Using Lean Techniques to Manage Cash Flow

The Agile Lean Alignment
October 1, 2018

Using Lean Techniques to Manage Cash Flow

How Lean Processes Can Benefit Your Firm’s Cash Flow 

Value-added activities

Picture a traditional manufacturing process. What do you see? Work started well before it’s needed? Items being produced in large batches? A bunch of work in process (WIP) sitting around waiting to be finished?

While those are all common scenes in manufacturing facilities, the inventory or WIP you see is a lot of cash sitting around on shelves. And this cash is sitting around in service firms, also.

Manufacturers looking to implement Lean processes must first consider WIP and its impact on cash flow. The scene on the shop floor is more chaotic than it needs to be. Usually, it’s because the manufacturer doesn’t know any other way – “it’s the way we’ve always done things around here.” Behold Lean processes. Manufactures now focus on reducing batch sizes and WIP, creating a more continuous flow of product and information through the system and reducing the chaos.

A manufacturer that implements Lean should be able to reduce its WIP inventory by 50 percent or more and reduce raw material and finished goods inventory. What does this mean for cash flow? There is a significant improvement, even in the first few months.

And don’t think for a minute that this leads to a decline in customer service. In fact, lean manufacturers that focus on producing smaller batch sizes more frequently (few vs. many) increase their flexibility and responsiveness to customers. It’s a bit counterintuitive, but a business truth none the less. The more inventory a company has, the less likely it is they will have what they need.

What About Service Firms?

Service firms have WIP to deal with as well. Think of all that work sitting in your automated workflow solution or inbox, etc. waiting for the next step to be taken. Most firms don’t look to control WIP. Eventually it begins to get out of control and creates chaos – especially at bottleneck steps in your operations.

Getting your employees to focus on completing WIP quickly is sometimes arduous. You may be able to accomplish this by looking at how you reward them. Are they encouraged to complete projects or increase charge hours, or number of calls handled, etc.? Most traditional firms encourage and reward those employees who hit these numerical goals. Typically, these firms are great at starting new work but terrible at getting the work completed and out the customer. When faced with a tough problem, it’s easier to put what you’re working on off to the side and pick something else up. This creates more WIP and further delays your cash inflow.

Adjusting the Mindset in Your Organization

Focus on getting your employees to see your WIP as cash – because that is what it is. To become even more successful, you need to convert WIP to cash as fast as possible. Unfortunately, this mindset isn’t widespread in the service industry, for instance, you will see many staffers that are great at starting a project, like an insurance claim, tax return or an audit, but terrible at finishing it.

Firms that have implemented Lean have the advantage when competing against those firms that have inventory sitting around. Lean companies tend to provide better client service in terms of turnaround time and accuracy while having more time to provide value-added services. Most importantly, Lean firms have a stronger financial/cash position. And how could that impact your organization?

Lean Thinking when strategically adapted by manufacturers can dramatically improve overall business performance including revenue growth. Manufacturers who are embrace lean experience elevated levels of business performance improvement.

Four ways lean manufacturing can help a company grow revenue:

  • More free cash flow to develop new products, make acquisitions and/or increase marketing activities.
  • Lean manufacturers are highly flexible and quickly respond to customer needs faster, better and cheaper than the competition helping them gain more market share.
  • Current customers give the best suppliers more orders and often earn sole source status.
  • Develop a lower cost advantage that provides more pricing flexibility to gain more sales.

When you think of lean as an overall business strategy rather than just a cost reduction tool, it can assist in growing your revenue and profitability goals not only by reducing WIP, but by reducing lead times and raw material/finished goods inventories.

 

Willie L. Carter is the president and principal of Quantum Associates, Inc., Highland Park, Illinois. Carter is a Certified Lean Sensei, Certified Manager of Quality/Organizational Excellence, and a Certified ISO 9000 Lead Assessor. For more information on Lean and Process Improvement please contact Willie at wcarter@quantumassocinc.com or by phone at 847-919-6127.

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