Standard Business Roadmap

Implementation Manual

UNDERSTANDING BUSINESS BENEFITS

It is very important that senior management recognises the business benefits of lean and how they relate to the overall business strategy.  Depending on a particular business model, excellence in operations can be either a driver for business strategy or a prerequisite for that strategy, see figure 24.  Lean manufacturing is a driver for business strategy when acquired excellence in operations produces a strategic advantage.  An example can be in a mature market where one company develops the capability to manufacture and convey a product Just-in-Time.  This gives the company a distinct advantage over its competitors, so a strategic advantage may result for the company.  Lean manufacturing is a prerequisite for business strategy if excellence in operations is required for a company to maintain its competitive position.  An example is a firm that draws its demand from internet sales and has little forward visibility of customer demand.  Thus, the manufacturing system must be as lean and flexible as possible to satisfy the customer demand.

Either acquired or necessary, excellence in operations enhances overall business strategy and helps increase the overall profitability of the business.  The profitability increase is realised through:

·        Tangible business benefits

·        Intangible business benefits

Tangible business benefits

The tangible business benefits of the lean transformation can be grouped into Quality, Cost and Delivery. 

·        Quality

-                     Increased yield from processes.  Defects are detected and solved at their source, rather than just being detected at downstream processes.

      -            Reduced scrap and rectification costs.  Material and labour requirements are limited through increased yields of individual processes.

·        Cost

-            Higher return on assets.  Asset intensity is reduced as space and transportation requirements  should diminish.  Also, equipment is “right-sized” to maximise value-added work, often extending the life of the investment beyond its original “book value”.

-                     Improved cash flow.  The number of inventory turns should increase through the introduction of a pull system, which prevents overproduction and links production to actual customer demand.

-                     Reduced conversion costs.  Improved yields and a continual focus on increasing value-adding work for an operator reduces these costs.  Also, the number of indirect or peripheral activities necessary for production should diminish.

·        Delivery

-            Shortened, more consistent Production lead time.  A Quicker response to changes in customer demand and the ability to guarantee delivery schedules.

-                     Increased flexibility in operations.  The efficient use of manpower can easily adapt to changing volume and product variety fluctuations.

Intangible business benefits

·        Increased rate of continuous improvement

-     The company should become committed to the ongoing identification and elimination of waste as a way of life, consistently reducing product cost.

·        Strengthened problem solving skills

-     Previous recurring problems should be eliminated as the company begins to attack the root cause of problems.

·        Improved customer satisfaction

-    The greater fulfilment of Quality, Cost and Delivery benefits can help foster customer loyalty.