The Lean CFO Blog Series #2
Here are next two paradigms the Lean CFO must incorporate into the business to drive financial success with Lean
Improve Flow to Make More Money
A lean business strategy is more than simply eliminating waste. Flow must be created, measured & improved. Flow eliminates and manages variability in business processes. Making flow works requires strict adherence to lean practices and constant real-time measurement. The result will be tremendous improvements in productivity.
After-the-fact traditional financial analyses do not provide information to measure & manage flow. The Lean CFO needs to manage & maintain a lean performance measurement system that measures flow daily & weekly and align business decision making around flow & its impact on the business.
Capacity has Value
If you ask a traditional manufacturing company how it calculates capacity the answer will probably be headcount, standard hours available or utilization. This is because the traditional financial view of people & machines is as operating expenses. As a result much effort is put into understanding the drivers of these costs. The result is complex cost analysis systems such as standard costing.
Lean companies look at their machines & people as resources – it is their capacity that is used to create customer value. The primary question in a lean company is how are its resources spending their time – on creating value or doing something else, which is waste.
Capacity must be measured in a lean company, from a lean viewpoint: analyzing the time spent on value added activities and non-value added activities. This may sound like activity-based costing, but it is definitely not.
The Lean CFO must lead the effort to measure capacity because of the economics of lean. Using lean practices to eliminate waste will create capacity and there will be many business decisions that have to be made about how to use that capacity. The ultimate financial outcome of these business decisions will be dependent on how the accuracy of this capacity information.