Implementing lean manufacturing is often considered “a must” for any manufacturer today. Countless industrial practitioners worldwide have preached the monumental improvements that lean manufacturing has brought to their or their clients’ production facilities.
Yet, is the lean manufacturing doctrine really as useful as many have claimed? Is it possible to measure its impact? What metrics are used to calculate the transition into lean manufacturing’s Return on Investment (ROI)? And how do we measure lean manufacturing’s actual impacts on a plant’s productivity?
Estimating the ROI of lean manufacturing investment must be done as early as possible before spending any penny on the transition into lean manufacturing. Besides the initial investments, it’s also crucial to think about long-term lean qualitative and quantitative improvements as well.
In this article, we will briefly introduce you to the fundamentals of lean manufacturing and how to implement it, how to measure a transition into lean manufacturing’s ROI, and an example of this calculation to illustrate how it works in a real-life setting.
At the end of this article, we also included a lean manufacturing e-book PDF that you can download for free.
What Is Lean Manufacturing?
Before we dig deeper into measuring lean manufacturing’s ROI, it’s essential to know what manufacturing is. In brief, lean manufacturing is a doctrine that aims to eliminate the 8 types of waste in a production facility. These 8 types of waste are:
These 8 forms of waste must be removed, as they drain your organization’s coffers and your employees’ time and energy. Learn more about the 8 wastes of lean manufacturing.
The Lean Process: 5 Improvement Steps
To remove the 8 types of waste above and reap tangible improvements from lean manufacturing, you must execute these 5 principles:
- Identifying What Your Customers Value
- Value Stream Mapping
- Creating a Lean Manufacturing Flow
- Establishing a Pull System
- Kaizen (Continuous Improvement)
These principles must be implemented based on the order above, as each principle is interconnected. Learn more about the 5 lean manufacturing principles in our dedicated article.
The present-day lean manufacturing doctrine was introduced by Taiichi Ōhno – an industrial engineer from Toyota. In 1956, he went to the US and visited several American automotive factories. There, he learned about their production methods and how they can be improved.
Moreover, he was also fascinated by the then-new concept of supermarkets. In a supermarket, a customer can simply “pull” the products that they want from the shelves. Afterward, store employees will just replenish the supply on these shelves.
These lessons from his American trip led him to develop the legendary Toyota Production System (TPS) we know today. This system also gave birth to numerous lean manufacturing philosophies, such as Kaizen, Jidoka, Heijunka, and the Just-in-Time Production System.
A McKinsey article written by Deryl Sturdevant, a former President and CEO of Canadian Autoparts Toyota (CAPTIN), brings a convincing example of how TPS and the lean manufacturing doctrine have radically changed his shop floor. Previously, changing the metal die used for fabricating an aluminum alloy wheel took 4-5 hours. Yet after he rolled out the TPS and lean thinking in his plant, it took his workers under an hour to complete this task.
Thanks to this and other small yet impactful improvements, Toyota has achieved dominance in the global auto industry. As of 2022, Toyota was the world’s best-selling automaker, a title it has held for 3 uninterrupted years.
Occasionally, manufacturing practitioners mix up the terms “lean manufacturing” with “agile manufacturing.” Despite sounding identical, they are two separate doctrines with differing philosophies, goals, and methods. See more on the agile manufacturing vs lean manufacturing comparison.
How Do You Measure Lean Manufacturing’s ROI?
Now that the fundamentals of lean manufacturing have been covered, it’s time to get to this article’s main point: is it possible to measure lean manufacturing’s ROI? And if so, how can we calculate it?
The answer is yes; measuring lean manufacturing’s ROI is possible. To calculate it, divide the Net Improvement by the Investment Cost and then multiply them by 100%.
Net Improvement is obtained by subtracting the Old Net Production Output (your production output before the introduction of lean manufacturing) from the New Net Production Output (your production output after the introduction of lean manufacturing).
The formula below showcases how to measure lean manufacturing’s ROI:
The following sections of this article will thoroughly explain each element in the formula.
New Net Production Output
After implementing lean manufacturing in your plant, your production output will likely increase thanks to waste elimination. This part refers to your plant’s new production output after lean manufacturing’s implementation – measured in the net value of goods it produces.
To calculate it, simply subtract the amount of capital needed to make 1 unit of a product from its retail price in the market. Then, multiply the result by the quantity of that particular good the plant could produce at a given time. Here’s an illustration of the formula:
For example, a plant produces shampoo in 600 ml bottles. This shampoo costs EUR 3 to make and is sold for EUR 5 in supermarkets. After implementing lean manufacturing reforms, this plant can manufacture 720,000 bottles of this particular shampoo each month.
Thus, the New Net Production Output would be:
(EUR 5 – EUR 3) x 720,000 = EUR 1,440,000/month
Old Net Production Output
Old Net Production Output refers to the net value of goods that a plant produces before implementing lean manufacturing. As seen below, it shares an almost identical formula for calculating the New Net Production Output.
However, there’s one difference: the quantity of goods multiplier refers to the plant’s maximum production output before lean manufacturing’s implementation and not after.
For example, before introducing lean manufacturing to its plant, the same shampoo factory that we mentioned earlier could only produce 600,000 bottles of shampoo per month. The retail price & capital needed to produce a bottle of shampoo were also the same (EUR 5 & EUR 3 respectively).
Therefore, the Old Net Production Output was:
(EUR 5 – EUR 3) x 600,000 = EUR 1,200,000/month
Investment Cost
As the name suggests, this part refers to all costs associated with introducing lean manufacturing into a plant. This element covers many expenses, such as purchasing and installing new machinery & tools, employee training, downtime during the transition process, and any other lean manufacturing transition-induced cost.
Example of Lean Manufacturing’s ROI Measurement
To demonstrate how to calculate lean manufacturing’s ROI in a real-life setting, we’ve provided an example below:
Background
Let’s say that Natalie is the manager of a plant owned and run by Vulture Aerospace – a fictional company that produces airplanes. Natalie’s plant produces Vulture Luxjet – a small 10-seater private plane.
Just like any other aircraft manufacturing plant, Natalie’s production facility is enormous. Its floor spreads around 50,000 square meters, or around 7 times larger than a soccer field.
As a result, Natalie’s employees spend a significant amount of their working time walking in her plant every single day. Be it to move between different production stations, take & return tools in the central tool depot, or simply get a drink or a snack at the cafeteria outside the plant.
A significant chunk of her employees’ time is wasted on walking instead of performing more productive tasks. Natalie is witnessing unnecessary motions – one of the 8 types of waste in lean manufacturing- committed daily in her plant.
Lean Manufacturing Process Improvement
One day, Natalie decided to introduce a moving assembly line in her plant – complete with industrial robots. Her employees will no longer have to move to different production stations, as the manufactured planes will come to their production station in the assembly conveyor belt instead. This eliminates the previously time-wasting long walks between production stations.
Moreover, Andon lights are also installed in each production station. These Andon lights will instantly inform every worker if there’s a problem in one or more production stations.
As a part of this factory re-design, her assembly line is divided into 30 production stations. Each production station has its own function, ranging from bolting the wings to the fuselage to installing chairs inside the cabin.
In addition, Natalie placed a tool cabinet in each production station. Consequently, her employees no longer have to take and return their tools to the central tools depot, as all necessary tools are already placed at each production station.
And to boot, Natalie also installed a machine that dispenses snacks and drinks to her employees at each production station. With these improvements, her employees can stay in their production station throughout their entire shift – eliminating the previously existing time-wasting walks.
The Cost of Transition to Lean Manufacturing
Natalie’s decision to introduce lean manufacturing solutions to her plant comes at an immense cost. Here’s the breakdown:
- Acquiring and installing the new moving assembly line (including the Andon lights and industrial robots): EUR 80 million
- Adding a tool cabinet in each production station in 30 production stations (a large tool cabinet costs EUR 3,000/unit): EUR 90,000
- Adding a snack & dispenser in 30 production stations (this machine cost EUR 2,500/unit): EUR 75,000
In total, this factory overhaul cost Vulture Aerospace EUR 80,165,000.
Calculating the Lean Manufacturing Transition’s ROI
Vulture Aerospace has significantly upgraded its factory to conform to lean manufacturing doctrine. The question is: is it worth it? Can this costly investment deliver the lean waste reduction it should? It’s time to analyze the ROI.
The per unit cost of Vulture Bizjet is EUR 33.5 million, and it costs EUR 30 million to manufacture one. Thus, each Vulture Bizjet generates EUR 3.5 million in profit for Vulture Aerospace.
Before the upgrade, Natalie’s plant produced 10 planes/month. However, this plant now produces 14 planes/month due to reduced waste and inefficiency.
To calculate this investment ROI, we will use the following formula:
The investment cost is EUR 80,165,000.
Before we get into that formula, we should calculate the New Net Production Output and Old Net Production Output first.
To calculate the New Net Production Output:
(Retail price per unit of Vulture Bizjet – Cost to build one) x Number of Vulture Bizjet produced per month after the lean manufacturing upgrade
After the upgrade, Natalie’s plant produces 14 Vulture Bizjets/month.
(EUR 33.5 million – EUR 30 million) x 14 = EUR 49,000,000
Thus, the New Net Production Output is EUR 49,000,000
To calculate the Old Net Production Output:
(Retail price per unit of Vulture Bizjet – Cost to build one) x Number of Vulture Bizjet produced per month before the lean manufacturing upgrade
Before the upgrade, Natalie’s plant produced 10 Vulture Bizjets/month.
(EUR 33.5 million – EUR 30 million) x 10 = EUR 35,000,000
Thus, the Old Net Production Output is EUR 35,000,000
Now that we have the values of the Investment Cost, New Net Production Output, and Old Net Production Output, let’s use them in the Lean Manufacturing’s ROI calculation formula.
The calculations are:
((EUR 49,000,000 – EUR 35,000,000) / EUR 80,165,000) x 100% = 17.46%
Hence, the monthly ROI value of Nathalie’s lean manufacturing upgrade in her plant is 17.46% per month. It will take 5.73 months (or 171.9 days, if we’d assume that there are 30 days/month where her plant is operating) until her lean investment reaches a break-even point.
Of course, this is just a simple illustration of calculating a lean manufacturing transition’s ROI. In real life, additional factors need to be added to the calculation, such as planned maintenance time, unexpected machinery breakdowns, fluctuating customer demands, and numerous other factors.
There are also various KPI improvements that must be taken into account, such as the first time right, lead time, capacity utilization of your machines, and various others.
Software Tools for Lean Process Improvement
To start your transition into lean manufacturing, you will need all of the best tools at your disposal. In addition to hardware such as moving assembly lines and Andon lights, industrial productivity software such as Azumuta will also support your transition to become a lean manufacturer.
Digital Work Instructions
Transitioning into lean manufacturing is always a challenging task. Whether your employees can adapt to the lean manufacturing doctrine and practices is the most crucial factor in your transition’s success. And that’s precisely why you’ll need our Digital Work Instructions module.
With this module, you can create intuitive paperless work instructions – backed by visual elements such as videos, icons, schematics, and even 3D models. All within a matter of minutes – thanks to our drag-and-drop interface.
In addition, our digital work instructions are not a one-way street. Besides making and sharing instructions with the shop floor employees, our module allows two-way communication between its users. Users can also capture photos and videos in real-time and share them. With our Digital Work Instructions module, coordinating between multiple production stations is a walk in the park.
Quality Management
Unlike many other competitors, our software can be connected to a wide array of peripheral devices, ranging from digital torque wrenches to weighing scales. To boot, our software can also be integrated with numerous other digital tools, such as SAP, Microsoft Power BI, and Google Calendar, to name a few.
Thanks to these integrations, your peripheral devices and business software can feed their data directly into your PC, tablet, and smartphone. You can process and visualize these rich data using our data visualization dashboard.
When calculating your lean manufacturing transition’s ROI, you must have sufficient data, especially concerning your plant’s production output. Our software ensures that you will always have abundant data thanks to its integration abilities and pleasantly visualizes them with our Quality Management module. With all data conveniently displayed on your screen, making continuous metrics-based improvements s has never been more straightforward.
Audits & Digital Checklists
When calculating your lean manufacturing investments’ ROI, multiple crosschecks are recommended. Multiple data and statistics must be considered; even the slightest miscalculations can be extremely costly. After all, transitioning into lean manufacturing can easily cost millions, be it for purchasing new equipment, re-designing your plant, or training your employees.
Prevent any possible error and negligence with our Audits & Digital Checklists module. Easily create digital checklists using our drag-and-drop interface, and compliment them with images and videos for extra verification.
Skill Matrix & Training
Calculating your lean manufacturing investment’s ROI is a highly technical and complicated task. Even though the mathematical formulas seem simple, implementing them in real life is far more complicated than it seems. Tasks such as measuring your plant’s full production output, tracking all expenses related to lean manufacturing transition, and estimating the resources needed to make a product require deep technical expertise.
Ensure that your employees are sufficiently trained using our Skill Matrix & Training module. Use it to plan employee training programs, where you can share training materials, select participating employees, and send automated notifications to your employees’ devices when training is due.
Keep track of your employee’s knowledge and skills with your digital skills matrix. Use our pre-existing template and create a visually intuitive skill matrix in a matter of minutes.
Just input the necessary data, and our skill matrix will automatically calculate and color-code the average value of your employees’ skills and knowledge. Thanks to this feature, you will have an overview of your organization’s skill and knowledge levels with just a single glance at our skill matrix.
Free Lean Manufacturing E-Book
Deepen your understanding of the lean manufacturing doctrine through our free downloadable e-book.
Check out how our client’s use of Azumuta has led to impressive improvements: 60% fewer customer complaints, 50% less time spent on creating and managing work instructions, 40% quicker problem resolution, 40% less time spent on employee training, and an overall 20% full-time employee gain due to increased work instructions efficiency in their own words.
Not yet convinced? Be sure to check other success stories as well. Our lean manufacturing software tool will make your transition into lean manufacturing an effortless and seamless process.
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