3 Lean Lessons for CFOs

3 Lean Lessons for CFOs

In this article Rick highlights 3 dimensions of Lean CFOs should be familiar with.

Inventory: The Key Indicator of Lean

Inventory reduction was a core element of Taiichi Ohno’s Toyota Production System. Excess inventory is one of the seven wastes, and Ohno focused heavily on flow and Kanban to reduce inventory, improve flow and help reduce the other six wastes. During that time a classic process visual was developed, showing that as water (inventory) was lowered, the rocks (problems) were revealed, which allowed problem solving to occur and thus continuous improvement.

As I tour many companies that are engaging in Lean efforts, one of the things I notice is that their inventory turns are very low. I see piles in the warehouse or on the production floor and as I read pallet tags, I see inventory that’s been there for months and even years. When I ask why their turns are low, executives often tell me that their focus is on productivity improvement and they have inventory to help assure they can meet their customer commitments. In other words, you can’t sell out of an empty wagon.

However, I’ve found that I can often double or even triple inventory turns while increasing customer delivery performance. I do this by taking a holistic view of inventory management looking at four elements: Demand Management, Supply Chain Management, Inventory Management and Product Management.

You can’t improve turns by simply buying less inventory. Lowering the water without removing the rocks is a recipe for disaster. However, if you look at the four elements above, it is possible to dramatically increase inventory turns. I’ve seen turns well into the teens and have reduced inventory for clients by 75% with improved profitability and service levels.

Don’t choke on your own inventory and don’t run your ship onto the rocks. Take a holistic view of inventory management and you’ll experience benefits beyond anything you can imagine.

Go Lean for Your Customers

I gave a presentation to a trade group entitled “Leadership and Strategy in a Lean environment.” The attendees were key executives and Lean Champions from a number of companies, all of which are on the journey toward Lean.

As part of the presentation I asked, “Why is your company implementing Lean?” The audience split into teams to examine this question and presented their main reason to the group. The results were telling.

Some of the answers included:

  • To save money
  • To eliminate waste
  • To be more competitive
  • To improve morale

One group said to change the culture and another said to improve the quality of life, which I thought was interesting. Learn about lean from this short video prepared specifically for finance leaders

Essential considerations for Lean

Notice that no one said anything about the customer! If you study the roots of the Toyota Production System through the writings of Taiichi Ohno and his consultant Shigeo Shingo, you will find that their basic goal was the reduce the time it takes from order to delivery to provide the customer what they want. While quality and cost can be part of that, the two keys are speed and customer.

If your Lean initiative is focused internally, recent studies suggest that you have a better than 70% chance of failing to achieve your goals. A focus on the customer is vital to your success.

Empowering Workers to Enact Change

One of the concerns I’ve always had about Lean is the strong focus on process and the somewhat weak focus on people. World Class Manufacturing predated Lean, and it was comprised of three basic elements, one of which is involving people:

  1. Total Quality Management
  2. Just-in-Time (JIT)
  3. Total Employee Involvement

While the House of Lean has a pillar named Respect for People, in practice most organizations focus on process improvement and workplace organization and overlook worker involvement. Particularly in Six Sigma the worker is often pushed aside while the experts determine the improvements.

Peter Drucker considered his most important contribution to be the concept of the responsible worker and the self-governing plant community. He formulated much of his thinking on this topic during his project with General Motors in the early 1940s, well before the Toyota Production System came on the scene. One of Drucker’s biggest disappointments was his apparent failure to convince US automakers to use these concepts, while Japanese companies seemed to pick them up and run.

Part of the critical change component – strong leadership – involves empowering people at the point of work. Be sure any improvement opportunities include that consideration.

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