A Three-Step Process for Capturing the Financial Benefits of Lean

Part 1 of 2. Next: Translating Lean Gains into Superior Shareholder Value

We hear the question all of the time. “We see the immediate benefits from our lean projects and events. We understand the power of the process. Why don’t we see it on the P&L statement?” The CFO, who frequently isn’t participating directly, might even put it more bluntly, “On that kaizen event you say you improved productivity in that work cell by 50%. But next week’s payroll will be the same as this week. Where’s the return?”

At the tactical level, whether it’s a kaizen event, a lean project, or an A3, translating such ground-level activity into financial gains follows a three-step process in which the ultimate responsibility for capturing the benefits depends on management action. The first step is making the process improvements by applying the lean tools and methodology to eliminate waste, improve productivity, reduce inventory, and improve flow. The second step is to physically free up the resources. This could be floor space, labor hours, machine time, material utilization, or plant capacity.

The third step is the specific action that management takes to capture the gains. For example, if a kaizen project frees up floor space on the factory floor, management action starts by roping it off and not allowing it to be backfilled with miscellaneous material and equipment. But it hasn’t been converted to dollars yet. Monetizing such gains happens when the company is able to close an outside warehouse, or use the floor space for additional production and sales without having to invest in any new buildings.

If your lean efforts generate productivity gains in an area, supervisors and managers must follow through and permanently remove the labor from that area. You don’t want to go back in two weeks and find the same number of operators in a work cell. Reduce total labor hours by eliminating overtime or temporary help, or through attrition. Of course, freeing up labor and floor space creates an opportunity to bring in more work and do it with existing employees, thereby eliminating any potential need for layoffs and improving return on assets. Such actions convert the waste that has been eliminated into hard returns.

If a project improves yield, by reducing scrap for example, the money can flow out pretty quickly with less material usage. Unfortunately, such gains can get lost in a standard cost accounting system. Here the reduction will show up as a material usage variance that can be difficult to trace. If standard cost builds in a 2% scrap rate—in effect saying that it’s okay to throw away 2% of material—when process improvements reduce scrap rates management must revise the standard.

Every lean project or event will free up capacity in one form or another, be it production capacity, inventory storage space, asset utilization or working capital. When your teams free up those resources, it is management’s responsibility to follow through and capture those gains and translate them into financial returns.

Part 1 of 2. Next: Translating Lean Gains into Superior Shareholder Value

Bill Schwartz was a math major in college and he still likes the numbers. He is currently Managing Director of TBM’s Medical Products and Pharmaceutical Consulting Practice. He challenges clients to leverage lean as a strategic tool for growth by implementing strategy deployment and driving culture change.