One of the key considerations in IKOR when undertaking a LEAN project is the return on investment and that is where the first doubts arise concerning how to quantify the improvements that are achieved. How can we justify the cost of this investment ?…
Firstly we must distinguish between “bottom line improvements” and “practical improvements“. If you invest in training for your team, you will undoubtedly see a return, but it is unlikely that you will see an immediate saving in your trading account; however, this training might be a “sine qua non” condition for your company for gaining access to certain markets.
So, how do we measure the return on this investment? Even when we are talking about a virtually infinite ROI, come the end of the month we may not have improved the company’s cash-flow by a single cent. Something similar happens with some Lean projects; we increase productivity and we improve our workshop times, reducing non-added-value tasks, but we do not see this immediately reflected in the bottom line of the company’s accounts.
The explanation is simple: we manage to complete the tasks more quickly but our resources are still the same as before we implemented the improvement. In other words, we have achieved practical improvements but we cannot yet quantify these improvements in terms of cash
And this is usually when we take out our calculator and start juggling numbers….
- I multiply the potential freeing of inventory by profitability [click click]…
- The hours that have been freed up, multiplied by the machine’s energy consumption[click click]…
… But the calculator screen does not display the expected figure and it looks like we will not be able to justify the investment
So, have we benefited from the changes or not? The answer is an emphatic yes, because the same resources are capable of doing their job more effectively and we are preparing ourselves to take on a greater workload without the need to add weight to our business structure.
The returns will come but they will not all be financial in nature; some will take the shape of solid foundations that will support the company’s growth and that is something that calculators are still not capable of recognising.
And that is why there is a difference between bottom line improvements and practical improvements, and why an investment can always be defended through one of these prisms. Just please don’t perform a juggling act with your calculator; instead, keep in mind that some improvements are essential, regardless of whether or not they produce immediate financial gains.