How to EnsurE roI from Your ContInuous ImprovEmEnt ApproACH
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Over the years Phase 5 Group has worked with a fairly diverse collection
of companies, from quite large (i.e., more than 200 sites) to relatively small
(i.e., fewer than 5 sites), from those running capital intensive, high hazard
chemical processes to those running more labor-intensive discrete parts
operations, and from those with a long CI history to those who are basically
“starting from scratch.” Yet, despite this diversity, there is one fundamental
question that every company needs to answer before they pull the trigger
on a substantive investment in CI…“why are we doing this?”
this is the textbook example of, as one of our clients once put it, “a 5 cent
question with 5 dollar answer.” In a sense the answer should be simple.
the purpose of CI is to improve the efficiency and productivity of the
organization, which translates into operational and financial returns for the
business. Yet I think it’s also fair to say that, to be truly sustainable, CI has
to be about more than the bottom line. so how does one start to think
about the roI of CI within the context of larger cultural transformation
journey?
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when we’re supporting a client with their
early stage CI deployment, we like to initiate
the process with a kickoff workshop involving
the corporate operations Leader and his/her
team. that workshop has a well-defined
agenda designed to create alignment among
the team, make some critical decisions about
how the deployment will occur, and apply
certain fundamental change management
best practices to the effort. one of the first
activities during that workshop is to define the
objectives for the initial deployment.
The Business Case Pendulum
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to facilitate that discussion, we often encourage participants to imagine a
pendulum that swings from left to right. on one side of the pendulum are all
of the potential business benefits associated with CI, such as reduced cost
of manufacture, released capacity, less working capital tied up in inventory,
better customer service, increased market share, etc. on the other side
of the pendulum sit the cultural benefits associated with CI, more capable
employees, greater discretionary effort, improved working conditions, etc.
what’s important for every organization to understand is, at some point, for
CI to drive a transformational change in the organization at all levels, the
pendulum needs to end up balanced between those two ends of the
spectrum. It can’t be solely about driving financial returns or the principles
and methodologies won’t ever get infused into the DnA of the organization.
Conversely, CI isn’t a social experiment or an academic exercise. It must
generate returns or business leadership will lose energy for it.
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so keeping in mind that eventually the
pendulum must be balanced, a critical
question for any organization that’s investing
in a structured approach to CI, is which
direction to swing the pendulum during the
early days of the deployment. some
companies recognize a need to generate
significant productivity improvements within
the first 6-12 months of a broad-based
deployment either because there’s an
urgency driver in the business or there’s a lack
of alignment internally on the expected value
to be generated from CI, so “proof of concept”
is critical. one of our clients developed a site
transformation model specifically designed to
accelerate value capture in the first 6 months
after start of deployment (they even referred to
some of the initial improvement
projects as “value accelerators”). As the
vp of Global supply Chain operations
described it, his organization needed
to “earn the right” to invest in capability
building and culture change through CI
(which they did).
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on the other hand, we’ve partnered with clients who have undertaken CI
primarily to address perceived cultural barriers within the organization. one
such client had at one time been perceived as the employer of choice in its
region, but due in part to some senior leadership turnover and increased
competition for talent, attraction, retention, and overall job satisfaction were
starting to become major concerns. recognizing the value of CI to the overall
employment value proposition of the organization, this company focused their
early deployment activities on leveraging the tools and methodologies to
improve working conditions and solve operational problems that, while not
easily connected to hard dollar savings, would nonetheless drive increased
employee engagement and discretionary effort. this client also made a
significant early stage investment in building the capability of first line leaders
in order to enhance their effectiveness and credibility in the eyes of the team.
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1. sTaGe GaTe YOur invesTmenT –
In the so-called “traditional” approach to a
structured CI deployment, the organization
ends up absorbing a lot of cost before it’s in a
position to realize any benefits. these costs
can come in one or more of the following
categories:
• staffing the central CI team
• staffing site-level CI resources
• Leveraging an external consultancy
• Licensing instructional/training content
• training employees (corporate and site level)
• travel
3 KeYs TO GeTTinG rOi frOm Ci
that disconnect between when the investment is made and when the
returns are realized can create trepidation within the organization about the
wisdom of undertaking the journey. And to be fair, some level of up-front
investment will always be necessary, but there are ways to better align the
investment with the returns so that the CI program is “paying for itself” so to
speak.
In fact, phase 5 Group’s approach is specifically designed to help companies
optimize their initial financial investment in CI while maximizing the likelihood
of sustainability. By leveraging the Eon platform, our clients can support the
CI efforts at more locations with fewer dedicated CI resources. Additionally,
there is less need for a massive up-front consulting engagement that is
expensive, disruptive, and unsustainable. the support we provide tends to be
limited in scope and focused primarily on building client capability. the result
is a significantly lower initial deployment cost than the traditional deployment
model would typically accommodate.
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2. CalCulaTe The enTiTlemenT
A common mistake that many organizations
make is to presume that their manufacturing
operations have a clear understanding of their
gap to perfect performance and the financial
value to be generated from closing that gap.
In reality, many operations don’t really know
with a high degree of accuracy what they
could deliver to the business under ideal
circumstances, how their current performance
compares to the ideal standard, or what
percentage of the gap between current and
ideal is addressable through CI. In fact, in our
experience many operations assume that their
current performance levels are pushing the
limits of what’s possible and that there is little
opportunity to improve significantly (which is
a big problem for an organization that is
trying to drive a continuous improvement
mindset). Even worse, if each operation
doesn’t understand the value of a step
change in performance, then it’s impos-
sible for the business as a whole to truly
understand the value as well.
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for these reasons we recommend to all organizations that they consider incorporating
a gap to perfect performance analytic into the process. the gap to perfect analytic
is a quantitative and qualitative “deep dive” into the operation in order to holistically
compare performance against a perfect or world class standard for the expressed
purpose of identifying the biggest operational and financial improvement
opportunities, flagging which of those opportunities to pursue, and recommending the
best tactics for pursuing them.
A critical benefit from a gap to perfect performance analytic is the immediate and specific
line of sight into where, when, and how the organization will generate a significant return
on investment from CI. Additionally, these analytics can be used to change employee
mindsets about the nature and size of the opportunity. on the other hand, a critical
challenge for organizations is how to make performance analytics scalable and
repeatable across time. fortunately, help is on the way. phase 5 Group is developing a
new Gap to perfect Analytic tool within Eon specifically designed to address that
challenge. the Gtp Analytic will walk users through an interview-style process to input
the appropriate operational and financial data required to analyze opportunities across
three major performance categories – productivity, quality, and yield.
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3. TraCK The value CaPTure
for some, this would seem to be an intuitive
recommendation. Yet many companies
undertake CI without an effective mechanism
for tracking value capture. sometimes the
difficulty lies in clearly defining what gets
characterized as value and how value is
determined. many companies we work with
have developed categories of cost savings
associated with CI that they capture and report
separately, such as:
hard savings – benefits that directly impact one or more line items in the budget (e.g., reduced
overtime or contract labor spend, lower energy or raw material consumption, reduced spend on
parts, tools, & supplies, etc.)
soft savings – benefits that don’t directly impact a particular budget item but nonetheless are worth
tracking (e.g., improved labor utilization, reduced customer complaints, etc.)
Cost avoidance – relates to improvements to avoid a future cost (e.g., deferring a capital expense,
mitigating a potential product quality issue, etc.)
a.
b.
c.
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once settled on the categories of value, getting alignment on how to value certain
improvements can sometimes be a challenge. for example, let’s say an operation
institutes an improvement that increases productive capacity. the valuation of the
additional production could be based upon the gross margin generated on each
additional unit, which is likely the right answer if the business can sell the
additional units. If, however, there is no market for the additional production, then
the value needs to be based on some other multiplier, such as the labor and
benefits cost per unit. for businesses that have a diverse product and customer
portfolio, figuring out the right way to value these types of improvements can pose
a challenge.
And while these challenges are not insignificant, they should not stop an
organization from actively tracking the value obtained from CI. If they do, then
operations and CI leadership may find themselves in a constant struggle with both
business and site leadership to justify an ongoing investment in continuous
improvement. fortunately, Eon provides a mechanism to facilitate value capture
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from improvement work. Eon allows users to estimate the value capture and
overall return on investment from in progress improvement projects and track the 12
month value capture from all completed improvement projects. the result is clear
visibility into the business benefits associated with continuous improvement.
a common theme woven into all three of the tactics described above is that the Ci
program needs to be deployed and managed with a high degree of transparency. the
business needs to be transparent about its appetite to invest and the returns it expects
from CI. operations needs to be transparent about what it can deliver in terms of
bottom line results based on an accurate assessment of the opportunity. And
everybody needs to be transparent about the value generated as a result of CI.
Beyond that, the organization needs to have the right partner and apply the right tools
to manage the program and track the return on investment. phase 5 Group generally,
and Eon specifically, can help organizations to achieve their roI goals for CI. for more
information, please visit www.phase5group.com