What if Operating Improvement Doesn’t Increase Profit?

What if operating improvement doesn’t increase profit?

Great organizations have learned how to unlock incredible value through the implementation of a world class operating model with A3 thinking, daily management, practical problem solving, and leader’s standard work.  These same organizations have seen equally great improvement in their profitability.

But … what if your operating improvement doesn’t increase profit?

Is it possible to improve an operation and not see additional profit?

A world class operating model starts with a strategy based on A3 thinking. What is the business case for the improvement? What is the current condition? What is the target condition we would like to create? Actions are taken to build the target condition and measures are put in place to validate the hypothesis.

As an example, an organization may have decided to improve overall equipment effectiveness by improving its availability through a reduction in changeover time.  It may conduct a changeover kaizen, identify tasks that can be completed while the equipment is still running, and reduce the overall changeover time by 50%.

The daily management system will show the reduction in changeover time and the increase in availability that indeed leads to increased overall equipment effectiveness (OEE). Essentially, more product is being produced in the same amount of time with the same number of people. There is no question the operation has improved.

However, a look at the financials at the end of the month shows the net profit of the organization actually dropped. Why?

Understanding “headwinds” is critical

Organizations unable to answer why their operating improvement did not lead to increased profit run the risk of not benefiting from the improvement efforts or worse, stopping the efforts.

Those organizations who can clearly articulate the “headwinds” they experienced that offset the operating improvement savings have a much better chance of benefiting from the improvement and additional momentum.

Suppose in the example above, the same organization that reduced changeover by 50% experiences a quality problem not related to the changeover process, but one which requires several hours of labor to sort product before shipment. The quality problem (the “headwind”) absorbed any savings from the reduced changeover and actual lead to a decrease in profit.

A very valid argument can be made that the overall business case for the changeover reduction strategy may not have been as important as a quality improvement strategy, but it would be a loss to assume the operating improvement was not valuable or successful.

The key is clearly articulating the story

Leadership is often put in a difficult situation when it commits resources in the form of time and money to an improvement process, but the results of the good work they are hearing about do not translate into more profit. Sponsoring continued efforts is hard.

The countermeasure, however, is the ability to articulate the story. The same effort and rigor that goes into defining the original business case for improvement needs to be done to analyze the loss in profit with a verifiable improvement in operations.

One of the best ways to visualize the improvement and the headwinds is with a waterfall or bridge chart.

Clearly showing the impact of the headwind, along with actions that will be taken to reduce its effects in the coming months, give leadership confidence the improvement achieved will turn to improved profit.

And a word of caution … don’t be fooled by “tailwinds.” They can falsely inflate improvement results as well and need the same level of analysis.

Learn more in Patrick’s book, “Facilitating Effective Change,” available online through Amazon and Barnes & Noble.

Patrick Putorti

Patrick Putorti

Patrick Putorti

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