Chapter 3: A Helicopter Perspective To Profitability

Business is about the fact that the result of the process of processing products & services generates more money from customers than the company has to pay for all the resources they consume. That is, a productivity that generates profit and/or return on invested capital. This may be illustrated by The Refinement Bowl:

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The Refinement Bowl



Maximized productivity builds on (full) measurable visibility throughout the refinement process from supplier to customer to manage and control resource consumption relative to its contribution to the value increase of the product or service.

The fundamentals of the refinement process (Lean = Value Chain)

A refinement process "floats" through a chain of different Responsibility Triangles, with fulfillment flow from supplier to customer, driven by Customer/Market demand (opposite direction). Input to each Responsibility Triangle is resources (soft as hard) and the question of capacity, then through activities and processing within a Responsibility Triangle. This results in a product or service that constitutes an in-depth resource to the next Responsibility triangle in the refinement chain.


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Cooperation between the Responsibility Triangles (departments)

 

Responsibility Triangle (Lean = cell)


 

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The respective Responsibility triangle must, within the framework of its part in the refinement process, have:
  • Responsibility / measurable goal. A responsibility to, based on a specified
    resource consumption, cost, refining and delivering specified products or services
    expressed in numbers like time and quality. Measurable goal, such as stock limits compared to actual outcome, are values within the framework of a customer driven product cost compass. In the review of The Staircase Model, in chapter Organization, we will describe how to connect a Responsibility Triangle's setpoints to the products or services Customer Driven Product Cost Compass. We will also show that many departments' Responsibility and measurable objectives are in direct conflict with the authority and Right to Influence as a consequence of these departments being governed by Parkinsson Law and not a Customer Driven Product Cost Compass
  • Ability and Right to influence. A foundation in Lean is Continuous Improvement where
    employees are engaged and encouraged to chase waste. One challenge is that Responsibility and measurable objectives in many companies are in direct conflict with the ability or Right to Influence. Another challenge is that Lean's Continuous Improvement implies that a setpoint values must be revised successively in order to be in the congruence with the actual values of your refinement process. This is today's economic management models do not handle. An additional challenge with Continuous Improvement is that the setpoints for the responsibility Triangles must be coordinated in relation to each other in order not to create disturbances (crashes) in the refinement process. A more or less continuous coordination is missing in the framework of Lean.
  • Information and tools. Here lie the crucial challenges in the form of an IT/ERP community which, in the lack of deeper competence in business management, are in a more or less monopolistic position. An IT community, which we claim, is building bureaucracy instead of helping companies in their process orientation, helping companies to get an effective interaction between the various Responsibility Triangles.
  • Knowledge. To ensure the right knowledge to partly execute the activities on one
    effective way, partly to be an active part of continuous improvement, is one
    challenge in our post-industrial society. The combination of old-fashioned "T-Ford Economics",
    today's IT solutions, education and positions of interest and support organizations have in many cases placed the people and employees in different "bird crests", where one bird's cave does not know what the other is doing and therefore suboptimates instead of interacting within the framework of an efficient processing process.


Activity is the engine in the refinement process that consumes resources and results in
products or services that can be sold to customers and generate revenue. It is the activity
that should be constantly questioned if it may be implemented more efficiently, or simply rationalized or removed.

"Added Value Cost" and "Non Value Added Cost".

The formely accounting firm Arthur Andersen divided resource consumption into the concepts "Added Value Cost" and "Non Value Added Cost". A division that was accepted by large parts of the consultative community and also by the education system. A division we as founders of the expertscenario initiative strongly question.


The reason we don’t accept this division is because the breakdown means accepting activities and, by then, resource consumption in the business that does not have to confirm its existence based on its contribution to the value increase of the products and services or to the return on invested capital. In other words, the acceptance of the concept of Non Value Added Cost opens for a growing unproductive bureaucracy which nobody wants.


The growing overheads is the engine of The Law of Parkinson

Financing of bureaucracy (soft refinement) on the basis of an expense budget gives rise to growth and unproductivity. Parkinson's Law tell us that "work expands so as to fill the time available for its completion".

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This law includes the claim that "the one who has the least to do is most stressed." Parkinson also believes that the number of employees and the working volume is not in relation to each other. Two arguments for this are:

  • An official wants to increase the number of subordinates, not the number of rivals
  • Employees create work for each other

Through some mathematical formulas, Parkinson's law describes how to get seven employees in a short space of time to do the job of what only one did before.

Lean Accounting failure

Instead of focusing on the root of the evil, ie, get a full measurable visibility (Customer Driven Product Cost Compass) throughout the refinement process from supplier to customer in order to manage and control resource consumption relative to its contribution to the value increase of the product or service, Lean Accounting throws more or less product calculation into the trash. A quote from Practical Lean Accounting (Maskell, Baggaley & Grasso, 2011)

“When using value stream costing, it is not necessary to know the costs of the specific products to make decisions on these issues. Pricing decisions for Lean organnizations are never made with reference to the cost of the product. Lean organizations focus on the value created for the customer on the market”

Lean Accounting avoids the fact that more and more of the processing is soft without acting on a traditional industrial perspective. By also rejecting the traditional internal accountancy, the appeal is an unnecessary conflict with the economy-establishment approach.

In a seperate chapter, we will show how The New Digitial Economy opens for a cooperation between Lean and Financials. The challenge is the reengineering required by the IT/ERP Community.

A Customer Driven Product Cost Compass for a measurable visibility throughout the refinement process from supplier to customer

It is the product or service that, through the activity, consumes resources and costs and generates the business revenue. That's why it should be vital to ensure to set up a Customer Driven Product Cost Compass in your business.

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The argument that it is too complex, too costly and ultimately an impossibility to ensure a functioning Customer Driven Product Cost Compass in post-industrial digital society is false, based on insufficient insight into the consequences of continuing to accept a growing productivity fog and overhead costs. It's a huge lack of insight into IT technology's ability to automate measurement and store volumes of data.

To realize a customer driven product cost compass is required:

  • An acceptance of soft refinement and its logic within the financial elite community, in other words; accepteing a postindustrial accounting model in harmony with GAAP
  • That all parts of the soft refinement business accept that you are part of the process and thus measurably linked to the product or service.
  • The IT/ERP do a re-design of their solutions

We will return to the above paragraphs in following chapters. We want to emphasize that we are not looking for any traditional piece rate campaigns. What we will show is that by measuring and controlling, companies can better prevent the bubble to grow (and in the end burst) with exceptionally bad scenarios and large layoffs. On the contrary, by measuring and controlling, a Customer Driven Product Cost Compass will drive a pre-emptive maintenance and investment in employees, as in the case for hard investments in machines, etc. Likewise, a Customer Driven Product Cost Compass will greatly increase productivity in your IT- investments and in your business as a whole.

Bert-Olov Bergstrand & Stefan Johansson