Financial Implications of Going Lean

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Financial Implications of Going Lean

HOW DO WE IMPROVE FINANCIAL PERFORMANCE?

Lean Manufacturing is something we all implement for the same end result: improvement in financial performance. When Taiichi Ohno first developed his thoughts on Lean, he and his employer, Toyota, were trying to solve a very specific financial problem. In capital-scarce post-World War II Japan, they needed to find a way to enjoy economies of scale without requiring large stock piles of inventory, which required capital. Elimination of waste through process improvement provided the answer.

What exactly does that mean though?

How will making improvements to factory processes result in a better bottom line or a stronger balance sheet?

THINK LEAN, INCREASE OUTPUT, REVENUE

Lean is about eliminating waste. Lean is about encouraging the operators to continually improve their work processes. Activities generate costs and accounting attempts to manage those financial implications. A factory incurs costs to purchase raw materials and to transform them into product that can be sold. In addition to the direct cost from procuring material and labor, the requisite capital itself also has a cost. For firms who finance operations by borrowing from a bank, this is the interest expense associated with the loan. For firms who use retained earnings instead, the interest is best thought of as opportunity cost. If the shareholders could employ their capital outside the firm, what could they earn? They expect to be paid at some point for buying shares. Either way, there is a cost to acquiring the funds needed to finance a business.

By eliminating waste in materials and labor, we reduce the amount of each we need to buy. By reducing waste, we also increase the rate of output. When the factory can produce more output for the same or lesser input, we don’t need to hold as much raw material, work-in-process, or finished goods inventory. The cost of goods sold decreases on the profit and loss statement as does the amount of inventory on the balance sheet. Both actions increase cash flow for the business, improving financial performance. Strong Hold’ industrial cabinets and storage solutions facilitate this kind of lean manufacturing that eliminates waste and saves money. A product from us is an investment in the kind of lean manufacturing that creates success in the industrial workspace.

Author: Anthony Diebold

Position: President

Company: Strong Hold Products


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