Organizational Performance Part 41: Measuring the Impact of Process Improvements | Operational Excellence Quick Hits

Quick Hits share weekly tips and techniques on topics related to Operational Excellence. This week’s theme relates to the impact of process improvements. We hope you enjoy the information presented!

Speaker 1: (00:05)
In today’s session we’re going to talk about the next mindset change that’s required for companies to get breakthrough improvement. Again, this series is about the mind shift that’s necessary for companies to go through to get breakthrough improvement. If we don’t get the mindset change, we’re not going to get breakthrough improvement. This week’s session is about process improvement and measuring the impact of process improvement. So a lot of people believe that the sum of all the process improvements are equal to the overall company performance improvements, so if we do a bunch of events in a bunch of different areas and a bunch of different departments and we make improvements to those areas, will it result in improve company performance?

Speaker 1: (00:53)
How most companies measure that is through cost accounting, and what they typically do is say, “Look at the cycle time of the reduction of the improvement.” So if I make the improvement to an area, what’s the cycle time reduction? Then they take that and say, “Okay, how many units are we going to produce across this machine or across this resource?” And get the total hours saved in a year, and then look at the total hours saved and then what are the associated labor wages, fringes, and overhead that might contribute to that and come up with an annual savings. And so a lot of times the improvement is justified by the amount of savings based on cycle time reduction, which is really the value added portion of the process.

Speaker 1: (01:44)
What we really want to do is understand the impact from a global perspective, not a local perspective. So we want to understand if we make this change in this department, what effect is that going to have on the company performance? And the measures that we use to look at this is what’s the throughput or change in throughput? What’s the change in operating expense? And more importantly, what’s the impact on net profit? So if the change in throughput is greater than the change in operating expense, then you should do the initiative.

Speaker 1: (02:15)
And again, our goal here isn’t to reduce operating expense, the goal is to increase throughput, which is the value add portion at a faster rate than we increase operating expense. So operating expenses might go up but if throughput goes up at a faster rate, that’s an improvement. So the global measures, throughput, operating expense, and investment, to calculate the return on investment, we just take the impact of the change in throughput minus the impact on the change in operating expense and then divide by the impact of change in investment. And investment can be two things, it’s money that we’re going to spend to make the improvement, but it also can be reduction in inventory. So we can use that inventory reduction as a return on investment impact calculation.

Speaker 1: (03:09)
The paradigm that we need to have is not all process improvements affect overall company performance. We should only look at the process improvements that have an impact on company performance. So one of the criteria that we need to look at, criteria at number one, it improves the flow rate of the entire system. So that means either sales goes up or lead time goes down. So if sales doesn’t go up and total lead time doesn’t reduce, it’s not an improvement. Second, it reduces operating expense. The income statement, if the period prior to the improvement is greater than the period after the improvement, then it’s an improvement, so cost actually went down. So actual cost, not perceived cost.

Speaker 1: (03:58)
And last, it reduces the total inventory investment of the organization. So if this three criteria, if any one of these three criteria are met, then it’s an improvement for the system. Many times, most of the local process improvements don’t translate into company improvements, but people have the mindset that oh, if we make all these changes, it’s going to improve the company performance. Most likely not, so then of course, our focus is doing what should be done and not doing what shouldn’t be done. So the things that we shouldn’t be doing are things that don’t impact the overall performance of the system.

Speaker 1: (04:38)
In next week’s session, we’re going to talk about the mindset of in order to complete an entire project on time, the best way to do that is to manage each task to make sure that each task is completed on time. So we’re going to challenge that paradigm.