Optimization and Context: Measuring the Unmeasurable (Part 1)

SOURCE: Kay Sever | August 1, 2022

Context is defined as “the circumstances that form the setting for an event, statement or idea”. In 2022, we will be exploring the context surrounding optimization in business… 1) what we believe and have been taught about success in business and 2) how these beliefs have influenced our perspectives on the “who, what, when and how” of optimization and the gains we are able to achieve and sustain.

To illustrate the power of context on business success, over the next few months we will consider     “information gaps” and weaknesses within the framework of traditional management perspectives and activities that constrain performance… how you define management responsibilities, how you communicate, how you solve problems, how you measure success… and how success is unintentionally limited despite investments in improvement/optimization. This month we are going to focus on what you cannot see.  

A Measurement Analogy

Think for a moment about your cell phone. We know that cell phones receive or send invisible electronic “waves” of data. Our phones continually convert incoming data to sound or information AND convert outgoing sound or information to data for transmission. Experts say that these waves may cause a cancer risk if we hold the phone too close to our head, so we use the phone’s speaker to lower that risk. 

We CANNOT SEE the waves that create the risk, but it is POSSIBLE TO MEASURE their intensity with an “e-field sensor” that gives readouts of e-field strengths at various distances from the phone. I bought one of these instruments and it gave me a new perspective about the strength of these microwaves. My sensor classifies wave strength into green, yellow and red “distance zones”… information I can use to minimize my health risk. These quantitative measurements gave me new insights that created urgency to change my habits and empowered me to make strategic choices about something I cannot see!                

With this example in mind, let’s think about business… what you measure and how you use that information to make decisions… AND what (you believe) cannot be measured and how the lack of that information impacts the decisions you make. Let’s start with two datasets that every company uses to measure performance and make decisions.

Actual Data

To monitor performance by the minute, hour, day and month, systems capture and report data that reflects what is actually happening over time. Much of this actual data is linked to physical assets that we can see, touch and hear… run rates, volumes, weights, temperatures, time, dollars spent, etc. If you chart actual performance data over time, you will either be happy with the trend or you will decide to make a change to improve the trend.

Budget Data

The second set of numbers is not generated by equipment or processes. This dataset is created by management and is their “best guess” for future performance and profit. Budget data quantifies the most desired operating scenario for the coming year given external drivers (economic, supply chain, regulations, etc.) that the company does not control. Budget data gives departments goals and targets linked to the approved operating plan (production, cost, income, etc.)

Management’s Use of Actual and Budget Data

Management has access to performance data for what’s actually happening and data for the plan for performance. Management uses actual and budget data in tandem to measure performance, give direction for process changes, and evaluate equipment upgrades, the need for more people and expansions. The variance between actual and budget becomes a key driver for many management actions. Hours are spent in weekly meetings explaining budget variances. Monthly reports are prepared to explain budget variances to division management and the executive team. Performance bonuses and management credibility may hinge on achieving a “zero variance” (a measure of excellence). Because of the pressure to minimize budget variances, managers may choose actions that reduce a variance in one area but cause unmeasured losses elsewhere in the company.

Management’s Only Option

With only two datasets to measure performance, it is understandable why meeting budget becomes a priority. If you are in management, comparing actual to budget data helps you follow the plan and make decisions based on what you see (one of your key responsibilities). BUT… what if your team wants to achieve “best possible” performance? Budget values are NOT THE SAME as “best possible” values, which means your team has NO DATA to help them accomplish that goal! As a result of this data void, achieving budget becomes the default for measuring excellence in companies… not because it’s the best process for measuring performance, but because it’s management’s ONLY OPTION!        

Operating Potential – A Third Dataset

To achieve “best possible” performance, you need to quantify the dollars you are leaving on the table… your operating potential. Operating potential can be simply defined as “a company’s existing untapped capacity for profit (generated by assets and the organization)”. Operating potential has already been bought and paid for, but is invisible UNLESS management intentionally measures it. Why? Because actual or budget datasets DO NOT INCLUDE ANY DATA FOR OPERATING POTENTIAL!

What causes this very expensive data gap?

1) Financial systems used by every company were designed to track and report ACTUAL statistics and dollars that follow product as it is processed, supplies used, payroll costs, etc. and do so with accounts, cost centers and roll-up structures for reporting that meet GAAP requirements.

2) Budget systems contain estimated statistics and dollars for FUTURE operating plans for production, cost and profit. Budget roll-up structures for reporting are similar to accounting system structures so that variances from budget can be analyzed and reported.  

3) Financial systems and budget systems were NOT DESIGNED to reveal, track or report operating potential, so neither system contains that data.  

As a result, executives and management teams NEVER SEE any numbers for operating potential, so they believe 1) operating potential does not exist, 2) operating potential cannot be measured, or 3) believe that operating potential exists but they don’t know how to measure it. The lack of data for operating potential also means that it is possible to meet budget every year and unknowingly leave millions of dollars on the table!

Going back to my cell phone example, continuous invisible cell phone transmissions create health risks if the phone is too close to the body. Once I measured the strength of the e-field, the data made the transmissions VISIBLE! With that data, I could measure the risk and make educated choices to minimize it. Likewise, every executive team or site management team wanting to produce the best possible result for the company needs data that makes operating potential VISIBLE! 

Thought for the month: If you understand what’s missing and take action to remove barriers that are holding you back, you can be confident that you are not just “getting better”… you are “getting it all”! 

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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Kay Sever Author
P.O. Box 337 Gilbert, AZ USA 85299-0337

Kay has worked side by side with corporate and production sites in a management/leadership/consulting role for 35+ years. She helps management teams improve performance, profit, culture and change, but does it in a way that connects people and the corporate culture to their hidden potential. Kay helps companies move “beyond improvement” to a state of “sustained optimization”. With her guidance and the MiningOpportunity system, management teams can measure the losses caused by weaknesses in their current culture, shift to a Loss Reduction Culture to reduce the losses, and “manage” the gains from the new culture as a second income stream.