Measurement and Return on Investment in the Lean Organization

 

Lean Nation,

It is nice to return to the blog scene which I have committed to doing monthly.  Today's blog is on measurement and developing a return on investment (ROI) using a lean improvement system.  In order to get to a return on investment, you must begin by measuring both your processes and your results.   Processes are operational indictors that tell you if your process is running as designed.  Results are what show up when your processes are robust and running well. 

Before I go on, let me state that measurement is critical because it is the only way we can show improvement.  If you can't measure it, you can't improve it.  As we go further in this topic, I'd like to offer that measurement is "easy".  This statement is true once we have a good idea of what to measure. 

Candidates for measurement in an improving environment comes from five dimensions. Quality, Delivery, Cost, Staff Morale, and Growth.  Collectively these measures make up we call a balanced scorecard or what the lean world calls "true north" dimensions.  When waste is removed from a process, some or all five of these dimensions move favorably and simultaneously.  When improvement is done well, you can expect double digit growth in each of these measures year over year.  

The table below explains the five dimensions and their definitions in more detail.

True North Category	True North Measure Definition
People	Measures of staff morale or staff engagement
Quality	Measures of defects per unit of service or process outcomes related to meeting the customer’s requirements
Delivery	Measures of the lead time for goods and services from customer need identified to customer need met expressed in time (minutes/hours/days)
Cost	Measures of hours or dollars consumed per unit of service. Typically, a measure of productivity
Growth	Measures if increases in revenues or volumes

When measuring improvement progress, great organizations can measure at the local, site, and the enterprise levels.  And typically, they can measure things in real time.  No waiting for month end reporting or quarterly reporting to know which way things are trending. 

Before you migrate your organization to real-time reporting, you can start by simply having the ability to measure "things".   Do not accept the "computer system" can't give us that information.  Go get it.  Automated data is great if possible. Acquire manually gathered data if not automated and acquire data with a stopwatch if necessary. "Go and See" is the best way to see if something is working.

During the course of improvement, we want to ensure we have a good return on investment.  A well-done lean improvement system will deliver an ROI of 3 or 4 to one on an annual basis.  The return on investment is based on "hard dollar" results.  Hard dollars are things that show up on an income statement or a balance sheet.  Items such as more revenue, less cost, fewer defects, higher productivity, and less cash tied up in inventory.   The investment side of this ratio should consist of all in expenses for the work.  This will include staff time, improvement supplies, labor for moves of equipment, etc. 

Be cautious, however, as every improvement project will not return hard dollars. Nor should it.  An example of a project that might not directly lead to hard dollars is an activity to improve customer satisfaction. This could lead to better customer retention and an improved brand, but the correlation can be difficult to quantify.  

A common mistake organization's make is expecting every individual project to return hard dollars. This neglects the dozens of important pieces of work that return soft dollars, improve the customer experience, improve staff morale, make the workplace safer, and change the culture of the organization. 

One of the techniques I like to employ to ensure a good ROI is running a multiple team kaizen event.  In this circumstance, one of the teams should be expected to have a hard dollar savings. This in effect funds the other teams.  The balance of the teams can attack a variety of different wastes but may or may not generate a hard dollar savings. 

In summary I offer the following advice:

1) First determine what to measure.  Use the true north dimensions to be sure you are looking at all the benefits of using lean to see and eliminate waste.

2) Go get the data.  There are two alternatives: automated and manual. No excuses, go to GEMBA and get the required data.

3) Translate the data into a return on investment.  A lean organization expects a ROI of 3 or 4 to 1 every single year. 

 Lean Blessings,

        Ron

        President and Sensei

        Breakthrough Horizons LTD

        www.breakthroughhorizons.com 

        LinkedIn: https://www.linkedin.com/in/ron-bercaw-882a0a8/