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I’m hoping to manipulate your blog for personal gain (not the first time and I’m probably not the only one!) This thread ties into a recent thread on the NWLean forum and I’m curious to see response from this information source.

What are Lean financial measurements that are acceptable financial measurements? Everyone can understand On-Time Delivery and Lead Time, but financial managers cannot relate that to hard $$. Inventory levels and Inventory Turns can be defined financially, but what are other metrics that can be used?

I’ve asked others with Lean backgrounds. One suggestion (which has merit) is called a Productivity Index. It is (Sales – Raw Materials) / Expenses (generally EBITDA – I’ve also heard it described as variable expenses). I’m being challenged (in a positive way) to find ways to measure the success of our company through Lean measurements, as opposed to our traditional Variances, Effectivity, Reported vs. Earned Hours, etc.

I’d love to hear other people’s responses. Remember, they need to be something that financial managers could relate to, so employee morale or simply saying “providing a service level to our customers” – things not definable by $ – won’t help. I firmly believe there has to exist a transitional method of going from Financial measurement to Lean measurement, without making an incredible leap of faith.

Any suggestions?

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I was recently in a couple factories of a medium-sized specialized medical device manufacturer. They make complex devices that have long (even after lean improvements) raw and processing lead times, with a wide range of potential configurations. But customers consider it critical… valuable… that products be delivered within 48 hours of order. Thus when you go through their factory you see world class lean everywhere you look… then you look through those double doors into the warehouse and see mountains of inventory. But that inventory is value to the customer.

Kevin

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Hardly the Gemba mindset that I would expect from someone who professes such deep knowledge of manufacturing. Combined with the unwarranted praise of Dell and Wal-Mart, I think someone has a new book to sell…

I’m sure Prof. Schonberger has visited many other companies but I wonder how many true Lean companies he has personally visited to understand their true capability?

Clearly, Prof. Schonberger is smart, but it’s hard to take these comments seriously when he hasn’t spent meaningful time observing Toyota’s process. I am certain that the public tours Toyota offers are insufficient in this regard.

I’m also certain that Toyota does not care too much what Prof. Schonberger thinks or looks forward to, as inventory turns are a metric nowhere to be found within Toyota.

In fact, you would be hard pressed to find someone in Toyota (even in Accounting) who understands and uses the calculation.

The truth is, Toyota uses simple visual control to manage inventory and optimize their system to perform with a dual supply base — Japan and local.

That’s who Toyota is, and it’s not going to change, no matter what “experts” write. Toyota could care less about inventory turns because their process capability allows them to manage the underlying drivers of inventory.

By the way, systematically planned inventory is not a bad thing. Excess inventory, on the other hand, is a risk which Toyota has proven capable of managing through fundamental execution and PDCA.

The Lean community also needs to wake up to the fact that ultra-low inventory is inherently at odds with service levels, particularly in a global marketplace with long lead-times.

Optimizing the trade-offs between inventory and service levels is not something that Toyota does, or knows how to do. They just manage this implicitly through TPS and solve real problems (customer, supplier, or otherwise) one-by-one.

The “shareholder” problem of insufficient inventory turns is not one that gets much attention at Toyota.

Like all financial metrics, turns can be gamed. That’s why Toyota focuses relentlessly on process.

Could they do better with Global Network Optimization? Probably. But their ability to develop local suppliers cannot be accelerated with software or wishful thinking.

Until then, the Japan-based supply base will continue to be an integral part of Toyota’s global growth. When inventory turns improve, it will be largely because of supply base localization and not because of any new “improvements” in inventory management.

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—————–
Cribbed from LEI:
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…Richard Schonberger – a stalwart leader of the lean movement from the very beginning – has recently claimed that Toyota has not been “walking the talk” for a key indicator of lean practice – inventory turns. He points out that Toyota’s company-wide turns have fallen from more than 80 in the 1960s to about 12 today, and follows this observation to some rather gloomy conclusions about the future of the lean movement.

In my and Dan Jones’s view, Richard has identified an important symptom – Toyota’s turns really have fallen – but has come to the wrong diagnosis and prognosis. Toyota’s turns have not fallen because its individual plants are less lean. We visit them frequently and know that this is not true. Rather Toyota’s turns have fallen because of the steady global expansion of Toyota without the ability to globalize and regionalize its production system at the same rate.

In the 1960s Toyota created practically all of the value in its products within a short distance in Toyota City and sold most of its output in the Japanese domestic market. In addition, it sold its finished units at the factory gate to the independent Toyota Motor Sales Company, meaning that the Toyota Motor Company carried no finished-unit inventories. Its lean methods inside Toyota City made 80 or more turns quite practical. (Remember that turns are calculated by dividing the cost of goods sold during a year by the average value of the raw materials plus work-in-process plus finished goods on hand during the year. This means that shorter value streams always produce higher turns, other things being equal.)

As Toyota began to sell abroad, it suddenly needed to ship finished vehicles vast distances by sea. What was more, because it could no longer build most vehicles to customer order as it did in Japan (due to the long lead times for shipping), Toyota had to create stocks of finished units in each export market. At first these vehicles were owned by independent foreign distributors and were not carried as inventory on Toyota’s books once they left the boat. However, over time Toyota bought out its foreign distributors and in 1982 merged with its Japanese distributor to form the current-day Toyota Motor Corporation. This had the effect of transferring all finished units not at dealers onto Toyota’s books and dragged down inventory turns.

Then, after 1984, Toyota began to establish assembly operations abroad, supplied initially by parts makers in Japan. Even with frequent shipments from suppliers, mountains of parts were always on the ocean, pulling turns down further. Over time Toyota has worked hard to establish a parts base within each region, but the steady growth of Toyota assembly operations has always run ahead of its ability to create local parts manufacturers and in any case the local suppliers are not nearly as close to Toyota assembly plants or as tightly coordinated as they are in Toyota City.

Therefore, even Toyota has a lot of work to do to fully “walk the talk” for its extended value streams, now stretching across the world, and doing this will be a continuing challenge as it moves to the head of the global automotive industry. I look forward to an upturn in inventory turns at Toyota in the years ahead and anticipate that members of the Lean Community will be involved in this campaign as Toyota suppliers.

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