Yesterday's post on breaking non-value adding costs out on the P&L drew a couple of the questions and opinions that can be expected when the issue is raised around the conference table in any organization. Evolving Excellence readers being the high class folks they are, the issues were raised in a much less contentious manner than you can expect, but the nature of the challenges they raised are about the same.
Steve H has some concerns about classifying quality control costs as non-value added. Dietmar thinks purchasing is value adding. Prashant is afraid classifying training as non-value adding will subject it to cost cutting, which is presumably a bad thing. George questions classifying material handling as non-value adding as waste since it has to be done – somehow the stuff has to move from one place to another.
All of this gets at the fundmental challenge an organization faces when deciding to embark on the lean journey. The basic definition of lean is the elimination of waste – and waste is anything that does not add value in the eyes (and the pocketbook) of the customer. Knowing what is waste is pretty important – else how can the organization get rid of it? If one person assumes the cost of quality inspection is pure waste, while another sees it as adding value the result is not good. The norm is for folks to advocate kaizen exercises aimed at eliminating the waste of other folks' processes, but rarely urging elimination of the waste in their own back yard.
I suppose there is a certain logic to classifying quality inspection as valuable when you look at it as a necessary task to get dismal quality under control. Customers won't pay much for genuinely shoddy quality and I suppose they will pay more if it is improved by weeding out the bulk of the bad stuff. The better lens, however, is to compare product A that sells for $10 with excellent quality achieved by capable processes, poka yoke and absolute control at the source, with product B having comparable quality selling for $11 to cover the cost of inspection. The customer is not going to pay the extra $1 for product B when it can get the same quality without the inspection expense.
That said, the product specifications for many items sold to military and aerospace customers include documented inspection results. Effective quality inspection is clearly part of the value proposition as defined by the customer. This demonstrates that there is no one size fits all definistion of waste.
The toughest nuts to crack in deriving a consensus on value-adding versus non-value-adding are items such as training – Prashant's very legitimate concern. In fact, management spends a lot of money on things such as training that customers will not pay for – at least they won't pay for it directly. Again back to product A or $10 and B for $11. All else being equal (and all else is never equal in the real world), am I willing to pay an extra dollar in order to cover the cost of training the employees who made product B? Of course not. I am only willing to pay extra if the product has superior value – better quality, more precise utility, superior reliability. The dollar spent on training has to translate into a dollar of reduced waste, a dollar of greater product vale, or some combination of the two. If it doesn't, management should cut the training expense.
There are lots of management controlled, non-value adding expenses that fall into the same category as training. Support staff, computers and software, company picnics and most meetings. Customers won't pay for any of this stuff; and the only justification for it is the belief that it will translate into a dollar for dollar reduction in other waste or an enhancement of product value. Calling it value adding rather than waste, however, is a dangerous practice because you are assuming it always results in offsetting benefits – not a particularly accurate or honest assumption in my experience.
Classifying an expense as value adding because (1) it is perceived as a necessary cost of the operation, (2) management has decided it is good for the business in the long term, or (3) some government regulation dictates that it must be incurred even though that expense is for an activity customers won't pay for is a serious mistake. It is the same as recalibrating my bathroom scale so it shows I only weigh 200 instead if 235 because I can't control my metabolism and I can't get out of the family eating binges we call the holidays. Lying to myself is not going to help me lose weight, even if the reasons for my excess weight are tough to avoid.
I can't tell you what adds value to your customers and what doesn't. Only you can do that based on your individual products and customers. It requires objectivity and honesty, and to make it even tougher, the definitions may be different within your organization for the various value streams and the channels they serve.
Just having the discussion, however, is a great (and necessary) first step. Nothing but good can come from opening up this particular can of worms.
Paul Todd says
Bill – this sounds like a great exercise, and a very productive first step for organizations leery of this thing called Lean Accounting.
When faced with people who are loathe to classify themselves as non value adding, I have tried to get them thinking of their connection to the customer, as in “If you are not personally treating the patient or running a machine, how do you support those who do?”
That doesn’t change the need to reduce the cost of accounting or material handling or training, but it builds teamwork towards a common purpose.
Jon Miller says
The challenge is setting the right time horizon to define value.
Value is every input needed to meet customer requirements. This may include training and inspection as well as rearranging atoms. Anything that the customer does not want should be cut, the argument goes. Goodbye training, since most management systems do not effectively track cause and effect of cuts in training to safey, quality, delivery and cost. Removing a value added atom rearrange processes delivers bad results within minutes or days. Removing hours of training may not show bad effects for months or years.
If we want to talk Lean & Green, the pollution prevention / energy conservation steps that we are not implementing or that we are actively cutting out tend not to show up as costs until years later when we are sick, productivity drops, healthcare costs rise and tax money is spent to clean up the land.
There is an inherent conflict between financial reporting which is quantitative, reductionist and short-term and an attempt to define value, which is qualitative, holistic and long-term.
That said, lean accounting is a small step in the right direction.
Bill Waddell says
Nobody said there needed to be a numerical, financial cause and effect relationship between costs like training and creation of customer value that existing management systems could track. In the end, like most decisions, management must consider both financial and non-financial matters. The idea is simply to create a prism through which management can assess spending money on things like training. When someone proposes spending money on employee training, management should be able to see a reasonably clear path to how the training will result in better performance in terms of enhanced customer value. If the person proposing the training cannot mount a lucid justification as to how the training will reduce costs, improve quality, enhance delivery, etc… management should think twice about the training – or hiring a staff person, buying a new computer, etc…
Too many lean proponents (and proponents of many other things) expect management to invest in employee training – any training – simply because they believe any and all training is inherently good for its own sake. In fact, much of the employee training in many companies is an utter waste of employee time and company money.
The ‘lean and green’ thing I won’t even touch. Management can spend its money on whatever it likes. The point is that management should have its eyes wide open when it spends money on things customers will not immediately pay for. If they see some benefit, now or in the distant future, they should go ahead and spend the money, but they should be aware of the fact that any benefit is somewhere down the road.
Most important, I will take issue with your classification of lean accounting as a “small step in the right direction”. I believe it is a fundamental necessity, whether the pure leanies like it or not, and whether it is Toyota-esque or not. The fact is that accounting is the language of business. Decades of trying to make the case for lean in non-accounting terms have largely failed. Convincing management to embrace lean on philosophical terms, asking them to make a leap of faith, is a tough sell, and one that seldom works.
If I were the CEO of a manufacturing company and someone asked me to completely trasform my business model and culture, but could not explain to me in financial terms how such an overhaul relates directly to my bottom line, I would be very skeptical too.
I think that what also confuses the issue is that customers see value in terms of price, and the producers define value in many different ways – which ultimately manifests itself as cost. This fundamental difference between cost and price can cause a quality person to defend his job as value-add, while a customer will struggle to care at all so long as the good or service meets his need.
My position on this is that whether it is value-add or non-value-add is irrelevant, waste exists in both elements and it is our job to eliminate waste. If we don’t, then the market will tend to take care of the differences between price and cost for us.
Bill Waddell says
I certainly agree with your view Bryan, however, eventually a company has to take waste out of the theoretical realm and arrive at a consensus understanding of just what they are trying to eliminate. When it is left to an individual, ad hoc, make it up as we go along approach very little gets done.
You hit it right on the nose with your comment about the quality person assuming he/she adds value. Egos and psychology muddy up the works, with everyone wanting to believe that their work adds value, and that waste resides with everyone else.
You are right that the customer’s concept of value is hard to quantify, but it must be done. Senior management has the obligation to lead the discussion and provide a clear direction – just as difficult because they are typically waste in that they do nothing customers pay for and only contribute to the extent that their work enhances the value proposition, but are often the last to know it.
The bigger concern is that most companies have little focus on waste at all. Going back to the original point of the post, a traditional P&L drives management to focus on direct labor and direct materials as the biggest opportunities for cost reduction. The restated P&L launches the very sort of discussion and debate we have going on in Evolving Excellence – which is a big improvement. If companies start debating what is waste, and quits beating up direct labor and suppliers (ironically the only places everyone can agree is value adding) they have moved in the right direction.
I can’t even get my company to have the conversation.
Steve H says
Your example is right. The company that has to pay 10 people to inspect everything off the line isn’t going to be competitive with one who doesn’t have to.
I think there is still lots of times when end of line inspection is good. Cars, right off the line, get test driven. That’s an easy way to make sure everything went together as planned and fixed before reaching the customer. Sliced, ready to eat meats, that get sampled after production for harmful bacteria can be a fairly inexpensive way to help you sleep at night.
Either way – the topic has made me think more about it.
Jim Fernandez says
One of the big values to our customers is on-time delivery. So we are constantly trying to reduce waste in things that improve our on-time delivery. This eventually takes us into all areas of our manufacturing process.
Kyle Hanson (@discipleleader) says
Thanks for weighing in on this, Bill. We tend to forget the most beautiful thing about “Value-Adding” and “Non-value Adding” is the simplicity of the concept. If in doubt, ask your customer how much he/she is willing to pay for the process in question… Scary how our absence of humility surfaces in our efforts to rationalize a current state destined to change.
web design Bangalore says
I believe it is a fundamental necessity, whether the pure leanies like it or not, and whether it is Toyota-esque or not. The fact is that accounting is the language of business.That’s an easy way to make sure everything went together as planned and fixed before reaching the customer.
Tim Cole says
Whether it is a business requirement or not has nothing to do with whether it is value-adding or not. That is the whole point of the article. If a function is not value-adding, then its costs and its effects on the value-adding process should be minimized. ie. – You shouldn’t interrupt your factory workers with providing inputs to your accounting stream. You automate that data collection, eliminating that waste.
Maybe all the the “training” questions might be easier answered by considering the adage: “You train dogs. You educate people”. Maybe training isn’t lean, but education might be.