Lean Yardstick

Thinking about how the Lean Business System and its principles can influence your business is paramount and a key component of establishing your True North. Lean, although filled with tools, is by its very nature a people system. At its very foundation is respect for people. This does not mean just “being nice”, it means that you fundamentally believe people are capable and competent and therefore can challenge them to higher levels of performance. The ultimate measure of Lean will always be how well we engage and empower associates to solve real problems.  Over the last 20 years of working with organizations I’ve found the following metrics to be a good indicator of how well or deep Lean Thinking is embedded in the organization. In a sense, it follows the mantra “easier, better, faster and cheaper”—and in that order!


Ideas submitted/implemented per employee:

Every organization talks about engagement and empowerment.  But do they really mean it? Employee engagement is the extent to which employees feel passionate about their jobs, are committed to the organization, and put discretionary effort into their work. Can we have engagement without new ideas and problem-solving? I do not think so.  Employee empowerment is the cascading decision making and the ability to actually improve things closest to where the work happens.

Why it’s important: If we have people focused on making their work easier, quality goes up and the ability to flow (speed) is improved. This leads to more satisfied employees and lower cost which of course leads to more engagement. Think of this at the nutrients you need to nurture and grow a tree. If you want it to produce fruit you must feed and water it.

The metric for world class is one idea implemented per employee per day. In a 100 person site, that means 25,000 ideas/improvements/problems solved being implemented every year! Do you believe you would have an engagement or empowerment issue in this type of environment?  Now you may want to start a little slower-start with an idea per month per employee implemented….that’s 1,200 improvements—large or small they will have an impact on the business!


First pass yield (FPY):

First pass yield (FPY), also known as throughput yield (TPY), is defined as the number of units coming out of a process divided by the number of units going into that process over a specified period of time. Only good units with no rework or scrap are counted as coming out of an individual process. So, First Pass Yield is an important metric for measuring quality and production performance in any process. You can think of it in terms of complete and accurate or first time right.  There are substantial benefits to including it your measurement system, such as measuring the effectiveness of a process and eliminating waste. The significance really comes into play when we talk about rework. In most organizations, rework is a huge time and cost burden and creates a big sucking sound on employee satisfaction. Using the First Pass Yield metric can help prevent hidden costs and eliminate untimely and frustrating rework.

Why it’s important: Without great quality and stable operations it is difficult to improve. You are in constant fire fighting or reaction mode the robs you of the time to actually improve something or steals time to deliver more output. Rework is a capacity killer and a morale drain.

The ideal FPY for any process is 100%, however, achieving even a Six Sigma performance level, which equates to 99.99966% or 3.4 defects per million opportunities, can only be accomplished with extremely efficient/effective processes and highly dedicated internal and external participants. Start with some basic measurements and recognize that Six Sigma is not a likely target. A better target would be a range from 3 to 6 sigma, or 93.33% to 99.9966% — the higher the better, of course. This can be accomplished through kaizen blitz on the components of each process to increase FPY. Happy calculating!


Customer Lead Time:

Customer Lead Time can be defined as the time it takes from the instant an order is made by a customer, till the moment it reaches the hand of the customer.  It is a measure of customer service and a measure of competitive advantage, in particular in combination with inventory turns and first pass yield.  Lead Time is an important factor for customer satisfaction. If Customer Lead Time is less than: Material Lead Times, Production Lead Times, or Cumulative Lead Times it will result in the holding of inventory within the supply chain at some or all points. Everything else equal, the organization that can respond the fastest to a customer demand will win in the long run. It is a good mental model to consider how the Uber’s and the Spotify’s of the world have changed the model for Lead Time and WIP.

Overall customer lead time is the elapsed time from the placement of a customer to the actual receipt of the order by the customer (assuming complete, accurate, and meeting quality expectations). For most manufacturing companies it is measured in days or weeks.

Why it’s important: Companies with the lowest lead time without the need for excessive inventories will be the fastest and most responsive to customer demand. With high quality this is a winning model. I believe every organization should have lead time reduction as a True North metric.


Capacity (Hidden Factory):

The Hidden Factory is the set of activity (or activities) in the process that result in reduction of quality or efficiency of a business process or manufacturing department, and is not known to managers or others seeking to improve the process. These wastes rob from the ability to produce and deliver. They are unseen costs that are many time accepted as the cost of doing business.

We have found the best way to measure the hidden factory is through value stream analysis and lean accounting. Modeling the current state and then stripping out the waste you can determine the approximate amount of capacity that can be gained. From here you develop the future state lean P&L.

Why it’s important: The hidden capacity of the organization represent the latent capability within an organization to produce more with what it has (people, space, equipment). From a financial perspective this provides the potential for large improvement to both the P&L and Balance Sheet. This is best demonstrated by working through the prospect of delivering say 15% more revenue with the people, space and process equipment your already have. Consider what this would do to your bottom-line results and cash flow.


WIP Inventory/Inventory Turns:

Why it’s important: WIP is an indication of balanced work, flow and cost. Typically the higher the WIP the less balanced the organization is. These organizations will typically be plagued with high carrying costs, quality and obsolescence issues and customer service shortfalls. In many organizations where high WIP exists you will hear “we have inventory everywhere but we don’t have what we need for customer orders”. Ouch!

Of course we would welcome your feedback and comments!  What are your most valuable lean metrics?

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