Archive: Dec 2013
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Written by Andrew Northmore, Director
Please note – this is not an article about water companies but an article about WASTE, so please humour me for a short while!
Did you know that our Water Companies lose on average over 20% of their treated water before it gets to you, the customer….in places, this equates to somewhere in the region of 200 litres per person per day!!!
The water industry in England and Wales loses 3.36 billion litres of water a day in leaks. OK – the water companies are investing in improvements to their network and leaks are now 35% lower than in the mid-1990s. However, if all the pipes could be fixed it would save enough water to supply 22.4 million people every day.
In 2010-11, Severn Trent lost 27% and South West Water lost 20% of their treated water.
“Shocking”, “shouldn’t be allowed”, “put me in charge for a week” ….I hear you say.
But have we got the right to criticise? How efficient are the companies we own/manage?
To illustrate my point – take a typical manufacturing company – with product variable costs (material, labour and variable overhead) of £50 (excluding any waste and productivity allowances) and a target selling price of £100 i.e. this company should make a 50% contribution to fixed overheads. Fixed overheads are budgeted at 25% of expected sales revenue – so this company should make a 25% bottom line before tax and dividends.
It may not surprise you to find out that there are many companies with this type of cost structure that are only making 5% at the bottom line……i.e. they have a serious profit leak and they are losing 20% off their potential return on sales….not so very different to our water companies!
Profits leaking away…. not a pretty picture.
Why would companies let this happen and why don’t they plug the leaks?
The answer comes down to a combination of factors… a sort of ABC of leak detection i.e. a lack of Awareness, Business Leadership, Capability, Discipline, Energy, Focus.. Information.. Motivation, Ownership.. Processes.. Training..Va Va Voom …etc. etc.
These “lackages” (a word I just made up) manifest themselves in a number of leakages or wastes – incidentally, waste is anything that does not add value.
Originally documented by Taiichi Ohno (Architect of the Toyota Production System), he identified the following types of waste:
- Processing – poorly designed and incapable processes that create scrap
- Motion – unnecessary steps that increase production time and do not add value
- Waiting – wasted time waiting for parts, information, authorisation
- Inventory – unnecessary stock that ties up capital and risks damage or obsolescence
- Moving things – increases production time and causes extra work-in-progress
- Making too much – ties up capital, reduces flexibility and increases risks
- Defects – scrap, rework and customer returns – irrecoverable materials and labour
To which I would add an eighth waste
- Commercialism – e.g. selling things at the wrong price (either too cheap or too expensive) or purchasing things at the wrong price/quality or not collecting debts on time
But inevitably, this is just what we see on the surface….lurking below the surface is LEADERSHIP waste. By Leadership waste, I mean:
- Planning – Failing to plan leads to sub-optimisation, work-around, late deliveries, penalties
- Control – Lack of formal system of controls to prevent overpayments, duplication, theft, fraud, unnecessary or incorrect purchases
- Information – missing information, unnecessary/irrelevant information, inaccurate information, untimely information and inconsistent formats, which waste time
- Goal alignment or Focus – where management and employees objectives are not consistently aligned so the employees pursue their own objectives not those of the owner/manager
- Ownership and Motivation – where employees are not allowed or motivated to take ownership and implement continuous improvements
- Discipline – where companies fail to maintain behaviours and things slip back to how they were.
- Communication – where poor communication causes the wrong action or creates delay or confusion
- Decision Making – making bad decisions due to lack of time, lack of attention, lack of information
Here are a couple of practical examples of how waste arises and what you can do about it:
- Your business is expanding and you can’t do everything yourself, so you recruit someone to drive sales. This person earns a basic wage and a bonus based on turnover. There is a danger that your new sales person will try to maximise sales but at the expense of profitability i.e. they will sell things too cheaply and you will become “busy fools”. This could manifest itself as waste in the form of making too much or creating defects as production struggle to meet increased demand. It is however a good example of leadership waste – specifically goal alignment. Also, if your information systems are not up to scratch, you may not spot this profit leak for many months. You should know what contributions (sales less variable cost) to expect and you should have information systems in place that tell you what contributions you are making! Finally, link the bonus to profitability not just turnover and only pay the bonus when you are paid by your customer (it’s not a sale until you get paid). So, make sure your goals are aligned, make sure your information systems are up to scratch, make sure you have adequate controls in place and watch those incentives.
- People who make your products or deliver your services know better than anyone else what causes waste. If they are empowered, trained, supported and motivated, they can surface all sorts of issues that are costing you money or losing you customers. The savings may be quite small but if you get enough small savings they can add up to a lot of money. In one company, we had an issue where a piece of production equipment was regularly stopped by “widgets” not located correctly in a conveyor system. When a stoppage occurred, it was inevitably accompanied by product breakage, scrap and the need to clean up. It wasn’t doing the machinery much good either! The operators were encouraged to fill in Kaizen Action Sheets (Continuous Improvement Sheets) where they could see an improvement opportunity. For an idea to be put in practice there was a process of assessment, validation, authorisation and implementation, in which the operator was an integral part. In this instance, the operator came up with a low cost solution, which involved a height restrictor on the conveyor. If a “widget” was too high, it hit a barrier (similar to a height restriction in a car park), which stopped the conveyor and allowed the operator to intervene before there was a blockage. This resulted in significant savings and this is just one example of many. So, empower your people, make sure your processes are capable and implement a continuous improvement culture.