Profit Mapping

We've Been Busy

2011-04-26T12:42:00.002-04:00

You may have noticed that we have not posted to our blog in awhile. We’ve been very busy with other writings!

Forthcoming Book in 2012

Execution Dynamics: Align to the Customer Quantum for the Best Possible Business Performance

Let us know if you would like to review an advance copy. We are always appreciative of a few kind words.

Detailed Articles

Achieving Rapid Business Success with Lean Thinking: A Holistic Systems Approach

Lean success, as enjoyed by Toyota Motor Co, has eluded most Western companies. Recent studies have documented and identified various causes for this abject failure. In this e-article, we analyze the situation and propose six attributes necessary to achieve success. We further describe the Profit Mapping methodology that incorporates the six attributes and provides a holistic and systematic way to rapidly achieve success with lean.

Predictive Operational Analytics: A Holistic SystemsApproach to Plan, Manage, and Optimize Business Performance

Predictive Operational Analytics is the convergence of business methods, systems thinking, and business intelligence software for rapid decision making to maximize performance and profit. In this article, we describe the individual elements of Predictive Operational Analytics and present its practical application using Profit Mapping methods and tools.

Adam Garfein

Two Tiers of Continuous Improvement

2009-11-05T15:31:00.009-05:00

Part I in a Series of Observations from Biology for Business

Running a business is akin to maintaining health and well-being. In our book "Profit Mapping" we devoted a lot of attention to lean thinking, systems theory, business goals, and integrated financials. Profit Mapping is a set of methods and tools for business analysis and optimization. Fundamentally, Profit Mapping is inspired by cell biology -- the basic unit of life. As the book did not talk as much about biology, we are writing a series of blogs to illustrate parallels between business improvement and what we were taught in high school biology.

Continuous Improvement "Tiers"

Over many years and across varied organizations we have observed that many successful companies use a two-tiered approach to continuous improvement.

The first tier is akin to emergency response fire fighting. Here, managers and workers battle daily operational “fires.” Problems are immediate, often mission critical, and must be resolved quickly or the risks may threaten operations and/or the business. Effective managers are good at this, calling upon their wealth of real-world experiences. In addition, low hanging fruit for change is often targeted in this tier.

Actions taken in Tier I are tactical in nature. The objective is to quickly get operations back on track. Living to fight another day is an ongoing struggle.

The second tier tackles harder and more complex opportunities to maximize process and financial performance simultaneously. A big challenge for managers is to figure out how to optimally configure multiple product, process, resources, supply chain and financial parameters all at once to achieve the best possible performance.

Managers frequently confide in us how difficult this is to do well. On the one hand, we are trained to reduce problems into narrower definitions and improve upon a few variables at a time. Reduce waste in any particular part of the system, we are taught, for instance, and the impact will percolate up to show real business value.

Yet, the reality is that everything is interconnected. Even the smallest operational or policy changes have ripple effects, which are dependent on both the specific and collective changes within the environment. In other words, a business is not the sum of its individual parts, but the collection of its interdependent operational systems.

Thus, managers must both constantly fight fires on demand (Tier I) as well as systematically drive complex change for the purpose of meeting multiple business objectives, including financial performance (Tier II). You can't do just one or the other! You have to do both effectively or the organization will get sick and may perish.

The Biology of Continuous Improvement

A little background on us helps explain our thinking. I am a gerontologist by training -- one who studies adult development and aging. Anil Menawat, who is the creator of Profit Mapping, comes from a cellular metabolism and systems theory background. How we ended up in business together is a story for another day. One might say our interests span from individual cells to entire human beings, with emphasis on facilitating growth and maintaining health and well-being.

You can begin to see the connection to business. Swap the above terms with those such as products, operations, factories, business units, supply chains, people, etc., and the "living" system comparison comes to life in a business context.

The first tier of continuous improvement is analogous to disease and the immune system. For instance, we are all exposed to viruses and bacteria on a daily basis. This is our risk exposure. Sometimes we develop infections. Some are life threatening. Some people may obsess over prevention. We take different actions depending on the severity and our pre-existing conditions and current situation when disease strikes. These symptoms are the "fires" that we all fight sooner or later.

The second tier of continuous improvement is analogous to growth and cell division. Growth relies on the production of new cells through cell division. This biological process is one of the most complex systems in the world, particularly when you extend this to an entire human being. Its parallel in the business world is also complex and dynamic. We've all heard the slogans concerning the "DNA" of business. The analogy seems to be that strategy is the genetic code guiding growth. This raises several business questions. Does the organization have the right strategy and roadmap? Is the cell division carried out properly? What are the risks?

The objectives for growth in both biology and business seem to be to "get it right" and sustain. Yet, the risks are great with plenty of opportunity for "error" in both systems, whether in cell division or implementing the right operational changes.

In the Tier I example of a virus or bacterial threat, our actions are tactical, such as taking a couple of Tylenols or getting a prescription for antibiotics. However, that does not change the larger context of cell growth and life (or death).

In Tier II, disturbances in cell division can also cause problems. Sometimes the implications are benign, but they can also have dire consequences. In addition, uncontrolled cell growth is cancer. In business this might be viewed as irresponsible management. Both of these biological and business situations are unsustainable without swift and appropriate action.

As we know from biology, there are more than two “tiers” to human existence and functioning. Likewise, organizations have many interconnected functions and tiers. We have simply focused on a couple to illustrate the dual approach to business improvement.

Adam Garfein

Future Blogs in this Biology-Inspired Series
• Planning for Growth and Sustenance
   • Two Tiers of Toyota Production System
   • Systems of the Human Body and Business Management
   • Interdependence of Metabolism in Cells
   • Please share your ideas for others too

Why Progressive Companies Should Embrace Their Complexity

2009-05-15T09:25:00.001-04:00

A corporation is like a sponge in the sea of commercial energy which surges around it. Taking in goods and services, it makes a unique conversion, and then sends out something of value to others. Like the biosphere, the output of one part becomes the input of the next.

The memory of this activity is represented by the countless records of every transaction, internal and external, created by the conversion process. To become fully in tune with what’s going on, the organization needs to somehow be mindful of all the data flowing through it, and find a way of metabolizing it. By doing so, the company mediates its functions and remains in harmony both internally with its own constituent parts, and externally with the wider commercial world.

The balancing process, like the sea, is fraught with danger, however. The chaotic energy of the world, like fluctuating markets forces, pull and push against the innate self-organizing ability of the enterprise, and if we can’t react quickly enough, our business becomes inflexible. This eventually results in points of starvation and blockage in the company’s throughput and ultimately to a decline in the commercial health of the enterprise.

The information we need to stay subtle is all there in the transaction dynamics, but interpreting such a rich stream in time to take the right action it is not an easy task, and without the correct analytical tools, most companies struggle. Viewed in isolation the numbers are useless fragments like individual pixels in a giant TV screen. But composed into a grand mosaic, they form a meaningful picture of the corporate metabolism, and once the movie is synchronized, decisions can be taken in the best interest of the company with very low risk of failure.

Learn to read the pulse of the organization and you will benefit from a new source of profit generating energy and risk deflection.

James O’Sullivan
Ireland

Integration of Finance and Operations

2009-03-23T10:40:00.002-04:00

Recently, an operations executive expressed his frustration about the management’s inability to manage their company in these hard economic times. He complained about limited integration between Finance and Operations affecting their decision making. The CFO runs business models in Excel spreadsheets, but the models are not tied to the operations systems. The scenarios cannot be validated for being operationally realistic. Nevertheless, they set the expectations for the operations.

Without a “reality check” the decisions become surgical mandates. If the CFO demands a 10% drop in inventories, operations manager cannot evaluate its consequences on the customer service. They don’t know whether they could afford even more cuts. Or, what would be the right level of inventory for the current business environment. Such single dimensional approaches often result in unintended consequences elsewhere. More importantly, managers lose the real opportunities of making a number of smaller changes to achieve strategic business goals.

On the flip side, the value of an operational improvement is not known until the end of the quarter when financials accrue. The lack of integration hampers forward looking projections of financial KPI’s. Impact of the proposed initiative is unknown without implementation. Some initiatives succeed while others don’t. In reality the situation is even more troublesome. With many on-going initiatives it is difficult to isolate the successful ones.

On the surface it sounds like a typical silo mentality that exists in most companies. The CFO office does their model and throws a mandate over to the operations. Operational managers do not know the reason why they are being asked to do so. They have no opportunity to contribute in developing a solution to meet real objectives. It being a mandate they work busily to meet without understanding the full situation.

Fortunately, the situation is usually not this critical. The operations managers do talk to the financial managers to understand the situation. This is, however, a partial solution only. Both are talking with their respective expertise but without real facts and data. Without the integrated analytical capability neither can substantiate their proposals with any real analysis for the expected “future” environment. The product mix, volumes, and a whole lot of other variables change frequently over time. If the goal is to reduce overall cost then probably there are many options available that must be considered along with inventory reduction to make it work. Single variable approach is dangerous and often results in moving costs around the strategic business unit netting little to nothing on the bottom-line. This is a far too frequent occurrence in continuous improvement programs.

There are many who believe that such problems can never be solved with any mathematical analysis. They argue no matter the sophistication of mathematics it cannot capture the complexity of the real situation. In my humble opinion this is an uninformed position. Indeed there is no single formula or software that can solve this problem of integrating process and finance. But, it can be achieved by integrating problem solving and mathematical analysis tools in tandem. Rudimentary mathematical analysis such as OEE calculations or static capacity analyses are inadequate for the job.

Commonly used continuous improvement approaches, and even the mentality, are not sufficient for the required restructuring. It requires holistic thinking, which is different from “divide to conquer” approach of continuous improvement. It demands a systematic approach and expertise to identify the correct set of parameters to change simultaneously. You have to create many such scenarios before finding the most feasible solution with minimum risk. Detailed dynamic process, resource requirements and financials analyses with “appropriate” mathematical rigor provide the basis for comparison among scenarios. It’s an iterative process that results in a collaborative solution to meet the strategic business goals. That’s what the discipline of risk management is all about.

We have been studying this problem for over 20 years and have confronted this problem as senior managers and consultants in many different industries. Our consulting business is solely dedicated to this very single issue of connecting operations and financials to strategic business goals. We have developed a set of methods and tools called Profit Mapping focused for rapid restructuring. We invite you to learn more about them at www.menawat.com.

Anil Menawat

The Winds of Change

2009-03-07T20:33:00.005-05:00

A business can be like a hanging mobile. Pull on any part of it, and the whole thing will go into a dance until some kind of equilibrium is restored. That's just what happens when you take one part of a production process and change it. We typically focus on that one part, but all the other parts begin to dance around it, sometimes with unexpected results.

Likewise, if the wind comes along, every part of the mobile starts changing all at once. It’s like that now for businesses everywhere, as shockwaves of the global banking crisis reverberate around the world.

Because we’re powerless over external factors, it’s now vital to optimize the profitability of the processes inside our businesses; and we can’t do that without looking deeply into their dynamic interactions. Tools like Value Stream Maps, and measurements like Overall Equipment Effectiveness served us well as a compass might an explorer or a ship’s captain at sea. But now we’re navigating narrow streets and alleyways for survival itself and we need something with the pinpoint accuracy of a GPS if all’s not to be lost. In short we need a way to put a financial value on the disposition of every workflow, asset, unit of labor, utility, raw material and consumable for every conceivable situation…and be able to quickly what-if the whole thing as each new situation presents. Impossible? Up until recently, yes.

Now, it is possible for a company of any size to embrace this level of complexity. You need Profit Mapping’s analytical engine, PAL and a way to hook it up to your process. That connection is made with a Business Execution Profile from which emerges your Process and Policy Map, (a mechanism we’ll talk a little more about another time). For now the message is this. The technology is here to turn the current situation into an unprecedented opportunity. Thousands of companies are going to fail in the near future, but yours doesn’t have to be one of them. Instead you can position it not just to survive, but to absorb the huge amount of additional business that will become available when the shakeout is over. Business you couldn’t win in any other circumstances. But to do it will take a level of agility few companies currently possess. Profit Mapping can give you that edge. Your time has arrived, seize the day.

James O'Sullivan

Optimize the Value Stream: Closing the Loop Between Continuous Improvement, Execution and Business Objectives

2008-12-09T12:26:00.005-05:00

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.

Adam Garfein

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.

What’s Right and Wrong with OEE?

2008-07-03T08:30:00.022-04:00

Lately, Overall Equipment Effectiveness (OEE) has taken center stage as the measurement of choice among manufacturers. Most have adopted it as the measure of their performance. A significant segment uses it in “real time” to control shop floor. It is common to see electronic boards hanging over manufacturing lines prominently displaying OEE along with other manufacturing measurements such as parts produced and quality.

A measure of manufacturing efficiency

OEE incorporates three critical aspects of manufacturing efficiency – productivity, equipment availability, and product quality. Following equation is its definition:

OEE = Productivity x Availability x Quality

OEE condenses the complexity of a manufacturing operation in a single value. A decline in OEE is often viewed as losing profitability, and, thus, is highly undesirable. Foremen work diligently to meet or exceed the target on shop floors.

The popularity of OEE stems from a strong belief that high productivity coupled with high quality and availability is a prescription for high manufacturing efficiency. And, a highly efficient process operating at or above the target OEE meets the customer requirements of on-time-delivery of good quality products but also does so at low cost. In other words, a high OEE represents little or no waste in the process.

OEE has served manufacturing well in growth market. As demand increased, it became imperative to have high productivity and availability. Of course, meeting quality standards goes without saying; it is essential to stay in business these days. Manufacturers continued to improve OEE performance. Maintaining high OEE became an important strategy to ward off competition from low cost producers. It, therefore, is not surprising that improving OEE has become a cottage industry within the manufacturing improvement consultancies. It is hard to find a manufacturing enterprise software vendor who does not have an OEE module in their offerings.

Changing operating environments

Many manufacturers are facing the wrath of increased oil prices and declining US auto industry in the form of reduced demand for their products. Some have lost more than half of their volumes. They have limited choices: either run at full rates for shorter times, or run at slower speeds. Devising new operating policies are not simple as many other policy factors confound the issue. In any scenario, OEE takes a tumble. High productivity is difficult to maintain in a declining market because of lower demands unless assets are taken out of service.

The correlations between manufacturing cost and OEE, which apparently worked in the narrow range at near capacity operations, are now failing. Absence of such simple relationships is leaving managers to wonder about their decision making process. The apparent “linearity” of correlation in the narrow range is no longer valid as the operations have moved far beyond the vicinity of earlier operating conditions. The relationship between cost and OEE, in many cases, is exhibiting sudden changes like quantum shifts. Some managers are starting to ask how OEE is related to cost. Some have started to wonder whether OEE is at all related to cost. They want to move beyond the simple correlative approach to understanding the functional relationship. Can they continue to depend on OEE as a good measure of their performance? They don’t know any more.

OEE as measurement in setting operating policy

Making correct decisions require apposite measurements. This premise is elementary to every feedback decision-making process notwithstanding the type of decision – whether to control a machine, a process, or the whole business.

Most manufacturing improvement consultants and practitioners strongly believe that maintaining high process efficiency is the way to control cost. In other words, can OEE, which is a measurement of process efficiency, act as a surrogate for business performance? Let’s answer this by comparing OEE as a measure of performance in two instances. The scenarios represent two completely distinct operating policies for the same manufacturing line. Both are equally viable options. The scenarios are designed to have identical OEE but differ vastly in operating conditions.

The table and the figure below summarize the two scenarios. The blue scenario has high productivity and lower quality, while the red scenario has high quality and lower productivity and availability. The question is which one is better to select? The answer, of course, depends upon your business objective and not process performance. If the quality is of greater importance then you pick the red one, whereas if throughput is most critical then you pick the blue one. This selection is without regard to the cost to add value in either case. If OEE and cost are related by a direct and linear relationship then we would expect the cost structures for the two scenarios to be at least similar, if not identical.

Table 1: Two scenarios with identical OEE

Figure 1: Comparing two scenarios with same OEE

Relationship of OEE to cost and business performance

Since both scenarios have identical OEE, do they both have the same cost structure also? The answer is a most definite “NO”. In order to maintain high quality in the red scenario, we have to inspect more parts. This requires additional inspection stations and the associated resources. There is more rework to be done as well as increased scrap in order to meet the higher quality standard. Increased rework takes time away from what otherwise would be first time quality production resulting in lower productivity as manufacturing line produces less good parts per hour. With the lower productivity and increased activities for rework, we would expect the cost to add value per part would be higher.

In addition, a more stringent preventive maintenance program may be necessary to reduce variations in machine performances. This would reduce machine availability for production. In the red scenario in comparison to the blue one, increased quality does not increase the composite value of OEE as the productivity and the availability, both, decrease.

Both scenarios are two distinct modes of operation on the same manufacturing line. Despite both reporting the same composite value of OEE, their process dynamics, resource requirements, and financial performance are vastly different. The single value measurement of OEE does not reflect these differences. This example makes it clear that there is no one-to-one relationship between OEE, which is a measure of process performance, and the financial or the business performance.

In fact, one could question the claim of OEE, a composite value, as a suitable measurement at all for any purposes. Fortunately the situation is not that hopeless. OEE is a good indicator of process performance only when it is closer to the 100% marks on all three dimensions and the deviations are not large. In such cases the triangle on the radar chart approaches its boundary. If any one of the dimensions moves farther away from the 100% mark, OEE tends to lose its sensitivity and starts to break down.

Conclusion

OEE, the simplicity of which lured many to adopt it as a primary measurement, is not a good measure for process performance if the line is operating far away from full capacity. It is rarely a good indicator of the business performance. OEE is a good indicator for the foreman on the shop floor only when deviations in all three dimensions are small. Using OEE, however, for continuous improvement projects or to devise operating policies to face the challenges of the constantly changing marketplace is risky and warrants caution.

Anil Menawat

Beyond Continuous Improvement: Continuous Optimization

2008-04-10T09:14:00.009-04:00

Ensure Process Improvement Meets or Exceeds Business Expectations

Your organization is guided by lean principles, invests in people and lean practices, and deploys tools that help identify and reduce wasteful activities while increasing customer value. Your plant has smoothed out uneven production flows, converted to cellular operations, moved to smaller batches, transformed the culture, and so on. Your technical or business services group (e.g., call center, insurance processing, financial services, software development team) has incorporated similar lean principles to improve performance.

Despite doing all of the right things, management is disappointed that the return on investment in equipment, technology, and people has not produced the expected contributions to the bottom line – that the investment threshold did not warrant the benefits. What happened?

Continuous Improvement is Important

The leading continuous improvement frameworks are grounded in sound principles and concepts, and most organizations have very competent people involved in the deployment and adoption of the particular best practices. Given this environment, why do so many efforts produce uneven results? That is, why isn’t everyone successful?

We believe that the fundamental stumbling block is not with the people or technology, but with the lack of tools that are specifically designed to inform the practitioner of the holistic impact of any proposed change on the organization. Change does not occur in isolation, and we should stop creating solutions based on a limited view of the potential interactive impact.

Divide to Conquer Doesn’t Add Up

In practice, we have been taught to deal with the complexity of operations and performance by breaking challenges into smaller “manageable” pieces. The accepted thinking is that by making piecemeal or “isolated” process improvements, it is perfectly reasonable to expect the activities to roll up and produce a total impact that is greater than the sum of the individual pieces. Upgrade to higher technology equipment, invest in IT improvements, reduce the workforce or do more with the same, etc. The assumption is that these or other changes in isolation will produce performance gains expected by management.

Unfortunately, while these and other actions may seem like the right things to do at the time, all of the individual changes have dynamic interdependent effects on performance – and the leading continuous improvement tools are not capable of shedding light on these effects. Thus, management is literally operating in the dark.

How do you know whether any individual or collective change will bring the organization one step closer to achieving the overall business objectives? The short answer is, you don’t. This is not a philosophical debate, but a stark reality. We rely on our intuition and expertise and hope that we are making the right decision. The risks, however, are too high today. We need new tools that provide the necessary insight, complement our own expertise, and give us greater confidence that we are making the right decisions.

Continuous Improvement Benefits from a Holistic Balance

A plant manager recently shared with us that his team had at least three different and good ideas for how to reduce costs while meeting quality requirements and fluctuating demand. That is the good news. His company is in a fiercely cost competitive global business and this particular plant must quickly improve its financial performance or risk losing business. The company did not want to invest any more in the facility and expected to see radical improvement within the current asset base and capabilities.

The plant manager matter-of-factly stated that because there were “no good tools” to evaluate the “business impact” of each operational change option, he was going to implement his own ideas. It wasn’t that his thoughts were necessarily any better than the others. He admitted that he had “no idea” which improvement option was in fact the best one. His team was very competent and also had access to expert consultants.

However, since he had “to live with the final decision” he “might as well” follow his own recommendations! Thus, in the absence of an integrated method for holistically quantifying the process and business impact of his team’s ideas, his confidence in selecting the “right” option was vastly reduced. Does this situation sound familiar?

Continuous Optimization is “Guided” Continuous Improvement

Continuous optimization involves a slightly different yet wholly complementary way of thinking. It is a method of making operations as fully effective or functional as possible. The definition of “effectiveness” is not arbitrary, but comes directly from the organization’s business objectives.

Whereas continuous improvement asks, “how can it be made better,” continuous optimization asks “how do we make it most effective within its larger operational and business context.” The senior management team frankly does not care if you make the process better. They are concerned with identifying the most effective path for transforming operations to better serve customers while achieving the business objectives. Thus, you must do it all.

The central difference between improvement and optimization thinking, therefore, lies in the explicit focus on business objectives. One can be “successful” at continuous improvement by meeting the definition of success provided for the particular continuous approach (level flow, cellular design, defect reduction, etc). This is why gaps are often observed when results are rolled up through successive management levels, where process improvements do not always produce the expected benefits as defined from a financial or customer perspective.

With this definition, “effective” is always a moving target as objectives, customer needs, and internal capabilities and limitations are always changing. Thus, continuous optimization is a “guided” implementation of continuous improvement, ensuring that every change brings the organization at least one step closer to achieving its customer and business objectives. Conversely, changes that cannot achieve both process and business goals are bypassed, freeing up valuable resources to apply elsewhere.

Continuous Optimization and Continuous Improvement: A Partnership for Success

Continuous improvement and optimization should be treated as a partnership that has the best interests of the organization in mind. Business optimization requires sound strategies for improvement and improvement can be wasteful if it does not ultimately improve the business.

Partnership for Success: Attributes of Both Approaches

Continuous Improvement	Continuous Optimization
- Seeks to “make it better” - Process improvement focus - Assumes local optimization rolls up - Implicitly linked to business objectives - Static approach - "Divide to conquer" philosophy	- Seeks to optimize the business - Holistic thinking for the larger benefit - Process and financial integration focus - Explicitly linked to business objectives - Dynamic approach - "Unite to win" philosophy

When systematically deployed in partnership these two approaches ensure that every activity – ranging from changes on the shop or services “floor” to upper management activities – move the organization at least one step forward in the optimal business direction. This partnership for success thus requires that (a) all process changes contribute in some meaningful way to optimizing the business and (b) business optimization be treated as an ongoing endeavor because operational constraints and capabilities as well as the business environment are never static. This is the domain of Profit Mapping.

Adam Garfein

It’s all About the Right Business Balance: Use Lean to Improve the Business, not as Carte Blanch for Workforce Reduction

2008-03-18T14:47:00.000-04:00

As I reflect upon my “Lean” experiences with various German manufacturers it strikes me that I am often left wondering, “What is the real issue here?”

We want to sell a product at the best possible market price and at a high profit, and the only way to do that is to have a company at which all parties involved in production, directly or indirectly, dovetail their work and are thinking and cooperating between each other.

If we look at the beginning of modern automation in Germany, the main reason was to let machines take over simple and repeating work in order to set people free for more demanding tasks, considering the limited sources available after the war. At that time companies invested both in automation and to up-skill their employees, who brought the right balance between machines and workers, creating the success of the 50s, 60s and 70s.

Later on, due to higher competition in the market and changes in the ownership of companies, the situation changed. It seems that the current management thinking is that to save money, companies must invest in even more machines and fire more skilled (expensive) people. Unfortunately this has reached the point of diminishing returns between automation and workforce, and by that, many companies have lost their know-how and competence because of the loss of highly skilled and devoted employees.

Due to the pressure from the stock market, many managers have tried to perform miracles to show a good financial result, by relocating parts of their production into other countries, etc. Or they sell parts of the company to satisfy the shareholders. Shareholders want to maximize their profit and management faces high pressure to achieve profit targets. These actions may work for a short time but in the end the risk is too high and sometimes kills the company.

For me, it seems that the “automation-driven” mentality has passed its zenith. Yet, hiring or re-hiring more skilled workers isn’t necessarily the answer either. Unfortunately, the solution is not so simple as “It is better to have more of x and less of y.” So, what are we to do?

The answer is easier to identify if one asks a different question. Rather than asking “Which is better?” we should be asking “What is the right balance?” In this case, the question is, “What is the right balance between automation and people?” This leads us down a different pathway for creating the right solution.

We often conveniently “forget” or ignore that fact that automation has its own issues. An expensive piece of equipment typically requires very expensive support personnel. From the view of accounting, these support personnel are part of the indirect budget. Yet, their costs are very real and the company doesn’t see any improvement at the end of the day when all such “indirect” costs are tallied.

Lean tells us to use automation to reduce cycle time variation to level out production. This is often coupled with redesigning into work cells. But these same principles can lead to other challenges. For example, I have seen many instances where managers question if operations are “over-automated.” A machine breaks down or demand changes suddenly. The automation does not provide enough flexibility (or is too expensive) to adjust on the spot to support the required configuration. In some instances, having lower levels of automation and an appropriate level of operators may actually improve flexibility and lower overall costs at the same time.

In my opinion, the only solution that makes sense is the one that balances the total costs of the machines, labor and salaried personnel, etc. while satisfying customer demand – as well as the needs of the internal and external stakeholders. In the absence of finding the right balance between the process and financial implications relative to serving our customers, we are all just fooling ourselves that any changes we make in the short term will guarantee positive longer-term and sustainable impact.

Michaela Gerweler
Germany

Financial Performance in the Life Sciences: Costs Are Moving from an Afterthought to the Forefront

2008-01-28T16:06:00.000-05:00

Changing market conditions, increased competition from generics, difficulty bringing new products to market, high regulatory costs, etc. are putting intense pressure on life sciences companies. The recent headline in the Wall Street Journal, “Drug Maker Wyeth May Cut 10% off Work Force Over Three Years,” (1/25/08) is just the latest in a string of news reflecting the economic realities facing this industry.

The article mentioned Effexor, one of the Wyeth’s leading drugs as facing generic competition. In a coincidence of geography, Effexor is manufactured in Ireland, which was the setting the day before for a talk given by James O’Sullivan, Managing Director of Menawat & Co. Ireland at a MESA International working group meeting hosted at Bausch & Lomb in Waterford. James’ research focused on the opportunities of MES in contributing to financial and other performance in the life sciences (see presentation).

Traditionally, reasons to implement MES include: optimizing production efficiencies for increased profitability, increasing asset utilization by reducing downtime and unscheduled maintenance, improving product quality, and reducing waste. Yet, in the life sciences, there are more compelling reasons to implement MES.

Historically, companies have approached enterprise IT solutions, whether MES, PLM, etc. with a tactical mindset. However, in today’s intensely competitive global environment, the expectations of the returns on such investments are changing dramatically. Tactical improvements are often no longer enough to justify such investments; they must also help the company achieve its strategic priorities. Choosing the right tactical path is still imperative, but it is critical to frame the opportunity in the larger strategic context to be successful from a business perspective – and to receive the project funding.

The most striking revelation of James’ research is the true cost reduction opportunity of MES solutions in the life sciences. If you look at the “Cost to Add Value” (direct costs minus materials) in industrial manufacturing, it represents about 44% of the business. This presents a large field of opportunity to optimize production, quality, costs, and so on. Even a small change can have significant improvement implications due to the size of the improvement pool.

In contrast, the Cost to Add Value in the life sciences shrinks to approximately 10% of the business. Other cost drivers, such as increased R&D and regulatory requirements expand dramatically compared to other industries. In other words, once you design the process, make the capital investments, and obtain certification, the research shows that 90% of the costs are outside of manufacturing. Thus, the promise of a “big” cost improvement may not percolate up given the small opportunity relative to other cost drivers in the organization.

Implications for Life Science Companies: Optimize the Business not Operations

Forward thinking companies are elevating MES, PLM, and other related investments into strategic advantage. Compliance and product development are prime examples. MES and PLM represent significant investments, and their potential value expands vastly when couched in terms of strategic priorities. For example, reducing service and warranty costs, improving traceability, increasing speed to market, and so on are “business” issues of central importance to corporate management, which transcend plant level operational issues.

This kind of integrated business thinking (i.e., strategic + tactical = success) can be a challenge for operational personnel who have not traditionally been pressured to think beyond their local domain. These are not simply efficiency tools that reduce process, supply chain, and product development costs. They support regulatory and strategic priorities. It appears that MES and PLM vendors are catching on to this new message and are beginning to talk about how they serve the business goals, not simply how their tools help plug local tactical gaps.

What are some of the “takeaways” for operational managers? Think in terms of planning and aligning investments to strategic value. Right size deployment and support efforts and costs to where they will have the greatest business impact and avoid investments that will not provide sustainable business improvement. To do so, one must validate the business value before implementation. Most importantly, maintain a clear focus on the business objectives before, during, and after installation. This will help facilitate a change in thinking from process improvement to optimizing the business. Profit Mapping provides a structured and holistic approach for accomplishing all of the above.

MESA International’s rapidly expanding membership is perhaps a reflection of this new integrated thinking. For instance, what does the term MES mean to you – Manufacturing Execution System? MESA is short for Manufacturing Enterprise Solutions Association. If we take their lead and substitute the word Enterprise for Execution, Manufacturing Enterprise System (MES) takes on a completely new strategic meaning – one that companies can choose to ignore at their own peril.

Look for an expanded business optimization talk for the life sciences by James in the April timeframe in Ireland. It promises to generate some lively discussion.

It seems that the more things change from industry to industry, the more the fundamental competitive issues remain the same. At least, that is what the life sciences industry is painfully discovering about their costs and business improvement opportunities.

Adam Garfein

Is There a Future for Lean?

2007-11-17T13:13:00.000-05:00

We often get asked, “What’s beyond Lean?” or meet managers who say “When we started doing Lean we were way ahead of the pack. But now our competitors are doing it too, so how do we get back in front?”

What this tells us, is some people believe just using Lean tools makes them Lean, and if that’s so, then they’ve missed a key point. Initiatives like Lean and Total Quality are slow and steady approaches based on the principle that doing the right thing at the right time will lead to greater value.

The fact is that Lean has been approaching something of a crisis for quite awhile. Operations people continue to drive the effort, but business managers, with responsibility for making profit have lost faith because they can’t see results on the bottom line, and they don’t have the thirty years it took Toyota to beat the competition. They need more money NOW.

Your gut feeling will tell you that reducing waste and saving time have to be good. Right? Shutting the machine off when you’re not using it reduces the utility bill. More automation reduces direct labor cost. So where’s the “disconnect” with profit?

But think about it. Does a lower utility bill really have visibility in the overall cost? Did we shed direct labor when we hired automation engineers to support the new robots? Did that project solve an obvious difficulty that needed to be solved right now? If the answer to questions like these is “no”, then there’s your disconnect.

If we assume a solution, or even pick the Lean tool to solve a problem, before viewing that problem in its business context, then we’re going the wrong way. To avoid disconnect, look for the immediate, accurate match between a business unit goal and your Lean project, and if you can’t find one, forget it.

The good news is, that if you laser target an explicit business objective with every Lean initiative, every time, you will see the bottom line results, and fast. But if you haven’t established that direct relationship between your project and that objective, then you shouldn’t be doing it.

It turns out that running your business by rules of thumb like, “more efficiency means less spending” or, “lower inventory means increased cash flow”, is just plain dangerous. Because if you’re not addressing the most pressing issues facing the business right now, then you’re the one wasting time and resources.

Making that connection consistently is a talent we must add to our skills list with a matter of urgency.

Oh, Lean has a future all right, but only if we to do it with the “paranoia” of making sure that every project has that one-to-one match with the achievement of a clearly stated business objective.

James O’Sullivan

Lean, Total Quality, and Real-Time Enterprise Initiatives: Are They Having the Desired Impact on Business Performance?

2007-10-25T05:24:00.000-04:00

The majority of manufacturing companies are pursuing strategic initiatives to improve business performance. They range from traditional Lean and Total Quality programs, to include a more recent IT-driven focus on creating a Real-Time Enterprise (RTE).

Despite the widespread adoption of such initiatives, recent research shows that companies do not make full use of the many core practices associated with these programs. This is the conclusion of a study conducted over the summer of 2007 on behalf of the Manufacturing Enterprise Solutions Association (MESA) by Julie Fraser at analyst firm Industry Directions.

The report indicates that while significant progress is being made, piecemeal implementation of the available fundamental practices from performance improvement programs is hindering companies from realizing the full potential of these initiatives.

While there is a rich and proven body of “best tools and practices” to call from, companies are struggling to piece together the right combination of core practices from a smorgasbord of improvement programs and options that will work best for them. The complexity inherent in choosing the right menu for one’s company and competitive circumstances is evidently causing many companies to leave unrealized performance gains on the table.

Out of 40 surveyed practices covering all three performance improvement areas, only four practices are used by all of the companies. These widespread practices include:

• 5S workplace organization (Lean)
• Standardized work or method sheets (Lean)
• Corrective action and preventive action (CAPA) (Total Quality)
• Kaizen (Lean and Total Quality)

Clearly, this research reflects the popularity of Lean and Total Quality. It also highlights the challenges managers have in selecting the right tools to implement for their organization. The MESA research focused, for instance, on a subset of 12 Lean practices. In our own research, we have identified over 50 different Lean tools. Can the essence of Lean and quality principles be boiled down to four key practices? It is a stretch by any imagination to respond with an unequivocal “yes.”

Six Dimensions Help Increase the Likelihood of Success of Strategic Initiatives

Whether your strategic improvement initiatives include Lean, Six Sigma, Total Quality, RTE, or something else, you can help improve the likelihood of success by attending to a number of key issues from the outset. We have posed these dimensions in the form of questions to illustrate the importance of integrated thinking.

The answers will be unique to each company and competitive circumstances. There are not necessarily any right or wrong answers. Yet, in general terms, the richness of practices deployed in each dimension have enormous performance improvement implications.

Are your improvement initiatives:

Focused on the Business Objectives? A full 80% of respondents report that having metrics aligned with the business needs make them more effective. Of this group, it is unclear what portion of activities are directly tied to the business objectives.

Systematic? Does the organization have a systematic way to implement each improvement philosophy according to the unique circumstances of the company and business opportunities? Many companies simply pick and choose among practices to implement without an overall framework to ensure (a) that the practice is best suited for the particular situation and (b) the overall success of the program.

Integrated? Nearly half of respondents indicate that departmental metrics are commonly in conflict, and about one quarter are in conflict between management levels. Among the companies with more than one metric conflict, employees can find themselves in situations where ill will develops due to working towards conflicting goals.

Holistic? Are improvement programs properly integrated within and between the different approaches, and with other functions of the business? Do they enhance overall business performance or simply produce isolated improvement and/or difficult-to-sustain change?

Dynamic? How do improvement initiatives account for a dynamic market and operational environment? How do they deal with changes in product demand and complex operational dynamics on the plant floor? The MESA survey, for instance, highlighted that a large portion of companies do not adjust metrics to keep pace as business needs change, increasing the risk that their metrics become irrelevant.

Customer Focused? The Total Quality findings were striking for their disconnection with customers. “Another surprise is the limited use of customer-defined quality and value practices, which are a foundation for ensuring that quality programs are implemented in areas that matter to the market.”

Profit Mapping addresses the gaps highlighted above head on. It is a complementary approach. You can keep doing what you are doing. However, if a strategic initiative falls short in a dimension, we advise embracing appropriate change in core practices to overcome the deficiency and realize the full potential of the improvement effort.

Incorporating Profit Mapping into existing strategic initiatives takes management vision and leadership.

“While many have declared their intention, manufacturing companies must now show the vision and leadership to change processes, mindsets and supporting technologies to reliably achieve ongoing improvements across their organizations.” MESA, 2007

Rigorous implementation of strategic initiatives has produced significant gains over the years, yet much work remains. If it were easy, we would all be reaping the full benefits and have probably moved on to tackle other sources of competitive advantage by now.

Adam Garfein

Winning at Continuous Improvement: Balancing Cost and Process Efficiency

2007-08-21T16:19:00.000-04:00

Much has been written over the years about the difference between doing the right things versus doing things right. This is the effectiveness versus efficiency challenge. The legendary management thinker, Peter Drucker captured the essence of this challenge in his famous observation, “There is surely nothing quite so useless as doing with great efficiency what should not be done at all.”

Through a multitude of educational, cultural, and work experience factors, operational managers are taught to focus on the efficiency side of the competitive equation. Efficiency improvements hold an “unquestioned” position in the business improvement toolset. In improving process efficiency through lean, Six Sigma or other approach the assumption is that one need only to wait for the positive business results to accrue. Create a better process and good things will follow for the organization and customers – at least that is mindset. Build it and they will come in the form of happier customers and increasing profits.

This kind of thinking is based upon a dual assumption that continuous improvement is both the right thing to do and that it will produce the desired business results when all is said and done. As for the former, continually striving to improve operational performance is without a doubt a fundamental and essential business function in an ever more competitive world.

The second part of the assumption is the source of much discussion, debate, and disappointment – but usually not until after a gap emerges between the expectations of the particular improvement effort and the outcomes. Unlike in the movie Field of Dreams, building it is not assurance that “they” will come. In the present context, “they” refers to the appearance of each and every mandated business objective, including financial performance.

Over the years, many senior and middle-level managers have experienced firsthand the meaning of Drucker’s quote. They embraced lean principles and tackled quality problems with abandon. Waste was banished from the organization or at least controlled. Product quality rose dramatically. Yet, despite doing all the right things, many organizations failed to prosper from these investments, and some even failed precisely because of their emphasis on continuous improvement at the expense of other things they might have done to improve competitiveness.

Focus Continuous Improvement Efforts to Where They Will Have the Greatest Business Impact

With objectives in hand, managers embark upon a journey to change the organization.

Let’s look at a specific tool to illustrate a central improvement challenge facing organizations today. Kaizen blitz events (also known as Kaikaku events) are an extremely popular part of the lean toolset. Whereas continuous improvement is a systematic longer-term proposition, a Kaizen blitz is designed to create rapid change. In a bout of highly focused activity everyone associated with the process or department follows a typical pattern — ideation, analysis, future state mapping, and collecting the “best” idea(s) to move forward.

Often, the result is a re-arrangement of a product line or work area. Sprinkle in a change or two in policies to sustain the new way. In doing so, Kaizen events often produce “visible” improvements. Again, this is good. But, is it an outright win or simply a “pyrrhic victory” where the cost savings are not worthwhile for the invested effort?

A fundamental challenge, not just with Kaizen, but in any system is, how do you know which of the collection of good ideas are the “right” ones to implement given your unique situation? In fact, how can you confidently determine whether any of the ideas should be implemented at all? Sometimes taking no action is the best option – but this can be difficult in a culture where an action consistent with the operational philosophy (although misguided) is better than none.

The message is one of caution. It is imperative to understand that any continuous improvement tool can give you a sense of victory when you can actually be “losing.” In this context, losing is defined as successfully achieving a portion of the business objectives (e.g., process efficiency), but not all of them (e.g., financial, customer, growth).

Is process efficiency or quality improvement sufficient? The answer is “no” unless the continuous improvement effort is firmly tied to cost and any other internal or external factors deemed important by the organization.

As Peter Drucker presciently noted decades ago, better tools are needed if we are to transform a process efficiency concentration into a business effectiveness mindset.

“…yet our tools—especially our accounting concepts and data—all focus on efficiency. What we need is (1) a way to identify/priorities the areas of effectiveness (of possible significant results), and (2) a method for concentrating on them.”

That’s the role of Profit Mapping…

Adam Garfein

Business: A Living Dynamic System

2006-12-18T12:50:00.000-05:00

Does a dollar saved by efficiency improvement of a process have the same value to the organization as another dollar saved elsewhere say in labor, marketing, or accounting? The answer to this question is: it depends. It depends on many factors and the reasons are not only unique to the organization but also to the current situation. The value of the savings achieved at one part of the business is different depending on where it was saved, when it was saved, and what other consequences result from it. Consequently, more of the same cost savings, which benefited the company bottom-line once, may not have the same effect ever again.

The value of one dollar in cost savings changes as it bubbles through the organization. It may either increase or decrease. Rarely will it maintain its one dollar value on the financial statements of the strategic business unit. The change in its value depends on the various interactions among the different business functions and their current status. For example, savings by off-loading work to increase efficiency are either reduced or lost by an increase in the overhead. One can not add the savings in individual components for the overall gain.

A business is not a random bag of individual functions put together. It is more than a collection of operations, accounting, marketing, sales, and so on. All functions connect with each other to create an ongoing business. Unless all perform collectively for the good of the organization, the business can not flourish; in fact, it would deteriorate. A business is a living dynamic system.

Improving a dynamic system

A system is a connected network of various entities, not a mere collection of individual components. It has built-in influencers that either amplify or attenuate, but surely manipulate, the response of an individual component to any stimulus. The stimulus may result from external factors such as changes in market demand, or from internal decisions to improve financial performance, meet regulatory compliance, and the like.

Any stimulus or cause to one of the components creates an effect, which in turn becomes the cause to other components, and so on. The chain continues to build resulting in a cascade of effects. Unfortunately, just because a component has already been influenced by another cause does not exclude it from being stimulated again, resulting in feedback and stimulating that component repeatedly.

Let’s consider an example. The objective is to reduce cost by $1 million. This could be achieved by one of many ways. The company could implement continuous improvement (such as lean, six sigma, flexible processing, etc) to enhance process efficiency, move operations to a low labor cost region, force suppliers to reduce their prices, reduce sales and marketing efforts, reduce IT infrastructure, eliminate new product development projects, and so on. As evident from this list, all are possible options but none are confined enough to be isolated from other parts of the business. Each has multiple consequences and affects the overall business in complex ways.

Another characteristic of the above options is that their payoff and influences on other parts of business are not at the same time. Each component reacts differently over its own time frame. Before the dynamics of an effect die out, a new cause may, and it often does, arise further complicating the dynamic response of the system. For example, eliminating new product development projects would bring cost savings right now but would adversely affect the business in the future for a lack of new products.

Need for a systematic approach

Efficiency enhancements by continuous improvement approaches generally do not result in long term financial or other benefits unless the operational influences are permanently modified. For example, reduction in inventory brings about a one time benefit unless the role of inventory is changed in the business. Unless the system that caused the bloated inventory in the first place is changed, the reduction in the holding cost would be short lived. Only when it would no longer be possible to let the inventory to increase again without affecting the rest of the operations, the cost savings would become sustainable. This is one of the most significant deficiencies of continuous improvement efficiency initiatives. A change that produces a one time, non-repeatable gain does not contribute to sustainable improvement.

Each component of the system reacts to any stimulus in its own characteristic way. Responses to distinct causes, generally, are not the same. In fact, systems exhibit different responses to the same cause depending on their current situation. The magnitude and the type of the cause along with the current state of the component define the response. If the finished goods inventory is high and the management decides to suspend production of some products due to a lack of raw material availability, the business may not suffer the consequences. Conversely, the business would suffer loss in sales with a lean inventory situation – different response for the same cause depending on the current situation.

Many proponents of continuous improvement methodologies, such as lean, take an enthusiastic approach of doing the right things, yet not allowing any financial levers to guide their thinking. They argue that financials are the result and should not factor into the means. This argument assumes a direct and linear relationship between efficiency improvement and financial gains. Experience shows otherwise. The interconnectedness of the overall system moderates this relationship. Cost savings bubble through the organization in different and constantly changing ways. Consequently, efficiency improvements, although noble things to do, achieve mostly short term gains and fail in the longer run for a lack of a clear financial insight.

Managing a business – a dynamic living system – is to device a moderate path between two extremes: being overly bloated or too lean. Arriving at the right balance requires a clear acknowledgement of risks, and an intimate knowledge of how various stimuli affect the individual components of the business and the resulting cascading effects on the strategic business unit.

Without a systematic approach to ascertain the current status of the system and then to change it, which is to redesign the activities requirement to execute the necessary processes, long term sustainable gains are impossible. In other words, the interconnected influences among the various components of the system have to be reorganized to attain lasting benefits. It is not sufficient to identify the interconnections. It is imperative to also understand the magnitudes of responses in order to meet specific business objectives. Good managers instinctively understand this reality.

Anil Menawat

Building a Profitable and Sustainable Lean Organization with Profit Mapping

2006-06-13T13:52:00.000-04:00

One of the enjoyable aspects of our work is that we interact with a wide array of people in companies, ranging from the executive suite to the front lines. This is a great opportunity to understand the pulse and priorities in organizations from a number of often differing perspectives. Not surprisingly, Lean is one topic with a great deal of mindshare in companies today – and the focus of this article.

The range of opinions and comments we hear about Lean is quite fascinating. On the one hand are the “motherhood and apple pie” perspectives. For these practitioners, Lean is the be all and end all solution to their operational and business challenges. On the other extreme are those that definitively claim that “Lean doesn’t work.” Many more organizations are between the two ends of the continuum, including those who are just beginning their Lean journey and do not have enough data points to quantify their successes or disappointments.

Lean is a driver to improve your business just as Information Technology is a facilitator. Neither is the end game. Lean principles and tools are a wellspring of good ideas and practices. Keep in mind that even if Lean is a stated business objective for your company, it is to achieve a larger objective. Lean is one of many and not the only objective. You have other important objectives such as profitability, customer satisfaction, and so on.

You have to balance Lean with all the other unique objectives and priorities within your company. In fact, regardless of the specific strategy, successful companies emphasize building agile, profitable, and sustainable organizations to capitalize on ever changing opportunities in the global economy. Lean happens to be a part of this larger puzzle. Profit Mapping helps companies achieve their larger goals in conjunction with Lean, if Lean is desired. The goal is not to seek Lean impact, but the impact of Lean on the business objectives.

Lean principles are without question helpful to organizations that wish to reduce various forms of waste and deliver value to the customer. The plethora of Lean tools attests to its popularity. We have compiled upwards of 50 Lean tools available to the practitioner. Some of the more popular tools are 5S, Kaizan, Value Stream Mapping, Kanban, and Poka Yoke.

There are so many tools such that practitioners can get bogged down in tool implementations while losing sight of why they are using them. This is a forest and trees issue. How do you know what tool(s) make the most business sense to use for your company? When should they be used? What will be the overall impact of the outcome on the business? These are but a few important questions for any process improvement approach.

Fundamentally, Lean principles are sound. The challenge is in knowing how to translate sound principles into precise actions that make the most sense for your organization. Yet, actions alone are not enough. Every Lean action must be prioritized and directly connected to achieving your company’s overall business objectives.

In practice, what works for one company is not guaranteed to work for you. Each company has different products, processes, customers, strategies, and so on. Moreover, these factors are constantly changing. That is, your company will always differ in ways, large and small, from others.

You are not operating in a steady-state business environment. The business factors are constantly changing within and around your company. Copying the best practices from yesteryears of other companies is not enough; you have to know why those practices would be better than what you are currently doing given the unique capabilities and constraints of your company.

Since the business environment is inherently dynamic, both internally and externally, how should companies guide their Lean efforts – to ensure success from the outset? This creates a sizable challenge for knowing how, where, and why to implement any particular Lean tool in ways that will create the biggest business impact for the investment in time and effort. This requires the benefit of a structured methodology such as Profit Mapping to help you focus, prioritize, and align your Lean efforts with your business objectives.

Profit Mapping is an intuitive, systematic, and forward-looking methodology for business execution. It is a structured yet flexible approach that is highly complementary to Lean efforts. Specifically, Profit Mapping enhances Lean in the following ways:

• It integrates multiple perspectives, including cost, so that managers can assess the profitability of their Lean decisions. This gives managers critical insight that also helps avoid implementing Lean in ways that could potentially destroy profitability.

• It connects Lean thinking and tools to the business objectives by identifying the parameters that managers can control.

• It shows the impact of any particular Lean project or action across the business, not just in isolation of that segment of the process.

• It creates a roadmap to the desired future Lean state showing the precise steps and actions that will achieve the business objectives. If the future state is not achievable, it can show you what additional process changes, resources and/or investments are required to get there. No other methodology can do this!

• It helps identify which Lean tools are most appropriate to use in any given circumstance.

• It helps extend Lean into situations where multiple products are produced on the same line.

• It helps dynamically adjust and prioritize Lean efforts in relation to changing internal and external factors.

Lean is a way of thinking and Profit Mapping is the execution tool that helps you get the most out of Lean by connecting your efforts to the business objectives and quantifying the financial implications of your actions. Profit Mapping provides critical insight into which Lean actions will be effective and which will not. If your Lean actions are not producing the desired effects, Profit Mapping also shows you how to quickly correct course, avoiding mis-implementation of Lean principles.

Lean is a terrific way to come up with good ideas for reducing waste and focusing on value from the customer’s perspective. But Lean alone is not enough in today’s intensely competitive and dynamic business environment where companies must compete against world prices.

You do not have the luxury of implementing Lean programs and actions, and hoping they will have the intended business impact sometime down the road. You need to know now and in advance if and how successful your Lean initiatives will be for the overall business, not just on a process efficiency. Profit Mapping helps you do this.

Adam Garfein and Anil Menawat

Why Current Approaches Fall Short in Creating a Profitable Future

2006-03-06T12:13:00.000-05:00

The chairman of a mid-size manufacturer recently confided in us the essence of his company’s cost and operational performance improvement mindset. For us, “The process is not dictated by the present. It is dictated by the needs of the future.” He went on to explain how “continuous improvement” does not provide enough competitive bang for the buck; he is most interested in “breakthrough improvements” that provide customer and profit returns that sustain the company’s success.

Such breakthroughs can come from manufacturing advancements, product design, process re-design, and so on. Regardless of the source of the innovation, the innovation must be converted into a profitable customer focused operation. Otherwise, the business cannot survive over the long term.

Today, most companies try to create their future by looking into their past and extrapolating what they find into some sort of concocted view of the environment of the future. Unfortunately, such approaches are inadequate for the task because they (1) do not account for the different conditions of the future, (2) rely on steady-state analytical approaches that incorrectly assume that the business and operational environment does not exhibit variability (3) rely on standard costing, which does not work well for understanding the past (as it has to be corrected by variance analysis), and is therefore even less effective for understanding the future, and (4) lack a systematic implementation methodology that connects specific management actions to achieving the business objectives.

Profit Mapping is a proven management decision tool that overcomes these shortcomings. It:

Integrates advanced functional (domain) analysis within current constraints
Emphasizes process dynamics over steady state approaches
Uses activities-based resources and financials instead of standard costing and variance analysis
Looks into the future rather than data-mining the past
Connects controllable actions to strategic objectives
Constructs a roadmap to achieve the strategic goals

Profit mapping virtually eliminates decisions that have adverse effects on your business. It helps you correct your situation immediately and guides you to where you want to go, like a GPS navigation system.

Adam Garfein and Anil Menawat

Pressure on Prices: How will you Respond?

2006-01-26T20:20:00.000-05:00

Here is a timely article written by Anil Menawat on how companies respond to pricing pressures. It highlights the challenges companies face in becoming more cost competitive in the context of a multi-product and high-variability demand environment. The article was originally published in the January 2006 edition of the Next Generation Manufacturing eJournal.

Pressure on Prices: How will you Respond?

Increased telecommunications technologies are making it easier for customers to shop globally for lower prices. While customers everywhere are enjoying more options and lower prices, here in North America, raw material and energy costs are rising, creating unprecedented challenges for manufacturers. Only a select few are able to pass the increased cost to their customers while most are sacrificing profits to stay in the game. How will you respond to this power shift?Before we begin I would like to say that I am honored as well as delighted on the invitation to be a part of this eJournal. The suggestion of exploring ideas that go beyond the applicability of the “Toyota Production System” is refreshing. In my opinion, this is a very important topic in multi-product and variable-demand environment often found in the SMB (small and medium-sized business) sector.

Where is the Opportunity?

When manufacturers are unable to pass the increased cost to their customers, they usually adopt one or both of the following strategies:
(1) To reduce the internal costs of producing products and services, and
(2) To discontinue the unprofitable products, services, channels or customers.
In either case, they first need an accurate measurement of costs to determine true profit margins for each product and service. Without a true assessment of the costs it is difficult to identify where the opportunities lie and what can be done about them. Furthermore the interest is less in what their costs were in the past and more in what they will be in the future for them to stay competitive.Most companies focus on tracking past performances and then tend to extrapolate from that to forecast future operational requirements and capabilities. Unfortunately, your past performance, no matter how successful, was based on different work requirements, demands, customer needs, and market conditions. Operating approaches and strategies that may have helped you in the past may not produce the desired result in the future because the environment has changed. In multi-product environments where demand fluctuates routinely, such as in high-variety and low-volume scenarios, this is an everyday event.Measuring revenues is not a problem but getting true cost of each product and service is.

Most companies keep good accounting data and the problem is not in adding up the cost. The problem is in distributing them to each product and service. If your product mix, demand volumes, and how you produce your products or services do not change significantly then you can use standard costing with variance analysis to get a fairly good assessment. But, that is not the environment in which the typical SMB operates. The high variety of products and fluctuating demands make the standard cost data misleading. The per-piece cost for each unit of product depends on the dynamics of the operating environment on the shop floor at the time that piece was produced. The product mix and the demand volumes impact the activities required to meet the demand. The activities composition plays the most important role in how to absorb the costs – in particular the costs of technology, capital investment, back office, design, maintenance, holding inventory, etc.

Today your operational environment is different from when the standard cost structure was developed. Today the product mix is different, the demand volumes are different, and in many cases, the policies and procedures are also different. A considerable constitution of the activities by people and machines required to deliver the products or services is new. Most companies in the SMB sector do not have the resources to update their cost structures frequently hence we find them to be out of date in great majority of situations. In some cases we have seen standard cost information to be more than several decades old. Clearly the company made a different set of products back then, than it does today.For the sake of discussion let us assume that we can overcome all these inadequacies, but the main problem still remains that this is historical information and not forward looking into the future. In your quest to respond to the price pressures when you make any significant change in your operating dynamics, you will be operating in a new and different environment. Your decisions on what to do must be made with the cost structures based on the yet unknown future. If they are based on the past cost structures then you are more than likely to go off course.

Uncertainty engenders partial solutions and misapplications

When faced with the rising pressure on prices, we find that managers often jump to conclusions – improve process efficiency, improve throughput, reduce inventory, reduce labor cost, outsource to a cheaper producer, etc. These are good things to do per se, so long as you are taking the cost out of the system and not merely shifting it to another area. In majority cases we find shifting costs to be the more common response. But, more importantly, the elimination in cost must be significant enough to make an impact. Very often managers forget to ask the four basic questions:

Can it be done? Is it possible? If not, then what additional capabilities are needed?
Will it be profitable?
What is the impact of my decision across the product mix and the functional capabilities of the organization?
How do I get to my desired future (the roadmap)?

In the absence of answers to these questions, the environment is fertile for half-baked ideas based on correlative thinking and rules-of-thumb, and misapplications of sound principles. Let us consider the implications of this uncertainty. The results are far reaching that affect not only the accountants and senior managers, but also the operations personnel. Process managers are asked to redesign the process and policies that will reduce costs and increase profits in future based on historical information. Without a reliable framework they do not know for sure whether their solutions will bear any fruit. They are left to use vague guidelines, which depend on inaccurate information, without questioning the accuracy and accepting on faith. They shoot in the dark and hope to kill. Misapplications are rampant throughout industry.

An example of misapplication and shifting costs

Let’s consider an example of a truck power-train component supplier. The company manufactured twenty four product families with several hundred individual SKUs. The demand of various products varied from a paltry 2 units for some to several thousand for others over a four-week long period. The plant operated in a batch fashion with two primary routings but no direct connecting flow between workstations. In other words, each work station continued to produce until it ran out of work to do. The plant financials were good with overall net income at almost 7% of sales. Unfortunately, WIP piled up everywhere. Management decided to convert the batch operation into a flow line to improve efficiency and reduce WIP.

Using an aggregated constraint capacity analysis tool they were convinced that their plan was feasible. They sized the buffers based on historical performance and line balancing showed a lot of promise. They estimated the WIP to decline precipitously with overall increase in bottleneck efficiency. Using the standard costing model, adjusted for the expected improvement in efficiency, they believed they were going to save a lot of money.

The reality unfortunately was not as they expected. Reduced WIP choked the flow and the machine utilization rates suffered significantly reducing the overall throughput by about 20%. The financial result was a disaster; the overall net income fell to negative 3% of sales. They not only lost on the bottom line but they also lost on the top line since they could not produce enough to meet the customer demand and had to outsource to fill the gap.

The problem was not in their objectives but in their analytical tools and the applicability of the principles. They were attempting to squeeze a square peg in a round hole. The problems emanated from two causes:

1. The processing requirements at workstations depended on individual product type, and

2. They did not understand how the machine failures would impact the dynamic interactions throughout the process.

If the processing requirements at workstations in a line depend on each product then with each change in product batch the dynamics of the entire line changes. Not having large enough buffers (WIP) in between workstations to attenuate the dynamics of the process flow caused the line to experience significant amount of blockage and starvation. They could not anticipate this because they used a static model of aggregated constraint capacity. These are steady-state models and cannot show the dynamic effects. A dynamic analysis was required for the job. Furthermore, they used the standard cost data from history but the activities composition was so different in the flow line that the old cost structure had no applicability at all.

Response to price pressures

The above situation is a common occurrence in any multi-product shop with high-demand variability. Static capacity models and standard costing or machine run-rate approaches to calculate individual product costs are not valid methodologies. Decisions made using these approaches will always be wrong. You may find partial successes but will never be able to tap your full potential. The activities based cost and management (ABC/M) techniques can help but only after the fact. After all, ABC is an accounting device and not a management tool to create the future. A similar situation would rarely exist in a low-variety with long-run setting. The solution requires a tool that assesses the dynamic changes in the process and the corresponding activities composition to build the resource requirements and financials for the future environment.

Profit Mapping is a tool for aligning operations with future profit and performance. It focuses on the activities performed by people and machines to improve process effectiveness and growth. Here we construct an activities composition of the process, understand the dynamics of how it changes over time, and tie this information to the resource requirements and the cost to produce products or services. As business conditions change – such as changes in product mix, demand, product or service delivery capabilities, vendor performance, business strategy, etc. – Profit Mapping reassesses the resource requirements and cost/profitability implications of the new and changed activities composition. The capability of Profit Mapping is in its ability to directly connect the controllable parameters to the business objectives within the capabilities and constraints of your organization. It is a radical yet intuitive enhancement to operational decision making process that is equally suitable from executive to shop floor decision making.

In subsequent issues of this journal I will explore with you several real-life examples of using Profit Mapping. We will identify parameters that we can control within our capabilities and constraints to reach our financial as well as other business objectives. This is one of the fundamental principles of the Profit Mapping methodology. In applying Profit Mapping we take an agnostic view towards the improvement philosophy and evaluate the consequences of decisions, irrespective of their origin or basis, from the process, resources and financial perspectives. Our focus is not on what happened in the past but to look forward to the future.

I believe the complexity in multi-product and high-variability in demand environment is immense where traditional single-focus methodologies and generic guidelines are not acceptable. A systematic approach focusing on the business goals – not on the intermediary issues such as efficiency, throughput, inventory levels etc. – is imperative.

Dr. Anil Menawat is the founder of Menawat & Co.

Welcome to the Profit Mapping Blog

2006-01-06T18:16:00.000-05:00

Anil Menawat and I are pleased to announce our entry into the world of blogging. Our mission is to help raise awareness of Profit Mapping by sharing information and resources on how Profit Mapping drives cost and operational effectiveness for both manufacturing and services companies.

Profit Mapping enhances any strategy, improvement framework or measurement approach. It complements what you are already doing and provides the equivalent of a GPS navitation system for the business. Profit Mapping is the only approach that can guide you with precise steps and activities leading to the desired results.

We are currently preparing several articles that explore in more detail how Profit Mapping enhances leading improvment approaches. Our first article will address Lean principles. This will be followed by a Six Sigma article. Others will follow. We will post these articles on the Menwat & Co. web site when they are ready.

Please let us know about your significant business challenges. We look forward to discussing them in this blog.

In the meantime, please take a look at Anil Menawat's recent article, Pressure on Prices: How will you Respond?, from the JobshopLean journal. This is a timely article on the need to become more cost competitive in today's global business environment.

You can find more information about Profit Mapping and how it works at our web site and in our book, Profit Mapping: A Tool for Aligning Operations with Future Profit and Performance, from McGraw-Hill.

Regards,

Adam Garfein