Dear Gemba Coach,
Good webinar, thank you. I would like to ask lean-minded fellow finance professionals if they make a difference in appraising lean initiatives from other investments in their companies, e.g. different project and investment appraisal techniques, hurdle rates, etc.?
That’s an interesting question and I’ve been thinking about it — but not sure I’ve come across many such cases at the gemba. I’ve been in debates when there was a clear choice between purchasing more equipment –typically, injection presses — to alleviate bottlenecks. Upon further investigation, it was shown that the existing presses were poorly utilized, as we discussed in the Q&A during the webinar on building the business case for lean. This actually occurs quite often. In this case the choice is between (a) buying more kit and (b) investing in TPM and SMED workshops to get more out of the equipment we already have.
In this case, yes, there is an appreciation difference, particularly with companies new at lean. If I buy an extra press, this comes out as an investment which will increase my balance sheet and that I can depreciate. This seems to be a no–lose scenario as my company is now “worth” more and the cost is “minimized” through the depreciation calculation (I have to confess I never got my mind around it). Now, from a cash is reality point of view, this is pure nonsense, and indeed can even become a “black swan”. I have personally seen two companies driven to bankruptcy because they bought cheap a lot of equipment (from other companies going down) they didn’t need and couldn’t use, and then could not recover from the cash drain. So, a black swan: an event with a catastrophic impact that wasn’t predicted at the time but, in hindsight, is perfectly understandable. Humans seem to have a blind spot for that, and as lean guys, committed to respecting the fact that humans are, well, humans, we need to keep an eye out for that.
Vanity, Sanity, Reality
On the other hand, investing in SMED and TPM, which means investing in developing your people, you’re not buying anything that can go on the balance sheet, so it’s a straight cost. Worse, it’s a cost that can lead to a reduction of inventory which will both reduce the balance sheet AND impact negatively the profit in the early phases. Of, course, from a lean point of view, you’re doing great by considering your people are your most important assets and investing in them, and by strengthening the cash position of the company is better use of existing equipment and inventory reduction, but it might not play like this in the numbers. Again, sales are vanity, profit is sanity, but cash is reality.
Your question, however, raises a more troubling issue. I’ve discussed this with one of my senseis, Orry Fiume, who was CFO of Wiremold at the time of its lean transformation Jim Womack and Dan Jones described in Lean Thinking. He points out that the question assumes lean is seen as one tactic out of many, not a fundamental strategy for the business. His point is that once you understand lean as a strategy you realize that it affects everything the organization does. There is no such thing as investments in “lean initiatives” and “other investments.” Every investment needs to first be assessed as to how it supports the Lean Strategy. That question is not a financial one but a strategic one. And if the answer is “it doesn’t” then why do it? If it does and you are faced with multiple investment opportunities choose the ones that move the strategy forward the fastest.
How to build a strategy around lean concepts:
- What is our growth engine?
- How do we build the cash machine?
- Can the growth engine and the cash machine be sustainably profitable?
- How do we squeeze capital expenditure to right size it?
- How do we use the lean “learning to learn” system to develop every employee in the company?
Reconciling Lean and Lucre
Now, Art Byrne, who was Orry’s CEO at Wiremold, writes fun pages in his book The Lean Turnaround about how he had to twist Orry’s arm to participate in a first kaizen event. As a traditional CFO at the time, Orry didn’t see how shop-floor activities could possibly be a good use of his time. He even meticulously recorded all the costs items of the event! Orry came out of his first gemba kaizen transformed and went on to not only support lean as a strategy, but to change the way financial information was presented in order to support the lean strategy. Orry is co-author of Real Numbers and a founder of the lean accounting movement.
In lean thinking, the test method is essential to the design of options, so having a debate about “investment” is going to be judged is absolutely spot on. Personally, I whole-heartedly agree with Orry, when the company starts making noises such as “how can I justify back training people or conducting improvement workshops?” I usually just stop talking to them. When I still thought I could convince them, I tried to argue we should first get a local gain from every workshop, and then multiply that gain to every similar cell to get a feel for the opportunity potential, but I fear this is a fight I now walk away from.
Which is wrong. The question your asking is absolutely the kind of questions we should be discussing and debating within the lean movement, and thank you for asking it. I currently know of no obvious way to get senior managers to see beyond the tactical potential of lean, but we need to keep discussing this until new ideas appear and new voices are heard. One thing I’m certain of is that until we can reconcile gemba-level lean and making-the-numbers attitude, the full potential of lean will remain untapped.
