Shownotes
The reason all owners are in business should be primarily to create value for themselves. The way they create value for themselves is by creating value for customers. One way to do that is by productivity acceleration. Productivity is accelerated by understanding non-value-added activities and stop doing them. That frees up a tremendous quantity of resources, time, cash, and physical space to focus on delivering customer value. This is a deep dive continuation with Sean Hutchinson, CEO/Partner with SVA Value Accelerators and Alistair Stewart, the Manufacturing Practice Leader, also with SVA Value Accelerators. This continuation is where we’re going to dig deeper and talk about productivity acceleration.
—
Productivity Acceleration Detailed with CEO/Partner Sean Hutchinson and Alistair Stewart SVA Value Accelerators
Creating The Path To Higher Valuation with CEO/Partner Sean Hutchinson and Alistair Stewart
This is a deep dive continuation with Sean Hutchinson, CEO/Partner with SVA Value Accelerators and Alistair Stewart, the Manufacturing Practice Leader, also with SVA Value Accelerators. This continuation of the episode is where we’re going to dig deeper and talk about productivity acceleration. I appreciate it. Thanks so much for taking the time.
Thanks. It’s great to be with you.
Let’s talk a little bit about what productivity acceleration is. We can think about productivity as the effectiveness of the productive effort. It’s measured by the rate of output per unit. What does accelerating mean? That means making it happen quicker. The reason all owners are in business should be primarily to create value for themselves. The way they create value for themselves is by creating value for customers.
Here’s an example. Imagine that an owner staples a new order to their back, the next customer order…every time they shake somebody’s hand, every time they meet somebody, every time they wait for somebody, every time they wait for something, every time something has to go back to be redone, checking and rechecking all those activities, are what we call “non-value-added” steps. If you start to look at the operations of a typical company, and most owners are going to be shocked if they are reading this for the first time, about 95% of all activities do not create customer value.
To create customer value, an activity has to pass a classic three-part test. An activity, has to be done right the first time; It has to change the form fit or function if it’s a tangible product or has to deliver a service that otherwise wouldn’t happen or it has to convert data into information or knowledge, changing the form fit or function of something.
The last and best of the three parts of the acid test is the customer must be willing to pay for it. Again, imagine a hypothetical owner stapling him or herself to an order that halfway through that order has to go back to the preceding step because we are missing some information. We’re not exactly sure if the customer wanted it in blue or in black. We go back and we find that the sales guy wrote down B in the color box. That was all non-value-added activity. We’re going to break that out as a line item on the invoice to the customer. Checking what color you ordered. You told us loud and clear what color you ordered. We didn’t understand. We didn’t write it down. We didn’t record it. No customer is going to pay that. All of these little activities that are pervasive in every organization are death by a thousand cuts, and productivity is hurt..
Productivity is accelerated by understanding non-value-added activities and stopping doing them. That frees up a tremendous quantity of resources, time, cash and physical space to focus on delivering customer value. Think about the activities that don’t change the form, fit or function of the product, aren’t done the right first time, and the customer would be unwilling to pay for if he or she saw them as a separate line item on the invoice. As we think about all the roughly 95% of the time that’s dedicated to non-value-added activities, we can see that those non-value-added activities can be classified into eight types of waste..
I’ll run through them in short order. There’s a great acronym that people can use to remember them. The acronym is DOWNTIME. I’ll go through each of the classic eight wastes.
First is defects. Making something out of plastic that we either scrapped, or redid. The worst kind of defect is one that makes it to the customer. Even if that defect is detected internally and something is either scrapped or reworked, that’s still a waste. Don’t confine our thinking to tangible products. There are many information defects that occur throughout many organizations.
The next kind of defect is overproduction. We make stuff that hasn’t been ordered. What do we do with that stuff that hasn’t been ordered? It sits on a shelf somewhere. We’ve got to have a shelf for it to sit on. We have to insure the space that the shelf’s in. We have to insure the stuff that’s on the shelf all due to overproduction. That is working capital not available for productive use.
The next of the wastes, that’s waiting. If we’ve overproduced and something’s hanging around, it’s waiting. Or f I’m downstream from Sean, Sean is taking longer than anticipated to complete his activity and I’m next in line, what am I doing? I’m waiting for the product that Sean is working on.
The next of the wastes–and I believe as do most people who have studied and used this approach–is the worst of all: non-utilized talent. If we harness the creative and physical capabilities of everybody on our team, we’ll start to accelerate productivity. Just because you’re the newest hire in customer service with six months’ work experience out of college doesn’t mean you don’t have a great sharp, curious mind.
The next of the waste is Transportation, moving stuff around. We can think of this classically in a manufacturing facility, but we also can think of it in terms of email. Shuffling documents back and forth. It’s very corrosive because we don’t think about the time it takes to move information, take a look at it and get back to it. Why are you moving that information around? It’s getting a second opinion. You’re asking somebody to check something.
There is an interesting example of that we all get frustrated by, which is… the document gets emailed to eight people. There’s no clear instruction about who’s supposed to review it and who’s supposed to get back with comments on it when it probably could have gone to one person without the copies to the other seven. That person reviews it and comments on it. There’s the question of “did it have to happen that way if it had been done right the first time?” Nobody would have had to review it.
If we harness the creative and physical capabilities of everybody on our team, we'll be starting to accelerate productivity.
As we move through this concept of value-stream mapping, we’ll identify who needs to get something downstream and who doesn’t.
The next of the wastes is inventory. If we have inventory hanging around, that is working capital that is unavailable for other productive uses, for example, being applied to innovation.
The next of the wastes is the concept of motion. This comes more from a manufacturing perspective but on the shop floor, moving your hands, your body leads to all kinds of ergonomic challenges, maybe not as relevant in the virtual world, the virtual economy. It certainly has a role as a waste in a service industry where there’s a physical delivery of something.
The final waste is excess processing. Painting the inside of a machine housing. Nobody is looking at the inside of that housing.
That’s an example from a physical, tangible world. We can also think of excess of processing in the design phase of anything. Am I doing more than is needed for the customer? That might mean I don’t understand customer requirements.
Eight classic wastes of business activity that contribute to 95% of the hours. Imagine if my boss is looking to get 40 solid hours from me every week. If I’m in a typical company, I’m spending 38 of those 40 solids on non-value-added activity. That is stunning, and should get the attention of every business owner. Stop doing the non-value-added activities, which allows us to focus on value-added activities.Productivity goes through the roof.
How do we understand these wastes? How do we see them? An easy way of learning to see classic wastes is through a technique known as value stream mapping. It’s laying out in sequential order a picture that shows the discreet activities or operations that go on and some data to characterize each operation. What is the standard cycle time for an operation?, If you’re in the banking sector, You could think of this in terms of originating a loan.
Processing a mortgage.
It doesn’t have to be just the physical world. We lay out the sequence of activities for each operation that’s involved. What’s the standard cycle time? How many people does it take to do it? If there’s some piece of equipment, a database, a computer, a machine, a truck. Anything that we need to do the work isn’t always a machine. Is there set up that needs to be done? If I’m doing a step in processing a mortgage, I probably have to go and get some kind of credit information. What does it take to have all the available pieces of data so that I can now submit that credit application? Lord forbid we might be missing one critical piece of information, which means we have to go back, all the delays and so on that are involved.
Productivity Acceleration: The worst of all the wastes is non-utilized talent.
This idea of value stream mapping helps us identify how value flows through an organization from the receipt of an order, shipment or delivery of the service or product. When we can visually see it, we can start asking ourselves, “Is that activity needed? Is it adding any value? Where are these eight wastes? What can we do? Most importantly, what can we do to get to get rid of them? As we think about eliminating unnecessary activities and reducing or mitigating wastes in other activities, we’re accelerating throughput. Henry Ford in 1926 took the assembly time for a vehicle from thirteen hours to two and a half hours.
If something that takes you thirteen hours to do, and we can get it down to two and a half hours by eliminating waste, people might be skeptical. There’s a track record for decades of applying these classic tools, these classic methods to eliminate waste and free up so much capacity to create customer value. When you create more customer value more quickly, you’ve got a stronger competitive advantage and you’re more profitable.
We can also think about throughput as being revenue. If you believe in Dr. Goldratt’s Theory of Constraints approach to running a business, there are only three metrics to solve for and they’re throughput, inventory, and operating expense. The idea of “stop doing the non-value-added activities” in order to accelerate throughput is fundamental to being a highly effective business person.
Sean: I saw you do a value stream mapping exercise once that I thought was interesting. The visual aspect of this is crucial for people to be able to see it. What you did was brilliant in its simplicity. We had a management team in the room. We drew six lines on a whiteboard. Those lines, the space in between them represented what were called swim lanes. Those swim lanes represented either a department in the company or a functional area of the company. For each step along the way, we put a sticky up there and we wrote what the step was. Someone touched a physical thing or something was happening in the company. We put the sticky note in a swim lane to assign it to the operations area or the finance area, so on and so forth. You could very easily see the different activities that were happening and also where they were being performed in the company
What I found fascinating about that exercise, besides the work that went into it, was that people were discovering things as they went. Go back to the example of stapling a customer order to your back and walking it through the organization. That was what was happening. There was a crucial question. Who touches it first when it comes in? Who’s the person that receives it? I watched that group struggle probably for 30 to 45 minutes to identify step one because everybody kept saying, “That’s where it starts, and then somebody else would say, “No, there’s a step before that.” And we would move the note or put up another one.
Once you got them up on the board, you’re looking at it and there are 70 steps. All of them representing tasks, it’s a pretty crowded board. We can now ask , “Is that necessary? No, it’s not. Rip it off the board.” Until eventually the happy path in that particular process emerges from the first step to the last step. You go from 70 stickers on the board, to 50 on the board, maybe less. What Alistair was saying is you can make a big jump just by eliminating 10% or 15% because everything that happens when you free up those unnecessary steps converts to not just to the financial performance of the organization but the line on the organization’s balance sheet that’s always at the top, cash-on-hand.
Necessity is the mother of invention.
If an owner is thinking” we’re doing better but my cash is burning up. I’m growing but my cash is disappearing. What’s happening?” You can point right back to gaps in productivity, gaps in throughput, or constrictions on throughput. If you look at it visually, you’re going to be able to begin to find those things.
Here’s the intimidating part of value stream mapping. That particular exercise was about an invoice coming in the company and an invoice being paid. How long has that taken us? It was taking a long time.
Once an invoice is in the company, there are probably only three or four steps until somebody writes a check. I found that to be fascinating to watch it happen in real time with real struggles. Magnify it to 100 or more crucial processes that are similar We need to map every single one of those and look for potential gains in productivity.”
In our value accelerator, by the time we get to productivity, we have a very clear vision of the Company in the Future because that’s the sprint that precedes it. Now we have clarity on where we want to go. If we didn’t do that first, it’s very possible to focus on solving the wrong problems.
Let’s imagine that there are productivity problems on the shop floor, in manufacturing. We can see that there are productivity problems in one production line for one product that the company is making. The company allocates a significant amount of money to correct the problem and sends the team out on the floor to improve that product, to improve that piece of their throughput.
If, after that, they do their strategy work, their company of the future work, they get clarity on the fact that the product didn’t do anything to produce value for the customer or for the company. It’s taking a lot of capital. If we trace it all the way through, we’re getting no shareholder value out of it. Now we’re going to starve that. We’re going to redirect that capital to another higher value activity.
Now, somebody walks out from the management and says to the shop floor team, “Take that line down, we’re not doing it anymore.” The person says, “We spent $500,000 improving the throughput for that product. Do you think you could have figured out before we did that we didn’t need to? We could have put that $500,000 over here into something of higher value.” It’s important to have clarity on strategy. Otherwise, you’re funding things that you’re probably not going to get any value out of.
Productivity Acceleration: Have a very clear vision of the company in the future because that’s the sprint that proceeds productivity acceleration.
It’s important to have everybody in the organization aware of what we’re doing to accelerate productivity. We can make tremendous gains, let’s say 0n the shop floor, to get more productivity; unless we have orders to take advantage of the capacity that we have liberated by eliminating activities, reducing non-value-added activities then there’s no more cashflow. It’s absolutely vital that, for example, the sales and marketing organization are part of the productivity acceleration conversation.
If sales increased demand, we enter a virtuous cycle of creation. I’ll use a manufacturing example. It’s true in service. It can be true in retail. It’s true in distribution. Imagine that we and our competitors have trained our customers, have trained the market to accept a seven-week lead time for our products. We look within our operations from beginning to end. We identify where the choke in throughput is. We recover or add capacity at the chokepoint, which causes the choke to move somewhere else. A relentless focus on this brings our lead time down from seven weeks to five weeks. Inherently our unit cost is lower and generally speaking, customers will pay a premium for shorter lead time.
If we don’t have sales and marketing in the conversation about productivity gains, we may not have anywhere to go. If sales and marketing are with us, a couple of things are going to happen. We’re going to communicate our greater value to the market by having a five-week lead time compared to everybody else’s seven-week lead time. We will adjust prices to reflect that incremental value. We have this virtuous margin expansion going on where we’re charging more and realizing a higher price and the unit cost is lower because it’s taking us less time. We’re making more of them because of the productivity gains that we realized. We could only do that with a relentless focus on understanding where the chokepoint is and recovering or adding capacity to it, and continuing to rinse and repeat to address other chokepoints in throughput.
That’s an important point: you have to have the demand in some ways to justify the investment in productivity. Bringing in sales and marketing and also market intelligence, competitive intelligence, what kind of data are you getting that would support the idea that you’re going to get more into your channel,...
