By Rudolf Burkhard; winner of the 1999 PricewaterhouseCoopers award for the best article on shareholder value add
Summary:
Executives are under too much pressure to spend time looking for and developing new and better solutions to running their business. They are aware of the need to manage their business as a system but on the whole do not do so, because they are lacking the tools to do so. Goldratt’s five focusing steps are a way to solve this missing capability by focusing on the very few constraints any (business) system can have. Policies (the way things are done) are key constraints to better profits and improved SVA and many need to be changed. Some examples show how policies from the past are blocking businesses from earning much better SVAs.
Examples of Policies that Damage Profitability
3. Measurements
Do our measurements cause the right behaviour in our people? What sort of behaviour would we like to see? It is easy to verbalise – we want our people to behave in a way that helps the system (the business) – to meet its goal. Do we actually measure performance in this way? Of course not. It is just too difficult to measure a function based on its impact on the business. This is why many companies have metrics to measure each of its functions – manufacturing, sales, R&D etc. In some enterprises something called ‘functional excellence’ is called a best practice.
Yield (or its inverse scrap rate) is a popular measure used in manufacturing. If it becomes the prime measure – the one the plant manager’s bonus really depends on – then it will be focused on. So much so that the business will suffer.
For instance, a plant manager was told to improve yield from about 78-80% to at least 85% - or else, someone would be found who could. He did it. He did it by sacrificing machine speed to get his desired result. Unfortunately the plant was already out of capacity and the yield improvement was far less than the lost capacity from slowing down the machines. The business lost money – SVA went down.
In another similar case the plant manager simply out-sourced all the small volume products that had poor yields to a subcontractor with more appropriately sized equipment for these products. Yield went up. At the same time the plant manager’s machines often stood idle along with their operators. The fee from the toll manufacturer far outweighed the (yield) savings.
There is a lot of SVA in choosing the right measurements to get all functions to behave for the good of the business and not just the function.
Technorati Tags: 6-Sigma, Continual Improvement, Quality, Shareholder Value Add, Strategy and Tactics, SVA, Theory of Constraints, TOC, TQM, Key Performance Indicator, KPI
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