Lean Mesurement Book

L E A N
E N T E R P R I S E
Participant Workbook
L E2 0 8
Performance Measurement
for the Lean Enterprise

v1.0
L E A N
E N T E R P R I S E
L E2 0 8

v1.0
This copyrighted course was developed by BMA Inc. in collaboration with
NIST/MEP and is the preferred Performance Measurement training for all
360vu clients and is offered exclusively through certified 360vu providers.
360vu is a registered service mark carried by certified providers of 360vu
services.
To contact a certified provider of 360vu services, dial 866.GO.360vu or visit
our website at 360vu.com.
How this workshop fits into the big picture.
This workshop is one piece of an integrated suite of 360vu tools
and services created exclusively for small manufacturers by
360vu.
The concepts and practices taught in this 360vu workshop are
powerful and proven. They've helped companies like yours
significantly improve their operations from shop floor to front
office.
However, 360vu is more than the ideas presented in this
workshop. It is a strategic approach to business that helps small
and mid-sized manufacturers really start looking at their whole
company-where they want to be and how they can get there.
At the core of 360vu is the professional business advisor. This
manufacturing and business expert will guide you through a
series of steps, the 360vu Business Approach, developed to
help you systematically tackle the right projects, in the right
order, at the right time.
All 360vu resources-people, tools and workshops like this one-
are pulled into this process as needed to help you focus on
improving and integrating the systems that drive your business,
all within the context of where you want to go.
iii

Contents
Welcome and Introductions.... page 3
The Purpose of Performance Measurement page 5
Performance Measurement and Lean Manufacturing page 7
The Starter Set... page 31
Corporate/Strategic page 36
Value Stream.. page 46
Cell Measures. page 65
Developing Performance Linkages page 84
Implementation.. page 103
Summary and Evaluation. page 124
v
L E A N
E N T E R P R I S E
L E2 0 8

v1.0
LE208 v1.0 Performance Measurement 360vu
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L E A N
E N T E R P R I S E
Performance Measurement for the
Lean Enterprise
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LE208 v1.0 Performance Measurement
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Not everything that can be counted
counts, and not everything that
counts can be counted
Albert Einstein
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Course Agenda
Welcome and Introductions
The Purpose of Performance Measurement
Performance Measurement and Lean Manufacturing
The Starter Set
Corporate / Strategic
Value Stream
Cell Measures
Developing Performance Linkages
Implementation
Summary and Evaluation
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What You Should Be Able To Do
After This Class
Understand and explain how traditional performance
measurements conflict with lean performance
Understand barriers to adopting performance measurements and
how to begin to overcome them.
Understand and implement the starter set of performance
measurements at the Corporate level, the Value Stream level, and
in Production Cell to motivate lean behaviors.
Develop a clear linkage from your companys business strategy to
performance measurements used in the value stream and in
production cells.
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Course Agenda
The Starter Set
Value Stream
Cell
Implementation
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Why Are the Right Performance
Measurements Important?
What you measure is what you get.
Measurements drive peoples behavior.
People need rapid and relevant feedback.
Measurements indicate progress towards planned goals.
When you can measure what you are speaking about, and express it in
numbers, you know something about it. But when you can not measure it,
when you can not express it in numbers, your knowledge is of a meager
and unsatisfactory kind...
Lord Kelvin (1824-1907)
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Course Agenda
The Starter Set
Value Stream
Cell
Implementation
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Defining Lean
A systematic approach to identifying and eliminating waste (non-
value-added activities) through continuous improvement by
flowing the product at the pull of the customer in pursuit of
perfection.
The MEP Lean Network
Lean is:
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Definition Of Value-Added
Value-Added
Any activity that increases the market form or function of the
product or service. (These are things the customer is willing to
pay for.)
Non-Value-Added
Any activity that does not add market form or function or is not
necessary. (These activities should be eliminated, simplified,
reduced, or integrated.)
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Lean = Eliminating Waste
Non-Value-Added
Defects
Overproduction
Waiting
Not Utilizing Employees knowledge,
skills and abilities
Transportation
Inventory
Motion
Excess Processing
Typically 95% of all lead time is non-value-added.
Value-Added
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Lean Building Blocks
Value
Stream
Mapping
Continuous Improvement
Performance Management
Quick Changeover
Standardized Work Batch Reduction Teams
Quality at Source
5S System Visual Plant Layout
POUS
Cellular/Flow Pull/Kanban TPM
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Shadows of the Neanderthal
Read or listen to the story Shadows of the
Neanderthal:
- What are the main points of the story?
- What are examples of the two tower problem from
current events, or from family life?
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Two Views of the Same Reality
Your world view depends upon where you are looking from
your perception.
Two groups can have a quite different perception of the same
situation according to their viewpoints and their assumptions.
These perceptions can become deeply held beliefs.
Our beliefs constitute mental models about how the world
works.
People work to preserve their mental models even when they
acknowledge their inadequacy.
These mental models often lead to conflict between two
groups even when they have similar ultimate objectives.
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Lean Represents a New Mental Model for
SHIFT
Traditional Lean
Focus on
Lowest
Product
Cost
Focus on
Maximizing
Value Stream
Profitability
The Dimensions and Implications of this Shift are Presented
in the Following Slides
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Compare the Differences
ASSUMPTION: Profit comes from full utilization of resources
Traditional Measurements
MEASUREMENT: Labor efficiency & machine utilization
BEHAVIOR: Make more product
WHAT IS IMPORTANT: Full utilization of resources
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Compare the Differences
ASSUMPTION: Profit comes from maximizing flow based on
customer pull.
Lean Thinking
MEASUREMENT: Throughput
BEHAVIOR: Eliminate barriers to flow
WHAT IS IMPORTANT: Flow according to customer pull
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Comparing Assumptions
Profit comes from full
utilization of resources
Direct labor is the most
important conversion cost
Control the business thru
detailed tracking
All excess capacity is bad
Traditional Assumptions
Profit comes from maximizing
flow on pull from customers.
Waste = resources impeding the
flow
Control thru continuous attention
to flow & waste
Excess capacity provides
flexibility
Lean Assumptions
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Increased Sales Revenue
Value to the customer
Value streams
Flow & pull from the customers
Team structure and individual
empowerment, accountability
System quality
Pursuit of perfection
Full utilization of resources
Cost per Part
Overhead absorption
Batch and Queue
Inventory valuation
Departmental structure and
individual efficiency
Product quality
Pursuit of budget
Comparing What Is Important
Traditional Thinking Lean Thinking
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Labor efficiency &
machine utilization
Cost variances vs.
standard
Budget adherence
Direct labor as % of
sales
Cycle time
Throughput
First time quality
Inventory Turns
Delivery to customer
Value stream focus
Comparing Measurements
Traditional Measurements
Lean Measurements
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Make more product
Utilize resources to the
max
Optimize dept.
efficiencies
Track direct labor in
detail
Allocate other costs
Eliminate barriers to flow
Focus on value streams
rather than departments
Continuous improvement
and team-work
Eliminate waste,
inventory, and over-
production
Comparing Behaviors
Traditional Behaviors Lean Behaviors
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Dynamics of Lean Implementation
Improvement Results:
Short cycle times
Lower inventories
Higher quality
On-time delivery
Less machine downtime
Simpler planning &
scheduling
Improved
Results
Improvement
Efforts
Commitment
to Lean
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Dynamics of Standard Cost Accounting
Unfavorable Variances:
Volume variances
Labor utilization
variances
Machine utilization
variances
Overhead absorption
variances
Excess
Capacity
Less Parts
Produced
Less Direct
Labor Hours
Unfavorable
Variances
Pressure to
Produce
More Parts
Lean
Improvement
Results
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The Two Views Work Against Each Other
Excess
Capacity
Less Parts
Produced
Less Direct
Labor Hours
Unfavorable
Variances
Pressure to
Produce
More Parts
Improved
Results
Improvement
Efforts
Commitment
to Lean
Initially.
Overhead
burdens per unit
go up
Variances go
unfavorable
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Lean Has Produced Very Positive
Results
Lead times reduced from 20 days to 5 days
Inventory turns increased from 10 turns to 50
Cash flow has doubled
On-time delivery increased from 80% to 99%
These Results Should Lead to Improved
Profitability
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But The Costing System Has Masked
The Profit Improvement
Significant inventory reduction has a short-term
negative impact on profitability.
Acme Stamping Income Statement
Current State
before Lean
Lean Future
State
Lean
Improvement
Revenue 216,200 $ 216,200 $ - $
Production Costs 121,043 $ 119,000 $ (2,043) $
Material Costs 71,944 $ 71,944 $ - $
One-Time Inventory
Reduction - $ 12,243 $
Overhead Cost 20,000 $ 20,000 $ - $
Total Cost 212,987 $ 223,187 $ 10,200 $
Gross Profit
3,213 $ (6,987) $ (10,200) $
12,243
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Discussion
How do you propose to reconcile these
conflicting views?
What are some fundamental things that must
change?
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The Solution
Develop a set of measurements throughout the organization
that thoroughly reflect the companys lean strategies and
goals.
Replace the traditional measurements with lean performance
measurements that are designed to motivate and monitor lean
behavior.
Engage people to work to improve measurement results, so
that they will be actively contributing to company goals.
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The Measures Must Achieve
Effective Control
SYSTEM
Gap
Input
Output
Measure
Gap between
Actual and
expected
Control Process
Cause/effect
Rapid feedback
System
Changes
Goal
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They Must Measure Causal and
Predictive Factors
Historical Predictive
Causal
Derived
Traditional
Lean
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Effective Performance Measurement
Makes a Difference
Measure of Success
Performance Measurements
Agreement on Strategy 90% 47%
Communication of Strategy 60% 8%
Cooperation and teamwork 85% 38%
Adapted from: Ingle & Scheiman Is Measurement Worth It Management Review,
Morgan & Scheiman, Measuring People & Performance Quality Progress
Measure of Success
Organization with Good
Organizations with Poor
Industry Leader over the Last 3
Years
74% 44%
Three Year Return-on-Investment 60% 45%
Success in the last major change
effort
97% 55%
Organizations with Lean
Organizations with Traditional
Organizations with Lean
Organizations with Traditional
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Course Agenda
The Starter Set
Value Stream
Cell
Implementation
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Three Levels of Measurements
To empower the cell teams to
monitor and control their production
activities in support of the value
stream objectives.
To guide the Value Stream
continuous improvement team in
executing company strategies and
achieving objectives.
To enable senior managers of the
company to monitor the
achievement of strategic goals.
Cell Level
Measurements
Value Stream Level
Measurements
Key Performance
Indicators and
Targets
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Strategic Goals and Key Performance
Indicators
Grow Sales
Grow Earnings
Improve Cash Flow
Improve Customer Value
Improve Employee Satisfaction
Employee Turnover
On-Time Delivery
Customer Satisfaction
Inventory Turns
EBITDA
Sales per Employee
Sales Growth
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The Starter SetPrimary Measures
Days of Inventory/
WIP to SWIP
Overall Equipment
Effectiveness
First Pass Yield
Dock to dock/Order to
Dock
A/R Days Outstanding
Average Cost per Unit
Shipped
First pass Yield
Day-by-the-Hour Units per Person
On-Time Delivery
Value Stream Gross Profit
Percentage
CELL/PROCESS
MEASURES
VALUE STREAM
MEASURES
KEY PERFORMANCE
INDICATORS
Sales Growth
Sales per Employee
On-Time Delivery
EBITDA
Inventory Turns
Employee Turnover
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Course Agenda
The Starter Set
Value Stream
Cell
Implementation
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Corporate MeasurementsKey
Performance Indicators
The corporate (strategy-level) measures give senior
management answers to basic questions as to how well the
business is achieving its goals with regard to:
- Financial results
- Business Growth/Diversification
- Operational improvement & Productivity
- Customer value
- Organization development
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KPI Starter Set Measure Monthly...
Sales Growth
EBITDA
Inventory Turns
Sales per Employee
On-Time Delivery
Organizational
Capabilities
Employee Turnover
Customer Value
Perspective
Financial
Perspective/
Business Growth
Operations
Perspective
Organization
Perspective
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Sales Growth
Measures how fast the business as a whole is
growing from the previous period and over longer
one and five-year periods
How to calculate:
- Level in Dollars
- % Growth/(Decline) from Prior Period
- % 1-Year Growth/(Decline) from previous 12-
month period
- Average Annual 5-Year Compound Growth
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Earnings Before Interest, Taxes,
Depreciation, & Amortization (EBITDA)
EBITDA measures cash flow from operations.
- Equals net income plus interest, taxes and non cash charges such a
depreciation and amortization
Dimensions measured:
- Level in Dollars
- % Growth/(Decline) from Prior Period
- % 1-Year Growth/(Decline) from previous year
- Average Annual 5-Year Compound Growth
How to calculate:
*Any other significant non-cash and/or charges, such as write-off of investments, should be added back to income
Net
Income
+
Interest
Expense
Amortization]
Expense
Provisions
For income
Taxes
Depreciation
Expense
+ + +
[
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Inventory Turns
Measures how effectively material flows through the
production process, the stability of the processes & visual
systems, and the lead time for the business.
Shows the total inventory including raw material (at point of
use), work-in-process, and any completed items.
How to calculate:
- Inventory Turns =
Total Inventory Dollars
Cost of Sales
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Sales per Employee
Measures productivity of the company.
Shows value created by the company.
How to calculate:
- Sales per Employee =
- A full-time equivalent employee equals the total hours worked by
full- and part-time workers (including overtime) divided by the
number of available straight-time hours per employee during the
period.
Total Sales - Discounts
Avg. Number of Full-Time Equivalent
Employees
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Key Customer Satisfaction by Product
Measured by an index which encompasses the factors that are
valued by key customers of the product.
Dimensions measured:
- Comparison with previous Period (Quarter)
- Comparison with previous year
How to calculate:
- Calculate the weighted average of the indices for the factors
deemed important by customers (product functionality,
product quality, service responsiveness, timeliness, etc.)
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On-Time Delivery
Measures the shipment of the right products in the right numbers
to the customer order.
- Shows the effectiveness of the production process in making to
customer demand
Shows the percentage of the scheduled customer order volumes
actually shipped on schedule.
How to calculate:
- On-Time Delivery =
Orders Shipped on Time
Total Orders Shipped
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Employee Turnover
Measures the satisfaction of employees
Indicates the ability of the company to retain its employees
How to calculate:
- Employee Turnover =
- An Unwanted Departure occurs when a employee leaves
the company prior to the planned departure date
Employee Unwanted Departures
Total Employees
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Course Agenda
The Starter Set
Value Stream
Cell
Implementation
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Value Stream Starter Measurements
Support Measures
- OEE at the Constraint Cell
- Average Projects per Person
- Average Cross-Training per Person
- Number of Safety Incidents
Primary Measures
- Units per Person
- On-Time Delivery
- Dock-To-Dock Time
- First Pass Yield
- Average Cost per Unit Shipped
- Accounts Receivable Days
Outstanding
- Value Stream Gross Profit
Percentage
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Primary Value Stream Measurements
Establish value stream objectives and targets to link to
attainment of strategic goals
Monitor attainment of value stream objectives
Identify constraints to value stream performance and direct
continuous improvement at the level of the cell to their
elimination.
Monitor the effectiveness of improvements in eliminating
constraints to value stream performance.
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Linking Value Stream Goals to
Measurements
Accounts Receivable Days Outstanding
Collect cash within
30 days
First Pass Yield
Average Cost Per Unit Shipped
Zero Defects/Zero Waste
Increase Value Stream Productivity
Dock-to-Dock Time Reduce order fulfillment
lead time to < 1 Day
On-Time Delivery Ship on time in the right
volumes 100% of the time
Units per Person
Increase throughput
with the same resources by 25 %
MEASUREMENT VALUE STREAM OBJECTIVE
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Value Stream Starter Set
Measure Weekly...
- Value Stream Gross Profit
- Average Cost per Unit Shipped
- Accounts Receivable Days
Outstanding
- Units per Person
- Dock-to-Dock/Order-to-Dock Time
- First Pass Yield
- On-Time Delivery
- Value Stream Support Measures
Financial
Perspective
Customer Value
Perspective
Operations
Perspective
Organization
Perspective
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Value Stream Gross Profit Percentage
Measures the profitability of the value stream during the period
Includes the sales value of all shipments from the value stream during
the period
Includes all value stream costsproduction labor, production materials,
production support, operation support, facilities and maintenance, all
other value stream costs
Primarily cash based costing--charges costs directly from basic
ledgerspayroll, accounts payable, depreciation accrual
Limited allocations
How to calculate
Value Stream
Gross Profit %
(Value Stream Revenue Value Stream Costs) X 100
Value Stream Revenue
=
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Average Cost per Unit Shipped
Measures the productivity of the value stream during the period.
Includes all value stream costsproduction labor, production
materials, production support, operation support, facilities and
maintenance, all other value stream costs
Primarily cash based costing--charges costs directly from basic
ledgerspayroll, accounts payable, depreciation accrual
Limited allocations
How to calculate:
- Avg. Cost per Unit
Total Value Stream Costs
Total Units Shipped
=
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Measures the average time to collect cash after shipment
How to calculate:
- Calculate the average sales per day and divide it into the
period-end accounts receivable balance
- AR Outstanding Days =
Average Sales per Day =
Accounts Receivable Balance
Average Sales Per Day
Average Months Sales
Working Days in Month
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Units per Person
Measures throughput and productivity of the value stream.
Shows value created by the value stream.
How to calculate:
- Units per Person =
- Include all full-time equivalent employees dedicated to the
value stream during the period, including first line
management.
Units Shipped by Value Stream
Avg. Number of Full-Time Equivalent
Dedicated Employees of The Value Stream
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Dock-To-Dock/Order-to-Dock Time
Dock-to-Dock Measures the flow of products from receipt of raw
materials/customer orders to the shipment of finished goods.
Shows the speed of conversion of raw materials or customer orders to
finished product.
- Expressed in hours or days
How to calculate:
Dock-to-Dock Days =
Order-to-Dock Days = Dock-to-Dock Days + Order Processing Days
Units of
Control Part
in the Plant
Manufactured
End
Products per
week
Days per
Week
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18,400 pcs/mo
- 12,000 L
- 6400 R
Tray=20 pcs
2 Shifts
Customer
Staging
SHIPPING
2700L
1440R
I
1 Person
ASSEMBLY#2
1200L
640R
I
1 Person
ASSEMBLY#1
1600L
850R
I
1 Person
S.WELD#2
1100L
600R
I
1 Person
S.WELD #1
4600L
2400L
I
200 Ton
STAMPING
Coils
5 days
I
27,600 sec.avail
2 Shifts
Uptime=100%
C/O=0
C/T=40 seconds
EPE=2 weeks
27,600 sec avail
Uptime=85%
C/O= 1 hour
C/T=1 second
27,600 sec.avail
2 Shifts
Uptime=100%
C/O=0
C/T=62 seconds
27,600 sec.avail
2 Shifts
Uptime=80%
C/O=10 minutes
C/T=46 seconds
27,600 sec.avail
2 Shifts
Uptime=100%
C/O=10 minutes
C/T=39 seconds
Tues &
Thurs
1 x
Daily
Michigan
Steel Co.
500 ft. coils
MRP
Production
Control
90/60/30 day
Forecasts
Daily Orders
6-Week
Forecast
Weekly Fax
Daily Ship
Schedule
5 Days
1 Second
7.6 Days
39 Seconds
1.8 Days
46 Seconds
2.7 Days
62 Seconds
2 Days
40 Seconds
4.5 Days
Dock-to-Dock Time
23.6 Days
Value-Added Time
188 Seconds
Weekly Schedule
Dock-To-Dock Time
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First Pass Yield
Measures percent of total units successfully manufactured
through the value stream on the first pass without being repaired,
reworked, re-tested or scrapped.
How to calculate:
- The First Pass Yield for the Value Stream is the product of the
First Pass Yields at each Evaluation Point in the entire value
stream:
FPY at Evaluation
Point (EP)
=
Total Units Processed-Not OKs
Total Units Processed
FPY for Value
Stream
= FPY(EP1) x FPY(EP2) x FPY(EPn)
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On-Time Delivery
Measures the shipment of the right products in the right numbers
to the customer order.
- Shows the effectiveness of the production process in making to
schedule.
Shows the percentage of the scheduled customer order volumes
actually shipped on schedule.
How to calculate:
- On-Time Delivery =
Orders Shipped on Time
Total Orders Shipped
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Supporting Measurements
Identify the focus for improvement initiatives at the cell level.
Calibrate the progress of the value stream in developing a
culture of continuous improvement.
Track progress in the ability to use resources flexibly.
Measure progress in creating a safe work environment.
- OEE at the Constraint Cell
- Average Projects per Person
- Average Cross-Training per Person
- Number of Safety Incidents
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Value Stream Level Performance
Management
Value Stream
Measurements
Identify Performance
Gaps
Targets
Establish Root
Causes of Gaps
Improvement
Projects
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Value Stream Performance Management
Framework
Cell
Value
Stream
Attains Target Misses Target
Attains
Target
Misses
Target
Running
Smoothly
Align cell
and value
stream targets
Implement cell-level
improvements that
remove constraints;
then reset
targets
Identify constraints
to value stream
performance and
revise cell
targets to meet
value stream
goals
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Value Stream Measures Focus
Cell-Level Continuous Improvement ...
Value Stream Performance
Measure Results
against
target
Provide focus for use
of House of Lean
tools at cell level
Understand
patterns and
trends
Define the
causes of
the trends
Gap
Cell
initiatives
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Lean Performance Measurement
Exercise

To improve these measures Which Lean Tools are Needed where?

Units Shipped per Employee
from 1,150 to 1,533

On-Time Deliver improve
from 90-98%

Dock-to-Dock Time from 23.6
Days to 4.5 days

First Pass Yield maintain
and improve

Accounts Receivable days
maintain 30 days

Reduce Average Cost per Unit

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Course Agenda
The Starter Set
Value Stream
Cell
Implementation
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Cell
A group of machines and/or workstations physically and
geographically linked, staffed by a consistent team of operators,
which makes parts or products within a product family.
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Cell Starter Measurements
Support Measures
- Cross Training Chart
- Safety Cross
- 5S Audit
- Number of Improvement
Projects Completed
Primary Measures
- Day by the Hour Report
- Days of Inventory
- (or) WIP to SWIP
- Operational Equipment
Effectiveness (OEE)
- First Pass Yield
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Primary Cell Measurements
Enable the cell production team to monitor and control their
primary production activities.
Facilitate the collection of problems and issues arising from
production.
Provide first-line data for analysis by the cell or the
continuous improvement team.
The objective here is to keep to takt-image. The measures
help to keep focus as a dash-board toolvisible to all
owner managed yet also acts as a visual control for managers
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Linking Cell Objectives to
Cell Measurements
First Pass Yield Eliminate Scrap
and Rework
First Pass Yield Eliminate Variability
Day-by-the-Hour Build to Schedule
Day-by-the-Hour
WIP to SWIP
Overall Equipment Effectiveness
Reduce / Standardize
Cycle Time
MEASUREMENT CELL OBJECTIVES
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Overall Equipment Effectiveness Eliminate Machine Waste
Inventory Days or WIP to SWIP Reduce Batch Size
Inventory Days
5S Audit or Self-Audit
Institute Visual
Management
MEASUREMENT CELL OBJECTIVES
Linking Cell Objectives to Cell
Measurements (continued)
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Day by the Hour Report
Measures adherence to production schedule.
- Constantly reinforces the need to achieve consistent cycle time
to match customer takt time.
Shows adherence to the production requirement for the cell for
each hour.
- Can be expressed as a quantity for the hour (#/hr) and/or as a
cumulative quantity for the shift. (#/shift)
How to calculate:
- Cell supervisor records the quantity completed at the end of
each hour, the cumulative quantity for the day, and any
comments or reasons.
- At the end of each shift, cell supervisor calculates percentage
completed in comparison to schedule.
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Inventory Days
Measures how effectively material flows through the cell, the
stability of the process & visual systems, and the lead time for the
cell.
Shows the total inventory on the cell including raw material (at point
of use), work-in-process, and any completed items.
- Can be expressed in quantity of parts used in production or in
dollars.
How to calculate:
- Cell operators calculate cell inventory on a weekly basis by
counting material and production kanbans
- Inventory Days =
Total Inventory of the Cell
Cell Production Rate
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Measures how effectively material flows through the cell, the
stability of the process and visual systems.
Shows the total inventory on the cell including raw material (at
point of use), work-in-process and any completed items.
Focuses the operator attention on the importance of kanban rules
and single piece flow.
How to calculate
- Cell operators count the total inventory on the celltotal
kanbans, number of products, number of representative
parts
- Divide by the standard inventory for the cell
- WIP/SWIP =
WIP TO SWIP
Total Inventory in the Cell
Standard Cell Inventory
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First Pass Yield
Measures percent of total units successfully manufactured on
the first pass without being repaired, reworked, re-tested or
scrapped.
Can be expressed for each workstation or for the entire cell.
- Shows where cell-level improvement should be focused.
How to calculate:
- Workstation FPY =
- Cell FPY =
Total Units Processed - Rejects or Reworks
Total Units Processed
FPY
WS1
* FPY
WS2
* FPY
WS3
* ..
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Overall Equipment Effectiveness (OEE)
Measures a combination of availability, performance efficiency,
and quality for a machine or a process.
- Identifies waste caused by machine & process
inefficiencies.
Shows effective use of machine or cell.
- Can be collected by shift, by day, by product, or by
product family
How to calculate:
- OEE = Availability * Performance Efficiency * Quality
Availability = Operating Time / Net Available Time
Performance Efficiency = (Ideal Cycle Time * Total Products Run) / Operating Time
Quality = (Total Products Run Total Rejects) / Total Products Run
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Support Measurements
Enable the cell team to monitor and control important
aspects of their work which support the cells primary
responsibilities.
Cross training chart
Safety cross
5S Audit
Number of Improvement projects completed
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Cell-Level Performance Management
Establish Targets
Record Daily/Shift
Outcomes
Identify Problems &
Causes
Take Corrective Action
Record Daily/Shift
Outcomes
Obtain assistance if needed.
Notify improvement team when causes are
beyond scope of the cell team.
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Implementing Cell Measures
Exercise
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Acme Stamping Initiatives
Pacemaker Loop:
- Objectives
- Develop continuous flow from weld through assembly cell
- Kaizen work elements to reduce total cycle time to 168 seconds or
less
- Eliminate weld-fixture changeover time
- Improve uptime on welder # 2 to 100%
- Develop pull system with finished goods supermarket (eliminate
schedules)
- Goals
- Only 2 days of finished goods inventory
- No inventory between workstations
- Operate the cell with 3 people at current rate of demand
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Stamping Loop:
- Objectives
- Establish pull system with stamped-parts supermarket
- Reduce stamping batch sizes to 300 (LH) and 160 (RH)
- Reduce stamping changeover times to less than 10 minutes
- Goals
- Only 1 day of stamped bracket inventory in supermarket
- Batch sizes 300 and 160 pieces between changeovers
Supplier Loop:
- Objectives
- Develop pull system with steel coil supermarket
- Introduce daily coil delivery
- Goal
- Only 1.5 days of coil inventory in supermarket
Acme Stamping Initiatives (continued)
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Course Agenda
The Starter Set
Value Stream
Cell
Implementation
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Creating Performance Linkages
Strategic
Goals
Key Performance
Indicators and
Targets
Value Stream
Objectives
Value Stream
Measures
Cell
Objectives
Cell / Process
Measures
M
e
a
s
u
r
e
m
e
n
t
s
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Strategic Goals
What is the company trying to achieve?
- Financial
- Customers & markets
- Products & services
- Short-term & long-term
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Examples of Strategic Goals
Increase sales revenue and market share.
Increase cash-flow and reduce debt.
Create a culture of continuous improvement.
Maintain a stable and well-educated workforce.
Develop and commercialize new products.
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Corporate Objectives
How will the company achieve its Goals?
- Specify levels of achievement needed to attain the
companys strategic goals.
- Set specific and measurable targets.
- Establish specific achievement dates.
- Use goals to develop corporate performance
measurements.
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Examples of Corporate Objectives
Grow our revenue by 25% over the next 12 months and
increase market share to 15% in our 3 major markets.
Bring our debt down to less than $500,000 by year end.
Improve cash flow from operations by 25% by year end
65% of the workforce engaged in continuous improvement
projects by year-end.
Everybody in the company trained in 100% Safety by June.
All operations people trained in lean thinking by September.
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EBITDA
Inventory Turns
Strategic
Goals KPIs and targets
Linkage of Strategic Objectives to
Key Performance Indicators
Sales Growth
Grow our revenue
by 25% over the
next 12 months and
increase market
share to 15% in our
3 major markets.
Bring our debt
down to less than
$500,000 and
improve cash flow
from operations by
25%.
Sales per Employee
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Value Stream Objectives and Measures
Define the organizations value streams:
- Order fulfillment value streams, new account sales value
stream, product development value stream, etc.
Relate the value stream objectives to the corporate goals.
- The value stream objectives must be the outworking of the
corporate goals.
Use objectives to develop value stream performance
measurements.
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Linking Strategic Goals to
Value Stream Objectives
Increase Thru-Put by 15% with
Same Resources
Reduce Order Fulfillment Lead
Time from 12 to 3 days
Reduce AR days outstanding to
45 days.
Increase Inventory turns to 6 turns
Perfect Quality. Zero
product-faulty returns.
Improve Productivity. Cost per
Unit of $17.65 or less.
Strategic Goals
Grow our revenue by
25% over the next 12
months and increase
market share to 15%
in our 3 major
markets.
Bring our debt down
to less than $500,000
and improve cash
flow from operations
by 25%.
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Same Resources
Reduce AR days outstanding to 45
days.
Increase Inventory Turns to 6 turns
Improve Productivity. Cost per Unit
of $17.65 or less.
Sales per Person
On-Time Shipment
Dock-to-Dock Time
First Time Through
Average Cost per Unit
OEE at Constraint Work Center
to Measurements
Value Stream
Objectives
Value Stream Measures
Value Stream Gross Profit Percent
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Cell Objectives
Relate the cell goals to the value stream goals.
- The cell goals must be the outworking of the value stream
goals.
Use goals to develop cell performance measurements.
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Linking Value Stream Objectives to
Cellular Objectives
Value Stream Objectives Cellular Objectives
Same Resources
Reduce AR days outstanding to 45
days.
Increase Inventory Turns to 6 turns
Improve Productivity. Cost per Unit
of $17.65 or less.
Reduce Cycle Time
Build to Schedule
Reduce Batch Size
/Single Piece Flow
Eliminate Variability
Effective Visual
Management
Increase Operator
Flexibility
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Cell Objectives
Cell Performance
Measurements
Linkage of Cell Objectives to Cell
Measurements
Reduce Cycle Time
Build to Schedule
Reduce Batch Size
/Single Piece Flow
Effective Visual
Management
Increase Operator
Flexibility
Day by the Hour
Report
Days of Inventory
OEE
First Pass Yield
# Improvement
Projects Completed
5S Audit
Cross Training Chart
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Exercise
Using the forms on the following pages develop linkages
for the remaining objectives of the starter set reproduced
on the following page:
Grow sales and Increase Customer Satisfaction
Continuously Improve
Improve Employee Retention
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Strategic Goals
Value Stream Objectives Cell Objectives
Exercise: Summarize Linking Strategic Goals
to Value Stream Objectives to Cellular Objectives
Improve Employee
Satisfaction
Improve Customer
Satisfaction
Improve On-Time
Delivery
Perfect Quality
Increase
Responsiveness
Improve Customer
Value
Provide Increased
Flexibility
Reduce Number of
Safety Incidents
5S + Safety
Build to Demand
Reduce Cycle Time
Continuously Improve
Reduce Batch Size /
One Piece Flow
Institute Standard Work
Increase Opportunities
for Advancement
Increase Project
Participation
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Course Agenda
The Starter Set
Value Stream
Cell
Implementation
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Implementation Steps
1. Choose Your Implementation Approach using the Maturity Path
Implementing the starter set
Creating your own linkages
2. Introduce the Measures
Train the Employees
Define the Measurements
Create Visual Displays
Setup a Review Process
3. Manage Performance
4. Disseminate the information
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Lean Manufacturing Maturity Path
Pilot Lean
Production Cells
Lean
Manufacturing
Widespread
Lean Through-
Out Company &
Partners
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Successful lean cells
Extensive training in lean
principles
Kanban pull & 5S
SMED & quick change-over
Standard work
Quality at source & self-
inspection
Implementation Approach:
New cell level performance
measurements and targets
Pilot Lean
Production Cells
Lean
Manufacturing
Widespread
Lean Through-
Out Company &
Partners
Just Getting Started with Lean
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Stage 2: Lean Manufacturing by Value
Stream
Cellular manufacturing with std. work &
single-piece-flow
Extensive use of visual systems
Improvement teams trained &
established
Initial supplier certification & kanban pull
Manufacturing managed value stream
Process control through SPC
Work in Process and Finished Goods
Inventories relatively low & consistent
Integrated performance measurements at
value streams & strategic or corporate
levels
Pilot Lean
Production Cells
Lean
Manufacturing
Widespread
Lean Through-
Out Company &
Partners
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Stage 3: Lean Accounting
Throughout the Company & Partners
Company organized by value stream
Extensive cooperation with customers,
suppliers, & partners
Value streams extend outside our four
walls
Continuous improvement is a way of life
Lean throughout the enterprise
Target costing driven from the voice of
the customer linked to features and
characteristics
Target costing drives internal product
and process design
Target costing drives supplier product
design
Pilot Lean
Production Cells
Lean
Manufacturing
Widespread
Lean
Throughout Company &
Partners
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1. Choose Your Implementation Approach
Use the starter set of measurements
OR
Develop your own linkages between your corporate strategy and
performance measurements
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Implementing the Starter Set
Introduce the new cell level measurements.
Introduce the new value stream level measurements.
Introduce the new corporate or strategic level measurements.
Eliminate the old measurements.
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Creating Your Own Linkages
Although the standard measurement set is broadly
applicable, it is only a starting point.
Different companies have different strategies, and the
performance measurements will change according to the
changing strategy.
Working with a cross-functional team, step through the
process of creating performance measurements at the
strategic level, the value-stream level, and the cell/process
level.
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Creating Your Own Linkages (continued)
Requires careful and disciplined analysis.
- Identify how company strategy drives performance
measurements and performance measurements drive
behavior across the company.
Not a one-time exercise.
- Performance measurements change over time as the
companys strategy changes and as the market
conditions change.
Must involve people at all levels of the business.
- Make it truly cross-functional.
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Performance Measurement for Lean Manufacturing
Performance Measurement Definition
Value Stream

Cell or Process (if
applicable)

Define
Measurement

How to
Measure it

How to
Calculate it

Source of the
Data

Baseline Date: Result:
Targets Date: Result:
Frequency

Accountability

Presentation

Who Reports
the
Measurement

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Performance Measurements for Lean Manufacturing
Cell or Process Performance Measurements
Value Stream
Cell or Process
Value Stream Goals Value Stream Objectives
List the Relevant
Value Stream
Goals and
Objectives

Critical Success
Factors for
the Cell

Objective Date Objective Date List the
Objectives of the
Cell

List the
Performance
Measures

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Performance Measurements for Lean Manufacturing Value
Stream Performance Measurements
Value Stream
Define the Value
Stream

Strategic Goals Strategic Objectives
List the Relevant
Strategic Goals
and Objectives

Critical Success
Factors for the
Value Stream

Objective Date Objective Date List the
Objectives of the
Value Stream

List the
Performance
Measures

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Performance Measurement for Lean Manufacturing
Strategic Goals and Objectives
Company Strategy

Important Strategic
Issues Related to
Lean Manufacturing

Strategic Goal Strategic Objective Date

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Introduce New Measurements
Cell
Value
Stream
Corporate
Create cell performance
measurement board for
daily control.
Create performance
measurement board for
continuous improvement.
Design performance
measurement
presentation &
dissemination methods.
People Define the
Measurements
Create a Visual
Display
Set Up a Review
Process
Train the People
Train cell & process
team-members,
managers, &
accountants.
Train value stream
team-members,
managers &
accountants.
Train senior manager
& financial
accountants.
Cell team design
measurements with
accountants & lean
specialists.
Value stream team
design
measurements with
accountants & lean
specialists.
Financial
accountants and
lean specialists
design
measurements.
Establish daily
performance review for
each cell team.
Establish weekly
performance review for
continuous improvement
team.
Establish timely review
of corporate
measurements. Often
part of Sales & Ops.
Planning.
Introduce Lean Performance
Measurement System
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Introduction Tips
Make the presentation of measurements as simple and
graphic as possible.
Make sure there are places on the boards for the
people to write their comments and suggestions.
Train the people in the use of the measurements, as
well as in the mechanics of creating them.
If possible, have the people manually create their own
performance reporting each day or each week.
Eliminate all other performance reporting.
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Establish Baseline and Targets
Once the measurements have been determined and introduced, allow time
to establish a baseline.
- Allows you to understand where you are now on these measurements.
Have the people develop performance targets from an understanding of
the baseline:
- Base initial targets upon what is achievable.
- Later, set targets from a knowledge of what the customers value. Use
Quality Functional Deployment (QFD) and target costing.
- Later still, allow the teams to pursue perfection. As continuous
improvement becomes a way of life, targets become less necessary.
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4. Manage Performance
What performance management does:
- Enables the cell/process team to track & control their own processes
each day & each shift.
- Drives the value-stream continuous improvement team to make changes
that support the companys strategy.
- Enables the senior managers to monitor the companys progress towards
strategic goals.
What performance management does not do:
- Monitor individuals.
- Identify people doing the wrong things.
- Enable micro-management of the operation.
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Cell
Measure
Strategic
Goal
Value
Stream
Objective/
Target
Value
Stream
Measure
Cell
Improvement
Factors
Cell
Objective/
Target
Guide value
stream
direction
Refine
product/
market goals
Refine
financial goals
Refine
resource goals
Adjust value
stream results
that will
achieve
strategic goals
Set specific
target
Establish time
for
achievement
Measure the
attainment of
value stream
objective/
targets
Re-visit
specific lean
cell initiatives
that will
achieve the
value stream
goals/ targets
Adjust cell
results that
will achieve
value stream
objectives/
targets
Set specific
target
Establish time
for
achievement
Measure the
attainment of
cell
objectives/
targets
Strategic
Measure
Measure the
attainment of
Strategic
Goal
Performance Measurement Linkage Enables
Performance Management
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5. Disseminate the Information
Small companies with single locations.
- Visual and manual
- Sales & operations planning
More complex organizations.
- Visual & manual performance measurement locally
- Computer systems to disseminate the information
- Often using simple spreadsheets, database, and graphic presentation
- Sales & operations planning
Large, multi-location, complex organizations
- Visual & manual performance measurement locally
- Performance management and policy deployment systems
- Sales & operations planning and Hoshin policy deployment methods
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Course Agenda
The Starter Set
Value Stream
Cell
Implementation
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Summary The Problem
Traditional cost and management accounting measurements
motivate non-lean behavior.
If we continue to use traditional measurements we will not be
able to sustain lean manufacturing, because the
measurements will push back against the changes.
We cannot have two sets of measurements: one for financial
control and the other for operational control.
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Performance Measurements Should
Reinforce the Goals of Lean
Improvement Results
Short cycle times
Lower inventories
Higher quality
On-time delivery
Less machine downtime
Simpler planning & scheduling
Unfavorable Variances
Volume variances
Labor utilization variances
Machine utilization variances
Overhead absorption
variances
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Summary The Solution
New performance measurements are needed for Lean
Manufacturing.
Implement the starter set of performance measurements for
production cells, value streams, and the corporation.... or
develop your own!
Use performance measurements to drive your business
strategy throughout the organization.
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What Does a Lean Performance
Measurement System Look Like?
Strategically focused and aligned
Primarily non-financial
Simple and easy-to-use
- Manually created
- Graphically posted
Changes over time and between locations
Provides immediate and timely feedback
- Daily, weekly, monthly
Fosters continuous improvement
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How Will This Change What You
Measure Tomorrow?
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L E A N
E N T E R P R I S E
Thank You.
130

P E R F O R M A N C E M E A S U R E M E N T
F O R T H E L E A N E N T E R P R I S E
L E2 0 8
v1.0
APPENDICES
Recommended Readings
Glossary
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RECOMMENDED READINGS
Becoming Lean: Inside Stories of U.S. Manufacturers
by Jeffrey K. Liker
Productivity Press, 1998
Becoming Lean uses first-hand accounts, performance records, and real numbers to show how
actual U.S. manufacturers have gone lean. Learn what they learned about the logistical and
people issues related to a Lean transformation and what the results of that transformation meant
to these businesses.
The Goal (A Process of Ongoing Improvement)
by Eliyahu M. Goldratt and Jeff Cox
North River Press, 1992
The Goal introduced the Theory of Constraints to American business. A fast-paced novel, The
Goal uses fiction to vividly demonstrate how to overcome the barriers to making money. Used as
a management text in business schools across the United States, this book offers real world
guidance on identifying and solving chronic productivity and quality problems.
Lean Thinking
By James P. Womack and Daniel T. Jones
Simon & Schuster, 1998
In Lean Thinking, Womack and Jones show how the principles of Lean production, described in
The Machine That Changed the World, have been successfully applied outside the automobile
industry. They document the transformation of 25 U.S., Japanese, and German companies
through the application of Lean thinking. (The description of the arrival of the Japanese sensei
at the Porsche plant in Germany alone is worth buying the book.)
The Machine That Changed the World
By James P. Womack, Daniel T. Jones, and Daniel Roos
HarperCollins, 1991
The authors, who directed MIT's five-year study on the future of the automobile, explain the
development and the principles of Lean production. The descriptions of the application of the
process show not only how it works, but also why Lean manufacturing results in more cost-
efficient products and is transforming manufacturing around the world.
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World Class Manufacturing: The Next Decade
By Richard J. Schonberger
Free Press, 1996
How do you judge the worth of a company? In this book, Schonberger challenges the assumption that
worth is measured according to sales and profits. Using benchmark data derived from real-world
research, he shows how competence, capability, and customer-focused, employee driven performance
define worth and can be measured.
Toyota Production System
By Yasuhiro Monden
Engineering & Management Press, 1997
Toyota Production System provides detailed examples of how to apply the lean tools. It considers how to
adapt production schedules to the demand changes in the marketplace while satisfying the goals of low
cost, high quality, timely delivery, and improved worker morale.
Real Numbers: Management Accounting in a Lean Organization
By Jean E. Cunningham and Orest J. Flume with Emily Adams
Managing Times Press, 2003
Real Numbers describes how management accounting evolved to this point and how simplicity and clarity
can be restored, particularly in a lean organization.
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GLOSSARY
TERM DEFINITION
5S System A system designed to organize and standardize a workplace
and consisting of five component parts: Sort, Set in Order,
Shine, Standardize, and Sustain.
8 Wastes Wastes addressed by Lean manufacturing that include:
overproduction, waiting, transportation, non-value added
processing, excess inventory, defects, excess motion, and
underutilized people.
8D or 8Discipline The eight-step Ford methodology for problem solving.
Batch-and-Queue Processing Producing more than one piece of an item and then moving
those items forward to the next operation before they are all
actually needed there. Thus these items need to wait in a
queue. Also called Batch-and-Push. Contrast with
continuous flow.
Bottleneck A resource whose capacity is less than the demand put on it.
Buffer Inventory The strategically placed inventories that protect the material
flow and whose consumption set the schedules in a Pull
System.
Buffer Stock Finished goods available to meet Takt Time when variations
in customer demand exist.
Capacity-Based Lot Sizing An approach to calculating batches on a setup-intensive
resource that is based on the capacity of the resource, not
on unit cost.
Catchball The handing back and forth of information between workers
and management and the subsequent feedback.
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Cell Operating a true continuous flow on machines and workstations
placed close together in the order of processing, sometimes
called a U shape. Cell operators may handle multiple
processes, and the number of operators is changed when the
customer demand rate changes. The U shaped equipment
layout is used to allow more alternatives for distributing the
work elements among operators, and to permit the leadoff and
final operations to be performed by the same operator.
Cellular Manufacturing Linking of manual and machine operations into the most
efficient combination to maximize value-added content while
minimizing waste.
Changeover When a piece of equipment has to stop producing in order to be
fitted for producing a different item; for example, the installation
of a different processing tool in a metal working machine, a
different color paint in a painting system, a new plastic resin &
mold in an injection molding machine, loading different
software, and so on.
Charter A document that clearly defines the focused kaizen team
mission, scope of activities, risks, and deliverables (if required
by management to provide additional details).
Continuous Flow Processing The process by which items are produced and moved from one
processing step to the next one piece at a time. Each process
makes only the one piece that the next process needs, and the
transfer batch size is one. Also called single-piece flow or
one-piece flow. Contrast with batch-and-queue processing.
CONWIP Constant Work In Process. This is another way of defining
FIFO. (See FIFO.)
Core Team The designated group of people primarily responsible for
completing the details of the plan.
Cycle Time How frequently an item or product is actually completed by a
process, as timed by direct observation. Also, the time it takes
an operator to go through all of his or her work elements before
repeating them.
Defects Waste Inspection and repair of material in inventory.

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Demand/Customer Demand Also commonly referred to as Takt Time. (See Takt Time.)
Direct Consumption Kanban A Kanban approach which replenishes an inventory buffer in
the quantities withdrawn, thus allowing any variability in
customer demand to propagate through the supply chain.
EPEI Refers to the every-part-every interval, which is a basis for
production batch size. For example, if a machine is able to
change over and produce the required quantity of all the high-
running part types dedicated to it within three days, then the
production batch size for each individual part type is about
three day's worth of parts. Thus this machine is making every
part every (EPE) three days.
Excess Inventory Waste Any supply in excess of a one-piece flow through your
manufacturing process.
Extended Team Member An individual who provides expertise to the project team, but
will not have the responsibility of implementation.
Fabrication Process Segments of the value stream that respond to requirements
from internal customers. Fabrication processes are often
characterized by general-purpose equipment that changes over
to make a variety of components for different downstream
processes. Compare to pacemaker process.
FIFO Stands for first-in, first-out, which means that material
produced by one process is used up in the same order by the
next process. A FIFO queue is filled by the supplying process
and emptied by the customer process. When a FIFO queue
gets full, the supplying process must stop producing until the
customer process has used up some of the inventory. FIFO is
sometimes called CONWIP, or Constant Work In Process.
Fixed Replenishment Interval A production cycle in which goods must be produced in a fixed
sequence.
Flow A main objective of the entire Lean production effort, and one of
the key concepts that passed directly from Henry Ford to Taiichi
Ohno (Toyotas production manager after WWII). Ford
recognized that, ideally, production should flow continuously all
the way from raw material to the customer and envisioned
realizing that ideal through a production system that acted as
one long conveyor.

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Heijunka The act of leveling the variety and/or volume of items produced
at a process over a period of time. Used to avoid excessive
batching of product types and/or volume fluctuations, especially
at a pacemaker process.
Heijunka Box A physical device that visually displays the product family.
Pitch and work orders for meeting daily demand are
represented by Kanbans.
Inventory All of the money invested by purchasing goods intended for
sale.
Inventory buffer A quantity of inventory located at a specific point in the value
stream to protect the flow of material and to provide
replenishment schedules.
Just-in-Time (JIT) Producing or conveying only the items that are needed by the
next process when they are needed and in the quantity needed.
Kaizen Continuously improving in incremental steps.
Kanban
A signaling device that gives instruction for production or
conveyance of items in a Pull System. Can also be used to
perform Kaizen by reducing the number of Kanban in
circulation, which highlights line problems.
Kanban Quantity The replenishment quantity of material authorized by a Kanban.
Lead Time The time required for one piece to move all the way through a
process or value stream, from start to finish. Envision timing a
marked item as it moves from beginning to end.
Lean A systematic approach to identifying and eliminating waste
(non-value-added activities) through continuous improvement
by flowing the product at the pull of the customer in pursuit of
perfection.
Lean Enterprise The organization that fully understands, communicates,
implements, and sustains Lean concepts seamlessly
throughout all operational and functional areas.
Leveling The process or method used to distribute work within the value
stream to maximize material and information flow efficiency.

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Line Balancing A process in which work elements are evenly distributed within
the value stream to meet Takt Time.
Location Indicator A type of red tag that shows where an item belongs. These
include lines, arrows, labels, and signboards.
Material Handlers Production-support persons who travel repeatedly along
scheduled routes within a facility to transfer materials, supplies,
and parts in response to pull signals, and to make paced
withdrawal of finished goods at pacemaker processes.
Material Requirements
Planning (MRP)
A computerized system typically used to determine the quantity
and timing requirements for delivery and production of items.
Using MRP specifically to schedule production at processes in
a value stream results in Push production, because any
predetermined schedule is only an estimate of what the next
process will actually need. Manufacturing Resource Planning
(often called MRPII) expands MRP to include capacity planning,
a finance interface to translate operations planning into financial
terms, and a simulation tool to assess alternative production
plans.
Milk Run
Routing a delivery vehicle in a way that allows it to make
pickups or drop-offs at multiple locations on a single travel loop,
as opposed to making separate trips to each location.
Mixed-Model Scheduling An approach to scheduling final production processes which
smoothes out demand on the supply chain by producing some
of each item over the shortest possible time horizon. (See
Heijunka.)
Motion Waste Any movement of people or machines that does not add value
to the product or service.
Muda See Waste.
Non-Bottleneck A resource whose capacity exceeds the demands put on it.
Non-Repetitive Demand Independent demand that does not require inventory buffers to
meet customer service requirements.
Non-Value-Added Any activity that does not add market form or function or is not
necessary. (These activities should be eliminated, simplified,
reduced, or integrated.)

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Operating Expense The total amount of money spent to convert inventory into
throughput.
Operator Balance Chart A seven-step process used to meet customer demand or Takt
through optimal human and equipment efficiencies.
Order Point The buffer inventory level at which a replenishment order must
be placed.
Order Quantity The amount of a replenishment order.
Overproduction Making more than is required by the next process. Making
earlier than is required by the next process, or making faster
than is required by the next process.
Paced Withdrawal A timed sequence of withdrawal of finished product from the
pacemaker process. Paced withdrawal is a tool for pacing an
assembly process and becoming aware of production problems
within a pitch increment.
Pacemaker Process A series of production steps, frequently at the downstream
(customer) end of the value stream in a facility, that is
dedicated to a particular product family and responds to orders
from external customers. The pacemaker is the most important
process in a facility because how you operate here determines
how well you can serve the customer, and what the demand
pattern is like for upstream fabrication processes.
Pack-Out Quantity The number of units/parts that can be moved throughout the
value stream to ensure flow efficiency. Pack-out quantity may
or may not be customer driven.
Pitch When Takt Time is too short for a reasonable paced
withdrawal, it can be adjusted upward to a consistent increment
of work called pitch, which becomes the basic unit of your
production schedule for a product family. Pitch represents the
frequency at which you withdraw finished goods from a
pacemaker process as well as the corresponding amount of
schedule you release to that process. Pitch is often calculated
based on the customers ship container quantity.
Point of Use Storage (POUS) Raw material stored at the workstation where it is used.
Process Cycle Time The amount of time taken to produce one good part before it
continues to the next process in the value stream.

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Process Kaizen Improvements made at an individual process or in a specific
area. Sometimes called point Kaizen.
Processing Time The time a product is actually being worked on in a machine or
work area.
Processing Waste Effort that adds no value to the product or service from the
customers viewpoint.
Product Family A group of products that goes through the same or similar
downstream or assembly steps and equipment.
Production Kanban A printed card indicating the number of parts that must be
produced to replenish what has been consumed from the
supermarket.
Production Smoothing See Heijunka.
Pull System An information system for controlling and improving the flow of
materials and information and for allocating resources based on
actual consumption, not forecasted demand.
Push System A system where resources are provided to the consumer based
on forecasts or schedules.
Quality at the Source When operators are given the means to perform inspection at
the source, before they pass it along. A final inspection station
is not required when quality at the source is used.
Queue Time The time a product spends waiting in line for the next
processing step.
Quick Changeover Changing over a process to produce a different product in the
most efficient manner.
Red Tag (for 5S) A visible way to identify items that are not needed or in the
wrong place.
Repetitive Demand Independent demand that requires inventory buffers to support
required customer service levels.
Replenishment Interval The time interval between the receipt of replenishment orders
into an inventory buffer.
Runner A person on the production floor that paces the entire value
stream through the pick-up and delivery of materials through
Kanban utilization.
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Safety Stock Extra buffer inventory to cover fluctuations in customer demand
within the replenishment lead time.
Set in Order (for 5S) Step 2 of the 5S System. To identify the best location for
remaining items, relocate out of place items, set inventory
limits, and install temporary location indicators.
Shine (for 5S) Step 3 of the 5S System. To clean everything, inside and out
and to continue to inspect items by cleaning them and to
prevent dirt, grime, and contamination from occurring.
Signal Kanban A printed card indicating the number of parts that need to be
produced at a batch operation to replenish what has been
consumed from the supermarket.
Sort (for 5S) Step 1 of the 5S System. To perform Sort through and Sort
out, by placing a red tag on all unneeded items and moving
them to a temporary holding area. Within a predetermined time
the red tag items are disposed of, sold, moved or given away.
When in doubt, throw it out!
Standardize (for 5S) Step 4 of the 5S System. To create the rules for maintaining
and controlling the first 3 Ss and to use visual controls.
Standardized Work Operations safely carried out with all tasks organized in the
best-known sequence and using the most effective combination
of resources (people, materials, methods, machines).
Storyboard A visual representation of all the main activities of a Lean
project from start to finish.
Supermarket A controlled inventory of items that is used to schedule
production at an upstream process.
Sustain (for 5S) Step 5 of the 5S System. To ensure adherence to the 5S
standards through communication, training, and self-discipline.
System Kaizen Improvement aimed at an entire value system.
Takt Image The time frame or window that prevails throughout the value
stream acknowledging, identifying, and communicating a
certain quantity of parts that should have been produced.

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Takt Time The rate of customer demand: how often the customer requires
one finished item. Takt Time is used to design assembly and
pacemaker processes, to assess production conditions, to
calculate pitch, to develop material handling containerization
and routes, to determine problem-response requirements, and
so on. Takt is the heartbeat of a Lean system. Takt Time is
calculated by dividing production time by the quantity the
customer requires in that time.
Theory of Constraints A management approach that is based on identifying system
constraints, exploiting the constraints, subordinating everything
else to the constraints, improving on the constraints, and then
repeating the process.
Throughput The rate at which money is generated through sales.
Total Product Cycle Time The total individual processing time of a particular process or
for the product throughout the value stream. Total product
cycle time would ideally be equal to total value-added time.
Total Productive Maintenance
(TPM)
A systematic approach to the elimination of equipment
downtime as a waste factor.
Transportation Waste The waste of unnecessarily transporting parts and materials
around the plant.
Underutilized People Waste The waste of not using peoples mental, creative, and physical
skills and abilities.
U-Shaped Cells U-shaped, product-oriented cell layouts that allow an
operator(s) to produce and transfer parts one piece, or one
small lot, at a time.
Value A product or services capability provided to a customer at the
right time, at an appropriate price, as defined in each case by
the customer.
Value-Added Any activity that increases the market form or function of the
product or service. (These are things the customer is willing to
pay for.)
Value-Added Time Time for those work elements that transform the product in a
way the customer is willing to pay for.

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Value Stream All activities, both value added and non-value added, required
to bring a product from raw material into the hands of the
customer, a customer requirement from order to delivery, and a
design from concept to launch. Value stream improvement
usually begins at the door-to-door level within a facility, and
then expands outward to eventually encompass the full value
stream.
Value Stream Loops Segments of a value stream whose boundaries are typically
marked by supermarkets. Breaking a value stream into loops is
a way to divide future state implementation into manageable
pieces.
Value Stream Manager The person responsible for creating a future state map and
leading door-to-door implementation of the future state for a
particular product family. This person makes change happen
across departmental and functional boundaries.
Value Stream Mapping A pencil-and-paper tool used in the following two stages:
1. To follow a products production path from beginning to end
and draw a visual representation of every process in the
material and information flows.
2. To then draw a future state map of how value should flow.
The most important map is the future state map.
Value Stream Methodology A sequential process used to implement Lean concepts and
tools derived from the Toyota Production System for the
purpose of attaining a waste-less flow of product throughout the
value stream.
Visual Controls Simple signals that provide an immediate understanding of a
situation or condition. They are efficient, self-regulating, and
worker managed.
Waiting Waste Idle time created when waiting for anything in a manufacturing
process.
Waste Any activity that consumes resources but creates no value for
the customer.
WIP Stands for work in process. Any inventory between raw
material and finished goods.

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Withdrawal Kanban A printed card indicating the number of parts that will be
removed from the supermarket.
Work Place Organization A safe, clean, neat, arrangement of the workplace that provides
a specific location for everything, and eliminates anything not
required.

145

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