September 2, 2016

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Freeing Stranded Cash

After nearly 40 years of Lean in the US, it is commonly assumed that 80% of companies still fail to sustain Lean implementations.  And Six Sigma initiatives seem even more difficult to sustain. Combining the two, seemingly different improvement programs, into one Lean SixSigma (LSS) program baffles almost every organization.  I would like to explore some potential reasons for this.

 

Almost all experienced LSS practitioners understand that the lack of leadership commitment, leadership turnover, traditional cost accounting, conventional human resources approaches, and a true understanding of how Lean applies to the entire enterprise are often identified as the common life-cycle failures of LSS iniatives.  But how can your organization solve for these failure modes? Let's go into that so your organization can add value at higher rates.  

 

First, let's define the term "stranded cash" to mean all money that is tied up, even only temporarily, in wastes and variations in your business.  These wastes and variations emanate from errors in operations and misses in revenue opportunities.  Many, if not most, of these errors are hidden.  While you may in some instances find their effects aggregated and summarized on financial statements, you won't see them explicitly defined on a financial statement.  This makes driving ongoing operations from the P&Ls only a near waste of time over longer time horizons.  Leaders often struggle to see just how much cash is hidden within the business.  They are generally surprised to find that it may represent several percentage points of profit or the equivalent of the profit lost from an additional 10-20% of net sales. And sometimes it can be much, much more.  As an example, I once helped an organization find a combined $84 million in hidden costs and lost sales opportunities all because the business model they were proudly using to run their operations was deeply, but non-obviously flawed. The errors were invisible at the P&L level.     

 

Essentially, every dollar a business could make- but isn't- in a given period is preceded by one or more errors.  Seems obvious.  These errors could be mistakes made in understanding customer needs or errors made in manufacturing, service, information processing, in HR, or accounting policy, or a combination of these and many others. The 'secret' that few business leaders know is that systematically understanding and eliminating these errors is the way to improve both top and bottom line in the shortest amount of time.  The first step is to understand and add all the losses due to errors.  This sum is the total stranded cash, or current profit value gap, in the business.  The second step is to make all the errors visible.  Has your company identified all the errors?  Does your leadership know to?  Does anyone know how?

 

If you want to understand what your investment and expected rate of return for an Operational Excellence program should be, you need these numbers.  For example, there is no reason to spend five years rolling out a traditional Lean or Six Sigma program modeled after the Toyota Production System across a 200 employee organization if the total opportunity is only a million dollars.  An organization at this scale, no matter how good it is at problem solving, will likely only realize about half of that million in total cost opportunity.  And it will do so at a pitch interval some multiple of its production and sales cycle timing- no matter how badly leadership may want it to be faster. Your organization won't overextend on effort, focus or program expenditure if the scale is known.  Do you know the total stranded cash opportunity and the physical cycle limitations of the rate of return for your business?  After determining total stranded cash and pace, you can scale resources and investment accordingly to maximize both rate and return.  This is good capital management.

 

The third step is to understand how to solve any problem or error.  For this, your team needs to understand how to find and eliminate every error, be it in sales operations, HR operations, production, R&D or any other function.  GroEngine is the problem solving system which can be scaled for any size organization, to ensure that profits are maximized and program costs are minimized for the return, enabling an organization to side-step the scaling issues which doom sustained deployment of traditional Lean and Six Sigma programs in about 80% of businesses.

 

Systematically finding, prioritizing and eliminating errors is THE work to be done for accelerated process and product innovation.  It is also THE work to be done to continually improve individual and social well-being and balance this with performance.

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