Spending last week at the Lean Accounting Summit probably made me a bit over-sensitive to the subject, but coming across a story about the Department of Justice spending 16 bucks apiece for muffins and a dollar an ounce for coffee got me thinking about this whole value adding – non value adding thing. I thought I would offer up a pretty simple way to quickly change the nature of the financial discussions within an organization.
Step one is to have the management team sit down with the chart of expense accounts and argue about which of them add value in the eyes of the customers, and which don't.
This is quite often a contentious exercise, as people resist the notion that their work – often their whole department – does not add value. The acid test is whether customers will pay more for the product if you perform the task in question better, or do more of it.
Non-value adding work can be dumped into one of three categories: pure waste (stuff like defects, material handling and bureaucratic nonsense), regulatory waste (the cost of complying with OSHA, EPA, EEOC, ISO paperwork and the like) and management controlled waste (lean training and lean consultants, staff salaries, computers, office furniture, etc…). The management controlled waste is the sort of thing customers won't pay for directly, but you do because management thinks it will be more than offset by reductions in other waste, or will enhance the value adding efforts by more than it costs.
Step two is to change the format of the P&L statement. No need for anyone to get traumatized over this. The P&L can be generated in both the old and new formats – it's not an either/or situation.
Instead of this:
Reshuffle the numbers and have the P&L look like this:
Same numbers – just looking at them different. In the first one – the traditional P&L - when management doesn't like the profit number, they look to material and labor costs as the opportunities to improve.
In the second version, it is hard to ignore the $530K – 21% 0f the money – spent on things customers will not pay you for.
No big change in accounting, not asking management or anyone else to change anything or make any commitments – just looking at the numbers from a different angle – and it never fails to change the discussion. For too many managers who don't spend enough time at the gemba and are unable to see waste in reality, putting the waste on a piece of paper with a $ in front of it makes it very easy to see. You will be surprised at how quickly terms like 'value adding' and 'non-value adding' become part of the company language, and at how quickly management becomes focused on eliminating waste.
… and it works for manufacturers, healthcare organizations, retailers …. even government agencies like the Department of Justice.
Steve H says
“The acid test is whether customers will pay more for the product if you perform the task in question better, or do more of it.”
I work in Purchasing and this always drives me nuts because I think deep down I know my job is non-value added. But that doesn’t mean I can’t try to help and support the people who are. That’s a saving grace, so to speak.
The only thing on this that I’m a bit slow on would be putting Quality Control as a non-value added. I’m actually on the fence with that. I work in food manufacturing. Would customers pay less for a product if they knew the company paid less for quality control? Would they pay more? I don’t know, really.
Either way – interesting way to look at numbers without making major changes.
Mike says
Bill- do you have that DoJ article link?
Bill Waddell says
Mike:
Here ya go:
http://www.foxnews.com/politics/2011/09/20/what-recession-justice-department-spent-nearly-half-million-on-refreshments/?test=latestnews
Steve:
I believe they will pay quite a bit for quality at the source – it is the cost of poor quality – inspectors needed because there is every chance things didn’t go right at the source – they won’t pay for.
Dietmar Dold says
Great article Bill!
I also would like to reply on Steve H. comment.
1. Purchasing can and should be value adding (depending on the definition of value add)! By standard economic definition, it isn’t.
But put yourself in the shoes of your customer. You can cluster all kind of customer value in four major categories: a)Delivery, b)Quality, c)Price, d)Innovation. In purchasing you should at least contribute partly on delivery (on time), quality (of raw material or semi finished good purchased)and price (cost reduction in the interest of competitive pricing)!
2.Quality is one of the expectations of customers, see number 1. That’s why it’s so hard to see quality control as non-value adding, but this activity is really non-value adding. Why? Probably a root cause for having a quality control are variations in your production process resulting in quality issues (or maybe missing focus of purchasing on quality :-) ). So quality control is just an expensive countermeasure. Better go to gemba (as a purchaser even to your supplier) and built in quality into your products (process) and fix the issue where it happen and stop any end of line quality inspections. If you do quality control to fulfill ISO Standards you will also understand why ISO has nothing to do with value add or lean thinking!
David Hallsted says
Breakdown maintenance should be $20K. When you add the preventive maintenance and the breakdown maintenance you get $30 from the Machine maintenance. This would make the non-value added 21% not 22%. It is small but I found it confusing in trying to understand the concepts.
***** Good catch – fixed it – thanks David, Bill
Prashant says
Excellent article as always, however, I am confused on the inclusion of training in non value adding. Surely its not ‘direct’ value in the eye’s of the customer, but wouldnt including it in the ‘non-value’ adding bucket make it a candidate for cuts?
George says
I understand that in theory material handling is waste. But how do you get the material from the vendor’s truck to the welder’s torch without handling it?
And if your customer won’t let you store materials on site how do you coordinate multiple vendor JIT delivery of various lead-time items and a constantly changing installation schedule without material handling?
Liz Copeland says
I agree totally, A lot of times when you look at things differently, you subconsciously reminding yourself for later. So when they see the numbers in the second format it may influence decisions in the future without even being mentioned.
Peter Reynolds says
This is a great way of reframing the perspective on business efficiency.
Why is depreciation classed as value-adding? And what is the thinking behind preventive maintenance – will the customer be prepared to pay more for your shopfloor maintenance?
Bill Waddell says
Peter,
Again there are no universal rules for classification, but generally, most companies view the normal cost of owning and operating production equipment – i.e. depreciation planned maintenance, utility consumption – as value adding; while the costs of things not going as planned (breakdown maintenance) are seen as non-value adding.
The logic is that the machine is the center of value creation and its normal costs are the costs of creating that value.
Peter Reynolds says
Thanks Bill for the clarification!
Rick Bohan says
I wonder if the folks with asthmatic kids paying higher local taxes because their water treatment plant can’t handle all the toxic crap being sent to it by industry think that the costs of complying with regulations is waste. Or the folks who get sick with e. coli or salmonella. Or the folks that got lied to about what the real interest rate on their recent home or auto purchase.
Just wondering.
Bill Waddell says
Rick,
I don’t know what they think, or what your hypothetical, sad stories have to do with the question of how customers of the typical American, European or Australian manufacturer who incur the costs of regulation perceive value.
Are you suggesting that western manufacturers should assume their customers are willing to pay higher prices because customers want to pay to combat the liberal narrative on the evils of corporate behavior?
Seems to me, Rick, customers vote against your opinion every day in Walmart when they buy Chinese products without those regulatory costs, instead of American products with those costs imbedded in the price. Perhaps American consumers are all heartless s.o.b.’s Rick, but they make it loud and clear they do not see products from countries with those regulations as more valuable than products from countries without them.
How about providing a link to where you have ranted about the Obama administration giving a free pass on those costs to Chinese manufacturers, or do you only think such costs are value adding only for western companies?
pletcherywv says
Abercrombie and Fitch Officiel Site.Bienvenue discharge parcourir Abercrombie France site en ligne, Abercrombie and Fitch france vente en ligne Restrained Period Belstaff en France, Abercrombie and Fitch parisvous pouvez acheter la qualite superieure et escompte.