To set themselves apart from the competition, improve the quality of their products, and increase profitability, manufacturers continue to hop aboard the lean manufacturing train. Fueled by waste reduction and process improvement, this “locomotive” helps manufacturers ensure efficient resource management, effective operations, and optimal productivity.
Combined with digital transformation, lean manufacturing has been instrumental in helping companies weather economic disruptions and adapt to the new norm. And since fewer inefficiencies and less rework take pressure off employees, manufacturers who take a lean approach may see improvements in employee retention.
Various lean manufacturing practices exist, such as the 5-S methodology and Six Sigma, and each has its own area of focus. But at its core, lean manufacturing is based on five essential principles: value, value stream, flow, pull, and perfection. Here’s an overview of these principles and how a CPA firm like ARB can help.
5 Essential Principles of Lean Manufacturing
- Identify value from the customer’s perspective. Manufacturers create the value of their products, but their customers define that value. The questions you must ask and answer are: How much value do your customers place on each of your products or services, and how much money are they willing to pay for them? The ultimate goal is to charge your customers an optimal price at the highest profit to the company. To do so, you need to eliminate waste, minimize costs, and maximize productivity.
- Map the value stream. Start by recording the flow of information and materials required to produce each product across its lifespan – from raw materials to disposal. Once the value stream is recorded, analyze each stage of the lifecycle to identify and eliminate anything from the production process that does not add value and uncover opportunities for improvement. Are product defects costing you time and money? Are you sitting on excess inventory or untapped manpower? Are you over-producing a specific product? Are you incurring unnecessary costs related to transportation? Are there times when employees or equipment are idle? Are product customizations adding value?
- Create flow. Based on your findings, work to eliminate functional barriers and improve processes from the time an order is received to its delivery. Lean manufacturing relies on uninterrupted production, so creating and maintaining optimized flow requires synchronized and integrated processes and an internal supply chain that aligns with common goals and standards.
- Establish a pull system. Move away from the push system, where manufacturing occurs based on forecasted needs. Push systems can cause a swing effect, alternating between too much and not enough inventory. And these issues can lead to schedule disruptions and poor customer satisfaction. Instead, leverage flexibility and communication to manufacturing based on a pull system, where purchases and production occur at the time of demand.
- Pursue perfection. Lean manufacturing is an ongoing commitment. You have to target and eliminate the root causes of product defects, minimize variability in production, monitor your progress, and continue to strive for improvement.
5 Ways ARB’s Manufacturing Services Team Can Help
- Inventory cost management. At ARB, our industry knowledge and experience make us uniquely qualified to help manufacturers capture appropriate inventory and overhead costs, create pricing strategies, and improve inventory cost management.
- Profitability & cash flow analyses. ARB helps manufacturers identify which products or lines of business are most profitable and how to improve their company’s overall performance. We help manufacturers collect the facts before making major decisions on purchases and improvements by helping them forecast, budget, assess cash flow and liquidity needs, and evaluate financing alternatives.
- Cost accounting reviews. We help manufacturers design financial systems that maximize efficiencies and minimize costs. In a cost accounting review, we break down fixed and variable costs to enhance your overall pricing strategy and identify areas for efficiency gains.
- Benchmarking. We can help manufacturers get a clear view of how their business is doing against peers in the industry and identify areas to focus on through the development of KPIs.
- Process improvement strategies. We evaluate processes and perform operational reviews with a lens toward both incremental improvements and potential overhauls.
Contact Albin, Randall & Bennett
ARB’s Manufacturing Advisory Services Team is dedicated to helping manufacturers of all sizes grow and thrive. Contact me today if you have questions about lean manufacturing or would like to discuss your company’s accounting, tax, and advisory needs.
by Erika Gagne, CPA, MBA
Erika Gagne is a manager at ARB. She specializes in providing business advisory and attest services primarily to manufacturing companies, commercial businesses, credit unions, auto dealerships, and nonprofit organizations.