Performance Measurement for the Lean Enterprise

1
Performance Measurement for the Lean Enterprise
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• Not everything that can be counted counts, and
  not everything that counts can be counted
• Albert Einstein

3
Course Agenda

• Welcome and Introductions
• The Purpose of Performance Measurement
• Performance Measurement and Lean Manufacturing
• The Starter Set
• Corporate / Strategic
• Value Stream
• Cell Measures
• Developing Performance Linkages
• Implementation
• Summary and Evaluation

4
What You Should Be Able To Do After This Class

• Understand and explain how traditional
  performance measurements conflict with lean
  performance
• Understand barriers to adopting performance
  measurements and how to begin to overcome them.
• Understand and implement the starter set of
  performance measurements at the Corporate level,
  the Value Stream level, and in Production Cell to
  motivate lean behaviors.
• Develop a clear linkage from your companys
  business strategy to performance measurements
  used in the value stream and in production cells.

5
Course Agenda

• Welcome and Introductions
• The Purpose of Performance Measurement
• Performance Measurement and Lean Manufacturing
• The Starter Set
• Corporate / Strategic
• Value Stream
• Cell
• Developing Performance Linkages
• Implementation
• Summary and Evaluation

6
Why Are the Right Performance Measurements
Important?

• What you measure is what you get.
• Measurements drive peoples behavior.
• People need rapid and relevant feedback.
• Measurements indicate progress towards planned
  goals.

When you can measure what you are speaking
about, and express it in numbers, you know
something about it. But when you can not measure
it, when you can not express it in numbers, your
knowledge is of a meager and unsatisfactory
kind... Lord Kelvin (1824-1907)
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Course Agenda

• Welcome and Introductions
• The Purpose of Performance Measurement
• Performance Measurement and Lean Manufacturing
• The Starter Set
• Corporate / Strategic
• Value Stream
• Cell
• Developing Performance Linkages
• Implementation
• Summary and Evaluation

8
Defining Lean
Lean is
A systematic approach to identifying and
eliminating waste (non-value-added activities)
through continuous improvement by flowing the
product at the pull of the customer in pursuit of
perfection. The MEP Lean Network
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Definition Of Value-Added

• Value-Added
• Any activity that increases the market form or
  function of the product or service. (These are
  things the customer is willing to pay for.)
• Non-Value-Added
• Any activity that does not add market form or
  function or is not necessary. (These activities
  should be eliminated, simplified, reduced, or
  integrated.)

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Lean Eliminating Waste

• Non-Value-Added
• Defects
• Overproduction
• Waiting
• Not Utilizing Employees knowledge, skills and
  abilities
• Transportation
• Inventory
• Motion
• Excess Processing

Value-Added
Typically 95 of all lead time is non-value-added.
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Lean Building Blocks
Continuous Improvement
Performance Management
Value Stream Mapping
Performance Measurement
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Shadows of the Neanderthal

• Read or listen to the story Shadows of the
  Neanderthal
• What are the main points of the story?
• What are examples of the two tower problem from
  current events, or from family life?

13
Two Views of the Same Reality

• Your world view depends upon where you are
  looking from your perception.
• Two groups can have a quite different perception
  of the same situation according to their
  viewpoints and their assumptions.
• These perceptions can become deeply held beliefs.
• Our beliefs constitute mental models about how
  the world works.
• People work to preserve their mental models even
  when they acknowledge their inadequacy.
• These mental models often lead to conflict
  between two groups even when they have similar
  ultimate objectives.

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Lean Represents a New Mental Model for
Performance Measurement
Traditional
Lean
Focus on Lowest Product Cost
Focus on Maximizing Value Stream Profitability
SHIFT
The Dimensions and Implications of this Shift
are Presented in the Following Slides
15
Compare the Differences
Traditional Measurements

• ASSUMPTION Profit comes from full utilization
  of resources

• WHAT IS IMPORTANT Full utilization of resources

• MEASUREMENT Labor efficiency machine
  utilization

• BEHAVIOR Make more product

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Compare the Differences
Lean Thinking

• ASSUMPTION Profit comes from maximizing flow
  based on customer pull.

• WHAT IS IMPORTANT Flow according to customer
  pull

• MEASUREMENT Throughput

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Comparing Assumptions
Lean Assumptions
Traditional Assumptions

• Profit comes from full utilization of resources
• Direct labor is the most important conversion
  cost
• Control the business thru detailed tracking
• All excess capacity is bad

• Profit comes from maximizing flow on pull from
  customers.
• Waste resources impeding the flow
• Control thru continuous attention to flow waste
• Excess capacity provides flexibility

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Comparing What Is Important
Traditional Thinking
Lean Thinking

• Full utilization of resources
• Cost per Part
• Overhead absorption
• Batch and Queue
• Inventory valuation
• Departmental structure and individual efficiency
• Product quality
• Pursuit of budget

• Increased Sales Revenue
• Value to the customer
• Value streams
• Flow pull from the customers
• Team structure and individual empowerment,
  accountability
• System quality
• Pursuit of perfection

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Comparing Measurements
Lean Measurements
Traditional Measurements

• Cycle time
• Throughput
• First time quality
• Inventory Turns
• Delivery to customer
• Value stream focus

• Labor efficiency machine utilization
• Cost variances vs. standard
• Budget adherence
• Direct labor as of sales

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Comparing Behaviors
Traditional Behaviors
Lean Behaviors

• Make more product
• Utilize resources to the max
• Optimize dept. efficiencies
• Track direct labor in detail
• Allocate other costs

• Eliminate barriers to flow
• Focus on value streams rather than departments
• Continuous improvement and team-work
• Eliminate waste, inventory, and over-production

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Dynamics of Lean Implementation

• Improvement Results
• Short cycle times
• Lower inventories
• Higher quality
• On-time delivery
• Less machine downtime
• Simpler planning scheduling

Improved Results
Improvement Efforts
Commitment to Lean
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Dynamics of Standard Cost Accounting

• Unfavorable Variances
• Volume variances
• Labor utilization variances
• Machine utilization variances
• Overhead absorption variances

Excess Capacity
Unfavorable Variances
Less Direct Labor Hours
Pressure to Produce More Parts
Less Parts Produced
Lean Improvement Results
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The Two Views Work Against Each Other
Excess Capacity
Initially. Overhead burdens per unit go
up Variances go unfavorable
Unfavorable Variances
Less Direct Labor Hours
Pressure to Produce More Parts
Less Parts Produced
Improved Results

Improvement Efforts
Commitment to Lean
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Lean Has Produced Very Positive Results

• Lead times reduced from 20 days to 5 days
• Inventory turns increased from 10 turns to 50
• Cash flow has doubled
• On-time delivery increased from 80 to 99
• These Results Should Lead to Improved
  Profitability

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But The Costing System Has Masked The Profit
Improvement
Acme Stamping Income Statement
Current State
Lean Future
Lean
before Lean
State
Improvement
Revenue
216,200


216,200


-


Production Costs
121,043


119,000


(2,043)


Material Costs
71,944


71,944


-


One-Time Inventory
Reduction
12,243
12,243
-




Overhead Cost
20,000


20,000


-


Total Cost
212,987


223,187


10,200


3,213


(6,987)


(10,200)


Gross Profit
Significant inventory reduction has a short-term
negative impact on profitability.
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Discussion

• How do you propose to reconcile these conflicting
  views?
• What are some fundamental things that must change?

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The Solution

• Develop a set of measurements throughout the
  organization that thoroughly reflect the
  companys lean strategies and goals.
• Replace the traditional measurements with lean
  performance measurements that are designed to
  motivate and monitor lean behavior.
• Engage people to work to improve measurement
  results, so that they will be actively
  contributing to company goals.

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The Measures Must Achieve Effective Control
Goal
Input
Output
SYSTEM
Gap
Measure Gap between Actual and expected
System Changes
Control Process
Cause/effect Rapid feedback
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They Must Measure Causal and Predictive Factors
Historical
Predictive
Lean
Causal
Derived
Traditional
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Effective Performance Measurement Makes a
Difference
Organizations with Lean Performance Measurements
Organizations with Traditional Performance
Measurements
Measure of Success
Performance Measurements
Agreement on Strategy
90
47
Communication of Strategy
60
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Cooperation and teamwork
85
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Adapted from Ingle Scheiman Is Measurement
Worth It Management Review, Morgan Scheiman,
Measuring People Performance Quality Progress
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Course Agenda

• Welcome and Introductions
• The Purpose of Performance Measurement
• Performance Measurement and Lean Manufacturing
• The Starter Set
• Corporate / Strategic
• Value Stream
• Cell
• Developing Performance Linkages
• Implementation
• Summary and Evaluation

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Three Levels of Measurements
Key Performance Indicators and Targets
To enable senior managers of the company to
monitor the achievement of strategic goals.
To guide the Value Stream continuous improvement
team in executing company strategies and
achieving objectives.
Value Stream Level Measurements
To empower the cell teams to monitor and control
their production activities in support of the
value stream objectives.
Cell Level Measurements
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Strategic Goals and Key Performance Indicators

• Grow Sales
• Grow Earnings
• Improve Cash Flow
• Improve Customer Value
• Improve Employee Satisfaction

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The Starter SetPrimary Measures
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Starter Set LinkageOrder Fulfillment Value
Stream
Measures
Cell Objectives
Measures
Strategic Goals
Value Stream Objectives
Units per Person
Grow sales Improve Productivity
Increase Thru-put
Day by Hour Report
with Same Resources
On-time Shipments to Schedule
Reduce Cycle Time
Reduce
Dock-to-Dock Time
Lead Time
Build to Schedule
WIP to SWIP
First-time Through
Reduce Inventory
Reduce Batch Size
Operational Equipment Effectiveness
(Single Piece Flow)
Increase Earnings and Cash Flow
Average Cost per unit
Perfect Quality
Eliminate Variability
Accounts Receivable Days Outstanding
First Time Through
Improve Productivity
Value Stream Gross Profit Percentage
Continuously Improve the Cell
Number of Improvement Projects
Improve Customer Satisfaction
Collect Cash Quickly
5S Audit
Increase
OEE at Constraint Cell
Improvement Project
Participation
Increase Cross Training
Average Projects per Person
Cross Training Chart
Provide Advancement
for Employees
Average Cross Training per Person
Safety Cross
Improve Employee Satisfaction
Eliminate Injuries
Number of Safety incidents
and Accidents
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Course Agenda

• Welcome and Introductions
• The Purpose of Performance Measurement
• Performance Measurement and Lean Manufacturing
• The Starter Set
• Corporate / Strategic
• Value Stream
• Cell
• Developing Performance Linkages
• Implementation
• Summary and Evaluation

37
Corporate MeasurementsKey Performance Indicators

• The corporate (strategy-level) measures give
  senior management answers to basic questions as
  to how well the business is achieving its goals
  with regard to
• Financial results
• Business Growth/Diversification
• Operational improvement Productivity
• Customer value
• Organization development

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KPI Starter Set Measure Monthly...
Financial Perspective/ Business Growth

• Sales Growth EBITDA
• Inventory Turns Sales per
  Employee
• Customer SatisfactionOn-Time Delivery
• Organizational Capabilities
• Employee Turnover

Operations Perspective
Customer Value Perspective
Organization Perspective
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Sales Growth

• Measures how fast the business as a whole is
  growing from the previous period and over longer
  one and five-year periods
• How to calculate
• Level in Dollars
• Growth/(Decline) from Prior Period
• 1-Year Growth/(Decline) from previous 12-month
  period
• Average Annual 5-Year Compound Growth

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Earnings Before Interest, Taxes, Depreciation,
Amortization (EBITDA)

• EBITDA measures cash flow from operations.
• Equals net income plus interest, taxes and non
  cash charges such a depreciation and amortization
• Dimensions measured
• Level in Dollars
• Growth/(Decline) from Prior Period
• 1-Year Growth/(Decline) from previous year
• Average Annual 5-Year Compound Growth
• How to calculate

Net Income
Interest Expense
Amortization Expense
Provisions For income Taxes
Depreciation Expense





Any other significant non-cash and/or charges,
such as write-off of investments, should be added
back to income
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Inventory Turns

• Measures how effectively material flows through
  the production process, the stability of the
  processes visual systems, and the lead time for
  the business.
• Shows the total inventory including raw material
  (at point of use), work-in-process, and any
  completed items.
• How to calculate
• Inventory Turns

Cost of Sales
Total Inventory Dollars
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Sales per Employee

• Measures productivity of the company.
• Shows value created by the company.
• How to calculate
• Sales per Employee
• A full-time equivalent employee equals the total
  hours worked by full- and part-time workers
  (including overtime) divided by the number of
  available straight-time hours per employee during
  the period.

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Key Customer Satisfaction by Product

• Measured by an index which encompasses the
  factors that are valued by key customers of the
  product.
• Dimensions measured
• Comparison with previous Period (Quarter)
• Comparison with previous year
• How to calculate
• Calculate the weighted average of the indices for
  the factors deemed important by customers
  (product functionality, product quality, service
  responsiveness, timeliness, etc.)

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On-Time Delivery

• Measures the shipment of the right products in
  the right numbers to the customer order.
• Shows the effectiveness of the production process
  in making to customer demand
• Shows the percentage of the scheduled customer
  order volumes actually shipped on schedule.
• How to calculate
• On-Time Delivery

Orders Shipped on Time
Total Orders Shipped
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Employee Turnover

• Measures the satisfaction of employees
• Indicates the ability of the company to retain
  its employees
• How to calculate
• Employee Turnover
• An Unwanted Departure occurs when a employee
  leaves the company prior to the planned departure
  date

Employee Unwanted Departures
Total Employees
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Course Agenda

• Welcome and Introductions
• The Purpose of Performance Measurement
• Performance Measurement and Lean Manufacturing
• The Starter Set
• Corporate / Strategic
• Value Stream
• Cell
• Developing Performance Linkages
• Implementation
• Summary and Evaluation

47
Value Stream
Value stream The set of all the specific
actions required to bring a specific product from
receipt of the order to a finished product in the
hands of the customer.
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Value Stream Starter Measurements

• Support Measures
• OEE at the Constraint Cell
• Average Projects per Person
• Average Cross-Training per Person
• Number of Safety Incidents

• Primary Measures
• Units per Person
• On-Time Delivery
• Dock-To-Dock Time
• First Pass Yield
• Average Cost per Unit Shipped
• Accounts Receivable Days Outstanding
• Value Stream Gross Profit Percentage

49
Primary Value Stream Measurements

• Establish value stream objectives and targets to
  link to attainment of strategic goals
• Monitor attainment of value stream objectives
• Identify constraints to value stream performance
  and direct continuous improvement at the level of
  the cell to their elimination.
• Monitor the effectiveness of improvements in
  eliminating constraints to value stream
  performance.

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Linking Value Stream Goals to Measurements
51
Value Stream Starter Set Measure Weekly...

• Value Stream Gross Profit
• Average Cost per Unit Shipped
• Accounts Receivable Days Outstanding
• Units per Person
• Dock-to-Dock/Order-to-Dock Time
• First Pass Yield
• On-Time Delivery
• Value Stream Support Measures

Financial Perspective
Operations Perspective
Customer Value Perspective
Organization Perspective
52
Value Stream Gross Profit Percentage

• Measures the profitability of the value stream
  during the period
• Includes the sales value of all shipments from
  the value stream during the period
• Includes all value stream costsproduction labor,
  production materials, production support,
  operation support, facilities and maintenance,
  all other value stream costs
• Primarily cash based costing--charges costs
  directly from basic ledgerspayroll, accounts
  payable, depreciation accrual
• Limited allocations
• How to calculate

(Value Stream Revenue Value Stream Costs) X 100
Value Stream Gross Profit

Value Stream Revenue
53
Average Cost per Unit Shipped

• Measures the productivity of the value stream
  during the period.
• Includes all value stream costsproduction labor,
  production materials, production support,
  operation support, facilities and maintenance,
  all other value stream costs
• Primarily cash based costing--charges costs
  directly from basic ledgerspayroll, accounts
  payable, depreciation accrual
• Limited allocations
• How to calculate
• Avg. Cost per Unit

Total Value Stream Costs

Total Units Shipped
54
Accounts Receivable Days Outstanding

• Measures the average time to collect cash after
  shipment
• How to calculate
• Calculate the average sales per day and divide it
  into the period-end accounts receivable balance
• AR Outstanding Days
• Average Sales per Day

Accounts Receivable Balance
Average Sales Per Day
Average Months Sales
Working Days in Month
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Units per Person

• Measures throughput and productivity of the value
  stream.
• Shows value created by the value stream.
• How to calculate
• Units per Person
• Include all full-time equivalent employees
  dedicated to the value stream during the period,
  including first line management.

Units Shipped by Value Stream
Avg. Number of Full-Time Equivalent Dedicated
Employees of The Value Stream
56
Dock-To-Dock/Order-to-Dock Time

• Dock-to-Dock Measures the flow of products from
  receipt of raw materials/customer orders to the
  shipment of finished goods.
• Shows the speed of conversion of raw materials or
  customer orders to finished product.
• Expressed in hours or days
• How to calculate
• Dock-to-Dock Days
• Order-to-Dock Days Dock-to-Dock Days
  Order Processing Days

Manufactured End Products per week
Units of Control Part in the Plant
Days per Week
x

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Dock-To-Dock Time
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First Pass Yield

• Measures percent of total units successfully
  manufactured through the value stream on the
  first pass without being repaired, reworked,
  re-tested or scrapped.
• How to calculate
• The First Pass Yield for the Value Stream is the
  product of the First Pass Yields at each
  Evaluation Point in the entire value stream

Total Units Processed-Not OKs
FPY at Evaluation Point (EP)

Total Units Processed
FPY for Value Stream

FPY(EP1) x FPY(EP2) x FPY(EPn)
59
On-Time Delivery

• Measures the shipment of the right products in
  the right numbers to the customer order.
• Shows the effectiveness of the production process
  in making to schedule.
• Shows the percentage of the scheduled customer
  order volumes actually shipped on schedule.
• How to calculate
• On-Time Delivery

Orders Shipped on Time
Total Orders Shipped
60
Supporting Measurements

• Identify the focus for improvement initiatives at
  the cell level.
• Calibrate the progress of the value stream in
  developing a culture of continuous improvement.
• Track progress in the ability to use resources
  flexibly.
• Measure progress in creating a safe work
  environment.
• OEE at the Constraint Cell
• Average Projects per Person
• Average Cross-Training per Person
• Number of Safety Incidents

61
Value Stream Level Performance Management
Value Stream Measurements
Targets
Identify Performance Gaps
Improvement Projects
Establish Root Causes of Gaps
62
Value Stream Performance Management Framework
63
Value Stream Measures Focus Cell-Level
Continuous Improvement ...
Measure Results against target
Value Stream Performance
Gap

• Understand patterns and trends
• Define the causes of the trends

Cell initiatives
Provide focus for use of House of Lean tools at
cell level
64
Exercise Relate Value Stream Objectives and
Measures to Lean Tools
Instructions Working in teams and using
information about Acme Stamping on page 54, draw
a line from the value stream performance
measurements to the House of Lean tool (or
tools) that Acme Stamping used to create its
future state.
Which Lean Tools Are Needed

• To improve these measures
• Units Shipped per Employee from 1,150 to 1,533
• On-Time Delivery improve from 90-98
• Dock-to-Dock Time from 23.6 days to 4.5 days
• First Pass Yield maintain and improve
• Accounts Receivable days maintain 30 days
• Reduce Average Cost per Unit

where?
65
Course Agenda

• Welcome and Introductions
• The Purpose of Performance Measurement
• Performance Measurement and Lean Manufacturing
• The Starter Set
• Corporate / Strategic
• Value Stream
• Cell
• Developing Performance Linkages
• Implementation
• Summary and Evaluation

66
Cell

• A group of machines and/or workstations
  physically and geographically linked, staffed by
  a consistent team of operators, which makes parts
  or products within a product family.

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Cell Starter Measurements

• Support Measures
• Cross Training Chart
• Safety Cross
• 5S Audit
• Number of Improvement Projects Completed

• Primary Measures
• Day by the Hour Report
• Days of Inventory
• (or) WIP to SWIP
• Operational Equipment Effectiveness (OEE)
• First Pass Yield

68
Primary Cell Measurements

• Enable the cell production team to monitor and
  control their primary production activities.
• Facilitate the collection of problems and issues
  arising from production.
• Provide first-line data for analysis by the cell
  or the continuous improvement team.

The objective here is to keep to takt-image. The
measures help to keep focus as a dash-board
toolvisible to allowner managed yet also acts
as a visual control for managers
69
Linking Cell Objectives to Cell Measurements
70
Linking Cell Objectives to Cell Measurements
(continued)
71
Day by the Hour Report

• Measures adherence to production schedule.
• Constantly reinforces the need to achieve
  consistent cycle time to match customer takt
  time.
• Shows adherence to the production requirement for
  the cell for each hour.
• Can be expressed as a quantity for the hour
  (/hr) and/or as a cumulative quantity for the
  shift. (/shift)
• How to calculate
• Cell supervisor records the quantity completed at
  the end of each hour, the cumulative quantity for
  the day, and any comments or reasons.
• At the end of each shift, cell supervisor
  calculates percentage completed in comparison to
  schedule.

72
Inventory Days

• Measures how effectively material flows through
  the cell, the stability of the process visual
  systems, and the lead time for the cell.
• Shows the total inventory on the cell including
  raw material (at point of use), work-in-process,
  and any completed items.
• Can be expressed in quantity of parts used in
  production or in dollars.
• How to calculate
• Cell operators calculate cell inventory on a
  weekly basis by counting material and production
  kanbans
• Inventory Days

Total Inventory of the Cell
Cell Production Rate
73
WIP TO SWIP

• Measures how effectively material flows through
  the cell, the stability of the process and visual
  systems.
• Shows the total inventory on the cell including
  raw material (at point of use), work-in-process
  and any completed items.
• Focuses the operator attention on the importance
  of kanban rules and single piece flow.
• How to calculate
• Cell operators count the total inventory on the
  celltotal kanbans, number of products, number of
  representative parts
• Divide by the standard inventory for the cell
• WIP/SWIP

Total Inventory in the Cell
Standard Cell Inventory
74
First Pass Yield

• Measures percent of total units successfully
  manufactured on the first pass without being
  repaired, reworked, re-tested or scrapped.
• Can be expressed for each workstation or for the
  entire cell.
• Shows where cell-level improvement should be
  focused.
• How to calculate
• Workstation FPY
• Cell FPY

Total Units Processed - Rejects or Reworks
Total Units Processed
FPYWS1 FPYWS2 FPYWS3 ..
75
Overall Equipment Effectiveness (OEE)

• Measures a combination of availability,
  performance efficiency, and quality for a machine
  or a process.
• Identifies waste caused by machine process
  inefficiencies.
• Shows effective use of machine or cell.
• Can be collected by shift, by day, by product, or
  by product family
• How to calculate
• OEE Availability Performance Efficiency
  Quality

Availability Operating Time / Net Available
Time Performance Efficiency (Ideal Cycle Time
Total Products Run) / Operating Time Quality
(Total Products Run Total Rejects) / Total
Products Run
76
Support Measurements

• Enable the cell team to monitor and control
  important aspects of their work which support the
  cells primary responsibilities.
• Cross training chart
• Safety cross
• 5S Audit
• Number of Improvement projects completed

77
Cell-Level Performance Management
Establish Targets
Record Daily/Shift Outcomes
Record Daily/Shift Outcomes
Take Corrective Action
Identify Problems Causes

• Obtain assistance if needed.
• Notify improvement team when causes are beyond
  scope of the cell team.

78
Implementing Cell Measures

• Exercise

79
Acme Stamping Exercise Current State
80
Acme Stamping Exercise Future State
Supplier Loop
Pacemaker Loop
Stamping Loop
81
Acme Stamping Initiatives

• Pacemaker Loop
• Objectives
• Develop continuous flow from weld through
  assembly cell
• Kaizen work elements to reduce total cycle time
  to 168 seconds or less
• Eliminate weld-fixture changeover time
• Improve uptime on welder 2 to 100
• Develop pull system with finished goods
  supermarket (eliminate schedules)
• Goals
• Only 2 days of finished goods inventory
• No inventory between workstations
• Operate the cell with 3 people at current rate of
  demand

82
Acme Stamping Initiatives (continued)

• Stamping Loop
• Objectives
• Establish pull system with stamped-parts
  supermarket
• Reduce stamping batch sizes to 300 (LH) and 160
  (RH)
• Reduce stamping changeover times to less than 10
  minutes
• Goals
• Only 1 day of stamped bracket inventory in
  supermarket
• Batch sizes 300 and 160 pieces between
  changeovers
• Supplier Loop
• Objectives
• Develop pull system with steel coil supermarket
• Introduce daily coil delivery
• Goal
• Only 1.5 days of coil inventory in supermarket

83
Exercise
84
Course Agenda

• Welcome and Introductions
• The Purpose of Performance Measurement
• Performance Measurement and Lean Manufacturing
• The Starter Set
• Corporate / Strategic
• Value Stream
• Cell
• Developing Performance Linkages
• Implementation
• Summary and Evaluation

85
Creating Performance Linkages
Cell Objectives
Strategic Goals
Value Stream Objectives
Key Performance Indicators and Targets
Value Stream Measures
Cell / Process Measures
Measurements
86
Strategic Goals

• What is the company trying to achieve?
• Financial
• Customers markets
• Products services
• Short-term long-term

87
Examples of Strategic Goals

• Increase sales revenue and market share.
• Increase cash-flow and reduce debt.
• Create a culture of continuous improvement.
• Maintain a stable and well-educated workforce.
• Develop and commercialize new products.

88
Corporate Objectives

• How will the company achieve its Goals?
• Specify levels of achievement needed to attain
  the companys strategic goals.
• Set specific and measurable targets.
• Establish specific achievement dates.
• Use goals to develop corporate performance
  measurements.

89
Examples of Corporate Objectives

• Grow our revenue by 25 over the next 12 months
  and increase market share to 15 in our 3 major
  markets.
• Bring our debt down to less than 500,000 by year
  end.
• Improve cash flow from operations by 25 by year
  end
• 65 of the workforce engaged in continuous
  improvement projects by year-end.
• Everybody in the company trained in 100 Safety
  by June. All operations people trained in lean
  thinking by September.

90
Linkage of Strategic Objectives to Key
Performance Indicators
Strategic Goals
KPIs and targets
Grow our revenue by 25 over the next 12 months
and increase market share to 15 in our 3 major
markets.
EBITDA
Inventory Turns
Sales Growth
Bring our debt down to less than 500,000 and
improve cash flow from operations by 25.
Sales per Employee
91
Value Stream Objectives and Measures

• Define the organizations value streams
• Order fulfillment value streams, new account
  sales value stream, product development value
  stream, etc.
• Relate the value stream objectives to the
  corporate goals.
• The value stream objectives must be the
  outworking of the corporate goals.
• Use objectives to develop value stream
  performance measurements.

92
Linking Strategic Goals to Value Stream
Objectives
Value Stream Objectives
Strategic Goals
Increase Thru-Put by 15 with Same Resources
Grow our revenue by 25 over the next 12 months
and increase market share to 15 in our 3 major
markets.
Reduce Order Fulfillment Lead Time from 12 to 3
days
Increase Inventory turns to 6 turns
Perfect Quality. Zero product-faulty returns.
Bring our debt down to less than 500,000 and
improve cash flow from operations by 25.
Improve Productivity. Cost per Unit of 17.65 or
less.
Reduce AR days outstanding to 45 days.
93
Value Stream Objectivesto Measurements
Value Stream Measures
Value Stream Objectives
Sales per Person
Increase Thru-Put by 15 with Same Resources
On-Time Shipment
Reduce Order Fulfillment Lead Time from 12 to 3
days
Dock-to-Dock Time
Increase Inventory Turns to 6 turns
First Time Through
Perfect Quality. Zero product-faulty returns.
Average Cost per Unit
Improve Productivity. Cost per Unit of 17.65 or
less.
Accounts Receivable Days Outstanding
Reduce AR days outstanding to 45 days.
Value Stream Gross Profit Percent
OEE at Constraint Work Center
94
Cell Objectives

• Relate the cell goals to the value stream goals.
• The cell goals must be the outworking of the
  value stream goals.
• Use goals to develop cell performance
  measurements.

95
Linking Value Stream Objectives to Cellular
Objectives
Cellular Objectives
Value Stream Objectives
Increase Thru-Put by 15 with Same Resources
Reduce Cycle Time
Reduce Order Fulfillment Lead Time from 12 to 3
days
Build to Schedule
Increase Inventory Turns to 6 turns
Reduce Batch Size /Single Piece Flow
Perfect Quality. Zero product-faulty returns.
Eliminate Variability
Improve Productivity. Cost per Unit of 17.65 or
less.
Effective Visual Management
Reduce AR days outstanding to 45 days.
Increase Operator Flexibility
96
Linkage of Cell Objectives to CellMeasurements
Cell Objectives
Cell Performance Measurements
Reduce Cycle Time
Day by the Hour Report
Days of Inventory
Build to Schedule
OEE
Reduce Batch Size /Single Piece Flow
First Pass Yield
Eliminate Variability
Improvement Projects Completed
Effective Visual Management
5S Audit
Increase Operator Flexibility
Cross Training Chart
97
Exercise

• Using the forms on the following pages develop
  linkages for the remaining objectives of the
  starter set reproduced on the following page
• Grow sales and Increase Customer Satisfaction
• Continuously Improve
• Improve Employee Retention

98
Starter Set LinkageOrder Fulfillment Value
Stream
Measures
Cell Objectives
Measures
Strategic Goals
Value Stream Objectives
Units per Person
Grow sales Improve Productivity
Increase Thru-put
Day by Hour Report
with Same Resources
On-time Shipments to Schedule
Reduce Cycle Time
Reduce
Dock-to-Dock Time
Lead Time
Build to Schedule
WIP to SWIP
First-time Through
Reduce Inventory
Reduce Batch Size
Operational Equipment Effectiveness
(Single Piece Flow)
Increase Earnings and Cash Flow
Average Cost per unit
Perfect Quality
Eliminate Variability
Accounts Receivable Days Outstanding
First Time Through
Improve Productivity
Value Stream Gross Profit Percentage
Continuously Improve the Cell
Number of Improvement Projects
Improve Customer Satisfaction
Collect Cash Quickly
5S Audit
Increase
OEE at Constraint Cell
Improvement Project
Participation
Increase Cross Training
Average Projects per Person
Cross Training Chart
Provide Advancement
for Employees
Average Cross Training per Person
Safety Cross
Improve Employee Satisfaction
Eliminate Injuries
Number of Safety incidents
and Accidents
99
Exercise Translating Strategic Goals to Key
Performance Indicators
Strategic Goals
KPIs and Targets
Improve Customer Satisfaction
Improve Employee Satisfaction
100
Exercise Linking Strategic Goals to Value
Stream Objectives and Cell Objectives
Strategic Goals
Value Stream Objectives
Cellular Objectives
Improve Customer Satisfaction
Improve Employee Satisfaction
101
Exercise Translating Objectives to Measures
Cellular Measures
Value Stream Measures
KPIs and Targets

Customer Satisfaction On-Time Delivery

Employee Turnover Employee Satisfaction


102
Exercise Summarize Linking Strategic Goals to
Value Stream Objectives to Cellular Objectives
Value Stream Objectives
Cell Objectives
Strategic Goals
Improve On-Time Delivery
Build to Demand
Perfect Quality
Eliminate Variability
Improve Customer Satisfaction
Increase Responsiveness
Reduce Cycle Time
Improve Customer Value
Improve Employee Satisfaction
Continuously Improve
Provide Increased Flexibility
Reduce Batch Size / One Piece Flow
Reduce Number of Safety Incidents
Institute Standard Work
Increase Opportunities for Advancement
5S Safety
Increase Project Participation
103
Course Agenda

• Welcome and Introductions
• The Purpose of Performance Measurement
• Performance Measurement and Lean Manufacturing
• The Starter Set
• Corporate / Strategic
• Value Stream
• Cell
• Developing Performance Linkages
• Implementation
• Summary and Evaluation

104
Implementation Steps

• Choose Your Implementation Approach using the
  Maturity Path
• Implementing the starter set
• Creating your own linkages
• Introduce the Measures
• Train the Employees
• Define the Measurements
• Create Visual Displays
• Setup a Review Process
• Manage Performance
• Disseminate the information

105
Lean Manufacturing Maturity Path
106
Just Getting Started with Lean
Pilot Lean Production Cells
Lean Manufacturing Widespread
Lean Through- Out Company Partners

• Implementation Approach
• New cell level performance measurements and
  targets

• Successful lean cells
• Extensive training in lean principles
• Kanban pull 5S
• SMED quick change-over
• Standard work
• Quality at source self-inspection

107
Stage 2 Lean Manufacturing by Value Stream
Pilot Lean Production Cells
Lean Manufacturing Widespread
Lean Through- Out Company Partners

• Cellular manufacturing with std. work
  single-piece-flow
• Extensive use of visual systems
• Improvement teams trained established
• Initial supplier certification kanban pull
• Manufacturing managed value stream
• Process control through SPC
• Work in Process and Finished Goods Inventories
  relatively low consistent

• Integrated performance measurements at value
  streams strategic or corporate levels

108
Stage 3 Lean AccountingThroughout the Company
Partners
Pilot Lean Production Cells
Lean Manufacturing Widespread
Lean Throughout Company Partners

• Company organized by value stream
• Extensive cooperation with customers, suppliers,
  partners
• Value streams extend outside our four walls
• Continuous improvement is a way of life
• Lean throughout the enterprise

• Target costing driven from the voice of the
  customer linked to features and characteristics
• Target costing drives internal product and
  process design
• Target costing drives supplier product design

109
1. Choose Your Implementation Approach

• Use the starter set of measurements
• OR
• Develop your own linkages between your corporate
  strategy and performance measurements

110
Implementing the Starter Set

• Introduce the new cell level measurements.
• Introduce the new value stream level
  measurements.
• Introduce the new corporate or strategic level
  measurements.
• Eliminate the old measurements.

111
The Starter Set
112
Creating Your Own Linkages

• Although the standard measurement set is broadly
  applicable, it is only a starting point.
• Different companies have different strategies,
  and the performance measurements will change
  according to the changing strategy.
• Working with a cross-functional team, step
  through the process of creating performance
  measurements at the strategic level, the
  value-stream level, and the cell/process level.

113
Creating Your Own Linkages (continued)

• Requires careful and disciplined analysis.
• Identify how company strategy drives performance
  measurements and performance measurements drive
  behavior across the company.
• Not a one-time exercise.
• Performance measurements change over time as the
  companys strategy changes and as the market
  conditions change.
• Must involve people at all levels of the
  business.
• Make it truly cross-functional.

114
Developing Strategic Objectives and Goals
115
Developing Value Stream Linkage
116
Developing Cell Linkage
117
Defining the Performance Measure
118
Introduce New Measurements
Introduce Lean Performance Measurement System
Cell Value Stream Corporate
Create cell performance measurement board for
daily control. Create performance measurement
board for continuous improvement. Design
performance measurement presentation
dissemination methods.
119
Introduction Tips

• Make the presentation of measurements as simple
  and graphic as possible.
• Make sure there are places on the boards for the
  people to write their comments and suggestions.
• Train the people in the use of the measurements,
  as well as in the mechanics of creating them.
• If possible, have the people manually create
  their own performance reporting each day or each
  week.
• Eliminate all other performance reporting.

120
Establish Baseline and Targets

• Once the measurements have been determined and
  introduced, allow time to establish a baseline.
• Allows you to understand where you are now on
  these measurements.
• Have the people develop performance targets from
  an understanding of the baseline
• Base initial targets upon what is achievable.
• Later, set targets from a knowledge of what the
  customers value. Use Quality Functional
  Deployment (QFD) and target costing.
• Later still, allow the teams to pursue
  perfection. As continuous improvement becomes a
  way of life, targets become less necessary.

121
4. Manage Performance

• What performance management does
• Enables the cell/process team to track control
  their own processes each day each shift.
• Drives the value-stream continuous improvement
  team to make changes that support the companys
  strategy.
• Enables the senior managers to monitor the
  companys progress towards strategic goals.
• What performance management does not do
• Monitor individuals.
• Identify people doing the wrong things.
• Enable micro-management of the operation.

122
Performance Measurement Linkage Enables
Performance Management
Cell Measure
Strategic Goal
Value Stream Objective/ Target
Value Stream Measure
Cell Improvement Factors
Cell Objective/ Target
Strategic Measure

• Guide value stream direction
• Refine product/ market goals
• Refine financial goals
• Refine resource goals

Adjust value stream results that will achieve
strategic goals Set specific target Establish
time for achievement

• Measure the attainment of value stream
  objective/ targets

• Re-visit specific lean cell initiatives that will
  achieve the value stream goals/ targets

Adjust cell results that will achieve value
stream objectives/ targets Set specific
target Establish time for achievement

• Measure the attainment of cell objectives/
  targets

Measure the attainment of Strategic Goal
123
5. Disseminate the Information

• Small companies with single locations.
• Visual and manual
• Sales operations planning
• More complex organizations.
• Visual manual performance measurement locally
• Computer systems to disseminate the information
• Often using simple spreadsheets, database, and
  graphic presentation
• Sales operations planning
• Large, multi-location, complex organizations
• Visual manual performance measurement locally
• Performance management and policy deployment
  systems
• Sales operations planning and Hoshin policy
  deployment methods

124
Course Agenda

• Welcome and Introductions
• The Purpose of Performance Measurement
• Performance Measurement and Lean Manufacturing
• The Starter Set
• Corporate / Strategic
• Value Stream
• Cell
• Developing Performance Linkages
• Implementation
• Summary and Evaluation

125
Summary The Problem

• Traditional cost and management accounting
  measurements motivate non-lean behavior.
• If we continue to use traditional measurements we
  will not be able to sustain lean manufacturing,
  because the measurements will push back against
  the changes.
• We cannot have two sets of measurements one for
  financial control and the other for operational
  control.

126
Performance Measurements Should Reinforce the
Goals of Lean

• Improvement Results
• Short cycle times
• Lower inventories
• Higher quality
• On-time delivery
• Less machine downtime
• Simpler planning scheduling

• Unfavorable Variances
• Volume variances
• Labor utilization variances
• Machine utilization variances
• Overhead absorption variances

127
Summary The Solution

• New performance measurements are needed for Lean
  Manufacturing.
• Implement the starter set of performance
  measurements for production cells, value streams,
  and the corporation.... or develop your own!
• Use performance measurements to drive your
  business strategy throughout the organization.

128
What Does a Lean PerformanceMeasurement System
Look Like?

• Strategically focused and aligned
• Primarily non-financial
• Simple and easy-to-use
• Manually created
• Graphically posted
• Changes over time and between locations
• Provides immediate and timely feedback
• Daily, weekly, monthly
• Fosters continuous improvement

129
How Will This Change What You Measure Tomorrow?
130
Thank You.