How to make traffic return on investment. Of course, if you drastically reduce your operating costs in order to increase your return on investment with bad investments, most likely you will end up jeopardizing the desired result and get the opposite effect. Finally, when processes are more flexible, investments are often not needed.
The real question is not, can ROI and Lean coexist? But can a strategy increase the chances of increasing return on investment? The answer is definitely yes. Let’s go back to the ROI formula: (profit / sale) x (sales / investment). In this case, the return on investment is affected by sales, profits and investments. Please note that sales are indicated both in the numerator and in the denominator, which gives them additional weight.
This was not a financial issue, but rather a logistic one. Toyota was interested in how to increase the flexibility and speed of the workflow in order to satisfy demand without requiring additional investments, since there was no money for it. The answers they received created an approach that focuses on eliminating work that does not add value to the customer, thereby providing a source of growth for the same assets, both employees and machines. They probably did not think about how this would affect the return on investment, because they were clearly focused on the things necessary for their survival: to satisfy a client with limited resources.
As a result, they discovered a new observation method that actually determines what affects ROI. And thanks to the multiplier effect contained in the ROI formula, they created a method for exponentially increasing ROI. Each of its components is explained below. Considering the ROI formula, we start with a percentage of sales, which is the result of sales minus costs divided by sales. Costs are the sum of the costs of raw materials, labor, general and logistics costs, classified as production, trade or administrative. In other words, it is profit before interest and taxes (EBIT). Let’s start with the costs.
Raw materials / components: most companies produce a lot of waste. This waste may be due to poor design or due to poor manufacturing processes or both. However, the information system does not detect this, since standard costs include a loss coefficient determined by average values for past periods. While the company is at a historical level, the system shows a small or zero output variance.
In other words, waste is institutionalized by a standard cost system, and low deviations suggest that there are no problems. The share of components in the cost of sales is usually 60%, and for scrap – 5%. Waste management can improve sales and EBIT by three points. For most enterprises, this is far from insignificant. How to make a perfect first time to reduce scrap? In mass production, products may be defective at some stage of manufacture, but not detected until the next stage, which may be in days, weeks, or months. At the moment, thousands of components are faulty and should be fixed, if possible, or discarded.
Over time, it becomes impossible to determine the cause of the malfunction. When the Lean strategy is implemented, the defective product is detected immediately, and the amount of waste approaches zero, since the rule to stop production requires countermeasures before resuming production. Lean exponentially improves product quality and eliminates almost all waste, increasing return on investment. Labor: although accountants in manufacturing companies like to say that direct labor is less than 10% of total costs, the reality is that staff costs are number one costs, which are called direct, indirect, commercial or administrative. Most companies see employees as value. There are many historical reasons for this, but the fact is that this way of thinking was codified in accounting rules: many employees are classified as variable or flexible costs. And they are treated according to the same logic.
Almost all companies consider their employees “their most important asset,” but when you see how they relate to them, you understand that these are just words. The historical approach to personnel management is to consider this value as a variable and adjust it to maintain a ratio of personnel costs and sales. In an enterprise focused on workers, these are the only assets that can increase in value. They represent capital in human resources. Other assets, such as buildings and cars, depreciate over time.