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Jon Miller

Jon Miller: Value-added Percentage, and other Parlor Tricks

By Jon Miller, - Last updated: Monday, February 9, 2015 - Save & Share - Leave a comment

“What should be the target value-add percentage in a process?”

This is a very interesting question. Oddly, value is one of the least discussed and understood topics in lean. Perhaps this is because there is so much good that can be done simply by tackling the vast amounts of obvious waste in most of our organizations and processes. Even a poor definition of value is good enough, as long as it sheds light on the opportunities to covert wasted time and effort into more valuable ones.

Value is subjective. Humans define value. How we define value is time-bound. Humans are very bad at making long-term decisions concerning our own well-being and the well-being of others. In life, compound interest and delayed gratification yields more value but we are not wired to understand this so we choose the shorter-term value that in fact is lower value to our lives. This is important because the result is local optimization, or the maximization of value for me and my process to the detriment of others. Humans are also bad at assessing system-level impacts of our decisions.
Value is defined by the customer. But who is the customer? The customer of a process is the downstream process, all the way down the chain. This thinking allows the creation of a lean production system triggered by pull. This in turn minimizes overproduction, which limits various other wastes such as inventory, defects, transportation and motion, since less unnecessary output means less waste associated with output in general.

At the beginning process of the pull chain, consumption, the paying individual is the customer for the product or service. The target value to the customer should be at least 100%. Receiving less than 100% of the promised value turns people off. It is unfair at best, dishonest at worst. Receiving more than 100% expected value is what creates customer delight and repeat business. It is simply a question of under-promising and over-delivering. But that is shallow thinking that most lean organizations fall under. It is dangerous to define value only in terms of the paying customer.

What about the employees who work in the process, and are themselves not only stakeholders but consumers and members of society? What about allowing them to define factors that affect value in the process, such as health and wellness, creativity, empowerment to make changes, the various things that lean thinkers may bundle under “respect for people”? More leaders and organizations are realizing that a designing a workplace that has value for the employees and not only the end customers is critical to attracting and retaining talent, engaging them, improving performance, and retaining customers. It is a virtuous cycle. The target is 100% engagement, with the ideal (but not the target) being 100% satisfaction.

But what about the shareholder? Executives who worship at the altar of “increasing shareholder value” view share price as the ultimate value, over and above the paying customer and the employee or community stakeholder. If we aimed for 100% value to shareholders, at the expense of those other customers, the result is a sociopathic organization whose products and services pollute, executives who cheat, mistreat people and make a lot of money for short periods of time while nurturing a toxic culture that leads to eventual decline. At the risk of ruining my chances of ever being invited to be on a Board of Directors again, I will state my conviction that maximizing shareholder value is not a good management process target for any organization other than privateers.

Toyota aims for 95% run rate on their assembly line. Why is it not 100% as a target? It turns out that a perfect day hides problems, such as overburden on the workers, slack in the process that makes it easier to hit 100%, or other. ‘No problem’ is a problem. A perfect day is not possible; it is only an illusion of safety that lulls us into complacency and eventual decline. The lesson here is that we must set targets that help us to safely expose and address our problems, not hide them.

How should we set targets for value-add in a process? First, define the customer at several levels, and think as broadly and as long-term as possible. Get a clear enough definition to separate good from bad, waste from value. This is not too hard, but keep in mind that the answer will be subjective.
Second, think about the processes involved and ask “What is the need of the downstream process?” Depending on how well we understand the customer and answer this question will result in how we design our processes and set targets for value-added.

Is the customer need desirable? This question asks whether we even want to be doing business with these customers in the first place. Are they reasonable people? Do they pay on-time? Are they profitable? Do they fit our company vision, mission, culture and so forth? When we force-fit customers to delivery processes, we create a lot of waste and the value-add percentage will be low. Being able to answer ‘yes’ to the question “is it desirable?” means that we are designing in a high value-add percentage to your process by offering products or services that we can build and delivery smoothly and at a low cost. Sometimes we have to fire your customers to have a high value-add process. At other times such as during a startup phase, we may wish to acquire undesirable customers to gain market knowledge, or if the business must take on more work of any kind in order to survive, the value-add percentage may be sacrificed. The ideal answer to “is it desirable?” is yes, the situational answer is ‘no, but’.

At the process level, it is much harder to ask this question since it is not practical for most processes to refuse to supply the next process within the same organization. Yet, this is exactly how pull works. If the downstream process makes an unreasonable demand, the chain breaks and problem solving activity is triggered. If the downstream process request is truly unreasonable, the takt is adjusted, capacity is supplied and flow is resumed. If the request is reasonable but the upstream process is unable to supply, the root cause of this is located and removed. We don’t want the process to break, but we also don’t want it to never break. We must intentionally remove waste but add slack to the system, and continuously test the right amount of slack within different customer demand conditions.

What is the value of slack in the process? Taiichi Ohno wrote “Don’t fear opportunity losses” in exhorting Toyota managers to not keep inventory “just in case” it was needed. This was directed at the Toyota business model of the 1980s for mass producing low-cost, high quality automobiles in high volumes. It does not necessarily fit a business whose model is built around responding to profitable quick-response opportunities, emergencies or natural disasters. International courier services, hospital emergency departments and moisture removal product companies come to mind. In these situations, keeping inventory or capacity on hand in order to respond to unpredictable customer needs is practically the only way to deliver. Viewed from a value-add percentage point of view, it may be very low, but profitability may be very high. Customers who will pay more for an immediate delivery, be it medical care or take-out food, based on their situation. Value is subjective.

At the process level there are situations that do call for keeping reserve capacity, in effect reducing the process value-add. For example, keeping a top sales person at 50% load or less so that they are available to respond in a moment’s notice to an unexpected visit by a high-value customer is a valid strategy. Keeping a water spider’s standard work at 80% or less in order to respond to cycle time fluctuations in the production lines they are supporting caused by product mix variations is another example of local sub-optimization for optimizing at a higher level of the system. One area that most lean and non-lean organizations fail is in adding more indirect team leaders and supervisors (slack and cost at the headcount level) to an organization in order to create capacity to monitor, train, coach and improve people and processes (overall cost and quality improvement at the system level).

Lean thinkers love to talk about value added percentage, shaming traditional managers by how low it is in their organization and shocking them into action. While useful, this is largely a parlor trick. The truth is that lean thinkers are just as bad at defining value as the rest of the world. We just have fewer good excuses for this.

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