Value Stream Mapping (VSM) is a common assessment tool in the world of Lean Manufacturing. The idea is straightforward: create a flow chart of the way things are today for a specific workflow, brainstorm and apply “lean thinking” to possible improvements and show what the Value Stream would look like if the improvement ideas were implemented. The first map is what is called the Current State, the improvement ideas are “Kaizen Bursts”, and the improved map is the Future State. What’s not to like?
Well, there are several gaps in the Value Stream Mapping approach. First and foremost, VSM is not a design tool. Think of it instead as an assessment tool or as a sales tool to justify a full-scale process improvement effort. There is just not enough detail included in a typical VSM to capture all of the elements of a Mixed Model workflow, which may include hundreds of different configurations or models. Even the creators of the VSM method (Rother and Shook) have expressed concern that practitioners are expecting too much from the technique. Use the VSM as a justification for embarking on a Lean Design project but understand that you can’t just use the VSM for the design. There’s a lot more work to do after the VSM is created.
The other gap in the VSM method is that it doesn’t drill down very deeply on quantifying the benefits of achieving the Future State. Yes, a timeline at the bottom of the VSM will estimate the improvements in the total lead-time, and maybe you can glean some productivity information from the data as well. You are going to need to sharpen your pencil to estimate some of the other benefits of achieving the Future State, and that’s the subject of this article.
WHAT BENEFITS ARE POSSIBLE?
Here is a list of some of the benefits that you hope to achieve through a VSM improvement project. Some of the inputs to these estimates will come directly from your Value Stream Map, while you’ll need to draw on outside sources for others.
It is important that your process improvement efforts show results, and these results should be communicated in dollars, euros, or your local currency. In some cases quantifying results is easy: productivity, inventory, overtime, scrap and rework are categories of improvements that convert to dollars without too much challenge. Other types of improvements are harder: office processes, lead-time, cycle time reduction and inventory accuracy are examples of improvements that are harder to express in dollars. A dollar benefit exists for these types of improvements, but the link is not as direct.
Your goal is to quantify these improvements in dollars, but you should qualify them in one of two ways:
- Dark Green dollars refer to benefits that are certain and easier to achieve.
- Light Green dollars are those benefits that are harder to quantify (but nevertheless real).
Remember to project benefits sufficiently far into the future! If the benefit is expected to continue to yield results, compared to maintaining the status quo, then a reported result over a longer period makes sense. For example, 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 dollars. This number is usually not readily available. This type of savings will not show up directly on a Profit & Loss statement for the company.
If your 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 this effort. The management team should also agree that the value is reasonable and conservative.
Draw on accounting personnel to help come up with the “dollars per”. This will add legitimacy to a number that may otherwise be questioned. Examples of this follow below.
WIP INVENTORY REDUCTION
Type: Dark Green Dollars
Work-In-Process Inventory is one of the easier benefits to calculate since it is directly related to the Value Stream lead-time or Manufacturing Cycle Time. These values should be calculated on your Current and Future State VSMs. Important: remember that inventory is an asset and not an expense. If you reduce inventory by $1,000,000, that savings does not flow directly to the bottom line. Instead it will show up as improved cash flow, which is great but it’s not “profit”.
DATA REQUIRED
- Current WIP Inventory Value for the Value Stream.
- Calculation or estimate of manufacturing cycle time reduction, as shown on the Current and Future State Value Stream Maps. Also measurable through tagging or WO tracking.
HOW TO QUANTIFY
WIP inventory is tied to cycle time reduction. A reduction of 50% in cycle time should equate to a 50% reduction in WIP inventory. Divide the new cycle time value by the previous cycle time value, and multiply by the current WIP value. This gives you the projected new WIP value. Subtract from the previous WIP dollars to calculate potential savings.
FINISHED GOODS INVENTORY REDUCTION
Type: Dark Green Dollars
It is reasonable to expect that if Manufacturing Cycle Time is reduced substantially, then the need to carry Finished Goods Inventory is reduced. If FGI can be replenished more quickly, then the safety stock levels can be lowered. The financial benefit of reducing FGI is the same as for WIP inventory, again remembering that inventory is an asset on your Balance Sheet.
DATA REQUIRED
Current Finished Goods Inventory in $. The FGI reductions are to be achieved through reduction in Manufacturing Cycle Time, resulting in potential reductions in Finished Goods safety stock levels. Reducing cycle time by itself will not automatically reduce Finished Goods, without changing safety stock levels in your manufacturing system.
HOW TO QUANTIFY
Estimate potential reductions in FGI in $. Safety stock levels could change in relation to cycle time reductions. Be conservative.
EXAMPLE
Apply a estimated percentage reduction to the current FGI dollar value. If the current FGI inventory is $1,000,000 and you estimate that this can be lowered by 20%, the new FGI level would be $800,000 and the cash flow benefit would be $200,000.
RAW MATERIAL REDUCTION
Type: Light Green Dollars
This inventory category may be more difficult to estimate since it is largely dependent on your ability to optimize your external supply chain (where most of the dollar inventory values originate). An internal Kanban pull system will help control raw material on the shop floor, but for most companies that is a small percentage of their total inventory investment. Most of the inventory dollars reside in the warehouse, and not on the factory floor. That said, if significant effort is going to be make in supply-chain improvements, then you will need to estimate the potential benefits. If your Value Stream improvements do not include supply chain improvements, then the impact on total Raw Materials may be small.
DATA REQUIRED
Current inventory value of raw material, and projected level of raw materials after the improvement.
HOW TO QUANTIFY
Reductions are normally the result of Supplier Kanban systems and improved material management. Reducing WIP will not necessarily reduce raw material. The difference in raw material can be directly calculated if Material Kanban is introduced. This is a great benefit of having a Plan for Every Part analysis tool, which will allow you to compare current Raw Material levels with potential levels under a pull system.
EXAMPLE
A new Supplier Kanban system will limit Raw Material to an average of $123,000, once it is in place and being used. The current inventory level for these materials is $223,000, so a reduction of $100,000 is expected.
INVENTORY ACCURACY IMPROVEMENTS
Type: Light Green Dollars
DATA REQUIRED
Using a sample of inventory items, count the number of parts and compare the computer inventory balance with the number counted. If the counted quantity is within a pre-defined tolerance range, it is a “hit”, and a quantity outside the range is a “miss”. The total number of hits, divided by the total number counted, is a measure of inventory accuracy. To calculate the benefits, it is necessary to establish a cost of inventory inaccuracy, in dollars. Costs include delayed shipments, wasted time looking for materials, material write-offs and losses, etc. Quantify this cost as a dollar figure that management will agree to. Multiply each percentage of inventory inaccuracy by this number, for a calculation of total dollar impact. Note that this is a management tool only!
HOW TO QUANTIFY
Change in inventory accuracy percent, multiply by the “dollars per percentage inventory inaccuracy”.
EXAMPLE
The company has agreed that every percentage point of inventory inaccuracy costs the company $10,000 in late shipments, inventory write-offs and lower productivity. Inventory accuracy is improved from 82% to 93%. Benefit = 11% × $10,000 or $110,000.
FLOORSPACE REDUCTION
Type: Dark Green Dollars
The amount of floorspace required is expected to drop, based on two changes: a reduction in the inventory allowed on the factory floor, and an improved workflow layout that typically puts stations and machines physically closer together. I’ve included this benefit under Materials since that is usually where the majority of the floor space savings come from. It is classified as Dark Green because unless you are adding significant capacity to your new Value Stream design, a reduction in floor space is almost certain.
DATA REQUIRED
Current square feet or meters occupied by the Value Stream being analyzed. You probably don’t have a new layout where the space savings could be assessed directly, so you will also need an estimate of the potential space savings.
To convert the space savings to dollars you will also need a Cost Per Square Foot (or Meter)value. Note that this is one the management tools that we discussed earlier. The dollar savings does not appear on your Profit and Loss Statement, and your ability to take advantage of the space savings depends on either avoiding the need to expand, or the ability to use the freed-up space for money making purposes. Otherwise the physical space is a “sunk cost”.
HOW TO QUANTIFY
The calculation is straightforward. Calculate the potential floorspace reduction and multiply it by the Cost Per Square Foot value.
EXAMPLE
You estimate that the space required can be reduced by 20,000 square feet. In working with your accounting department, an estimate of $7.23 per square foot was agreed upon. Potential savings is therefore $20,000 x $7.23 = $144,600.
DIRECT LABOR PRODUCTIVITY IMPROVEMENT
Type: Dark Green Dollars
Direct Labor is the labor cost of building the product, as opposed to Indirect or Support Labor costs. Direct Labor is something that is usually tracked closely, in part because it is used (rightly or wrongly) as the basis for allocation of Overhead costs. Multiply the number of Direct Labor workers by the average hourly labor rate by the number of labor hours in a year, and you should have a good estimate of the total annual Direct Labor Dollars associated with that Value Stream.
Alternatively, your accounting system may be able to give you that number directly, which would be even better. Now the question becomes: how much can we improve Direct Labor productivity, so that we could produce the same number of units with fewer labor hours?
Caution! It is possible to make major improvements to a Value Stream without reducing the Direct Labor content. Reducing queue time, for example, can radically reduce production lead-time without necessarily eliminating any Direct Labor. Usually, however, this does not happen. When you take the time to rethink your workflow, check the Standard Work Definitions, improve material delivery, improve the line balance, and improve the physical layout, it only makes sense that the Value Stream will be more productive.
How much more productive?
If you have scrubbed your Standard Work Definitions, eliminated NVA work steps, or made process improvements that are reflected in your documentation, then you should be able to calculate the percent improvement. At the Value Stream Mapping stage, however, it is unlikely that you’ve done that, so you’ll need to make an educated guess. If in your estimation the Current State is already fairly “lean”, then set a more modest aspirational goal.
If you know that a significant amount of time during the working day is consumed by delays, part selection, line stoppages and material shortages, then you should be more aggressive in setting your aspirational improvement goal. We have rarely seen less than a 10% productivity gain and usually more, even for environments that considered themselves very “lean”.
DATA REQUIRED
- An estimate of annual direct labor dollars for the Value Stream being analyzed.
- An estimate or measurement of productivity improvement as a percentage. If the company is gathering labor hours via a work order system, the actual labor dollars can be collected from the work order system.
HOW TO QUANTIFY
Multiply Annual Direct Labor Dollars times an estimate of productivity improvement.
EXAMPLE
The company spends $3,000,000 per year in Direct Labor for this Value Stream. If productivity can be improved by 10%, the Direct Labor expense could be reduced by $300,000. Warning: this assumes that the extra people can be transferred to another area, or that the additional productivity can be absorbed through growth. Using Lean Manufacturing as an excuse for laying off workers is not a part of a winning strategy.
OVERTIME EXPENSE REDUCTION
Type: Light Green Dollars
Overtime can be a significant additional labor cost for many companies, and it is reasonable to expect that when improvements are made to the workflow the need for overtime should go down. Of course, your ability to reduce overtime may be limited by other factors like the need for additional capacity or highly variable customer demand.
DATA REQUIRED
- A measure of current overtime paid over the last year.
- A projection or actual measurement of overtime reduction.
HOW TO QUANTIFY
Apply a conservative percentage improvement to the current over-time dollars.
EXAMPLE
The company has spent $500,000 on overtime in the last fiscal year. Improvements in schedule attainment, cross-training and improved productivity are expected to cut overtime by 1/3. The reduction in overtime costs amounts to $133,000, or $500,000 over a three-year period.
REDUCTION IN OVERHEAD EXPENSE
Type: Light Green Dollars
Inventory is a balance sheet item, while expenses impact the Profit & Loss statement. You can estimate potential overhead expense savings by applying a Cost to Carry Inventory percentage to estimate bottom-line savings related to inventory reductions. These bottom-line costs include the expense of storage, obsolescence, damage, cycle counting, moving, receiving, picking, financing and so on.
The Cost to Carry Inventory percentage is a management tool used to quantify the potential benefits of making the effort to reduce inventory. This benefit is in addition to the cash flow benefits described above. You’ll need to work with your finance people to come up with a reasonable value, with the understanding that this savings does not appear directly on your Profit and Loss Statement. The lower the percentage used, the lower the value of reducing inventory (from a management perspective).
DATA REQUIRED
A Cost to Carry Inventory Percentage. This is a management estimate of the cost of maintaining inventory and is applied to current total inventory levels. Be clear that this is a management tool only. You will also need to add up the potential inventory reductions in the three categories of Raw, WIP and Finished Goods.
HOW TO QUANTIFY
Multiply the estimated inventory reduction by the Cost to Carry percentage to estimate the annual P&L savings.
EXAMPLE
A reduction of $3.5M, using a cost-to-carry factor of 10%, should result in bottom-line (expense) annual savings of $350,000.
SCRAP AND REWORK BENEFITS
Type: Dark Green Dollars
If you don’t have any scrap or rework, congratulations! You can move on. If you do, however, there are probably significant benefits that typically come from a Lean initiative, and they should not be too hard to estimate.
DATA REQUIRED
- Current period scrap and rework dollars.
- An estimate or measurement of potential improvement in scrap and rework. Don’t assume that scrap and rework will go away just because you are now “lean”, but you can expect significant improvement if you put some effort into it.
HOW TO QUANTIFY
Apply a percentage improvement to the current scrap and rework dollars. This benefit can also be measured directly if before and after scrap dollars are available. At the end of a Kaizen event, you often use an estimated reduction figure, based on engineering judgment.
EXAMPLE
The company reported $2.5 million in scrap and rework last fiscal year. A sample of yields after process improvement changes suggest a 50% reduction in scrap and rework costs. The benefit projected over a year would be $1.25 million.
ON TIME DELIVERY IMPROVEMENTS
Type: Light Green Dollars
It is reasonable to anticipate that if your factory can respond more quickly to customer orders by “linking and balancing” your workflow, then your on-time delivery percentage should improve. Reminder: don’t just give away your customer quoted lead-time to your customers just because you can. Unless there is a large competitive advantage in doing so, use the improvements in Manufacturing Cycle Time to improve on-time delivery (and give you more planning flexibility) and leave your Customer Quoted Leadtime unchanged.
DATA REQUIRED
- Calculation or estimate of Manufacturing Cycle Time reduction. This should be available on your Current and Future State Value Stream Maps
- A dollar value estimate of the value of a day of cycle time, for use as a management tool. Cycle time reduction in most cases has a positive correlation with increased productivity, sales and market share. You also need a Dollars Per Day value that reflects this opportunity realistically. As before, this factor is a management tool only, and does not appear directly on a Profit and Loss Statement.
HOW TO QUANTIFY
Multiply the number of days of cycle time reduced, times the Dollars Per Day value.
EXAMPLE
Current line has a Manufacturing Cycle Time time of 25 days. A reduction in cycle time to 15 days should be possible, based on reducing queue time and “linking and balancing” the required processes. Management has determined that a day of cycle time is worth $75,000 in increased productivity, sales and market share. A 10-day reduction is valued at $750,000. This number is used to assess ROI potential, and to compare various improvement alternatives.
ADDITIONAL BENEFITS
There are many other areas of potential benefit that you can consider adding to this list. If you plan to impact office processes, come up with a reasonable way to estimate those savings. Preventive maintenance is another source of improvement and related benefits. How about the potential impact on your company stock price or Earnings Per Share?
By creating a rational list of total potential benefits related to a Value Stream transformation, it becomes much easier to get management buy-in and approval for an improvement project. And then…you need to do it!