Monday, November 17, 2014

Focus and Leverage Part 394

The other day I was having a conversation with someone about continuous improvement in general and he asked me how I defined a true improvement and how did I measure its impact.  I thought both were really good questions, so today I want to share the gist of our conversation.

If we look back through the history of continuous improvement methodologies there is a list of topics and acronyms that could fill an entire sheet of paper.  Just think about it for a minute,  We've had Total Quality Management (TQM), Business Process Re-Engineering (BPR), and so many others.  It seems that  new waves burst onto the scene, stays in vogue for a relatively brief amount of time and then are replaced with the newest fad.  Think about it....if these methodologies had been so successful, then why didn't they last?  The fact of the matter is, at least in my opinion, that the savings proclaimed by these methods didn't fall to the bottom line as they were expected to do by the leadership of many companies. 

Today, we have three predominant methodologies with each proclaiming that they are the real deal and unfortunately they  all seem to be in competition with each other.  Lean, Six Sigma and the Theory of Constraints are the three "newest" fads and they all have their zealots proclaiming there's is the best.  I suppose, if history repeats itself, these three will also suffer the same fate as all of the others and will fall into disfavor and be abandoned due to lack of results and payback.  For me, the reason many improvement initiatives fail to deliver acceptable bottom line improvements is not because of the methodologies and tools themselves, it's more because of the way improvement savings are calculated.  So what do I mean by that?

In so many companies that I have gone into, I see labor hours being reduced for a particular job and the labor hours are claimed as savings when in fact they do not fall to the bottom line.  I've seen wastes like too many steps to complete a product being "eliminated" but they can't seem to find these  "savings" actually falling to the bottom line. I've seen celebrations of how fantastic their continuous improvement initiative is performing and yet, the savings proclaimed don't show up on the bottom line.  If this sounds familiar, it's because it happens every day in virtually every company.  For me, the answer to this scenario is the method used to view improvements.  So the first question is, "What is the definition of improvement?" 

In order to effectively answer this question, we need to know what the company's goal is.  If the company is a for-profit company, which most are, then the over-arching goal is to make money now and in the future.  So if this is the goal, then how should we approach the definition of improvement?  The way I look at this is, real improvement must positively impact the goal or in other words, the improvement must improve profit margins.  Reducing hours for a particular job does not necessarily improve profits.  Let me explain this in more detail.

The above figure represents a company's main process for producing their product.  The steps are listed as A, B, C, D, E, and F with the time it takes to produce a single unit of product.  The market is strong so if this company could produce more units, it could sell them.  The revenue for a single product is $500 and the raw material cost per unit is $100.  This company has an active continuous improvement initiative in place with many on-going projects.  One of the projects is in Step B, currently taking 8 minutes to complete.  The team came up with an improvement idea to reduce this step from 8 minutes down to 4 four minutes, a whopping 50 % reduction in time.  The team has calculated their improvement and explained that they should be able to make twice as many products that they currently make.  Leadership congratulates the team and gives them all a small bonus.

Another team is working on Step E which currently takes 30 minutes to complete.  This team has come up with an improvement idea that reduces the time for Step E to 26 minutes (13.4% reduction), but nobody is excited about it, so no bonus is given.  Both improvement ideas cost $1,000 to implement.  My question to you is, "Which improvement team's project would you select if you were the CEO and why would you select it?"  Remember, we're looking at which improvement contributed the most to profit improvement.  I'll give you my answer in my next posting.

Bob Sproull


Ashwin Vyas said...

E. Isn't it obvious! :)

Bob Sproull said...

Hi Ashwin. It may be obvious to some, but not to everyone. The main purpose of my blog is to present different ways of thinking to all, so if you have time, please expand your response as to why it's obvious to you. I will be including Throughput Accounting into my answer. Thanks for the comment. Bob

Ashwin Vyas said...

"Isn't it obvious!" was a tongue-in-cheek pointer to Dr. Goldratt. :)

My thinking is that a 4-min time saving at Step E will compress the overall production time by over 7% (from 57 to 53 min), while a speed improvement at Step B will not reduce the overall production time at all.

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