Lean companies recognize that optimization of the entire value stream flow is the primary goal of lean operating practices, tools and methods, and this goal must take precedence against all departmental goals. When it comes to measuring operating performance, lean companies employ a different philosophy than traditional measurement systems: understand the present to change the future. This forms the basis for making improvements. Improving future performance to better serve customers will require specific actions and changes to current operational activities.
Traditional measurements have two common characteristics – they are financially based and developed around the vertical structure of the organization. Financially based measurements (any numbers with dollar signs in front of them) are automatically backward- looking. Sure, the root cause could be identified, but there’s nothing that can be done to change the outcome, because it’s already happened. In traditional manufacturing companies, performance analysis is often based around comparing the actual performance with standards set in a standard costing system. A standard costing system generates rate & volume variances by design. Standards are entered into the system, actual is reported into the system and variances are created.
Traditional operational measures are usually deployed based the vertical structure of the company. The goal of such a system is to maximize each department’s performance. This creates complexity.
First, there are usually way too many measures. I’ve seen plants that have upwards of 50 -100 performance measures. Even if the measures are good, it is impossible for a plant location to try to maximize performance in that many areas, and it forces the plants to make trade-offs. Second, these measures are often disconnected from the real operational issues affecting a plant because they are decided upon by top management and dictated to the plant.
Existing performance measurements that are not lean-focused must be eliminated from the business; otherwise conflict will occur. Performance measures that are based solely on the vertical structure of the company must be eliminated or modified. The modification of these measures requires that the department, such as quality or supply chain, have measures on the department that focus on its ability to support the value stream. In a traditionally structured company, the department dictates performance to operations; in a lean company, the value stream dictates performance to the department.
Lean performance measures must be simple and easy to calculate so they can be reported frequently – hourly, daily or weekly. Simple measures which are timely and easy to understand will focus teams on identifying the root causes of poor performance. This is fundamental to driving productivity improvements.
Basic Lean Performance Measurements
Flow – The best measure of flow is related to inventory velocity – turns or days. Creating flow will allow more demand to flow through the value stream and will drive revenue growth. Improving flow creates more capacity to meet additional demand without increasing costs.
Quality – Poor quality interrupts flow, causes late deliveries, lowers customer satisfaction and negatively impacts productivity. Measuring defects at the source means defects will be discovered quickly, root causes will be easier to identify and continuous improvement will ultimately reduce defect rates.
Delivery – delivering on-time to the customer request date has the potential to set a company apart from the competition. Meet the customers’ needs in terms of delivery creates value, which will drive growth in revenue.
Order Fulfillment Lead Times – lead time is the total time from receipt of a customer order to delivery of the product to the customer. Lead time is an excellent performance measure precisely because it requires looking at how the value stream performs as a system, rather than just looking at the individual process steps of the value stream. Short lead times create value for customers and creates a competitive advantage for a company.
Productivity – Lean companies define productivity as output (such as revenue) divided by input (resources required). If lean practices are in place and delivering value to customers, then demand will be increasing. Likewise, if lean practices are eliminating waste, a company will be able to sell, make, and ship more products and services without increasing the resources in the value stream.
Lean companies create and continuously improve flow in value streams. This is the basic business operational model of a lean strategy. The lean company doesn’t need to measure everything; it just needs to measure the right things. If the measurements are aligned with the principles of lean the expected outcomes will occur.