Operational Performance Improvement
In an asset-intense process industry up to three quarters of total costs are based on raw material and energy costs, it is essential to have a daily focus on maximizing production efficiency and minimizing consumption of fiber, chemicals, water and energy. Operational excellence provides the single largest lever to improve bottom-line profits in a production environment.
A lot of effort has been invested in control and quality systems but a disproportionately small amount has been invested in harvesting the benefit from this data. It is common practice to document and productivity and consumption development. However, some key improvement opportunities remain untouched — implementation of standard production processes across sites, machines, shifts and even individuals. Often important operational decisions are quickly taken and are based on experience and intuition without direct quantitative and analytical support.
Our view is that a reduction of process variability is the key to a step change in productivity and cost reduction. The basis for this is a combination of quantitative and qualitative actions.
The starting point is a methodic analysis of variability, trends and efficiency losses combined with detailed performance comparisons and benchmarking. This then allows for standardized processing of data for meaningful reports, implementation of best practices and collaborative development of standard procedures and guidelines. Group-wide understanding, acceptance and institutionalization of new procedures and standard processes must be fostered by workshops, training and enablement.
To ensure sustainability of the achieved improvements, a management cycle of monitoring, controlling and rewarding performance has to be established. According to StepChange experience, these efforts can lead to productivity increases of 2-8%.
Reducing working capital by managing the payables and receivables processes almost seems too obvious to talk about. In today's tough competitive landscape, every company claims to have a strong focus on this subject.
Upon closer inspection additional value can be captured by managing the details. Typical industry quotes include, "I have negotiated tough payment terms and we cannot press our customers / suppliers further or this will show in the price," or "If we pressure our customers to pay earlier we will lose them." There is certainly truth in these statements. However, managing working capital requires a proper breakdown of the processes that drive working capital levels. Too often the management of the process is left trying to manage payment terms up or down, or going after overdue customers late in the process.
Potentials can also be found in the internal process set up, quality and consistency of data and in the responsibilities in the process chain. A company's ERP system is often programmed based on the best knowledge of the programmer without a clear business rule or value-driven process design up front. Potentials can be found in the frequency and intervals of the dunning runs and in the definition of the date stamp for the calculation of overdues. From a process responsibility side, too much is left to the sales force to settle in the favor of the customer.
Often it is easier to use the good guy / bad guy approach and leave as much of the standardized processes to the back sales office or finance functions. In this manner, adherence to agreed terms & conditions is managed separately from the sales negation process. This results in the sales person conceding fewer compromises on overdues. Additionally, the incentive systems need to be checked against the working capital targets. In many situations the sales force or procurement functions have a very strong influence on the working capital levels, but personal incentives are not aligned and sometimes achieve the opposite (e.g. volume-based sales incentives vs. tough payment conditions).
At StepChange Consulting we have the experience to increase your cash flow significantly, driving value from the operational side of working capital management. StepChange supported initiatives have achieved improvements of 20-30% in working capital reduction.
In spite of low levels of net cash flow, the industry has not yet widely adopted professional cash management practices. Cash management strives to achieve the optimum cash level to manage daily cash requirements and avoid the opportunity costs from lost interest rates or additional interest paid for short-term financing.
Many medium-sized and larger companies are too conservative in their approach for managing cash, others use too much short-term financing rather than a partial shift into medium-term rates. The main reason is a lack of integration of the cash management function into the finance processes that drive the cash levels. Just like product inventory is driven by sales and production, the cash level is determined by receivables, payables and loans. The cash manager often finds himself in the spotlight without transparency of information or authority to drive value. This results in very conservative cash levels to avoid personal blame.
Value opportunity exists in having the required daily data, analyzing trends of cash levels over longer periods of time and determining the optimum cash levels. This is achieved by value-driven process redesign to allow for true visibility and transparency of cash levels across the corporation. Once this has been achieved, standard tools can be applied to determine the optimal cash level. A forecasting process alongside a running trend analysis needs to be established to allow for up- to-the-minute optimized cash management. Responsibilities have to be defined properly and the performance management system adapted to generate value.
From our point of view, cash levels can often be reduced significantly to achieve interest savings of 1-3% and reduce the overall cost of capital.
One of the prime drivers of operating cost is maintenance spend, yet often maintenance is the least challenged. Maintenance often remains as a "holy cow" left untouched for fear of increased production outages. While other process areas have benefited from new technology, best practice process and organizational reengineering, the economic approach to maintenance has largely remained the same. New tools have been introduced, such as handheld devices to support predictive maintenance and condition monitoring, but the core processes and maintenance organizations have not changed significantly.
One of the key challenges that bedevils maintenance organizations is the interfaces between production, engineering and maintenance. Conflicting performance metrics and a lack of customer service approach across these departments cause dysfunctional behavior and efficiency losses. A further challenge is the vicious spiral of reactive maintenance — increasing time spent on fire fighting and reducing the focus on preventive tasks. Escalating costs are also a common characteristic for maintenance organizations. This is often the consequence of a stand-alone maintenance and too independent maintenance organization, costly outside service management, comfortable internal resourcing coupled with traditional shift & overtime agreements, informal procurement channels, satellite spares storage and budgeting based on last year's costs plus a little extra.
Increased effectiveness combined with cost reductions are achievable through the following actions: maintenance strategy definition; prioritization and service level definition per equipment item; definition of spare-part requirements and cooperation across locations; comparison of insourced vs. outsourced services; standardization, visibility and control of service and spares sourcing and storage; redistribution of roles & responsibilities regarding condition measuring & monitoring and realignment of performance criteria; review of resource requirements, shift patterns and overtime; review work of planning, including shut-down and start-up practices.
All these improvements are necessary but only as good as the maintenance organization, performance metrics and spend management systems accompanying them. A key requirement to achieve a step change in maintenance efficiency is a shift in responsibility for spend. Aligning the budget responsibility to the asset managers creating the value (e.g. PM or Plant Managers) will lead to a systems of checks and balances creating a healthy conflict of customer — supplier relationship between maintenance and production that allows for overall reduction in maintenance spend.
It is essential that any of the key actions mentioned above are accompanied by training and workshops to foster wide-spread understanding, acceptance and institutionalization. This change management element is a crucial driver for sustained improvement within the maintenance area.
StepChange Consulting can help you with a structured and holistic approach to maintenance transformation that typically leads to a 5-15% reduction in maintenance spend.