Chapter 5 – Using Lean Measures
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What sets lean performance measurements apart from conventional measurements is they are much more than reporting measures. They are part of a measurement system that is integrated into the daily work of process teams and are actively used to understand value, identify waste and practice PDCA. Let’s look at the four attributes which separate lean performance measurement systems from other types of measurements.
Lean performance measurements must be relevant to the strategic objectives of lean – deliver value and eliminate waste. They must also be relevant to any specific process being measured to reveal the actual problems and issues that are preventing value from being delivered. Measuring the following criteria of process performance will ensure that a process team will have the relevant information for understanding operating performance and making improvements:
Delivery (“What by when”)
Customers value the on-time delivery of a product or service. This is a pretty consistent value proposition across all types of customers, companies and also business processes. The key component of measuring on-time delivery is basing it on when the customer wants delivery.
Quality (“Detect quality before delivery”)
In Chapter 3, we explained one aspect of customer value is a certain level of quality specifications which must be achieved by any business process. It’s best to measure defects as frequently as possible; frequent feedback helps to understand the root causes of defects.
Lead Time (“Speed is a competitive weapon”)
Lead time measures the length of time it takes a process to “complete an order.” Lead time is an important measure because it reveals both how the process performs as well as the delays between process steps. Average lead time is measured in the unit of time, (weeks, days or hours), which is most applicable to the process being measured.
Productivity (“Increasing output with same resources”)
Another impact of reducing waste and applying available capacity to value added activities is improving the productivity of any process. Productivity can be defined as increasing the output of a process with the same resources.
Cost (“Costs do not exist to be calculated. Costs exist to be reduced.” Taiichi Ohno)
Accounting and accountants spend a great deal of time calculating and analyzing costs. What is important for accounting to understand is that many of the conventional methods of cost analysis it uses may not work well in lean organizations as performance measurements of cost.
Lean thinking decreases costs over time in two ways:
- Improvement activities can generate actual cost savings that can be specifically identified during an improvement activity, such as a reducing overtime or scrapped/wasted supplies. These actual cost savings will be realized in the short-term on an income statement.
- Improvement activities can possibly prevent future cost increases. As we have previously explained (and will be repeated many more times in this book!), improvement activities create capacity in a process. Applying this available capacity to value added activities improves productivity and has the financial impact of avoiding future cost increases, such as hiring more employees, to meet increased demand on a process. There is no short-term realized cost savings but the growth rate of costs in the long-term will be reduced.
The typical lean measurement of safety is Incidents per Employee. Conventional thinking on measuring safety is that it’s primarily in manufacturing or healthcare. Safety in service businesses is also quite important. Conditions like repetitive motion injuries (e.g. carpal tunnel syndrome) and eye strain from computer use can impact employees in service businesses. Also the idea of psychological safety which has to do with respect for people!
Morale: Respect for People
Lean performance measurements for morale focus on getting real-time feedback and measuring what contributes to desired outcomes. This can be done through simple and frequent staff input. Teams can check morale during their daily huddle for feedback about how well the team feels set up for success that day (good/neutral/bad) and track trends over time. Or the team will be asked if they went home yesterday evening feeling good about their day or not.
Process Team Ownership
Process teams “own” their lean performance measurements. Process teams often calculate their own performance measurements, rather than having them calculated elsewhere in the organization. Calculating measures drives a better understanding of their purpose and creates ownership. The purpose of teams defining and calculating their own measures is for the team to understand and use them to identify improvement opportunities.
Process teams self-monitor and self-report their performance measurements through the use of visual performance boards. Process teams are also responsible for using their lean performance measurements in performing PDCA to determine and address the causes of both positive and negative performance factors.
Typically lean performance measurements are a combination of daily, weekly and monthly measures each used for a specific purpose, as we will now explain.
Daily Measures for Process Control
Daily measures are best for process control and detecting abnormalities in process performance, and they align with daily lean management practices. Daily measures answer questions such as:
- How did the process perform today relative to requirements, targets or expectations?
- What problems & issues were identified?
- What is being done to address these issues?
Weekly Measures for Improvement
Weekly measures focus on measuring process improvement over time (such as lead time and productivity), rather than daily process control. The purpose of weekly measures is to determine the specific, recurring wasteful activities which are impeding the delivery of value, then conduct process improvement activities.
Monthly Measures for the Lean Strategy
Monthly measures focus on measuring lean thinking from a strategic viewpoint. Lean organizations develop specific initiatives as part of their strategy deployment process. Monthly measures answer the question: Are the initiatives successful? Monthly measures allow company leadership to gauge whether adjustments need to be made to any initiatives. Like improvement measures, targets are usually set for strategic measures. These targets are usually annual targets.
Create Visibility into Problems
Improvement can only occur if process problems are revealed, become visible and the extent of problems can be quantified. This is one characteristic by which lean performance measurements differ from conventional measurements, which focus more on reporting. Successful lean transformations focus on employees identifying the right problems and solving those problems using PDCA. Lean cultures embrace understanding process problems and openly discuss problems with no fear of personal blame on anyone.
Lean Measurement Wrap Up: Measures that Matter
In the 21st century most companies rely on information technology systems to “run the business” and these systems create the capability to measure almost anything. In lean accounting, it’s important to measure what matters:
- Serving customers better
- Learning and improvement
- Problems and issues
The seven categories of lean performance measurements create objective visibility and insight into process performance, and they create the opportunity to use the measures, in conjunction with PDCA, to drive improvement throughout a company. Let’s now move onto Chapter 6 – Using PDCA.