The fifth aim of Lean Accounting is that we highlight the impact of process improvement. So we use our Lean Accounting methods to show the benefits of our investment in improvement. To start to do this, we need to revisit the purpose of Lean Accounting. And to remember that Lean Accounting was developed to provide management accounting support for the lean philosophy, and that it focuses on improving the speed and efficiency of a process in order to create capacity to allow us to do more profitable work. That means that the time and financial investment in improvement will be justified by the increase in contribution that using this additional capacity brings. And that's quite a straightforward formula if you think about it.

Lean Accounting provides the measures and data to support process improvement, looks at the flow and looks at quality through the purchase. SS. And it's saying that by improving the process, we will create capacity, which allows us to do more work and therefore generate more revenue. And therefore this additional contribution that's been bought by improvement allows us to justify the investment of time, and money and improvement activities. It's actually quite a straightforward, logical way to think. And we can use the tools of Lean Accounting to help us do this.

So let's look at that. Our first priority then, is to value the increasing capacity that we've created by undertaking improvement. And this is best shown with an example as I have here on the screen. Let's say that a process currently costs $100,000 a month to run and delivers sales of $150,000 a month. And clearly that's a contribution of $50,000 per month 33%. Now we have the opportunity to expand sales, we can target new customers and new markets.

We could expand sales to $200,000 a month. But we currently don't have the capacity in our process in house to be able to deliver this additional income. So what are we going to do? We could invest in new capacity, but we might not have access to the capital. And we might not wish to add to our overheads or to our gearing. The only other alternative is to improve the capacity of the process so that it can carry out the extra work.

I undertake improvement activity using our lean philosophy using our Lean Accounting tools. If we can reduce the end to end time of the process, which is one of the measures we looked at earlier, the time the elapsed time from order entry to delivery, if we can reduce it from the current 10 working days through our improvement efforts to six working days, then we'll be able to cope with this order in house with the same level of operating expenses. That means that contribution would increase to $66,600 per month. Our investment and improvement activity they're spending time for the team to review and evaluate the process and streamline the efficiency of the process would generate nearly $200,000 additional contribution per annum. And we note here one of the key points of Lean Accounting that the cost of running the process remains the same. We've employed the same people with the same equipment.

The only change is the marginal cost of materials for the extra service, extra products and any additional energy cost or other marginal costs. As well as looking at the additional contribution that our improvement generates. We can also look at the other benefits of improvement and these include some cost savings. For example, by improving the quality of the process. We will reduce the cost of scrap rework, and therefore save material costs and save energy costs for we work, perhaps we can estimate what those savings will be. We will reduce inventory particularly work in progress inventory, but also less finished goods inventory, because we're able to satisfy customer orders more quickly.

And this will clearly have a cash flow benefit, which we may be able to estimate. Additionally, the streamline process should take up less space. We discussed this under the value stream profit and loss account charging for space taken up by the value stream. And this frees up space for other revenue generating activities. So perhaps we can estimate the opportunity cost of the space freed up. Next, fulfilling customer orders more quickly means better customer satisfaction.

And that means that more customer orders, it might even mean more premium priced expressed orders to can we estimate the value of these additional orders Finally, a more engaged and involved workforce means less employee turnover, which means less recruitment and training costs. So there's a saving there that we can estimate to. Just remember that in lean and Lean Accounting, we do not attempt to reduce headcount that would stifle improvement activity and improvement culture, who would willingly improve themselves out of a job, that sort of activity will soon stop any improvement culture in its tracks. The box score, the weekly performance management tool that we saw earlier, can also be used to show the impact of improvement. So on the screen here, we see two options being evaluated for this organization. We have the current state, which is the latest quarter for in house production of this product, whatever it is, we have the possibility of outsourcing something called the low vowel, a valve and we have the impact of Introducing the high vowel pro a new product and we see the changes that these options bring to the performance measures to the capacity and to the financial performance.

So, the end to end flow time is unaffected by the outsourcing and by the introduction of the new product, because it has the same flow time we see the inventory days rise with the outsourcing and then with the introduction of the new product, because the company needs to carry an additional safety stock because this low Val product which is outsourced has a long supply chain. We see scrap and rework being reduced as quality issues are being tackled and the same with returns and with customer satisfaction. In terms of capacity. We see that outsourcing, which is the first step reduces the productive capacity and creates available capacity. Obviously, we're taking a product out of in house production and sending it to another producer. And then we're introducing the hi Val, so a better value product that uses up some more productive capacity, but still leaves 10% available capacity for future use possibly.

And therefore we see the impact on revenue. So outsourcing doesn't impact sales revenue, because we're still selling this low Val, we've just outsource production. But now we're introducing the new product, the high Val, and the quality issues have also been addressed. So sales revenue increases. material costs, of course, reduce without sourcing, because that's replaced by the outsourcing cost line below. And then the material costs increase when we introduce the new product.

Staff costs remain the same, because we still have the same staff working within the process. We have some depreciation with the high Val, presumably we've had to introduce a new machine for this new product. We have a one off quality credit cost for the outsourcing to resolve the quality issues that were experienced. And we had the outsourcing cost, so that we see from the current state of a 26% value stream of contribution. Outsourcing alone would reduce that to 18%. Because of the additional outsourcing cost, however, it does free up capacity, which we then use to introduce the new product, the high Val Pro, that increases the value stream contribution to a total of 157,000 euros or dollars or pounds actually in this case, and that increases the value stream contribution to 28%.

So, the total project for outsourcing one product so that we can introduce a new higher value product does increase value stream contribution does help us improve some of our performance measures, and therefore, we can see the financial benefit of this initiative. which in this case is a financial benefit of 35,000 pounds per quarter these figures are for. So in Lean Accounting, it's relatively easy to show the financial benefit of improvement activity. We need to look at the increased contribution, that the improvement activity allows us to bring into the business by freeing up capacity to allow us to do new work. And we can also see that improving quality improving process times etc. will give us some cost savings in terms of material and energy and so on.