CFO: Master of the Measurements

Everything about lean sounds easy, but it’s hard to do because a traditional company is basically working against itself. It takes a great deal of discipline to break away from traditional thinking, daily fire-fighting, and the inertia that keeps you doing things the same old way. Fortunately there is a solution – measures. A key element of a successful lean strategy is measurements that are based on how lean works.

As the CFO, you are the resident expert (and owner) of the measurements. It is very important for you to change the financial and operational measurement system so that the measures drive lean behaviors. Traditional measures, of course, will drive traditional behaviors. That is what they are designed to do. But these traditional measures will obscure and undermine the vital changes required by the economics of lean.

This is a new wine in old wine skins problem. If you change to a lean business strategy, you can not account, control, and measure it using the old methods. One of the most important contributions of the CFO is to lead these changes.

Five Lean Principles

The economics of lean are based on the 5 principles of lean: customer values, value streams, flow & pull, pursue perfection and empower employees. Adopting a lean business strategy means these principles must become the way of life for your company. These principles must permeate the entire organization from its cultures, operating practices, and management style. Let’s take a look at how these principles impact measuring and reporting.

The number one objective of a lean business strategy is to provide superior value to your customers and markets. This requires two things. First, you must clearly understand value from the customer’s perspective. Second, you actually deliver the exact value the customers want. By doing both these things effectively, a company will change the dynamics of customer relationships, and how they view your competition. These are the reasons why measurement & reporting systems need to be changed. We must measure how good we are at delivering customer value, at any time.

What exactly is value and how do how is it delivered? It’s easy to when you look at the products or services your customers buy. These products or services must meet certain quality specifications and delivery standards. But lean companies understand that value is much more than just the product or service. Customer value is created every time a customer has an encounter with your company. Think of all the encounters your customers have with your company outside of the actual use of your product or service. Placing an order, receiving and paying the invoice, after-sales support, navigating your web site and the ease of talking to a person in your company are just some examples of where value can be created. This is the reason lean companies identify, organize & manage by value streams. The second lean principle is working by value streams.

Value streams are not departments. Value streams are the sequence of process steps from the time a customer places an order to the time the customer receives the product or service. Value streams are the profit centers of your business. These are the reasons why measurement and management systems need to be aligned around value streams because the only way to increase profitability is for value stream performance to improve. The financial and operational measurements must be changed to focus on the performance of the value streams.

Before I go on, let me explain the difference between value streams and business processes. Value streams focus on order fulfillment – meeting customer demand and generating revenue. Business processes also meet demand of its customers, but do not generate revenue. As I previously mentioned, lean is a comprehensive business strategy that impacts the entire organization, not just the factory. Throughout this book I will be using the term value streams, but everything written about value streams applies equally to all the business processes.

The responsibility of the Lean CFO is to change measurement systems so the delivery of value can be measured consistently & frequently throughout the entire business. Every business process delivers value. Value streams create & deliver value to your paying customers. Internally other business processes delivery value to internal customers or other stakeholders. Every business process needs the same basic measures.

The economics of lean can be explained in basic terms of supply and demand. By proving your customers lot more value, the demand for your company’s products or services increase; and you can command better prices. By eliminating waste, productivity across the entire company improves dramatically. This frees up resources to make more product, provide more services, make more sales calls, design more products, and run the company better; without increasing your costs. All the extra revenues come FREE. From a financial perspective, this means the growth rate of revenue is much greater than the growth rate of costs. This gives you much higher profits and and a tsunami of cash flow.

CFO is Key to Lean Success

So where does the CFO fit into all of this? The CFO has a key role to play in successful lean. lean will not be successful if the CFO is not driving lean forward.

As CFO you chart the financial strategy of your company. Whatever the business strategy, you need to project the financial impact of the proper execution of the strategy. You also have oversight to the management accounting system: the measures & methods that are used internally to measure how well a company is performing at any time. How you present the financial benefits of lean and how you measure business results will be the determining factor of the success of lean in your company. Your voice is also crucial to the company adopting a lean business strategy or merely thinking of lean as just a part of the strategy.

As a Lean CFO, it is important for you to understand the economics of lean, and for you to align the financial strategy with how lean makes money for the company. You will also need to make changes to the financial measurement & reporting systems, and you will need to measure the execution of the lean business strategy. I believe this is the single most important factor that prevents companies from realizing the true financial potential of lean. You need to translate the language of lean into the language of money so that everyone in your business can see why lean is the only way to go.

Lean is a Money Making Strategy

I always ask the question “What is Lean?” when I work with a company or present a seminar. I ask everyone to give an answer. I always get a wide variety of responses. Lean usually means different things to people, and this is often based on their role in the company or the department they work in. Some say eliminating waste. Others cellular manufacturing, or just-in-time inventory, or kanban. Rarely get the answer I am looking for. Lean is a business strategy to make a lot more money.

Lean is a Business Strategy

For lean to successfully become a money-making machine, it must be THE strategy of the business. Some companies understand this but other companies think lean is “part” of a business strategy. This distinction may not seem that important, but it has a dramatic impact on what a company thinks it can accomplish with lean.

If a company thinks lean is “part” of a business strategy, then it will selectively implement certain lean practices. The usual approach in these companies is to think that lean applies strictly to operations, and they see it as a cost cutting method. The end result is some limited improvements in operations, but for the most part it’s business as usual.

Lean is a business strategy that impacts every part of the company. Every person from the CEO to the shop floor operator to the marketing manager to the accounting clerk will have to change the way they think about and do their work. Every business process will be analyzed the same way and re-built to better serve its customers. Adopting lean practices, tools and methods cannot be avoided. Excuses such as “lean doesn’t apply to us” or “we are different” are not accepted. And this of course includes the CFO. In fact, the role of the Lean CFO is vital if lean is to fulfill it’s financial potential.

Lean Every Day

Companies that adopt a lean business strategy are successful because they practice lean everyday and everywhere. On a daily basis, the lean company focuses on 3 things: providing more value to the customers, flowing all business processes faster and better, and eliminating waste in every process.

Lean is not a project that is implemented, and (fortunately) it doesn’t happen all at one time. Lean change and improvement is done everyday throughout the entire company by everybody. Lean is often called a journey because you adopt a lean business strategy, forever.