financial benefits of lean improvement
DESCRIPTION
Financial benefits of lean improvement. Lean planning. The problem. If Lean Manufacturing is so great – how come we can’t see any financial benefit?. When Lean Manufacturing is introduced, the executives of the company expect to see tangible financial improvement. - PowerPoint PPT PresentationTRANSCRIPT
© BMA Inc. 2008. All rights reserved.
Financial benefits of lean improvementLean planning
© BMA Inc. 2008. All rights reserved.
The
problem
If Lean Manufacturing is so great –
how come we can’t see any financial benefit?
• 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.
© BMA Inc. 2008. All rights reserved.
• 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.
The reason
© BMA Inc. 2008. All rights reserved.
• 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.
Lean is not a cost reduction
strategy
© BMA Inc. 2008. All rights reserved.
AvailableCapacity
Sell more stuff
Strategically
Re-deploy resources
Eliminate resources
Freed up cash
Profit & lossReport
Cash flowReport
Use ofAvailable
Cash
The financial benefits of lean depend on how available capacity is used
© BMA Inc. 2008. All rights reserved.
Analyzing the capacity
Productive capacityValue added activitiesProvides value to the customerComes directly from customer pull
Non-productive capacityNon-value-added activitiesChange-overs, unplanned maintenance, making for
stock, defects/rework, etc.
Available capacityCapacity that is not currently being use for productive or
non-productive 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
© BMA Inc. 2008. All rights reserved.
What bridges the gap between the operational and financial results? Why have we seen improved operations and
no financial improvement? What has changed?
The effect of lean improvements:Acme Stamping – future state
Current State
Sales per Person $131,429
On-Time Delivery 82%
Dock-to-Dock Time - Days 23.60
First Time Through 90%
Average Cost per Part $4.94
AR Days Outstanding 30
Op
erat
ion
al
Productive Capacity 25%
Non-Productive Capacity 30%
Available Capacity 45%Cap
acit
y
Annual Revenue $1,840,000
Annual Material Cost $772,800
Annual Conversion Cost $317,752
Value Stream Profit $749,448
Value Stream Cash Flow $749,448
Fin
anci
al
Future State
$131,429
96%
4.50
90%
$4.94
30
22%
8%
70%
$1,840,000
$772,800
$317,752
$749,448
$1,813,672
Lean improvements have freed up capacity.
Revenue and costs are still the same.
© BMA Inc. 2008. All rights reserved.
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 $1M of cash.
© BMA Inc. 2008. All rights reserved.
What did Acme Stamping do?
Using their Value Stream Capacity Analysis information, Acme developed a plan to increase the revenue of the value stream through the judicious use of the newly available capacity.
Specific changes:
• Added a new product for James Hinde Company.• Brought in stamping work for a sister division.• Leased floor space to a sub-contractor.• Trained additional “lean champions”.
© BMA Inc. 2008. All rights reserved.
Long term future state for Acme Stamping
Sales Price per
Unit
Sales Dollar Increase
Miscellaneous Expense
Reduction
11.75$ 54,050.00$ -$
3.53$ 52,875.00$ -$
- 15,000.00$
121,925.00$ -$
Sales Volume Increase
-
-
-
Operating Volume Increase
15,000
Long Term Future State--Monthly Impact at Steady State
Material costs the same as for base
business
Introduce new brackets for the James Hinde
Company 4,600 4,600 4,600
Supplier Loop
Stamping Loop
Pacemake
Actions
$15k rental income -
Comment
Provide Stamping Services to Sister
Division
Lease floor space to Polonius Polishing
-
-
15,000
-
4,600 - 19,600 Total Impact of
program at Long Term Future State
19,600
© BMA Inc. 2008. All rights reserved.
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.
Box score: Acme Stamping Pulling it all together
Current State
Sales per Person $131,429
On-Time Delivery 82%
Dock-to-Dock Time - Days 23.60
First Time Through 90%
Average Cost per Part $4.94
AR Days Outstanding 30
Op
erat
ion
al
Productive Capacity 25%
Non-Productive Capacity 30%
Available Capacity 45%Cap
acit
y
Annual Revenue $1,840,000
Annual Material Cost $772,800
Annual Conversion Cost $317,752
Value Stream Profit $749,448
Value Stream Cash Flow $749,448
Fin
anci
al
Future State
$131,429
96%
4.50
90%
$4.94
30
22%
8%
70%
$1,840,000
$772,800
$317,752
$749,448
$1,813,672
Long Term Future
$235,936
96%
4.50
90
$4.73
30
29%
11%
60%
$3,303,100
$986,832
$317,752
$1,998,516
$3,062,740
© BMA Inc. 2008. All rights reserved.
Use the Box Score to Show the Benefits
Value Stream Box Score
prior to additional people &
machines
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
Average Cost $263.04 259.24 255.83 250.89 217.68 244.65
AP Days - AR Days 0 -8 -8 -8 -8 -8
Productive 31% 31% 31% 33% 48% 34%
Non-Productive 59% 59% 60% 59% 66% 60%
Other 0% 0% 0% 0% 0% 0%
Available Capacity 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%
OP
ER
AT
ION
AL
CA
PA
CIT
YF
INA
NC
IAL
© BMA Inc. 2008. All rights reserved.
Box Score: Result of the Planned Action
Value Stream Box Score
with new equipment and people
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
Average Cost $263.04 $259.24 $255.83 $262.44 $236.83 $261.17
AP Days - AR Days 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%
2 new machines purchased @ $90,000 each6 additional people in the OEM Machining cells
CA
PA
CIT
YF
INA
NC
IAL
OP
ER
AT
ION
AL
© 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.