LMJ September 2014

Issue 7 Volume 4 | September 2014 | www.leanmj.com

$65

– £4

5 –

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Organisations and interviews featured in this edition include: Commonwealth Bank of Australia, Industry Forum, BMA Consultants, John Bicheno, Jean Cunningham, Ian Machan, Bill Bellows and Bob Emiliani.

IN THIS ISSUE:Increase quality, increase velocity: LMJ editorial board member, Joseph Paris, explores the financial industry’s attempts at lean and shows where savings have been made in processes within both personal and investment banking sectors.

Turning loss into cost: Paul Hardiman, TPM consultant manager at Industry Forum explores how organisations can control their losses and turn them into profits by learning how to use value analysis/value engineering (VA/VE) and industrial symbiosis.

Lean accounting: Consultant Brian Maskell outlines the effectiveness off lean in accountancy departments and provides case studies from a range of sectors around the world.

Bring back, lean out and serve: Ian Machan asks readers to help in understanding the future of lean, the effects of reshoring and servitisation.

Analysing lean’s place in the world of finance

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Dear reader,

The application of lean in manufacturing has produced a wealth of high profile, successful and lasting results, as well as a legacy of literature and academia on the subject.

The Toyota Production System changed the face of manufacturing with a focus on two goals: the elimination of any step in a process that did not directly add value to the product, and the smoothing of the flow of work necessary to build the product. The ambition was to create better value to the end user of a product while eliminating waste in the process and cutting the manufacturing cost.

This issue of LMJ explores the feasibility of applying lean principles to the financial sector and whether financial institutions stand to benefit.

Financial institutions operate in many areas that resemble automotive manufacturing. For example, the processing included in loan origination or payment operations requires multiple steps, carried out by expert staff, and linked together to create a meta-process that can span the entire enterprise.

In addition, the end product has two values associated with it: adding value for the customer, and the value or cost the institution places on work to create it. Time and time again, the latter cost surpasses the value placed on the product by the customer.

The similarity between automobiles and banking is good news for financial services because it suggests lean methodologies can be applied to complex operations to gain efficiency and improve quality.

Brian H. Maskell, president of BMA consultants, discusses the application of lean in accounting, sharing case studies that reveal common mistakes in outdated accounting practices, as well as what lean can teach businesses about simplicity and efficiency.

Business productivity improvement manager at the Commonwealth Bank of Australia and lean consultant, Max Cardew analyses the incorporation of lean in the world of professionals, sharing the challenges and success that arise from a lean intervention.

Consultant Ian Machan presents how a lean transformation, servitisation and reshoring creates competitiveness and asks readers to help him explore the ideas of this new phenomena in manufacturing.

This month features a case study from lean diary author Joseph Ricciardelli, that explores how even a well-run organisation can be improved through careful scrutiny and investment in people.

September’s issue also includes regulars from LMJ board member Bill Bellows, who writes his regular column Lessons from Deming, John Bicheno reviews Factory Physics for Managers (2014), by Edward Pound, Jeffrey Bell, and Mark Spearman and LMJ rounds up the latest conversations from lean’s social media community in Lean online.

Victoria Fitzgerald, Managing Editor.

C O N T E N T S

S E P T 2 0 1 4

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04 Lean News

05 Introducing the editors

06 IntroductionSarah Lethbridge asks if financial institutions are doing their part to help rebuild customer relations with the use of lean.

P R I N C I P L E S & P U R P O S E

07 Turning cost into lossTPM consultant manager at the Industry Forum, Paul Hardiman, shows how organisations can control their losses and even turn them into profits by learning how to use value analysis and industrial symbiosis.

12 Henry Gantt: lean before there was leanBob Emiliani, consultant and lean blogger, presents some words of wisdom from one of the forefathers of lean, Henry Gantt and his 1916 book on production and management.

14 How to deal with the doubters of leanConsultant Jean Cunningham explores how those who fail to see the benefits of a lean transformation might be converted, even when the results do not speak for themselves.

17 Latent process widgetsMax Cadrew, business productivity improvement manager at the Commonwealth Bank of Australia analyses the incorporation of lean into the world of professionals like lawyers and bankers.

22 Increase quality; increase velocityLMJ editorial board member Joseph Paris explores the financial industry’s attempts at lean and shows where the real savings have been made.

2 6 S P E C I A L F E A T U R ELook around for ways to automate your manufacturing processJack Rubinger, of Graphic Products explores how automation can save businesses time, money and the headache of wasted productivity potential.

2 8 S E C T O R F O C U S : A C C O U N T I N gLean accountingBrian Maskell highlights the effectiveness of lean in the accounts department of any large organisation.

3 2 S P E C I A L F E A T U R EBring back, lean out and serveIan Machan asks for reader contributions on his research into the effects of reshoring, servitisation and lean. Is it beneficial? Do you have experience in it?

3 8 L E S S O N S F R O M D E M I N gBill Bellows presents a lesson showing how teamwork and organisation can be invaluable at teaching how to recognise problems in the production line.

4 0 B O O k R E V I E wUniversity of Buckingham’s John Bicheno reviews Factory Review for Managers (2014) by Edward Pound, Jeffrey Bell, and Mark Spearman.

4 1 L E A N O N L I N EWe bring you all the latest news and discussion from our LinkedIn and Twitter pages.

4 2 E V E N T SFind out about the latest lean events coming your way.

4 3 S U B S F O R M

Elizabeth House, Block 2, Part 5th Floor, 39 York Road, London, SE1 7NQT +44 (0)207 401 6033 F 0844 854 1010 www.sayonemedia.com.

Lean management journal: ISSN 2040-493X. Copyright © SayOne Media 2014.

E D I T O R ’ S L E T T E R

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E D I T O R I A LCommissioning editor Andrew [email protected]

Managing editor Victoria [email protected]

Editorial directorCallum [email protected]

D E S I g NArt editorMartin [email protected] Cole, Nick Bond, Katherine Robinson, [email protected]

In order to receive your copy of the Lean Management Journal kindly email [email protected] or telephone 0207 401 6033. Neither the Lean Management Journal or SayOne Media can accept responsibilty for omissions or errors.

Terms and ConditionsPlease note that points of view expressed in articles by contributing writers and in advertisements included in this journal do not necessarily represent those of the publishers. Whilst every effort is made to ensure the accuracy of the information contained in the journal, no legal responsibility will be accepted by the publishers for loss arising from use of information published. All rights reserved. No part of this publication may be reproduced or stored in a retrieval system or transmitted in any form or by any means without prior written consent of the publishers.

www.leanmj.com | September 2014

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LMJ

If you have any news that you think would interest and benefit the lean community please let us know.

Send submissions to the commissioning editor Andrew Putwain: [email protected]

Our experienced editorial board members contribute to the journal providing comment against articles and guiding the coverage of subject matter.

EDITORS

More information on our editorial board, their experience, and views on lean is available on the LMJ website: www.leanmj.com

I N T R O D U C I N g y O U R

SHORTLIST FOR LEAN AwARDS ANNOUNCED

The British Quality Foundation (BQF) has announced the shortlist of finalists for the Lean Six Sigma Award at its annual UK Excellence Award Ceremony in London in October.

The 2014 finalists include The Office for National Statistics, luxury mobile phone manufacturers and retailers, Vertu, and pensions and investment firm Standard Life.

The awards recognise exceptional performance improvement projects of all sizes. Past winners include BAA (Heathrow), London Underground and Royal Mail.

The finalists are judged based primarily on the lean methodology used and the results achieved, rather than organisational transformation or the scale of the project.

They carry out an initial assessment of each entry and use the following criteria to assess entries: the organisation’s understanding of the problem; application of the correct lean and/or six sigma tools achievement of bottom line results.

LEAN HEALTHCARE CONTINUES ITS ROLL OUT

A leading hospital board in the US state of Washington has opened the doors of a vast new medical centre built on lean principles that is already giving positive results. Coming just weeks after a Canadian provincial government cut back its lean management policies due to public outcry at its wastefulness and the high fees of the consultancy firm involved, which was based in the same state.

The Providence Medical Group is a cutting edge hospital built on lean principles. The designers were given a week long intensive training session to learn the value of lean in patient care.

The hospital came in ahead of schedule and took just 22 months to build. It can accommodate over 120,000 patients a year.

The hospital was built not only with lean but also BIM (building information modelling) a concept that focuses on forethought and planning that is revolutionising hospital construction and shares many positives with lean.

IRISH COURTS ADOPT LEAN

In an effort to cope with budget cuts the Irish Courts Service is adopting lean principles, expected to help save €2m a year.

The services in the country have been under extreme pressure for several years as Ireland’s financial crisis has seen public sector budget cuts for five consecutive years, adding to fears that the court system would be unable to cope.

Chief Justice of Ireland Susan Denham said: “Given our current resources, if we do not change the organisation of court venues and use the resources and staff available in a more streamlined way – it is inevitable that there will be disruption to the operation of courts.“

Lean’s introduction could be vital as she added, “(the) input and flexibility of the staff” was essential for making these changes possible, as the system continues to be “flexible and imaginative in its approach in doing so much, so often with less and less funds”.

5www.leanmj.com | September 2014

Irish High Court, image courtesy of Darragh Sherwin on Flickr (CC BY-NC-SA 2.0)

Paul Hardiman industry Forum, united Kingdom

René AAgAARdTelenor, denmark

RenÉ AeRnoudts Lean Management Instituut, the netherlands

Jacob austad Leanteam, denmark

Bill Bellows President, in2:inThinking Network

DaviD Ben-Tovim Flinders medical Centre, australia

John Bicheno University of Buckingham, United Kingdom

Gwendolyn GalsworthVisual thinking Inc., Usa

Brenton Harder Commonwealth Bank of australia, australia

Alice leeBeth israel Deaconess Medical center, USA

Sarah LethbridgeCardiff business School, United Kingdom

Jeffrey K. LiKer University of Michigan, USA

joseph parisoperational excellence society

Zoe RadnoR Loughborough University, United Kingdom

nick rich Swansea University, United kingdom

Ebly SanchEzVolvo Group, Sweden

Peter Walshlean enterprise australia

Peter Watkins Gkn, United kingdom

wendy wilsonwarwick Manufacturing Group, University of warwick, United Kingdom

Torbjørn neTlandnorwegian University of Science and Technology (nTnU), norway

Steve YorkStoneedinburgh napier University, United kingdom

P R I N C I P L E S

& P U R P O S E

Paul Hardiman, TPM consultant manager at the Industry Forum explores how organisations can control their losses and even turn them into profits by learning how to use value analysis/value engineering (VA/VE) and industrial symbiosis.


Turning loss into cost

whether an organisation uses lean principles or other tools like total productive maintenance (TPM) to drive improvement, it is important for an organisation to fully understand all losses and

their associated costs to enable focused improvement activities. Costdown pressures will only intensify as global competition progresses and emerging economies continue to improve.

For TPM, the Japan Institute of Plant Maintenance (JIPM) encourage organisations to group losses into three main categories comprising of 16 losses.

The first task for an organisation is to ask whether they have a true picture of all losses. Many organisations think they do, but a more detailed analysis often identifies many gaps.

Next is to look at the way the losses are accounted for. Many are reported as measures such as overall equipment effectiveness (OEE), parts per

I N T R O D U C T I O Nw R I T T E N B y S A R A H L E T H B R I D g E

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I’ve worked with financial service organisations to help them to adopt lean practices and one of

the things that can be frustrating for a project team keen to increase value add and reduce waste, is the amount of legislation that exists which teams feel largely powerless to challenge.

Of course, with high profile financial disasters such as the Enron scandal, the pervasive sale of subprime mortgages and the collapse of institutions from Lehman Brothers to Lloyds Bank, leading to the global economic recession of 2008, (a recession which it could be said, we are only just beginning to emerge from) it is quite clear that legislation is needed, however!

To look on such economic catastrophes in an extremely positive light, you could say that the devastation caused has offered organisations a unique opportunity to start again. To review their policies and processes and try to convince their customer base that they are organisations that can be trusted.

Indeed, to deal with massive profit losses, financial institution reform has also been driven by a need to focus on what’s important, to streamline and to, simply, make money again. The application of lean thinking therefore has naturally been widely adopted within the sector.

Cardiff Business School’s Lean Competency System has worked with AIG, Allianz, Lloyds Bank, Nationwide, RBS and Rabobank and their lean learning programmes are all comprehensive and impressive. And the effects of lean can be clearly seen when experiencing their services as a customer.

Knowing that Nationwide, the UK’s largest Building Society, has an extensive programme of improvement

and change, I have always examined the services they provide to me as a mortgage customer closely. After 5 happy years with them in my old home, I decided to purchase a new mortgage with them for my new address. It would be an interesting time to take out a mortgage as the whole sector was having to undertake a massive overhaul of their mortgage process in order to meet new demands made by the Financial Conduct Authority. I applied for my mortgage and although the same cannot be said of the house sale and purchase process itself, dealing with Nationwide to procure my new mortgage, was a dream.

I received text messages at every stage of the process to inform me of progress. Progress itself was very swift and I felt in control at all times. I didn’t have to ring Nationwide once in order to question any aspect of the service or chase things up. Saving them a huge amount of failure demand work. Upon moving into my new property, I was greeted with a homebuyers welcome pack – a lovely gift, filled with cleaning products, home catalogues, mugs and tea bags, which really made me feel pleased to have stayed with them. It was very clear to me that the process had been examined from a customer’s perspective extremely closely and it was a delightful experience as a result.

In this issue, you will hear from a number of different lean experts about how they have adopted different aspects of lean to the sector. As the financial sector bounces back from the Great 21st Century Depression, it is hoped that a lean approach can be widely incorporated within their practices to ensure profitability, customer satisfaction and perhaps most importantly an honest, quality, reliable service that people can trust again.

R E A D A B O U T :

Creating opportunities from loss

How to make a business more profitable by reducing muda

Lost/cost matrixes

1. Breakdown

2. Set up & adjustment

3. Cutting blade replacement

4. Start up

5. Minor stoppage & idling

6. Speed reduction

7. Defect & rework

8. Shutdown

9. Management loss

10. Motion loss

11. Line organisation loss

12. Distribution loss

13. Measuring & adjustment loss

14. Teild loss

15. Energy loss

16. Die, jig & tool loss

In this issue, you will hear from a number of different lean experts about how they have adopted different aspects of lean to the sector


Breakdown loss

Fixed cost: breakdown time x no. of people x wage rate + cost of breakdown maintenance changeover loss

Fixed cost: changeover time x no. of people x wage rate

Variable cost: cost of parts used in adjustment x number of parts used minor stops and speed loss

Fixed cost: minor stop time x no. of people x wage rate

Scrap and rework

Fixed cost: (time spent producing defects + time spent reworking defects) x No. of people x wage rate

Variable cost: wasted raw material + energy + cost of additional materials

Labour efficiency

Fixed Cost: time spent on wasteful activities x no. of people x wage rate

Energy loss

Variable cost: start up time x energy cost per unit of time cost of total energy input - cost of energy used effectively

Yield loss

Variable Cost: amount of material scrapped x unit cost of material

Jig and tool loss

Fixed cost: (subject to depreciation. Any excess cost over and above the target cost is treated as an initial investment loss) Initial investment loss = actual costs – estimated costs

Costs from losses associated with forced deterioration: (breakage and shortened life), often included as consumables cost of variable production costs.

Life curtailment loss = actual jig and tool costs – estimated jig and tool costs breakage loss = refurbishment costs

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P R I N C I P L E S

& P U R P O S E

T U R N I N g L O S S I N T O C O S T P A U L H A R D I M A N

The first task for an organisation is to ask the

question whether they have a true picture of all losses

million defect (PPM) or percent scrap or rework. But what are these losses really costing?

Finance will often make assumptions based on the data, which often are not visualised or understood throughout the organisation.

A tool extensively used in TPM is a loss cost matrix.

The following guidelines can be used to assist in drawing up your own loss/cost matrix and in calculating the cost of the losses. You will need at least one person in the team with detailed financial knowledge. They will need to know

how the costing system works in your own organisation.

To create the matrix list the 16 losses down the left hand side of a grid. You may need to split some of the losses into more than one line e.g., rework and scrap, as they have slightly different cost components.

Along the top of the grid create columns for the total manufacturing costs, split into categories that reflect typical line items in the Profit and Loss account.

The matrix is then populated to show which losses inflate which costs. The solid and outlined circles show the direct and indirect impact, respectively, of the losses on the various costs.

Again detailed knowledge of how costs are made up in your organisation will help in populating the matrix.

Now calculate the cost of the losses in the right hand column. The following formulae are guidelines as to how some of these may be done. The finance team will need to provide a lot of the information to make the conversion.

In this matrix we are showing the costs for the whole organisation and so the losses at level 4 of the loss tree will have to be totalled across the whole tree.

Finance will often make assumptions

based on the data, but often these

results are not visualised or understood

throughout the organisation


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P R I N C I P L E S

& P U R P O S E

VA/VE is becoming a must-

have capability for manufacturers

in advanced countries. In

particular, where a firm detects that its market is under threat from Asian companies using a cost innovation

approach, the determined use of VA/VE is a good way to kickstart a response

The key idea in industrial

symbiosis is process waste only exists in relation to a specific process. The process waste from a given firm

is just stuff the firm doesn’t know how to transform into something

customers want

T U R N I N g L O S S I N T O C O S T P A U L H A R D I M A N

World War II. It spread to Europe and the UK during the 60s and 70s but in recent decades has become unjustly neglected.

A VA/VE project should be carried out by a cross-functional team and needs effective leadership. It is easy to find how to guides for VA/VE on the net and it is worth using one which goes into some detail and following each step through.

One of the powerful aspects of VA/VE is the effort that goes into identifying, analysing and refining the problem. A common feature of failed costdown projects is they assumed too rapidly the real cause of the problem had been identified and ended up only tackling symptoms rather than the real issues.

VA/VE also goes through a well-structured method of brainstorming solutions and then carefully selecting and refining possible solutions. Often three options are taken forward some way and the final option is only selected on a careful cost-benefit analysis.

A good VA/VE project guide will also include suggestions on how to play the inevitable organisational politics that surface in a project of this kind. For example, it is important at an early stage to identify the main stakeholders involved in the solutions that are being investigated and to keep them informed of how the project is developing. A sudden surprise at senior level when the project is well developed can easily provoke hostility, resistance or even rejection. A senior project sponsor is also an invaluable asset. This method of developing innovation is currently emerging globally in

the public sector under the new name of i-team.

It is important to recognise that this disciplined approach to sustaining or enhancing product performance, while making major reductions in cost, has been used by Chinese manufacturers to progress from significant regional players to dominant global firms in specific markets. This development has been analysed in the book The Dragon at Your Door: How Chinese Cost Innovation is Disrupting Global Competition by Ming Zeng and Peter J Williamson. The project leader for VA/VE exercise can make good use of the examples in this book, to help persuade doubters of the importance of boosting value while reducing cost.

It is true that currently the low cost competitive platform of Chinese manufacturing is facing various challenges which are beyond their control. This means they will almost certainly develop the strategies which they can control like cost innovation. Effectively this means that VA/VE is becoming a must-have capability for manufacturers in advanced countries. In particular, where a firm detects that its market is under threat from Asian companies using a cost innovation approach, the determined use of VA/VE is a good way to kickstart a response.

Many experienced observers of the global manufacturing scene think the strongest cards advanced country manufacturers possess lie in the power and potentiality of the networks they can develop and leverage. An important example of this approach goes under the name industrial symbiosis (IS).

IS started as an academic idea but it was first shown to be practically effective in the West Midlands. The key idea in IS is that process waste only exists in relation to a specific process. The process waste from a given firm is just stuff the firm doesn’t know how to transform into something customers want. Whether the waste is in fact useful to someone else is unknown until a deliberate search is made.

IS uses the power of networks to find customers for the material that other network members can’t use. It is important to recognise the immense power of this

approach. The firm generating the waste finds that something that it had to pay someone to dispose of becomes a revenue item – cost has literally been changed into value. Similarly the firm that takes the waste as input finds it benefits from a costdown on its purchasing bill.

This approach relies on the network being large and varied so there is a good chance a reasonable proportion of the identified wastes can find new users. It is also helped by a well-designed matching system.

IS now has an important profile in Europe. In its 2020 flagship initiative, Roadmap to a Resource Efficient Europe the European Commission highlighted the role industrial symbiosis schemes can play. The European Resource Efficiency Platform (EREP) has acknowledged the role of “facilitated industrial symbiosis” schemes in “diverting waste from landfill, contributing to the preservation of resources and moving waste up the value chain”. It has called for the wide-scale implementation of IS networks across Europe. It also credited industrial symbiosis projects for accelerating innovation and creating green jobs. There is now an important desire to implement a Pan-European network of industrial symbiosis programmes.

Europe’s leading experts in the implementation and development of facilitated industrial symbiosis projects and networks have joined forces to create the European Industrial Symbiosis Association (EUR-ISA). EUR-ISA initially brings together the organisations responsible for up to 10 established industrial symbiosis programmes (collectively engaged with more than 20,000 companies across Europe) and provides the European Commission with a focal point to accelerate industrial symbiosis in Europe in order to generate substantial economic, environmental and social benefits.

Now think about other costs that can be included in the loss totals. Some examples are shown below:

Penalties for missed or late deliveries.

Premium freight costs.

Costs associated with outsourcing manufacture to catch back on lost production.

Any significant supplier rebate costs – i.e. paying a higher price per unit for supplied items as the predicted volume (which would have been supplied at a cheaper unit price) was not bought in.

Impact from cash flow disruption; not being paid in the expected time slot as delivery late, so needing to borrow money. This will incur the costs associated with borrowing.

Scrapping material as a result of a breakdown e.g., if other earlier parts of the process can’t be shutdown.

Costs of catalyst loss. If a catalyst is used in the process and it has a known shelf-life then loss can be incurred when it is not used to process materials during extended breakdowns.

The cost of utilities e.g. heat/light/water/waste costs can’t be recovered at any point.

It is very important to capture how you calculate each of the loss costs so it can be repeated later. You should write down the sources of information used, the conversion factors (correct at that date), any assumptions made and the actual formulae used in your organisation.

Once the matrix is created this can now be used by the improvement teams to attack and reduce the biggest losses. It is easy at the end of the improvement activity to see the true financial benefit to the organisation.

This matrix exercise may well identify an area which requires sustained attention. A proven and effective method for progressing such areas is value analysis/value engineering (VA/VE) which was developed in the United States during

F U R T H E R R E A D I N g :

www.nispnetwork.com


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P R I N C I P L E S

& P U R P O S E

Bob Emiliani, of the lean professor blog, shares the value of Henry Gantt’s lean teachings and how the ideas are even more relatable now with current structures of many large firms.

Lean before there was lean

gantt would no doubt be upset and

disappointed with today’s finance and accounting

leaders. They thought the

best route for reducing unit costs was by offshoring work to

low wage countries

The following excerpts about financiers and accountants are taken from Gantt’s book,

Industrial Leadership, (1916).

Referring to financiers and merchants, Gantt said: “Their natural tendency, therefore, was to apply to the purchase of labor the same rules which they had applied to the purchase of materials, namely, to buy it as cheaply as possible.”In this context, Gantt makes the case that labour is vastly different from material and must be carefully acquired, developed, and rewarded. The consequences of cheap labour are undesirable for a business, and include low quality work and workers who perform only well-enough to keep their job. This is seen in lean with many companies strategically avoiding hiring new employees because they wouldn’t embrace lean culture. Unfortunately it’s not seen in finance where high turnover and no loyalty between staff or employers creates inefficiency.

“Too often the system of cost accounting has been to a large extent to blame, for the systems in general use

which those at the head of the business perform their functions, that is at least as good as that which we use to measure the efficiency of the operative.”We now have that means. It is called lean accounting.

“The time will come, however, and indeed is not far distant, when cost keeping and accounting methods… will be so changed as to place blame for failure where it belongs, and give credit to whom credit is due.”Lean accounting helps assign problems to the correct areas so that root cause analysis can be performed in a non-blaming, non-judgmental way. One of the effective aspects of continuous improvement is the emphasis on going back through to the beginning to always find the root causes of a problem.

“Our difficulty in the past has been mainly with the commercial man, who has certain theories of efficiency gained from the cost accountant which are fatal to our efforts to make improvements of any kind.”Indeed, the commercial man, focused on selling, lives on, and continues to remain closely aligned with status-quo oriented cost accountants.

“The financier, in many cases, still sincerely believes the accountant to be more important than the manufacturer, even though he only keeps a record of what the manufacturer does.”Manufacturing is where value is created, not in accounting. The financier must pay attention to manufacturing.

“It is time we readjusted the traditional relative positions of the record keeper and the doer. The record keeper is just as essential as ever, but under modern methods he must yield his supremacy to the producer, and give up his privilege of being simply a critic.”The accountant must become actively engaged in continuous improvement through participation in kaizen.

Gantt would no doubt be disappointed with today’s finance and accounting leaders. They thought the best route for

reducing unit costs was by offshoring work to low wage countries, thereby continuing the long tradition of failing to understand the difference between unit cost and total cost. Gantt would rip the leaders of large corporations who drove their suppliers to set up businesses in low wage countries, and then, a decade later, take credit for re-shoring work to the home country (e.g. Wal-Mart, General Electric).

Today’s finance and accounting leaders extended payment terms to their supplies, which, in effect, raised their costs. But, unable to pass the increased costs on to their customers, they suffer reduced profits which threaten the future existence of their business. Instead of helping suppliers improve their processes, they harmed suppliers.

Gantt would also despair at today’s financiers, who remain far more adept at speculation and harvesting the resources in a business than improving businesses and the processes used to create value for customers. He would have harsh words for company leaders who hoarded cash and richly rewarded shareholders, while reducing the wages and benefits of the employees that remained after all the layoffs.

Ultimately, Gantt would be upset that, 100 years later, the pinnacle of management practice remains zero-sum (win-lose). He would be disappointed in leaders for not evolving towards non-zero-sum (win-win) business practices, and in governments and society for not holding them accountable.


R E A D A B O U T :

Henry Gantt (1861-1919), an associate of Frederick Winslow Taylor, the father of scientific management, the predecessor to lean management

Gantt’s views on financiers and accountants, based on his extensive experience with progressive management practice

Gantt’s ideas of proto continuous improvement where reflecting on problems was the key to efficiency

often fail to disclose the real troubles, and content themselves with blaming the shop with inefficiency… the call for efficiency which has been so loudly proclaimed throughout the country for several years has had a great deal of influence on shop organizations, but it has hardly been heeded at all in the financial and selling ends of the business, where it is needed even worse than in the shops.” Gantt believed finance departments remained notable laggards in the application of lean principles and practices to finance and accounting work. Accounting is based on what has happened. Projections and what could happen are given less importance. The scientific approach of what might happen, the causes and what has been missed, needs to be embraced.

“The cost keeping and accounting methods in general use in our industries today are so devised as to put all the blame for failure on the producing portion of the business, and do not investigate how the loss could be due to improper business policies, which it is safe to say are a more fertile source of failure than mistakes made by the production end of the business.”This idea that errors could occur far more easily in the office than on the factory floor is an interesting point and remains true today in any organisation that continues to use standard cost accounting.

“It is necessary that our cost keeping and accounting methods of the future shall show what losses are due to an unwise policy, or to poor management… or industrial schemes will not be rounded out until we have a means of measuring the ability with

The accountant must become actively engaged in continuous improvement through participation in kaizen

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P R I N C I P L E S

& P U R P O S E

Lean practitioner Jean Cunningham teaches how to persevere through the doubts of a kaizen event, even if there’s opposition.

Questions of the lean doubters

when kaizen events occur ongoing

with full employee and management support, the

financial impact will

become clear as time goes

on

If the CFO asks this question, they are just doing their job of seeing that company resources are being utilised in value adding ways.

The key word here is financial. The answer to this question immediately after an event is easy; immeasurable. Or, maybe even zero. As you probably already know or would guess, answers like that do not play well to those who do not yet understand the lean transformation or the ongoing value it delivers.

But do not be confused and think that this means a kaizen event does not have value. A well-executed kaizen event has very real, sustainable value. But the value begins with implementation of the process changes pulled out of the kaizen future state and compound thereafter each time the process is performed. I believe kaizen events are the most important single lean tool available to launch and sustain a lean transformation.

It is the lean expert’s job to provide a response that convinces the enquirer that value is being added even if it cannot be seen on a traditional financial report.

There are better answers to the original question, including alternative ways to view value that show obvious positives for every company. These all overlap, but have distinct traits of their own that may be useful.

I N C R E A S E D C A P A C I T y D U E T O w H A T D O E S N O T H A P P E NFirst, keep in mind that accounting deals with financial measuring of what has occurred in the past. Accountants do not have the tools to measure work that does not happen or material that is not used or revenue that is not realised due to process waste. For instance, there is no accounting transaction for:

Rework that does not happen Overtime not worked Scrap not generated A worker who does not leave and does

not need to be replaced Recruiting that does not occur for a

position that does not need to be filled from the outside

A customer who leaves for a faster and higher quality competitor

A lawsuit that does not happen

For a given process, you are spending less, using less, and/or doing less because of your kaizen improvement efforts. This translates directly to increased capacity to do additional things. Everyone involved with the kaizen improvement events know this. But, traditional accounting cannot measure it and track it with a report, and the accounting function,

CFO, and others viewing traditional financial reports cannot see the lean value or support it.

T R A C k I N g T R E N D SThe best way to make lean gains obvious is by tracking trends. Are we spending more or less on these items over time relative to

Accountants do not have the tools to

measure work that does not happen or

material that is not used or revenue that is not realised due to process

waste

some other

constant financial factor? Trends are simple

to understand and easily made visual. For instance:

Is the cost of workers’ compensation insurance more or less than it used to be as a percent of worker pay?

Is scrap as a percent of sales greater or lesser?

This type of percentage of a constant (usually sales) is normal and customary in traditional metrics, and therefore, acceptable to many. Of course, even these measures are flawed because sales might be higher or lower due to price change making it

As lean experts there are questions that we receive over and over from people who have not yet

really come to understand lean thinking. The questions are from others inside the

company concerning whether or not the lean efforts you teach are an effective, high value use of company time and resources.

And one of the most common questions is, “What is the financial return

of a kaizen event?”


16

an unstable constant. But their use is currently the best available means to champion kaizen event gains.

Tracking trends may become an ever-increasing norm at some point in the future because trends provide an absolute picture of important positive business outcomes that are simply not seen with traditional accounting metrics.

I F N O M E A S U R E ; M O N I T O R Second, the fact that you cannot measure a kaizen event in traditional financial terms does not mean that you should not be monitoring kaizen results. There should always be monitoring, whether there is direct financial measurement or not. Out of every kaizen event, there should be some expected impact due to process improvement. This might be something direct, such as reduced scrap due to a new method. Or it might be less expected overtime due to reduced time to do a repeated task. In that case, monitoring over time that this cost is reduced is logical and meaningful. This monitoring is the check in the PDCA cycle and will show if you need an ‘A’ for the process.

Most often there are changes resulting from a kaizen that do not have a direct cost impact. But the changes still have an expected ongoing process impact. Perhaps it is:

Fewer cash application deductions Fewer manual entries Fewer material shortages Fewer steps More items on kanban

Any of those would be the process metrics to follow post-kaizen. Add these to a box score for your overall lean transformation, and to the MDI (managing for daily improvement) boards in the process area. Monitor for three to four months to ensure they become part of the normal and embedded process.

C U M U L A T I V E k A I z E N I M P A C TThird, sometimes the ulterior motive behind the question is really about justifying the lean promotion office

and resources. In this case keep a

spreadsheet with a listing of all the events.

The columns would be a wide variety of areas of where you should see impact. Examples might include:

Hard cost Hard inventory Number of people hours Number of machine hours Safety Space lead-time Quality

Across from each kaizen you can either put a factor of what the expected impact from the kaizen should be, or just an X mark that the kaizen focused in this area.

A spreadsheet will give you a resource to go to for discussion with management about the impact and then help with any PDCA or audit activities. It’s also a tool that will help in planning follow-up actions.

I N T I M E , F I N A N C I A L I N D I C A T O R S B E C O M E A L E A N F R I E N D Lastly, when kaizen events occur ongoing with full employee and management support, the financial impact will become clear as time goes on. Indicators will improve and the reason will be waste reduction through lean. If you have journeyed for one year, and you have no improving financial indicators, then something is wrong:

The organisation is just using tools, and not working on the business.

There is no sustainment. There was a large inventory decrease

and accounting does not know how to show the impact of inventory reduction on the income statement clearly.

Some favourite high-level indicators reflecting lean waste reduction are:

Sales per employee (year to year) Inventory and A/R as percentage

of sales Capital spending as percentage of sales Lead-time reduction Quality rate

This way the kaizen value question will become more about the offensive rather than the defensive as the organisation engages in the lean transformation.

The fact that

you cannot measure a

kaizen event in traditional

financial terms does not mean that you should not be

monitoring kaizen

results

P R I N C I P L E S

& P U R P O S E

Max Cardew, business productivity improvement manager at the Commonwealth Bank of Australia and lean consultant to financial services, analyses the incorporation of lean in the world of professionals.


Contrary to the successful process improvements gained in back office environments, lean six

sigma (LSS) continues to struggle delivering substantial results within the professional departments. This isn’t the result of a failed methodology, instead it shows LSS practitioners are ill equipped to take on these processes due to the shift in emphasis when developing and delivering LSS training curriculums – the art of mastering process thinking and the ability to measure uncertainties.

T H E D I S C O N N E C TIt’s an encouraging position when a LSS deployment programme in the financial industry is mature enough to shift its focus from the structured transactional back-office process world, and begins to infiltrate some of the last bastions within the professionals’ space.

This is not a sign that institutions such as legal, credit and risk are intentionally laggard or purposely recalcitrant, it’s

R E A D A B O U T :

Exploring the common challenges behind applying a process improvement approach

Pragmatic introduction to quantifying uncertainty using probability tools

Bayes theorem and Kappa studies

because we have failed to demonstrate value through creatively adapting and adopting our tools and techniques to something these professions can relate to.

We often attempt to streamline peripheral processes and claim we have cracked this departmental nut, when we have only utilised some of our basic skills to project manage a solution – typically, one the business owners had already identified. This exercise alone has the potential to undermine all expectations and benefits of a group-wide efficiency drive through confirmation that process improvement adds little value. It also supports the premise that any significant improvement can only come from within the respective doctrines i.e. legal will identify a legal solution, risk will identify a risk solution. Until we bridge this caveat, LSS will struggle to make headway in liberating these processes.

This division stems from LSS practitioners building their business case around

Latent process widgets within

professional services


18

P R I N C I P L E S

& P U R P O S E

L A T E N T P R O C E S S w I D g E T S M A x C A R D E w

It is one thing to gain

common agreement

on the widget going through the process, it is another to measure it

This is not a sign that institutions

such as legal, credit and risk

are intentionally laggard or purposely

recalcitrant, it’s because we have

failed to demonstrate value through

creatively adapting and adopting our

tools and techniques to something these

professions can relate to

a measurement system and helping businesses to learn to see where process improvements are possible. By identifying how the process widget is performing with respect to how a customer or stakeholder may see it. However, in the professionals’ world, this widget can remain elusive.

Therefore, the first challenge is to help professionals see their world from a different perspective – moving away from perspectives arising from past models. This exercise is provocative as it forces them to reassess their role.

To process practitioners, it’s simple, we agree within a process we have a widget that gets worked on resulting in a more valued item for the intended recipient. This could be something material as in a manufacturing product line, or immaterial such as a mortgage being processed from front to back office.

However, identifying widgets within the professionals’ world proves difficult and is not obviously a single concept. They see their world being full of probabilities and complexities beyond simplification and codification. It has taken years of perfecting a vocabulary that qualitatively describes these complexities in a manner that minimises the reference to any standard. Therefore, any methodology which expresses itself as a tool to identify process improvement opportunities by measuring its performance against customer expectations has little chance of gaining traction within age-old institutions.

SMOkINg OUT OUR wIDgETSApart from the ambiguity of being able to describe what

they do and perhaps some reluctance from professionals, why are these widgets so hard to identify?

Two reasons; firstly, these latent widgets may appear to be unquantifiable. Certainly, they are incorporated within the language of our professionals, employed every day, although positioned as a principle only with multiple interpretations depending on how they are used. This subjectivity presents the first challenge to our practitioner – especially as the techniques required are generally not included in the standard LSS training kit.

The second reason for this illusiveness is these latent widgets are a means to an end and not the end itself. To demonstrate, the goal in collections is to minimise Net Bad Debt. In order to achieve this,

the department needs to foster and deliver a Kept Promise. In the world of

Operational Risk, the goal of the department is to minimise the risk

exposure to minimise losses. This is delivered

through developing risk

management plans providing a reasonable assurance back to the business that is generating the risks.

To the professionals, these widgets can appear to be entering the unknown. Teasing these will require creativity as there is no prescribed formula to do this, only high level guides:

1. You must stay within your process beliefs. Professionals are convincing when it comes to describing how their world is not process driven. Take note of the behaviour that contravene LSS. While navigating through uncertainties, throwing radical ideas of zero defects will not win you friends.

2. Do your research. Crystalise what clients/stakeholders expect of the profession. Be careful when broaching concepts such as the voice of customer (VOC) and be prepared to debate its requirement/value to the overall project objectives.

3. Resist getting involved in the details for as long as possible. Defining their job is a complex discussion and you will get immersed in too much detail to process it. Get them to describe the work in layman’s terms.

4. Map the blocks of work chronologically. Make sure you represent those blocks of activities in the sequence that builds value, rather than those that look and feel like rework i.e. wasted work practices, from a process purist perspective. This is where to expect opposition, as clients may not be in the right mind frame and will defend the practice as necessary.

5. Identify. Find the point on the map that polarises the work stream into two distinct characteristics such as proactive and reactive. Craft a definition of this point of interest using the language of the business. (Hint: sometimes it’s easier to describe what that point in the process is not. E.g reasonable assurance does not imply internal control systems will frequently fail.)

D E V E L O P I N g P R O C E S S E y E SThese maps prove a process does exist and a view of an all going well scenario. This helps to position the wasted practices argument.

M E A S U R I N g : T H E R I g H T T O O L S F O R T H E R I g H T J O BIf something can be observed, it can be measured. LSS training syllabus’ needs to be commensurate with the type of project opportunities. Over the years of productivity improvement, we have evolved training programs to accommodate the time pressure demands from the businesses to minimise the amount of down-time practitioners will experience due to training. As projects have focused on the low hanging fruit, tool kits have been stripped back to their bare minimum.

Identify delinquent account details

Identify risk

Develop right party connect approach

Assess and rate risk

Solicit promise to pay

Identify controls to manage the risk

Monitor and support account

Develop control test plans

Deliver kept promise

Test and report assurance

C O L L E C T I O N S P R O C E S S

R I S k M A N A g E M E N T P R O C E S S


20

P R I N C I P L E S

& P U R P O S E

The maturity of LSS deployments has shifted

considerably over the last decade and the blocks of activities

described are hard to pin

down with the standard tools and

techniques available today

By broadening our

appreciation of this topic

we will equip our process practitioners

with new tools and techniques

and delight our clients

with insights into where

improvement can be made

The maturity of LSS deployments has shifted considerably over the last decade and the blocks of activities described are hard to pin down with the standard tools and techniques available today. Yes, we can compare how many accounts successfully progressed versus not progressed to the next phase in collections, but how do we quantify assurance? This is where we need the LSS stats courses from the 1990s, as probabilities has dropped right off the contemporary training radar.

We dabble with probabilities when we deal in relative

numbers such as percentages, maintain a p-chart - a probability

statistic of how significant the

statistics are - but the tools

I refer to review

probable data

from

multiple angles rather

than taking a one dimensional view

of a relationship. These tools lift

understanding of an event through

looking at the data using a

different lens such as observed as opposed

to expected values and conditional probabilities

– providing a pragmatic, holistic perspective.

Two tools modern process practitioners are denied are the Kappa assessment and Bayes theorem. As with many of our LSS borrowed tools and techniques, the philosophical underpinnings of both the Kappa and Bayesian theorems are rich and their mathematics stunningly

simple. In their most basic form, they are both algebraic expressions that can fashion subjective or unknown information leading to valuable insights into decision quality and reasonable predictability.

Kappa is a ratio tool, measuring the relationship between how one subject matter expert (SME) may interpret a situation (observed judgment response) to that of how they should have or how much variation there is within the whole team (expected value).

By example, assessment and rating of risks is purely at the discretion of our risk practitioner i.e. freedom to exercise judgement and to make decisions without referring to a specific rule. There are guides practitioners must refer to, but this discretion challenges any process improvement approach wishing to describe the performance of a process by comparing outputs against a standard.

Kappa provides a measure of the degree to which judges concur in their respective assessments to a scenario such as a certain risk, which controls are best and how to test them. The tool can even go one step further, to identify and help prioritise which field requires more attention when developing a training plan as an attempt to get more alignment - in engineering terms, recalibration and providing more consistency with rating and assessments.

The computation of a Kappa study is not dependant on access to statistical software packages like Minitab, as a basic spreadsheet will provide the analysis.

Bayesian is concerned with conditional probability. It tells us the probability you may experience an outcome (either wanted or unwanted), given some other event (directly or indirectly) has happened. Unlike a static prediction that relies on an event happening in the past, this is a learning tool which requires us to think through problems more carefully, even employing gut-level approximations which on their own are too crude to use. It provides the risk practitioner a way to factor subjective judgements into the objective equations.

To compute a Bayesian prediction all you require are three simple pieces of information. First, we rely purely on historical information (called our prior probability), which is accessible i.e. there are known risk drivers within the industry and these are standard within the risk community.

Secondly, the information is employed in any risk evaluation and is, given your understanding about the way the business manages this risk, what is the probability of an incident materialising?

The last piece forces predictors to rationalise their thought process by estimating the probability of this

event not happening given the circumstances the predictor visualised in estimating the event may happen - the other side of the equation. This is not an automatic inverse of the original prediction as this is more about giving the benefit of doubt.

Depending on probability, our resultant prediction can appear counterintuitive with respect to the methods normally employed, however, what we now end up with is a closer approximation to the truth as we begin to remove biases as well as update the formula as circumstances change.

Employing the probabilistic approach has the potential to provide insights through rolling up your probable findings from each of the blocks of work to the point which polarises your mapping exercise performed earlier. And quantitatively represent what has only been speculation in the past. Measuring your latent widget using either of the above tools is well suited to serving two masters at the same time - the knowledge and the process worlds.

U N C O N S C I O U S Ly C O M P E T E N TLSS practitioners shouldn’t re-enrol in statistics programmes and immerse themselves in academic papers to employ these tools, the LSS community has just started to make gain in assimilating with business. Adopting a theoretical approach will drive the programme backwards when trying to translate the statistical findings into something the business needs to understand.

The introduction and removal of tools and techniques in the LSS curriculum needs consideration. Take the removal of design of experiment (DOE) within the transactional world; this has now left the black belt (BB) less informed, and deprived the practitioner of the edge as someone who can offer alternate practical approaches. As the transactional world is more dependent on discretion and long lead times before any observations can be made and therefore doesn’t lend itself to a crisp decisive tool such as DOE, but it was the lesson within the concept of dealing with multiple factors at a time, and the ability to identify optimal solutions within factor intercepts, that armed our productivity practitioner – providing them with more depth when considering the optimal solution.

This same approach can be folded into BB training with respect to Kappa and Bayes theorems i.e. to not only tease out what the immediate data is telling us and also what it’s not. Constructing a set of basic questions and applying a simple structure around both objective and subjective information available will provide a more indicative view, of not only how the latent widget is behaving from a process perspective, but also the complexities of how professionals view their world, and presenting it in a succinct way that gets all the heads nodding - learning to see!

L A T E N T P R O C E S S w I D g E T S M A x C A R D E w


How To Measure Anything – Finding the Value of “Intangibles” in Business. 3rd ed., Hubbard, D 2007

The Signal and the Noise, Silver, N, 2012

Probabilities – The Little Numbers That Rule Our Lives, Olofsson, P, 2010

Risk Assessment and Decision Analysis with Bayesian Networks, Fenton, N and Neil, M, 2013

Against the Gods – The Remarkable Story of Risk, Bernstien, P, 1998

C O N C L U S I O N Being products of two emerging worlds, latent widgets can be difficult to pin down. The professional world will tend to describe task outcomes along a process, whereas the process practitioner will try to construct an end to end process with fragmented components. The identification of latent widgets is not provided within any LSS training programme nor do any of the multitude of LSS reference manuals offer any guide. It requires the process practitioner to enter the professionals’ world, listen attentively, and translate those professional milestones into process milestones using the vocabulary of the business.

It is one thing to gain common agreement on the widget going through the process, it is another to measure it. The professional world lends itself to dealing with uncertainty and the only way of measuring this uncertainty is through the use of probabilities. By broadening our appreciation of this topic we will equip our process practitioners with new tools and techniques and delight our clients with insights into where improvement can be made.


22

P R I N C I P L E S

& P U R P O S E

when people think of continuous improvement,

they don’t think of the

finance– except to believe it needs more

improvement

Contrast that with an ad on television several years ago, from a major American bank. The bank’s president was speaking to the camera and said, “Last year our bank processed over 10bn cheques accurately”. He then corrected himself and said, “Actually,

We can witness this with our own life experiences. The mundane transactions above occur without our giving them a second thought. But look at some of the more complex transactions, and what some of these increased complexities (and human involvement) might be;

Vehicle loans: requires more paperwork to be examined and accepted than everyday personal banking activities – but the process is largely standardised due to the number of transactions of this sort. Does the appraised value of the vehicle support the value of the loan being considered? Is the title clear of liens? How will the person taking out the loan pay it back?

Home loans: even more paperwork to be examined and accepted. There are all of the above requirements, plus the history of the property going all the way back to its discovery. Who owned it from when to when? Were all the loans throughout its history satisfied? Are there easements? Did it pass an inspection?

Commercial loans: now the evaluation process for the bank becomes labour intensive. What is the viability of the company and its long-term prognosis for success? What is the value of a custom-built facility or a specialty apparatus to the marketplace beyond the company making the acquisition? If the bank had to repossess, how much could they actually expect to get for the asset? What about the inventory? Is it really worth what the company says its worth?

Each of these transaction types are commoditised transaction. Sure, a familiarity and relationship between the parties’ helps, but the only difference from lender to lender is price and terms. The result is pressure on the sell price, and the resultant pressure on cost to deliver.

M E R g E R S A N D A C Q U I S I T I O N S – w H E R E C O S T D O E S N ’ T M A T T E R : Think of Facebook’s acquisition of Instagram for $1b in April 2012. That is just the announcement of a transaction

R E A D A B O U T :

How mergers and acquisitions may never be leaned

Trimming the fat in the ever-changing world of finance is almost impossible

How day-to-day transactions are where savings can be made

we processed one cheque accurately last year and then

repeated the process over 10b times”. I am sure he

did not realise it at the time, but he was directly

speaking of velocity of lean and the quality of

six sigma.

What is remarkable is the transformation of cold hard

cash having to be physically transferred when a transaction

was made back in the 1900’s – to different pieces of information

transferred from one financial institution’s computer to another’s, as it is today.

When people think of continuous improvement, they don’t think of finance– except to believe it needs more improvement. How many of us would consider ourselves fans of our own bank?

But in reality, financial institutions do an excellent job when it comes to high-volume transactional activity – an area in which they have invested mightily in automation.

For instance, in the last five years, how many of us have had transactions gone awry? Posted from, or to, the wrong account? Or an occasion when the amount was wrong? What was the source – the root cause – of the error?

Whether processing a credit-card charge, posting a payment, making a deposit, or processing a cheque – all of these activities are standardised, rigid and automated. There is no room for error once the control and processes are within the system. If there is an error, it is usually at the point of entry or exit – when a human has the opportunity to engage.

As the transactions get more complex – with the number of variables and steps increasing as well as the level of risk – the processes become less standard, leading to less automation and an escalation of human involvement. These circumstances also result in an increase in exceptions with the result being quality and efficiency suffers.

Increase quality,

increase velocity

LMJ editorial board member Joseph Paris explores the financial industry’s attempts at lean and shows where the real savings have been made.

willie Sutton, a famous bank-robber during the mid-1900’s, was

once asked why he robbed banks. Willie responded, “Because that’s where the money is.”


24

P R I N C I P L E S

& P U R P O S E

I N C R E A S E Q U A L I T y , I N C R E A S E V E L O C I T y J O S E P H P A R I S

Employment agreements: after the deal is done, some people are going to stay and others are not. For those who are going to stay, there has to be a position and a compensation-package agreed. For those who are going to go, there has to be compensation to keep them quiet about the proprietary information they possess (and also not to go to, or become, a competitor).

Due diligence: each side has to ensure the other is representing itself accurately and there are no post-merger risks that are not properly accounted or undisclosed. Each of the parties must consider regulatory issues that might be relevant to the deal.

Definitive acquisition agreement: the formal terms and conditions of the deal must be decided and agreed.

Indemnifications and warranties: defines what happens if things agreed are not as they were represented. Who is responsible, under what circumstances, and to what extent?

But this does not stop after the deal is done. The companies still have to make it work. The business world is littered with the carcasses of failed mergers and acquisitions: the majority of acquisitions fail outright or fail to meet expectations.

C O S T I S w H A T y O U P A y , V A L U E I S w H A T y O U g E TIn addition to the uniqueness and complexities involved in the transaction, there is no real motivation to cut costs. The motivation lies in accelerating the process. And if that costs more, so be it (so long as it does not negatively impact the rewards). In the example of Facebook and Instagram, the $1b became $715m by the time the deal was done because of the drop in the price of Facebook shares (which were the bulk of the payment of the acquisition price).

For example: you are told you are going to get $1m at the end of a process. And you have in the power to accelerate that process at considerable cost, but not coming out of your $1m. Remembering

that time is the enemy in these deals, would you spend other people’s money to get yours?

w H E R E D O O P P O R T U N I T I E S F O R I M P R O V E M E N T E x I S T ? And where in the business are they likely to actually occur and have the largest impact?

We agree that what is important to mergers and acquisitions, what is value in the eyes of the customer, is velocity of throughput – and not cost. So any improvement in the processes would be measured in terms of increasing the speed of delivery with any subsequent increase in cost being (willingly) borne by one or both of the parties. But considering the deals are one-offs, that standards beyond checklists do not really exist, and the security requirements of the information being passed between the parties (and not leaking out beyond those directly involved); one can expect the scope of improvements to be incremental and not transformational.

So that leaves the emphasis of applying continuous improvement efforts for banks and financial institutions, in the activities surrounding personal banking and other high-volume activities.

Consider the cost of money (the raw materials of banking). The US Federal Reserve Bank’s funds rate is currently 0.25% – has been for some time and is projected to continue to be such for some time. In addition, the average interest paid on personal savings accounts and certificates of deposit (other sources of raw material) are around 1%.

Then consider the interest rates charged for revenue-generating transactions; a new car loan can be obtained for between 3% and 4%, and home loans for 3.1% (15-year fixed) or 4% (30-year fixed). A profit margin of 2% to 3% on deployed capital is threadbare (especially considering the indirect servicing burdens of bad-debt, infrastructure, and compliance). In fact, the only shining light for banks is in the margins realised on the interest charged on unsecured personal credit (credit cards), which can be in excess of 21%.

But there is a magnitude in volume of these types of transactions, and they all follow the same process (with very, if any, exceptions). Thus leveraging the benefits of economies of scale and lending themselves to automation (eliminating labour costs) result in considerable benefit to the bank and to the customer as well.

There is online banking, every vendor takes credit or debit cards, and there are ATMs almost everywhere. And if a customer has a problem, the banks have implemented sophisticated telephony trees, where an automated system answers the call and the caller is prompted with a series of questions intended to guide the caller to the answers they seek. Some more robust trees will also provide computer-generated answers to some routine questions such as account balance, last charges, next payment date and amount due.

Recently, Citibank changed its credit-card fraud detection system. If a charge is suspected of being fraudulent, a text detailing the charge and asking to return a 0 if the charge is valid and a 1 if it is otherwise.

There has been an enormous amount of transformation in the banking industry in the past 20 years. Some improvements have reduced the costs to deliver financial services while simultaneously increasing the velocity of providing the services and their accuracy; such as leveraging the technologies related to the internet and telephony. And some of these same improvements have led to their being exploited for nefarious activities and a lessening of ability to engage should a need arise that is outside the system.

The challenge to the future will be: how much non-value-add-costs will banks pursue to eliminate? How much accurate and secure acceleration will customers want (but still have the ability for a human to engage when the situation is outside operational parameters)? And how much of all of this are governments willing to allow?

in principle, the very beginning of the merger process – two owners meeting and agreeing to a deal and the rough parameters under which it will be ultimately consummated. Since most deals get done once announced (especially when one of the parties is a publicly-traded entity), the news is usually celebrated with great fanfare.

Sometimes, the deals are not made in a friendly fashion. Sometimes, the party that is wanting to acquire will call the (publicly-traded) party which is the target of the acquisition and simply inform them of their intent. Then things can get very complicated.

What if there other serious bidders? Such was the case with RJR Nabisco, which pit a leveraged buy-out from Kohlberg Kravis Roberts (KKR) against a leveraged management buy-out. In the end, KKR won.

And are governments willing to get involved? This occurred with General Electric’s (GE) acquisition of Alstom. In this case, there was a feigned attempt from Siemens to get involved in the deal as a spoiler, but it was the French Government, citing national interests that was the real hurdle that needed overcoming. Once GE agreed to pay the French government, all the national interest issues were resolved.

Most business leaders are motivated to get deals done. After all, the executive leadership are usually going to make money when the deal is completed.

But these transactions are complex and require highly specialised experts (on both sides of the transaction) to ensure that the accuracy of the transaction and its intent is a reality. Although most deals have similar considerations, the nature of the deals are such that each one is a one-off and do not easily or obviously lend themselves to streamlining.

Terms of the deal: what’s it going to take for both parties to be satisfied?

Non-disclosure agreements: neither parties want the private inner-workings and strategies of their organisation to be made public.

There has been an enormous amount of

transformation in the banking

industry in the past 20 years. Some

improvements have reduced

the costs to deliver financial

services while simultaneously increasing the

velocity of providing the services and

their accuracy

If there is an error, it is usually at the point of entry or exit – when a human has

the opportunity to engage


26

Look around for ways to automate your manufacturing process

Jack Rubinger, of graphic Products explores how automation can save businesses time, money and the headaches of wasted productivity potential.

C A S E

S T U D y

C A S E S T U D y J A C k R U B I N g E R

for processing and handling products, process automation systems, general motion control systems, automation related software, and condition-monitoring equipment and systems.

Business benefits of automation include global competition, meeting orders quicker, faster deliveries, increasing shift productivity, lowering operating costs, increasing yields, reducing load/unload times, reducing damage or breakage during handling, less material waste, and labour savings.

In Australia, there’s no cheap labour, explained James Abbot of Challenge Engineering. Abbot relies on computer numeric control (CNC) machining which offers multiple

Automation typically isn’t a solution that can be tried and changed

easily and should occur in the latter

stages of a lean implementation

to eliminate worker

overburden

Industries realised savings and cut enough waste that it postponed its plans to build a third production facility, and discovered it could run at 1.5 times its previous production capacity with the same assets. With these findings, PGT Industries decreased labour and energy costs by 20%.

Portable analytical instruments help automate processes in the pharmaceutical and scrap metal industries too, according to Larry Zeltner, director of operational excellence, Thermo Fisher Scientific.

“Monitoring and controlling raw material and quality regulatory compliance is critical with pharma companies,” he said. “A low-cost handheld device generates instantaneous and accurate results - avoiding costly and time consuming quality control analysis typically done by offsite labs. XRF screening tools help make accurate and quick estimates of the value of these loads - leading to profitable decisions in a business that operates on thin margins.”

Automation played an important role in the recipe for Barber’s Farmhouse Cheesemakers’ success. Their challenge? Ensuring accurate size and weights for cheeses as required by UK law while minimising oversize portions. Barbers engineers implemented an automated weighing and cutting system and reduced give way from 4-5% down to less than 1%.

Another hands-on approach to lean manufacturing and automation was delivered by Lois Quinn, Rapid Operational Improvement, for a furniture manufacturer.

Quinn and her team addressed several key challenges and engineered the changes. One problem? An awkward framing table used to square and assemble desk divider panels commonly used in offices. Before launching into the lean programme, measureable goals were established:

Improve the table, decrease frame assembly time, eliminate defects.

Reduce change-over time from one panel size to the next and improve ergonomics by eliminating reaching over to get to smaller panels in the middle of the table.

Identify and eliminate major safety hazards.

Ultimately, a new and improved table resulted from a kaizen workshop lead by the operators. The new table rides on linear bearings to adjust to the width of the panel. Two clamps (one at each corner) can be moved to adjust panel height. This allows two operators to work on opposite sides of the panel at the same time without reaching out over the table. In the past they would be required to carry the panel to another table. Now all the work can be completed at one table - eliminating the safety and ergonomic issues of lifting and moving panels and saving time.

Benefits: Minimal work in progress (WIP). Minimal part travel distances. Safe and ergonomically designed

production cell. Ensured the table was capable for

production - a volume of 800 panels per day.

Met the allocated portion of labour costs and time to support the achievement of the 25% cost reduction desired.

Eliminated safety and ergonomic issues.

Improved 5S level by 25%.

From both a managerial and an operational perspective, automation plays an important role in lean manufacturing. Not only because it frees up time for humans to actually think about their processes but it speeds up tasks and jobs that machines can ably do.

But some experts believe automated processes should be phased in systematically. “Automation typically isn’t a solution that can be tried and changed easily and should occur in the latter stages of a lean implementation to eliminate worker ergonomic overburden as well as mitigating potential safety concerns,” said Paola Castaldo, Oregon Manufacturing Extension Partnership.

She added, “But designing automated systems before going through the rigours of lean could potentially fix the wrong problem because you could be automating a broken system. However, when human constraints get in the way of continuous flow and quality, automation could be the only way to deliver the next incremental improvement and be an appropriate solution.”

S A F E T y A N D L E A N Eliminating opportunities for injuries goes hand in hand with increasing business productivity. While some view injuries as an unavoidable consequence in many operations and industries, these impact the bottom line and the morale of the other employees.

The wave of the future is balancing the ROI of implementing automation processes and achieving job/work satisfaction. The tools and coaches are out there.


Lean manufacturing is an iterative approach that encourages

manufacturers to eliminate

waste

HHow do you get started automating your manufacturing process? Just take a look around.

Look for wasted movements, time and effort, wasted space, and disorganised work areas. Then ask operators how to eliminate waste and think visually about how and where things should go. A simple instructional or operational sign can help an operator remember and prioritise all the steps in a particular process.

“Manufacturers deal with seven forms of waste: inventory, over production, transport, defects, over processing, motion and waiting,” says Melissa Topp, the director of Global Marketing for enterprise software provider ICONICS. “Lean manufacturing is an iterative approach that encourages manufacturers to eliminate those sources. Technology solutions accompanying each phase concentrate on manufacturing intelligence reporting, alarm management and downtime reduction.”

The manufacturing automation industry is huge - encompassing technologies such as computer controlled machines

R E A D A B O U T :

Identifying areas where businesses can improve in simple ways

How technological advancements can help manufacturing

How automation can reduce accidents and payouts and improve morale

manufacturing processes in a single machine. They are quickly and easily set up, and all turning, milling and drilling operations can all be carried out in a single setup. This type of automation machinery maximises staffing and helps his company maintain an edge over imports.

A U T O M A T I O N R O IWhen faced with production requirements that exceeded current operational capabilities, PGT Industries applied ICONICS’ software to 12 critical production assets to analyse the overall equipment effectiveness (OEE) of the plant. The software was used to zero in on sources of loss of OEE, focusing on availability, quality and performance. PGT

Brian H. Maskell, President of BMA Consultants, presents a case exampling how lean is used in accounting and what it can teach a business in terms of simplicity and efficiency.

Companies that are seriously pursuing a lean journey soon find their accounting, control,

and measurement systems need to change to support the new strategy. The principles and methods of lean thinking and practice are quite different from traditional business and require different measurements.

The changes are driven by both positive and negative needs. The positives include accounting, control, and measurement processes that support the new lean strategy. The negatives are to eliminate the harmful impact of traditional accounting and measurements. There is also a third change driver that is related to waste. While traditional companies often build increasingly complex accounting systems, lean companies recognise their accounting and measurement systems need to be stripped down to the minimum amount of work.

T R A D I T I O N A L A C C O U N T I N g S y S T E M SWhy are these systems harmful to lean? Traditional accounting and measurement methods are not wrong and bad. But they were designed to support 1920’s mass production. Lean manufacturing is in many ways the opposite of mass production. Traditional measurements

Traditional accounting and measurement

methods are not wrong and bad. But they were designed to support 1920’s mass production.

Lean manufacturing is in many ways the

opposite of mass production

like labour efficiency, purchase price variance, machine utilisation, and others drive mass-production thinking. They lead to large batches, long lead times, high inventory, shortages, expediting, and crisis management. These are not bad measurements, but they are designed to support mass production and motivate mass-production thinking and actions.

This is the opposite of what a lean company is trying to achieve. If we are trying to make lean change and improvements, these accounting and operational measurements will push back and stymie our efforts. A very potent anti-lean measurement is the overhead absorption variances. This also leads to manufacturing large amounts of products even when the customers have no demand for them.

A recent academic study showed the 2008 bankruptcies of General Motors and Chrysler Corporation were impacted badly by overhead absorption thinking. The car plants continued to manufacture economic order quantities, spending huge amounts of money, and making hundreds of thousands of cars nobody wanted to buy - until the companies ran out of cash.

In a job-shop style production environment, these measurements and accounting tools are particularly harmful. The

use of standard costs and margins lead to poor decisions. Decisions related to pricing, sourcing, make-buy, capital purchase, improvement projects, new products, etc., need to be made for the value stream as a whole. Decisions made related to the individual product or sales order will always be poor decisions.

A lean organisation - particularly a low-volume and high-variety one - must eliminate these accounting systems and replace them with lean accounting methods that support and prosper lean thinking and practices.

S O w H A T A R E T H E P O S I T I V E S ?Lean accounting has been designed to support lean manufacturing (and lean sales, lean product development, lean engineering). In order to do this, we need to develop accounting, control, and measurement processes that reflect lean thinking and motivate lean methods and action throughout the entire organisation.

1 We focus our financial and operational reporting around the whole value stream rather than individual cells, work centres, processes, or departments.

We are not so much interested in the efficiency of individual departments or processes, but we are very interested in the productivity of value stream as a whole—the effectiveness and profitability of the entire system. A value stream is all the things we do to create value for the customers. The starting point of all lean thinking is an understanding of how we create value for our customers. And this value is created within the company’s value streams. The value streams start from sales and go all the way through to purchasing, production, shipping, and cash collection.

Lean companies organise their businesses around the value streams that serve the customers. They create dedicated teams focused on a family of products or a market. And the team has a laser-sharp view of what must be done to increase revenues, reduce costs,

S E C T O R F O C U S L E A N A C C O U N T I N g S E C T O R

F O C U S

28 29www.leanmj.com | September 2014

Lean accountingR E A D A B O U T :

The process of lean accounting

Case studies of how to learn from other’s mistakes

Adapting outdated accounting practices to a modern world

increase cash flow, and grow their part of the business.

The job description of a value stream manager is:

To create more value for the customer. Grow the business. Eliminate waste from every process. Make tons of money.

I recently worked with an aerospace component company in the UK where we have helped them develop a value stream organisation. Even though they are in the pilot stages and have only created two value streams, their team members are wildly enthusiastic about the new arrangement. The operations director told me that he has been inundated by people in the company wanting to be included in a value stream.

2 Once an approach to value streams has been set up, then the financial and operational reporting is at the value stream level.

Traditional accounting is eliminated in favour of a simple, direct weekly income statement of profit and losses. Instead

of the complicated financial reports used by traditional companies,

we create plain English income statements that everyone in the company can readily

understand and use.

If you have timely and understandable financial information, then the

value stream leaders and team members are able to make much better decisions, leading

to growth, productivity, and profits.

Similarly with the operational

measurements. The vital few measurements are produced weekly and visually displayed on the value stream performance board. These simple, timely measurements enable the team to drive continuous improvement every week based on real information everybody owns.

This operational and financial information is also used to work out the true financial benefit coming from lean improvement.

The purpose of lean accounting is to provide the

vital operational and financial information in a way that

motivates lean transformation

and improvement

S E C T O R F O C U S L E A N A C C O U N T I N g S E C T O R

F O C U S

30

The starting point

of all lean thinking is an understanding

of how we create value for our customers. And this value

is created within the company’s

value streams

C A S E S T U D y 3Another example is a multi-national chemical company that has been applying lean accounting methods in their major plants. Lean improvements had been introduced in their plant in Recende, Brazil but the improvements had shown limited results.

The financial controller and the continuous improvement manager decided to introduce lean accounting to provide better control, measurements, and visual management to their processes.

The company normally produced an average of eight production batches of their major product each week, but with a lot of variability. Some weeks they achieved 12 batches and other weeks much less. Within a few weeks of introducing lean accounting the plant was able to produce a consistent output of 11 batches, and this consistency has continued for over a year.

The financial controller explains that the lean accounting measurements and financial reporting provided timely and practical information that enables the production people to increase their output by 37%. This was achieved by identifying the issues, driving focused improvements that solved problems and sustaining the results. He also explains lean accounting is not just for the financial people, it has provided valuable information across the entire workforce.

C A S E S T U D y 2Cobham Defense Systems is a division of UK-based Cobham plc. Dean Cantrill, vice president of operations in the USA, was actively involved in the introduction of lean accounting several years ago. Cantrill observed:

“We applied lean accounting to a value stream that was able to treat labour as a fixed cost. It yielded three measurable wins: 1) Improved pricing capability which quickly lead to improvements in value stream profitability, 2) reduced/eliminated the waste of direct labour employees entering labour data into the ERP system, and 3) a sustainable lean mindset for all members of the value stream.”

I could write a chapter for a book on each of the three items, but the highlight of this transition was item three, the sustainability. Nothing confuses the mindset of the value stream members more than telling them that eliminating waste is a daily mission, but keep doing the non-value added time keeping tasks because accounting needs the information.

The value stream accounting shows you the real, bottom-line savings and profitability of your lean improvement efforts.

3 The value stream team members have a clear focus on the value created for the customers.

When we are organised in value streams, then all the team members have line-of-sight to the customers. When we know what the customers truly value and we know (and have full control over) the processes that create this value—then we can work step by step to increase the value, while at the same time reducing the costs. If you increase the value to the customers, then you can increase prices and/or gain unheard-of market share growth and customer loyalty.

4 Lean accounting is a lot less work.

In lean accounting we have primary reporting at the value stream level. We do not need the thousands or millions of transactions required to maintain the departmental reporting, the labour tracking, or any of the other so-called control systems traditional companies anguish over.

There is a maturity path to making these changes. As your company becomes proficient with lean thinking, your processes will come under control. Much of this control comes from pragmatic, visual tracking by the

people in the processes. As your company makes more progress with lean, you will get to the point where the secondary transactional control systems (ERP/MRP) are increasingly unnecessary and can be gradually phased down. Do not think that I am speaking against these ERP systems. They are valuable tools for any lean company. But they are largely wasteful, and we need to eliminate waste from the systems as well as the physical processes.

We have a good number of customers that have a two-transaction factory. They use a transaction to receive materials and a transaction to ship the product. They have largely eliminated accounts payable and no longer track inventory. Not every company can achieve this, but this is the gold standard of transaction simplification.

C O N C L U S I O NAs you begin to make progress with lean manufacturing, lean product design, lean sales, lean engineering, and lean administration, it soon becomes clear that the traditional accounting, control, measurements, and decision-making systems are no longer appropriate. In fact, they are in many ways anti-lean. The purpose of lean accounting is to provide the vital operational and financial information in a way that motivates lean transformation and improvement—and is itself a low-waste and lean process.

While lean accounting primarily supports and enhances an organisation’s lean transformation, these companies saw specific and radical improvement directly from the introduction of lean accounting.

C A S E S T U D y 1EIS Wire and Cable (South Hadley, Massachusetts) is a company specialising in both customised and standard wiring for industrial and military organisations. The company provides a range of products from single conductor hook-up wire to complex multi conductor, composite cables.

EIS has been working to introduce lean manufacturing methods for a few years and had some good success. Roy St. Andre, VP and General Manager, saw the need for simpler and more effective measurements, financial reporting, and decision-making, and worked to introduce lean accounting methods into the company.

Mr. St. Andre recently shared that, “our lean accounting has served us very well by shifting our focus to one value stream we’ve increased that value stream’s profitability by over 100%. We’ve grown by 32% over the past 3 years without adding any employees to the head-count.”


32

Bring back, lean out, and serve

Consultant Ian Machan reveals how a lean transformation, servitisation and reshoring creates competitiveness and asks readers to help him explore the ideas of this new phenomena in manufacturing.

S P E C I A L

F E A T U R E

S P E C I A L F E A T U R E B R I N g B A C k , L E A N O U T A N D S E R V E

The reshoring is seen as a way to competitively address customer’s needs beyond product purchase and to support business growth. Using lean tools to deliver both changes together is a challenging concept. Hopes are that the ideas raised can be researched and extended by asking for volunteers to share their experiences and also to offer help and a community support to those looking to make such a transformation.

w H A T I S S E R V I T I S A T I O N A N D I T S L I N k T O L E A N ?An excellent definition of servitisation is provided by Baines and Lightfoot of Aston University in their book Made to Serve:

“Servitisation is a term given to a transformation. It is about manufacturers increasingly offering services integrated with their products. Of these, some manufacturers choose to servitize by

The increase

in offshore labour rates and the cost

of transporting goods across

the oceans and the pressure

of green miles have made

these remote sites less

competitive

offering an extensive portfolio of relatively conventional services, while others move to deliver advanced services.”

The large players that have embraced this in recent years and grabbed the headlines include Rolls Royce, Caterpillar and Alstom. However a number of SMEs, such as Haigh Engineering Ltd, Assistive Control and Goodflo have used it as a way to differentiate themselves from their competition.

We see servitisation as requiring a client to really understand their customers’ needs and maybe even their customers’ customers’ needs and finding the best way to meet them. This is value steam mapping to a level of depth that goes far beyond delivering products and information, further even than providing spares and repairs. Starting from that point and deciding how best to deliver what products and services can lead a client to a true transformation. The aims of that transformation are to provide a competitive offering, reduce wasted resources over the cycle of use, and promote growth.

R E S H O R I N g T H E L E A N w A yReshoring or onshoring is the process of bringing back production to your home country, the opposite of offshoring. The drive to move manufacturing to the Far East, China and India in particular is being reversed. The motivations for such a phenomenon are many.

First there is the undeniable stretch in the length of the supply chain from production to customers, with all the issues we know that entails. De-bugging product introduction and new technology has often proven to

be costly across time zones and adding to the known risks of sharing sensitive intellectual property.

Second, the increase in offshore labour rates and the cost of transporting goods across the oceans and the pressure of green miles have made these remote sites less competitive. The US is believed to be seeing some returns to homeland because of the lower cost of energy, courtesy of native shale gas production.

The decision making process to bring back a manufacturing process may in some ways be more complex and challenging than sending it out there. The new process does not need to match the existing. The phrase “botshoring” has entered the language, recognising that the return of a process can be combined with automation or robotics to minimise the labour cost element, which is why the organisation went east in the first place.

The transformation of your manufacturing and supply chain is therefore a set of decisions about not just where you will produce but also how. How might you invest in what type of capital equipment? How will you treat the reduction of supply chain inventory? What might you do with the reduction in headcount required by

R E A D A B O U T :

What is servitisation?

The advantages of reshoring

Taking part in research on this topic

Use Cash

Customer purchases product

Manufacturer provides

product and possibly services

CashConsumables

MonitorSelection &

Disposal

Repair Equipment

Figure 1: Production system delivers products a product-service system delivers capabilities

The customer’s footprint of responsibilities

L E A N

S E R V I T I S A T I O N R E S H O R I N g

Our focus

Reshoring of production out of low labour cost sites to a range of western countries has become a

hot topic issue in manufacturing as countries like China see wages begin to catch up with the developed world. This effect will introduce the servitisation of manufacturing companies to deliver advanced services, but this is only one form of servitisation.


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Core business activities

34


changer in the field, supporting growth that can only be financially supported by an efficient, fast response, low in WIP supply chain. The key will be going back to the voice of the customers (VOC) to work out what they will buy and how the value can be provided. That will drive the real purpose of the re-shoring, rather than just bringing them back home.

H O w L E A N H E L P SWith the purpose clear, and the value understood, now we should look to apply the right lean tools to deliver a new value stream map:

The longer the process to be transferred back, the longer each transfer step will be. Look to standardise and transfer in chunks, keeping the work going through your transfer team at a manageable level.

Consider moving part-manufactured goods for finishing in the home market.

Consider machining parts in the home market and finishing them off shore. Prove each step is capable first.

As-is and future value stream maps (VSM) are an obvious tool. What steps can be removed with re-design? If products are rented to customers for use then financial transactions will become flows instead of lumpy one-off transactions. Credit control and accounts receivable processes will change in size and type.

By changing to an advanced service business model the organisation structures and span of control of a business can change.

S E R V I T I S A T I O N A N D R E - S H O R I N g N E E D S U P P Ly C H A I N O P E R A T I O N SServitisation clearly puts value creation and value delivery at the forefront of the competitive strategy. Value creation is closely related to demand creation and value delivery is closely related to demand fulfillment. Consequently, the implications of servitisation are not only to the supply chain (demand fulfillment side) but also to where the demand is created in the first place.

the new process? What might you do with the technical and support staff that were liaising with the offshore plants?

That set of decisions, and the process of delivering them should be an ideal workspace for a lean approach, reducing waste, focusing on right first time, reducing packages of work to minimise lead-times of the transfer all come to mind. These will all be relevant whether a company is a Tier 1 or Tier n supplier, business to business or business to consumer.

S O , R E S H O R E A N D S E R V I T I S E ?Combining the two potential transformations described above enables the possibility of bringing back a manufacturing operation closer to your critical mass of people and closer to your customers. Being closer and how you allocate your resources can be used to maintain the same business model or try and take advantage of a servitisation model offering advanced services. Those services might include a life cycle support or Rolls Royce pounds of thrust type solution. Those services might be a game

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Design and production activities Core business activities

Direction of material flow

Position conventionally taken by manufacturer

Position conventionally taken by customer

Supp

ly

Design and production operations

Position taken by manufacturer delivering advanced service

Position taken by customer adopting advanced services

Extended front office operations

Figure 2: Positioning of functions within a production-centric manufacturer and their customers

Figure 3: Positioning of a servitised manufacturer and their customers for advanced services

we want to hear from you!As the Lean Management Journal progresses on its own continuous improvement journey, we understand how important it is for us to listen to the voice of our readers.

So we have set up our own suggestions box and would like you to tell us what topics we should cover in the journal and at our events in the next few months. What are the questions you want answered? What are the issues you are facing that you would like to read about? We believe in pull and will always welcome your suggestions and feedback. We will try our best to address every request by providing helpful, thought-provoking case studies, interviews and features.

Don’t forget that our Letters and comment section is open to anybody in the lean community who wants to share an opinion or an experience with their peers.

Your feedback is important to us as we strive to improve our publication, services, and overall reader experience.

If you have any suggestions for topics you would like the LMJ to feature in the coming months, please send an email to the editor, Andrew Putwain, who can be reached at [email protected] or +44 (0)20 7401 6033.

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In my experience almost any

business faced with decisions

about reshoring, changes to business

models such as servitisation

and lean implementation, find themselves

stretched

Dr Benny TJahjono from Cranfield University observes “successful companies who have adopted servitisation exhibit a clear link between their supply chain strategy and marketing/sales strategy to lock customers into a contractual provision of product and the associated services. We believe that this demand-driven supply chain, or demand chain, goes hand-in-hand with the servitisation and reshoring strategies that naturally are customer-intimacy centric. Rolls-Royce’s total care is an example of the demand chain, driven by the desire of the customers to buy the capabilities of an aero engine rather than the engine itself.

In supporting the servitisation strategy, we need an operational model that is based strongly on lean thinking principles, that are ultimately about increasing the value of offerings to customers, rather than simply cost reduction exercises. The model also needs to emphasise on delivering the added value to customers.

The demand chain management extends the traditional view and scope of the supply chain operational model of make, source, deliver to cover not only contractual arrangements upfront, but also throughout the typically long life-cycle of the contract.”

L E A N E x T E N S I O NThe Cranfield School of Management research and conduct projects to help industries design and improve the operation of their servitised supply chain.

To support this they extend the functionalities of value stream maps through modelling and simulation (M&S). M&S extends VSMs by allowing a better visibility and prediction of performance of supply chains impacted by process time variability. The latest techniques in simulation thus allow a better assessment of servitisation. Service delivery can be modelled together with the product delivery, and hybrid models allow intangible parameters, (e.g. customer needs) to be included into the model. More importantly, outsourcing and re-shoring decisions can now be appraised in conjunction with servitised decisions.

w H A T ’ S N E x T ?In my experience almost any business faced with decisions about re-shoring, changing to business models such as servitisation and lean implementation, find themselves stretched. There can be housekeeping activities required to prepare for such large changes and a significant amount of headspace required to work out what it all means and how to tackle it effectively and competitively.

So having explored the topic and some ways to tackle it what are the next steps and where do we go from here?


www.machan.co.uk/reshoreservitise

Made to Serve, Baines and Lightfoot, 2013.

I’m working in association with Professor Tim Baines from the Servitisation Centre at Aston University and Dr. Benny Tjahjono at the Cranfield School of Management to compile what we understand already and what new entrants need to know.

We are looking for businesses to contact us with their experiences and what they are hoping to do. With a good enough response we plan to run a spring 2015 forum at Aston for those volunteer businesses to share, explore and learn from each other. We also anticipate some solid research to publish in late 2015 to help the whole sector.

So if you are a manufacturing business that is: Looking to do this, and looking for

help/involvement in this project Or preparing their structure/

organisation for the change Or have been there and would like to

share their learnings

Then please contact us via the website below to join us in building the knowledge base and finding solutions to common problems. In particular, we are targeting four countries for this research: UK USA: what benefit is lower energy

costs having on reshoring, or is there another dynamic in play?

Ireland: after economic success and financial crash, how is this country taking advantage of the opportunity?

France: we’re looking for an organisation based in continental Europe.

To indicate your interest with this research please visit our website listed below.


38

Profits, pragmatism, and the possibilities of possessing other eyes

LMJ editorial board member Bill Bellows explores the ideas of teamwork and how Deming’s ideas on working with a new set of beliefs could help an organisation with productivity.

On July 22, 2014, Apple announced financial results for its fiscal third quarter, reporting

a revenue of $37.4b and a quarterly net profit of $7.7b. From sales of iPhones to iPads to computers, Apple executives offered explanations for these results and predictions for the future.

The value of profits as an ingredient for organisations to sustain and develop their operations is undeniable. Thinking beyond the design and development of the next product, profits allow for improvements to current products, needed technology upgrades, employee development, and dividends for shareholders. But, do organisations solely exist to earn profits or meet financial goals, or, are their profits the result of how well they invest their resources, from innovation to revenue and equipment, and then deliver new and improved products or services?

As with Russell Ackoff, who once described a focus on sufficient profit as “like a person saying his mission is to breathe sufficiently,” Dr. Deming saw profits as the result of a well-designed and managed organisation. In his 1993 book, The New Economics, he posed, “profits must exist, and industry must work as a team in which all participants, large and small, prosper.” Further, “The boundary of a system….may be drawn around a single company, or around an industry, or…the whole country. The bigger the coverage, the bigger the possible benefits, but the more difficult to manage. The aim must include plans for the future.”

Moving from profits to pragmatism, let us not lose sight of the need to be practical in our efforts to manage systems of increasing size and complexity. A common description of a pragmatist is one who takes a practical approach to problems and is concerned primarily with the success of failure of their actions.

In consideration of this explanation, I was once asked, “is it practical to work on things which are good and arrive on time?” in reference to a question I posed during a presentation, specifically, “how much time is spent discussing parts, tasks, activities, programme milestones, etc. which are good and completed on

when we shift our

thinking from forms of yes or no

questions and define quality, we begin to see systems differently,

comprised of interdependent parts, tasks and elements, and move away from value streams of

independent parts, tasks,

and elements

time?” While the answer to this question is routinely none, my response to this inquiry was, “is it practical to wait for a crisis to take action?” In other words, why wait for trouble that can be prevented, if it can be anticipated?

Consider, for example, being the passenger in a car and asking the driver if the car has petrol. Ask again in an hour and the answer may remain the same, yet the amount of petrol in the tank has declined and will continue to do so until the car runs out of fuel. By asking questions such as “does the car have petrol?” or “is the part good?” and “does this step add value?” each of which has only two answers, yes or no, we are overlooking how the tasks are organised as a system.

When we shift our thinking from these forms of yes or no questions to “how much petrol does the car have and what action should we take now?” and define quality as Deming did, we begin to see systems differently; comprised of interdependent parts, tasks and elements, and moving away from value streams of independent parts, tasks, and elements. In doing so, what is pragmatic in terms of seeing systems (asking how well the parts, tasks, and elements work together) will be viewed as impractical for those who continue in the tradition of seeing parts, tasks, and elements as independent (asking if the parts are good or bad). Could it be that pragmatism depends on how one sees systems?

Another example of pragmatism; consider the situation of a plant manager, faced with a decision to invest £100K per year to redesign the fabrication process of a consumer product with excessive warranty claims. With the ability to see a larger system than the plant and also the ability to ask how well do the parts, tasks, and elements work together, an engineer proposed an annual £100K investment as a means to drastically reduce world-wide expenses for warranty claims, estimated at £10M per year for parts and labour, and reduce the impact of customer discomfort. In terms of corporate profits, consider the pragmatism of a solution in which customers received a better performing product, all with a 100:1 payback.

Consider also an investment opportunity that was revealed by shifting from a traditional view of quality (are the parts good or bad?) to Deming’s systemic view of quality: “a product or service possesses quality if it helps somebody and enjoys a good and sustainable market”.

Sadly, from the perspective of the plant manager, who rejected the proposal, as it was not practical for him to spend his budget to help the corporation. Did this manager care about profit? Deming would remind us that this manager is being practical under the confines of the prevailing system of management, wherein parts, tasks, elements are managed as being either good or bad. Which includes meeting the plant’s financial goals and not overspending its budget, with a goal of maximising the plant’s profits.

To borrow again from The New Economics:

“If the various components of an organization are all optimized (each for individual profit, each a prima donna), the organization will not be. If the whole is optimized, the components will not be. The prevailing style of management must undergo transformation A system can not understand itself. The transformation requires a view from outside.

The outside view. The layout of profound knowledge appears here in four parts, all related to each other:

Appreciation for a system Knowledge about variation Theory of knowledge Psychology”

Contrary to the dominance of the prevailing style of management, Deming saw possibilities for individuals to work together. Throughout his lifetime, he saw clear evidence of teamwork and the benefits it could bring.

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S P E C I A L F E A T U R E L E S S O N S F R O M D E M I N g

There is little evidence that we give a hoot about

profit w. Edwards Deming


Profits must exist, and industry must work as a team in which all participants, large and small, prosper

LMJ board member John Bicheno reviews Factory Physics for Managers (2014), by Edward Pound, Jeffrey Bell, and Mark Spearman.

BOOk REVIEw

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Many readers, I hope, will be aware that factory physics is a different, original and profound

approach to factory management, and in particular scheduling, that has been around since Hopp and Spearman published the first edition of the book Factory Physics in 1995.

In my opinion, factory physics has been a more than worthy successor to Goldratt’s theory of constraints (not the thinking frameworks, but the original work on scheduling as popularised in the goal). However, Factory Physics, now in its third edition, remains quite a tough read with lots of equations. Inevitable, I guess, but a pity that this treasure house has not reached a wider audience, particularly in the lean community. Hopp’s Supply Chain Science, a book that has been prescribed on our MSc in lean for some years, considerably improved the accessibility of the concepts.

Now, with the publication of Factory Physics for Managers, Ed Pound and his co-authors have further lifted accessibility. For me, this is welcome for two reasons. First, the concepts are too important to miss. They not only give a deeper conceptual understanding on the

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LMJ’s LinkedIn page has been its usual hotbed of questions and debates this month. Top Contributor Steven Boyd, international operations manager at Tokheim, once again asked some great questions.

ROUNDINg UP THE MONTH’S DIgITAL COMMUNICATIONS ON LEAN

LMJ LinkedIn


theory underlying Toyota and lean scheduling, but they also extend the concepts out from the high volume repetitive environment. For example, a pull system is one that establishes a limit on work in process (and therefore is not limited to kanban), and the three types of buffer (time, inventory, and capacity) are management decision variables and not something that must be blindly reduced or freed up in the case of capacity.

Second, lean publications of late seem to have become totally dominated by people issues. Sure, people issues are vital, but if managers don’t understand basic concepts such as Little’s law they may be demanding infeasible achievements by pushing initiatives in the belief the problems lie with culture and motivation.

Several crucial ideas are explored in depth in the book. These include:

Guennael Delorme Consultant at the Boston Consultant GroupIn my experience, winning the hearts and minds of everyone from the leadership to the front line needs to happen in conjunction with harvesting the low hanging fruits; doing one before the other weakens the compounding effect of change.

David Ogan Operations Management graduate studentI think the comparison of possible lean projects to fruit is quite apt, actually. Once you harvest the low-hanging fruit, sure, you’ll have to go higher up in the tree - until the fruit on the lower branches regrows.

Variation – a topic that is glossed over in so many classic lean texts, or discussed but not applied in many six sigma texts.

Kingman’s equation. For me, the equation of lean showing as it does the relationships between inventory queues, utilisation, arrival variation, and process variation.

The inventory investment/fill-rate curve. This crucial concept, that can save huge amounts without sacrificing customer service, is again found in few texts I am aware of.

The use and abuse of MRP in a lean context.

The production flow graph, showing the relationship between throughput and WIP, and critical WIP.

Pull systems – principally CONWIP.

What is surprising is to relate several of the concepts in the book to a few of the classic operations management texts as used in many MBA programs. Some treasured concepts such as ABC analysis, service level, batch sizing, buffers, pull systems, variation, and MRP, are simply naïve or wrong in those textbooks.

I hope I have said enough to raise your curiosity about the book. Although still a book that requires hard concentration, in some sections, it could also be your breakthrough book of the year.

Lean Implementation - what to do next when the low hanging fruit is eliminated?

We have a good insight to some of the struggles we see when implementing lean thinking. If it was easy we would all be doing it.

Once the low hanging fruit is gone we require significantly more supportive leadership to maintain the passion to improve even when the kaizen event does not remove much waste.

This is when leaders have the greatest opportunity to demonstrate their skills and go to the gemba to inspire and motivate team members to continue.

So please let people try and solve their own problems. Leaders must work hard to create the free space for their teams to learn, develop and fail continuously.

How do you carry on the lean mission and help keep other lean implementers on the correct path?

Manuel Martínez, project manager at SOIL group, an environmental services organisation in Spain, asks what affect will reducing carbon footprints have to applying lean to businesses?I know that industries are becoming more competitive and environmentally sustainable. Generally, competitiveness is increased by applying the lean management philosophy, and the second issue of environmental responsibility, is possible by reducing the carbon footprint of the enterprise. But, from my point of view, both philosophies could be effected by the requirements of transport and freight. Here’s an example:

If our business must supply 238m of product and has 3 vehicles to do that: a 3.5m delivery van, a 14m truck and a 34m truck, lean tell us that we have to supply our product as soon as possible, without having it sit on our goods yard like waste, and to start receiving money from the first delivery.

In this situation, I’d choose the van, because our customer will receive enough of the goods and frequency for the work to get under way. But what will happen if we consider the carbon footprint?

The carbon emissions of each one of previous vehicles are, on motorways, 268.78, 410.38

and 527.76 gCO2/km respectively. So

considering that to complete the 238m delivery we would make 68, 17 or 7 trips respectively. By the end of our supply we would have emitted 18.21 kgCO

2/km for the van, 6.98 kgCO2/km for the 14m truck and 3.69 kgCO2/km if we would use the 34m lorry.

In this situation, the most sustainable option is to use the 34m truck (only 7 deliveries) but we’ll create a big backup in our yard, deliveries won’t be frequent. So it’s against lean instructions (and what’s more, the French government want to create a new tax about 0.13 €/km for every truck crossing its border to combat CO

2 emissions concept). Although carbon footprints must be important for our customer, and their corporate social responsibility as well.

How do you operate? Do you consider your carbon footprint? What do you think about it and what would you recommend to me?

It’s an interesting problem; do you go for the most efficient answer with the least wasted time? Or the environmentally responsible option?

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Issue 7 Volume 4 | September 2014 | www.leanmj.com

$65

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5 –

€50

Organisations and interviews featured in this edition

include: Commonwealth Bank of Australia, Industry Forum,

BMA Consultants, John Bicheno, Jean Cunningham, Ian

Machan, Bill Bellows and Bob Emiliani.

IN THIS ISSUE:

Increase quality, increase velocity: LMJ editorial board

member Joseph Paris explores the financial industry’s

attempts at lean and shows where savings have been

made in processes within both personal and investment

banking sectors.

Turning loss into cost: Paul Hardiman, TPM consultant

manager at Industry Forum explores how organisations

can control their losses and turn them into profits by

learning how to use Value Analysis/Value Engineering

(VA/VE) and Industrial Symbiosis.

Lean accounting: Consultant Brian Maskell outlines

the effectiveness off lean in accountancy departments

and provides case studies from a range of sectors round

the world.

Bring back, lean out and serve: Ian Machan asks readers

to help in understanding the future of lean, the effects of

reshoring and servitisation.

Analysing lean’s place in the

world of finance

An annual subscription to LMJ (10 issues) is £295 for the print edition and £195 for the digital one.

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There is currently an expanding pool of events available for the development of the lean community. They offer both general and sector specific opportunities to renew your enthusiasm and gain new perspectives through communicating with lean contemporaries.

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RELENTLESS LEADERSHIP: LEAN SUMMIT 2014September 17-19, Cape Town, South Africa

The theme of this year’s summit will be RELENTLESS LEADERSHIP. The Summit will provide a platform for thought leaders and practitioners to share their lean management system experiences in improving profitability, delivery effectiveness and staff morale.

Keynote speakers include:

Michael Ballé, Co-Founder of the Project Lean Enterprise and the Institut Lean France;

Denise Bennett, Lean Thinking Practitioner, Australia;

Ian Glenday, Lean Enterprise Academy, UK;

Professor Norman Faull, Chairman of the Lean Institute Africa;

Dr Johan van Zyl, President and Chief Executive Officer of Toyota.

To book your place or for more information please visit www.lean.org.za/lean-summit-2014

LEAN SUMMIT INDIA November 5-6, 2014, Bangalore, India

The Lean Summit is a two-day mega event designed for mid- to upper-level managers, with a focus on sustaining their lean journey at the transformational level, and providing them the insights into innovative ways to enhance their lean journey. Highlights include:

Deep knowledge development from the best known sensei in the lean world - John Y Shook, Chairman;

CEO of Lean Enterprise Institute and Jose Roberto Ferro, President, Lean Institute Brazil;

A variety of learning situations, including keynotes, interactive learning sessions, and CEO panel discussion.

To book your place or for more information visit www.leaninstitute.in/lean-summit

4TH EUROPEAN LEAN IN I .T . SUMMIT October 15-17, 2014, Paris, France

Meet leaders from the information technology sector who are applying lean strategies and shaping their success.

Speakers Include:

Pierre Masai, VP & CIO of Toyota Motor Europe;

Nunzio Cali, CTO & CIO of AlmavivA;

Fred Mathijssen, European Technology Senior Director of Nike;

Sari Torkkola, CIO of Patria;

Carlos Condé, Chief Technology evangelist for Amazon Web Services EMEA as well;

Lean IT practitioners from ING Bank, BNP Paribas, Bombardier, LeMonde.fr and more will also share their experience.

To book your place or for more information visit www.lean-it-summit.com

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