GA 292 | The Financial Impact of Continuous Improvement with Ron Pereira

No doubt there are more reasons why we sometimes can't see the financial impact of continuous improvement. Being aware of these failure modes and discussing them up front gives us a better chance at showing that Kaizen pays off. Hey everyone, this is Ron Pereira and today is going to be sort of a solo show. You're only going to hear my voice, but you're actually not going to hear many of my thoughts, and I'll explain why that is. So, as you may know, Gemba Academy has a blog, and we all these podcasts actually get posted on that blog. But we also write articles every week. In fact, every Monday, John Miller, one of my business partners, blogs consistently. So every Monday he releases a new article. And then every Friday, myself, Kevin Meyer and Steve Cain, we all take turns blogging on Friday. And then of course, on Thursday, we release this podcast that also goes out on the blog. So there's lots of stuff coming out on that blog. So if you haven't ever checked that out, I would really encourage you to do that. You can actually subscribe to it. Just go to blog.gembaacademy.com and you'll be able to subscribe to all of our articles and podcasts that come out. But let's say back In August of 2019, August 12, to be precise, John actually wrote an article titled why can't we see the Financial impact of Continuous Improvement? And you know, John has written many good articles over the years, but for some reason, this particular article really, really touch the nerve. And it's been viewed probably five times as many times as our other blog articles that have come out. So it's a really, really, really powerful topic or a topic that many folks are obviously interested in. So what I thought I would do was I would really kind of convert this written article into an audio article. So sort of like a audiobook of a blog article, if you will. So I'm just going to read it. But I would definitely would encourage you to go over and read the actual article, mostly because at the bottom there's a comment section and there's, as of right now, I think there's 18 different comments from folks who had some really good insights and some interesting takes on the article. So sometimes it's as fun reading comments as it is the actual article. And yeah, there's some good stuff there. So, yeah, that's what I'm going to do today. I'm just going to read the article. So again, this was published August 12, 2019, written by John Miller. The title is why can't we see the Financial impact of Continuous Improvement Last week I had the opportunity to address the question of why it's sometimes difficult to see the financial impact of successful continuous improvement efforts. If actions don't deliver results or if they aren't sustained, it's not hard to see why. Or what if we can visit the process and see that it's 30% more productive as a result of Kaizen activity, but the financial controller can't see this well, here's a summary of a discussion with a group of continuous improvement specialists organized around five common mistakes that prevent us from seeing the financial impact of lean efforts Not Agreeing up front on how to Measure success the starting point is to involve stakeholders and to agree up front on how to measure success. The definition of success may not always be financial, but sooner or later it needs to be. Sometimes there's a direct financial impact, other times it's an indirect benefit that requires further action. To realize savings, all continuous improvement activity should be measurable in one or more of the macro categories of people, safety, quality, delivery, cash and cost. Once the main problem areas have been agreed and defined in terms of KPIs as the company measures them, perform lean diagnostic activity Collect data, make an analysis calculate estimated savings. If a consultant or CI specialist doesn't know how to do these things, stop and get the education first, it's necessary to know where the financial controller or equivalent person will look for the results and how that translates to key performance indicators. At the GEMBA level, it helps to have P and L management experience or at least a basic familiarity with how to read balance sheets, income statements and cash flow statements. Mistake number two Improving the links but not the chain Some improvements fail to hit the bottom line because the gains are local, isolated and don't contribute to better overall flow. The countermeasure is to design and execute activities that will result in changes across a value stream or at least a continuous segment of a demand supply process chain. This is where the CI specialist or consultant needs to understand how each of the lean tools affects a specific key performance indicator, both directly and indirectly. Since the aim of continuous improvement is to build or improve a system, these relationships are rarely simple, direct, or one to one. A tree diagram is useful for mapping which continuous improvement efforts affect which KPIs and how these build up to a measurable financial impact. For example, 5S itself rarely delivers a direct financial impact and may have indirect benefits on quality, safety, productivity, etc. However, 5s will enable SMED, which will enable reducing lot sizes, which will enable Kanban which will enable shorter lead times, which enables better inventory turns and on time delivery, which enable cash flow or reduced expedited costs. Mistake 3 declaring victory too soon an improvement may fail to show financial impact because the new process is not yet stable. Equipment may not perform in continued operation as it did during the improvement and experimentation phase. Incoming materials, quantity and quality may fluctuate. Methods may need updating. As rarely seen configurations or special orders are run in the new process. Productivity and quality may lag as people working in the process experience learning curves. There are many potential change points to be aware of, track and monitor their effect on seeing financial results. Mistake number four not making changes to supporting systems. Lean activity on the shop floor may change the physical reality of that process. However, there are SOPs, data protocols, documentation and various other supporting elements. These affect how the work is done in the system. Even if the factory is capable of small lot production. If the lead time offsets and lot sizes are not changed in an ERP system, or if Kanban cards are not updated, orders will be executed according to the old reality of the process. Excess stock may need to be moved away from the process so that there's no temptation to run larger. Lots of engineering drawings may need changing. The bill of materials may need updating. The cost basis may need to be updated. These should not be surprises but identified, addressed and agreed up front. Mistake number five Assuming that physical results will be visible as financial results, sometimes a project leader is happy. The people in the area are happy, the plant manager is happy, but the financial person is not happy. She still can't see the results. This should not happen if that person has been involved throughout the process in defining success, understanding cause and effect of various CI tools on KPIs in identifying potential system change requirements, monitoring new process documentation and so forth. Things will change and finance people may need clues on where and what to look for in order to see the impact of these changes. There are other factors to be aware of such as reporting error reporting, delays, variability or fluctuation, averaging or normalization of data. There may be unexpected adjustments from reality on the shop floor to the manufacturing execution system to the financial reporting. Some plant leaders may hedge in reporting the new cost basis because they don't fully trust the new process. They want additional buffer or slack so that they are not on the hook to run at a lower cost when the process begins to backslide. Slide. For companies just getting started in leed, it's not uncommon that there will be communication gaps. No doubt there are more reasons why we sometimes can't see the financial impact of continuous improvement. Being aware of these failure modes and discussing them up front gives us a better chance at showing that Kaizen pays off. Okay, well, that's the end of the actual article. What I want to do now is I'm going to jump over to the actual blog and I want to read a couple of the comments. It was one gentleman, Raph, I guess. Raph, I don't have your last name, Raf, so I apologize for that. But they said his comment was if you allow me. Mistake number five, making improvements in a chain but not in the bottleneck. You will just increase your whip. He adds a mistake number six, assuming that if you improve your operations, you'll have more sales. If your market is mature, you may not have more sales. And even if you improve, you may be forced to keep the same assets. Raf's mistake number seven is having an accounting system based on standard cost. You'll need to probably finish your year and an accountant ready to review the system and go towards marginal contribution. Mistake number eight, not having an operational information system. If you do, even if you were measuring the wrong KPI, you may be able to take your data and rebuild the right KPI and then Rafs number nine. Mistake number nine is not measuring variation and causes. So again, there's a few other really good comments here that I'm not gonna, I'm not gonna read, but I would encourage you to go over to to our blog and check it out. And so to make it that easier, instead of having to type in blog.gemma academy.com just go to the show notes for this episode which is gembapodcast.com this will be episode 292. So yeah, go check that out. And the last thing that I'll say, I'm just going to kind of build on one thing that John mentioned early in the in his article and it's around that financial control or financial, you know, associate whoever is going to be validating the financial impact. I especially see this on, you know, more traditional Lean or Six Sigma type projects where there's a project charter and there's a, you know, a place for the financial controller to sign their name and all that kind of stuff. And a common mistake. And I'll be honest, it happened to me many, many times back and when I worked in corporate world, you know, we would go off on these projects and have all these great ideas and we'd make things better and they truly were better. Then we go to the financial controller to kind of get them to sign off on it at the end and they were, you know, not understanding or in some cases, you know, to John's point, we were, we weren't really impacting, you know, the bottom line. It was more of a soft savings or productivity savings or something like that. And yeah, if I would have just involved the financial controller and to be beginning, which I think is probably one of the biggest things that you can do is involve them early on, even in scoping the problem, you know, before you, before you even try to, you know, experiment or any countermeasures, anything like make sure that you and the financial controller are aligned. That Mr. Or Mrs. Controller, if we do X and we get Y, do you agree that this could, you know, benefit the organization financially? And what might happen is they may come back and say, no, I don't agree, and here's why. And then that what that might do is that might lead you in a different direction, a better direction that's going to help you, you know, achieve even more impact for the organization. So by no means do we want to ever treat our financial friends as, you know, outside the organization or against the continuous improvement. Improvement folks. We're all in it together. We're all trying to make our companies better. And the financial controllers, they're intimately involved with, you know, what's actually happening on that profit and loss statement. And so let's really work hard to involve them up front and just to avoid any misunderstanding or miscommunication down the road. In fact, the last thing that you want to hear, and I heard this also from some financial controllers, is that, you know, what you continuous improvement people, this gentleman told me one time says, you're always just dealing in monopoly money. And I was like, oh, man, you know, it's like. And this is, sadly, I've seen some companies who will, they'll have these formulas where they say, oh, if we get our 5s score from a 3 to a 4, we're gonna, we've got this formula where we say it's worth this much money. If you're doing that, please stop, okay, because you're not helping. That's nonsense. Don't do that. That's what controllers will indeed roll their eyes. They will indeed accuse you of dealing and monopoly money. And if you're doing that, you really are. So keep things real, fix what bugs you. You know, try to, try to understand the problem, deeply understand the problem. Involve that controller up front so you're all on the same page and things are going to go much, much better as it relates to the financial impact of your continuous improvement efforts. Okay, thanks for listening again. Go check out the show notes which we'll link to this article GembaPodcast.com this is episode 292 thanks thanks for listening to the Gemba Academy Podcast. Now we invite you to take a no strings attached, fully functional Test drive of GembaCademy.com gain immediate access to more than a thousand Lean and Six Sigma learning resources, all free of charge at GembaAcademy.com.