A New Lean Metric: ROI LT

When teaching value stream mapping one of the hardest metrics for people to grasp is production lead time (PLT) which is also commonly referred to as throughput time. 

Here is a quick summary of how PLT works. 

Say there are 3 processes A, B, and C.  Let’s also say there are 5 days’ supply of work in process (WIP) before each process.  If we simply sum these up we get 15 days’ supply which is our PLT or throughput time.

Fuzzy Math

It is at this moment many folks stand up and accuse the lean teacher of “fuzzy math.” Their argument goes something like this, “Our current lead time is not 15 days.  It is more like 4 or 5 days.  This lean stuff is stupid.  Can I leave now?”

They have a point

Believe it or not, while many of these folks present their arguments like true knuckle heads, they actually have a point.  Chances are their true lead time to the customer probably isn’t 15 days.  In fact, it is probably more like the 4 or 5 days they claim.  In most cases this is due to things like expediting and allowing “buffers” to just sit there for no purpose but to protect against inefficiencies.

Missing the point

While these folks may be correct, it must be explained that they are missing the true point of this metric.  You see, while PLT can help us estimate the lead time of a process that operates in a true first in first out (FIFO) manner its true power is in helping us understand how quickly we will return our investment on any material purchased.

Starting a Business in your Garage

Imagine you run a manufacturing business out of your garage and have spent all your hard earned savings on raw materials in order to start things up.  Wouldn’t you want to turn that inventory into profit as fast as possible?  I mean your kids need to eat man and your wife is getting real nervous about this “business opportunity” of yours.

So in our example, if we have 5 days’ supply before process A this really means it will take 5 days to turn that inventory into finished product that can be sold (for a profit hopefully).

It’s the same thing for us

It’s the same thing in our companies.  When our supply chain friends order raw material we must figure out a way to turn that inventory into profit as fast as possible.

Introducing ROI LT

So without further delay, let me introduce a new lean metric – Return on Investment Lead Time (ROI LT).  OK, it’s not a “new” metric as it is the same thing as PLT.  But I think it is a more appropriate name for the often confused production lead time.  

Summary

For any company to prosper we must be able to turn any and all investment into cash as fast as possible. 

So, instead of debating whether or not PLT is representative of the actual lead time for a process… focus more on explaining how ROI LT is extremely representative of how quickly you will turn your inventory into the sweet cash all for profit businesses hunger for. 

5 Comments

  1. andar909

    August 11, 2008 - 1:26 am

    hi, andar here, i just read your post. i like very much. agree to you, sir.

  2. Siddarth

    August 16, 2015 - 6:34 am

    Really simplified way of putting the concepts across..