The Economics of Lean – Part 3 of 4

CFO: Master of the Measurements

Everything about lean sounds easy, but it’s hard to do because a traditional company is basically working against itself. It takes a great deal of discipline to break away from traditional thinking, daily fire-fighting, and the inertia that keeps you doing things the same old way. Fortunately there is a solution – measures. A key element of a successful lean strategy is measurements that are based on how lean works.

As the CFO, you are the resident expert (and owner) of the measurements. It is very important for you to change the financial and operational measurement system so that the measures drive lean behaviors. Traditional measures, of course, will drive traditional behaviors. That is what they are designed to do. But these traditional measures will obscure and undermine the vital changes required by the economics of lean.

This is a new wine in old wine skins problem. If you change to a lean business strategy, you can not account, control, and measure it using the old methods. One of the most important contributions of the CFO is to lead these changes.

Five Lean Principles

The economics of lean are based on the 5 principles of lean: customer values, value streams, flow & pull, pursue perfection and empower employees. Adopting a lean business strategy means these principles must become the way of life for your company. These principles must permeate the entire organization from its cultures, operating practices, and management style. Let’s take a look at how these principles impact measuring and reporting.

The number one objective of a lean business strategy is to provide superior value to your customers and markets. This requires two things. First, you must clearly understand value from the customer’s perspective. Second, you actually deliver the exact value the customers want. By doing both these things effectively, a company will change the dynamics of customer relationships, and how they view your competition. These are the reasons why measurement & reporting systems need to be changed. We must measure how good we are at delivering customer value, at any time.

What exactly is value and how do how is it delivered? It’s easy to when you look at the products or services your customers buy. These products or services must meet certain quality specifications and delivery standards. But lean companies understand that value is much more than just the product or service. Customer value is created every time a customer has an encounter with your company. Think of all the encounters your customers have with your company outside of the actual use of your product or service. Placing an order, receiving and paying the invoice, after-sales support, navigating your web site and the ease of talking to a person in your company are just some examples of where value can be created. This is the reason lean companies identify, organize & manage by value streams. The second lean principle is working by value streams.

Value streams are not departments. Value streams are the sequence of process steps from the time a customer places an order to the time the customer receives the product or service. Value streams are the profit centers of your business. These are the reasons why measurement and management systems need to be aligned around value streams because the only way to increase profitability is for value stream performance to improve. The financial and operational measurements must be changed to focus on the performance of the value streams.

Before I go on, let me explain the difference between value streams and business processes. Value streams focus on order fulfillment – meeting customer demand and generating revenue. Business processes also meet demand of its customers, but do not generate revenue. As I previously mentioned, lean is a comprehensive business strategy that impacts the entire organization, not just the factory. Throughout this book I will be using the term value streams, but everything written about value streams applies equally to all the business processes.

The responsibility of the Lean CFO is to change measurement systems so the delivery of value can be measured consistently & frequently throughout the entire business. Every business process delivers value. Value streams create & deliver value to your paying customers. Internally other business processes delivery value to internal customers or other stakeholders. Every business process needs the same basic measures.