Operations people who’ve spent a lot of time and effort on Lean Transformation or Six Sigma cost improvement projects, are sometimes disappointed with the lack of enthusiasm from the Finance people.

An operations manager once said to me.

“We improved the process and had excellent operational results, but there was very little change in the company bottom line. How’s that even possible?”

Everyone in Operations thought they were doing a great job, but the Finance staff couldn’t see any results. It’s no wonder their enthusiasm was muted.

So how IS that possible?

Well, it’s usually because the relationship between direct and indirect costs are not understood, or worst, are hidden. Direct costs, like labor and material, are clean and easily trackable, but indirect costs, like everything else, are not.

It reminds me of a story about a well-known manufacturing company who decided to automate their main assembly line. Operating efficiency went up and direct costs fell dramatically. The operations improvement decision seemed to be a great success.

However, almost immediately indirect costs started to go up, even more dramatically. When some analysis was done, it was found that an army of high-salaried robotics engineers were hired to support the automation. Programming and service downtime were hurting flexibility, and, in fact, the entire line was not producing as much!

Eventually they were forced to roll back the project because the indirect costs had not only eaten up all the direct labor savings but was putting on-time delivery and competitiveness at risk.

A change like this must result in a reduction of total cost, not just the direct part of it. A clear picture of the "before" & "after" impact of shop floor decisions needs a lot of analysis but it is absolutely vital to company survival.