3.4 PER MILLION
Know What You Want
Selecting meaningful metrics can influence the path you take
by Mike Carnell
Having learned Six Sigma in the 1980s makes today an interesting time to live in.
Six Sigma was a strategy to achieve the corporate vision of total customer satisfaction. The corporate leadership team understood the critical link between satisfied customers and revenue.
With that understanding, vision meant that as you selected projects, you needed there to be a link between a project goal and objective and something that touched customer satisfaction in a positive way. Being customer focused was sound strategy and low risk. Understanding the link to customer satisfaction made project selection relatively simple, assuming you understood your customer and possibly your customer’s customer.
In recent years, you don’t hear the customer satisfaction issue discussed frequently. We have replaced it with a surrogate acronym called VOC (voice of the customer), which is more often viewed as a Star Wars Jedi-type thing where someone closes their eyes and uses "the force" to understand customer wants, needs and desires as opposed to the more complex method of simply asking them.
Today’s discussions center around project savings or cost reductions, which are internally focused as opposed to externally focused. It is akin to the traditional approach of operating to a profit as opposed to growing to a profit.
But it’s difficult not to stand up, place your hand over your heart and swear allegiance to cost reductions. Even mediocre continuous improvement practitioners learn early on that being fluent in the dialect of cost reductions when using corporate-speak has potential to lengthen your career, or at least buy you sufficient time to find a less-scrutinized position.
Cost reduction metrics are safe. They are like the chief information officer who purchases IBM computers because "nobody ever got fired for buying IBM." It may not be optimal, but it won’t be wrong.
Mining case study
Let’s look at a case study1 that demonstrates how stating the metric differently affords you the flexibility to choose the safe route and—for the less faint of heart—look for projects that can really change the face of a business.
By looking very simplistically at the mining industry, you can see it produces a commodity. Basically, an ounce of a particular metal is the same as someone else’s ounce of the same metal, with the exception of some generally low levels of impurities. The market sets the selling price. For instance, the price of gold is a number frequently reported as a financial metric.
Generally, this makes the goal of the majority of mining improvements simple: reduce unit cost. If everyone sells at the same price, the most profitable producer is the lowest-cost producer. The producer with the best unit cost becomes the last man standing. It is the most profitable in terms of return on investment, not necessarily raw dollars, at market price.
There is another aspect of mining that’s important to understand: mines’ ore reserves. Ore reserves are the metal located on your mine’s lease area. This is the input to your process. When the reserves are gone, so is the mine. This is how the life of a mine is determined. Reserves are finite: location and content are pretty well understood. These reserves are the same as any other process having a finite raw material inventory.
Another aspect of these reserves is that they are not homogeneous. Some contain ore with more metal (higher grade) content than others. Some areas contain no ore, but they must be developed to get to areas containing ore. Assuming a well-understood process that is stable and in control, higher-grade ore will allow you to produce more metal with no significant difference in processing effort, at least to some theoretical maximum level.
Mine plan created
A mine plan is created that tells the miners what to mine and when. That allows the ore-processing organizations to plan what and how they will process.
When you understand the entire value stream, then you can appreciate the difference it makes to include the exploration and planning process, as well as the mining and processing. Because there is the constraint of a finite raw material resource and commodity pricing, you must get as much of the metal to the market when it is at a higher price.2
We were asked to work on a mining continuous improvement program in which the metal’s price was at an all-time low. Projects were focused on cost reductions following the last man standing strategy. Six months into the program, the metal’s price went from an all-time low to an all-time high.
The continuous improvement program would have done well if it would have continued to focus on cost because of the commodity status of the product previously discussed. The target set by the CEO was not cost reduction, but instead earnings before interest and tax improvement. This allowed us to work projects that supported either cost and revenue or both.
The increase in metal price allowed throughput projects to deliver significantly more financial benefits than cost reductions. The program was restructured to focus primarily on throughput rather than cost reductions. Project cycle times were reduced significantly because people now understood the response time to market changes was reduced based on project cycle times.
The right metric
The point is not that cost reductions are a poor metric, although you need to remember that driving pure cost reductions can provide suboptimal solutions. No organization has ever shrunk themselves to greatness. A more prudent version of cost reductions would be reducing unit cost.
Our accounting systems are geared toward understanding cost or, at the very least, creating the illusion we understand cost. Because we understand it, we constantly use it for a metric. Just like anything that is repetitive, it becomes a pattern of thought, and anything cognitive or innovative tends to atrophy.
This is an area in which top down may make more sense. Just as Motorola did, we were given a corporate vision—the leadership team’s view of a future state. It was amazing in its simplicity: total customer satisfaction.
Of course, someone will step up and say it needs to be at the right price. It also needs to be the right product delivered at the right time. We were allowed latitude in the path to the vision.
We must make sure we understand what we are doing when we set metrics for anything, not necessarily just a continuous improvement program. When we set these metrics, we are predetermining an outcome—maybe not the size of the outcome, but certainly what the outcome will be. More importantly, we are going to determine people’s behavior. We will determine what they do, what they discuss and how they will interact with the organization because we have just set the direction for change in the organization. A year later, we will have had made an impact on the organization’s culture by simply setting the metric.
That is a metric that deserves some serious consideration.
- Information on the mining example was taken from Wynand van Dyk, director and process consultant at Arete Consultants Ltd.
- This strategy can become more complex in terms of mine development, and a net profit value baseline analysis of the operation and the operations risk profile.
Mike Carnell is president and CEO of CS International in New Braunfels, TX. He earned a bachelor’s degree in business administration from Arizona State University in Tempe. Carnell is a member of ASQ.