Why Create a lean business
I attended an APICS event last night and the presentation by Robert Fox focused on lean & Six Sigma and why we would want to implement them. Most of us associate ‘lean’ with manufacturing as the concepts which originated at Toyota were focused on the manufacturing process to reduce cost in manufacturing, reduce lead times and improve quality.
These concepts also apply to non-manufacturing businesses and to the non-manufacturing processes in all business, which I have referred to as the Financial Supply Chain (see my blog posts How to Evaluate the Financial Supply Chain http://www.hiddenprofitsblog.com/how-to-evaluate-the-financial-supply-chain and The Financial Supply Chain http://www.hiddenprofitsblog.com/the-financial-supply-chain).
While in last night’s presentation the concepts were not new, the approach and the reasons were certainly very thought provoking. Lean processes and going lean are almost always associated with reducing cost. That of course is a very laudable goal. Last night the focus was on the goal of increasing throughput or capacity. Which of course once you reduce waste and time of the process you automatically increase throughput. We normally do not look at that side of the coin. In manufacturing, Mr. Fox talked about how increased capacity provided the opportunity to make and sell more products without increasing the costs of production. We usually think of increasing a capacity with the need to add plant space and/or additional locations machinery and people. However, if we have reduced waste, thus freeing up capacity we can in fact increase the quantity produced and sold without increasing cost. This makes the additional products produced very profitable.
The same is true when we look at non-manufacturing processes or the Financial Supply Chain. Even though the focus for the last couple of years has been on the slowing economy, layoffs etc., the reality is that many companies are growing. As companies grow they rarely are evaluating their processes to be efficient. The workload grows with the company, often faster, and they simply keep hiring staff and increasing office space to manage the workload. Often as part of this lead times increase. So what does this look like in the financial supply chain?
The number of AP invoices increases and often the number of late payments increases. So the AP department grows and everyone scrambles to find ways to make sure that invoices are paid on time. The assumption being that the more people in AP the more invoices can be processed in a timely manner. This often results in chaos.
As the number of customers increases, the number of AR billings and cash receipts increases. Often the time to get invoices out to customers increases. AR personnel are busy with billing and applying payments and they don’t pay attention to collections. So, often cash inflow slows down. And of course the number of AR personnel increase to handle the billing and cash receipts.
Slowed billing and payments start to create an imbalance in cash flow so now there becomes an increased reliance on working capital lines of credit, which of course increases interest expense.
Month end close processes become more cumbersome and more accountants are hired in accounting to address all the needs of the close process and management’s increasing need for information.
Of course you also have the ancillary costs of more office space, additional locations, increase personnel in HR and Payroll and increased management levels.
What would happen if at this point the company embarked upon implementing lean business processes to optimize the financial supply chain? We could increase capacity and throughput in the non-manufacturing processes! The business would be able to grow at the same pace or maybe even faster, without the explosive growth in personnel and cost. Management would have better information for making decisions which could further enhance growth. Customers would probably have less complaints which would also further enhance growth.
This has in fact been my experience with many clients. In my most recent project, the client was planning to double in size, which would have made them almost a billion dollars in revenue with locations all over the US and Mexico. By designing lean processes for AR/Cash Application, Purchasing/AP, HR/Payroll, Budgeting, Capital Assets and Financial Close, they project they will be able to absorb that growth with the current staff levels. An accomplishment most CFOs would consider impossible.
If you would like an assessment of how your company could benefit from lean business processes contact us at 818-709-6583 or info@ljrconsultingservices.com
