In part 1 of this topic the fundamental concept of customer value was discussed. Before applying lean methods to improve a process, the first step is to define exactly what value means for that process. Or more accurately, to define what value means for the customers of that process.
This understanding of what adds value – which comes from an understanding of customer requirements – can then be used to categorize each process step as either Customer Value-Add (CVA) or Non-Value-Add (NVA). Once this categorization is performed a lean practitioner can focus on eliminating or minimizing non-value-add activities. Sounds simple, and for many lean projects it can be that straightforward.
As was explained in Part 1 of Defining Value, there are two key characteristics of process steps that add customer value:
1) Change to materials OR information
2) Something for which a customer will pay
So to be clear: A customer value-add process step must cause both a change to materials (OR information) AND be something for which customers will pay. Examples of such activities in manufacturing include cutting metal, assembling a wiring harness, and painting a panel. In a transactional process CVA activities include analyzing data, writing a report, approving a loan, performing a credit check, and answering customer questions.
The Second Time Around
Not covered in Part 1 was the situation where any of these activities are done a second time due to a mistake made the first time. In this case the process step should not be categorized as customer value-add. Such an activity is a form of rework, and although it may meet the first part of the definition of customer value-add (a change to materials or information) it fails the second part (activities for which a customer will pay). Think about it: If you purchase a new television, would you want to pay for rework performed on that TV? Or if you submit an application to refinance your home loan do you want to pay for mistakes made by the staff of the bank?
One easy way to check if an activity is non-value-add is to see if the letters “re” are used in describing the task. Some NVA examples include: rework, review, rewrite, repaint, retest, recheck, return, recall, retype, retrain, reissue, reship, redesign. Always keep in mind the lean goal to ‘do it right the first time’.
Assessing Value in Internal Processes
This approach to classifying activities as CVA or NVA seems pretty straightforward for most manufacturing processes, and even most service processes. Where many lean practitioners struggle is when they are working to improve internal processes that may not directly impact the external customer. Examples of such processes include payroll, month-end close, hiring/HR, and regulatory processes. Clearly such processes do result in a change to materials or information. But just as clearly, external customers are not willing to pay for these types of activities.
There are two keys to assessing value in such processes. The first is the previously mentioned question of who is the customer of the process. But the second consideration is to answer the question: Are we looking at the process level, or at the organization level? The answers to these questions will help in characterizing the process steps.
To be clear, when speaking of organization level I am referring to the value stream used to meet the needs of the external customer by the organization. This value stream – sometimes referred to as the order fulfillment process – is really made up of a series of sub-processes including order entry, scheduling, operations, packaging, and delivery. The customer at the organization level is the customer who pays for the product or service they receive.
On the other hand, the process level refers to any process within an organization whether it is part of the order fulfillment process (such as operations) or is a support process (such as payroll or hiring). The customer of the hiring process is the department that needs a new employee. The customer of the month-end-close process is the management team.
Now let’s look more closely at a process like payroll. Does the external customer – i.e., the paying customer – care about payroll of their supplier? No, they do not. So at the organizational level, the payroll process does not contain any CVA activities.
But now consider the customers of the payroll process: employees (who want to be paid), managers (who need to track costs), and the government (who need the information to tax the company and its employees). Each of these entities do value the activities required to provide them with the various products (checks, reports, information) of the payroll process. So at the process level, there are CVA activities.
And here is the clincher: What if the company decided to outsource payroll? That is, what if they asked a third party to perform the process of payroll. Would the company pay the third party to perform this process? Absolutely. Therefore, one can infer that the company values the critical activities performed in the payroll process. So now we have met the two requirements of a CVA activity covered in Part 1: (a) Change to material OR information, and (b) Something for which a customer will pay.
Do you have non-value add elements in your processes? What are you doing to make your processes more efficient?
21st Century entrepreneurs and business owners are writing smaller business plans but doing more business planning. Verbs are becoming more important than nouns.
The founder of a new company recently received $6 million venture capital without providing investors the traditional 40-page business plan document. She instead used a 12-slide PowerPoint to communicate the case for her venture followed by a Q&A where she very capably answered all of the investor’s questions to their satisfaction.
She had no plan (noun), but she had done the planning (verb).
Rhonda Abrams, who shared this story with me, has sold more than a million books on business planning. On September 7, 2011, she shared what has and has not changed in business planning.
What has changed?
Rhonda said, “Writing is no longer as important as the planning process and activities.” Very few people take time to read a 35-page business plan. Instead, they read the 1-page executive summary.
What has stayed the same?
What improvements have you implemented to your organization’s business planning process?
Does your company create daily price quotes for customers to make a sale? If yes, which one of these landscapers most closely resembles your quote process?
Assume you want to contract landscaping for your home. You’ve found three companies that can do the work. You ask each to quote your job.
Instead of accepting the low bid, a wise move is to ask each how they arrived at their pricing.
Which one do you give your business and why?
Here’s what I would do? I’d tell each vendor that I might not be able to do the entire project and ask each one to rebid my job on a line-by-line basis.
I would then ‘cherry pick’ and see if by doing so I can come up with a total cost of less than the third landscaper’s original $950 bid. If I can come up with a lower total price, the “material-doubler” landscaper will undoubtedly lose money on what he sells me, the more rational one will at least turn a profit on the items he does sell me, and the third may or may not turn a profit on its portion of the sale.
If you don’t have a system similar to landscaper #2, customers will cherry pick you. They’ll buy things from you that are under-priced, e.g. you are losing money on them but you don’t know it. And you won’t sell the things you’ve overpriced that would be profitable at a lower, more competitive price.
I’ve seen scores of manufacturers with invalid cost models win major contracts on which it was impossible to earn a profit this way – some of which won enough of these contracts to put the company out of business.
Which landscaper pricing method does your company most closely resemble?
Evergreen Solar recently announced they are firing 800 workers at their Massachusetts factory and moving all solar panel production to China. The February 6, 2011 issue of Bloomberg Business Week interview of Evergreen’s CEO exposes how they could have prevented the firings.
1. Management built too big of a factory. 75% too big! If the company had used Lean principles, they would not have overbuilt.
2. Management took on too much debt to start the company. See #1 for a reason for the big debt.
3. Management ran out of cash. Cash is the lifeblood of any company, even profitable ones. China offered management cash in exchange for moving the jobs to China.
Everyone makes mistakes. Learning from mistakes is a key trait of successful leaders. What mistake provided you or your organization its greatest lesson?
I’ve learned that most people are skeptical when they’re told to expect significant financial benefits from implementing Lean.
In teams of 3, I used TMAC’s Financial Fundamentals business simulation game to teach finance to non-financial people. During the 6-hour workshop, each team manufactures and sells a common product to a single customer … me. The winner of the workshop is the team with the most income in Retained Earnings.