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Michael Balle

Michael Ballé: Real lean results will show up in bottom-line and cash

By Michael Balle, co-author of The Gold Mine and The Lean Manager - Last updated: Wednesday, January 19, 2011 - Save & Share - Leave a comment

If I’m honest, I have to admit this is not an issue I’ve encountered firsthand. I hear many people complain about the fact that their lean program does not deliver budget-level efforts, but I have to wonder what kind of lean we’re talking about.

Withe the CEOs and Operations VPs I work with, lean delivers in terms of bottom-line and cash in the one to two year horizon. or put it more precisely, the companies I work with show percentage points improvement in bottom-line and significant cash gains in between one to two years time. Since the effort is personally driven by very senior guys they quite naturally attribute these results to their lean action and no one is going to dispute it are they? One construction company has taken a 40% volume hit in 2009, and still more than doubled its profit from 2008. In 2010, it has almost regained its 2008 volume (not quite), but doubled its profit again. One  industrial company has taken a 10% hit in volume in 2009, but increased its EBIT and released 15 million euros in cash.

When it’s not the CEO driving the lean journey, things get more complicated right away. One plant has increased its productivity in terms of parts per person per hour by an average of 7% every year for six years running (a 45% improvement in sales per person over the six year period), and still there is an argument. The previous divison VP said that he saw it in his divions’ bottom line, no debate, but his successor says that the profitability of this plant remains questionable. Hmm. In another company, the industrial division has radically improved quality, delivered 3% transfer price reduction per year, delivered increased profit and increased market share, and yet the CEO (who never adhered to the lean effort) attributes much of the market share gains to the efforts of the sales and service division.

What has had me puzzled over the years is this “eye of the beholder” effect. One would expect EBIT and cash to be unarguable figures, but it turns out that contributing factor to EBIT and cash are very much debatable (and debated), whether standard costs variances, contributions, entitlement, and so for.

To a large extent, my anwser to the question “why is it so hard to see the financial benefits of lean” is: who is asking? When a senior exec is asking for the financial benefits of a traditional lean program, it’s a no brainer: he or she won’t see any. developping a lean “model-line” is costly int erms of consulting fees and efforts and only pays back if the lessons are applied across the board, wall-to-wall. In the same way, a five-day kaizen even might have local results, but as long as the rest of the process is broken, first the results will not show up at profitability level (the benefit will be absorbed by the rest of the broken process) and secondly, the results won’t be sustainable because the rest of the process will pull the kaizened area back.

On the other hand, when the CEO has decided that every cell in his three factories will go to single-piece-flow and that supervisors will learn to balance the work and reduce variations and they know what to do with the people liberated from the processes, results WILL show on the bottom-line.

The one lesson I’ve learned from these various experiences is that profit-and-loss thinking allowes you to think that it’s okay that some processes don’t deliver to well as long as otehrs do, and overall we’re ahead. The money I lose somewhere is compensated by what I make somewhere else. Lean thinking does not accept this. To make money every process, and every cell should generate profit, no excuses. When an entire company starts aligning itself that way, results are such that whatever counting games are played with how to calculate costs and benefits in the books, results do show up in terms of both EBIT and cash.

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