Lean Office FAQ - Lean Office Waste Reduction

The Lean Office Glossary defines waste as anything that does not directly add to or support the creation of stakeholder value. Waste is part of the value equation...

Received Value = Created Value – Created Waste

If no waste is created, then all of the value created by an organization is received by the stakeholder or customer. This is rarely the case.

In the value equation, it is the customer who establishes the Received Value. Here customer can either be an internal or external stakeholder. If an organization’s Created Value is not perceived by the customer as valuable then, to balance the equation, the difference in value is considered Created Waste.

Created Waste can also be produced directly by an organization at the same time as Created Value. Anything that is not considered to be part of the Received Value by the customer, but was a by-product of producing that value, is Created Waste. The basic test of waste is: if given a choice, would the customer pay for it?

For example, suppose an error was made in a product or service. Customers prefer not to pay the price to produce an error, or the price to fix it. Therefore the production of the error and its fix are both considered Created Waste. Errors or defects are just one example of seven types of waste that can be created. See the Lean Office Glossary for the definition of the seven wastes of Lean Office.

Note that each variable in the value equation is calculated using the unit of price. The price is what the customer is willing to pay for the value. Therefore waste, or what the customer is not willing to pay for, is also calculated at price. It is a common mistake to calculate the Created Waste at its cost, not its fully burdened price. The accounting equivalent of trying to sweep waste under a rug. Just as Created Value is calculated as the total fully burdened cost to create that value plus a margin for profit, Created Waste is also calculated at fully burdened cost plus the same margin uplift to account for the lost value opportunity.

Companies not managing their waste have Created Waste equal to 50% or more of their Created Value. As a result they have a large difference between the value they create and their customer's Received Value. The value equation shows that even a small percentage of waste reduction unlocks the value potential that is already being produced by an organization by transferring more Created Value directly into Received Value.

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2. What are the tradeoffs in cost reduction vs. quality improvement?

Cost reduction can be easier to achieve

The costs of an organization are easy to see and therefore make a good target for reduction. Reducing cost has an immediate impact on the bottom line so there is immediate feedback on results. This creates a reinforcing cause and effect feedback loop that further encourages cost reduction behavior. If you try something that is relatively easy and the results are viewed as successful, you’ll try it again.

Quality improvement is viewed by many as being a much harder target to hit than cost reduction. Most organizations attempt to improve quality by reducing the number of errors or defects. Unlike costs, it’s difficult to make a change that directly reduces the number of errors; the organization is already doing the best it can. In addition improved quality is sometimes hard to quantify. Quality improvement produces a weak cause and effect feedback loop that leads to discouraged quality improvement behavior. If something is hard to achieve and the results are hard to determine, why bother with it?

In addition cost reduction is viewed as having a linear cause and effect. For each unit of cost saved a unit of savings drops to the bottom line. Quality improvement has a non-linear cause and effect. The closer the organization is to perfect quality the harder and costlier it is to make additional improvements.

Quality improvement builds a stronger organization

The cause and effect feedback loops of cost reduction are not linear over time. In the short term, cost reduction can appear linear when taking a department-by-department view. But over a longer term and applying a system-wide view, cost cutting impacts the overall effectiveness of the organization to create value. A small cost reduction in one area can reduce the cost effectiveness of a process creating value in another, eventually leading to its elimination as well. This is result is also known as the death spiral and its impact can be as bad as it sounds.

Quality improvement is more than reducing defects. Defects are just one of the seven wastes. The Lean Office Glossary defines the other six wastes as; overproduction, waiting, transportation, unnecessary processes, inventory, and variation. Attempting to reduce these six wastes is just as easy a target as reducing costs. In fact reducing these wastes reduces costs. They also turn out to be the root cause of many defects, so reducing the other six wastes also reduces defects and improves quality. Improving quality increases stakeholder value and potentially revenue.

Implementing a program to continuously reduce waste engages employees to make the business better every day. Employee satisfaction goes up as employees are empowered to eliminate the barriers of waste in their way. Throughput and response times increase creating a more agile organization to customer needs increasing their satisfaction.

Whereas cost reduction and quality improvement both can increase profits – quality improvement alone can increase revenue as well as employee and customer satisfaction.

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3. What is the difference between waste reduction and cost reduction?

It’s all in the name:

The objective of cost reduction is to reduce costs
The objective of waste reduction is to reduce waste

At the end of the day which would you rather have; less cost or less waste?

The problem with cost reduction is that it is not discriminatory. If the only criterion is to reduce costs, then the result is that both good and bad costs are eliminated. Cost reduction does not distinguish between the two.

In many cases cost reduction is performed by asking each department or group to reduce its costs by some percentage. This approach almost guarantees that some good will be thrown out with the bad. A 10% cut in one department may only cut 20% of their fat, but the same 10% cut in another might slice right into the muscle of the organization.

Waste reduction is essentially a cost reduction program with built in criteria for where to cut. It seeks to remove all areas of fat but leave the muscle. There is no need to set a stopping point like when 10% of costs are eliminated. A waste reduction program continually works to eliminate all areas of waste and overtime can far exceed a 10% cost reduction objective.

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4. What if waste reduction can't reduce enough cost?

This question assumes the organization has an active waste reduction program that is continuously searching for an eliminating waste. There are times when the resulting cost savings are not enough.

Perhaps an organization’s revenue is dropping faster than their costs? Or the revenue is growing but its costs are stubbornly growing faster? For either of these situations it’s necessary to revisit the organization’s value equation. The Lean Office Glossary defines the value equation as...

Received Value = Created Value – Created Waste

If everything that can be done is being done to reduce the costs of Created Waste, then the areas to focus on are Received Value and Created Value.

If revenue is dropping it is because the customer no longer sufficiently values the product or service being received. If the sales and marketing organization cannot reverse this perception then it becomes necessary to reduce the Created Value of the organization.

Costs’ rising faster than revenue is essentially the same problem as revenue dropping from a value equation point of view. If the sales and marketing organization cannot increase customer perception of the value received, then Created Value must be reduced.

Reducing Created Value becomes a case of deciding what value is no longer going to be produced by the organization. This becomes a strategic decision, not a waste or cost reduction decision. It is not one to be left to the arbitrariness of cost cutting knife. Other Lean Office techniques such as value stream mapping can be used as tools in this situation to help maximize the stakeholder value created for a given investment in labor and capital.

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5. How does reducing waste improve quality?

The Lean Office Glossary defines seven forms of waste or non-value added activities.

Overproduction - Producing work prior to its being needed or producing more work than is needed.
Waiting - Any time period where any resource is not being used.
Transportation - Moving a resource from one place to another or requiring a lot of motion to perform an activity.
Unnecessary processes - Activities that are non-value add.
Inventory - Assets or resources that are unused or waiting.
Variation - Multiple methods, approaches, paths, or tools for performing the same work.
Defects - Any error that occurs.

Of these wastes the seventh one, defects, is the one (and only one) usually associated with quality problems. However, reducing anyone of the seven wastes leads to increased quality. When there is less overproduction, waiting, transportation, etc., there is less waste produced within an organization. But when each of those wastes reduced, defects are also reduced and overall quality improves.

For example, overproduction by definition creates work products that are not needed right away. If defects are included in the overproduction, they will not be discovered until the work is needed. Many times their discovery occurs too late to fix all of the overproduction defects. If overproduction is reduced, then the defects can be found as they are being created. Potentially finding the cause on the first piece of work prior, not waiting until the defect has been introduced into all of the work, improves quality.

Another example is variation. Having multiple ways to do the same thing leads to confusion as to which way it was done most recently. Confusion leads to mistakes. If one person always checks something before passing it on and another doesn’t, the recipient of both work products can cause a defect by incorrectly assuming if the check was already performed or not.

Each of the first six wastes above can either be the root cause of or hide many of the quality defects in an organization. Therefore once any of the seven wastes is reduced quality improves.

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6. How does reducing waste increase revenue?

Waste is the opposite of value. An activity of an organization either creates waste or it creates value. By definition it is not possible to create both at the same time. If an activity is creating waste, it has the effect of eliminating an equal amount of value. An hour spent creating waste is an hour spent not creating value.

Customers pay for value. The more value provided the more they are willing to pay. Create more value and your revenue will increase. It will increase because customers will be willing to pay a premium for your product or service. Or it will increase from the increased customer retention due to the increased customer satisfaction from receiving greater value for a given cost.

Therefore reducing waste will increase revenue by increasing the value provided to customers.

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7. What is the hardest waste to remove?

Of the seven wastes defined in the Lean Office Glossary, the seventh one, defects, is the one waste that is the hardest to do anything about.

Defects are the result of errors or mistakes. Mistakes are made. This can be truer when people are involved. Telling someone to make fewer of defects rarely accomplishes the intended result. Many times the extra pressure of trying not to make a mistake just leads to increased numbers of mistakes.

However, the other six forms of waste are relatively easy to reduce or eliminate. If someone is overproducing, and if the process can be changed, then that person will stop overproducing. If an unnecessary process is eliminated, the people that were involved performing that process will stop doing it.

No one wants to be associated with any form of waste. Training people on all of the seven wastes, not just defects, and empowering them to search out and destroy all wastes, creates a waste intolerant organization that not only produces more customer value every day, it also reduces the number of mistakes or defects and improves overall quality.

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8. Where is the best place to look for waste?

At the beginning of a process!

By looking at the processes of most organizations you would think that waste only occurs at the end of a process. That is typically where the quality checks start to appear. This is probably because that is where the errors or defects become obvious. But waste can be introduced at the very beginning and at any step downstream in the process.

For example, errors in a product or service delivery can be tracked back to waste introduced in order processing. And errors in order processing can often be tracked back to waste in the sales process. Yet how many organizations take a close look at waste in their sales process when they are not creating sufficient value in their product fulfillment?

The information dependencies of most office environments are too complex to predict how the presence of waste in one area will cause additional waste to be created in another. All of the employees of an organization should be trained to identify and reduce waste. Adding value creates more value as work moves through the organization. Adding waste early in a process also creates more waste as the work flows downstream. Removing waste from a point upstream in a process eliminates the snowball effect of waste adding more waste, as it cascades downstream through the process.

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