SOURCE: Kay Sever | June 28, 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 Part 2 of this article, we will review management strategies focused on people and the organization and how they can be powerfully affected by metrics. But first, let’s quickly review some characteristics of optimization metrics:
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 these metrics are used in tandem with actual and budget data, you can compare today’s performance to the budget AND to targets for “best possible”, which means you can quantify the gap between today’s performance and “how good you could be” AND you will know if your budget contains unachievable targets.
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 Topic Important?
When I meet people who want to improve/optimize performance, they want to know how much money they have been leaving on the table. They also want to learn how to create an optimization metrics dataset, but incorrectly assume that just having the metrics will increase profit. The real power of optimization metrics is activated when the metrics are strategically LINKED to existing management strategies and decision processes for production equipment and the organization. These linkages make the magic happen, which is why this two-part article is so important!
Subjective Management Strategy Examples
I have listed four examples of strategies that executives and management teams employ to manage organizations. These examples are part of a TRADITIONAL LIST of internal policies and procedures established by every executive team… some learned in management training classes, others engrained in older organizations as “the way we work”… strategies, policies, choices and actions intended to eliminate problems, increase profit, promote consistency, reduce costs and shape corporate culture. They ALL INVOLVE WORKING RELATIONSHIPS and how those relationships are managed, controlled, restricted or connected.
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- Degree of Centralization
- Vertical vs. Horizontal Management
- Customer/Supplier Requirements
- Management Responses to Problems
Let’s briefly review each of these strategies.
Degree of Centralization
This is a choice that every executive team makes when companies are established. It is also a choice that is revisited when margins are shrinking or new data systems make it possible to increase centralization of certain functional activities (procurement for example). A decision to move from decentralization to centralization is frequently justified based on projected cost savings.
Vertical vs. Horizontal Management
Vertical management is a traditional approach based on organization chart structures that illustrate how departments are grouped under levels of management and the executive team. Horizontal management is a newer approach where executives/managers “co-manage” a group of departments linked to product flow (i.e., the production value stream) or use it to manage projects. Horizontal management does not replace vertical management; it is an optional strategy used to create the best result for productivity, cost, system bottlenecks/expansions, and solving problems that could not be solved using a vertical management approach.
Customer/Supplier Requirements
Traditionally customer/supplier requirements have been focused on relationships between external customers and suppliers. Sales and marketing were “expected to manage” 3rd party customer relationships. Procurement was often “expected to manage” 3rd party supplier relationships. I listed customer/supplier requirements as a management strategy because, in recent years, we recognize that a focus on internal customer/supplier requirements creates significant efficiency and value.
Management’s Response to Problems
This last example would rarely be listed by executives or managers. “Response to problems” is part of every manager’s and executive’s responsibilities, so why is a strategy for this activity important? It’s important for three reasons:
- Only executives and managers have the authority to solve most problems. The workforce may be trained to respond to problems in the moment (especially safety), but solutions to problems are always reviewed, agreed to and approved by management.
- Because #1 is true, there is an expectation within every organization that management will respond when problems not solvable by the workforce are communicated upward.
- When problems are reported by the workforce (or by people with management responsibility), the quality of management’s response to those problems impacts the company in several ways… the bottom line, the trust level within the organization, the “corporate culture”, even the success of improvement initiatives. I have written and spoken many times about how important this one management activity is to the success of a company. For now, we can say that quality of response has been historically viewed as a “discretionary responsibility” for each person in management instead of a management strategy for organizational and financial success!
What Would Change if Optimization Metrics were Linked to these Four Management Strategies?
Each of the subjective management strategies listed above can result in higher profit or lower profit for a company, depending on how each one is managed/executed. The financial impact of weak management strategies cannot be quantified using actual/budget data because a portion of the losses are profits that could have been generated but weren’t, which means some dollars are missing from the financial system. We are talking about millions of dollars, not a few thousand lost in rounding.
GOOD NEWS: Optimization metrics CAN help management teams quantify the financial impact of weak organizational strategies and relationships, which means that executives and management teams can be empowered with a new perspective about their impact on relationships and profit. Quantifying losses linked to a management strategy makes it is easier for management teams to modify or abandon that strategy and adopt a new one, instead of clinging to old ways of working that create a negative result.
So, what would change if we could link optimization metrics to these four strategies?
Degree of Centralization – what would change?
- When centralizing functional activities, it is important to be aware that there may be weak processes within a centralized group that will create losses in departments/locations they serve. In a large company, these losses may total millions of dollars… losses that are seldom reported.
- Optimization metrics can be used to discover and quantify these losses. Remember… people on the receiving end of problems caused by weak centralized processes know losses are occurring even if they don’t know how to calculate them. Executives and senior management need to understand what causes hidden losses within a centralized framework, how to quantify those losses and what steps to take to stop them.
Vertical vs. Horizontal Management – what would change?
- Vertical management activities would not stop. Horizontal activities would be applied strategically when groups/departments are involved in producing a product/service OR to get the best result from project management work.
- Optimization metrics can highlight areas to focus on from a hidden loss perspective. People participating in horizontal management activities will be excited to finally fix problems caused by weak working relationships. When losses linked to weak working relationships are discovered, it is much easier for a “silo” department to choose collaboration because that choice will avoid a loss for the company.
Customer/Supplier Requirements – what would change?
- Simply stated, the needs of people/departments downstream would be known by people/departments upstream. The process of strategically spreading and using process knowledge to prevent problems and increase efficiency is called Process Orientation. I have done extensive optimization work using this tool and have seen amazing things happen when management supports and is committed to sustaining this work.
- Optimization metrics are part of the data spread within the organization… again, selectively and strategically to achieve and sustain a desired performance result and to create a corporate culture where “achieving “best possible performance” is everyone’s measurable goal.
Management Responses to Problems – what would change?
- Of the four management strategies listed here, this is the ONLY ONE focused primarily on the management subculture. Executives and management teams would look inward as they self-examine how they view their roles and responsibilities.
- Optimization metrics would help the team quantify losses linked to poor responses to problems. Instead of accepting poor management responses as “just the way it is here”, the team can unite under a desire to achieve “best possible” results. They can take pride in having the courage to change the choices they were making by setting a new standard for themselves that reduces losses, increases management’s credibility, and BUILDS TRUST with the workforce. We could spend a lot of time expanding on this last sentence because your success with profit, corporate culture and change all rest on a foundation of management credibility and trust.
To summarize, these four examples show how subjective management strategies can create a higher-value result when optimization metrics become part of the decision-making process. The first three examples are focused more on interdepartmental relationships. The fourth example looks inward into the management choices/strategies that prevent the organization from performing at its best. If executives and management teams knew that one of their strategies/choices was causing financial losses, they would immediately want to fix the problem. Having metrics to apply to the strength of relationships 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 change and metrics.
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.
