Were My Improvement Efforts Worth It? by Kevin McManus
First published in Industrial Engineer magazine December 2005
I am amazed by the number of people I encounter during the course of doing my work that do not know what the processes they own cost. I am equally amazed that people so frequently ask questions like “How do I know if my 5S program is worth it?” or “How do I know if our lean initiatives are making a difference or not?” Personally, I cannot fathom how a supervisor or manager could effectively do their job without knowing the details of their process costs, and yet, the majority seems to be in this situation.
Maybe I was lucky. Maybe I just happened to go to work for companies that not only stressed the need to share their operating costs with their people, but also made significant efforts to ensure that all types of process costs were shared. From an early business age, I was taught to consider all of the cost pools – direct labor, indirect labor, material, and overhead – whenever I assembled a cost justification or made an improvement proposal. Those early teachings were only expanded as my job responsibilities changed. Today, just as I would not want to serve in a leadership role if I was not allowed to use measurement tools, I would not attempt to fill such a role unless I was given the ability to understand all of the costs that were associated with my key processes.
No matter what I think, it does not seem to be as much that way in today’s world. Many industrial engineers I talk with seem to primarily focus on reducing headcount or overtime as the main way to save money, and most production and operations supervisors seem to be much more focused on simply making their daily schedules and staying under the budget value someone else has set. I regularly encounter safety managers who don’t know the costs of the accidents they are charged with trying to reduce. I consistently speak with engineers who have process improvement responsibilities, but don’t know what the costs of those processes are outside of the direct labor category. What’s it like in your company? Do you know what the processes you own cost your company each day? Can you use this knowledge to tell if your improvement efforts are making a difference or not?
I can think of a lot of reasons why this condition exists. As an American culture, we don’t like math, and we continue to let our math skills atrophy each day. In our formal education system, we don’t allocate a lot of time to teaching our future managers and leaders about standard costing practices, product cost structures, or different cost justification approaches. Most people are quite happy leaving the numbers to the bean counters. Besides, it’s not cool to be a numbers person, is it? Personally, I can’t see how a manager can effectively do their job if they are not one.
I think it is really sad if one has to ask "How do I know if my lean six sigma (or other improvement) efforts are making a difference or not?". In the first place, I really can’t see how a company can make an educated decision about which improvement strategies to pursue if they don’t include a cost dimension in their evaluation process. Secondly, if you know what your process costs are, it should be relatively easy to do a before and after comparison to see which numbers have changed and which ones have stayed the same or improved. It sounds both simple and logical doesn’t it? Unfortunately, many organizations tend to be weak in both the cost justification and cost understanding areas, and therefore, these types of questions tend to persist.
To me, work is simply people spending time and money each day to execute processes. Having a solid process cost understanding should be both the starting point and the primary focus of all process owners, instead of being something that some people track on a piecemeal basis. Our process cost understanding should drive our decision making on a daily basis, but instead, many companies dilute this type of practice to nothing more than making sure that each manager stays under the prescribed budget total. We keep asking the question “How do I improve?” and ignoring the potential of letting everyone in on our cost secrets.
Unfortunately, I believe that a lack of trust is a significant part of the problem. Because we fail to appreciate what our true business assets are (the skills and abilities of our people), we tend to place excessive value on keeping the details of our actual operating costs and profits a secret. If we share these numbers with our people, our competitors might eventually also end up with this information, in turn giving them a competitive advantage. Following this largely paranoid and misdirected logic encourages us to keep many of the numbers close to our upper management vests and tightly controlling access to those that we do choose to disseminate out into the company. Unfortunately, pursuing this strategy will also significantly retard your process improvement efforts, and it won’t prevent your competitors from ‘stealing’ your true competitive advantage – your people.
I find it to be both ironic and unfortunate that open book management and activity-based costing are seen more as fads than as accepted and encouraged business practices. One of the four tenets of open book management, as popularized by Jack Stack of Springfield Remanufacturing, is to get the information out there. Another is to increase business literacy throughout the organization. My current experiences tell me that we are moving away from these tenets, as compared to moving closer to adopting them as a way of doing business. In a similar sense, many companies still allocate overhead in the ineffective, old fashioned way instead of basing such choices on those activities that truly drive such expenditures.
Because we don’t like numbers as a culture, we don’t make significant efforts to really understand them and use them each day. We are willing to let people spend thousands of dollars a day, but we are not willing to give them the information that lets them know how that money is really being spent. We regularly agree to make five, six, and even seven figure investments without having a clear vision of where we can expect to see the savings from these investments realized. As long as we spend less than we did last year, we are doing okay. If we are doing more work with fewer people, we must be saving money in the right places.
Unfortunately, business systems don’t work that way. It is often the case that reducing direct labor below an optimum level results in excessive waste in other overhead areas, added material waste, and lower levels of product and service quality. Because direct labor is the easiest for us to measure and control however, it has become our cost reduction area of choice. By failing to understand the cost system, we also fail to create sustainability. Our direct labor cost cutting efforts might make us look great as a manager in the short term, but they often come back to haunt someone else’s budget control efforts as customer complaints, product returns, lost business, and lower levels of employee morale have their systemic impact over time.
The true high performers in business today both know and share their process costs with all of their people. There are supervisors and managers out there who can tell you what the daily safety, quality, people, and transaction costs are for the key processes they are responsible for. They can also easily show you what percent of these costs are currently considered to be wasteful in nature. These people are much more the exception that the norm however. Which camp are you in? Do you know the full complement of the daily costs which are associated with the processes you are responsible for? What would be required for you to learn these costs? How do you determine if your efforts are worth it or not?
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“The only thing I know is that I do not know it all.” -- Socrates