Using Strategic Performance Measurements to Drive Lean Implementation

By Bruce Baggaley, Senior Partner, BMA, Inc., [email protected]

We often see successful lean manufacturing implementations that cannot be sustained over the long term. Initial reductions in lead time and inventory levels in these companies achieved in the early days of the lean effort are not present when we return to visit the company three years later. A common theme in these situations is that the companies continued to measure and evaluate operations based on their achievement of unit cost targets built into their standard costing systems. The recurrence of this problem has led us to conclude that lean manufacturing cannot be sustained over the longer term without replacing these standard costing measurements.

The Problem
The reason traditional standard costing measures don’t work in a lean company is that they were created to support mass production. Mass production was created to achieve lowest unit product cost through long production runs at each operation. Under this theory the lowest unit cost for the product can be achieved when the unit cost produced by each operation is minimized. Using this measurement scheme, individual operations were incented to produce as many parts as possible per unit of time. Parts produced that were in excess of amount demanded by customer orders were stored in work-in-process storerooms, to be used to support future demand.

Measure and Motivate
The solution to the problem posed above is to get cost measures out of the shop floor entirely and to replace them with measures that are designed to measure and motivate the causes of cost and performance. These new measures should thoroughly reflect the company’s lean strategies and goals at all levels. Consequently, as people seek to achieve the performance measures, they will also be working toward these ends.

In the remaining paragraphs we will describe a "starter set" of lean performance measures that will help most companies to spur their lean implementations.

The Starter Set of Lean Performance Measurements
This section describes briefly each of the "starter set" of measures for the cell and value stream levels of the lean company.

Cell Level measures enable the cell team to get done during a shift what has to be done that shift. The job of the cell is to make to TAKT (the rate of demand dictated by the customers), using prescribed standard work methods, and adhering to the kanban signals dictating what to make and when (to measure standard time, standard WIP, and standard work).

Day-by-the-Hour Report (Standard Time): This measurement board at the cell shows the volumes and products that need to be made each hour, how much has been made that hour, the problems encountered, and countermeasures employed. It provides the basis for cell team and supervisory management to get the cell the help it needs to fix the problems and get back on track.

Work-in-Process to Standard Work-in-Process (Standard WIP): This ratio shows the extent to which the amount of inventory at the cell is equal to the inventory levels specified when the cell was designed. Generally it measures whether the cell is following the kanban signals concerning whether and what to make. If this is so, the ratio will be "one." A ratio of greater than one generally signals that the cell is making products without getting a kanban signal to make and then proceed with the production. This measure serves to enforce this discipline.

First Time Through Quality (Standard Work): This measures the capability of the cell to make good parts. It equals the ratio of parts made correctly the first time (without rework or scrap) to total parts made that hour. Lean seeks to flag when a process starts to make out-of-spec parts and to stop to fix the problem immediately so that no further bad parts will be made. Generally, quality problems signal that standard work has not been adhered to or that there is need for a new standard.

Operational Equipment Effectiveness: This measure identifies the ability of machine capacity to be improved. It is generally useful for a bottleneck machine that has to operate at as close to full capacity as possible, and it provides a guide to improvement for the team regarding the highest priority initiatives to improve the capacity of the machine. The measure is calculated by multiplying the ratio of Availability (time up) of the machine relative to total time, times the ratio of the actual Run Rate (actual parts per hour) relative to design (or ideal) rate, times the First Time Though ratio for that machine.

The cell team leader posts these data manually on prominent displays at the cell so that they can be seen by all who walk by. At the beginning and the end of each shift, the team leader reviews the performance during the proceeding and upcoming shift, identifies problems that need to be fixed, and assigns the problems to team members for further study and improvement. Key problems and countermeasures are captured from the displays and submitted to the value stream continuous improvement team.

In next month’s issue, we will discuss solutions as they relate to Value Stream measures and suggestions for implementation.  

Bruce Baggaley is a Senior Partner at BMA, Inc. a lean accounting firm specializing in manufacturing and distribution processes. He can be reached at [email protected].