Lean Measures for Lean Enterprises

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					Lean Measures for Lean Enterprises
Lean Measures for Lean Enterprises




            The Measurement Paradigm
                    We don’t know what we don’t know…


                We can’t act on what we don’t know…

             We won’t know until we search…

    We won’t search for what we don’t question…

 We don’t question what we don’t measure…
                                                                Excerpt from Six Sigma
                                             by Mikel Harry, PH.D. & Richard Schroeder




             We know measures are a result, not a cause…
             To change results we must change behaviors…
Lean Measures for Lean Enterprises



Let’s face it. Lean is about your customer, culture, people, processes and
       place. Lean is about business renewal, growth and transformation.
       Sound strategic? It is! For any lean journey to be truly successful you
       must take time to strategically plan your progress, link it to your
       overall business strategy, and put measurements in place. There are
       no short cuts, no “trying it on for size”. Lean is a “leap of faith”. You
       know that waste exists, and eliminating that waste will increase value
       added activities. The cost of exposing and eliminating that waste will
       take time and will initially have a negative influence on the income
       statement. Lean is about commitment, investment and sustainable
       business improvement. Interested? Read on. If not, go back to your
       sandwich, keep wishing your operations would become more
       competitive, and cross off another day to retirement…

Today, manufacturers must have the right information to gauge and improve
performance. This is particularly true for organizations that are on the lean
journey. These organizations are transforming their workplace, and
recognize that only through the actions and behaviors of their people, can
sustainable change come about. People need the right information and tools
at the right time to adjust and improve their performance. As a result, clear
strategies and measurement systems are key elements in lean conversions.

Armed with the right knowledge, organizations can strategically and
collaboratively align people to achieve goals, exceed expectations and drive
success. Measurement is crucial to help transform this strategy into
operational activities. Strategy without action and ultimately, measurement,
is simply a wish. Organizations must view measurement as a necessary and
strategic activity, one that is crucial to achieving results.

This white paper is organized into the following sections:
         1. Establishing a strategic framework for measures
         2. Lean Measures versus traditional systems
         3. Characteristics of Lean measures
         4. Why measurement systems fail
         5. Conclusion
Lean Measures for Lean Enterprises




          Establishing a Strategic Framework for
                      Lean Measures

The lean enterprise is a strategy for achieving continuous rapid improvement
in value streams through the identification and elimination of waste. Lean is
a long-term strategy for growth and not another cost reduction program.
Where a lot of manufacturers get stuck is in the implementation of lean
principles. This is why the methodology used to drive lean success is so
very important. The following is a model based on concepts of the balanced
scorecard that can help shape and define your Lean Enterprise
implementation:

                                       “What does it look like?”
     Company Vision Statement
                                       Vision is the driving force that
                                       provides the necessary focus and
direction for the organization. The vision provides a clear mental picture of
the organization’s future. The vision should communicate how the
organization will create value.



                                         “What is our competitive
         Strategic Themes
                                         advantage?” Strategic themes are the
                                        five to seven initiatives that will
create competitive advantage for the organization. These themes typically
revolve around business value streams that will create growth and profits,
allowing the organization to realize its vision.
Lean Measures for Lean Enterprises

                                       “What goals will drive our
       Critical Business Objectives    competitiveness?” Critical business
                                       objectives take the strategic themes
and turn them into organizational-wide goals. They pose the question: For
our vision to succeed, how will we differ
    • To Shareholders (financial)
    • To Customers (value & service)
    • To Our Own Organization (what process/system improvements must we make to
         exceed customer expectations)
   •     In our ability to innovate and grow (what must we improve to create a learning
         organization and enable our ability to change)



Critical Operational Objectives     “What processes do we need to
                                    change?” Critical Operational
                                    Objectives represent processes that must
be improved to affect the Critical Business Objectives. They pose the
question: What systems or methods must change to positively impact the
Critical Business Objective?


                                  “Who will do it? When?”
  Critical Success Factors
                                  Critical Success Factors represent the
                                 actions that individuals and teams must
execute to change the processes above. These are the behavioral changes
that must occur for any improvement to be sustained.




The model below takes the above concepts and creates a visual template for
linking:
     • Vision with strategy
     • Strategy with tactics
     • Tactics with actions
     • Goals and measures to monitor progress
Lean Measures for Lean Enterprises




This model will help you think through your lean journey and put the
process in proper perspective. If you look at lean as the competitive weapon
for business renewal and growth, it becomes much easier to commit the time
and resources needed to make it happen. If you believe you can complete
some basic training, clean the workplace, and do a few kaizen events and
become lean, you will surely be disappointed.

Think about lean in the following terms: How do I educate my workforce to
drive internal process improvements? How do I use these process
improvements to create better customer service and improved financial
performance? What strategies, tactics, and actions will we implement?
Finally, how do we measure our progress and success in the lean journey?
Lean Measures for Lean Enterprises




        Lean Measures versus Traditional Systems
Before reviewing the differences between traditional measures versus lean
measures, you should consider the opportunity that this journey creates. The
table below highlights some lean measures and typical improvements…

                                               Lean Manufacturing
           Companies that embrace Lean as a foundation of their
           operational strategy capture real, and often staggering
           improvements
          Decrease
          Increase
                                      Benchmarks of Lean Benefits
                                                       0%   25%     50%   75%   100%

          Production
               Output per paid labor hour
              Errors and Rework
              Support Labor
              First Pass Errors
              Travel Distance per Part
              Inventory Actions / Transaction Volume
              Hand-offs per Part / Handling
          Quality Assurance
              Inspections / Effort
              Scrap Rate
              Cost of Quality
          Facilities Engineering
              Set-up Time
              Space Requirement
          Materials
              Overdue Parts / Shortages
              Lead Time
              Inventory
          Business Management
              Management Effort
              Value Added/Employee
              Sales/Employee
              Operating Profit/Employ
          Customer
              On Time Deliveries
              Order Fullfillment
              New Product Development cycle time




As lean is implemented, you can directly trace progress to your financial
performance. It should be cautioned that P&L results are not instantaneous,
however, results to key measures are. Typically, improvements will be made
faster than the organization can react from a business standpoint. For
example, if your organization is not growing at the same rate you implement
improvements, or attrition in your workforce is low, benefits will not rapidly
flow through to the bottom-line. If you attempt to follow a tactic of forced
workforce reductions as improvements are made, the lean journey will come
Lean Measures for Lean Enterprises

to an abrupt halt. The more effective strategy is to allow waste-related
savings to offset labor cost surplus through the early stages.

Recognize that lean may have a negative short-term impact on the P&L, in
particular when inventories are being driven lower. This is the result of
standard cost systems that apply overhead based on output or earned hours.
As you lower output, overhead costs are not fully absorbed and negative
variances flow to the income statement. This is offset by improved working
capital as idle inventory is converted to cash. The following charts represent
a simplified example of an organization that has implemented lean and the
related impact on financials.




 Alignment to P/L
                                                         Cost
                                                          Cost            Cost
                                                                           Cost
      Sales
       Sales         Cash Flow
                      Cash Flow      Productivity
                                      Productivity     Reduction
                                                        Reduction       Avoidance
                                                                         Avoidance



        Lead            Lead              Cycle
          Lead            Lead              Cycle         Inventory         Safety
        Times           Times             Times             Inventory        Safety
         Times           Times             Times


       Cost of          Cycle             Turn-                             Turn-
        Cost of           Cycle            Turn-           DFMA              Turn-
       Quality          Times             over              DFMA            over
        Quality          Times              over                              over

                                                          Material          Space
      Reliability      Inventory         Training          Material          Space
       Reliability       Inventory        Training        Saving             Req.
                                                           Saving             Req.


       Schedule                          Output/                           Cost of
         Schedule                         Output/         Overhead          Cost of
      Attainment                          Inv.             Overhead        Quality
        Attainment                          Inv.                            Quality


                                        Reliability
                                         Reliability


                                         Equip.
                                           Equip.
                                        Effective-
                                         Effective-
                                          ness
                                            ness
Lean Measures for Lean Enterprises




                                            Lean Manufacturing
         These improvements are directly linked to advances in
         financial health measured on the income statement and
         balance sheet
       Pre Lean Income Statement                                            Post Lean Income Statement

         Revenue                  100                                         Revenue                  100
         COGS                     75                                          COGS                      46


                                                                            ••••
               Direct Labor         5                                               Direct Labor         3
               Support Labor
               Material
                                  20
                                  50
         Earnings from Operations 25
                                                                              ••
                                                                              ••
                                                                                    Support Labor
                                                                                    Material
                                                                                                        10
                                                                                                        33
                                                                              Earnings from Operations 54
         Taxes (.40)              10        Cost Category Improvements        Taxes (.40)               22
         Net Income               15                                          Net Income                32
                                             Direct Labor
                                                               •   25-75%

       Pre Lean Balance Sheet
                                             Support Labor
                                                               •   40-80%
                                                                             Post Lean Balance Sheet
                                             Defects
                                                               •   30-80%
         Assets
                Cash
                                      100
                                       10
                                             Inventory
                                                               •   50-80%     Assets

                                                                             ••      Cash
                                                                                                           100
                                                                                                            40
                Receivables
                Inventory
                                       25
                                       35
                                             Direct Material
                                                               •   20-60%
                                                                            •••
                                                                                     Receivables
                                                                                     Inventory
                                                                                                            25
                                                                                                            15
                PP&E                   30    Space
                                                               •   15-60%
                                                                             ••      PP&E                   20
         Liabilities
                Payables / ST Debt
                LT Debt
                                       70
                                       20
                                       40
                                             Capital Equip
                                                               •   20-60%
                                                                              Liabilities

                                                                              •      Payables / ST Debt
                                                                                     LT Debt
                                                                                                            55
                                                                                                             5
                                                                                                            40
                Retirement Benefits    10                                            Retirement Benefits    10
         Shareholder Equity            30                                     Shareholder Equity            45




Traditional manufacturing measures have often been the drivers for results
contrary to Lean Enterprise principles. These results include:
    • Excess inventory
    • Unnecessary and expensive floor space
    • Big, expensive, and inflexible equipment
The diagram below highlights the metrics and outcomes of some of the more
traditional manufacturing measures used today.
Lean Measures for Lean Enterprises

                                Traditional (batch) Manufacturing

          However, common metrics often reinforce operational
          practices that generate results contrary to Lean principles
                   Common Metrics                   Operational Practices                        Results
             •   Equipment utilization          • Buy material in large lot sizes to   • Overproduction and high
             •   Labor utilization                ensure availability                    inventory levels
             •   Equipment and labor capacity   • Purchase large (usually capital      • Bottlenecks
             •   Labor efficiency                 intensive) equipment                 • Single-point-failures
             •   Material availability          • Batch and queue materials            • Added transportation
             •   Earned hours                   • Centralize operations in process     • Increased hand-offs and
                                                  villages                               motion
                                                • Maximize machine run time            • Increased complexity,
                                                                                         tracking and supervision




     Process Center Flow                                                                                     Stop
                           Process 1                                 Process 3

         Start
                                        Process 2                                        Process 4




Lean Measures differ dramatically, and as a result, drive different actions
and behaviors. The chart below highlights lean measures relative to
manufacturing.
Lean Measures for Lean Enterprises

                                          Lean Manufacturing                                         Reconfiguration

          Changing behavior, supporting Lean principles, and sustaining
          benefits requires a shift in operational performance measures
                  Lean Metrics                       Operational Practices                          Results
           • Variance of production to          • Produce at the rate of demand – lot     • Equipment available on
             customer demand (Takt)               size of one                               demand
           • Variance of effort time to cycle   • Drive cycle time closer to effort       • Decreased inventory
             time                                 time                                    • Flexibility and protection from
           • Inventory turns relative to
                                                • Purchase numerous “right-sized”           system-wide failures
             demand rate
                                                  tools and equipment (often off the      • Limited motion
           • Volume of physical and
                                                  shelf and inexpensive)                  • Minimal complexity and
             informational handoffs
           • Distance traveled by part(s)       • Locate equipment and activities in        planning
                                                  end-item cells                          • Visual control
           • Equipment “up” time
                                                • Operator-to-operator handoffs
                                                • Single piece flow




       End-Item Cellular Flow
                                                                                        Stop
                             Subassembly 1             Subassembly 3

                     Start
                                     Subassembly 2                   Subassembly 4




          Characteristics of Measurements
In our experience, measurement systems become the foundation for any
change process. These systems are typically moving away from standard
costing systems and toward activity-based management. Measures
constantly change to reflect the new standard of performance when we
consider changing customer demands and increasingly competitive
environments. To help guide the business we need to rely on leading
indicators versus the financial reports that are distributed one to ten days
after the month has closed. The need for information increases as your
organization succeeds in lean because of these ever-changing requirements.
This means that measures must be closest to where the work is done, visual,
and easy to understand, allowing people to adjust actions real-time.



Measurement systems in industry should first and foremost reflect customer
requirements. These “macro” metrics typically deal with customer,
organization, cost, quality, delivery and innovation.
Lean Measures for Lean Enterprises

Measures should reflect both financial and non-financial goals. Other key
elements of a good measure include:
          • Targeting waste elimination (exposing waste and problems)
          • Driving proactive improvement
          • Coordinating with other goals
          • Quantifying success
          • Maintaining visibility
          • Assuring easy “at a glance” understanding of current state
Measures should be real (meaningful to those closest to the work).

The following list highlights different measures at both a macro and micro
level:



               Performance Metrics
• Macro metrics:
     – Customer:                           – Quality:
         • Lead times and Cycle times           • Cost of quality (material
         • Order fullfillment                     scrap, rework, reclamations,
                                                  warranty,environment,
         • On-time delivery                       labor and service)
     – Organization:                            • First Pass Yield
         • Safety                          – Delivery:
         • Turnover                             • Reliability (one time and
         • % of workforce engaged in              accuracy)
           continuous improvement               • Schedule attainment
     – Cost:                                    • Overall Equipment
         • Productivity                           effectiveness (OEE)
         • Space requirements              – Innovation
         • Inventory (raw, finished             • Cost/time reductions
           and WIP)                             • Material savings
         • Overhead spending
         • Working Capital
Lean Measures for Lean Enterprises

                               Perform ance M etrics
      • M icro m etrics:
                                                                                          – P rocess:
             – P eople :                                                                            • V alue added ratio (the
                      • O utput per labor hour                                                        am ount of tim e for value
                      • D irect and indirect labor                                                    adding activities divided by
                        per unit                                                                      total tim e)
                      • U nits per hour or hours per                                                • R ejects and rew ork
                        unit                                                                        • First pass quality
                      • Crew size                                                                   • C ycle tim e
                                                                                                    • M aterial scrap
                      • O verhead costs/unit
                                                                                                    • O n tim e delivery
                                                                                                    • C ost of W IP
                                                                                                    • C ost of raw m aterial
                                                                                                      inventory
                                                                                                    • Set-up tim e



The chart below highlights the high-level links between key performance
measures and financial statements:



  P/L link to macro metrics
                                                                                               Cost
                                                                                                Cost                           Cost
                                                                                                                                Cost
           Sales
            Sales                Cash Flow
                                  Cash Flow                 Productivity
                                                             Productivity                    Reduction
                                                                                              Reduction                      Avoidance
                                                                                                                              Avoidance




                                                                                                                       Equip.
   Lead    Cycle             Turn-              Output/   Space                        Cost of              Schedule                      Material
                    Safety           Training                     Inventory Overhead           Reliability            Effective-   DFMA
   Times   Times             over                Inv.      Req.                        Quality             Attainment                     Saving
                                                                                                                        ness
Lean Measures for Lean Enterprises




           Why measurement systems fail
Measurement systems ultimately fail for a number of specific reasons.
These reasons include the following:
  ! Not aligned with strategic business objectives

  ! Dependent on past performance (lagging metrics); no leading

      indicators (predictor of future performance)
  ! Poor understanding of the measures themselves and not integrated

      with other information
  ! Measures are unbalanced, far to much dependency on financial

      measures
  ! Not visible, measures are not communicated effectively

  ! No milestones, progress toward established goals not monitored,

      celebrated or rewarded
  ! Not meaningful (do not relate to daily activities/work)




                             Conclusion
Becoming Lean is a process and a journey. Take the time to strategically
plan your business and deploy polices. Link your lean implementation to
that strategy. Put measures and milestones in place to guide your journey
and to monitor results. Lead and encourage your organization to become
customer and process-focused. Allow for learning and reward performance
aligned with strategy. Financial results will follow.

Look for our next white paper where we discuss the various stages of lean
and the types of results you can expect.

If you have questions or comments, feel free to call, write or e-mail me.


Steven M, Hirt
President, Manufacturing/Corporate Group
Performa, Inc.
301 N Broadway
DePere, WI 54155
Stevehirt@performainc.com
                                 Performa Inc. 2003