Can Lean and ROI Co-Exist?

Transcription

1 Can Lean and ROI Co-Exist? Lean Accounting Summit August 15,2016 Orest (Orry) Fiume Retired VP-Finance, The Wiremold Company All Rights Reserved 2016, Orest J Fiume The Wiremold Company West Hartford, CT 116 years old Product lines: wire management systems, power & data protection equipment and communications devices 12 plant locations in five countries Sell to electrical, electronic & telecommunications distributors, DIY and OEM s 2 1

2 Wiremold Background 3 Before we started our Lean Journey for real the company was driving Deming and TQM lots of training Attempted new MRP implementation and JIT Cut inventory for JIT without making necessary Result: Business operational performance improvements declined and customer service suffered... We didn t know what we were doing. Wiremold Results: Sales 20% Operating Profit (82%) 4 2

3 Wiremold s Status in Low Profits No Cash Bad Customer Service (< 50%) Losing Market Share But We raised the awareness of everyone (including the union) of the need for change We believed that the Toyota way of doing business was the right way Time for a Change! Sept 1991: Art Byrne hired as President 5 Lean A Business Strategy Not A Manufacturing Tactic Not A Cost Reduction Program 6 3

4 Time-Based Strategies Lead-Time Reduction Critical for driving improvement to your customers TIME IS THE CURRENCY OF LEAN Source: TBM 7 Lean is Not something you do while you run your business Lean is the Way you run your business. The Goal is Not to implement Lean It is to accelerate operational excellence to create sustainable competitive advantage. 8 4

5 Performance Measurement 9 Why are Metrics Important? Metrics send a message to employees as to what management thinks is important Employees want to appear to be doing what management wants them to do METRICS SHAPE BEHAVIOR 10 5

6 How Should Management Use Metrics? The winners will be those companies that focus on their processes, not their results Art Byrne We don t want to be a make-the-month company 11 However, You Say YES, BUT.. 6

7 Return on Return on A Single Number to Reflect: Operating Efficiency Capital Efficiency 7

8 Return on Earnings as % Sales Turnover Return on Earnings as % Sales Turnover Earnings Sales Sales Net 8

9 Return on Earnings as % Sales Turnover Earnings Sales Sales Net Sales Costs Working Capital + Permanent Funded Debt Earnings as % Sales Production Costs S,G and A Costs Income Taxes Return on Turnover Net Earnings Sales Sales Working Permanent Sales Costs Capital Funded Debt Inventories + Accounts Receivable + Cash Liabilities 9

10 Return on Earnings as % of Sales Turnover Earnings Sales Sales Net Sales Costs Working Capital Permanent + Funded Debt Production Costs Materials + Labor + Overhead S, G and A + Costs + Income Taxes Inventories + Accounts Receivable + Cash Liabilities Operating Efficiency? Material Cost: Flow Improves Quality & Reduces Scrap 60% Cost of Sales = 60% x 60% Material Content x 5% Scrap = 1.8% Increase in Margin 10

11 Operating Efficiency? People Cost: Flow, Pull, Takt and Standardized work eliminate non-value add work and free up capacity Wiremold s West Hartford Plant Doubled Volume Over Ten Years With the Same Number of People Operating Efficiency? 11

12 Operating Efficiency? Overhead: Most Overhead Costs Went Down Due to the Elimination of Waste Operating Efficiency? From 1990 to 2000 Wiremold s West Hartford Plant Added 13 Percentage Points of Gross Profit 12

13 Capital Efficiency? Inventory: Flow and Pull Reduce Inventory From 1990 to 2000 Wiremold s West Hartford Plant Increased Inventory Turns from 3.4x to 18.0x Capital Efficiency? Accounts Receivable: Defect Reduction Speeds Up Payments Most Late Payments Are Due To Problems That You Cause»Billing errors»damaged product 13

14 Capital Efficiency? Medical Devise Manufacturer Capital Efficiency? Machines: Economies of Scale Thinking Drives Overinvestment: Monuments vs Right Sized Flexible In-line Equipment Standard Cost System Hides Real Costs Lean Frees Up Capacity: Eliminate Unplanned Downtime, Producing Product that Becomes Scrap, etc. 14

15 Capital Efficiency? Buildings: Less Inventory and Compact Cells Frees up Floor Space for Growth Can Consolidate Facilities and Eliminate Rented Space Sales? Improved Customer Service Reduced Time to Market Increases New Product Flow Target Costing Improves Profit of New Products 15

16 Wiremold High Level Measurements To Achieve Improved ROI 100% Customer Service 20% Annual Productivity 20x Inventory Turns 50% Annual Reduction in defects (quality) 5c s and degree of visual management Over 10 Years ROI Increased by 31 More Than 500% Wiremold Before and After Lean Sales $100 Million $450 Million Assessed Value $30 Million $770 Million West Hartford: Sales per Employee $90K $240K Gross Profit 37.8% 50.8% Throughput Time 4-6 Weeks 1 Hours 2 Days Product Dev l Time 2-3 Years 3-12 Months # Suppliers Inventory Turns Working Cap % Sales* 21.8% 6.7% Wiremold Stock CAG = 34.7% per year S&P500 CAG = 15.5% per year * W/C = A/R + Inv Trade Payables 16

17 What is the Primary Enabling Tool for Improvement? KAIZEN Can Lean and ROI Co-Exist? The Lean Strategy Is the Best Way to Increase ROI Sales: Increase through accelerated new products Costs: -Eliminates Wasted Materials -Productivity Gains Reduce Labor as % Sales : -Frees up Working Capital -Frees up plant capacity - Avoids unnecessary future investment 17

18 The Biggest ROI Trap Most Kaizens Improve Productivity Improved Productivity Does Not Automatically Improve Profitability Do Not Attempt to Calculate the ROI of Individual Kaizens If You Must, Wrap it in Yes, but s Final Thought on Metrics Not everything that can be counted counts Not everything that counts can be counted 36 18

19 THANK YOU 37 go to Store, then Lean Applications 38 19