Lean Metrics Tutorial

7.2 Lean Management Lean Metrics

Hello again and welcome to Lean Management training by SimpliLearn! Before we proceed, let us recap what we learnt in the previous lesson. Lesson 1 gave an introduction about Lean, lesson 2 was a study of types of waste. Lesson 3 discussed about various tools used in Lean, lesson 4 detailed about Lean in manufacture while lesson 5 talked about Lean in service, and lesson 6 talked about Lean in office. This is lesson number 7 and here we will talk in detail about “Lean Metrics.” In the next slide we will start with agenda of what we are going to cover in this lesson and then cover in detail Lean Metrics.

7.3 Agenda

Here is the agenda; we will start with overview of Lean metrics covering why we need metrics and how to build one. After the overview, we will cover OEE (called as Overall Equipment Effectiveness) which evaluates and indicates how effectively a manufacturing operation is utilized. Then, we will cover the metrics FPY (read as First Pass Yield), this measures ratio of output versus inputs and RTY (read as Rolled Throughput Yield) is the probability of the entire process producing zero defects. The next metrics “Days in inventory”, measures the average number of days the company holds its inventory before selling it. Other critical metrics are schedule adherence, attainment, and Lean accounting. In the next slide we will start with overview of Lean metrics.

7.4 Overview

In this section we will cover overview of Lean metrics. It seems too often be the case that as the manufacturing operation grows the measurement of the efficiency of performance becomes ever harder. When sales orders go up work in progress increases, when inventory builds turnaround diminishes-all to the detriment of grasping how efficient or profitable each process is. Some assessment of financial, behavioral, and core process performances should be made on an on-going basis to provide mutually supporting testimony to the total continuous improvement efforts of the company. For this reason, Lean metrics have been established to allow a company to measure, evaluate, and respond to their performance in such a way that it does not sacrifice quality to satisfy quantity objectives, or increase inventory levels to achieve machine efficiencies. Often, these metrics are a means to discover Lean performance indicators that tell the tale of Lean implementation effectiveness. Before improving a process, it is necessary to define what "improvement" is. This definition will lead to the identification of a measurement, or metric. It is often said that, "What gets measured gets done." Measurements communicate values and priorities to an organization. Time and resources devoted to measurement demonstrate management commitment that the object of the measurement is important. Therefore, the selection of appropriate metrics is an essential starting point for process improvement. The application of Lean principles and methods to analytical processes will enable the organization to produce quantitative assessments and Lean metrics. These metrics provide management, operations, and other functions timely data that effectively evaluates the Lean implementation in any environment. Lean metrics can be used to track and reflect the improvements created by the application of Lean principles not only in manufacturing and operations processes, but also in processes within purchasing, shipping, accounting, and every other function. We will start with the metric OEE (called as Overall Equipment Effectiveness).

7.5 OEE

In this slide, we will cover the Lean metrics called OEE (Overall Equipment Effectiveness). Overall equipment effectiveness (OEE) is a hierarchy of metrics which evaluates and indicates how effectively a manufacturing operation is utilized. The results are stated in a generic form which allows comparison between manufacturing units in differing industries. It is not however an absolute measure and is best used to identify scope for process performance improvement, and how to get the improvement. If, for example, the cycle time is reduced, the OEE can also reduce, even though more products are produced for less resource. OEE measurement is also commonly used as a key performance indicator (KPI) in conjunction with Lean manufacturing efforts to provide an indication of success. OEE can be best illustrated by a brief discussion of the six metrics that comprise the system. The hierarchy consists of two top-level measures and four underlying measures The two top-level metrics are overall equipment effectiveness (OEE) and total effective equipment performance (TEEP). Overall equipment effectiveness (OEE) and total effective equipment performance (TEEP) are two closely related measurements that report the overall utilization of facilities, time, and material for manufacturing operations. These top view metrics directly indicate the gap between actual and ideal performance. Overall equipment effectiveness (OEE) quantifies how well a manufacturing unit performs relative to its designed capacity, during the periods when it is scheduled to run. OEE breaks the performance of a manufacturing unit into three separate but measurable components: availability, performance, and quality. Each component points to an aspect of the process that can be targeted for improvement. OEE may be applied to any individual work center, or rolled up to department or plant levels. This tool also allows for drilling down for very specific analysis, such as a particular part number, shift, or any of several other parameters. It is unlikely that any manufacturing process can run at 100% OEE. Many manufacturers benchmark their industry to set a challenging target; 85% is not uncommon. Where OEE measures effectiveness based on scheduled hours, total effective equipment performance (TEEP) measures OEE against calendar hours, i.e., 24 hours per day, 365 days per year. TEEP, therefore, reports the 'bottom line' utilization of assets. In addition to the above measures, there are four underlying metrics that provide understanding as to why and where the OEE and TEEP gaps exist. The measurements are “Loading, Availability, Performance, and Quality.” Let us go in detail about each one of these. First one, loading: The portion of the TEEP metric that represents the percentage of total calendar time that is actually scheduled for operation. The loading metric is a pure measurement of schedule effectiveness and is designed to exclude the effects how well that operation may perform. For example: A given work center is scheduled to run 5 days per week, 24 hours per day. For a given week, the total calendar time is 7 days at 24 hours. Loading = (5 days x 24 hours) / (7 days x 24 hours) = 71.4% loading. Next one, availability: The portion of the OEE metric that represents the percentage of scheduled time that the operation is available to operate. This metrics is often referred to as uptime. The availability metric is a pure measurement of uptime that is designed to exclude the effects of quality, performance, and scheduled downtime events. For example: A given work center is scheduled to run 10 hours per day. But, the machine is only available for 9 hours out of the scheduled 10 hours. The availability would be 9 divided by 10. That is 90% availability. The third metrics is performance: The portion of the OEE metric that represents the speed at which the work center runs as a percentage of its designed speed. The Performance Metric is a pure measurement of speed that is designed to exclude the effects of quality and availability. The final metrics is quality: The portion of the OEE metric that represents the good units produced as a percentage of the total units started. The Quality Metric is a pure measurement of process yield that is designed to exclude the effects of availability and performance. This is commonly referred to as First Pass Yield (short form as FPY). In the next slide we will talk about the next metrics FPY and RTY, called as First Pass Yield and Rolled Throughput Yield respectively.

7.6 FPY & RTY

First pass yield (FPY), also known as throughput yield (TPY), is defined as the number of units coming out of a process divided by the number of units going into that process over a specified period of time. Only good units with no rework are counted as coming out of an individual process. First pass yield (read as FPY) is a measure to evaluate the initial efficiency of a multistep production process. The formula for FPY is FPY = (Defect minus Free Output in First Pass) divided by (Total Input). The calculation of FPY, first pass yield, shows how good the overall set of processes is at producing good overall output without having to rework units. Rolled throughput yield (RTY) is method used to calculate the probability of creating a defect-free unit during the multiple process manufacturing. RTY is more important as a metric to use where the process has excessive rework. Since this rework involves many of the 7 wastes and contains the hidden factory opportunity, it is relevant to guide the team in the right direction. RTY is the product of each process’s throughput yield (TPY). This method is also used to calculate statistical control limits for measurement of procedural performance. The calculation of RTY is fairly straight forward; multiply the first pass yield (FPY) of each serial process. The calculations can become more complicated as more parallel processes are introduced. Also related, "first time yield" (FTY) is simply the number of good units produced divided by the number of total units going into the process. First time yield considers only what went into a process step and what went out, while FPY adds the consideration of rework. As opposed to first time yield, first pass or throughput yield reviews the material efficiency of a process rather than the time efficiency. In the next slide, we will cover the next metric called “Days in Inventory.”

7.7 Days in Inventory

The days in inventory metrics, is an important efficiency ratio that measures the average number of days a product sits on the shelf before it is sold. In other words, number of days a company holds its inventory before it is sold. The days in Inventory efficiency ratio is calculated as follows: Days in inventory equals to average inventory divided by COGS (read as Cost of Goods Sold) per day. COGS is cost of goods sold can be found on the company income statement and the average inventory can be located on the company balance sheet. A high days of inventory on hand ratio shows the company is not moving inventory fast. This could be a sign of low demand for the product and it may need to get pulled in order to make room for a better selling item. If days of inventory on hand ratio is too low, it could lead to the company running out of inventory faster. One might need to increase the inventory of the item in order to have enough on hand. If the company runs out of inventory, its profits will most likely decrease. One component of this ratio is the inventory turnover ratio, which calculates the number of times the total inventory of an item is sold and replaced over a period of time. In the next slide we will cover the metrics of schedule adherence and attainment.

7.8 Schedule Adherence Attainment

Schedule adherence is a business metric used to calculate the timeliness of production or deliveries from suppliers. It is a commonly used supply chain metric and forms part of the quality, cost, delivery group of performance indicators. Overproduction seems on the face of it to be a counter-intuitive notion. We've all been conditioned to think that in manufacturing producing as much of a product as possible is a good thing. But Lean manufacturing tells us otherwise-because customer demand (whether that customer is the next downstream segment in the production process or the end user of the final, packaged product) should "pull" the product from one upstream place to the next downstream. So production isolated from customer demand is meaningless. That's why a metric-coupled with the right management philosophy-designed to determine whether production is aligned with customer demand is so important. Deploying the schedule adherence metric is a way to accomplish both objectives on the way to implementing Lean manufacturing techniques. Here's the formula: schedule adherence = (total plan - sum of deviations) / total plan. Full schedule adherence is arrived at when the planned quantity of the product has been produced for each part. This metric is a tool that assists in matching, as well as helping managers to keep in mind the need for that matching, production with actual product demand. The goal is to produce only what is needed in terms of amount and at the exact time needed. Poor schedule adherence can result in enhanced buffer stock being carried to compensate for suppliers that fail to deliver on time. This has an associated business cost whilst the potential for stock outs can impact on customer service levels. Targets for schedule adherence are therefore usually set quite high and the calculation and review of the metric important. Some organizations experience problems in producing delivery schedule adherence information this can be caused by a failure of systems to record delivery forecast information, unreliable processes, and poor communication between buyer and seller. Ensuring that schedule adherence can be correctly calculated and then improved often forms part of Lean improvements. Schedule attainment is an ability of a production system to execute a plan, match the schedule of production or delivery to gradually produce certain amount of output according to a contracted plan, and to meet expectancies of the customers. In a successful Lean organization a rate of schedule attainment, being one of the primal business objectives and success measures, is continually controlled and improved (through a complex of specific approaches), so in ideal it steadily reaches 100%, which means that production stays on the schedule without any underrun (necessary products are delivered on-time). In order to reach success with schedule attainment a company needs to have an approved production schedule implemented, check it daily and remove any obstacles. It is important to do all the jobs right the first time, as a defective work cannot be sent to the next operation, and a rework minimizes the chances to attain a schedule. So far we have covered good set of metrics to understand the implementation of Lean and measure its effectiveness, efficiency, etc. In the next slide we will cover how to take all of these improvements and changes into consideration for accounting.

7.9 Lean Accounting

Lean accounting is the general term used for the changes required to a company’s accounting, control, measurement, and management processes to support Lean manufacturing and Lean thinking. Most companies embarking on Lean manufacturing soon find that their accounting processes and management methods are at odds with the Lean changes they are making. Often time one would hear that traditional accounting systems are anti-lean and contribute to the lack of sustainment of the transformation. This is due to the incompatibility of the traditional batch and queue philosophy underlying standard cost accounting and Lean. Inevitably, companies along the Lean journey find that the emphasis in traditional standard costing on labor efficiency and utilization promotes non-lean behavior such as building high inventories, large batches, building ahead, and overproduction. Traditional accounting systems based on standard costing principles will frequently provide misleading information resulting in poor decision making. Let’s look at a few examples. First example: Producing in smaller batches to match production with demand and reduce lead time to the customer will make the product cost appear to go up. Second example: The need to changeover a non-bottleneck machine more often in order to better match the mix required by the customer will reduce its utilization and appear to increase production costs. The purpose of Lean accounting is to support the Lean enterprise as a business strategy. It seeks to move from traditional accounting methods to a system that measures and motivates excellent business practices in the lean enterprise. Lean accounting is a series of methods and techniques that provide accounting, control, and measurement within companies embracing Lean manufacturing principles. Under the heading of Lean accounting are a number of the techniques that, when used in combination, totally change the way a manufacturer approaches the control of the company. There are two main thrusts for Lean accounting. The first is the application of Lean methods to the company's accounting, control, and measurement processes. This is no different than applying Lean methods to any other processes. The objective is to eliminate waste, free up capacity, speed up the process, eliminate errors and defects, and make the process clear and understandable. An organization that is seriously committed to the implementation of Lean or world class manufacturing methods must also make radical changes to its measurement and control systems. A new company vision for Lean accounting must be constructed that includes accounting personnel who are agents of change and improvement within the organization. Financial and cost accounting methods are stripped of their inherent waste, bureaucracy, and complexity. A new view of the organization is created that is thoroughly focused on the company's business processes and include accounting functions and systems that are totally integrated within the organization's operations. The second (and more important) thrust of Lean accounting is to fundamentally change the accounting, control, and measurement processes so they motivate Lean change and improvement, provide information that is suitable for control and decision making, provide an understanding of customer value, correctly assess the financial impact of Lean improvement, and are themselves simple, visual, and low-waste. Lean accounting does not require the traditional management accounting methods like standard costing, activity-based costing, variance reporting, cost-plus pricing, complex transactional control systems, and untimely and confusing financial reports. Let us next learn about the vision of Lean accounting.

7.10 Lean Accounting(Cont.)

Here is the vision for Lean accounting: First, provide accurate, timely, and understandable information to motivate the Lean transformation throughout the organization, and for decision-making leading to increased customer value, growth, profitability, and cash flow. Second, use Lean tools to eliminate waste from the accounting processes while maintaining thorough financial control. Third, fully comply with generally accepted accounting principles (GAAP), external reporting regulations, and internal reporting requirements. And finally, support the Lean culture by motivating investment in people, providing information that is relevant and actionable, and empowering continuous improvement at every level of the organization. Lean accounting provides accurate, timely, and understandable information that can be used by managers, sales people, operations leaders, accountants, Lean improvement teams and others. The information gives clear insight into the company's performance; both operational and financial. The Lean accounting reporting motivates people in the organization to move Lean improvement forward. It is often stated that "what you measure is what will be improved." Lean accounting measures the right things for a company that wants to drive forward with Lean transformation. Lean Accounting is also itself Lean. The information, reports, and measurements can be provided quickly and easily. It does not require the complex systems and wasteful transactions that are usually used by manufacturing companies. The simplicity of Lean Accounting frees up the time of the financial people and the operational people so that they can become more actively involved in moving the company forward towards its strategic goals. At a deeper level Lean accounting matches the cultural goals of a Lean organization. The simple and timely information empowers people at all levels of the organization. The financial and performance measurement information is organized around value streams and thereby honors the Lean principle of value stream management. The emphasis on customer value is also derived from the principles of Lean thinking. The way a company accounts and measures its business is deeply rooted in the culture of the organization. Lean accounting has an important role to play in developing a Lean culture within an organization. In the next slide we will summarize what we covered in this section of Lean metrics.

7.11 Summary

Here is what we have covered in this lesson. We covered Lean metrics in detail to understand aspects of Lean implementation and measure improvements. Some of these metrics are set as baseline so that improvements can be measured and accounted for accurately. We started with measuring efficiency of manufacturing process and equipment. Then we covered yield, that measures the ratio of good output in one pass versus inputs for each process and then for collection of processes. After that we covered how to calculate days in inventory, the metrics that help us understand number of days the inventory stays on the shelf and how to reduce it. We then discussed about schedule adherence and attainment which is the metrics to measure and report how often the products are produced or delivered on time. This helps with the just-in-time production system and also to reduce the inventory levels. Finally, we covered the Lean accountings, as traditional accounting may not recognize the lean benefits accurately. We need to have mindset change and update accounting methods to capture these. I hope you had great time learning Lean metrics.

7.13 Thank You

Thank you everybody.

  • Disclaimer
  • PMP, PMI, PMBOK, CAPM, PgMP, PfMP, ACP, PBA, RMP, SP, and OPM3 are registered marks of the Project Management Institute, Inc.

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