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Show Me the Money!

by Michael Ballé
February 26, 2014

Show Me the Money!

by Michael Ballé
February 26, 2014 | Comments (9)

“Show me the money” is really a question more than anything, and when it comes to Lean, it’s reasonable one.

The lean management model is fairly straightforward:

  1. Align each job with customer value (just-in-time techniques)
  2. Make sure every employee knows whether they’re doing OK or non-OK work (jidoka techniques)
  3. Engage every employee in their own development by giving them space to think through basic skills training (standardized work techniques) and encouraging their participation in individual or team improvement efforts (kaizen techniques)

Lean in short is this: customer satisfaction derives from employee satisfaction, or, to be more specific, satisfying customers (in their varied preferences) requires personal job fulfillment and continuous learning. In this day and age, few people would dispute any of this, although they may balk at the weird Japanese terms of the “how.”

Still, “show me the money!”, right? Let’s look at the alternative model to Lean. It usually looks like this. A strong leader makes gutsy calls in terms of high-return investments, picks “go-to” people to implement his strategy and makes sure the necessary systems are in place to deliver results. Enough of this “develop people and pray” stuff! Good, direct leadership is easy enough to understand. And if each part of the company is profitable—and this profitability is leveraged by specific return-on-investment projects—profitability will mathematically increase.

In the lean movement, we tell ourselves that this traditional management style is akin to playing roulette at the casino the odds favor the bank. First, great gambles usually lead to great losses. Second, treating people like cogs in a machine leads to disaffection and disengagement, which ends up in infecting customers who vote with their feet and so revenue falls. Unless you’re incredibly lucky, this “CEO as wizard of OZ model” (the great decision-maker running a well-oiled (lean?) mean fighting machine image), usually leads to disappointing outcomes. Sometimes disastrous ones! Again, many people may say they agree, particularly in the aftermath of the Lehman Brothers debacle. But still, show me the money… We can’t escape the money question, nor should we.

How then do you make money with this “to develop products you must first develop people” approach to business and management? Here’s how:

P/K = P/R x R/K

Profitability is in some form or other a Profit on Capital: how much you get over how much you’ve invested. P/K can be thought of as Profit from Revenue (gross margin) multiplied by Revenue from Capital (how much Sales revenue do you generate with the money you’ve put into the business). No surprises.

Except that in real life, Profit is really P - ? (a profit shortfall), Revenue is R - ? (a sales shortfall), and Capital is really K + ? (more capital than expected to run the business). Real-life profitability rests essentially with reducing the ? component – in lean terms, eliminating waste.

What do we know about these ??

Perceived quality → Revenue ?

Waste elimination → Profit ?

Flexibility → Capital ?

Perceived quality, waste elimination, and flexible use of equipment and processes cannot be forced—these things can’t be prescribed. They can only be obtained through employees’ fully engagement, attention, and initiative. Lean leadership and management means continuously developing people’s deep knowledge of their own jobs and encouraging people to work together.

Lean management is uncomfortable because managers must swap a direct action (manager tells employee what to do) with an indirect one (manager coaches employee, encouraging their self-development and listening to their suggestions).

This shift is profoundly uncomfortable, as it’s much easier to solve problems in one’s mind and tell others what to do than to consider one’s own actions first, identify areas for development, and support people through their interest-discomfort-satisfaction learning cycle!

If we don’t get better at showing explicitly where the gains of lean thinking and practice lay, why should managers listen? They’d have to trade a clear, well-known problem for a messy, uncomfortable one. Unless they see a clear path to financial success, they’re unlikely to take the leap of faith.

As lean enthusiasts, how good are we at showing the money?

The views expressed in this post do not necessarily represent the views or policies of The Lean Enterprise Institute.
Keywords:  global,  leadership,  musings
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9 Comments | Post a Comment
Phil Coy February 26, 2014
1 Person AGREES with this comment

A very good post and one that is a necessary reminder that should call us back to our lean roots.  My comment however is that the lean community is starting to lose the "how" to support your call to link continuous improvement to bottom-line performance. 

The earliest stories of lean successes were those where lean was adopted in "we try this or we are out of business" situations.  Lean was literally a survival strategy.  Wiremold for example.  The focus had to be on financial results. 

Over the past several years, I see a disturbing trend away from the historic quantitative understanding of our processes toward empowering enablement strategies and management / cultural change.  If we lose the quantitative orientation to takt time, every part every interval, kanban and supermarket sizing, etc we lose the ability to accurately link our behavior or our improvements to "show me the money."

I know that this is difficult especially for high mix/low volume manufacturers who are awash in data and have huge complexity and variation but tools are emerging that help. 

So while I completely agree with your point, the challenge left to all of us is how to do it. 

Reply »

Michael Ballé February 26, 2014

Thank you for your comment, and I completely agree. The ironic thing is that I was one of the early advocates of lean as a way to create a space to think/learn, we wrote a paper about it with Art Smalley, Durward Sobek and Godefroy Beauvallet back in 2005. Nothing fails like success :)

You raise a deeper question with the "burning platform" argument. To be honest, the execs I work with are not especially motivated by financial results - nore, to my understanding were the leaders of either Wiremold or Lantech back in the day. They seek growth and development. However, as CEOs they are clear that the test of learning is financial results. End of story.

I suspect that the real issue is that we need to understand both the lean tools and the financials. One of my great mentors, Orry Fiume, who was Wiremold's CFO at the time makes it very clear that Art Byrne, the CEO was very focused on people development - they also mastered the financials from the start as either CFO or as ex-GE manager.

I've had to do the journey the other way around and, having learned the lean tools, had to familiarize myself with a financial reading of the company - and truth is I still struggle with this, but try hard. My hunch is that the how is a training in finance and understanding the interactions between the P&L, the balance sheet and the cash flow statement :)

Reply »

Michael Ballé February 26, 2014
PS: and no argument from me that we can always understand better Takt & kanban - as well as andon and spotting defects closer to where/when they're created!

Reply »

Pedro Sousa March 03, 2014

Hello Michael,

Yes, this is a big question. In my own experience, when addressing problems through Six Sigma is always easier to estimate savings. However, when addressing problems through Lean it becomes more difficult. However, I agree with you that "to develop products you must first develop people." Then there is the issue of using Lean techniques per se. For instance, can we quantify the gains of a successful implementation of 5S? Maybe not so straightforward. But when using SMED, so then we can establish a relationship of cause and effect between reducing setup time and increasing the output of the process.

Anyway, I think that "money" will come and, once again, from my experience, the cultural change that is established for the implementation of Lean will bring benefits that go beyond the money itself. And by that, I mean, for example, to increase teamwork and their autonomy in solving problems and creating standards for their work routines.

Thank you for your article. This is a question that is always on my mind when it comes to highlight the results of a good Lean implementation to top management.

Reply »

Michael Ballé March 04, 2014

Hi Pedro,

Thanks for your comments and for giving this opportunity to clarify what I meant. I'm not talking about savings, but about MONEY, which really is about either increased sales, decreased costs, cash in the till or planned capital expense reduced.

"Savings" calculations are as abstract as direct cost calculations for parts - they don't mean much and seldom translate in either bottom line or cash flow (unless your "saving" is about shutting fdown a warehouse or something equally large). What I' talking about is visible improvement in the structure or the accounts, which is about understanding how our efforts lead to generating more sales (for instance, lower churn?), or more cash (flor instance higher turns?) or less costs (for instance fewer rejected parts and wasted materials?).

5S, as a program, is notorious for delivering not much more than headache and heartache - and clean-ish plants. But again, I fear 5S is misinterpreted. To my understanding, 5S is a method taught to operators so they themselves organized their cells in order to improve their level of standardized work. When this happens, the cell works closer to its true potential (the average of 5 cycles without interruption, for instance), and we're easily talking about 20% or 30% more parts at the end of one shift - if we're overproducing, in a cell of four to five people, this means one less job, so real productivity gains - which, across the board, will show up on the P&L.

The point I was trying to make with the post is that lean guys tend to sell to executive management - don't worry , if we do everything right, money will come. I don't disagree (I actually completely agree), but that is not a very encouraging message for execs who have usually been promoted for their control abilities, they just don't buy it.

On the other hand, few lean guys know how to read a budget line by line and show the specific gaps where there should be more money: the sales shortfall, the extra costs (anyone has a plant across the glbe and needs to fly engineers there all the time?), the added inventory, sales accounted but invoices not sent, and so on. This is a specific - and difficult - skills that, as lean guys, I believe we should be more proficient at in order to have a real dialogue with executives.

What do you think?

Reply »

Pedro Sousa March 04, 2014

Hi Michael, 

Thanks for the reply and for sharing your knowledge. Indeed, I´ve been taught to estimate the savings from a Six Sigma project in order to identify its financial impact.

Regarding Lean financial impact, my approach is to establish a link between, among other examples, the earnings from reduced setup time and increased process output (more parts to sell), systematic problem solving to reduce quality defects with cost reduction of scrap/rework. And I agree that one of the purposes of 5S is to improve the level of standardized work in operators routines.

Therefore, I absolutely agree with your arguments and appreciate your feedback.

All the best from Portugal!

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Twan Kersten March 04, 2014
Just want to add that the Lean way to Show the Money of a SMED project is not only to calculate the value of the hours saved in the plant assuming we do the same number of change-overs as before. The lean way is to use the economic order quantity model and calculate the before - after difference of total supply chain cost being the order/set-up cost in the plant + the inventory carrying cost. This cost will drop when we do more change overs and reduce our lot size. The additional benefit is less safety stock will be needed and service level to customer will go up. These also can be calculated. Sorry but too many times I have seen plants doing SMED just to improve OEE and conversion cost without considering the possible supply chain impact of every product every week/day.

Reply »

Chuan Peng Low March 05, 2014

Hi Michael, 

Enjoyed very much the post!

My cents on this thought... 

As lean enthusiants,

There is a thing we know...

Continuous Improvements --> Market Capitalization 

Market Capitalization a measurement of the market value of a company's shares (http://www.investopedia.com/terms/o/outstandingshares.asp). By continuous imrpovements, we increase the value of our people, our processes for our customers.

This journey to "show the money" will get better as we improve and integrate our Lean Thinking across the company into finance, sales and everyone. 

Chuan Peng from Singapore

Reply »

Michael Ballé March 08, 2014

I completely agree that at the end of the day we're trying to grow the company's market capitalization. the companies I have direct knowledge of are of three kinds: family owned (they just want to grow the business, selling is a transmission question), LBO (resale evry three to four years if they can, which in current markets is difficult) or The Street (shares traded every day).

In these three cases, market capitalization means very different things, but I'm not sure integrating lean thinking across the company actually helps, except in the third case.

Family owned business I know typically want to grow turnover and stay profitable (although far less sensitive to profitability than revenue). Lean emphasis is usually on doing a good job, and lean spread is typically from person to person, mostly in production/engineering. In these cases, lean is very focused towards solving delivery issues and improving customer care. Flexibilizng the business is less of a concern, and often the existing players are very set in their ways. About half the cases, the outcome is a younger generation of internal guys taking over management, which makes the business a lot more fun.

LBO type companies are all about resale value which is a multiple of EBITDA minus whatever degree of CapEX we're looking to, so there we're definitely looking at cash generation focus 1) to pay back loans we've saddled the company with, 2) to make it attractive to buys - the relationship between bottom-line profitability and cash generation is not always clear, and often difficult to graps for lean guys. In this case, what really matters is to use lean thinking to focus on the few key leverage points that will generate cash. In my experience, this is reduce batch size, reduce batch size, reduce batch size. Oddly, this sort of companies are not terribly sensitive to revenue increases and certainly rarely do what it takes on the sales front.

Companies on The Street are another kettle of fish altogether as it's all about meeting analysts expectations. This is where I've seen the crazyiest projects because some corporate director will sell the street some grand scheme, such as a central supply chain, an all-or-nothing investment in new tech, new systems, a radical footprint shift and so on, and then will have staked his or her career in making it happen no matter what. The Street rewards this kind of behaviour in the short term (quarterly), but valuation remain fairly resaonable in the mid-term (2 to 3 years). Some higher up execs develop strategies of a big hit that will raise the share price to a certain level, and then take their bonus and run. Who your main investors are really matter in this setting. Lean in a publicly traded company is then mostly about having a program that is indeed applied to all aspects of the company (looks good to investors) but that also competes with all other programs. Lean is expected to deliver savings as opposed to real gains. It's a very political environment in which, yes, integrating lean across the company has value because it looks good. not sure what kind of substantial results this gives, but if The Street likes the story, market capitalization improves.

A common difficulty in all three cases is getting management to grasp the link between solving quality problems and market value, but hey, that's what we lean guys are for, isn'it?

Reply »

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