Last week I had the opportunity to address the question of why it’s sometimes difficult to see the financial impact of successful continuous improvement efforts. If actions are inadequate to deliver results or if they are not sustained, it’s not hard to see why. What if we can visit the process and see that it’s 30% more productive as a result of kaizen activity, but the financial controller cannot see this?
Here’s 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 problem areas have been agreed and defined in terms of KPIs as the company measures them, perform Lean diagnostic activity. Collect data, make an 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’s 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 continuous 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, in 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 see the impact of these changes.
There are other factors to be aware of such as reporting error, reporting delays, variability or fluctuation, averaging or normalization of data. There may be unexpected adjustments 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. For companies just getting started in Lean it is not uncommon that there will be communication gaps.
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 discussing them upfront gives us a better chance at showing that kaizen pays off.