CHANGEOVER COSTS …

How many of you reading this know what your changeover costs are?
 
A survey in an FMCG company shows that probably less than 20% or so know how much a minute of changeover, or any other kind of downtime is worth. When we say “know” we do not mean a number that is basically pulled “out of the air” or even a value calculated by manufacturing or engineering. No, to be useful in planning and cost justification, the cost must be established by the Finance or Accounting Departments. Only if it comes from them is it “official”. Only if it comes from them will management accept it. Too many times people are seen trying to justify dollars spent with minutes saved. This is apples and oranges. Costs may only be justified by comparing dollars spent with dollars.
 
The cost of downtime can be calculated in various ways depending on the company’s fiscal philosophies and operational situation. Some may count just the cost of labor. Others may count the impact on output or capacity. Still others will look at impact on inventory. Most will look at a combination of these three. In addition to these tangible or quantifiable costs, there will be other, intangible costs. The biggest among these is likely to be the ability to provide the service levels your customers demand.
 
No matter how it is calculated, changeover is expensive. It is typically thousands and tens of thousands of dollars. Of those companies in which I know the “official” cost, the lowest we have seen is still over $2,000/hr. Even when it is only hundreds of dollars, it can still add up. E.g. One company that typically did 3  1-hour changeovers daily assumed a cost of $1,000/hr and was amazed to find that they were spending $750,000/yr on changeover.
 
(Three quarters of a million dollar$ does tend to open people’s eyes!)
 
So how much is changeover reduction worth? We also looked at it this way in the spreadsheet. For every minute that could be cut from the average changeover time, this company saved $12,500/yr.
 
I think that there are 3 reasons that many companies do not get serious about changeover.
 
First, there are still too many people out there who think like that it is impossible to make a serious dent in changeover so they do not see the point of going to a lot of effort to accomplish relatively little.
 
Second, they think that the monetary benefits of changeover are not significant. Even companies that make less than one changeover a day and consider their costs in the hundreds rather than the thousands are still spending fairly significant amounts of money over the course of the year.
 
Finally, they are afraid that in order to reduce changeover they will need to spend huge amounts of money. We all know that this is false. Significant reductions in changeover time can be had for little of no out of pocket expense. A great deal of reduction can be had from operation issues. Eliminate the time waiting for materials from the warehouse by having it staged ahead of time. Small things like fixed gauges, multiple photo-eyes, tool elimination can be done using in-plant resources and a few dollars from the maintenance budget. Even where capital expenditures are necessary, such as for custom change part racks, the total amounts compared to the dollars saved are peanuts. It is typically found that reductions of anywhere from 25-50% can be had for little or no capital cost.
 
We have to know our costs. It is the only way we will be able to justify a changeover reduction program. It is the only way that you will able to motivate the people who need to be involved: everyone.

Process Excellence – Quy Trình Hoàn Hảo

Một công ty thường được tổ chức thành các phòng ban như kỹ thuật, tiếp thị, kế toán, sản xuất, … và những phòng ban này sẽ nhận trách nhiệm thực hiện những công việc liên quan. Việc tổ chức nhân sự cho các phòng ban thường dựa vào kỹ năng và kinh nghiệm chuyên môn của các cá nhân và nhu cầu của doanh nghiệp. Và để thật sự thành công, “nhu cầu của doanh nghiệp” phải dựa vào nhu cầu của khách hàng. Tuy nhiên, giá trị mà khách hàng muốn mua không phải từ cách tổ chức của doanh nghiệp mà là những sản phẩm, dịch vụ có được từ hoạt động kết hợp của nhiều phòng ban. Vì vậy, các doanh nghiệp cần tập trung vào các quy trình hoặc chuỗi giá trị tạo ra giá trị.

Một quy trình không được đánh giá bằng việc có tạo giá trị gia tăng hay không mà chính là tính hiệu lực và hiệu quả của việc tạo ra giá trị. Tính hiệu lực xác định việc quy trình có đạt hoặc vượt những mong muốn của khách hàng hay không trong khi tính hiệu quả xác định mức độ nguồn lực tối thiểu cần sử dụng để có thể đạt hoặc vượt mong muốn của khách hàng. Những quy trình được xem là hoàn hảo đạt được cả tính hiệu lực và tính hiệu quả.

Process Exellence – PEx là một tập hợp các hoạt động được tổ chức đặc biệt nhằm có được các quy trình hoàn hảo. PEx định hướng vào các thay đổi và là các hoạt động đa chức năng, bao gồm Six Sigma, Lean, …Khi thiết lập một vị trí cao nhất cho PEx, lãnh đạo doanh nghiệp sẽ xác định một trách nhiệm rõ ràng cho vị trí quan trọng này. Lãnh đạo PEx sẽ dẫn dắt Process Excellence Leadership Team (PELT) bao gồm các trưởng phòng ban cũng như các nhân sự PEx ví dụ như Đai đen 6-Sigma, Lean Expert. Người lãnh đạo PEx này không đảm trách bất kỳ nhiệm vụ cụ thể nào nhưng có trách nhiệm xác định quy trình chủ chốt và phụ trách các quy trình này, sau đó đề xuất lên PELT để được phê duyệt. Các hoạt động PEx như Lean, 6 Sigma, … định hướng đến mục tiêu của tổ chức là xây dựng các quy trình nội bộ mang lại cho doanh nghiệp  lợi thế cạnh tranh giữ người tài, mang lại giá trị vượt trội cho khách hàng và mang lại lợi nhuận hấp dẫn cho các nhà đầu tư.

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The Evolution of Business Process Excellence

Steve Towers

A theme of recent global conferences has been the mix of different approaches to improving business performance. This quest for business performance improvement as measured by reducing costs, improving revenues and enhanced service (also known as ‘the triple crown’) is a worldwide phenomena brought on by increasing competition, greater customer promiscuity, chaotic business cycles and more  generally ‘globalization’.

The pressure continues to increase and companies are seeking to extract every last opportunity out of their various initiatives and approaches. So what works best then?

The last three decades have seen a gradual refinement of management thinking and practice to now present a strategic choice for organizations. The route people take should be determined by the place companies find themselves in, the place they would like to get to and the speed with which they need to move. Unfortunately all too often companies are choosing inappropriate methods and tools, investing large amounts of money in dubious technologies and training their people in techniques already proven suspect in the last century. Why is this so?

Confucius said “Knowing the right thing and not doing it is the ultimate cowardice”. None more so in the current business climate where political and shareholder pressure has resulted in extreme short–termism. It is estimated that the average tenure of the CEO in the 21st century is less than three years and accordingly results need demonstrating in quick-time. Senior executives faced with this kind of pressure will often revert to what they think they know best. It is a popular military axiom that the generals in the face of battle will fight the last war again, despite improvements in machinery and capability. History is littered with examples of such failures and it seems in business some CEO’s are just as culpable. Witness the recent statements from one CEO of a top three American airline commenting that their industry (airlines) was really not profitable anymore and at best they are striving for a social service for the best part? Contrast that with South West airlines and 57 quarters of successive profit.

Similar comments from the financial service, retailing, pharmaceutical and petroleum industries appear in the press ever-day. And yet those companies like South West continue to buck the trend and achieve double digit growth consistently. Delivering the Triple Crown is a way of life for these companies and interestingly the formula for this success is not difficult to understand.

So back to the myriad of different approaches and how they compare. There is in fact a means of understanding which one to choose and what size of benefit may result from the effective implementation of the correct choice. In terms of timeline the evolution from acknowledging processes to fully exploiting those covers the best part of thirty years. During this time practical experience of the different forms of business improvement has resulted in a range of approaches that can help us determine how best to make our companies more successful. In the ultimate form the emergence of Customer Expectation Management in the last two years produces a formula that embraces and suits current business challenges. A range of industry leading companies have emerged who consistently achieve Triple Crown plus performance some of their approaches are discussed in our book on this theme.

To better understand the ontology of Business Process Excellence we have produced the following chart. Explanations of each approach are provided in part by Wikipedia.

Figure 1: Approaches for Improving Business Performance
(Research of 800+ organizations, BP Group (www.bpgroup.org) 2006-7)
 
Total Quality Management (TQM)
is a management strategy aimed at embedding awareness of quality in all organizational processes. TQM has been widely used in manufacturing, education, government, and service industries, as well as NASA space and science programs.
Total Quality provides an umbrella under which everyone in the organization can strive and create customer satisfaction at continually lower real costs.

Business Process Improvement (BPI)
is a systematic approach to help any organization make significant changes in the way it does business. The organization may be a for-profit business, a non-profit organization, a government agency, or any other ongoing concern.
BPI works by:

Defining the organization’s strategic goals and purposes
(Who are we, what do we do, and why do we do it?)

Determining the organization’s customers (or stakeholders)
(Who do we serve?)

Aligning the business processes to realize the organization’s goals
(How do we do it better?)

The goal of BPI is a radical change in the performance of an organization, rather than a series of incremental changes (compare TQM). Michael Hammer and James Champy popularized this radical model in their book ‘’Reengineering the Corporation: A Manifesto for Business Revolution’’ (1993). Hammer and Champy stated that the process was not meant to impose trivial changes, such as 10 percent improvements or 20 percent cost reductions, but was meant to be revolutionary (see breakthrough solution).
Unfortunately, many businesses in the 1990s used the phrase “reengineering” as a euphemism for layoffs. Other organizations did not make radical changes in their business processes, did not make significant gains, and wrote the process off as a failure. Yet others have found that BPI is a valuable tool in a process of gradual change to a business.

Six Sigma
is a set of practices originally developed by Motorola to systematically improve processes by eliminating defects. A defect is defined as nonconformity of a product or service to its specifications.
While the particulars of the methodology were originally formulated by Bill Smith at Motorola in 1986,
Six Sigma was heavily inspired by six preceding decades of quality improvement methodologies such as quality control, TQM, and Zero Defects. Like its predecessors, Six Sigma asserts the following:
Continuous efforts to reduce variation in process outputs is key to business success
Manufacturing and business processes can be measured, analyzed, improved and controlled
Succeeding at achieving sustained quality improvement requires commitment from the entire organization, particularly from top-level management
The term “Six Sigma” refers to the ability of highly capable processes to produce output within specification. In particular, processes that operate with six sigma quality produce at defect levels below 3.4 defects per (one) million opportunities (DPMO).
Six Sigma’s implicit goal is to improve all processes to that level of quality or better.

The Lean Approach
is the production of goods using less of everything compared to mass production: less human effort, less manufacturing space, less investment in tools, and less engineering time to develop a new product.
The Lean Approach is a generic process management philosophy derived mostly from the Toyota Production System (TPS) but also from other sources.
It is renowned for its focus on reduction of the original Toyota ’seven wastes’ in order to improve overall customer value but has some key new perspectives on how to do this.
Lean is often linked with Six Sigma because of that methodology’s emphasis on reduction of process variation and Toyota’s combined usage (with the TPS).
Toyota’s steady growth from a small player to the most valuable and the biggest car company in the world has focused attention upon how it has achieved this, making “Lean” a hot topic in management science in the first decade of the 21st century.

Business Process Management (BPM)
is the intersection between management and information technology, encompassing methods, techniques and tools to design, enact, control, and analyze operational business processes involving humans, organizations, applications, documents and other sources of information.

The term operational business processes refers to repetitive business processes performed by organizations in the context of their day-to-day operations, as opposed to strategic decision-making processes which are performed by the top-level management of an organization.

BPM differs from business process reengineering, a management approach popular in the 1990s, in that it does not aim at one-off revolutionary changes to business processes, but at their continuous evolution. In addition, BPM usually combines management methods with information technology.

BPM covers activities performed by organizations to manage and, if necessary, to improve their business processes. In short, Business Process Management is a management model that allows the organizations to manage their processes as any other assets and improve and manage them over the period of time.

Customer Expectation Management (CEM)
is an emergent management and business approach with the powerful idea of defining your business, not in terms of the goods and services you provide, but in terms of “customer expectations.” CEM explicitly links corporate strategy down into every niche and corner of the enterprise to ensure that your business sets and meets customer expectations –without exception.

Within CEM everything the organization seeks to achieve should be aligned with achieving Successful Customer Outcomes – anything that doesn’t can be regarded as potentially ‘dumb stuff’ and eliminated.

Organizations implementing CEM approaches can achieve simultaneous reductions in cost, improvements in revenue and enhanced customer service (aka the Triple Crown). Furthermore Regulatory and Compliance requirements may be met and exceeded without a negative impact on business performance.

Various CEM approaches, such as the CEMMethod(tm), place the customer firmly at the centre of everything an organisation does. This evolving field includes world best 21st century performing companies such as Best Buy, Apple, Gilead Systems, South West Airlines, Zara and Virgin.

The book “Customer Expectation Management – Success with Exception’ (Schurter/Towers 2006) describes the clear and actionable guidelines, along with examples from FedEx, Virgin Mobile, Best Buy and a budget airline, explaining what companies can do to increase the customer pipeline, convert higher percentages of that pipeline to profitability, and extend the duration of the customer relationship where profitability is at its peak.

Reflections on the State of Play
Pressure to perform has never been greater at both a personal and company level. Each of the approaches has merit depending on the challenge faced however in our recent research increasingly the players who dominate their markets, those achieving triple-crown plus, are utilizing approaches and methods falling into the Customer Expectation Management domain.

The original pioneers of earlier approaches e.g. Toyota & Lean, General Electric & Six Sigma, have not stood still. In fact they are now the very companies pushing further and widening the gaps between themselves and rivals through what we have come to know as CEM. Other notable exponents of CEM type approaches include FedEx, Virgin Group, Ryan Air (Europe’s largest airline), Citibank, Zara and Best Buy.

Common themes to note are these companies ‘outside-in’ perspective, their alignment to achieving and exceeding customer expectations, the constant stretch to delivering Successful Customer Outcomes and a relentless focus on business success through reduced costs, improved revenues and enhanced service.

CEM is a natural evolutionary approach and yet remarkable in its ability to produce immediate and significant impact on corporate performance. It is readily embraced and incorporates facets of its predecessors. It is easy to understand at all levels (alignment to achieving Successful Customer Outcomes) and does not require significant technology investment.   

About the Author

Steve Towers, CEO and founder of the BP Group (www.bpgroup.org), is an expert on process and performance transformation.
Steve founded the first community focused on business process management in 1992. You can join the BPGroup here. Steve has bases in England and the United States..