financial benefits of lean improvement

© BMA Inc. 2008. All rights reserved.

Financial benefits of lean improvementLean planning


The

problem

If Lean Manufacturing is so great –

how come we can’t see any financial benefit?

• 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.


• 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.

The reason


• 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.

Lean is not a cost reduction

strategy


AvailableCapacity

Sell more stuff

Strategically

Re-deploy resources

Eliminate resources

Freed up cash

Profit & lossReport

Cash flowReport

Use ofAvailable

Cash

The financial benefits of lean depend on how available capacity is used


Analyzing the capacity

Productive capacityValue added activitiesProvides value to the customerComes directly from customer pull

Non-productive capacityNon-value-added activitiesChange-overs, unplanned maintenance, making for

stock, defects/rework, etc.

Available capacityCapacity that is not currently being use for productive or

non-productive activities.


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


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


What bridges the gap between the operational and financial results? Why have we seen improved operations and

no financial improvement? What has changed?

The effect of lean improvements:Acme Stamping – future state

Current State

Sales per Person $131,429

On-Time Delivery 82%

Dock-to-Dock Time - Days 23.60

First Time Through 90%

Average Cost per Part $4.94

AR Days Outstanding 30

Op

erat

ion

al

Productive Capacity 25%

Non-Productive Capacity 30%

Available Capacity 45%Cap

acit

y

Annual Revenue $1,840,000

Annual Material Cost $772,800

Annual Conversion Cost $317,752

Value Stream Profit $749,448

Value Stream Cash Flow $749,448

Fin

anci

al

Future State

$131,429

96%

4.50

90%

$4.94

30

22%

8%

70%

$1,840,000

$772,800

$317,752

$749,448

$1,813,672

Lean improvements have freed up capacity.

Revenue and costs are still the same.


This begs the question …

What are we going to do with these freed up resources?

Or, put it another way


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 .


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?


Inventory reduction

The future state has freed up over $1M of cash.


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”.


Long term future state for Acme Stamping

Sales Price per

Unit

Sales Dollar Increase

Miscellaneous Expense

Reduction

11.75$ 54,050.00$ -$

3.53$ 52,875.00$ -$

- 15,000.00$

121,925.00$ -$

Sales Volume Increase

-

-

-

Operating Volume Increase

15,000

Long Term Future State--Monthly Impact at Steady State

Material costs the same as for base

business

Introduce new brackets for the James Hinde

Company 4,600 4,600 4,600

Supplier Loop

Stamping Loop

Pacemake

Actions

$15k rental income -

Comment

Provide Stamping Services to Sister

Division

Lease floor space to Polonius Polishing

-

-

15,000

-

4,600 - 19,600 Total Impact of

program at Long Term Future State

19,600


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.


Box score: Acme Stamping Pulling it all together

Current State

Sales per Person $131,429

On-Time Delivery 82%

Dock-to-Dock Time - Days 23.60

First Time Through 90%

Average Cost per Part $4.94

AR Days Outstanding 30

Op

erat

ion

al

Productive Capacity 25%

Non-Productive Capacity 30%

Available Capacity 45%Cap

acit

y

Annual Revenue $1,840,000

Annual Material Cost $772,800

Annual Conversion Cost $317,752

Value Stream Profit $749,448

Value Stream Cash Flow $749,448

Fin

anci

al

Future State

$131,429

96%

4.50

90%

$4.94

30

22%

8%

70%

$1,840,000

$772,800

$317,752

$749,448

$1,813,672

Long Term Future

$235,936

96%

4.50

90

$4.73

30

29%

11%

60%

$3,303,100

$986,832

$317,752

$1,998,516

$3,062,740


Use the Box Score to Show the Benefits

Value Stream Box Score

prior to additional people &

machines

7/31/2004 31-Aug 30-Sep 31-Oct 30-Nov 31-Dec

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%

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%

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

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%

OP

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Box Score: Result of the Planned Action

Value Stream Box Score

with new equipment and people

7/31/2004 31-Aug 30-Sep 31-Oct 30-Nov 31-Dec

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%

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%

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

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 each6 additional people in the OEM Machining cells

CA

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OP

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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.

financial benefits of lean improvement

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