SOURCE: Kay Sever | May 30, 2024
The Renaissance Period was rooted in a desire to explore and discover new knowledge. Renaissance thinking focused on discovering “what was unknown, overlooked, missing or misunderstood”. In 2024, we will be using Renaissance Thinking to understand what’s missing from a traditional optimization scope and how to broaden that scope to capture millions of additional dollars with no additional capital.
In February we explored the history of accounting and learned that the 800-year-old accounting system developed by merchants to track trade (i.e., “buy and sell”) transactions, inventories and profit is still in use today (with few modifications). Companies around the world use it to track/report revenue, costs, inventories and profit. We also learned that if your goal is optimization (i.e., “best possible” performance), the financial system does NOT contain and/or report metrics for that goal.
In the months since February, we have shared thoughts about what that means to your business… why optimization metrics are important, what happens when they are missing and how management is weakened in their ability to achieve and sustain optimization/”best possible” results. In this article we will focus on management strategies and how they are affected by metrics. We will start with objective strategies… those linked to data and the choices management teams make based on the data they see and apply to decision-making every day.
Why Are Optimization Metrics an Asset to Executives and Site/Division Management Teams?
Optimization Metrics are stats, numbers and dollars that measure and quantify what is possible to achieve with equipment and people. Optimization Metrics reveal:
- Hidden Equipment Capacity (from an optimized perspective)
- Potential Profit (dollars left on the table, what could have happened…but didn’t with your equipment, organization, and management system)
- Optimization Barriers that Steal Profit, Hide Potential and Divide People, Prevent/Hinder Change
Optimization Metrics help you finally quantify “how good you can be”! When this third dataset is used in tandem with actual and budget data, you can compare today’s performance to the budget AND to targets for “best possible”. This third dataset means you can see the gap between where you are today and “how good you could be” AND know if your budget contains targets that are unachievable.
Optimization metrics give executives and management teams a new context for “upside potential”:
- production opportunities they have already paid for but are not tapping into…
- profits that their equipment and organization were capable of producing but didn’t…
- hidden impacts of organizational weaknesses on profit now visible for the very first time.
Why Is This Month’s Topic Important?
Many companies believe that more data will help them make more money. The truth is data only helps companies increase profit IF IT HELPS THE ORGANIZATION perform at a higher level and sustain that level into the future. When I meet people who want to improve/optimize performance, they are very interested in learning how much money they have been leaving on the table. They want to know how to create an optimization metrics dataset, but incorrectly assume that learning how to create the metrics will stop their losses and increase profits. The real power of optimization metrics is activated when these metrics are strategically LINKED to existing management strategies across the company. These linkages make the magic happen, which is why this two-part article is so important!
Objective Management Strategy Examples
I have listed four key management strategies that executives and management teams employ every day to run companies. These are data-dependent strategies… “decisions by the numbers” if you will… management choices and/or changes made as reactions to what your data is telling you about the state of your operations… quantifiable shortfalls, risks, weaknesses and opportunities… actions intended to yield more production, reduce costs and/or increase profit.
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- Managing to Meet Budget
- Focusing on Cost Reduction
- Increasing Productivity/Run-Rates
- Delay Management (equipment availability/utilization)
Let’s briefly review each of these strategies in the context of data that is available: actual and budget.
Managing to Meet Budget
Meeting budget is one of the most important quantitative measures of success in companies. As a result, budget variances are a top KPI for executives and managers, where the goal (regardless of product or service) is to make actual = budget (i.e., budget variance = zero). In reality, a zero budget variance is a reflection of a management team’s:
- Competence – operations can generate the promised results
- Focus – meeting budget goals is a high priority for all departments.
- Credibility – the approved budget matched performance capabilities.
Sometimes managers and the workforce are paid bonuses if budget targets are met.
Focusing on Cost Reduction
Costs are always budgeted for, but if external factors change, cost reduction may become a strategy for boosting profit margins or achieving budgeted profit (examples: if prices/sales decrease or costs of production inputs increase). When this happens, managing costs may shift from buying high-quality parts/supplies that minimize problems to sacrificing quality to increase margins. Cost savings becomes a management KPI for success, even when weak cost reduction methods result in unreported losses or higher costs elsewhere.
Increasing Productivity/Run-Rates
Production rates are budgeted for based on known equipment capability, historical actuals and budgeted sales. Actual run-rates are compared to budget and may be limited by the budget in a sales-constrained environment. Equipment-matching minimums/maximums affect throughput rates across a value stream (example: shovel/truck teams work to supply primary crushers which feed secondary crushers that feed mills in a concentrator).
Managers see actual feed rates on a real-time, hourly or daily basis, so they are intimately familiar with those numbers. Changing throughput rates to make up for a budget variance shortfall may be called for to meet budget goals, but data reflecting true value stream bottlenecks are not always available or understood. As a result, equipment can be pushed past its limits and cause unplanned downtime events.
Delay Management (equipment availability/utilization)
The other side of managing production is managing equipment delays (the time equipment is not running). Availability and utilization are usually budgeted for every production unit of equipment. As most of you know, maintenance delays usually receive more focus than operating delays. Budgets for maintenance delays are based on historical actuals, improvement goals to shorten the delays, or what has been deemed “world class” for an industry. Operating delays are usually budgeted for based on historical actuals and improvement goals for the coming year.
Managers see actual delay data for major production equipment (shovels, trucks, crushers, mills). They may not focus on delay data for support equipment. Shortening production delays to make up for a budget variance shortfall may be called for to meet budget goals, which often results in planned maintenance delays being shortened/cancelled to free up more time for production.
What Would Change if Optimization Metrics were Linked to these Four Management Strategies?
Managing to Meet Budget with Optimization Metrics – what would change?
- Meeting budget would still be an important objective.
- Optimization metrics help you achieve budget because they help executives and management teams choose operating strategies for meeting budget that simultaneously move them towards their goals for “best possible” performance.
- Taking action to achieve “best possible” performance removes the barriers that keep you from achieving budget, making it easier to solve problems, build teams, increase collaboration and sustain change.
Focusing on Cost Reduction with Optimization Metrics – what would change?
- Managing costs would still be an important objective.
- Optimization metrics would help you eliminate costs and losses that result from unplanned events and weak department relationships while preserving value-added variable costs that protect/insure quality and prevent/minimize expensive surprises.
- Optimization metrics allow you to trade “across the board percent cost reduction” for “targeted/surgical loss reduction” which eliminates chronic expensive unsolved or unrecognized production and organizational problems… common-sense exercises that encourage and promote site-wide/company-wide workforce participation. Millions of dollars of unreported losses can be converted to profit using this approach.
Increasing Productivity/Run-Rates with Optimization Metrics – what would change?
- Production rate targets would be set and budgeted for while knowing “best possible” rates for specific units of equipment (not “design rates” set by vendors).
- Run rates would consider “best possible”/optimum capacity values across a value stream and characteristics of material moved.
- Maximum would not necessarily equal “best possible” within the context of optimization.
- Changing throughput rates to make up for a budget variance shortfall may be called for to meet budget goals. Analysis/changes would be made within the context of known “best possible” rates, helping to avoid breakdowns and unplanned downtime events.
Delay Management (equipment availability/utilization) – what would change?
- Availability and utilization would still be monitored and budgeted.
- “Best possible” would be calculated based on known requirements for both maintenance and operating delays. New perspectives would be gained on which delays should receive more focus.
- All value stream production/support equipment capacity would be evaluated on a “best possible” basis. Improvements would be ongoing based on known values for “best” that had not been achieved.
- Value stream bottlenecks would be redefined on an optimum basis (invaluable data when expansions are considered to ensure correct placements of expansion capital and reveal hidden existing capacity already paid for).
- Shortening delays to reduce a budget variance may be called for. Analysis would consider “best” goals if planned maintenance delays are shortened/cancelled to increase runtime.
To summarize, these four examples show how objective management strategies can create a higher-value result when optimization metrics become part of the decision-making process. With optimization metrics, hidden losses are either avoided or converted to profit without capital spending. People unite vertically and horizontally in an organization to chase losses that block a company’s ability to achieve its “best” performance. Profit goes up when these losses stop. Suddenly what used to be hard to fix becomes easy to fix. All of these optimization dynamics bring a company closer to the truth about what is possible to achieve and change!
Next month: We will continue our optimization journey and talk about subjective management strategies that can be enhanced if optimization metrics are added to management’s toolbox.
Thought for the year: Renaissance thinking has a direct application in positioning your company for success with capital-free optimization. If executives and management teams foster and nurture the desire to explore for hidden profit potential everywhere, what they learn will give them a huge advantage when they want answers to “what’s possible to achieve”.
Kay Sever is a Performance Optimization Expert and Optimization Management Strategist/Coach. Kay helps executive and management teams quantify and tap their hidden profit potential to 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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- About Us
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.
