How to Apply Lean Six Sigma Principles to Improve financial Strength

During the economic downturn, demand for construction plummeted forcing contractors to face a new normal. Contractors were expected to maintain a high level of service at break-even or loss margins.  New competitors created downward pressure on bid pricing which radically reduced opportunities to replace backlog at reasonable margins for new projects.

One large commercial general contractor felt the pressure to face this new normal. The challenges of the recession made it more important than ever for the Company’s principals and management team to monitor their financial performance, both on a job-by-job basis as well as company-wide. A closer evaluation of their financial records in 2011 as compared to 2010 revealed a 21% decline in contract revenues, 50% decline in gross profit, and a rapidly shrinking of net income.  On top of that, the accounting department’s reports showed a projected net loss for 2012.

The management team recognized the need for timelier financial reporting to make better informed decisions in order to properly manage and improve their financial position.  At the time, the accounting department was working tirelessly, putting in significant amounts of overtime – almost every weekend for several months – to compile quarterly financials which were typically ready for review 60—90 days after quarter end.  The principals began investigating options to address these challenges – basically, the need to do more with less – and decided to work with an outside consultant certified in Lean Six Sigma to improve its accounting processes.

What is Lean Six Sigma?

Lean Six Sigma (“lean”) is the combination of two process improvement methodologies focused on increasing efficiency and quality in a process, by identifying non-value added activities (i.e.: wastes) and eliminating them. Simply put, it’s a way to do things better. For decades manufacturers have been using lean to improve production output, quality, and customer value. Over the past two decades, other industries have realized the significant benefits from using lean concepts to improve their processes as well. Although most corporate leaders have heard of lean manufacturing, they don’t realize how applying lean can have profound effects on their companies by improving productivity, customer value, employee morale, and ultimately profitability.

The Project

The Company’s initial goal was to reduce its financial closing and reporting process from 60 to 90 days on a quarterly basis to 15 days on a monthly basis to allow the principals and management to make more informed decisions using real-time financial reports. However, after addressing the details associated with this project, the focus turned to the Company’s cash disbursement process because of its significant role in the closing and reporting process timing.

A team comprised of 12 of the Company’s employees was formed to tackle this project. Formation of the team was strategic, in order to encompass a cross function of different departments and levels within the Company. The team included two principals, the entire accounting department, a vice president, a director, and a project manager, each representing various operational divisions. They had specific knowledge of the processes, which was critical to the project’s success. The items they introduced were evaluated and prioritized by the two facilitators certified in Lean Six Sigma.

Goals and Solutions

The team met for several days during a two-month period to analyze and review current processes, identify critical areas for improvement, and develop solutions associated with each process based on lean techniques and procedures.  The following goals and solutions, unique to the culture of the Company, were developed by the team.

Goal 1: Improve relationships and communication with customers, subcontractors, and suppliers for timely receipt of documents required to make payment.

Solution: Deliberate conversations between project managers and subcontractors regarding the importance of timely receipt of pay applications, insurance waivers, and lien releases, and establish consequences for untimely payment if the appropriate documents are not received.

Solution: Implement a paperless system for subcontractors to provide documents that do not require original signatures.

Goal 2: Better communication between operations and accounting departments to improve the documentation provided by project managers to accounting.

Solution: Develop and implement training programs for all personnel involved in the cash disbursement process, including reference guides for project managers to use when coding accounting documents.

Solution: Implement a paperless system for document sharing between project management and accounting personnel.

Goal 3: More timely and meaningful internal financial reporting to decision-makers.

Solution: Deliberate conversations between the principals, management team, and accounting department to determine which financial reports are meaningful for timely decision-making. Eliminate all other reports from the monthly reporting process.

Solution: Work with internal and external IT support to automate reports within the Company’s accounting system.

It’s difficult for an established company to undergo a major cultural shift by adopting a new philosophy.  The team recognized the complexity of their situation and responded by creating a detailed timeline over one year for the rollout of these solutions.  They also retained the facilitators to meet with them every other month to review the progress of implementation, add accountability for meeting progress goals, and provide outside perspective and lean expertise when solutions needed to be adjusted.

While some solutions can be implemented within a short time frame, others may take months. Just as inefficiencies do not occur overnight, the efficiencies that go along with implementation of the solutions will also not occur overnight. Rollout of a new process requires strategy, training, and accountability to sustain the gains. The creation of a timeline and the retention of experts on a part-time basis will help companies meet their end goals.

The Results

Almost three years later, the Company is still reaping the benefits of implementation of lean. After project completion, the Company lost three high-level key accounting personnel, who have yet to be replaced. With a reduced head-count in the accounting department, they still generate monthly financial reports for principals and management within one to two weeks of month-end, while working more reasonable hours with improved employee morale.

The Company also leveraged their gained capacity to focus on their client’s needs and to seek out additional business development opportunities. They experienced improved financial and operational strength, giving them an advantage over many of their competitors who are now financially weakened from the recession. Their backlog continues to grow as pent up demand in their market materializes into good projects, and they have the financial resources and management experience to weather the poorer contracts that are approaching completion.

The recession is now labeled a recovery and jobs are becoming more prevalent within the construction industry.  Contractors now face labor shortages and struggle to staff their jobs in today’s recovering economy.  Doing more with less is as important today as it was five years ago. By developing a culture that seeks continuous improvement and conducting periodic and purposeful reassessment of processes, contractors can maintain their edge in challenging environments and stay ahead of the competition.

During the economic downturn, demand for construction plummeted, forcing contractors to face a new normal. Contractors were expected to maintain a high level of service at break-even or loss margins. New competitors created downward pressure on bid pricing, which radically reduced opportunities to replace backlog

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