Make Money by Flowing Part 1 of 4

As a CFO you are given a business case and asked, “How much money will be make from this?” The outcome of the decision rests with your financial analysis. How would you, as CFO, answer this question about Lean? Your answer depends on your perspective of lean.

It’s common knowledge that lean eliminates waste. A traditional thinking company will look at waste in the amount of labor time saved. The traditional-thinking CFO’s financial analysis is quite simple. Multiply the total labor time saved by a labor rate to get the total savings Lean will generate. Often times this is then converted into head count reduction. While the amount of time saved is valid, the reduction in labor cost is not. This traditional perspective totally ignores the impact on revenue of improving the delivery of customer value by your company.

The Lean CFO recognizes this is a flawed financial analysis of lean due to the economics of lean. Financial success with lean occurs if a company can continuously improve productivity.  Productivity improvements do not simply come from eliminating waste. Value streams need to be redesigned to emphasize creating customer value above all else.  The redesign of value streams to improve the delivery of customer value is known as Flow & Pull, the 3rd principle of Lean. Real continuous improvement in productivity occurs when Flow & Pull Systems are established in every order-fulfillment value stream and administrative business process in a company. The responsibility of the Lean CFO is to create a measurement system that measures & manages flow.

 

Flow & Pull is probably the hardest part of becoming a truly lean company.   First, establishing flow requires “system-thinking”, which is how the entire value stream needs to work in a coordinated manner to always meet exact, specific customer needs, no matter how often they may change. This requires everyone working in a value stream to have a good understanding of customer needs as well as understanding the relationships between the process steps in the value stream.

Second, establishing Flow & Pull requires a redesign of business processes to work according to lean practices, not just simply eliminating random waste. Then once Flow & Pull is established, it must be constantly monitored & measured so interruptions to flow are found quickly and addressed.  Finally, maintaining flow requires constantly measuring & managing the process by the people that work in the process.

Finally, Flow & Pull requires organizational discipline, patience and a “blameless” culture. Discipline is required to follow established, proven methods of lean improvement and not cut corners or do things quickly. Patience is required to allow the people in the process to make the improvements themselves by following these proven methods rather than management telling people what to do. A lean culture that allows people to freely discuss the process problems identified without fear of being blamed.