Achieving Operational Excellence and Cost Efficiency

As head of a department responsible for developing a culture of operational excellence and improving efficiencies, I spend a lot of time leveraging human and manufacturing assets, influencing systems and technologies, and sharing best practices. I’ve also worked on ways to create teams that can tackle larger issues and some tools for continuous improvement. Here are three tips I’ve learned that can help others seeking to make operational excellence and improving efficiencies a focal point of their decisions: set up a system of metrics to measure your program and regularly report on your progress; develop ways to network to seek out improvements; and find ways to incentivize good performance.

What is operational excellence and why do we need it? Operational excellence equates to operating most efficiently, and there are significant financial benefits to such a program because the savings you make go straight to the organization’s bottom line.

To be effective, operational excellence should be integral to the way a company does business – not an add-on that gets considered for a time and dropped when things get busy. And, while these programs target internal processes, always keep in mind that their focus should be to help customers. Our program focuses most on safety, cost efficiency, and customer satisfaction – but there’s no one size fits all approach, so your program may address other areas. For companies that operate globally, be sure that the activities can fit local commercial strategies and embrace local culture.

Another reason to champion operational excellence is to fight any trend toward commoditization of your product. As you increase product volumes and competitors enter the market, margins become squeezed. Constantly looking for efficiency improvement is a good way to extend product lifecycle. At the same time, the best programs emphasize efficient ways to introduce new products.

Will you recognize operational excellence when you see it? Look for manufacturing facilities with these features:
•  Always ready for a customer visit at any time.
•  Continually identify opportunities to improve performance and implement the best ideas across the board.
•  Safe, clean and bright working environments, high levels of customer satisfaction, clear visual management, an engaged and well trained workforce, excellent communications, high process yields, reliable equipment, external recognition such as ISO certification and customer awards, and a growing, profitable business model.

Tip 1.  Develop appropriate metrics

One of the most important features of an operational excellence program is how it measures success. Deciding what metrics are most important to your business and what you will watch is the first step to achieving excellence. There are many things to measure, but here are a few that make sense for our business.

Scrap percentage of sales — This is a measurement of efficiency that takes the dollar value of what you scrapped that month divided by the amount sold.

On time delivery – How are you are maintaining delivery times?; a leading indicator of customer satisfaction.

Recordable injury rate (RIR) – A safety metric.

Return-on-capital-employed percentage – A measure of how profitably you are employing capital, it is an indicator of how well business investments are performing.

Inventory turnover – The number of times your inventory is used in the same period, e.g., one year. Working with a just-in-time approach usually is preferable, but there may be specific reasons for adjusting this metric.

Gross margin percentage – A financial measure of efficiency, sales minus cost of goods sold; many efficiency projects are conducted to improve gross margin.

Overhead percentage of sales – Another efficiency measurement, this one tells how much labor is needed to run a business and shows a direct correlation with competitiveness.

Our internal metrics program began in 2010 with several efficiency metrics. We later added metrics for on-time delivery and safety. Metrics will shift over time, and it is important to be careful when creating baselines and targets.

To implement our program we developed a system to score each plant’s performance on key metrics – the compilation of scores is displayed in our Max-Matrix^™ dashboard. Each metric has an “owner” from each plant to champion that metric and upload it to a file used for scoring. We have also been improving the process, automating the data collection to make it easier and more efficient by pulling information from other internal systems.

The latest changes were made in 2014, to focus more on safety metrics. We also developed a set of world-class definitions to tune the system appropriately for plants that are already performing at a high level. Since the metric targets are tightened each year, the significant amount of progress would otherwise make improvements bump up against the law of diminishing returns. For some areas, as they approach the levels listed, the metrics aren’t tightened as much for the next year; this is to ensure that plants doing well have an incentive to continue paying attention to the system.

In 2015, our goal is to automate the program more, so that each plant will load its metrics into a cloud-based system, with even more information being drawn from internal systems. Automation reduces discrepancies and reduces lead time, so the results are ready for managers review immediately after the month closes. Another option is to add a metric that measures the percentage of business from new products. Whereas earlier efforts focused on efficiency and safety, this metric would seek to measure and reward growth by creating new and relevant products.

As you develop a program, make sure you are aligning to your true desired outcome. The side effect of only focusing on efficiency could be that you may be cutting overhead and research and development. This may appear to be beneficial – until the products you are producing are no longer relevant in the marketplace.

Another important requirement is that you align your business objectives with a particular vision. Each year we review the baseline to see how plants have performed, determine what may be changing in the following year, and negotiate if there is a major change to the business. For example, if a plant is maintaining inventory (for a customer) as part of a Kanban system, it might have a negative effect on the inventory turnover metric – so we could make an adjustment if this is an integral part of their business plan. 

Tip 2.  Network for improvements

Make sure you have systems to support businesses or departments that may need help. Find ways to pull together teams and resources – and focus their efforts. This can be done in formal system or informal way, but direct people to the help they need.

For example, with a North American employee count of 2600 and a number of discrete businesses that may have had different origins, our team has been working on a way to link those in need of assistance with operational experts within the company. We developed and are now beta testing an app we call OPERA (OPerational Expert Resource Application), a searchable directory of subject matter experts, and process owners who can provide assistance with a particular process.

Our goal is to make it easier to create cross-functional teams that can be pulled together quickly to help a business with any operational issue.  The app creates a profile for each plant and lists specific expertise and equipment that might be used as a shared resource.

Tip 3. Celebrate success, incentivize good performance

The key to this tip is to build support, top down and bottom up. One of our company’s strategic priorities is to have a culture of operational excellence and cost efficiency and my role was created to further that goal. This gives the program a lot of influence and the push needed to maintain momentum. Whatever the size or nature of the organization, make sure that organizational excellence is in the forefront and that it is being watched by the management team.

In addition, be sure to reward good performance. The scoring we do with the Max-Matrix^™ program creates a friendly competition among the different plants. The competitive atmosphere gave the program ongoing visibility. At the end of the year we offer awards for first and second place, along with a President’s Award for Excellence for the best example of optimum performance.

Maintaining and improving a dashboard of key metrics for each team and senior management has given me insight to best practices to promote efficiencies and ensure that capital expenditures improve technical effectiveness. To do the same for your business, develop your own tools, projects and programs that align with your own business goals and objectives, share best practices, and above all, make sure that you think of operational excellence as a continuous process integral to all your activities.

Eric Larson is Morgan Advanced Materials’ director of Operational Excellence and Manufacturing Technology for North America. Contact him via LinkedIn.