Continuous Improvement -- What's Continuous Improvement Worth?

July 10, 2008
Focus on how operational excellence can help grow your business while increasing the revenue line.

Many of the practitioners involved with continuous improvement, lean transformation, operational excellence, world-class performance or any other moniker you care to use are often asked by the financial people in their organization to put a dollar value on their efforts and, guess what, most of these practitioners don't have a clue about what the true dollar value is. Most of you have seen the cost justification analyses that look at things like floor-space reductions multiplied by the average cost per square foot or labor cost savings from increased productivity leading to fewer labor hours -- often valued at the fully burdened factory labor rate -- along with cost reductions from better quality, resulting in reduced scrap and/or warranty cost.

One of my favorites is the savings from reducing inventory figured as a "dollar for dollar" cost reduction for each dollar of inventory reduced. All of these are false savings unless you can monetize the saved floor space by renting it out or selling it, actually reducing the head count on the payroll (and the burden rate just goes up because there are fewer labor hours to absorb the fixed burden costs), or increasing sales volume to absorb the surplus labor generated by the productivity increase. If you are really a forecasting genius and can predict what the scrap and warranty savings will be, you should take your skill and your magic crystal ball to Wall Street where you could use your talent to make some really big money. Inventory reductions are just a cash flow improvement issue and, in the short term, will have a negative impact on your balance sheet by reducing assets values (much to your friendly banker's chagrin), and your P&L will suffer while you are reducing inventory by increasing your cost of goods sold, which reduces your margins and net income.

A better way to look at the value of continuous improvement is to focus on what operational excellence can do for your company in growing the business and increasing the revenue line. As one of my bosses years ago told me, "Revenue growth will cover lots of sins." Think about your customers (and your competitor's customers) for a moment and the impact that operational excellence might have on them. Do you think that establishing a new standard of performance in your industry with the ability to deliver perfect quality products, exactly when your customers want them, with published lead times measured in days instead of weeks for "build-to-order" products, might have an impact on your ability to sell more to existing customers and acquire business from some of your competitors' customers?

I recently read an old article in the June 2003 issue of Harvard Business Review by James E. Ashton, Frank X. Cook Jr. and Paul Schwartz in which they wrote about midsized companies achieving sales growth rates of 15% to 20% per year for four to five years by focusing on the untapped potential of seemingly mature business using operational excellence as the competitive differentiator. It's now five years later, but there doesn't appear to be any shortage of untapped potential out there.

At the end of the day, continuous improvement and operational excellence is about delighting your customers and setting a new standard of customer service in your industry. It's the focus on speed in satisfying your customer's needs, resulting from continuous improvement and operational excellence, that will make you the preferred supplier in your industry. This status allows you to grow your revenues with existing customers and to acquire business from your competitors' customers without having to resort to price wars and the resulting margin reductions that price wars produce. That's not a bad place to be in this globally competitive world.

Ralph Keller is president of the Association for Manufacturing Excellence, an organization dedicated to cultivating understanding, analysis and exchange of productivity methods and their successful application in the pursuit of excellence. He has been an operations practitioner for the past 35 years.

Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!