Why Can’t We See the Financial Impact of Continuous Improvement?

Last week I had the opportunity to address the question of why it is sometimes difficult to see the financial impact of successful continuous improvement efforts. If actions are inadequate to deliver results or if they are not sustain, it is not hard to see why. What if we can visit to the process and see that the process is 30% more productive as result of kaizen activity, but the financial controller cannot see it? Here is a summary of a discussion with a group of CI specialists, organized around five common mistakes that prevent us from seeing the financial impact of Lean efforts.

Mistake #1: Not agreeing upfront on how to measure success.

The starting point is to involve stakeholders and to agree upfront on how to measure success. The definition of success may not always be financial, but sooner or later it needs to be so. Sometimes there is a direct financial impact, other times it is an indirect benefit that requires further action to realize savings. All continuous improvement activity should be measurable in one or more of the macro categories of People, Safety, Quality, Delivery, Cash and Cost. Once the main problems areas have been agreed and defined in terms of KPIs as the company measures them, perform Lean diagnostic activity. Collect data, make analysis, calculate estimated savings. If a consultant or CI specialist does not know how to do these things, stop and get the education first. It is necessary to know where the financial controller or equivalent person will look for the results, and how that translates to Key Performance Indicators at the gemba level. It helps to have P&L management experience, or at least basic familiarity with how to read balance sheets, income statements and cash flow statements.

Mistake #2: Improving the links but not the chain.

Some improvements fail to hit the bottom line because the gains are local, isolated and do not contribute to better overall flow. The countermeasure is to design and execute activities that will result in changes across a value stream or at least a defined segment of a demand-supply process chain. This is where the CI specialist or consultant needs to understand how each of the Lean tools affects a specific KPI, both directly and indirectly. Since the aim of CI is to build or improve a system, these relationships are rarely simple, direct or one-to-one. A tree diagram is useful for mapping which CI efforts affect which KPIs and how these build up to a measurable financial impact. For example, 5S itself rarely delivers a direct financial impact. It may have indirect benefits on quality, safety, productivity, etc. However, 5S will enable SMED, which will enable reducing lot sizes, which will enable kanban, which will enable shorter lead-times, which enables better inventory turns and on-time delivery, which enable cash flow and reduced expedite costs.

Mistake #3: Declaring victory too soon.

An improvement may fail to show financial impact because the new process is not yet stable. Equipment may not perform in continued operation as it did during the improvement and experimentation phase. Incoming materials quantity and quality may fluctuate. Methods may need updating as rarely seen configurations or special orders are run in the new process. Productivity and quality may lag as people working in the process experience learning curves. There are many potential change points to be aware of, track and monitor their effect on seeing financial results.

Mistake #4: Not making changes to supporting systems.

Lean activity on the shop floor may change the physical reality of that process. However, there are SOPs, data, protocols, documentation and various other supporting elements. These affect how the work is done in a system. Even if the factory is capable of small lot production, if the lead-time offsets and lot sizes are not changed in the ERP system, or if kanban cards are not updated, orders will be executed according to the old reality of the process. Excess stock may need to be moved away from the process so that there is no temptation to run larger lots. Engineering drawings may need changing. The Bill of Materials may need updating. The cost basis may need to be updated. These should not be surprises, but identified, addressed and agreed upfront.

Mistake #5: Assuming that physical results will be visible as financial results.

Sometimes the project leader is happy, the people in the area are happy, the plant manager is happy, but the finance person is not happy. She still can’t see the results. This should not happen if that person has been involved throughout the process in defining success, understanding cause-and-effect of various CI tools on KPIs, identifying potential system change requirements, monitoring new process startup fluctuation and so forth. Things will change, and finance people may need clues on where and what to look for to seeing the impact. There are other factors to be aware of such as reporting error, reporting delays, variability or fluctuation, averaging or normalization of data. For companies just getting started in Lean it is not uncommon that there will be some communication gaps, or unexpected adjustments made from reality on the shop floor to the manufacturing execution system to the financial reporting. Some plant leaders may hedge in reporting the new cost basis because they don’t fully trust the new process. They want additional buffer or slack, so that they are not on the hook to run at a lower cost when the process begins to backslide.

No doubt there are more reasons why we sometimes can’t see the financial impact of continuous improvement. Being aware of these failure modes and discuss them upfront gives us a better chance at showing that kaizen pays off.

15 Comments

  1. Bob Emiliani

    August 12, 2019 - 3:34 pm
    Reply

    Great post! In my experience, Mistakes 1, 2, 4, and 5 loom largest.

  2. cyrilsunil

    August 12, 2019 - 11:27 pm
    Reply

    I agree with Mistake No 2 and 3.
    To overcome mistake no 2, I think the language of improvement should be common in the organisation and it needs the blessings of the top.

  3. Raph

    August 13, 2019 - 8:06 am
    Reply

    If you allow me:
    Mistake 5 : making improvements in the chain but not in the bottle neck: you will just increase your wip
    Mistake 6: assuming that if you improve your operations you will have more sales. If your market is mature you may not have more sales and even if you improve you may be forced to keep the same assets.
    Mistake 7: having an accounting system based on standard cost. You will need probably to finish your year and an accountant ready to review the system and go towards marginal contribution
    Mistake 8: not having an operational information system, if you do, even if you were measuring the wrong kpi, you may be able to take your data and rebuild the right kpi
    Mistake 9: not measuring variation and causes.
    Humble opinion

    • Jon Miller

      August 13, 2019 - 9:09 am
      Reply

      Good additions. Thanks Raph

  4. Rey Elbo

    August 13, 2019 - 9:08 am
    Reply

    Mistake No. 1 of “not agreeing upfront on how to measure success” is very important and indispensable before we can even start on everything. There’s one maverick client who challenged me to produce cost savings of at least US$10 million or they will not pay. I accepted the challenge but on two basic conditions. One, they should be upfront with baseline facts and figures. And two, I should be allowed to do a Gemba Walk right on the spot with one manager taking photos that I can use during the workshop. They withdrew the offer. I had the last laugh.

    • Jon Miller

      August 13, 2019 - 9:10 am
      Reply

      Nice story Rey

  5. Lynne Fillipo

    August 13, 2019 - 10:21 am
    Reply

    Good post. I find mistakes 1 and 2 the most prevalent in Health Care and the others more prevalent in the manufacturing arena. In all of my work in Health Care, the costs are typically addressed in cycle 3 of improvement projects – once a critical mass has been trained. My experience in manufacturing has typically yielded savings during cycle 1. Just an observation.

  6. Dr. Alin Posteuca

    August 13, 2019 - 10:54 am
    Reply

    Jon Miller, Kevin Meyer
    The 5 concerns in the article are interesting. My answers from the perspective of the MCPD paradigm:

    For your Mistake # 1: measuring the success of meeting Cost of Losses and Waste (CLW) targets is always done by analyzing the achievement of “Multiannual and Annual Manufacturing Target Profit”;

    For your Mistake # 2: always an improvement of CLW will have a measurable and consistent impact on a process/flow level KPI target;

    For your Mistake # 3: always an improvement of the CLW will be complete and correct – the target will be met exactly at the planned time;

    For your Mistake # 4: following a CLW improvement, a new standard is always defined – the standard is implemented and monitored with maximum attention;

    For your Mistake # 5: in the MCPD paradigm, preconceptions and preconceived ideas are not accepted – continuous measurement of non-productivity and non-quality is mandatory – as well as their continuous transformation into costs and then systematic and systematic improvements.

    So, if you cannot see all the planned improvements in the expected financial impact, then the top managers of the company are on a totally wrong path. Top managers and especially on board companies are thinking about money.

  7. Scott Brown

    August 13, 2019 - 1:00 pm
    Reply

    Time / Length of evaluation is also a key area. Raw material tracking and cycle time analysis over an extended period to garner good hard evidence / data..

  8. Brian Eden

    August 13, 2019 - 2:02 pm
    Reply

    Well put.

  9. Rameshwaran Ruthrasekar

    August 14, 2019 - 8:55 am
    Reply

    Excellent article Jon. Thank you. Adding one more point: Marketing the lean activity right from the beginning also had brought success later on when the change had been accomplished.

  10. John Hardwick

    August 14, 2019 - 1:50 pm
    Reply

    I would add another which I have seen working in a multi-national, which is “not treating the improvement as an experiment” If we truly want to know the benefits of an improvement we need to have a ‘control’ to do the comparison. So many times I heard “well that site was different” or “that process was different, we can’t compare apples with pears”. A truly learning organisation will set up improvements as an experiment, and deliberately make an improvement to one line or process and not to a very similar line or process. Then leave it long enough to ensure it is not just a “white coat” effect.

  11. Christopher Ferrier

    August 14, 2019 - 6:43 pm
    Reply

    So helpful! Thank you, Gemba Academy!

  12. Alejandro Tapia

    August 16, 2019 - 11:25 am
    Reply

    Good post, I believe that the mistake #2 is the most common, in my experience if we only solve a particular problem the total chain will not be sense, including a launch of start up!, thanks

  13. Zafer Uran Zamanaman

    August 20, 2019 - 7:57 am
    Reply

    Thanks for very good summary of the subject,
    I have another item ( several cases for me) to add:
    Although all Kpı’s were agreed and action plans were set by time frames the owner of the company may be unpatient to wait till the end the project and sabotage it. The common consensius should be agreed with top the bottom but most important is the commştment and ful support of the company owner wait till the end with patiente.

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