Company leaders that embark on cost reduction programs often find themselves frustrated by the slow pace of change, on the relatively modest yields derived from such initiatives. All too often, we find that companies seeking to increase productivity and reduce operating costs take a micro-, rather than a macro-view, of where improvements can be made. They commission detailed studies of shop floor practices -- admittedly finding some ways to improve quality, reduce defects and shorten cycle times -- but miss the much larger picture related to the strategic priorities of the enterprise itself.
Companies seeking to gain real competitive advantage cannot think in terms of specific process improvements. Rather, they must think in terms of transformation, not just improvement. Transformation is the process by which companies, business units or locations make a step-change improvement in their operating performance. This, in turn, enables them to take new strategic approaches -- positioning themselves, for instance, as a premium producer, or gaining market share by becoming the low-cost player in the marketplace.
As I described in my new book, "The Lean Six Sigma Guide to Doing More with Less," a hydraulic hose company several years ago found itself operating at a negative 2% economic profit -- not even covering its cost of capital. The customer order lead time was twice that of the industry standard.
Management didn't understand that their lead time was having a negative impact on the business -- a situation aggravated by the poor quality products that were frequently being shipped to customers.
In less than two years, the company turned the situation around -- going from 2% economic profit to a positive 21% economic profit. They focused on reducing waste across and between functions to realize cost reduction and enable competitive advantage through alignment on enterprise speed and agility. To enable such a turnaround the company looked beyond process and rationalized customers and offerings that were not contributing to value creation.
The lesson: Companies must think strategically when they manage their costs down so that the actions they take are sustainable and contribute to operational excellence.
To undertake a true transformation, organizations must engage in three specific activity streams:
- Attain a proper understanding of the extent of the opportunity;
- Consciously choose a path to capture the opportunity; and
- Build the continuous improvement execution capabilities needed to capture the opportunity in both the short and the long term.
While many organizations know -- or think they know -- how to build the capabilities needed to capture continuous improvement capabilities, the real opportunities are missed in the first two areas. We find that companies often fail to understand the real gaps between their own performance and that of high performers in their industry, and consequently they under-commit to making needed improvements.
In a recent survey, for instance, we asked more than 1500 executives in over 21 countries which operational capabilities were most critical to high performance. We found significant differences between the "masters" (those at the peak levels) and "laggards" (those with the worst performance.)
One example: Masters reported a manufacturing lead time of just 3 days, while laggards reported a lead time of 35 days. If companies recognized the size of these gaps, they worked diligently to close them; but most companies underestimate the upside potential that can be derived from transformational efforts. They under-invest in achieving excellence and leave significant value on the table.
Similarly, high performing organizations take different approaches from average performers in how they go about addressing cost-reduction opportunities. Organizations that get the most out of their operational improvement efforts recognize that, if left open-ended, operational targets will be negotiated downward to levels that will not have an impact on the company as a whole. The best companies set stretch goals across the board -- such as 80% improvement quality, 30% reduction in costs, or 50% improvement in delivery. Seem impossible? Our experience has shown that over 80% of all activity in un-improved processes is waste -- adding no customer value whatsoever.
Setting such goals -- even if they initially seem unattainable -- yield two very important benefits for companies. First, they release companies from the typically unproductive effort of negotiating targets for reduction. Second, the goals prompt groups to think creatively about how to attain such ambitious targets, often leading to the development of tactical plans that demonstrate how such goals will be reached.
With goals properly set, the key question then becomes: Which path do we take? We believe there are three basic mechanisms that companies can use to close identified gaps:
- Continuous improvement
- Targeted interventions
- Transformational programs
All of these approaches can succeed in the right situations. However, while some changes can be made from the middle of the organization, the ultimate success of a transformation depends on having strong leaders who share both a common vision and a willingness to focus on a few vital issues -- commonly referred to as "North Star objectives."
Aligned leadership is needed for making tough calls. Within a single organization, one leader may be evaluated based on unit cost, another on profit, and a third on customer satisfaction. To accomplish a true transformation, all of leadership must understand and embrace mutually agreed-upon short- and long-term priorities in terms of strategy, assets, execution, customers and offerings. Those priorities may be quite different from old priorities. After all, your leadership rose to their current positions by being good at the way the company currently does business.
Once leadership is aligned with transformation priorities, the transformation effort can begin in earnest. Leadership must get out in front of the organization, driving changes that are essential. The key principle here is focus -- blocking out the distractions that will inevitably arise over the course of the process.
Transformations are a tremendously effective way to rapidly alter the cost base of a business, but their positive impact extends far beyond cost reduction. Long-term performance involves having the "muscle memory" in the organization that enables it to deliver constantly. Like a physically fit individual, the transformed organization can deliver consistently, but can also respond rapidly to any and all significant market and customer shifts.
Mark O. George, a managing director in Accenture's Process & Innovation Performance service line, is also the author of the new book published by John Wiley & Sons, "The Lean Six Sigma Guide to Doing More with Less, Cut Costs, Reduce Waste, and Lower Your Overhead." Accenture is a global management consulting, technology services and outsourcing company with more than 186,000 people serving clients in over 120 countries.