1. Financial benefits of lean improvement
Lean planning

2. 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.
The problem
If Lean Manufacturing is so great – how come we can’t see any financial benefit?

3. 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.

4. 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.

5. The financial benefits of lean depend on how available capacity is used
Sell more stuff
Profit & loss
Report
Available
Capacity
Strategically
Re-deploy resources
Eliminate resources
Cash flow
Report
Freed up cash
Use of
Available
Cash

6. 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 non-productive activities.

7. Important questions Let’s look at the example of Acme Stamping
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

8. 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

9. 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
Operational
Future State
£131,429
96%
4.50
90%
£4.94 30
Lean improvements have freed up capacity.
Revenue and costs are still the same.
What bridges the gap between the operational and
financial results? Why have we seen improved operations and no financial improvement? What has changed?
Annual Revenue
£1,840,000
Annual Material Cost
£772,800
Annual Conversion Cost
£317,752
Value Stream Profit
£749,448
Value Stream Cash Flow
Financial
£1,840,000
£772,800
£317,752
£749,448
£1,813,672

10. This begs the question …
What are we going to do with these freed up resources?
Or, put it another way

11. 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 .

12. What are we going to do with these freed up resources?
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?

13. The future state has freed up over £1M of cash.
Inventory reduction
The future state has freed up over £1M of cash.

14. 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”.

15. 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
Volume
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
Supplier
Loop
Stamping
Pacemake
Actions
£15k rental income
Comment
Provide Stamping
Services to Sister
Division
Lease floor space to
Polonius Polishing
19,600
Total Impact of
program at Long Term
Future State

16. 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.

17. 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
Operational
Future State
£131,429
96%
4.50
90%
£4.94 30
Long Term
Future
£235,936
96%
4.50 90
£4.73 30
Annual Revenue
£1,840,000
Annual Material Cost
£772,800
Annual Conversion Cost
£317,752
Value Stream Profit
£749,448
Value Stream Cash Flow
Financial
£1,840,000
£772,800
£317,752
£749,448
£1,813,672
£3,303,100
£986,832
£317,752
£1,998,516
£3,062,740

18. Use the Box Score to Show the Benefits
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%
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 -8
Productive
31%
33%
48%
34%
Non-Productive
59%
60%
66%
Other 0%
Available Capacity
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%
OPERATIONAL
CAPACITY
FINANCIAL
Value Stream Box Score prior to additional people & machines

19. Box Score: Result of the Planned Action
31-Jul
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%
100.0%
First Time Through
82%
84%
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 -8
Productive
31%
28%
41%
34%
Non-Productive
59%
60%
49%
Other 0%
Available Capacity
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
£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%
2 new machines £90,000 each
6 additional people in the OEM Machining cells
CAPACITY
FINANCIAL
OPERATIONAL
Value Stream Box Score with new equipment and people

20. 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.