Lean Manufacturing ROI

Manufacturing Costs 2Lean manufacturing methods always lead to lower costs.  But figuring out how much lower can be a challenge.

Lean Manufacturing and ROI
Lean manufacturing always provides a Return on Investment. Figuring out what that ROI is can be a challenge.

I get into lots of discussions about the financial benefits, the “cost cutting” benefits, the ROI of lean manufacturing. Most of these discussions start with a statement (or question) about how much money the lean initiative can be expected to save the organization.  Here’s the problem:  most manufacturing organizations don’t have a good grasp on 1.) what their problems are costing them, or 2.) what their forgone opportunities are worth.  Here’s another problem:  among those organizations that have given thought to #1 and #2, there are different conclusions as to how they should be measured.  So, when I’m asked “What will be the savings lean initiatives generate?  What will the ROI on our efforts be?”, I struggle to avoid the answer:  “It depends.”  (I really don’t like the “It depends,” response to any question.  When I hear it at times that I’m not feeling charitable, I hear it as “I don’t really have a clue.”)

Let me relate a story that will shed some light (I hope) on my thesis.  I had a client whose managers had set just one goal for their lean initiative and its component projects:  Cost savings of $75,000 for the year.  (Given the size of the organization, I thought the target was low but they were just getting started.)  Now, I generally like to avoid such targets but I said, “That’s great.  What sorts of problems have you identified that represent those costs?”  My response was blank stares.  “OK, where will these cost savings come from?  What sorts of improvement projects?”  More blank stares.  “Well, is it scrap reduction, downtime reduction, lowered inventories, changeover time reduction, delays reduction….what?”  More blank stares.

The managers figured there must be some cost savings somewhere.  That’s what they had always heard, right?  But they didn’t have a good idea as to what the sources of wasted money in the company were.

After some discussion, it was uncovered that equipment downtime was a serious problem and that the company actually did a fair (no better) job of measuring down time at different work centers.  “That’s a good start, ” said I, “I’ll bet there is an hourly charging rate associated with each work center, right?  I’ve seen that used at other places I’ve worked. ”  They didn’t know.

So, I went to find out.  I had several conversations with the company’s CFO about cost savings; what counts and what doesn’t.  His position was that a cost was something he wrote a check for.  Period.  A cost savings was something he used to write a check for but didn’t have to now.  Period.

You reduced the man-hours a task takes? Great! Did you send somebody home?  If not, it’s not a cost savings.

You reduced the amount of downtime on a particular machine? Great! You maybe saved some electricity but probably not enough to chase down the number.

You reduced scrap?  Yes, we can probably figure out what that’s worth.

You organized the workplace so that everyone can see, at a glance, whether the process is under control or not, and respond quickly when it’s not?  That’s great, too.  Show me how it reduces overtime (if it does), then we can talk.

It’s important to point out that this CFO was 100% behind the lean initiative at the company.  He just didn’t want managers to “find” cost savings where none, in fact, existed.

Now, I’ve worked at other companies that did, indeed, have a “charging rate” and considered decreases in machine downtime as a direct cost savings.  I’ve worked at companies that did consider a reduction in the man-hours associated with a task as a direct cost savings, whether or not it lead to actually reducing overall direct labor  in the short run.  So who’s right…the CFO in my story or these other companies?  Both, of course.

My response, then, to managers who need “cost savings” or “ROI on lean” is:  “My job is to help you realize tangible, measurable benefits when you effectively implement lean methods and principles.  It’s your job as managers to figure out what those benefits are worth.”