Debate: how to measure lean progress.

The 4,000 members of the Northwest Lean discussion group on Yahoo were treated recently to a lively discussion of the benefits, difficulties and necessities of measuring the impact of lean implementation on an enterprise. The discussion was sparked by a question asked by Susan Moss of the supply chain improvement team at Masterfoods USA in Columbus, Ohio, who asked for suggestions on quantifying savings as a result of lean activities.

"Does anyone have a simple, clean way to measure the dollar value for activities such as SMED [single-minute exchange of dies] 5S [sort, store, shine, standardize and sustain the workplace], etc.?" Moss asked. "Kanbans are easy because the inventory reduction goes straight to the bottom line. Not everything else does. I appreciate some help."

Her question sparked a philosophical debate over the need to measure lean results, and practical advice.

"The notion of calculating cost savings through every single nuance of the lean journey misses the point of understanding why one is doing lean in the first place," said Jerry Solomon of MarquipWardUnited. "Let's remember, lean is a business philosophy and strategy that enables a company to compete much more effectively in this global marketplace...If folks are asking for return on investment for 5S activities, I maintain that you have a lot more education to conduct with your leadership team."

Others concurred "Avoid going down that road at all costs," said Paul Parris, continuous improvement manager at Goodrich. "If you can directly tie in cost savings, by all means record it. Otherwise, use the tools, achieve direct results, compare. Is your management team so dense that they need you to put some BS dollar figure next to a lean initiative so they know freeing up square footage is a good thing? Can they not intuitively understand that reducing setup time from eight hours to one hour is beneficial? Trust me, if you go down this road, you will regret it."

Others agreed with that assessment, but said companies in the early stages of a lean implementation need to codify cost savings in order to achieve greater buy-in from management.

"If your management is demanding a justification, it's not a sign of weakness," noted Mark Woeppel of Manufacturing Excellence. "Rather, [it is] a sign of clear-thinking management that understands what business is about. Those who say lean efforts do not need to be justified are not living in the real world."

Demonstrating direct savings can be done, said Darren Challender of Hurel-Hispano. When Challender showed his management team savings of about $1 million "they soon started to take interest," he said. "If I hadn't spoken in their language at first, they wouldn't be asking the questions that they are now and finally seeing the real benefits of removing waste throughout the process."

Emerging from the newsgroup discussion were direct accounts of savings and improvements in business associated with the lean journey. For instance, Estelle Beecham, the lean manufacturing facilitator at Weber Aircraft said 5S is leading to savings of hundreds of thousands of dollars. The medical costs incurred by the company for trips, slips and falls fell by $250,000. "Strains are down $500,000," said Beecham. "This type of waste was directly impacted by 5S activities requiring materials and air hoses to be off the floors, floors to be kept clean and work items to be placed in a manner that is safe and ergonomically sound."

Others took a much broader picture, citing Toyota as a model. "Lean brought Toyota from nothing to the world's second largest car maker in 50 years," noted frequent NW Lean commentator Michael Baudin of the Manufacturing Management and Technology Institute. Wiremold used lean practices to grow by an order of magnitude in less than a decade, from $50 million in sales to $500 million.

"It's not about pinching pennies, but about growing a business," said Baudin. "Looking in the rearview mirror at an ongoing lean program, you need to consider the top-line as well as the bottom-line effect. Ask the sales manager how much more the company was able to sell because of its lean program."

Some companies have no choice but to implement lean, due to the demands of customers. Many of the benefits of lean cannot be easily measured, such as a company's reputation for producing quality products. A good reputation "is priceless," Baudin added, "and slipups can cost you the entire business. Just ask Firestone."

Other intangible benefits include improved employee morale, less absenteeism, engaged teams and the recovery of lost sales due to higher quality and better service.

Some lean projects solve root-cause problems and result in savings that justify the investment. "The cost of not doing the lean activity or engineering will result in the cost as a loss," said Sam McPherson of Ki International. "However, by employing the lean activity the loss never actually occurs.

Management must realize the projected cost of potential loss by not having a fully developed and deployed lean system."

Reductions in inventory and WIP "translate directly to lead-time reduction and may be translated into sales if you're properly connected to the sales organization," said Woeppel. Reductions in cycle time can be easily measured, added Bob Miller, director of manufacturing at Advanced Bionics Corp., a division of Boston Scientific. "The old cliche of time is money can be used to your advantage," he explained. "One of the very most important on-line measurements in most manufacturing organizations is cycle time. If your lean program resulted in a cycle time improvement, it's very simple to convey this into money savings: $ Saved = New Cycle Time / Old Cycle Time x $ of WIP. If you had $100,000 in WIP and you reduced cycle times by 20 percent, you saved $20,000."

Savings come from everywhere in a lean enterprise, said McPherson of Ki International. For instance, the use of 5S enabled his company to improve the life cycle and reliability of an industrial cutting knife from 800 hours to 12,000 hours. "The unit cost for the knife is $500," he explained. "Under normal circumstances, this knife would be replaced approximately 11 times throughout the year on seven machines at a cost of $38,325. Because of 5S, TPM and Six Sigma controls, we realized a 93 percent savings or an estimated $35,642. This can be expressed as projected savings or as savings due to safety stocking of these knives in our parts room."

Added Darren Dolcemascolo, senior partner with EMS Consulting Group: "For the best lean improvement/lean accounting metrics, I encourage you to read the book 'Real Numbers,' " by Orest Fiume and Jean Cunningham.

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