Performance Measurements: Traditional vs. Lean Organizations
Lean organizations face challenges if they try to measure their performance with
traditional cost accounting systems. The traditional accounting view often looks
to achieve economies of scale through large production batches (lowest cost per
unit), and supports the beliefs that 1) profit comes from full machine utilization
and 2) the more product you make, the greater your labor efficiency. The Lean approach
doesn’t match this thought process!
Think about it for a minute. Lean companies want to maximize the flow of product
at the pull of the customer, and they concentrate on reducing the barriers to flow
(waste!). These barriers include overproduction, excess inventory, underutilization
of people, etc. Their profit comes from maximizing flow based on the customer order
rate.
Comparing What’s Important
Let’s talk about the differences between traditional and lean thinking. Traditional
manufacturing looks at full machine utilization, cost per unit, absorption of overhead,
large batches, and inventory as a positive (asset $$). Lean thinking focuses on
flow and pull from the customer, value streams, system quality and team empowerment.
Lean thinking is about no overproduction (don’t run if you don’t need it), smaller
batches (one-piece flow) and less inventory.
Comparing Measurements
Traditional measurements often will not work or support a lean environment. These
measures could include labor efficiency and machine utilization, cost variance against
standards, and direct labor as a percent of sales, just to name a few. What is the
consequence of labor efficiency and machine utilization? Probably overproduction
and building of WIP inventory! (Remember, inventory is valued in standard accounting
– which is not positive in a lean environment.) Traditional cost and management
accounting measurements motivate non-lean behavior.
The Solution
Different performance measurements are needed for a lean manufacturer. A system
needs to be developed which reinforces the goals of lean, with improvement results
that can be measured like:
- Shorter cycle times
- Less inventory
- Higher quality
- On-time delivery
- Visual management
- Pull systems
And a Lean Performance Measurement System needs to be developed to support these
improvement results. What should it look like? It needs to be:
- Strategically focused and aligned
- Primarily non-financial
- Simple and easy-to-use - Visual and obvious
- Provides immediate and timely feedback
- Fosters continuous improvement
Purdue’s TAP/MEP Center is now incorporating Performance Measurement for the Lean
Enterprise into the services currently offered to its manufacturing clients.