Financial benefits of lean improvements


“We see wonderful results in operations, but they don’t show up in the financial statements. If lean is so great why doesn’t it hit the bottom line” ?

What happens in early phase of lean?

For operations Financial results
Reduced lead times Revenue (as such) remains the same
Improved Quality-reduced scrap and rework. Costs stay the same- although overtime and scrap costs may reduce a little
Improved on-time delivery Operating profit may go down- due to inventory reduction…although cash flow from operations may increase
Reduced floor space Average cost per unit has increased due to increased costs
Increased inventory turns There is under absorption of fixed costs caused by reduced production-impacting profitability

What lean improvements bring?

Now the traditional accounting approach:

1. Assumes that the particular resource was required to produce the current periods production.
2. Has no definite means of valuing any resource that has become free.
3. Demonstrates “how much” resource was used but not “how well” it was used.

So what to do?

Three Choices :

1. Eliminate the resource.
2. Use the freed up resource to expand the business.
3. Otherwise, do some combination of the above two.

Acknowledgement: Practical Lean Accounting by Brian Maskell & Bruce Bagalley

Gemba Kaizen