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OVERVIEW

Does lean manufacturing impact the six “don’ts” of working capital? Absolutely! Lean manufacturing focuses on reducing waste, ultimately causing an increase in working capital. Each mistake will be addressed in a little more detail, specifically pointing out how lean manufacturing could change a “don’t” to a “do”. However, not all of the mentioned mistakes are easy to see how the implementation of lean manufacturing could make an impact.

MISTAKE 1

Managing to the Income Statement

Managing to the income statement is one mistake where a lean environment would benefit. Since lean focuses on freeing up working capital, shifting the focus from the income statement to the balance sheet is a good start. The introduction of lean manufacturing generally leads to decreased profits during the beginning stages of implementation due to inventory reductions, write-offs, and increased payables from smaller, more frequent orders. Shifting the focus away from the income statement to the balance sheet allows management to see potential immediate benefits without relying only on earnings. When companies manage to the income statement they may get a false sense of failure due to the decreased profits, but by focusing on the balance sheet, especially inventory, poor manufacturing processes and/or inventory control may be brought to light where under the current method could remain hidden until it is too late.

Holding managers accountable for balance sheet items as well as profits prevents managers from showing increased profits due to volume discounts which can result in increased inventories and payables. If a manager is responsible for not only the profits but inventory levels and over-due receivables, he or she will make choices that benefit the company as a whole, not just the profit center.

MISTAKE 2

Rewarding the Sales Force for Growth Alone

By rewarding the sales group for growth alone, companies are missing a...