Lean practitioner Jean Cunningham teaches how to do persevere through the doubts of a kaizen event, even if there’s opposition.
As lean experts there are questions that we receive over and over from people who have not yet really come to understand lean thinking. The questions are from others inside the company concerning whether or not the lean efforts you teach are an effective, high value use of company time and resources.
And one of the most common questions is, “What is the financial return of a kaizen event?”
If the CFO asks this question, they are just doing their job of seeing that company resources are being utilised in value adding ways.
The key word here is financial. The answer to this question immediately after an event is easy; immeasurable. Or, maybe even zero. As you probably already know or would guess, answers like that do not play well to those who do not yet understand the lean transformation or the ongoing value it delivers.
But do not be confused and think that this means a kaizen event does not have value. A well-executed kaizen event has very real, sustainable value. But the value begins with implementation of the process changes pulled out of the kaizen future state and compound thereafter each time the process is performed. I believe kaizen events are the most important single lean tool available to launch and sustain a lean transformation.
It is the lean expert’s job to provide a response that convinces the enquirer that value is being added even if it cannot be seen on a traditional financial report.
There are better answers to the original question, including alternative ways to view value that show obvious positives for every company. These all overlap, but have distinct traits of their own that may be useful.
Increased capacity due to what does not happen
First, keep in mind that accounting deals with financial measuring of what has occurred in the past. Accountants do not have the tools to measure work that does not happen or material that is not used or revenue that is not realised due to process waste. For instance, there is no accounting transaction for:
- Rework that does not happen
- Overtime not worked
- Scrap not generated
- A worker who does not leave and does not need to be replaced
- Recruiting that does not occur for a position that does not need to be filled from the outside
- A customer who leaves for a faster and higher quality competitor
- A lawsuit that does not happen
For a given process, you are spending less, using less, and/or doing less because of your kaizen improvement efforts. This translates directly to increased capacity to do additional things. Everyone involved with the kaizen improvement events know this. But, traditional accounting cannot measure it and track it with a report, and the accounting function, CFO, and others viewing traditional financial reports cannot see the lean value or support it.
The most way to make lean gains obvious is by tracking trends. Are we spending more or less on these items over time relative to some other constant financial factor? Trends are simple to understand and easily made visual. For instance:
- Is the cost of workers’ compensation insurance more or less than it used to be as a percent of worker pay?
- Is scrap as a percent of sales greater or lesser?
This type of percentage of a constant (usually sales) is normal and customary in traditional metrics, and therefore, acceptable to many. Of course, even these measures are flawed because sales might be higher or lower due to price change making it an unstable constant. But their use is currently the best available means to champion kaizen event gains.
Tracking trends may become an ever-increasing norm at some point in the future because trends provide an absolute picture of important positive business outcomes that are simply not seen with traditional accounting metrics.
If no measure; monitor
Second, the fact that you cannot measure a kaizen event in traditional financial terms does not mean that you should not be monitoring kaizen results. There should always be monitoring, whether there is direct financial measurement or not. Out of every kaizen event, there should be some expected impact due to process improvement. This might be something direct, such as reduced scrap due to a new method. Or it might be less expected overtime due to reduced time to do a repeated task. In that case, monitoring over time that this cost is reduced is logical and meaningful. This monitoring is the check in the PDCA cycle and will show if you need an ‘A’ for the process.
Most often there are changes resulting from a kaizen that do not have a direct cost impact. But the changes still have an expected ongoing process impact. Perhaps it is:
- Fewer cash application deductions
- Fewer manual entries
- Fewer material shortages
- Fewer steps
- More items on kanban
Any of those would be the process metrics to follow post-kaizen. Add these to a box score for your overall lean transformation, and to the MDI (managing for daily improvement) boards in the process area. Monitor for 3-4 months to ensure they become part of the normal and embedded process.
Cumulative kaizen impact
Third, sometimes the ulterior motive behind the question is really about justifying the lean promotion office and resources. In this case keep a spreadsheet with a listing of all the events. The columns would be a wide variety of areas of where you should see impact. Examples might include:
- Hard cost
- Hard inventory
- Number of people hours
- Number of machine hours
- Space Lead-time
Across from each kaizen you can either put a factor of what the expected impact from the kaizen should be, or just an X mark that the kaizen focused in this area.
A spreadsheet will give you a resource to go to for discussion with management about the impact and then help with any PDCA or audit activities. It’s also a tool that will help in planning follow-up actions.
In time, financial indicators become a lean friend
Lastly, when kaizen events occur ongoing with full employee and management support, the financial impact will become clear as time goes on. Indicators will improve and the reason will be waste reduction through lean. If you have journeyed for one year, and you have no improving financial indicators, then something is wrong:
- The organisation is just using tools, and not working on the business.
- There is no sustainment.
- There was a large inventory decrease and accounting does not know how to show the impact of inventory reduction on the income statement clearly.
Some favourite high-level indicators reflecting lean waste reduction are:
- Sales per employee (year to year)
- Inventory and A/R as percent of sales
- Capital Spending percent of sales
- Lead-time reduction
- Quality rate
This way the kaizen value question will become more about the offensive rather than the defensive as the organisation engages in the lean transformation.