The title of this article could be phrased as a question or a statement. I have chosen to treat it as a question because that is how it is usually presented to me by readers and clients. Every company executive, owner, or manager uses some type of accounting system to gauge whether or not he is running a profitable business. Reports that are usually relied upon are financial in nature. Financial reports are OK, but their application is limited.
The frequency of producing balance sheets and income statements depends on the size of the enterprise and how many people are in the “need to know” chain of accountability. There are a number of reasons why I don’t like using accounting statements for measuring the success of a lean initiative. They include: the timing of the information included in the reports, which is usually well after the events that contributed to the outcome; some of the ambiguous contributors to the data such as the various types of inventory, which are counted as assets on the balance sheet even though some of the inventory is obsolete and has no real value, and offsets such as depreciation; and finally, and possibly most importantly, who is privy to the information and how able the recipients are to interpret the information in a meaningful way.
Lean requires lean reports
There is no doubt that accounting reports have their place, but they should be kept in their place and used for accounting purposes, not for measuring lean improvements. Accounting reports were the only measurements available when we started the lean transformation at Joe’s. The one that was relied upon the most was accounts receivable.
As with most businesses, Joe’s accounts receivable was based on orders shipped during the accounting period instead of what was produced in that period. On the surface that protocol makes perfect sense, but, being a conscientious businessman concerned about keeping his staff employed through the peaks and valleys of normal demand, Joe would pull orders ahead and then warehouse them for a short period before invoicing. Those orders showed up on the balance sheet as an asset, but not as a receivable. Since labor was expended to produce orders that didn’t transfer to the accounts receivable file, there was no continuity between the cost of labor and the revenue stream.
Area managers were held responsible for the labor that was being expended to complete orders, but they had no control over the final disposition of the orders on their schedule. They were constantly trying to explain away performance against a measure they couldn’t control rather than focusing on continuous improvement. It is understandable that labor would be hard to track against receivables given the fact that customer’s orders might follow a skewed and inconsistent path from entry to delivery. Fortunately there was a better measurement available that Joe was unaware of. The wheel didn’t have to be invented it just had to be shaped in a different way.
New way to measure
When we tasked the General Manager, who was also an IT specialist, with developing a means of capturing the “revenue” that was created on a weekly basis regardless of the disposition of the orders coming through the production processes he discovered that there had always been a process for collecting that data that hadn’t been turned on.
Turning that feature on provided managers with current information that enabled them to assess the impact of changes made in their Value Streams through lean thinking. Not only could a manager see how the entire plant was performing against expectations on a weekly basis, but he could also measure how his particular Value Stream was performing. Now there was alignment between a manager’s responsibility and his accountability.
Capturing the revenue created on a weekly basis was a good starting point, but there were still a number of variables that needed to be neutralized before meaningful, actionable data could be attained. To illustrate how weekly revenue alone can be misleading, take a look at the weekly revenue that has been captured since late December. The trend is very impressive until it is viewed in the proper context. Revenue has been steadily increasing, which is worth celebrating, but what variables have played a role in the steady increase?
Revenue by labor hour
Two of the most common variables are the number of days worked in a week and the number of hours worked in a day. In the data shown there are two holiday weeks when only two and three days were worked respectively. At Joe’s the typical work week consists of four 10-hour days. There was no overtime during any of the weeks shown so that neutralizes one other potential variable.
Neutralizing variables is essential for evaluating the impact of continuous improvement initiatives. Too many variables can skew the outcome and could lead a manager to erroneous conclusions regarding the impact of an improvement. To attain continuity in interpreting the revenue data at Joe’s we synthesized the data to a single common denominator – Revenue per Labor Hour (RPLH).
Evaluating the revenue data for the above period in the RPLH format indicates a positive, although somewhat less dramatic, trend. In this case a goal line was included to give each of the managers a common measure to strive for as an enterprise and as a Value Stream. Each Value Stream Leader has this same information available for his area of responsibility so Value Stream members can see how their individual improvements are affecting the measurements. Individualizing measurements is a key element in engaging the workforce in applying lean thinking in their work areas. If the measurements you are sharing with your staff cannot be personalized at an individual level stop sharing the data. No one can interpret it in a meaningful way anyway and you are creating non value-adding waste in the process.
Measure it all
When RPLH was first implemented the goal seemed unachievable. Now that managers have experienced implementing change and measuring the positive impact the changes have made they are reevaluating the goal to see if it should be increased. That is an evaluation that has included sales, engineering, production, delivery, and installation resources in a collaborative forum so supportive plans can be developed by each of the contributors and coordinated across the company.
Joe’s Cabinet Shop is achieving results because, there is a genuine commitment to supporting the lean initiative; there is an actively engaged workforce; leaders are working together developing executable plans; and everyone understands what to measure and how to communicate measurements in a format that can be applied at the individual level.
The examples illustrated in this article pertain to Joe’s production process, but Joe is also measuring the impact of Lean thinking in the engineering department and in sales and marketing. Every function of an enterprise can, and should, be measured in a similar manner. Chances are good that the data you need to get started on meaningful measurements for your company already exists. You just need to get the innovative and creative juices flowing to search out where the data is hiding.
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