SOURCE: Kay Sever | October 30, 2020
Each year executives and site management teams formulate a budget using actual historical trends and external factors that will impact future performance. They compare actual and budget data for performance drivers linked to productivity, cost and profit. Variances between actual and budget data tell decision makers how successful their people have been in achieving the budget… but nothing more!
What if the executives of a company want more? What if executives and site management teams have expressed a desire to be “the best possible” in their vision or mission statements? What if they know there is more that their people and equipment can deliver… more production, lower costs and higher profits, but they don’t know how to measure the potential left to get? It is important to know that actual and budget datasets are not linked to “best possible” or optimization, which means that decision makers cannot use them to determine if the company has reached its operating potential.
Executives and site management teams can only make operating and organizational decisions about the numbers they see.
1) The questions that management teams ask and the decisions they make day to day will only involve actual and budget data. Operating potential will seldom be discussed without data to quantify it.
2) Management cannot link the organization to “best possible” performance! Without this link, the actions of people will cancel out some of the profit delivered by equipment (even if new equipment was purchased to achieve optimization). Millions of dollars in unmeasured and unreported losses may occur year after year without management’s knowledge.
If You are Meeting Budget, Why Should You Care About This?
For decades the ability of a management team to meet budget has been a primary measure of talent, commitment and success. Setting annual budget targets often takes many man-hours of analysis and months of meetings to finalize. Bonuses are paid to managers who meet their budget goals for production, cost and profit and some managers are promoted because of regularly meeting this goal. This kind of thinking, budget process and reward system has worked for decades in all sizes of companies, so why consider a modification to it now?
This is a logical question that I asked myself over 20 years ago. Let me tell you a story…
Over twenty years ago I was working for a great company. I vividly remember sitting in a conference room with our executive team. That day we learned about defining a dataset that would quantify our upside potential, something that we thought about but had never tried to measure. Budget was NOT part of the discussion. As first, I asked myself “why do we need this information?” Then the lightbulb came on! For the first time, we could see how much better than budget we could be! It was easy to get excited about the concept and the numbers because no capital was required to capture the upside.
You know the saying… Once you gain a new perspective, you cannot go back to your old way of thinking. What I learned that day forever changed the way I look at business, profit potential and optimization. After the meeting, I was asked to help develop the optimum datasets for multiple sites across the company and help management link the datasets to processes, people and management responsibilities. We had met budget in past years and often had lower costs than our competitors, so we really did not believe that we would find many dollars associated with upside potential. We were surprised and happy to discover millions of hidden profit dollars waiting to be captured! Operating potential is NEVER quantified in the budget, so we were unaware of these losses… but with this new knowledge, we could now take action to stop them… AND THAT’S THE REASON TO LEARN MORE about this concept.
In closing, remember this…
1) Optimization is a “steady operating state” reached when assets, people and the management team are all focused on achieving measurable “best possible” results.
2) New equipment and systems sold as “optimization solutions” will not deliver “plug-and-play” optimization to your company’s doorstep or sustain an optimization state into the future.
3) If your vision or mission statements include the words “best possible”, a “best possible” dataset will help you turn that dream into reality.
4) Connecting the assets, people and management system strategically to a dataset for “best possible” or optimum performance is the key to reaching and sustaining “best possible” performance long-term.
Thought for the month: With no data for optimum performance, budget becomes the default for measuring your success, even if optimization is the goal.
Kay Sever is an Optimization Management Expert who helps executive and management teams reach their optimization goals. She has developed a LIVESTREAM management training system for Optimization Management called MiningOpportunity – NO TRAVEL REQUIRED. MiningOpportunity modules teach executives and management teams how to strategically “upgrade” parts of their management system to remove barriers that steal profit, divide people and prevent optimization. Training will use your problems and examples to maximize learnings and accelerate change. Unique insights from Kay’s 3-year study of management’s barriers to change and optimization are included in the content. See MiningOpportunity.com for her contact information and several training options for your team, including the NEW “Spend a Day with Kay” option.
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