Efficiency vs. Innovation

Efficiency is reducing inputs per unit of output. Inputs decrease, output stays flat. Think of cost reduction: we still produce 10 parts, but now it costs us $8 instead of the $10 it used to cost. Efficiency is a one-time, short-run result. Most Lean efforts are focused on efficiency, and I believe this is one of the reasons that Lean usually doesn’t yield long-term results.

Innovation is increasing output while maintaining level input. Your current levels of labor or materials now yield more. A client, a $100 million distributor, is increasing sales by 10 to 20% without spending a nickel more by implementing innovative business processes.

For long-term success, we want innovation, which boosts in sales and improves margins. When innovation starts to happen the results multiply, which means that you get much better traction out of an innovative approach than from pursuing efficiency.

© 2014 – Rick Pay – All Rights Reserved

Who’s In Charge, Your Auditors or Your Customers?

Today I was out shopping for oil and vinegar cruets, those little bottles used for vinegar and oil at restaurants. I wanted to put a set on my dinner table, ready to use on my salad. I walked into a well-known kitchen supply store and asked a clerk if they had any of the bottles. She said they normally carry them but are out of stock in preparation for their annual inventory.

What?! The accountants, not anyone concerned with customer service, must drive this company. While my purchase that day wouldn’t have made a big difference for the company, I’ll probably never go there again.

Internal processes should always support customer service and revenue growth, not act as a roadblock to serving the customer. An innovative way to prevent this from recurring would be for the store to use cycle counting to keep their inventory accurate and never do a full physical inventory count again. I’ve helped many companies implement cycle count systems, which the auditors accept as an alternative to a full physical count.

Build your processes to support growth, profitability and above all, customer service. You never know when someone might need a set of cruets.

© 2014 – Rick Pay – All Rights Reserved

Focus On Process

One of my favorite television shows is CBS Sunday Morning. I like it because it shows a series of short stories about people, places and events you might not see anywhere else. Recently they had a story about Matthew McConaughey, the award-winning actor. When asked how he acts, he responded that he focuses on the process, not the result.

Businesses should consider that approach as well. Many businesses focus on results only to find that they come up short. Great process produces great results. As you develop your new processes, you need to be sure they in fact produce the results you are looking for, so measurement and accountability are key to success. But too much focus on the result will often end up sub-optimizing or totally missing the results you strive for.

Think of an athletic team that has a game plan that gave them a solid lead going into the fourth quarter. Then they change to “protect” their lead (the result) only to have the other team come back to win the game. Does your team focus too much on results only to fall short? How are you developing great process?

© 2014 – Rick Pay – All Rights Reserved

Improve Processes Before Technology

Many companies try to use size, cost and technology to create competitive advantage. A Stanford study from 2010 showed that in comparing high performing business processes with high performing technology, the business processes are more important to improve first. If you have the best technology available with relatively weak business processes, all it does is speed up the rate of your bad business processes. Technology, whether it is conveyor belts or computer systems, can’t make up for bad processes, so the processes are the place to begin to make improvements.

© 2012 – Rick Pay – All Rights Reserved

Efficiency vs. Innovation

Efficiency is reducing inputs per unit of output. Inputs decrease, output stays flat. Think of cost reduction: we still produce 10 parts, but now it costs us $8 instead of the $10 it used to cost. Efficiency is a one-time, short-run result. Most Lean efforts are focused on efficiency, and I believe this is one of the reasons that Lean usually doesn’t yield long-term results.

Innovation is increasing output while maintaining level input. Your current levels of labor or materials now yield more. A client, a $100 million distributor, is increasing sales by 10 to 20% without spending a nickel more by implementing innovative business processes.

For long-term success, we want innovation, which boosts in sales and improves margins. When innovation starts to happen the results multiply, which means that you get much better traction out of an innovative approach than from pursuing efficiency.

© 2011 – Rick Pay – All Rights Reserved

 

Does Strong IT Trump Weak Business Process?

In a word, NO. In a research project published through MIT, authors C. E. Heinrick and D. Simchi-Levi measured the impact of mature and immature Business Processes (BP) and mature and immature IT.

First, they found that fully mature or strong BP and IT afforded the best performance for businesses. What they found next was surprising. While one would expect that immature or weak BP and IT would be the worst performing, that was not the case. It turns out that immature BP combined with mature IT were the worst performing.

Why would that be? Strong IT provides significant data and information, but weak BP cannot use it effectively. It is a waste of money. Companies that invest primarily in strong BP fare better than those that invest principally in IT. Better said, strong IT will not fix the problems that many companies experience, especially with inventory, cash to cash cycles, and cost reduction. IT can help with demand and supply planning, but a foundation of strong BP will yield better lead time, inventory turns and cash flow.

We can conclude that investing first in strong BP and then in IT to support it will yield the best results. Expecting the computer system to solve business problems is folly.

© 2011 – Rick Pay – All Rights Reserved