SOURCE: KAY SEVER | September 2, 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 questions that cannot be answered within traditional/historical business practices and how the resulting void in information shapes the context for this thing we call “management”… 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 continue to explore the concept of operating potential… factors linked to performance that are not measured but could be AND how a lack of data for operating potential affects performance and management decisions.
Operating potential as “a company’s existing untapped capacity for profit (generated by assets and the organization)”. Data for operating potential quantifies hidden capacity to generate earnings and what is possible to achieve with existing assets and the organization. Wouldn’t it be great to know what is available or possible when you are setting targets, building a budget, or considering an expansion? Of course it would, but executives and management teams NEVER SEE those numbers. Why is that?
NET NUMBERS are Part of the Problem
Two datasets are used by every executive team and site management team to measure and improve performance and make strategic business decisions: Actual and Budget Data. Let’s examine the makeup of these datasets in more detail:
ACTUAL DATA: Financial systems were designed to track and report actual statistics and dollars linked to product as it is processed, supplies used, payroll costs, etc. Actual data is grouped by account and cost center, then summarized to meet GAAP requirements. Actual data are linked to activities that occurred in the company… statistics for equipment/process activity and dollars that were collected and spent. All actual data are NET NUMBERS because they EXCLUDE a company’s gross potential for higher performance and earnings (dollars could have been reported as profit but weren’t, dollars that were left on the table).
BUDGET DATA: Budgets are projections for FUTURE actual NET NUMBERS for production statistics and dollars. Budgets are “management’s best guess” for what can be achieved within the budget timeline based on actual/historical data, operating scenarios, regulatory requirements and plans for removing known obstacles. Operating potential is usually MISSING from this list of inputsfor the budget process, which means that it is possible for executives and site management teams to meet budget every year and unknowingly leave millions of dollars on the table!
Wouldn’t We Know If We Were Leaving Millions of Dollars on the Table?
Right now, you may be thinking something like this:
“We have operated without data for operating potential for decades. We have sophisticated data collection systems for operating statistics and financial data. We meet our budget most of the time. We have expanded production and reduced costs through the years. Our executives say we are doing well. Wouldn’t we know if we lost millions of dollars because we left money on the table… money that we could have reported as profit but didn’t?”
Good question! The short answer to this question is “no”, you would not know. Let’s examine the basics of how profits and losses are reported to understand why you would not know:
1) If actual revenues are greater than the actual dollars spent to operate the business, you report a profit. If actual revenues are less than the actual dollars spent to operate the business, you report a loss. In either case, with no data for operating potential, you do not know the additional dollars of potential profit that you had the capacity to generate, so you would not know how many dollars you left on the table.
2) If actual profit is less than budgeted profit, you report a budget shortfall (not a financial loss). If actual profit exceeds budget, you report a gain over budget. In either case, with no data for operating potential, you do not know the additional dollars of potential profit over budget that you had the capacity to generate, so you would not know how many dollars you left on the table even if you met budgeted targets year after year.
Case Study Example: Years ago one of my clients proudly told me that they met budget nearly every year. After I asked a few questions about their operating potential, we discovered a FREE opportunity to gain production time that was worth $17,000,000/year in additional income. The capacity to generate these dollars had existed for years, but without data for operating potential, the management team was unaware of this loss. Further, without data for operating potential, meeting the budget was their ONLY OPTION for measuring their success. I could give you more examples of hidden losses like this one, but the bottom line is that it is possible to meet or exceed budget and NOT KNOW that you are leaving millions of dollars on the table!
Having a dataset for operating potential gives executives and site management teams new insights and awareness for hidden capacity to generate earnings and what is possible to achieve at a site or in a company. Creating a dataset for operating potential is the first step in preventing or minimizing losses like the one described above.
Next month we will unpack the things that executives and site management teams CAN’T DO because they don’t have access to data for operating potential.
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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