Continuous Improvement -- IW/MPI Census: Time Will Sell

Dec. 21, 2004
Capitalize on your process improvements.

Start with the basic premise that the purpose of any business is to make money. To deliver earnings at a percentage rate commensurate with risk, earnings that are distributed to owners or shareholders. Consider that, when asked to report their No. 1, day-to-day performance indicator, manufacturers will cite the type of productivity and quality metrics that we asked them to report on the IW/MPI Census of Manufacturers survey: quality yields, scrap rates, daily output or sales per employee. They may also cite order fill rates, on-time delivery or some other customer-satisfaction measure. Such indicators have the advantage of being immediate; they can be calculated by the hour or at the end of the day, far ahead of the end-of-the-month accounting tally. Notice the leap of faith when it comes to process improvement. Everyone assumes that improvement in such measures, reductions in order-to-delivery time for example, will be a) better for the customer and b) better for the bottom line. But what if the customer doesn't care if you can deliver in one week instead of three? What happens is that your process-improvement efforts result in short-term cost advantages that are eventually arbitraged away by the sales force through price reductions. So says George Stalk of the Boston Consulting Group, coauthor of the widely read Competing Against Time (1990, Free Press). Systematic advantages that could improve market share and drive earnings growth also fail to materialize. All of which is reason why sales and marketing needs to be brought into the process-improvement loop. Somebody has to make the customer care. "What's been missing in a lot of the intense embrace of operational effectiveness in the last 10 years has been the strategy side," says Stalk. "I'm talking about taking the benefits to the customer and getting rewarded for it. That's sales, marketing, product development. Manufacturing plays a role, but they can't do it by themselves." For every dollar that is saved through operational effectiveness, he says, three to four dollars come from reduced risk by making products closer to customer demand. Reduced product-development times lower the risk of obsolescence and missing the market. There's also the customer segment that will pay 15% to 20% more to get what it wants exactly when it wants it. "[Higher] prices are a big deal, but you can't just wait for it to happen. It's not a natural phenomenon. It's got to be sold," says Stalk. In addition to getting operations, product development and sales and marketing people in the same room, he advocates tracking "working capital productivity," which is the sum of accounts receivables plus inventories minus accounts payable, averaged for the year, and then divided into net sales. The result is a turnover measure that, tracked over time, accounts for an organization's systemic performance improvements. Inventory reductions from making factories more lean and flexible improve the measure, as does improved customer service that pushes down accounts receivables. Reducing accounts payable might seem to reduce cash and working capital turns, but suppliers that are paid more quickly often provide better service and deliver more frequently, which improves overall speed and responsiveness. The point isn't so much the intricacies of this particular metric. What's important for manufacturers is an improvement strategy that's not only coordinated across the organization but aligned with customer desires. One that looks outside as well as inside the organization. Only through such a strategy will operational improvement efforts translate into market results. A friend compares it to a five-star restaurant where patrons eagerly pay a premium for an individually prepared and exquisitely presented meal. Process improvements could conceivably allow the restaurant to deliver exactly what people expect in five minutes or less. But that would make it fast food, and a $4 value meal. David Drickhamer is IndustryWeek's Editorial Research Director. He also coordinates the IW Best Plants award program.

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