SOURCE: Kay Sever | August 30, 2021
Millions of dollars are spent removing inefficiencies and bottlenecks from the production process so “best possible” performance can be achieved. Many leadership teams believe that when equipment designed for optimization becomes operational, most of their work is done… but is that really true?
If you think about optimization as a typical mining project, the scope of work would include a review of physical obstacles and barriers that hinder installation, completion of the work, or throughput. In the case of optimization, you also need to consider obstacles and barriers outside the production process (i.e., invisible impediments to optimization in the organization and the management system). Let’s connect the dots on one of those impediments… a common management tool that can be a formidable barrier to optimization.
At the end of the day, the goal in every company is to make enough money to stay in business and grow. Companies measure their success with reported profit AND how close they were to achieving the budget. As a result of the focus on the budget, formulating/approving the budget and operating to achieve budget goals are core management responsibilities. Actuals are compared to budget on a monthly, weekly, daily, and sometimes even hourly basis. In thousands of management meetings the BUDGET VARIANCE becomes the most important number to focus on for production, cost and input variables, and the target value for those variances is ZERO.
The size of the budget variance is one of the most powerful motivators in business!
If the variance is more than expected, managers may tell their people to “adjust” operating practices to reduce a variance. The pressure to meet budget is so strong that management will sometimes shift production from next month to the current month, pushing planned downtime into the future and perhaps risking equipment damage to make the current month budget variance smaller.
The reason for talking about this dynamic is not to criticize management practices, but to raise awareness of the “KPI-like nature” of budget variances and their power to drive management behavior at all management levels. The heavy focus and dependence on the budget variance as a key indicator for financial success creates an invisible barrier when the goal shifts to “best possible” performance.
Let’s say you have decided to pursue optimization or have already made that investment…
Vendors understand the concept of optimization and design and sell equipment for that purpose, so if you have the money, you can buy equipment that helps you achieve that goal. It is easy to have conversations about “best possible” performance once the goal shifts to optimization. It is possible to measure “best possible” performance, not just for equipment but also for the organization. Measuring “best possible” performance is exciting and enlightening. Establishing measures and collecting data that reflect “best possible” metrics is a common-sense exercise that reveals much about hidden operating and income potential. But building a “best possible” dataset will not deliver additional profit to the bottom line. Something else is required…
When you shift to a “best possible” focus, you don’t stop using the budget. Helping management teams understand how “best possible” metrics are different from (and related to) budget is an important step in optimization implementations. Learning how to integrate “best possible” metrics with budget targets for measuring performance and making decisions is the NON-NEGOTIABLE STEP that helps management teams 1) escape their dependency on budget variances and 2) expand their focus to include both datasets in day to day operations and decision-making. Once the relationship between the two sets of data is understood, this relationship can even be used to evaluate “budget reasonableness/achievability” before the budget is approved.
If management does not know how to integrate budget and “best possible” data for analysis and decision-making, future conversion of hidden operating potential is at risk. Without that knowledge, it is easy for management teams to 1) revert back to their comfort zone of using only budget variances for decision-making and 2) ignore what “best possible” values are telling them about operating potential, earnings potential and dollars they are leaving on the table. When this happens, the opportunity to tap into hidden operating potential and reduce the dollars you are leaving on the table is LOST, regardless of the millions of dollars invested in new equipment and systems.
Thought for the month: Are you ready to escape the limiting factors linked to a heavy focus on budget variances?
Kay Sever is an Expert on Achieving “Best Possible” Results. Kay helps executive and management teams tap their hidden profit potential and reach their optimization goals. Kay has developed a LIVESTREAM management training system for Optimization Management called MiningOpportunity – NO TRAVEL REQUIRED. See MiningOpportunity.com for her contact information and training information.
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