Benefits and Costs of implementing Business Excellence

1. Mark Rehn Business Excellence for SMEs Benefits and Costs of implementing Business Excellence Prepared by Dr Mark Rehn Mark Rehn Business Excellence Pty Ltd Mob: +61 438 585 009 Email:markrehn@bigpond.net.au Web:www.markrehnbusinessexcellence.com

2. What is required for ‘business excellence’ (i.e. to be the best you can possibly be)? • Everyone pulling the rope in the same direction – alignment! • Working smarter not harder – with minimal waste • Getting what you measure – so measuring the right things • Sharing knowledge for maximum organisational benefit • Proactively orchestrating the above changes 2

3. Accordingly, the world’s converging Business Excellence frameworks all share the following five fundamental prerequisites for business excellence Chuan and Soon “A detailed trends analysis of national quality awards world-wide” Total Quality Management, V11, No.8, 2000, p.1065-1080 3

4. Is it worth pursuing? • Less than 4% of the western world’s organisations are actively pursuing business excellence in a premeditated, holistic manner • Such organisations in Australia and the USA have outperformed the industrial average Return on Capital Employed (ROCE) by more than 3 : 1 (ref: Australian Business Excellence Awards; USA Baldrige Awards) • Such organisations have also found that the typical Benefit to Cost ratio of well executed process improvement projects, an important component of business excellence, is usually 10 : 1 or higher – much higher than for most capital investments (ref: Deming; Juran) • The size of the organisation is not a limiting factor - but small to medium organisations do have the advantage of being able to move faster to implement the required changes! 4

5. The total ‘cost of poor quality’ (= cost of poor processes!) of any organisation can be represented as a large iceberg Visible cost of poor quality! • Scrapped materials • Servicing of complaints • etc Invisible cost of poor quality! • Poor staff utilisation • Loss of customers • Rework • Hand-offs • etc …for Service organisations (ie non-capital intensive) Total iceberg cost pa = 25% - 40% of Total Operating Cost (TOC) pa! …for Capital-intensive organisations Joseph Juran 5

6. A well structured and executed approach to process design and improvement is therefore astoundingly cost beneficial Example: An SME with current TOC of $4M pa would gain an extra $1.2M Gross Profit cumulatively over the next 5 years 6

7. Prepare an indicative (ie order of magnitude) 1-page Benefit to Cost case for your organisation to invest in process improvement Sequence (see over for worked example)... • Total cost of bad quality (typical – choose!) 25%-40% depending on the degree of capital intensivity as indicated on the previous slide (ref: Juran; Deming) • Best practice process improvement objective: reduce bad quality (ie Iceberg) by half over 5 years (aggressive but do-able!) • Table of annual savings over 5 years in terms of Total Operating Cost (TOC) • Summation of savings in terms of TOC (with TOC assumed to be static at today's value for a conservative estimate of 5-year benefits!) • Estimation of likely total training and participation costs over 5 years (assuming aggressive implementation!) • Hence determination of the likely Benefit to Cost ratio for your investment (of the order of 10 : 1) • Conclusion? – Just do it! 7

8. Example of worked 1-page Benefit to Cost ratio, assuming aggressive, 'best practice' implementation in an organisation with current $60M per annum Total Operating Costs (ie Revenue minus Gross Profit) Scale this example to suit your own organisation! 8

9. As the following diagram shows, the idea is to invest time and effort in prevention of process problems in order save a much bigger amount of money dealing with internal and external process failures! Prevention Overall Saving Appraisal Internal Failure Prevention Iceberg! Process Improvement Appraisal External Failure Internal Failure External Failure Time AusIndustry 9

10. There are many documented indicative cases of successful implementations of process improvement reducing the size of the Iceberg (ie Cost of [bad] Quality = CoQ), for example 10

11. However, when it comes to benefits and costs, you cannot expect someone else's numbers to have much meaning for your own organisation For example... • How much waste was in the baseline process of the companies surveyed - and how much is in your baseline process? • How much of their way of doing business depended on 'smart people' - and how much does yours? • What did the surveyed companies consider 'productivity' to be - and how does it compare to your definition? • How did the surveyed companies calculate return on investment related to a decrease in time-to-market or growth in market share - and would such calculations apply to your marketplace? • Did they follow procurement policies similar to yours, or do you have constraints that would keep you from achieving the same improvements? Sheard and Miller, Software Productivity Consortium, 2000 11

12. We should stop wishing hard numbers exist and we should stop waiting for them in order to 'make the case' for our own organisation • Hard numbers are not available • Hard numbers will not become available anytime in the near future • If there were hard numbers, you wouldn't be able to apply them to your company • If you did use them, nobody would believe you anyway Sheard and Miller, Software Productivity Consortium, 2000 12

13. Notwithstanding the indicative overall case, following completion of each Process Improvement project, you may wish to determine the associated actual net Benefit to Cost ratio as follows: • Arranged by the Project Coordinator for the project implementation, have the improvement team assess the differences between the AS IS and SHOULD BE processes and hence quantify (in a spreadsheet) the forecast (guesstimated!) incremental Benefits and Costs of first making the transition (as planned) and then operating the new process for, say, the next 7 years • The Net Present Value (NPV) for the differential Benefits stream should then be calculated, as should the NPV for the differential Costs stream • The forecast 'Benefit to Cost Ratio' of the Process Improvement project can then be calculated • A bullet-point list of the principal (top 5) qualitative benefits of the new process should also be prepared as part of this analysis • As soon as the new process has been institutionalised, update the formerly projected differential Benefits and Costs estimates with the actual values, and hence update the forecast Benefit to Cost ratio • Have the organisation's overall 'process champion' add the forecast benefits and costs of this project to the cumulative benefits and costs of all such formally conducted Process Improvement projects - and hence maintain a graphical record (see over) of the overall business improvement effort 13

14. If desired, forecast Benefits and Costs of all completed Process Improve-ment projects may be assessed quantitatively as follows (augmented by summaries of the top 5 qualitative net benefits of each project) Project #3 Cumulative NPV of Forecast Benefits ($M) ∑ Benefits Project #2 (3 Projects) Project #1 ∑ Costs (3 Projects) Cumulative NPV of Forecast Costs ($M) ∑ Benefits Cumulative Benefit to Cost Ratio = (for 1,2,…N Projects) ∑ Costs 14

15. However, while this cumulative analysis is quite rigorous and therefore convincing in its results, the danger is that the extra work involved may actually prove to be counter-productive • Ideally, the analysis should occur twice – once when the improved process is first ‘installed’ and the Benefits and Costs going forward are estimated - and again after the process has been in operation for some time in order to validate the earlier forecast assumptions • Employees often find it tiresome to do such additional work after they perceive that they have finished implementing the improved process • There is a strong case to be made for having employees devote this equivalent effort to improving another process rather than to analysing the completed process! 15