An early step in a good Lean program is implementation of visual metrics for decision making purposes. Lead Time and Throughput are the most direct and have the most impact on profit. Operating Expense – all labor and other material – is more difficult to make visual, but can be by highlighted in posted suggestion system results.
The value of lead time improvement is more easily understood by most employees than the value of reducing inventory, so it is best to post it as a calculation from Little's Law. SPC charts in the cell or in an area close to the cell can be used to trend improvements. SPC charts showing inventory directly can be maintained by the production office.
Because final throughput can be no better than throughput at the constraint that metric should be tracked visually at the constraint. Pieces per hour or pieces per shift are the most common visual metrics – often in the form of simple "fence and gate" tracking against a target number. It is important for the employee to record the reason for any misses, to serve as a source of future improvement efforts. Historical throughput can be tracked using SPC charts.
Metrics tracked for reporting purposes are generated too late to drive daily decision making.
Claiming the Value of Reduced Inventory in a Repair Business
We've really struggled with this over the years, and now recommend that value be claimed for increasing Capacity when there's backlog available to convert that capacity to Sales, and for reduced Lead Time when a gain in market share is likely because of it.
We've measured Cash Flow, which is just the change in Working Capital, and the component that changes is Inventory. As you know, inventory in a repair business consists mainly of man-hours, and because most of the jobs are billed at the end of each month, the inventory is reduced to a relatively small amount every month-end, and especially at every quarter-end. In any event the quarter to quarter difference – and thus the value of projects measured this way – is small. We found that integrating (math) inventory over time gave us a more reasonable metric, but it is complex – and troublesome to calculate. Remembering that the integral of a function is simply the area under the curve, picture 100 man-hours expended 10 months ago and not yet billed. The area under that function is 1000 man-hour months, which can be converted to dollar months. If the same 100 man-hours were carried in inventory for only one month instead of 10 the area then would be 100 man-hour months. Using the Company's Cost of Capital the dollar value of freeing up those 100 man-hours nine months earlier can be calculated.
The real problem is in developing the area under the curve. We plotted Cost Detail reports (man-hour expenditures per day) in Excel and added up each day's contribution. At the end of the day the value is still quite small, compared to that of increased capacity or market share.
Lean Savings Targets
Lead Time reduction should be measured as well as dollar savings. The problem many organizations have is that reduced lead time in itself has no economic value until they can grab additional market share or displace new make, after which it has tremendous value.
If one remembers that Y=f(X), that is, that profit increases are derived from a number of process improvements, those process improvements themselves should be measured as well as the end result. They are a quicker indication of change, and a quicker indication of behavior that is beginning to slip back to the old way of doing things.