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December 1, 2011

Defining value, part deaux

By raikman December 1, 2011

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.

Does your process contain too many non-value added activities?

What's the value?

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?

September 23, 2011

The $6 million PowerPoint presentation

By tpryor September 23, 2011

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. PowerPoint Presentation

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?

  1. Investors expect in-depth preparation by the business leader, e.g., what is your niche, who is your customer, how big is the market, what is the make-up of the management team? Leaders must know their stuff, inside and out.
  2. Business leaders must have financial acumen. They must be able to explain Financial projections for their P&L, Balance Sheet and Cash Flow report. Numbers are how we keep score.
  3. SWOT analysis … strengths, weaknesses, opportunities and threats is still neede
    d. Plans must include inside and outside perspectives about the organization.

What’s new?

  1. Feasibility analysis is something new in Rhonda’s books. Do a feasibility analysis BEFORE developing a business plan. TMAC calls this step “Fail Fast, Fail Cheap, Get Smart”.
  2. Think globally. The internet now makes it much easier for a manufacturer to sell product internationally. TMAC and Small  Business Development Centers have specialist who help American companies import and export product.
  3. Do more marketing and less sales. Peter Drucker said “Salesmen are a crutch for a poor marketing plan.” Every company should be using social media to market their products and services.
  4. Be socially responsible. B Corporations are replacing LLC’s and C-corps. B-Corps focus on the Triple-Bottom Line of People, Profit and Planet. For info go to www.BCorporation.net .
  5. Faster business plan presentations are best practice. No more than 12 critical slides and expectations of 5-year or less ROI’s for projects and investments.

What improvements have you implemented to your organization’s business planning process?

June 21, 2011

The Three Landscapers – A Study in Quoting

By tpryor June 21, 2011

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?

Image of a Sales Quote

Sales Quote Form

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.

  1. The first landscaper returns a price of $1,000.
  2. The second returns a price of $1,200.
  3. The third returns a price of $950.

Instead of accepting the low bid, a wise move is to ask each how they arrived at their pricing.

  1. The first explains he uses the same method Michael Dell used when he was starting his computer business; he doubles his material cost. His material cost him $500 so his price is $1,000.
  2. The second landscaper explains that his material cost is $500 and he needs 5 people for the day and he anticipates it will be one day’s worth of work for 5 laborers, at a cost of $350 and there is also an overhead cost for his trucks, loader, gasoline, maintenance and other equipment that he has assessed at $150 and the remaining $200 is used towards his profit and sales and marketing efforts.
  3. The moment the third is asked how he arrived at his pricing, he throws his hands up and screams at you. He explains that he doesn’t do business with people who are so nosey and what he has in his cost is none of your business. He further retorts that if he is the lowest bid he should be awarded the business and its irrelevant how his bid is created.

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.

  1. Based on his methodology, I know Landscaper #1, the “material-doubler”, is going to overcharge me for most things that are easy to install (or plant); like $3 bags of mulch or stones where it plans to charge me $3 to simply rip open and dump each bag. On the other hand, the same methodology will result in it giving me a bargain for most things that are more difficult to install; like a $50 tree whose planting will not only require a lot of labor, but will require special capital equipment as well.
  2. Because Landscaper #2’s methodology more closely links actual costs with the work being performed, the landscaper with a more rational quoting method will undoubtedly come up with a higher price for items like the tree and a lower price for items like the mulch and stones.
  3. The third landscaper will come up with whatever its quoting method generates.

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?

February 17, 2011

3 Lessons Learned from Evergreen Solar’s Mistakes

By tpryor February 17, 2011
Solar panel

Image via Wikipedia

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?

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November 12, 2010

Band-Aid Lean ≠ Financial Success

By tpryor November 12, 2010

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.

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