Manufacturing

Increasing Return on Net Assets (RONA) with Lean & Six Sigma

By Ron Pereira Published on August 27th, 2007

The business metric RONA (Return on Net Assets) is used by many companies in order to gauge how well they turn their assets into income.

I am no accountant but do know there are a few ways to calculate RONA.  For the sake of this article let us work with the simple formula: RONA = (Sales – Expenses) / Net Assets.

RONA Puts Inventory in it’s Place

The reason I personally like RONA is I believe it places the correct emphasis on inventory. If we decrease inventory (an asset according to cost accounting) and sales and expenses stay flat we improve RONA.

If we are able to actually increase sales, reduce expenses, and reduce inventory good golly Ms. Molly RONA is on her way up! 

Some Practical Ways to Increase RONA

So, what are some ways a lean and six sigma practitioner can work to improve RONA? Here are some ideas but I would love to hear yours too.

  1. Reduce defects – both on the shop floor and front office using six sigma and things like poka-yoke and the often forgotten pillar of the Toyota Production System jidoka (Reduces Expenses).
  2. Increase throughput by using tools like Value Stream Mapping with extra emphasis on flow. This assumes, of course, the market is not a constraint (Increases Sales and Reduces Assets as inventory turns increase).
  3. Implement pull systems ensuring we only produce what the customer wants when they want it which lowers inventory (Reduces Assets).
  4. Implement TPM ensuring machines are available when we need them to be (Increases Sales).
  5. While on the TPM journey ensure OEE is being tracked and improved (Increases Sales).
  6. Become obsessed with kaizen (Reduces both Expenses and Assets and can also Increase Sales).

Is your company focused on improving RONA? If so, please share how you go about improving it.

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Ron Pereira

Ron has more than 20 years of experience in various manufacturing, supply chain, and senior leadership roles. Ron has held the titles of process engineer, engineering manager, master black belt, and director of manufacturing & continuous improvement. In 2002 Ron was the first American to win the Nokia Global Six Sigma and Overall Quality award in Helsinki, Finland. Ron holds a bachelor's degree in automated manufacturing and an MBA in technology management.

  1. Chris

    August 28, 2007 - 9:27 am
    Reply

    Just being curious (and hating accounting metrics), I looked up on multiple websites what RONA was and the formula that was listed by them was:
    RONA = Net Income / (Fixed Assets + Net Working Capital)

    For this discussion their definition of Fixed Assets is critical… and it nullifies the benefit that you see in this metric, because a fixed asset is…

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be consumed or converted into cash any sooner than at least one year’s time.

    The upshot is that inventory is excluded from their formula and the only benefit of LEAN would be on the Net Income side of the formula.

    It does appear that ROA (Return on Assets) and ROTA (Return on Total Assets) might include inventory, but knowing accountants probably not. ;->

  2. Ron Pereira

    August 28, 2007 - 12:08 pm
    Reply

    Hmmm… I will need to ping some of my CPA pals and ask them to be sure but my personal experience has been that we are constantly working inventory down in attempts to improve RONA.

    I found an article from a Boeing CFO who wrote:

    RONA encompasses revenue, earnings and cash flow. Examples of RONA improvement are

    – Reductions in the amount of investment needed for inventory and facilities achieved through Lean Enterprise initiatives.
    – Reductions in receivables by reducing collection times for customer invoices.
    Increases in customer advances through accelerated payment schedules on customer sales.
    – Reduced inventory and equipment investments through cost sharing by suppliers.

    So it seems they also target inventory in attempts to improve RONA.

    But to your point perhaps different companies define things differently?

    I will dig in some more to see what I can learn. Thanks for the excellent comment.

    The Boeing link is:

    http://www.boeing.com/news/frontiers/archive/2005/march/i_fof1.html

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