Quantifying the Benefits of Improvement

And finally, I just want to spend a few minutes discussing how we can quantify the benefits of improvement. And the question to ask, which we’ve answered already in this course, is what is the purpose of improvement? We talked about the investment in improvement earlier. And the fact is that a team of six people meeting for half a day a week for say six months is equal to 84 person days of commitment, that is a fairly big investment for an organization particularly for small and medium sized organization. And the primary purpose of improvement is not cost saving. The purpose of improvement as we discussed earlier is to improve the speed and efficiency of the process by removing the non value adding steps, the delays, the constraints, the problems, the rework, the risk points. And this has the benefit of creating capacity to do more profitable work. So by removing Moving those constraints and barriers and problems, we create space to do more work for customers, which will generate more profits. Some costs will be saved, for example, from reduced scrap and rework from reduced energy costs by a swifter process. But the main purpose is to create new capacity, the investment and improvement is justified by the increase in contribution that using this additional capacity brings. So let’s have a look at that briefly. The first thing that we can do is to value the increase in capacity that we create by making improvements. So consider this example. Let’s say a process costs $100,000 to run per month, and delivers sales of $150,000 a month. That’s a contribution of $50,000 per month 33% contribution margin. Now we have the opportunity to expand sales attract new customers go into new markets. And we could expand sales to $200,000 a month, let’s say. But we currently don’t have the capacity in house to meet this extra demand. We could invest in new capacity of course, but we may not have the access to capital, or we may not wish to add to the burden of overheads or to gearing. The only alternative is to improve the capacity of the process so that we can absorb the extra work. And let’s say the end to end time of our process from customer order to delivery is currently 10 working days. If we make improvement activity, if we can reduce this to six days, then we’ll be able to cope with this additional work in house contribution will increase to $66,600 per month. Our investment and improvement activity therefore generates nearly $200,000 additional contribution per annum, the cost of running the process remains the same, we have the same people working the same equipment. The only additional costs are the marginal costs of materials and energy to meet the new orders. Our investment in improvement activity therefore, is justified by the significant improvement in contribution to the business. The second way that we can quantify the benefits of improvement is to look at the cost savings that there are. So for example, the reduction in the cost of scrap and rework means that material costs will be saved, and also the energy costs of rework can we quantify those inventory will reduce as we make the process more streamlined, there will be less work in progress from a swifter process and probably a need for less finished goods stock as well as we can satisfy customer demand more quickly. This reduction in inventory has a cash flow benefit Additionally, a streamlined process takes up less space, freeing up space for other revenue generating activities, we can estimate the opportunity cost of the space freed in terms of the additional revenue and contribution that will be created. Furthermore, fulfilling customer demands more promptly means better customer satisfaction, and that means more orders. It may also mean more premium price Express orders as customers realize that they can get their goods correctly when needed. Can we estimate the value of these additional orders. And finally, a more engaged and involved workforce means less employee turnover, which means less recruitment and training costs. We do not attempt to reduce headcount when we’re making improvements, because that would stifle the improvement culture who wants to improve themselves out of a job? So the cost savings don’t include healthcare savings. There may be, of course, natural wastage or early retirement on offer. But essentially, we are not trying to reduce headcount because that would destroy the impetus of our efforts. Taken together. This means that the benefits of improvement vastly outweigh the costs. The Four Laws of improvement as we have seen, provide the foundation for successful improvement activity. And unleashing the power of your people for improvement is much more cost effective than hiring external consultants. And the improvements are much more likely to stick as well. The key tools of improvement that we’ve looked at are easy to teach and to apply. And an engaged workforce is much more committed to the organization and will generate self sustaining culture of improvement. Improving processes creates the capacity to do more profitable work, leading to step changes in profitability. And there are cost savings to So now you should go out and get started, because better thinking leads to better results. Thank you for listening to this course and for your time. I hope it has benefited you and that the skills and ideas contained within it will help you develop your own improvement practices in your organization. Thank you very much for listening. Goodbye.