In my last blog (here’s the link in case you missed it: https://maskell.com/?p=637 ) I proposed a new way the analyze capacity in a lean company, and gave you a lean way to think about this. I made the case that what you really need to measure is whether you are spending your resources in the value stream on productive or nonproductive activities.
The best part about measuring capacity this way? The information needed is already on the value stream map.
BUT (Usually when there’s a “but” someplace, it’s time to pay attention!) … your value stream maps have to be up-to-the-minute correct, and verified by actual observation. Just a guesstimate won’t do.
Integrity of Value Stream Map Data
If you are going to use value stream map information to calculate the capacity each process in the value stream it must be created by direct observation. This will yield the very best available data for calculating the capacity of a value stream. It forms the foundation for calculating the productive, nonproductive and available capacity for a value stream.
I’ll go further. As a Lean CFO you should insist vehemently that direct observation be used to gather all operating information for a value stream. Do not allow people to use data from the ERP system or let people simply use what their “experience” tells them. Part of your goal, as a Lean CFO, is to make sure everyone in operations, accounting, and finance are on the same page when it comes to understanding the business. The Value Stream map has to be everybody’s focal point.
Use the Values From the Map in Your Capacity Calculations
Total Productive Capacity of a value stream is its total cycle time multiplied by the average demand (usually normalized to a month.) Cycle time is the uninterrupted work time to complete each process step. It does not include any of the 7 wastes. Average demand is used because producing at a rate greater than demand is waste.
Total Nonproductive Capacity is the total time spent on wasteful activities as shown on the value stream map. The value stream map data for some types of waste is expressed in rates, such as scrap, rework and downtime. These rates need to be converted into the units of time used on the value stream map. Other types of waste such as waiting and transportation are usually already expressed in units of time on the map. Convert all observed waste into units of time and simply add them up to get total nonproductive capacity.
Total Capacity is the total time the value stream resources work in a month. This would be the total resources in the value stream multiplied by work hours per day by the number of days worked each month. Productive and Nonproductive capacity are expressed as a percentage of total capacity.
Available Capacity in the value stream is calculated by subtracting productive and nonproductive capacity from total capacity. There should always some available capacity in a value stream for 2 reasons:
- The tools and practices used in a pull system slow down your faster processes to the rate of the bottleneck, which is the process step with the longest cycle time.
- Lean companies always reserve a portion of capacity as a buffer for variability that cannot be predicted. This is typically between 10-20% of total capacity.
Capacity should be calculated for both people and machines. It’s best to calculate capacity based on the resource that is performing the value added work. The value stream maps indicate which resources are performing the value added work
No Benchmarks. Finally, it’s important to remember at the outset that there are no “benchmarks” as to what your capacity numbers should look like – they are what they actually are. In other words, you want the current state capacity to reflect the real current state of the value stream based on however much waste is observable.
What is important is the trend of capacity numbers over time, which should measure the maturity of lean practices, improving productivity and getting better at delivering customer value.
Next time we’ll look at some specific ways to use this analysis of capacity to improve your company’s ability to assess the true financial benefits that flow from Lean.
That’s where Lean Accounting comes in.