How to EnsurE roI from Your ContInuous ImprovEmEnt ApproACH

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Over the years Phase 5 Group has worked with a fairly diverse collection

of companies, from quite large (i.e., more than 200 sites) to relatively small

(i.e., fewer than 5 sites), from those running capital intensive, high hazard

chemical processes to those running more labor-intensive discrete parts

operations, and from those with a long CI history to those who are basically

“starting from scratch.” Yet, despite this diversity, there is one fundamental

question that every company needs to answer before they pull the trigger

on a substantive investment in CI…“why are we doing this?”

this is the textbook example of, as one of our clients once put it, “a 5 cent

question with 5 dollar answer.” In a sense the answer should be simple.

the purpose of CI is to improve the efficiency and productivity of the

organization, which translates into operational and financial returns for the

business. Yet I think it’s also fair to say that, to be truly sustainable, CI has

to be about more than the bottom line. so how does one start to think

about the roI of CI within the context of larger cultural transformation

journey?

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when we’re supporting a client with their

early stage CI deployment, we like to initiate

the process with a kickoff workshop involving

the corporate operations Leader and his/her

team. that workshop has a well-defined

agenda designed to create alignment among

the team, make some critical decisions about

how the deployment will occur, and apply

certain fundamental change management

best practices to the effort. one of the first

activities during that workshop is to define the

objectives for the initial deployment.

The Business Case Pendulum

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to facilitate that discussion, we often encourage participants to imagine a

pendulum that swings from left to right. on one side of the pendulum are all

of the potential business benefits associated with CI, such as reduced cost

of manufacture, released capacity, less working capital tied up in inventory,

better customer service, increased market share, etc. on the other side

of the pendulum sit the cultural benefits associated with CI, more capable

employees, greater discretionary effort, improved working conditions, etc.

what’s important for every organization to understand is, at some point, for

CI to drive a transformational change in the organization at all levels, the

pendulum needs to end up balanced between those two ends of the

spectrum. It can’t be solely about driving financial returns or the principles

and methodologies won’t ever get infused into the DnA of the organization.

Conversely, CI isn’t a social experiment or an academic exercise. It must

generate returns or business leadership will lose energy for it.

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so keeping in mind that eventually the

pendulum must be balanced, a critical

question for any organization that’s investing

in a structured approach to CI, is which

direction to swing the pendulum during the

early days of the deployment. some

companies recognize a need to generate

significant productivity improvements within

the first 6-12 months of a broad-based

deployment either because there’s an

urgency driver in the business or there’s a lack

of alignment internally on the expected value

to be generated from CI, so “proof of concept”

is critical. one of our clients developed a site

transformation model specifically designed to

accelerate value capture in the first 6 months

after start of deployment (they even referred to

some of the initial improvement

projects as “value accelerators”). As the

vp of Global supply Chain operations

described it, his organization needed

to “earn the right” to invest in capability

building and culture change through CI

(which they did).

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on the other hand, we’ve partnered with clients who have undertaken CI

primarily to address perceived cultural barriers within the organization. one

such client had at one time been perceived as the employer of choice in its

region, but due in part to some senior leadership turnover and increased

competition for talent, attraction, retention, and overall job satisfaction were

starting to become major concerns. recognizing the value of CI to the overall

employment value proposition of the organization, this company focused their

early deployment activities on leveraging the tools and methodologies to

improve working conditions and solve operational problems that, while not

easily connected to hard dollar savings, would nonetheless drive increased

employee engagement and discretionary effort. this client also made a

significant early stage investment in building the capability of first line leaders

in order to enhance their effectiveness and credibility in the eyes of the team.

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1. sTaGe GaTe YOur invesTmenT –

In the so-called “traditional” approach to a

structured CI deployment, the organization

ends up absorbing a lot of cost before it’s in a

position to realize any benefits. these costs

can come in one or more of the following

categories:

• staffing the central CI team

• staffing site-level CI resources

• Leveraging an external consultancy

• Licensing instructional/training content

• training employees (corporate and site level)

• travel

3 KeYs TO GeTTinG rOi frOm Ci

that disconnect between when the investment is made and when the

returns are realized can create trepidation within the organization about the

wisdom of undertaking the journey. And to be fair, some level of up-front

investment will always be necessary, but there are ways to better align the

investment with the returns so that the CI program is “paying for itself” so to

speak.

In fact, phase 5 Group’s approach is specifically designed to help companies

optimize their initial financial investment in CI while maximizing the likelihood

of sustainability. By leveraging the Eon platform, our clients can support the

CI efforts at more locations with fewer dedicated CI resources. Additionally,

there is less need for a massive up-front consulting engagement that is

expensive, disruptive, and unsustainable. the support we provide tends to be

limited in scope and focused primarily on building client capability. the result

is a significantly lower initial deployment cost than the traditional deployment

model would typically accommodate.

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2. CalCulaTe The enTiTlemenT

A common mistake that many organizations

make is to presume that their manufacturing

operations have a clear understanding of their

gap to perfect performance and the financial

value to be generated from closing that gap.

In reality, many operations don’t really know

with a high degree of accuracy what they

could deliver to the business under ideal

circumstances, how their current performance

compares to the ideal standard, or what

percentage of the gap between current and

ideal is addressable through CI. In fact, in our

experience many operations assume that their

current performance levels are pushing the

limits of what’s possible and that there is little

opportunity to improve significantly (which is

a big problem for an organization that is

trying to drive a continuous improvement

mindset). Even worse, if each operation

doesn’t understand the value of a step

change in performance, then it’s impos-

sible for the business as a whole to truly

understand the value as well.

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for these reasons we recommend to all organizations that they consider incorporating

a gap to perfect performance analytic into the process. the gap to perfect analytic

is a quantitative and qualitative “deep dive” into the operation in order to holistically

compare performance against a perfect or world class standard for the expressed

purpose of identifying the biggest operational and financial improvement

opportunities, flagging which of those opportunities to pursue, and recommending the

best tactics for pursuing them.

A critical benefit from a gap to perfect performance analytic is the immediate and specific

line of sight into where, when, and how the organization will generate a significant return

on investment from CI. Additionally, these analytics can be used to change employee

mindsets about the nature and size of the opportunity. on the other hand, a critical

challenge for organizations is how to make performance analytics scalable and

repeatable across time. fortunately, help is on the way. phase 5 Group is developing a

new Gap to perfect Analytic tool within Eon specifically designed to address that

challenge. the Gtp Analytic will walk users through an interview-style process to input

the appropriate operational and financial data required to analyze opportunities across

three major performance categories – productivity, quality, and yield.

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3. TraCK The value CaPTure

for some, this would seem to be an intuitive

recommendation. Yet many companies

undertake CI without an effective mechanism

for tracking value capture. sometimes the

difficulty lies in clearly defining what gets

characterized as value and how value is

determined. many companies we work with

have developed categories of cost savings

associated with CI that they capture and report

separately, such as:

hard savings – benefits that directly impact one or more line items in the budget (e.g., reduced

overtime or contract labor spend, lower energy or raw material consumption, reduced spend on

parts, tools, & supplies, etc.)

soft savings – benefits that don’t directly impact a particular budget item but nonetheless are worth

tracking (e.g., improved labor utilization, reduced customer complaints, etc.)

Cost avoidance – relates to improvements to avoid a future cost (e.g., deferring a capital expense,

mitigating a potential product quality issue, etc.)

a.

b.

c.

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once settled on the categories of value, getting alignment on how to value certain

improvements can sometimes be a challenge. for example, let’s say an operation

institutes an improvement that increases productive capacity. the valuation of the

additional production could be based upon the gross margin generated on each

additional unit, which is likely the right answer if the business can sell the

additional units. If, however, there is no market for the additional production, then

the value needs to be based on some other multiplier, such as the labor and

benefits cost per unit. for businesses that have a diverse product and customer

portfolio, figuring out the right way to value these types of improvements can pose

a challenge.

And while these challenges are not insignificant, they should not stop an

organization from actively tracking the value obtained from CI. If they do, then

operations and CI leadership may find themselves in a constant struggle with both

business and site leadership to justify an ongoing investment in continuous

improvement. fortunately, Eon provides a mechanism to facilitate value capture

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from improvement work. Eon allows users to estimate the value capture and

overall return on investment from in progress improvement projects and track the 12

month value capture from all completed improvement projects. the result is clear

visibility into the business benefits associated with continuous improvement.

a common theme woven into all three of the tactics described above is that the Ci

program needs to be deployed and managed with a high degree of transparency. the

business needs to be transparent about its appetite to invest and the returns it expects

from CI. operations needs to be transparent about what it can deliver in terms of

bottom line results based on an accurate assessment of the opportunity. And

everybody needs to be transparent about the value generated as a result of CI.

Beyond that, the organization needs to have the right partner and apply the right tools

to manage the program and track the return on investment. phase 5 Group generally,

and Eon specifically, can help organizations to achieve their roI goals for CI. for more

information, please visit www.phase5group.com