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Topic Title: Lean ROI
Topic Summary: Examples/ Standardized Process/ Ideas
Created On: 04/28/2010 10:24 AM
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04/28/2010 10:50 AM
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1985FLHT
George McKinnon



Hi all;
My team has been asked to create an "ROI proforma" for Lean projects. Does anyone out there have any direct experience in developing such a tool?
Thanks in advance
04/29/2010 12:11 PM
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MarkRosenthal
Mark Rosenthal



This is a common problem.
It stems from the approach of:
"Lean projects will save us money, lets do some."
"OK, how much will they cost, and how much will they save?"
Thus, you end up needing to justify your improvements.

Often, this stems from an underlying belief that the business is OK as it is, but if we can figure out a way to make it better, great, we will do it as long as it doesn't cost too much. But otherwise, things are just fine.

Put another way, it is an underlying belief that "We are making enough money, our customers are satisfied, it is a safe workplace, what's the problem?"

On the other hand, consider the conversation if the targets and gaps were established first.

"We have a problem."
"How can we solve it?"

Then the various solutions to the problem would be explored, and the best one (for ease of implementation, cost, etc) selected and put into place.

What this comes down to is this -
Don't ask "What is the ROI?"
Ask "What kind of performance to we need or want, and what is stopping us from getting there now?"
That will point you at real problems that need solving, and the conversation about whether to do it or not gets a lot easier.
04/30/2010 11:29 AM
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128290
Bonnie Slykhuis



Hi George,
ROI is always hard to collect. I try to get the groups I work with to identify metrics they want to achieve up front. However, sometimes collecting the data becomes far more work than its worth, especially if the people involved are already overworked and collecting the data would significantly increase thier worksteps. I also have a lot of instances where hard data in unavailable. I do a serious of things to help show what lean has done for our departments, employees and customers.
1-track hard data where possible. I am often the custodian of the data asking for it every month until we feel the project is complete.
2-I use an action register to identify, assign and track project steps. Our project groups meet each month to review the progress of lean implementation. When steps are completed we add the benefits or effects of the changes in the comments section then move the item to the bottom of the list so anyone can look through and sees what's been accomplished.
3--I have also conducted opinion surveys of employees about projects they've been involved in. They know first hand if things are better or worse.
4--I conduct "Report Out" sessions at the end of projects where project group representatives meet with senior leaders to openly and honestly discuss project benefits, issues, etc. These are generally 20-30 minute meetings that are often enlightening to leadership.
5--I do regular informal checks with employees about what's working and what's not. This is often a time where they now can identify something measureable and give you hard numbers to track.

Hope this helps. I don't have one tool or method but use a variety of methods to prove it's working to make up for the times I can't get hard metrics.

Bonnie
Lean Consultant
05/03/2010 09:36 AM
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3393
Brian Maskell



George;

Using a traditional ROI approach to the introduction of lean changes is using the wrong tool. There are lean accounting methods that do a much better job of the assessment of the financial impact of lean improvement. These work at the strategic level through to the individual kaizen event, if necessary. I would be happy to give you more information if you are in interested. It would take too long to give a practical application in a message here. But I could upload you some stuff.

Brian
05/03/2010 09:36 AM
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azzi
Andre Andreazzi



Hi George,

It's very hard to have that information. In my team we have created a spreadsheet with all the expenses we have for material, hours, travels, taxi etc. Then we know how long time we will be involved and using the plan we have complete all the expenses for the entire deployment.

One it's done, it's time to start. To start we have done an estimate based on the first information of the process we will approach. Comparing this info to the costs you have estimated it can give you the ROI with a range of 50% (avoid it as a targt, it's too much and unecessary stress)

So, after each step of the deploymnt we have a report out with the stakeholders to ensure they are informed and are 'part of our team'. During these ROs we are usually asked for how is the ROI. And after each phase we decrese the range from 50 to 20% let's say (80 - 120k). So, it's followed through the deployment. Once it's done we keep looking it for 12 to 15 months gathering metrics to ensure the benefits are being produced.

So, the tool I would use is establish your costs first. Get previous information about the process and people involved. Do some assumptions working with the process owner and identify the potential benefits that will be the outcome for the next 12 months. Use it to compare with your costs. note that both are in range so you can reduce the range until you have the info more accurate.

It's being worked very well so far... Hope this help.

PS: if you start with 50% range and get down to 20% or 15% would be precise enough for the majority...

Andre Andreazzi
Lean Coach
05/07/2010 10:13 AM
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201536
Crystal Welker



Brian,

I would be interested in some info about the lean accounting methods that you have. We are a year into the lean journey and I have some managers asking how we are going to show all of our efforts and training are giving us value.

my email is welkercj@genco.com

thanks
Crystal
05/11/2010 12:11 PM
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Robert_ELSE_Inc
Robert Drescher



I agree with everyone that says ROI is not the most useful measure for several reasons, yet whether we like it or not it will be used (I will explain why later). Firstly it is a rate, not an actual value, a major project could either generate a low rate of return yet its actual dollar effect could be very large, and/or carry with it the benefit of creating a sustainable position for the enterprise, yet it may not be done because of a low or zero return. At the same time dozens of little projects that cost next to nothing get done because their ROI is large yet the total real dollar effect or long-term benefit maybe next to nothing.

A far better choice is a real cost benefit analysis, that would detail what the real affects will be for the enterprise, unfortunately today most companies do not have the ability or cost information to do a detailed cost benefit analysis. Much of the reason is that these detailed analysis expose the vast waste of resources in the overhead charges, something few managers want exposed. There are some companies though if you watch how they act you realize they must know their cost better than their competitors, because they act in the opposite way and win almost always (ie a Honda as a whole). So in an enviroment where cost information is poor (or maybe intentionally fuzzy) there are few other choices.

Additionally there are a few Lean activities that in the short-term are hard to track down, these usually involve actions that improve employee morale. But in the long run they do lower turnover rates and thus lower training costs, and improve overall performance. These activities are usuakky even hard to calculate a return for, but their cost are usually rather low as well (most comapnies do not spend a lot of effort tracking these other than turnover rates as they are fewer in number and theirt costs are usually rather small).

Now let us return to ROI, and why we need to be able to deal with it as often as possible. Well everyone lets get really honest, most of us live in a world that measures your worth on short-term results. Today most companies are owned by short-term focused mutual funds, pension plans, or individuals utilizing money managers. Who are these short-term minded owners, well we are, if you have a pension or mutual funds, trade stock or options regularly you are one of the guilty, as I am I. Why is this fact important?

Accounting and executive managers have to answer to these short-term focused owners, or face their rath. These people are pushed to deliver results now, not ten years from now. So if we want them to continue to support Lean even though the short-term effects of Lean are often negative to the financial statements, than we need to supply them proof that what they are supporting is actually doing something worthwhile. If we can give them solid data that shows in the future the cost will be reduced or the revenues increased, they can take that information and temper the bads news with detailed good news which if delivered will build more loyal shareholders.

Andre pointed you in the right direction, if your company has any accountants that truly understand real cost accounting, were it gets really detailed, they would be able to help you break down the costs and benefits for any project. Ideally the more you know about what things cost the greater the detail you can attach to any activity.

One point to remember when giving them the first estimates it is better to be conservative than optimistic, better results are easy to pass on when they occur, but having to explain poorer results is very unpleasant, especially for your finance and accounting staff.

Whenever you implement any change you need to be able to track it results, if you have not factored in data collection into the process, you leave yourself wide open for attack. Accountability in business is vital, and only something totally worthless would not want to be tracked. So everyone in the Lean community lets step up to the challange and fins ways to track as much as possible.

As I discussed in one of our presentations these people are not your enemy, but they are accountable to the shareholders for the projected results, if they are off they lose their credibility rapidly. You can find some information on our website Implement Lean.
05/14/2010 09:21 AM
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M300706
Glenn Ford



Data-Driven ROI

Good morning Folks ~ My group requested that I present data related to 'How Quality Saves Cost in an Engineering Prototype Environment". Give that the presentaion will need to be data driven and given to an Engineering Community...philisophical discussions will not succeed in convincing the team that Quality saves them money.

I would start with the presenting the Taguchi Loss Function, but I'm looking for more formulae, to which Engineers can relate, that can help them understand empirically how Quality saves cost. Perhaps there is a study that uses formula to define and predict how DFMA saves cost? A formula like this will be great for a 'production-headed' prototype, but won't suffice for a model needed for analysis.

Any suggestions or thoughts?
05/18/2010 04:57 PM
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MarshallAndrews
Marshall Andrews



George,
I will add another perspective here that is somewhat similar to the other comments. Firstly, I agree that "Lean ROI" is not a good starting point. My experience is the best approach is to work backwards. Start with the market price that is required for a product, the profit margin required for the company and to justify the investment, and then determine the target cost for the product. Now compare that with your current costs for materials, manufacturing, engineering, SGA, etc. This tells you how much you need to reduce your cost components to meet your profit requirements. The tool that is used for this is Target Costing.
Now, you can back into your "Lean Improvements" requirements. If you need to reduce your manufacturing costs by 25%, but your traditional approach to manufacturing productivity, ie; without lean, get you 5%, then you need to educate your team, and implement lean. Basically, you have no choice because your traditional approach can't get you there.
Furthermore, I am a firm believer in "Learn by Doing". If your management asks for a lean master plan, and you have not started lean, beware. But that is another whole discussion. If you want more on Target Costing, see http://www.targetachievementllc.com/.
Marshall Andrews
05/20/2010 10:14 PM
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1985FLHT
George McKinnon



Marshall et all;
Thanks for your feedback on the issue of Lean ROI.
It appears that there is a general consensus; that to emphasis ROI as a necessity for Lean/ Continuous Improvement efforts is misdirected or at the very least misguided.
However, at the end of the day, the world I live in requires that we try, so we've been looking at an ROI model that the Greater Boston Manufacturing Partnership provided (copy attached) as a possible starting point.
The hard metrics (Inventory, Lead/Cycle Time, Productivity, Energy etc...) have clear formulas that can be defended. It's the "leap of faith" metrics related to benefits that we are struggling with (improved Lead Times result in x% increase in Market Share, Time to Market, Revenue etc...).

If there are any ideas on these types of metrics we're all ears.
Thanks again.


Edited: 05/20/2010 at 10:13 PM by Lean Moderator


XYZ CompanyROI.xls XYZ CompanyROI.xls  (60 KB)
05/24/2010 09:29 AM
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ManuChem
Katie McCreadie



Brian,

The company I work for is interested in "predicting" the value of CI and Lean, as well as calculating the actual value of CI and Lean efforts.

Could you please email me information on the lean accounting methods?

my email address is: indengmanuchem@gmail.com
05/25/2010 10:41 PM
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MiteshJain
Mitesh Jain



Hi brian,

Please email me stuffs on Lean and CI, my id is : jainm@live.co.uk.

Many Thanks in advance.

Mitesh Jain
05/27/2010 12:19 AM
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cyrilbourke
Cyril Bourke



1. First of all I am surprised that a lean team would be asked to create an "ROI Proforma", this is something that everybody competing for limited funds would normally use in order to justify their proposed investment. From my experience, finance would establish guidelines and a model for this and be available to assist, advise, discuss and review prior to submission for approval. The role of finance beyond setting user friendly guidelines and model should also be to co-ordinate, collate and present such projects for approval. Of course not all changes involve capital expenditure and therefore such projects do not need to be passed through the rigors of the standard ROI review and sign-off; however ROI is still a worthwhile tool where proposed changes will impact on working capital requirements, but not necessarily the only nor best.
2. ROI will not be abandoned as suggested, such a proposal only makes for interesting academic debate at this time. I sense considerable and probably justified frustration through out the forums when it comes to evaluation and financial justification of proposed initiatives. I can only interpret that this stems from a lack of clarity, systemic issues and the role of the accountant that are adversely impacting the Lean community. What is required is for the accountant to be a business partner, not somebody who is seen as removed from where value is created. This business partner should be an expert who understands what you need to evaluate projects and based on their skill set to provide the necessary tools, training and support to represent change in financial terms. It was suggested in one of the comments that rather than asking about ROI we should ask about what kind of performance we want and how do we get there, unfortunately we cannot escape the need for financial evaluation after all in order to strive for perfection we should eliminate waste and reduce the cost of value-add. So performance change that does not add to shareholder wealth in the short to long term is non value-add, however if the customer is willing to pay for it then it is value-add which should return a positive ROI anyway. I am not suggesting that wealth creation for the shareholders is the sole objective as this would only be a short term strategy. We can drive down cost, improve customer satisfaction and deliver better ROI in the longer term than would otherwise have been possible.
3. Whether or not ROI is perceived to be the wrong tool I do not think that this will change. I do not see ROI as being the problem, it is not the formula per se but rather the rational and data that is used to compile this that is a fault.
4. What I believe is that a much more powerful evaluation method is required, that is, economic value analysis in order to derive the true "Economic Cost and Profit" for the proposed change.. The reason why this is a much more powerful evaluation tool is because it takes into consideration changes that you might be considering, the benefits of which are simply left out of the historical cost based ROI calculation. For example, a company mining bauxite in Australia that ships to Europe for smelting wants to reduce inventory levels by using smaller lot sizes and making more frequent shipments in smaller ships. Let's say, for example, that the proposed change will cost more per ton of raw bauxite than what it originally cost when stock piling at a port in Australia until a large ship could be filled. The dilemma is that unless there is capital expenditure associated with this change that it will get under the ROI radar for investment approval purposes. However you still want to use the ROI model to justify this. You might have a hard time in justifying this, even though you might be very well correct, why? The reason why is that because ROI is based on the expense and cost recognition based of "historical cost" what you will find is that the value of the huge reduction in inventory cost that is attributed to the reduction in process cycle time is excluded from the benefit. So using the ROI you might actually show an increase in cost per ton for a reduction in inventory. The math is beginning to look confusing. The reason is simple; we were simply using the wrong evaluation method. Using economic value analysis to calculate the economic cost and profit will reveal and take account of changes such as process cycle time, change in credit terms, inventory holding cost of capital etc. the list goes on. This method is invaluable in prioritizing the order in which continuous process improvement or major strategic change is initiated. This also overcomes the problem alluded to that projects with small monetary value with big ROI could take preference to large projects with lower ROI. Furthermore, because this measures the benefit after the cost of capital has been taken into consideration, which implies that it satisfies ROI as well as other things, then this ticks all the right boxes for you.
5. Regarding Lean Accounting, the concept of simplifying the accounting process is great. Even though I have read extensively on this I do have a number of questions. First, is GAAP compliance, re accrual concept, abandoning work orders or similar tracking of inventory, inventory valuation etc. I have searched for favorable opinion from recognized GAAP experts from the finance community, this would be very reassuring because if there were guidelines as to how the questions raised could be addressed then a one day close would be easily achievable. I would be interested to see a worked example of how the application of value stream costing and lean accounting would be applied to a specific problem that one of the contributors to this forum might have. However, similar to the ROI dilemma, the traditional approach to these methodologies is based on historical cost. For me, economic profit is where our focus should be, the methodologies by which this is derived is another matter.
05/27/2010 09:00 AM
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1985FLHT
George McKinnon



Hi Brian,
Please send any information to my email address; mckinng@chesterton.com. I seem to have problems getting uploads through the Lean site.
Thanks
George
05/27/2010 11:53 PM
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3744
Ronald Turkett



If there is not a measurable benefit to a lean transformation then the effort has little meaning. The goals of Lean are higher quality, lower cost, and shorter lead time. All affect the bottom line. The higest quality system yields the lowest total cost as a foundation and then other elememets of lean will continue the cost reduction.

If you truly understand the manufacturing system you can find the savings. Less inventory provides a one time cash flow increase and long term operations cost reduction in handling, storage, etc.

On time shipping and reduction in premium transportation is another area, In bound logistics is still another.

Always remember, that improving a traditional manufacturing system also reduces costs. Lean transformation adds a next stop for total savings.

Ron Turkett
06/01/2010 11:26 AM
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cyrilbourke
Cyril Bourke



Hi Ronald,
I agree, for this we need the right methodology and process to evaluate and provide feedback related to proposed change. This will enable buy-in where the proposed change can be justified. Whether benefits are immediate of longer terms is not the issue. As projected benefits over whatever period concerned can be expressed in todays values as the sum of the benefits But equally , where competing for investment funds or internal resources, all projects should compete in order to determine the order in which these will be undertaken.
I have posted the question that I raised in my last contribution above to other networking sites and forums (including financial) regarding Lean Accounting and GAAP but unfortunately have not received any opinion yet.

Regards

Cyril Bourke
06/01/2010 11:34 AM
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KaizenSensei-1
Geoffrey Mika



Ron:
You have to remember that "Lean" must be a culture change first, so sometimes an improvement might not seem like an ROI improvement but if it supports the philosophies of lean; "By the People, For the People, With the People" and improves the morale then you must include it. Not everything can be initially costed because a philosophy has no cash value but has essential elements needed for a successful Lean transition.
Geoffrey Mika @ www.kaizensensei.org
02/22/2017 12:07 PM
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Juliana
Julia Novik



Hello Brian,

I read you post regarding cost accounting methods to capture financial impact of lean improvement. Would you be able to send me something at julia.novik@rogers.com

Many thanks
Julia

____________________________________

Using a traditional ROI approach to the introduction of lean changes is using the wrong tool. There are lean accounting methods that do a much better job of the assessment of the financial impact of lean improvement. These work at the strategic level through to the individual kaizen event, if necessary. I would be happy to give you more information if you are in interested. It would take too long to give a practical application in a message here. But I could upload you some stuff.
02/24/2017 09:17 AM
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DennisCoates
Dennis Coates



Hi Brian, I have been working with a lean team on a project and it has taken several meetings to get them to understand ROI and why it is important. If you would please send me any lean accounting resources +/or tips you have it would be greatly appreciated. This is one topic that I have not seen much on in any blogs and I believe it is very important to the success of any lean project. Thanks, Dennis email: dcoates@bidplymouth.org
02/27/2017 10:30 AM
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Bernd
Bernd Sauerbrey



Hi Brian
please let me also know how to make a better Job of assessment of financial Impact of lean improvment. email: Bernd.sauerbrey@mega-airless.com
Thanks
Bernd
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