Figure 7.6 shows how a production process should be managed to execute an organization’s strategic goals and objectives. An organization’s financial performance and productivity and competitiveness depend on how well it manages all resources relative to a competitive strategy. At an operational level, the goal will always be to select a combination of projects, tools, and methods to improve process yields, increase system availability and capacity, and reduce lead times to support the production of product and services. This is accomplished by effective application of enabling initiatives to create core competencies. As an example, to improve yield, Six Sigma tools and methods help identify the root causes of low yields and guide productive solutions. Lean tools and methods reduce lead times
Evaluating productivity at an operational level.
through process simplification, standardization, and mistake-proofing using customer value and serves as a guide to eliminate process waste. This increases system availability and capacity to help meet demand, but with fewer resources.
Financial and operational data are used to identify productivity opportunities down to a process level. Figure 7.7 shows how this identification process is achieved using a flow-down model. It could start at any level of Figure 7.7, but, when completed, lower-level projects and their metrics should be aligned with higher-level metrics. As an example, we might
Aligning operational improvements with strategy.
begin the project identification at a business enterprise level and then successively move down to a project level. Alternatively, we could start the analysis from the bottom up, working upward from a major process issue. The top-down model is generally easier.
In the example shown in Figure 7.7, the high-level financial goal is cash flow improvement. Two areas impact cash flow and thus provide improvement opportunities. These are inventory reductions and fixed asset investment. The next step of the analysis might be to evaluate inventory investment (turnover ratio) for each of the facilities. Recall that the inventory turnover ratio is defined as the COGS divided by the average inventory investment necessary to support the COGS. The lower the inventory investment at a constant COGS level, the higher its turnover ratio. Taking the analysis down another level, the two major drivers of inventory are lead time (or demand over lead time) and demand variation. The longer the process lead time, the more work in process and finished goods inventory that will be needed until more inventory is received to replenish safety stocks. Also, the higher the variation of demand, the higher the safety-stock inventory required to meet demand at the targeted service level.
Continuing the analysis down through lead time shows several new categories that directly impact lead time. Any operational issues that increase the operation’s cycle time also increases system lead time. Depending on lead time and inventory investment impacts, process issues are potential improvement projects. In this example, lot size, supplier delivery, quality, and material availability impact lead time and hence inventory investment. The larger a lot size, the more inventory being kept on-hand. Large lot sizes occur for several reasons. These include suppliers requiring minimum purchases, a lack of visibility of on-hand inventory, and inaccurate container calculations. Additional inventory needs to be kept on-hand to ensure internal operations are not disrupted in the event a supplier misses a delivery. Quality issues require work be redone, which interrupts production schedules and lengthens the lead time for receipt of goods from suppliers. If internal materials are not available, production must wait, and lead times are lengthened. Some reasons for lack of available materials include poor inventory records, damage when transporting materials, and poor quality that is detected only after taken from inventory storage. Lean or Six Sigma projects can be created to address these process issues.
Project selection versus process improvement strategy.
Consultants gather information for each of the categories shown in Figure 7.8, looking for performance gaps when conducting operational assessments. These include cultural surveys, strategic gaps that need to be closed, financial analysis such as budget variances, identification of cost- avoidance opportunities, benchmarking other processes either internally or externally, value flow mapping (VFM), evaluation of other internal metrics including operational, the voice of the customer (VOC), regulatory findings and health incidents, as well as safety and environmental issues that impact the organization. These are analyzed and prioritized for action. The project charters are created and integrated into current organizational initiatives, and these are incorporated into the annual planning with periodic reporting of status.
Cultural surveys are one-on-one interviews or online surveys at different organizational levels. They help identify performance gaps using information provided by employees and other stakeholders. Online surveys are used to ask questions of selected employee groups, suppliers, or customers, depending on the surveys scope. There may also be followup questions. The goal of cultural surveys is to assess the organizations readiness for change. Questions should focus on previous initiatives and how they were deployed. Why were they successful? What were the benefits? What were the issues that should be avoided for future initiatives? Ideally, the questions will enable an analysis of the top issues, benefits, success characteristics, and similar themes. One good question format is, “What are your top three gaps or issues?,” “What would be solutions to these issues?,” and “Which types of improvement projects would create the greatest benefits for your organization?” Employee feedback gained from cultural surveys is useful for looking for areas that offer productivity opportunities.
Strategic performance gaps occur when strategic goals need to be executed but some have no solutions. Productivity opportunities (i.e., projects) have not been identified to close the gaps. The focus for identifying ways to close strategic gaps is to list the gaps and bring a team together to brainstorm actions or projects that would be good candidates for closing these gaps. The common approach is to analyze financial and operational reports that show the gaps and work the brainstorming exercise from that perspective. Then projects are created with charters and are integrated into current initiatives and their reporting.
This chapter discussed several approaches for identifying improvement projects using financial reports. Budget variances are used to identify abnormal changes in budgets. Cost avoidance projects are also good candidates for improvement projects if their basis is rigorously verified. An example would be a situation in which a material currently being used to build a product needs to be replaced in the future because of regulatory requirements. Failure to replace the material in a timely manner could result in future fines or prohibition of use, resulting in the product not being manufactured.
Internal and external benchmarking were discussed in Chapter 3. They were shown to be a useful for gathering process improvement information. Benchmarking can serve as a basis for identifying opportunity to increase productivity. In some instances, disruptive approaches for process improvement may dramatically improve performance. As an example, if an organization benchmarked an industry competitor to reduce facility costs, they may find that the benchmarked organization dramatically reduced facility costs by enabling remote work for a portion of their workforce. In addition to saving facility costs for things such as energy and maintenance, entire locations may have been sold or leases not renewed. An advantage of benchmarking is that, although an idea like remote working may have been discussed internally, seeing it work with testimonials is a powerful way to effect change. Another example would be finding a new solution to a chronic problem. Current policy may require sending invoices via mail to obtain signatures, whereas other organisms may use encrypted e-mail that controls access and provides sign-off approvals to dramatically reduce lead times and cost. In summary, benchmarking identifies differences between organizations’ process performance that may illuminate opportunities for creating improvement projects.
Because some process issues are not captured in management reports (e.g., the hidden factory) it is always useful to walk a process to identify the process waste associated with non-value-add operations. VFM and other Lean tools and methods discussed in Chapter 6 are useful for these process walk-throughs. There are likely many opportunities to simplify, standardize, and mistake-proof processes. Normally a workshop is held to bring together a team representing the process and its inputs and outputs. The VFM is created or displayed on a wall, and the operations are evaluated for customer value. Process waste is added to the VFM, as are relevant metrics. These include cycle time, rework and scrap, inventory, uptime, throughputs, floor space, and other information for each operation to provide insights into issues and potential projects.
In Chapter 3 we discussed customer experience and how it can be used to identify gaps in that experience. These gaps span the activities customers engage in to research and decide to purchase through use of products and services as well as disposal. This customer journey focuses on customer satisfaction and customer intent to repurchase. Customer experience projects increase revenue while reducing adjustments to revenue. These types of projects directly increase the numerator in the productivity equation. The denominator is also decreased when concession expenses are reduced for poor quality and other issues. Listening to the VOC through marketing research, complaints, one-to-one interviews, surveys, and on-site visits also provides ideas for process improvement.
The final categories shown in Figure 7.8 are regulatory, health, safety, and environmental issues. These are also good projects for increasing productivity. In many situations they are required by law or regulation. Direct impact to the profit and loss statement is seen with fines, worker injuries, and other expenses. There are situations where complying with laws and regulations improves a competitive position. An example is deploying technology that has reduced environmental emissions. Some organizations invest in technologies that have this advantage, whereas those that do not cannot sell products in regulated markets.
Figure 7.8 also shows several solutions that are employed to execute a project. These are just-do-it projects, Lean methods, Six Sigma methods, capital expenditures, and process reengineering. Many projects have a known solution. For these projects, the root causes should be eliminated as soon as possible without extensive analysis. These are called just-do-it projects. In situations with a very complicated process, Lean methods are used to simplify and standardize the process as described in Chapter 6. Lean methods can also be applied to a specific set of issues. 5-S and mistakeproofing are examples, but there are many others. If root causes are process-focused and an analysis of the process is useful, then the application of well-known Lean tools and methods is recommended. In situations that require extensive data analysis, Six Sigma methods may be appropriate. These will be discussed in Chapter 9.
There are also situations where machines wear out and cannot hold a designed tolerance. The solution is known: new tooling or machines are needed to improve quality. In other situations, a new machine or process design is needed to produce upgraded or entirely new products and services. Enhancements may also be needed relative to digitization and automation. These require investment of capital expenditures.
Reengineering may also be required. This includes changes to policy, process, people (i.e., roles and responsibilities), outsourcing, or other major changes. These may or may not require investment. Projects may be required for these changes because a root-cause analysis is typically the reason for the recommendations for these changes.
The operational goal is to align the deployment of improvement projects and their tool sets and methods to improve financial performance and
Linking Projects to Achieve Productivity Targets
productivity. Table 7.11 shows how to make this alignment. This discussion is an extension of Table 1.1, which describes enabler initiatives. The projects shown in Table 7.11 are aligned to the initiative and tool set most useful for its root-cause analysis and identification of solutions. The relevant operational and financial metrics are also shown. As an example, increasing throughput will reduce order-to-cash lead time when a process is simplified and standardized and the appropriate Lean methods are applied to maintain the takt time. Increasing manufacturing yields directly reduces the direct labor and material costs used by a production process. This is because scrap and rework are invested material and labor that need additional work. There are many other relevant examples throughout various industries and functions within a given industry. Table 7.11 shows that metric linkages should be set for all projects to ensure alignment between the customer, finance, and operations to optimally use scarce resources and increase productivity.
Common elements of a project charter.
Project improvement opportunities are incorporated into a project charter like the one shown in Figure 7.9. There are many different versions of project charters, but the list of common elements is used for most of them. A charter describes the problem and its extent (i.e., the scope), its impact on the organization, costs and benefits, its deliverables, its sponsorship, the leader of the team, the team, resource requirements, and the schedule. To fully document the costs and benefits, a project charter should have a separate section that shows the assumptions of the financial analyses of the project’s cash inflows, outflows, required investment, applicable financial ratios such as payback and IRR, as well as their impact on customer satisfaction and productivity. Charters are also communication tools for stakeholders that help garner organizational support. Finally, project charters are useful when aggregating several projects into a program or initiative to align the work to strategic goals.