Have you implemented lean within the four walls of your facility and you are wondering, Why don’t the results show up on the P&L statement?” This is a common question within companies early in their lean journey.
You may have realized some minor cost improvements but you are not seeing the large-scale profit improvements. There is a simple reason for that. Besides the culture change, it is really a growth strategy. You need to use that freed up capacity to GROW the business systematically and strategically. The true benefit to the P&L of lean is to allow you to sell more with the same manpower and equipment.
In Exhibit 1-A you can see the impact to the value stream income statement just from improvements on the floor.
Sales have stayed the same. Your profits decreased. Even if you removed the impact of pulling into the quarter the capitalized labor and overhead from prior quarters that were sitting in your inventory, Exhibit 1-B, shows that the impact is minimally favorable. Here you see that we only added $65,250, or 0.4%, to the bottom line for all our effort.
Let’s look at the income statement where instead of reducing the labor to sell the same amount of product, we use the freed-up capacity to strategically sell more product. That impact is shown in Exhibit 1-C.
We improved our profit margin by 1.6% points and $729,600! Because we utilized our excess manpower capacity to sell more with the same number of employees, we were able to make a significant improvement in our profits. Using lean as a growth strategy, using your freed-up capacity, is the most effective way to take advantage of your lean improvements.
Another area in which lean impacts the financial statements is on the balance sheet and the statements of cash flow.
- You will see a decrease in FGs
- You will also see a lowering of WIP inventory
- You will need less raw material
- Finally, you will have an improved cash flow as you sell more product and tie up less money in inventory.
So why are customers not flocking to you with new business? Your lean activities have attacked the plant floor but not the quoting process. How do you change the whole quoting process to be nimbler, thereby allowing the company to process and win more quotes at the margins desired? You simply cannot continue to use standard cost thinking, silo activities, and linear processes to accomplish the growth that lean promises. Just like leaning out the factory floor, you must lean out your quoting processes to utilize the capacity gains your other lean efforts have garnered. In subsequent postings I will discuss a unique quoting process that will allow you to quote faster and free up quoting manpower to spend the appropriate amount of effort on the few key quotes that can drive your profits higher.