Financial benefits of lean
improvement
Lean planning
© BMA Inc. 2008. All rights reserved.
The
problem
• 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.
If Lean Manufacturing is so great –
how come we can’t see any
financial benefit?
© BMA Inc. 2008. All rights reserved.
The reason
• 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.
© BMA Inc. 2008. All rights reserved.
Lean is not a cost reduction
strategy
• 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.
© BMA Inc. 2008. All rights reserved.
The financial benefits of lean depend on
how available capacity is used
Sell more
stuff
Available
Capacity
Strategicall
y
Re-deploy
resources
Profit & loss
Report
Eliminate
resources
Freed up
cash
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Use of
Available
Cash
Cash flow
Report
Analyzing the capacity
Productive capacity
Value added activities
Provides value to the customer
Comes directly from customer pull
Non-productive capacity
Non-value-added activities
Change-overs, unplanned maintenance, making for stock,
defects/rework, etc.
Available capacity
Capacity that is not currently being use for productive or nonproductive activities.
© BMA Inc. 2008. All rights reserved.
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
© BMA Inc. 2008. All rights reserved.
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
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Sales per Person
On-Time Delivery
Dock-to-Dock Time - Days
First Time Through
Average Cost per Part
AR Days Outstanding
Current State
Future State
$131,429
$131,429
82%
96%
23.60
4.50
90%
90%
$4.94
$4.94
30
30
Lean
improvements
have freed up
capacity.
Capacity
Operational
The effect of lean improvements:
Acme Stamping – future state
Financial
22%
25%
Productive
Capacity
What bridges
the gap
between the
operational and
8% and
30%
Non-Productive
Capacity
financial results?
Why have
we seen improved
operations
no financial
improvement?
has changed?70%
45%
Available
Capacity What
Annual Revenue
Annual Material Cost
Annual Conversion Cost
Value Stream Profit
Value Stream Cash Flow
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$1,840,000
$1,840,000
$772,800
$772,800
$317,752
$317,752
$749,448
$749,448
$749,448
$1,813,672
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
© BMA Inc. 2008. All rights reserved.
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 .
© BMA Inc. 2008. All rights reserved.
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?
© BMA Inc. 2008. All rights reserved.
Inventory reduction
The future state has freed up over $1M of cash.
© BMA Inc. 2008. All rights reserved.
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”.
© BMA Inc. 2008. All rights reserved.
Long term future state
for Acme Stamping
Long Term Future State--Monthly Impact at Steady State
Actions
Sales
Volume
Increase
Sales
Miscellaneous
Sales Dollar
Price per
Expense
Increase
Unit
Reduction
Operating Volume Increase
Comment
Supplier Stamping
Loop
Loop
Pacemake
Introduce new brackets
for the James Hinde
Company
4,600
-
4,600
Provide Stamping
Services to Sister
Division
15,000
-
15,000
-
-
-
-
-
19,600
-
19,600
4,600
Lease floor space to
Polonius Polishing
Total Impact of
program at Long Term
Future State
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4,600 $ 11.75
$
3.53
-
$ 54,050.00
$
-
$ 52,875.00
$
-
$15k rental income
$ 15,000.00
$ 121,925.00
Material costs the
same as for base
business
$
-
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.
© BMA Inc. 2008. All rights reserved.
Future State
Long Term
Future
$131,429
$131,429
$235,936
82%
96%
96%
23.60
4.50
4.50
90%
90%
90
$4.94
$4.94
$4.73
30
30
30
Capacity
Productive Capacity
Non-Productive Capacity
Available Capacity
25%
22%
29%
30%
8%
11%
45%
70%
60%
Annual Revenue
Annual Material Cost
Annual Conversion Cost
Value Stream Profit
Value Stream Cash Flow
$1,840,000
$1,840,000
$3,303,100
$772,800
$772,800
$986,832
$317,752
$317,752
$317,752
$749,448
$749,448
$1,998,516
$749,448
$1,813,672
$3,062,740
Operational
Current State
Financial
Box score: Acme Stamping
Pulling it all together
Sales per Person
On-Time Delivery
Dock-to-Dock Time - Days
First Time Through
Average Cost per Part
AR Days Outstanding
© BMA Inc. 2008. All rights reserved.
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
$263.04
259.24
255.83
250.89
217.68
244.65
0
-8
-8
-8
-8
-8
Productive
31%
31%
31%
33%
48%
34%
Non-Productive
59%
59%
60%
59%
66%
60%
0%
0%
0%
0%
0%
0%
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%
Average Cost
CAPACITY
AP Days - AR Days
FINANCIAL
Value Stream
Box Score
prior to
additional
people &
machines
OPERATIONAL
Use the Box Score to Show the Benefits
© BMA Inc. 2008. All rights reserved.
Other
Available Capacity
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
$263.04
$259.24
$255.83
$262.44
$236.83
$261.17
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%
Average Cost
CAPACITY
AP Days - AR Days
FINANCIAL
Value Stream
Box Score
with new
equipment
and people
OPERATIONAL
Box Score: Result of the Planned Action
2 new machines purchased @ $90,000 each
6 additional people in the OEM Machining cells
© BMA Inc. 2008. All rights reserved.
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.
© BMA Inc. 2008. All rights reserved.