Analysing the impact of the implementation of lean manufacturing strategies on profitability

Under standard cost accounting systems, reductions in inventories lead to falling reported profits. Rapid reductions in inventories intensify the impact to the bottom line. When a company embarks on an improvement programme such as lean manufacturing, a likely result will be an initial drop in reported profits due to the leaning out of inventories. This paper examines the impact of the adoption of such strategies on the key external financial performance measure of net profit as reported by the GAAP and SEC approved financial accounting methods and others. ANOVA analysis of data generated using a simulated manufacturing environment that includes a discrete event model of a manufacturing operation and a Microsoft Excel-based ERP system are discussed. The paper analyses both the magnitude of the reduction in reported profits and the span of reporting periods affected under three inventory reduction scenarios. This research was not concerned with finding justification for lean manufacturing strategies. Rather, it evaluates the inadequacies of standard financial reporting methods to accurately reflect operational improvements through the early stages of a lean programme.