Posted by: knightbird | January 29, 2017

Calculating Savings in Lean

I do not advocate entering a Lean Cultural Transformation for the sole purpose of cost savings. It’s a very narrow mindset and fails to consider how to engage employees in the transformation. In fact, with the backlog and outsourcing most organizations have, there is a better method to consider transforming your organization without a reduce cost mindset. Savings will come, but a true Lean Sensei must know how to recognize actual cost reduction opportunities and redeployment of assets into different uses, which does include if necessary a reduction in workforce. Here is how I advise organizations to consider capturing Lean savings.

Adopt a hierarchy for redeployment of staff when time freed up is emphasized.

  1. Assign to reduce the backlog of work.
  2. Bring outsourced work back in house (create positions if necessary)
  3. Assign to improvement events, eventually moving to facilitation of events held within work area.

-Kaizen

-5 S

-More experienced assigned to Lean Government Department

-Perhaps loaned to partners to help assist their efforts

  1. Redeploy to other positions.
  2. Reduce through attrition (replace 1 of every 2 to 4 departures.
  3. Reduction in Force only if required for business survival

In looking at this recommendation, there are 4 categories of possible savings.

Captured savings –reduces current spending by a calculated dollar amount

Capacity increase – allow more word to occur with same resources

One time savings – one time reduction of future spending

Future cost avoidance – Planned investment is no longer needed because of Lean

Here is an example where all 4 savings can be observed. I have a number of assumptions in table format.

Assume work day = 8 hours x 60 minutes or 480 minutes a day

Assume 440 average daily transactions

Takt Time = 1.1 transactions finished per minute

Assume variable cycle times

5 minutes = 2,400 minutes’ daily

10 minutes = 4,800 minutes’ daily

15 minutes = 6,720 minutes’ daily

Employee’s required per cycle time

5 minutes = 5 employees processing 440 transactions (best future state)

10 minutes = 10 employees processing 440 transactions (best intermediary state)

15 minutes = 15 employees processing 440 transaction (current state)

By reducing cycle time to 5 minutes per transaction, we reduce employee requirements by 10, for a $400,000 cost reduction. We might keep one employee additionally for a 15% buffer to cover for absentees and improvement work.

The next step is to look at the potential for Consolidation and elimination of accounting records. Elimination can come from implementation of a Just in Time program and the reduction in inventory and necessity for accounting records. It can also come from consolidation of procurement into a few suppliers. The net effect is to reduce the number of accounting records that must be processed.

I have only covered direct savings, and not affiliated savings. We will need less space, fewer computers and IT support, less copier and printer time, fewer records stored and accounted for and less procurement process requirements. And when defects go down, quality goes up and there will be fewer inquiries from customers and time spend on customer service. Excess production will be curtailed.

A good Lean Sensei will know, going in, what is achievable, and will drive the team to dream big. No use setting little goals when a big one is possible.

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