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Lean Diagnostics Institute

LDI has research proven Lean Sequencing Methodologies that rapidly bring financial benefits directly to your Bottom-line.

While conducting research at Walden University our founder, M. James Allen, Ph.D. Finance, discovered profound statistical significance between a wide range of domestic and multinational firms engaged in Lean transformation. He found that there was a definitive profile for companies whose standardized lean assessment scores corresponded to every measure of financial success.

More importantly he discovered a hidden sequence of Lean initiatives assuring that success. This never before recognized sequence has some very distinctive associated categorical Lean drivers.

These Lean drivers are the foundation of the Lean Diagnostics Institute. We call them: SMITH CQ.

Financial Considerations

Some of you think you have succeeded in transforming your company into a Lean enterprise just because your quality and delivery metrics and your customer relations are improved, you are wrong. Your performance may even have reached the so-called ‘best-in-class’ status among your peers and you’d still be wrong. Offering a high Lean assessment score as further proof of your success doesn’t help either, you’d be wrong again. You may also object that your product or service lead time is way down giving you additional capacity and are now growing you business as never before, but you would only be partially right, to a small degree about your success at Lean transformation. There is simply more to it than that, more money to be made, and much more money not to be wasted. After all the expensive training and investments of your hard earned time and money this may come as a shock. So, what else is there?

Well, unless these investments have dramatically improved your company’s bottom-line you are only mediocre in your success. You could even say you’ve failed. As a result you are much more likely to pass Lean by and go on to the next flavor-of-the-day. The operative word here is “dramatically”. Therefore, almost everything you think you know about Lean is probably wrong!

You may be well read in the history of quality from Deming through TOC to Toyota and be an expert in subsequent continuous improvement or command and control initiatives such as six sigma, Agile Manufacturing, or even what you have been led to believe Lean transformation really represents. You may have even tried them all and settled on Lean as the most all-encompassing system of continuous improvement. Indeed, you may have determined that Lean fits your organizational goals and aspirations better and more completely than the others because it quickly controls inventory, eliminates waste and promotes growth. But why has its intuitive promise of consistent and dramatic financial success been slow in coming?

Here are some things to consider before you abandon your Lean journey. The successful transfer of Lean knowledge in the general business community is exceedingly difficult. Why? Because it usually represents a cultural transformation. Failure is usually due to 1.) internal resistance to change (inertia), 2.) a lack of properly sequenced Lean conversion tools that specifically address that inertia, and 3.) an unrealized or slow financial pay-off that serves as a disincentive to the conversion of tribal knowledge into Lean thinking.

An improvement system that does not address these three critical elements may show signs of short term success but will probably be short lived and easily abandoned. Recent research has shown that, when overcome, these three elements may solve the mystery behind long-term financial success historically derived from value chain optimization based on effective Lean transformation. LDI has designed a business transformation system to bring a new level of awareness to the potential that (whether local or global) a natural state of properly sequenced Lean transformation does bring a dramatic financial benefit to the bottom-line.

Again, LDI refers to this system as SMITH CQ.

For assistance in finding Funding for your Lean Transformation select the following link to be directed to the NIST site where you will find Manufacturing Extension Partnership (MEP) information: NIST

Lean Drivers

There exists within the research data a sequence of Lean initiatives helping to assure success in Lean transformation. This sequence has some very distinctive associated categorical Lean drivers. LDI offers on site assistance in the development of proficient deployment of these drivers into your organization as follows:

EVENT DAYS:

Strategic Planning – return on investment, total current assets

Day 1: Performance Metrics, Customer Satisfaction, Finished Goods Strategies

Day 2: Lean Accounting, Risk Mitigation

Day 3: Values, Relations, and Reputation.

Mass Customization – profits, cost of goods sold, operating expense, after tax cash flow, selling expense, accounts payable, fixed asset turns, working capital, and inventory

Day 1: Standard Work, Visual Factory, 5″S”

Day 2: Continuous Improvement, Use of Space & Movement of Materials;

Day 3, 4, 5: Cell Design

Inventory & WIP – earnings before interest and taxes, total current liabilities, and debt ratio

Day 1, 2: Product Families, Capacity Planning, Mixed Model Value Streams

Day 3, 4: 3P; Shared Resource

Day 5, 6, 7: Supermarkets, FIFO, Lotting, Leveling Takt

Teamwork & Human Resources – inventory turns

Day 1, 2: Value Chains, Supplier Pull Systems, Logistics, Outsourcing, Supply Chain Rationalization

Day 3: Cultural Transformation & Lean Enterprise, Heijunka, Schedule Stability, TPM, and Setup Reduction

Commitment to Quality – capital expense

Day 1, 2: Statistical Process Control & Process Cert

Day 3, 4, 5: Quality Diagnostics, RCA, Mistake Proofing;

Day 6, 7: Reason Code Collaboration, Buffering and Safety Stock

Understanding the LDI Assessment Process

The sequence of Lean implementation is critical

The following excerpts from each LDI Assessment represents important information for an understanding of the nature of SMITH CQ. Each element of the acronym SMITH CQ stands for Lean initiatives to be completed in sequence to assure rapid financial benefit to the bottom-line during your Lean transformation journey:

Strategic Planning (S):

Strategic Planning is the beginning of your Lean journey. Lean strategic planning is about how well your company understands, and communicates, its reason for being and how well it defines the roles of ownership and partnership within its organization. It is not “us versus them” rather “one for all and all for one”. Each person and level within your company is a partner in success or failure to one degree or another, therefore equity in that partnership is a foundation for professional ethics and Lean transformation.

Strategic planning has been shown to be the foundation upon which Return on Invested Capital thrives. Companies with strong Lean strategic planning historically demonstrate rapid and substantial returns on invested resources and time.

Return on Investment (ROI)

This is the relationship between your company’s Net Income (Earnings After Taxes (EAT)) and Total Assets.

Caution: Low asset management ratios (such as Receivables Turns, Inventory Turns, and Asset Turns) and low Profit Margins may negatively effect the ROI. Generally, some consideration should be given to decreasing interest charges made on notes or bonds. Also reductions in selling expenses, administrative costs and/or miscellaneous salaries and overhead expenses will effect your earnings after taxes and thus your ROI.

Total Current Assets (TCA)

These assets represent current status of things like Accounts Receivable (AR), Inventory, Marketable Securities (MS), Cash, and Future Tax Benefits, etc.)

Caution: When subtracting total current liabilities (TCL) such as Accounts Payable, Notes Payable, Accrued Taxes Payable, and the Current Portion of Long Term Debt from TCA the difference represents Working Capital (WC). The efficient (Lean) utilization of WC calls for this difference to be low rather than high. Movement of either TCA or TCL should therefore be towards parity. Lean initiatives that increase this difference should be avoided unless their benefit contributes to other favorable company attributes. TCA should always be close to yet greater than TCL.

Current Ratio & Working Capital (CR, WC)

Working capital is that which remains after satisfaction of short term total current credit liability by total current assets. Another way to express WC is as a ratio between TCA and TCL. This is referred to as the Current Ratio.

Caution: Ratios that express a potential problem may be quite satisfactory and not a problem at all in your industry. However, the Current Ratio is only one standard for measuring Liquidity. Furthermore, notes and accounts payable, accrued and payable expenses and taxes, and any other current liabilities including the current portion of long term debt may be reduced to affect the Current Ratio and its measure of Working Capital.

Note: If your company experiences large volumes of inventory just subtract those numbers from the TCA and divide the result by the TCL. This then becomes the “Quick Ratio” and may be more accurate when making comparisons with your industry peers. It also has the added advantage of determining how stable your other current assets are during your Lean inventory reduction initiatives.

Mass Customization (M):

Mass customization is another way of saying Standard Work. It not only represents documentation and training initiatives designed to assure that consistent and accurate methodologies are followed but provides for the same production and/or business practices to be followed regardless of the experience or training of the individual performing those tasks. Standard work goes beyond the ISO tenants of policies, procedures, work instructions, and forms and enhances cross-training functionalities necessary for consistent risk mitigation and stable production.

Once strategic planning is properly oriented then the resulting goals and objectives become integrated into the framework of the organization through mass customization. Financial metrics directly impacted by this framework of standard work include gross & net profit margins (GPM, NPM), working capital (WC), the cost of goods sold (COGS), inventories (INV), operational expenses (OpX), selling expenses, fixed asset turns (FAT), and after tax cash flow (ATCF).

Gross & Net Profit Margins (GPM, NPM)

These measure the effectiveness of pricing and production cost control decisions and are reported in dollars or percent of Net Sales or Revenues. Gross numbers are calculated from cost of goods sold and net numbers from earnings after taxes as a measure of profitability of sales after all expenses and taxes are considered.

Caution: Regarding comparisons with industry standards for gross profit margin the various methods for cost accounting, inventory accounting and depreciation measurements may prevent reliable comparisons with your peers. A low Net Profit may indicate your products and/or services are priced too low in comparison to the market or that you have difficulty controlling total expenses and/or cost of goods sold. The latter may be especially true if your Debt Ratio is greater than your peers.

Cost of Goods Sold (COGS)

The net effect of adjusting labor, materials, and overhead for inventory results in a cost of goods sold which when, related to Net Sales, generates gross profit margin.

Caution: Cost accounting methodologies and inventory analysis must be reflective of an accurate current state to be useful in yielding COGS. In a Lean environment these metrics should reflect values that measure continuous Lean improvement initiatives rather than the metrics themselves driving the behavior.

Inventory (INV)

Materials that are either raw, work in process, or finished goods depend upon the level of value added. Several metrics may be used to measure these high cost characteristics. The number of annual inventory turns is one such metric and represents the average end of year inventory numbers divided by the gross dollar amount of profit (GPM).

Caution: Inventory turns may be a useful metric for determining the effectiveness of teamwork and human resource applications. However, the annual inventory turn number is less important in Lean transformation to bring profit to the bottom-line than the actual overall dollar value of inventory held within the organization from all three classifications.

Operating Expense (OpX)

Total Operating Expense includes the net selling expense, administrative costs, and miscellaneous salaries and is an important element in the calculation of earnings before interest and taxes (EBIT).

Caution: These values come from GPM to express EBIT and should therefore be an accurate reflection of reality for the period under study.

Fixed Asset Turns (FAT)

Measure of how well you have utilized existing plant, equipment and property to generate sales for the company.

Caution: This ratio should only be used for internal year on year comparisons due to the general affects of asset acquisition costs, age of assets, depreciation policies, and degree of fixed asset leasing.

After Tax Cash Flow (ATCF)

The net earnings after tax cash flow available to run the company from working capital contains monies generated from the Operating, Investing, and Financing functions of the company.

Caution: These three cash flows are combined to yield a net increase or decrease of cash flow. This metric should reflect the efficiency (Lean nature) of operations, investing, and financing activities in that they are derived from financial elements undergoing change during transformation.

Inventory (I):

Having created a useful Strategic Plan then established effective Standard Work through mass customization the next, and quite profound initiative in your Lean transformation is the control of Inventory. Inventory is a fundamental cost in almost every financial consideration and has a direct impact on EBIT and the relationship between your liabilities and your assets.

On your income statement the raw materials inventory numbers are critical elements in valuation of Direct Materials, as well as the calculations for Goods Available for Sale by virtue of beginning and ending finished goods inventory. As an asset element on your balance sheet inventories and contracts in progress are important for the calculation of risk exposure and total assets.

Earnings Before Interest and Taxes (EBIT)

EBIT is derived from gross profits and total operating expenses before consideration is given for any Federal, State, or Local taxes and interest charges.

Caution: An occasional reference is made to EBITDA which includes depreciation and amortization costs as an additional adjustment to earnings. Some companies feel this to be a more useful metric, however anytime a metric is used to drive behavior rather than the correct (Lean) behavior used to define and drive the metric it should be avoided.

Total Current Liabilities (TCL)

Liabilities are either current (short term) or long term and when combined with considerations for stockholder equity comprise one-half of your company’s balance sheet.

Caution: The other half are current and total assets values. Each half of the balance sheet must equal the other half so that total assets equals the sum of the company’s total liability plus stockholder equity.

Debt Ratio (DR)

The degree to which outside short and long term borrowing are financing your company’s assets.

Caution: Your ability to leverage your equity base in times of need may be affected by a high ratio as well as associated increases in fixed interest charges. A further negative impact to this ratio could result if non-cancellable financial leases and preferred stock dividends were included in the total debt.

Teamwork & Human Resources (TH):

Teamwork & Human Resources is a term referring to a specific category of Lean Activities around which reside the benefits of cooperative collaboration and Lean resource allocation. The degree to which this category impacts Lean transformation is profoundly seen in the Inventory Turn metric. As raw, WIP, and finished goods inventories decrease in a Lean environment the number of times your inventory turns over in any given time will increase.

It should be noted that an increase in inventory turns may happen for the wrong (un-Lean) reasons sacrificing company performance to customer expectations for example. Therefore it may be said that such an increase may not necessarily bring benefit to the bottom-line in a magnificent manner. However, when all levels of the organization cooperate and collaborate in Lean transformation a quite natural and effective increase in turns will result. Therefore, teamwork and human resource initiatives are a fundamentally “good” way to increase inventory turns.

Commitment to Quality (CQ):

Research has shown that Quality performance in terms of defect reduction and customer satisfaction may not be reflected in day-to-day operations to the degree of the stated commitment. This may be largely due to a continuing tendency towards mass production methods rather than Lean, small batch or one piece flow techniques that are less complicated, more flexible, and less expensive.

Lean makes defects visible at their source and quality initiatives such as clinics and kaizen activities help solve problems and prevent them from occurring again. At the same time there is a focus on Lean flow of value requiring simpler, more efficient methodologies. Therefore as Lean transformation goes forward a direct and favorable impact on capital expenses may be expected.

Capital Expense (CAP X)

A capital expense is one that requires an expenditure of an irregular amount of money with the promise of decreased long term costs, or improving profitability, and/or making production enhancements.

Caution: Mass production requires mass expense. Lean production requires simpler, more customized, and flexible equipment and investment. Care should be taken during your Lean journey however to avoid the tendency to replace large capital expenditures with more modest ones too quickly due to disruptions in production or service that may occur. Careful planning from an operational and strategic level is essential. Cultural transformation as required by Lean is a very delicate process thus the importance of SMITH CQ sequencing.

 

SMITH CQ

Lean Diagnostics Institute contributes cutting edge business analytics and lean transformation technologies to general business and manufacturing companies seeking Lean enterprise.

This list of services is only a small part of the potential to be gained from an affiliation with LDI.

Here’s all you need to remember about SMITH CQ

Start with Strategic Planning (the “S”), assure Mass Customization methodologies and Standard Work are deployed (the “M”), control Inventory (the “I”), manage Teamwork and Human Resources (the “T” and “H”), and finally solidify customer satisfaction with your strong and unwavering Commitment to Quality (the “C” and “Q”).

What’s wrong with this picture? Shouldn’t you always start with the customer and your commitment to quality then work everything else out as you go? This is true enough however don’t forget what we’re doing here. Remember we are creating a continuously looping business model for transforming your company culture into a Lean functioning enterprise. If you don’t properly sequence your efforts you will surely end up chasing the quality and customer satisfaction bunny around in circles. Once transformed the business model loop becomes a fully integrated machine whose smooth running depends on customer satisfaction and the definition of value.

Continuous improvement and value definitions must logically begin with the customer, but cultural transformation must begin with strategically defining the playing field and plotting a course that allows your company to succeed financially while satisfying or exceeding your customer’s needs.

 

LDI Principles & Guidelines

Operating Principles

Inspire Cultural Transformation; Active Transparency; DIRTFT & ZDOT every time; Connect & Collaborate; Honesty, Integrity, and Trust; Simple and Effective Action; Pursuit of Significance; Financial Integrity – hBDA©2001; Proven Bottom-Line Results

Guidelines

Engender Ownership; Promote Partnership; Engage Transformation; Exceed Expectations; Fair & Friendly Relations; Dependable Value Added Service; Honorable Practices; Open Communication.

 

LDI Skills & Talents

Customer Satisfaction, Safety & Environment, Strategic Planning, Cleanliness & Order, Commitment to Quality, Inventory & WIP, Teamwork & People, Supply Chain Integration, Production Use of Space, Visual Management System, Standard Work, Movement of Materials, Equipment & Tools, Scheduling Systems, Mass Customization, Complexity & Variability.

 

The LDI Guarantee

The Lean transformation and business turnaround methodologies employed by the Lean Diagnostics Institute are guaranteed to mitigate unfavorable and augment favorable changes in your company’s financial performance. Your level of success shall depend upon your level of engagement during implementation of Lean initiatives and compliance with the tenants of LDI fearless followup programs.

This guarantee takes the form of a 110% Money Back Guarantee on any SMITH CQ Lean assessment that fails to bring value to your company’s financial performance.

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