Measuring the Bottom Line: How to Calculate a Lean Fulfillment Stream’s ROI

“There is no line item on my balance sheet for ‘lean." – Paul Kaufman, CFO, Slumberland Furniture.

I am one of the lucky lean logistics managers on-site at my customer's facility. My customer intuitively (From the President to the CFO) understands the value of improving the Lean Fulfillment Stream. At LeanCor, however, it’s very important that we are able to communicate the Lean Fulfillment Stream's’ total cost with data and measurements to successful communicate our customer’s “Return on Investment” in lean (or the value of LeanCor).

Overall costs of fulfillment stream are captured in a total cost of fulfillment statement. These statements measure the impact of fulfillment-stream improvements on operational performance and income. Building a Lean Fulfillment Stream, p. 23

Using the Total Cost of Fulfillment model, as outlined above, I set out to develop a tool to model the costs and variables that existed within the stream, to then communicate the “LeanCor ROI”. Making this total cost visible to all levels at Slumberland would help me gain support from all levels for all Lean improvements.

Step 1: Gather The Data And Establish a Baseline

Sometimes not all of our customers have “complete” or “easily” traceable data - this is why it is important to set up inputs that 1) can easily be tracked from month to month and 2) are agreed “Total Logistics Cost” inputs from your customer.

We were able to capture cost in Outbound Logistics, Shipping, receiving and trailer yard management, material ordering, Inbound logistics, Supplier collaboration, and Inventory carrying costs.

Step 2: Measure, Measure, Measure

My customer wasn’t able to provide a “baseline” Total Cost, as some of the data elements didn’t exist a year ago - but we were able to get data back for a full year – and then continued to measure month over month.

Step 3: Determine a Relative Measure

Just as sales go up and down so do our costs each month as our workload shifts to meet changing customer demands. It is important that we relate the Total Cost as a percentage of an activity in order to make our data “scalable” – this avoids the “Shipping cost $500,000 more thismonth” argument, because well as a % of sales it’s less than last month!

Step 4: Calculate ROI YTD

To translate “Lean” in to the bottom line we multiple the % delta year over year and multiple by Sales – or in my case Material Received. I calculate ROI YTD in order to communicate a “running total” – because even if we have a bad month – or negative delta – we might still have a positive ROI.

Step 5: Continuously Improve and Check Adjust

Now that we have a measurement signed off by the customer, we can continuously improve our Total Cost of the Lean Fulfillment Stream.

Every month my customer and I review LeanCor’s ROI along with 3 other measurements we have determined to be important strategic partnership measurements. This has allowed for a non bias – “red, yellow, green” approach to answer the question “Do we have a happy customer?” and “What is LeanCor’s value?”.'

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Posted by LeanCor Supply Chain Group

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LeanCor Supply Chain Group is a trusted supply chain partner that specializes in lean principles to deliver operational improvement. LeanCor’s three integrated divisions – LeanCor Training and Education, LeanCor Consulting, and LeanCor Logistics – help organizations eliminate waste, drive down costs, and build a culture of continuous improvement.

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