Value and People: More with More, Less with Less, More with Less, Less with More

In a very tough economic environment, it is inevitable that everyday people like you and me will be impacted. Gyrations in demand — which is often a product of our own creation (i.e., the bullwhip effect) and not a natural result of supply and demand — will lead companies to make the tough decision to do one of the following:

1. Add more value with more people
2. Add less value with less people
3. Add more value with less people
4. Add less value with more people

Lean thinkers will often follow (1) or (3), whereas most companies are often guilty of (2) and (4).  It is clear that most companies hack at the branches instead of striking at the root, when it comes to corporate waste.

Carl Icahn — a person I admire — recently wrote about the state of American businesses and how most companies are full of waste. He said:

I have observed first-hand the sheer amount of waste and inefficiency at a few companies that I have taken over.

For instance, when I took over a rail freight car company called ACF during the 1980s, they had 12 floors in a Manhattan office building which was filled with workers. I couldn’t figure out what they did. I really tried to find out what these people did and even went so far as to pay $500,000 to a consultant to study the issue and get back to me. After weeks of research, even the consultant couldn’t figure it out. So I shut down the division and it had no discernable impact on the performance of the company, which I own to this day.

This experience, in my view, is emblematic of the extent of waste in corporate America. There are few companies that you can’t come in and cut 30 percent of operating costs and no one would know the difference.

Icahn highlights several types of wastes here:

• First, companies that are excessive and over-hire is wasteful.
• Second, the people that were hired and do work that is unimportant to the firm — that highlights a type of waste that is harmful to the human spirit — these are humans that can add value, but not in their current situation.  As a result, they collect a paycheck, but do no valuable work.
• Third, Carl — $500,000 USD to a consultant who couldn’t give you any insight is waste.  Without tooting my own horn too loudly, I could have helped you much better and I would’ve charged you less.  Call me next time.
• Fourth, the short-term solution was to terminate many people, the processes and activities that they engaged in, and also the complexity that they added.  I have no argument here.  But, Carl Icahn did not attempt to arrive at the root causes (ask why five times) for why those people were there in the first place.  The long-term countermeasure is to put-in-place preventative measures and avoid this situation again in the future.
• Fifth, waste limits growth.  It must reduced or eliminated.  This can only be done via rigorous root cause analysis and surgical countermeasures that eliminate or reduce the root causes for the waste.  Otherwise, any quasi-solutions will be analogous to the roman city built on top of a jewish city and a greek city built on top of that, ad infinitum.

Hidden Factories is a term I’ve used in the past to highlight processes, activites, and other associated business waste that become the norm, but are truly waste when seen from the perspective of an outsider or — even more appropriate — from the perspective of the customer.

What is Value?

To explain “value”, it is often easier to explain the opposite — waste or muda.

There are 3 types of activities, 2 of which produce waste:

1. Steps that definitely create value.
2. Steps that create no value, but are necessary given the current state of the system.
3. Steps that create no value and can be eliminated.

(2) & (3) naturally create wastes, of which there are 7 types:

1. Over-Production: Producing more than is needed, faster than needed or before needed.
2. Wait-time: Idle time that occurs when co-dependent events are not synchronized.
3. Transportation: Any material movement that does not directly support immediate production.
4. Processing: Redundant effort (production or communication) which adds no value to a product or service.
5. Inventory: Any supply in excess of process or demand requirements.
6. Motion: Any movement of people which does not contribute added value to the product or service.
7. Defect: Repair or rework of a product or service to fulfill customer requirements.

It’s important to understand “Value” in terms of the customer. From the customer’s perspective, “Value” could be defined in the form of a question:

Which process steps (and associated costs) do our customers not have to bear?

The answer to that question will define the non-value added steps that ought to be eliminated or reduced in order to bring more value to the customer.

The Big Mura

A type of waste that is quite harmful to the human spirit is the waste of human potential, often called Mura. Carl Icahn describes Mura in the citation above — an entire floor of workers that really were not needed, or, could be needed if deployed in the right way. In either case, the firm probably should not have hired those workers in the first place if, in the short-term, they would not be needed after all.

Listen to Icahn and Choose

Back to what I said in the beginning — some firms will choose one of the following:

1. Add more value with more people
2. Add less value with less people
3. Add more value with less people
4. Add less value with more people

Lean thinkers will often follow (3), whereas most companies are often guilty of (4) and (2). We often are the creators of the complexity and waste that repulses us and that we complain about. What would the customer have us do? I guarantee customers — in the most generic sense of the word — will probably answer (1) or (3). Yet, companies often commit (2) and (4).

Let the customer appropriately drive our behavior — it’s the only sure way to add value.