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Supply Chain News: Making the Lean Transformation Case to Senior Executives

 

Lean Drives All Elements of Profit and Financial-Benefit Generation, Jean Cunningham Says

Nov. 28, 2017
SCDigest Editorial Staff

The following column comes through special arrangement with the Lean Enterprise Institute.

How can Lean practitioners better communicate the value of Lean transformation to senior executives? In the interview below, Chet Marchwinski, Communications Director for the Lean Enterprise Institute, explores this important topic with Jean Cunningham, the former CFO at Lantech. The maker of stretch-wrap machines achieved outstanding, well-publicized results from its Lean program. Cunningham, now Lean consultant, is also the co-author of the acclaimed book Real Numbers, an essential text for transitioning to Lean accounting

Marchwinski: Why do senior leaders have such a hard time understanding or seeing Lean's financial benefits?

Supply Chain Digest Says...

Since a lot of people think Lean is only about reducing costs, they miss the fact that we're creating capacity for future growth.

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Cunningham: I think one of the reasons is that Lean is inappropriately assumed to be a cost-cutting activity. And of course it's really not; it's really about creating more value for customers. But one of the things we do with Lean transformation is try to identify waste and eliminate it. And that by itself just frees up capacity, and unless that capacity is deployed to other activities, we don't immediately see it on the income statement.

Marchwinski: That's a good point, because it's rare for lean's cost savings to be realized instantly in the income statement, even though most leaders probably wish that they were. Are there some non-financial metrics people can use to make the case to senior management?

Cunningham: Absolutely, when we look at metrics that indicate how well a process is working, not just the outcome of the process. Most of our business metrics have been financial indicators, and those are really all outcomes. The first thing we're doing with Lean transformation is engaging people, working cross-functionally and within their own areas to change the processes.

Those changes don't always immediately show up.
So one of the early metrics we maybe want to look at is, are those processes working the way we thought? So let's say we put in a process to work in smaller batches. We could track if the batches that we're making are actually smaller or not. As a result of that, has that led to a reduction in finished goods? Has it led to a reduction in work and process inventory? These are all indicators that the process is working and changing the results of the business.

We can also look at metrics like people involvement with improvement, just tracking the number of improvements being made. It's a really simple first way that lots of people can understand, not just the executives but the workers too. And convincing workers is also part of the challenge of Lean transformation. It's not only leadership; it's really convincing everybody in the company that it's worthwhile to work a new way.

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Marchwinski: In your workshop I've heard you mention cost avoidance is a powerful way to explain Lean's financial benefits. In other words, "We didn't have to rent that Air Force base to expand our operations; in fact, we don't even need our current warehouse!" Can you tell us more about that?

Cunningham:
Absolutely. Accounting measures things that do happen. How much scrap we actually created, how much in expediting fees we paid, how many customers we serve. When we change our processes to reduce the negative things that happen, we in accounting don't have a good way of measuring that. So what we have to do instead is use some trends that indicate we have fewer bad things than we've had in the past. Sometimes it's less waste compared to our volume, our sales dollars or other factors that help us to see that we're going in the right direction and we're not having as many of these bad things happen as we used to.

Marchwinski:
I know you use a graphic called a profit model to help explain the financial impact of Lean, regardless of the unique situation. Can you walk us through that?

Cunningham: I'd be glad to. You know, the profit model really isn't about Lean because it's really just basic economics. The resources you have as an organization are at a certain level and management makes the decision about how many resources we have. And then we have the contribution to profitability, which represents the amount of revenue we have and the variable costs that go along with that revenue. Where the resources of the organization and the contribution from volume cross is our breakeven. Above that level is profit, and below that it's a loss – and that's not special to Lean.

But what is special to Lean is that since a lot of people think Lean is only about reducing costs, they miss the fact that we're creating capacity for future growth, improving the contribution of the products we have, and improving the underlying infrastructure of capital inventory, receivables, and fixed assets that we have. So we're really hitting on all elements of profit and financial-benefit generation.

Any reaction to Cunningham's advice on selling Lean value? What would you add? Let us know your thoughts at the Feedback section below.

 

Your Comments/Feedback

Bob Emiliani

Professor, Connecticut State University
Posted on: Nov, 28 2017
Over time, Lean transformation has proven itself to be an unusually diffficult case to make to senior executives. Here's why: "A Study of Executive Resistance to Lean."

Scott Simmons

Principal, Scott Wade Simmons & Associates, LLC
Posted on: Nov, 28 2017

I need to read Jean's book Real Numbers again to firm up my understanding around lean accounting or what I've considered value stream accounting.  Her comments make it clear the first and most obvious indicators of success in the lean transformation are seen on the balance sheet, followed by employee engagement, and then later in COGS on the income statement.  What still remains missing is the interview is "How" to speak directly to the executives on the real value of lean. 

Most executives I've worked with pay little attention to the balance sheet and employee engagement, retention, or satisfaction.  They are fully focused on top and bottom line results, let the operations people figure out the stuff in the middle.  Unfortunately, the stuff in the middle is where all the value is created and the opportunities live. 

Again, and unfortunately, most executives see lean activities as a "Bolt-on" to the real business of selling and growing.  It is assigned to some champion or team and left to them to make it work.  The exectives aren't learning, teaching, and modeling lean behaviors.

Jean has clearly stated the financial focus of executives misses the real value and intent of lean thinking, process improvement, and customer value.  However, until we help executives to see Lean (TPS) as an incredible BUSINESS SYSTEM and not just a production system, lean transformations will continue as a luke warm approach to improving the bottom line of the company.  Frequently rejected after several years of investing resources with little obvious return. 

The power of engaged, excited, energetic workers sits waiting for leaders to really challenge them to create wildly successful business improvement systems, and they just have to shake themselves from old financially focused models and fill the gap with learning, leading, and energy.

Dean Schroeder

Professor, Valparaiso University
Posted on: Nov, 29 2017
Lots of wisdom in this piece ... but you expect that from Jean. Getting leadership on board is suprisingly difficult, and I suspect the single most challenging job. 
 
 

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