2. What are the tradeoffs in cost reduction vs. quality improvement?
3. What is the difference between waste reduction and cost reduction?
4. What if waste reduction can't reduce enough cost?
5. How does reducing waste improve quality?
6. How does reducing waste increase revenue?
The
Agile & Lean Glossary defines waste as anything that
does not directly add to or support the creation of customer
value. If no waste is created, then all of the value created by
an organization is received by the customer. This is rarely the
case.
A key concept is that it is the customer who establishes value.
Here the customer can be either internal or external. If the
value created by an organization is not perceived by the
customer as valuable then the difference is considered waste.
Waste can also be produced directly by an organization at the
same time it is creating value. Anything that is not considered
to be value received by the customer is 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 waste. Errors or defects are just
one example of seven types of waste that can be created. See the
Agile & Lean Glossary for the definition of the Seven
Office wastes.
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.
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 creating value in another. This is also known as a
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
Agile & Lean Glossary defines the other six wastes as;
overproduction, waiting, transportation, underutilization,
work-in-process, 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 can also increase revenue and
employee and customer satisfaction.
It’s all in the name:
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 costs (those creating value) and
bad costs (waste) 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.
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 core abilities to create customer value.
There is no need to set a stopping point like when 10% of costs
are eliminated. A waste reduction program works continually to
eliminate all areas of waste; and overtime can far exceed a 10%
cost reduction objective.
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? If everything that can
be done is being done to reduce waste, then it is time to focus
on the value being created.
Perhaps revenue is dropping it is because the customer no longer
sufficiently values the product or service being received?
It the sales and marketing organization cannot reverse this
perception, then it becomes necessary to reduce the value
created by the organization.
Costs’ rising faster than revenue is essentially the same
problem because customer's are not valuing the products or
services sufficiently to justify the costs. If the sales and
marketing organization cannot increase the customer perception
of the value received, then the value (and its associated costs)
must be reduced.
Reducing value becomes a case of deciding which 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 that should be left to the arbitrariness of a cost
cutting knife. Other techniques such as value stream mapping can
be used as tools in this situation to help maximize the customer
value created for a given investment in labor and capital.
Of the Seven Office Wastes defined in the
Agile & Lean Glossary, the seventh one, defects, is the
one (and only one) usually associated with quality problems.
However, reducing any of the Seven Office 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 later when the
work is needed, leading to lots of rework. If overproduction is
reduced, then defects as soon as they are created, allowing the
process to be fixed before more defects are introduced.
Another example is variation. Having multiple ways to do the
same thing leads to confusion. 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 is always performed
before they receive it.
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 are willing to pay
the value of your product or service. Or it will increase from
increased customer retention due to increased customer
satisfaction from receiving greater value for a given cost.
Of the seven wastes defined in the
Agile & Lean Glossary, defects is the waste that is
hardest to reduce.
Defects are the result of errors or mistakes. Mistakes happen.
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 an increased numbers of mistakes.
However, the other six forms of waste are relatively easy to
reduce or eliminate. If someone is overproducing, the process
can be changed to produce the value closer to when it is
actually needed. If an underutilized process is reduced, then
the cost of that process will be reduced.
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.