Spring 2013 issue of Horizons

MANUFACTURING & DISTRIBUTION

Increases in activities and related costs that are necessary and add value, should result in increased sales, enhanced selling prices or both. Management should consider making additional investments in these costs to drive profits higher. On the other end of the spectrum, management should try to eliminate non- value-added costs that are not critical to the end user and minimize non-value-added costs that are still necessary to the process. Measuring Success Measuring the success of any process improvement can be difficult. The ultimate measure of success is net income. Sometimes improvements made do not result in immediate enhancement to the bottom line.

Measuring progress made can be very important to maintaining your process improvement culture. More than half of those who responded to our survey and attended RubinBrown’s Lean Roundtable indicated that they did not have a formal measurement system in place or indicated they use an ad hoc method of monitoring. Monitoring improvement in the “value- added-ratio” is one way to communicate progress to management and your team. The value-added ratio is calculated as the ratio of identified value-added expenses to total expenses. Increases in this percentage indicate you are eliminating or reducing non-value-added costs.

Following is a sample calculation:

Value-Added

Depreciation of equipment

20,000

Freight expense

75,000

Retail locations expenses

150,000

Total Value-Added

245,000

Non-Value-Added

Advertising

15,000

Freight - branch transfers

65,000

Material handling

35,000

Office utilities

20,000

Management

100,000

Regulatory compliance

60,000

Total Non-Value-Added

295,000

Value-Added Ratio

45.4%

page 42 | horizons Spring 2013