Do you have a 6 or 7 figure improvement opportunity? By “you” I mean your company, but if you have one individually, congratulations! It makes sense that some work will need to be done, and that you will need to make an investment of time and money to achieve this opportunity. Otherwise you would have done it already, right? If you’re not sure, check out the Lean Benefits Calculator tool. It’s free and will let you play with some numbers. You may be surprised at how quickly the dollars add up.
In order to embark on a process improvement project that will need a budget, management will want to have an estimate of the expected benefits. That’s not unreasonable. We understand that “actual results may vary” but if the size of the potential benefit is large enough compared to the cost, then the folks who sign the checks will be a lot less nervous. If you have a 6 or 7 figure opportunity, then what are you waiting for? In this series of articles, I will be taking a close look at how to develop a Lean Benefits estimate that is both believable and aspirational.
Your expected benefit should be communicated in money (dollars, euros, pesos). In some cases, quantifying results is easy: productivity, inventory, overtime, scrap and rework are categories of potential improvements that convert to dollars easily. Other types of improvements are harder to quantify, including office processes, lead-time, cycle time reduction and inventory accuracy. A dollar benefit does exist for these types of improvements, but the link to dollars is indirect. We’ll cover both types of benefits in this series.
Make sure to identify all the potential impacts of your project. Here are some of the categories of benefits you’ll want to look at for a typical manufacturing improvement project:
- Inventory Reduction. This includes the sub-categories of Work in Process, Finished Goods, and Raw Material inventories.
- Direct Labor Productivity. The is the labor that can be directly attributed to building the product.
- Overhead Costs. This includes the potential impact on “indirect” labor as well as other costs that are hard to attribute directly to a product.
- Impact on Sales. Will your changes have any potential impact on product sales and profits?
- Quality Improvements. Do you expect to reduce workmanship errors, scrap and rework?
- Overtime Expense. If you can reduce the need to work overtime (through process improvements), that can be a substantial savings.
- Cycle Time Reduction. This is sometimes called MCT (Manufacturing Cycle Time) and reducing it brings a host of benefits.
- Floor Space. Factory space is something of a sunk cost, but there are many benefits related to reducing the physical footprint of a production line.
Remember to project benefits sufficiently far into the future. If the benefit is expected to continue, then reporting results over a reasonable period makes sense. You could calculate benefits over a three-year period instead of limiting the time frame to a year or less.
Some of the measurements require a “dollars per incident” value in order to convert the measurement to the common denominator of money. This benefits factor will not show up, at least directly, on a Profit & Loss statement for the company, but it can be used for management or decision-making purposes.
Example: Because our industry is very lead-time sensitive, we expect that a reduction in MCT (Manufacturing Cycle Time) will have a positive impact on sales. For purposes of evaluating the value of MCT reduction we estimate that for every 1-day reduction in MCT we expect a 2% increase in sales.
If the management team agrees that the category in question is worth improving, the “dollars per” figure is simply a management tool to put a relative weight or value on the benefits achieved. The management team should also agree that the value is reasonable. Ask accounting personnel to help come up with the “dollars per”. This will add legitimacy to a number that may otherwise be questioned.
In upcoming articles in this series I’ll be focusing on specific categories of benefits, clarifying the input data required, what to expect by way of improvements, and how to generate a realistic estimate. Please add your comments below and remember: If You Want to Grow You Have to Flow!
Footnote: I’ve created a “Lean Benefits Calculator” and put it online (for the time being). This is a free wizard that walks you through the main benefit categories mentioned above, and let’s you project the potential benefits. When you’re done you can email yourself a benefits report. Check it out at www.leanbenefitscalculator.com.