1. Financial benefits of lean improvement Lean planning

2. Theproblem • When Lean Manufacturing is introduced, the executives of the company expect to see tangible financial improvement. • Often there is no short-term improvement and sometimes the opposite. • The financial reports may show negative results and the finance people have no other methods for assessing the financial impact of lean manufacturing. If Lean Manufacturing is so great – how come we can’t see any financial benefit?

3. The reason • Traditional financial results are designed to show how money was spent but not how well it was spent. • Lean manufacturing frees up large amounts of resource capacity but this is not shown in the financial reports. • The traditional accounting reports assume that this capacity was required to produce the current period’s production.

4. Lean is not a cost reductionstrategy • In general, lean manufacturing and lean enterprise are not strategies for short-term cost reduction and bottom-line improvement. • Lean is a longer term strategy of business process improvement through value streams……. Leading to enormous financial benefit through growth.

5. The financial benefits of lean depend on how available capacity is used Sell more stuff Profit & loss Report Available Capacity Strategically Re-deploy resources Eliminate resources Cash flow Report Freed up cash Use of Available Cash

6. Analyzing the capacity Productive capacity Value added activities Provides value to the customer Comes directly from customer pull Non-productive capacity Non-value-added activities Change-overs, unplanned maintenance, making for stock, defects/rework, etc. Available capacity Capacity that is not currently being use for productive or non-productive activities.

7. Important questions • When should these financial benefits be calculated? Prior to embarking on the Lean Manufacturing implementation or project. After the Current and Future State maps are available. • Who should see these numbers and make decisions about the use of the freed up resources and cash? Management & value stream managers Let’s look at the example of Acme Stamping

8. Example of financial benefits Acme Stamping • Makes brackets for the auto industry • Implemented lean manufacturing • Reduce lead time for 24 days to 4½ days • Reduce inventory from 10 turns to 55 turns

9. Current State Future State Sales per Person £131,429 £131,429 On-Time Delivery 82% 96% Operational Dock-to-Dock Time - Days 23.60 4.50 First Time Through 90% 90% Average Cost per Part £4.94 £4.94 AR Days Outstanding 30 30 Annual Revenue £1,840,000 £1,840,000 Annual Material Cost £772,800 £772,800 Financial Annual Conversion Cost £317,752 £317,752 Value Stream Profit £749,448 £749,448 Value Stream Cash Flow £1,813,672 £749,448 The effect of lean improvements:Acme Stamping – future state Lean improvements have freed up capacity. Revenue and costs are still the same. What bridges the gap between the operational and financial results? Why have we seen improved operations and no financial improvement? What has changed?

10. This begs the question … What are we going to do with these freed up resources? Or, put it another way

11. Turn the question around….. When asked about the savings of the lean improvement projects and kaizens, • “What is the strategy for using the capacity freed up by lean changes?” To make lean improvement highly profitable you must have a plan for using the newly freed up capacity. You must also focus on the longer term .

12. Floor space used Acme Stamping Floor space in Current State 12,000 sq.ft. Floor space in Future State 5,753 sq.ft. Cost per Square Foot = £1.00 Savings £6,247 per month What are we going to do with these freed up resources?

13. Inventory reduction The future state has freed up over £1M of cash.

14. What did Acme Stamping do? Using their Value Stream Capacity Analysis information, Acme developed a plan to increase the revenue of the value stream through the judicious use of the newly available capacity. Specific changes: • Added a new product for James Hinde Company. • Brought in stamping work for a sister division. • Leased floor space to a sub-contractor. • Trained additional “lean champions”.

15. Long Term Future State--Monthly Impact at Steady State Sales Sales Miscellaneous Sales Dollar Actions Volume Operating Volume Increase Comment Price per Expense Increase Increase Unit Reduction Supplier Stamping Loop Loop Pacemake Introduce new brackets Material costs the for the James Hinde 4,600 - 4,600 4,600 same as for base £ 11.75 £ 54,050.00 £ - Company business Provide Stamping Services to Sister 15,000 - 15,000 - £ 3.53 £ 52,875.00 £ - Division Lease floor space to - - - - £15k rental income - £ 15,000.00 Polonius Polishing Total Impact of program at Long Term 19,600 - 19,600 4,600 £ 121,925.00 £ - Future State Long term future state for Acme Stamping

16. What is the expense of these increased sales? • Used existing machine capacity freed up by the lean improvements. No cost. • Use existing people; no additional hires. No cost • Used floor space freed up by lean improvements. No cost • Product design funded by freed up cash from inventory reduction.

17. Long Term Current State Future State Future Sales per Person £235,936 £131,429 £131,429 On-Time Delivery 96% 82% 96% Operational Dock-to-Dock Time - Days 4.50 23.60 4.50 First Time Through 90 90% 90% Average Cost per Part £4.73 £4.94 £4.94 AR Days Outstanding 30 30 30 Annual Revenue £1,840,000 £3,303,100 £1,840,000 Annual Material Cost £772,800 £986,832 £772,800 Financial Annual Conversion Cost £317,752 £317,752 £317,752 Value Stream Profit £749,448 £1,998,516 £749,448 Value Stream Cash Flow £1,813,672 £3,062,740 £749,448 Box score: Acme Stamping Pulling it all together

18. Use the Box Score to Show the Benefits 31-Dec 7/31/2004 31-Aug 30-Sep 31-Oct 30-Nov Units per Person 46.01 44.62 43.15 47.11 51.56 33.07 On-Time Shipment 98.0% 98.3% 99.0% 98.8% 72.3% 100.0% First Time Through 82% 84% 84% 82% 76% 86% OPERATIONAL Dock-to-Dock Days 0.00 8.20 7.60 8.10 3.40 5.60 Average Cost £263.04 259.24 255.83 250.89 217.68 244.65 AP Days - AR Days 0 -8 -8 -8 -8 -8 Productive 31% 31% 31% 33% 48% 34% Non-Productive 59% 59% 60% 59% 66% 60% CAPACITY Other 0% 0% 0% 0% 0% 0% Available Capacity 10% 10% 9% 8% -14% 6% Revenue £923,974 £895,549 £865,680 £979,075 £1,142,411 £688,827 Material Costs £317,570 £307,908 £297,735 £336,566 £396,024 £236,667 FINANCIAL Conversion Costs £345,084 £330,159 £315,691 £353,259 £378,838 £242,745 Value Stream Profit £261,320 £257,482 £252,254 £289,250 £367,549 £209,415 Value Stream ROS 28.28% 28.75% 29.14% 29.54% 32.17% 30.40% Value Stream Box Score prior to additional people & machines

19. Box Score: Result of the Planned Action 31-Dec 31-Jul 31-Aug 30-Sep 31-Oct 30-Nov Units per Person 46.01 44.62 43.15 43.99 52.9 30.89 On-Time Shipment 98.0% 98.3% 99.0% 98.8% 99.0% 100.0% OPERATIONAL First Time Through 82% 84% 84% 85% 85% 86% Dock-to-Dock Days 0.00 8.20 7.60 8.10 3.40 5.60 Average Cost £263.04 £259.24 £255.83 £262.44 £236.83 £261.17 AP Days - AR Days 0 -8 -8 -8 -8 -8 Productive 31% 31% 31% 28% 41% 34% Non-Productive 59% 59% 60% 49% 60% 60% CAPACITY Other 0% 0% 0% 0% 0% 0% Available Capacity 10% 10% 9% 23% -1% 6% Revenue £923,974 £895,549 £865,680 £979,075 £1,142,411 £688,827 Material Costs £317,570 £307,908 £297,735 £336,566 £396,024 £236,667 FINANCIAL Conversion Costs £345,084 £330,159 £315,691 £362,054 £362,054 £251,462 Value Stream Profit £261,320 £257,482 £252,254 £280,455 £384,333 £200,698 Value Stream ROS 28.28% 28.75% 29.14% 28.64% 33.64% 29.14% 2 new machines purchased @ £90,000 each 6 additional people in the OEM Machining cells Value Stream Box Score with new equipment and people

20. Summary:Calculating financial benefits • Lean improvement projects eliminate waste and create available capacity. • Inventory reduction creates available cash. • The financial impact of lean improvements are determined by how these available resources are used. • In most cases the financial benefits of using these resources do not come in the short term.