In my humble opinion…
Great words to start a post, eh? But the fact is, most of business and business process is based upon opinion. It is like a very loosely constructed scientific experiment with no great way to prove a hypothesis except with 20/20 hindsight. So when I speak of Lean in this post, it covers a lot of different ways waste and efficiency have been tested in business, but also tries to show when the experiment might be over.
From my perspective, there are two things to remember about lean practices in an organization: 1) Lean implementation is meant to take out the waste all organizations suffer from in the implementation of their manufacturing or intellectual processes. 2) Lean is like an asymptotic function and will never be “completed”.
It is this second point which I want to focus on today, the “never completed” idea. Let me set up a few scenarios for you:
Manufacturing: Elimination of muda across a production line over several years. Success has been demonstrated, and returns are harder to come by/prove, but management is still driving for 5% annual improvements. When does this cross the line from improvement to impossible?
Purchasing: The elimination of excess spending is implemented, incenting the purchasing department to challenge spending and vendor costs. Typically the more purchasing “saves” the company, the higher the bonus Purchasing receives. After years of paring down costs, vendors and excess spending, the parameters originally placed still exist, making it harder to show percent savings. Purchasing has completed the task but are required to continue to show the same result.
Sales Effectiveness: The sales processes put in place to bring all sales representatives up to minimum quota levels have been implemented, but as the goal attained, but process remains in place. In a normalized distribution, the best performing sales reps remain, but the distribution is so tight that even A-players are at risk for remediation.
The problem with all of these is there comes a point where the goals of the original program have been achieved (or nearly achieved–see asymptotes, above), but the program or initiative which was implemented remains in place. Not only the program, but also the infrastructure of people achieving their goals and objectives. Which means this becomes a hard beast to kill once the objectives have been reached since someone has taken ownership or is responsible for the program (a little job protectionism…).
Anecdotally, let’s take purchasing…from a sales perspective, the purchasing department is the enemy (I’ll get to the reason why in a minute). From the executive suite perspective, the Purchasing Department is a tool to leverage or recoup margin by driving down spend. To incent the purchasing department to do this, typically they get paid on percentage saved. Let’s use a paper purchase from Dunder Mifflin as an example. DM provides paper for the company and Purchasing has been tasked with reducing office paper costs. DM has a three-year contract to supply paper to the company and when the contract comes up for renewal, Purchasing negotiates a 5% reduction in overall price based upon an achieved volume. Now, whether this is really a company savings or not AND whether this is really a hit to DM’s bottom line is to be hashed out in details which aren’t relevant for this example. For now, let’s assume Purchasing has achieved its goal, so that 5% is represented back to them in some form of bonus, either to the group (less common) or to the manager (more common).
Buoyed by this success and newly realized profits, the company CEO declares ALL vendors will undergo a 5% price reduction, enacted every year, from now on.
Now let’s pause for a second and think about some of the consequences which could happen. If we are buying a physical good, there is a floor which the vendor cannot go below, since there is a hard cost in the goods. For services, there is a floor which the service provider cannot go below, since the service provider has to pay for the people who provide the service. If I ask for a year-over-year reduction of 5%, the vendor will have to remove some level of profit from their margins, and if they do this…
What happens? If it is a physical good, after a while, there will probably be a degradation in quality. If it is a service, then there will be a degradation in the quality of service (e.g. a cheaper resource, usually less experienced, as a replacement for the experienced resource).
So, cost cutting works in its initial phases by trimming excess spend. But in a long cycle, it is not a sustainable practice. The program quickly reaches its asymptotic limit (and usefulness), and great results have dribbled to almost results.
So why is Purchasing the enemy of Sales? Because Purchasing is missing a key component in its evaluation for cutting costs: Value.
If Dunder Mifflin provides only paper, then it is easy to say they can be replaced by any paper provider. But if DM provides 24/7 onsite service, free tech support for paper jams, whatever, then these value-added services can’t be evaluated for cost in a 5% reduction.
Recently I was discussing this with one of my colleagues, and where we saw the disconnect was ensuring Purchasing knew where the value was in the chain. Yes, Purchasing can drive price down, but if Vendor A has provided value up front, be it in consulting, configuration or evaluation, then they need to recoup that cost. Looking short term and purchasing from Vendor B may provide a lower initial cost, but there is a high probability Vendor B can’t match Vendor A in value.
This delta in the intrinsic idea of value is critical. Value separates the experts from the wannabes and quality manufacturing from defects. It is intangible but tantamount to excellence.
There is a story which I haven’t been able to track down, about General Motors many years ago. Apparently the CEO at the time told his suppliers they were going to cut their costs to GM by 2%. The thing is, telling them to cut 2% might sound trivial, but as we all know, this will flow down hill. The quote I remember from one of the equipment suppliers, and I’m paraphrasing here, was GM would get their 2% reduction in price, and a 20% decrease in quality. And they did. The problem is you can tell someone to cut their price (I’m so tired of hearing, “Sharpen your pencil.”) but the company you’re buying from still has to make a profit. If you put them in a situation where they can’t make a profit but are obligated to supply you, they will figure out a way to find that profit, and it probably won’t be to your advantage.
So, in the end, think about programs which look for perpetual improvement. If it is something where this can be applied, by all means do so. But if a program has run its course, put it to bed. There are other things which need streamlining in your organization.
Thinks, Inc. is a consulting firm which specializes in Smart Sales Processes & Operations. If you’d like for us to come and assess your chaos, drop us a line at contact@thinks-inc.com
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