Should KAIZEN™ Activities Provide an ROI?

BY MIKE MICKLEWRIGHT - 2017-07-11

The late great Dr. W. Edwards Deming once said,

“He should know that before he starts process and quality improvements, that he will be able to quantify a trivial part of the gain.”

Dr. Deming, as respected a man as there ever was in the fields of quality and Continuous Improvement (CI), especially by Toyota Motor Corporation Founder and former President/Chairman, Dr. Shoichiro Toyoda, who once said,

“Everyday I think about what he meant to us. Deming is the core of our management.”

Deming was basically saying, “go ahead, compute an ROI for your Continuous Improvement projects and for your client’s projects, but it won’t matter too much because it will be greatly underestimated and this must be realized.”  Dr. Toyoda supported this as he said Deming and his beliefs are the core of Toyota’s management ….  not an ROI analysis.

When a KAIZEN™ project team, either working on its own as part of an organization wide lean transformation or as part of external consulting effort, wishes to justify the existence of a CI effort and/or CI positions, it does become absolutely necessary to address the topic of money and a return on the company’s investment. The company, and any associated consulting company, must perform its due diligence in attempting to quantify and monetize the efforts to be put forth otherwise the internal efforts and time, consulting fees and/or other internal capital investments will not be justified and the project may not be allowed to continue.

The effort to quantify and monetize the payback must be completed, at a minimum to provide a basis and foundation for discussion, no matter how accurate the return estimates. These estimates are based on assumptions which are made that if certain improvements are made, there will be a certain quantifiable gain that will be realized and that there may be no unintended consequences. The debate over the estimates and the assumptions made is a healthy endeavor as it provides a very good reality check which should ensure robust decisions.

The worst thing that could happen is to not make an attempt to quantify the monetary benefits at all.  By not attempting to monetize the benefits, one is, in essence, making an assumed estimate of $0 return as the topic of ROI is never addressed. This is the worse danger.  I would rather see someone make wild assumptions and payback estimates, which would later be debated, than to make no assumptions and payback estimates at all.

But how and what can we monetize? Through high level tools such as Value Stream Mapping and the use of more detailed tools such as Yamazumi charts and mistake-proofing techniques, we can, of course quantity and monetize payback for:

1)    Productivity gains

2)    OT reduction

Furthermore, we can additionally quantify and monetize payback with:

1)    Profits realized through increased sales due to decreased lead times and increased capacity

2)    Less inventory

3)    Lower quality costs (rework, scrap, returns, rejects)

4)    Quicker received payments

Adding all of these savings and profits up, we would, as Deming alluded to, only be capturing a trivial part of the overall gain.  Dr. Deming, furthermore stated ….

“Actually, the most important figures that one needs for management are unknown or unknowable, but successful management must take account of them.”

But what are these most important unknown or unknowable figures Deming referred to when referring to a full lean transformation? 

As an example, if someone was to ask you to justify the return on deploying Leader Standard Work, you would have a hard time doing so. It’s not easily quantifiable and it is truly unknown, yet we intuitively know that it is the right thing to do. An academic bean counter would argue that therefore there is no return, yet the wise CEO and his/her senior leadership would know that this is not the case. Dr. Deming also said,

“But he that would run his company on visible figures alone will in time have neither company nor figures.”

Intelligent senior leadership realizes that many KAIZEN™ tools and processes provide invisible financial benefits and even though they are invisible, they are real. Knowing this with a combined focus on everything process related, is a key to success. 

Besides Leader Standard Work, some of the other KAIZEN™ tools and processes that provide real, but invisible, financial benefits, that may indeed more valuable than those that are quantifiable, include:

Gemba Walks, properly done to grow leaders through coaching

Daily Accountability Meetings

Visual Management

5S

Hoshin Kanri Policy Deployment

Kanban

Quick and Easy KAIZENs

 … to name but a few…

ROI is important and necessary to justify efforts put forth and to provide a means of measuring success.  However, an ROI analysis, by itself is not enough, because some of the more important efforts that provide long-term sustainability and Continuous Improvement, could be rejected from consideration due to the inability to calculate an ROI. We must give considerable credence to the unknown figures. Wise executives know this.


 
 
Gemba Kaizen