A culture of continuous improvement is vital for success. Leading companies engrain this mindset at all levels of the organization, and provide the necessary resources and management support to sustain initiatives. However, many senior managers are beginning to ask for more. They want to know precisely how any change in the operational environment will specifically impact the financials at the end of the reporting period.
Unless you can demonstrate the bottom line impact of any proposed operational improvement on a financial statement, there is no real improvement! Managers are less willing to sign on for changes with only the “promises of a better tomorrow.” They need something more substantial before they commit valuable time and resources to implementing the best ideas of your domain experts. In addition, they want to leapfrog continuous improvements and proceed directly to the “optimum” process and policy configuration to maximize performance.
Critical Management Questions in a Multi-Product and Multi-Workflow Environment
Managers convey to us several critical questions when it comes to reconfiguring processes and policies for superior performance.
- How do you know that the proposed change will improve the business?
- Can you guarantee that it won’t actually make things worse?
- How much will it cost and what is the return on investment?
- What is the financial performance of each product and workflow in our multi-product and multi-workflow environment?
Until now, it was not easy to obtain clear answers to these questions. Savvy managers can see right through hollow answers. Either show them the data or move on to something else. Fortunately, a benefit to answering the last question is that it also contains the answers to the above management questions. Financial insight at the level of products and workflows tells you your precise costs, and is a starting point for improving performance throughout the value stream.
Optimize the Value Stream Flow
Optimizing the value stream flow creates the best possible operational and financial performance for any given business context. The following figure represents all of the operations in a Strategic Business Unit (SBU). The rows represent different products and the columns represent different operations and activities involved in the production of a product or service. Collectively, the products and workflows represent all of the value steams for an SBU.
Typically, companies take the best advice from their domain experts as they set out to resolve operational challenges. Investing in new technologies and reconfiguring a line is a common solution approach. Yet, senior managers often confide that neither they nor their experts know which one is the best new configuration to adopt out of several reasonable possibilities. They are also not sure whether the new equipment is worth the investment.
The problem is they have been burned in the past. Previous investments in automation may have modernized production processes, but the cost savings never materialized over the years. Moreover, managers often report that previous technology investments have actually reduced their flexibility to quickly respond to market changes.
Drive Effectiveness In and Costs Out of the SBU
We frequently see how technology issues such as the deployment of robots impact business performance. A robot, for instance, is installed to feed parts into three independent grinding or polishing stations. If either the robot fails or any of the stations fail, the whole operation comprised of the four pieces of equipment (1 robot, 3 stations) ceases production.
Unintended consequences of this configuration can include: (a) exacerbated failure time behavior because all three grinding operations come to a halt if any of the four operations fail, (b) reduced flexibility for handling changes in product mix due to constraints imposed by the configuration of the robot and three stations, and (c) increased indirect labor cost for the more expensive technical personnel who are on call to support the technology.
The central management issue is not whether automation is helpful or not, but how well the proposed changes in automation plus all other changes in the SBU collectively roll up to produce measurable financial results. Local improvements may look quite reasonable when viewed in isolation in the SBU, but it is a fact that all such changes exist in the context of multiple products and workflows. The activities required to produce the given product mix coexist and dynamically interact with the other functions in the SBU.
As observed above several factors conspire against achieving true improvement in financial performance. Finicky automation behavior results in a line being run slower than its rated speed. Breakdowns are more severe in terms of their collective reduction in throughput. The particular configuration in a value stream flow is tied to a specific product mix. It isn’t practical to run different product mixes through these operations, resulting in less agility to respond to market conditions. The “visible” reduction in direct labor is offset by a “hidden” increase in indirect expensive technical personnel added to the SBU for support.
These types of management challenges are becoming more problematic for companies as they grapple with how to handle an increasingly complex and fluctuating product mix. Negative past experiences and a difficult economy conspire against committing to needed improvements.
Only when you can “see,” coordinate, and holistically balance improvements for the collective good within the entire SBU will you begin to achieve superior performance. The financial benefits flow when you optimize the interactive value streams in alignment to your business objectives for the entire SBU.
Note: The next posting will explore the central role Cost of Goods Manufactured and Unit Cost financial reports play in optimizing value stream flows. Hint: Optimization is easy when you quickly produce these reports at the level of products and workflows.