Posted by: knightbird | December 30, 2015

Value Capture Through Lean Thinking

Making a move from operational lean thinking to strategic lean thinking is understanding the concept of “Value Capture” within existing revenue and expenditures, and it’s impact on “Value Adding” during business development. This shift in thinking alters the way you can look at the future. Let me explain.

A story on the web tells about the impact the lack of a $25 grease gun can have on a manufacturing operation. [Link here.] During Sunday night startup, every machine was greased for the week. Because there was only one grease gun available, the process took a total of 22 hours (That works out to a total of 1,144 hours annually). During that time, employees sat idle, machines were not producing and production was not being achieved. This is considered waste, and lots of it. The estimated loss by the author of the article was $1 million (annually?) The loss equates to about $695 per hour, which is a reasonable estimate of loss.

Value Capture is the act of recovering the lost $1 million. The solution was a simple one. Buy 12 more grease guns at $25 each so each machine could be greased at the same time. This simple act gives you 22 hours a week of production and costs you nothing more than the $300 initial investment. That’s annually. Every year you capture this $1 million.

I have many more examples of Value Capture from my own experience. Once you learn what Value Capture is, you can apply it everywhere in your organization. In our health clinics, we usually had 3 exam rooms occupied at one time, yet we only had one piece of equipment that was used regularly. Health practitioners often had to wait for the equipment until another practitioner was done with it. If the wait time is 30 minutes a day per practitioner, we have 375 hours of nonproductive time annually. In addition to the inconvenience caused to our patient customers, the real cost to the organization is more like $12,500 annually. One example from our finance office recognized a report prepared weekly at a cost of 2 hours. The report produced nothing of value, but cost 104 hours annually at a cost of $3,500. Before we put in a spam filter, we estimated each employee received 50 items of spam daily, and that it took 1,750 hours of time annually to delete it at a cost of $57,000. (I am using an hourly cost of $32.50, a blended rate that doesn’t give a true cost, but estimates accurately enough to make the point).

Within 5 years, we had achieved a value capture of about 25% across the company. This meant we were able to do the same amount of work we did in year one with about $2.5 million less in year 5. Quality improved. Output improved. And satisfaction improved as well.

So what does Value Capture mean for Value Adding?

It means that you can stomp the heck out of your competition that doesn’t use Lean. As a board member for a profit making corporation, I see our executive team chasing greater revenue. They spend a lot on buying employees who are familiar with pricing bids. Their goal is to pursue more wins, and staff are rewarded for more wins. If they focus on Value Capture, and if they understand their competition’s pricing, the team will have an additional value of 26% available for making bid pricing decisions. In many government contracts, the bid team might try for a gross margin of 10% before Value Capture. After Value Capture, they have a gross margin potential of 36% available, and if the competition is tight, they can actually give up margin to get the bid. That’s the definition of Value Adding. It builds upon Value Capture that is used for business development.

OK. You might argue that you write your bids as tight as they can be written. You argue that you can’t capture any additional margin because you are already cutting expenses to the bone. With Value Capture, you can do the work at a cost 25% less than you did before. If you apply Lean Thinking to every aspect of your business, labor, cost of goods sold, G&A, procurement, finance and accounting, you can achieve at least 25% Value Capture with the application of Lean Thinking. $100 million of revenue with $10 million gross margin, $15 million G&S, and $75 million COGS becomes $32.5 million gross margin, $11,250,000 G&A and $56,250,000 COGS. Your cost of $90 million with $100 million is reduced by 25% to $67.5 million.

So Value Capture leads to a greater ability to create value that you can use to Value Add in new revenue. If you use your lower cost to double your revenue, you are looking at $200 million in revenue with $65 million in gross margin and $135 million in cost. You now have the earnings to pay for the additional cost you accrue to earn that additional revenue, without borrowing.

Now you only need to get past your doubts about the value of Lean Thinking. You don’t believe it can work. My assurances aren’t going to convince you, only your personal experience will do that. And guess what. It won’t cost you a dime in the first year to try Lean Thinking. Yes, you might have some upfront cost. But if you know how, you can recapture that as you conduct your first few Kaizen. You won’t be letting people go because you will need them as your business acquisition efforts become more successful.

However, you will need strategic guidance as you move forward with a Lean Thinking implementation. You WILL encounter considerable resistance. We all think we are doing a great job. The Dunning Kruger effect tells us that we believe we are among the top performers in our organization. When you show one of your “top performers” how to do better using a Lean Systems approach, they will resist. Many employees gain great personal value from a traditional command and control management system because they have the social skills and special knowledge about workarounds that gain them accolades. They are unwilling to let that go and put up resistance.

You also need strategic guidance in determining what your most important value streams are, and how to approach them for improvement. In most processes, there are many pull systems that contribute to initiate inefficiency. Here is a personal example from a patient process I analyzed.

5 Medical Providers were able to see an average of 11 patients daily. They were unable to put in a full 8 hours seeing patients, and had to use a 30 minute appointment instead of a 20 minute appointment because of a poor Electronic Health Record and no support. Each provider did their own paperwork and phone calls. With help, the existing providers could achieve an increase in patients seen of 25 daily, or 16 each. That works out to an additional 6,250 patients annually (for a total of 20,000 patients annually in 250 work days). That’s an approximate increase of 45%. The 45% increase in revenue pays for the additional help that takes away the paperwork and telephone call burden from the Provider. Now one of the “Pull” systems used during the appointment is the Electronic Health Record (EHR). Providers said that they could not move to 20 minute appointments because it took them approximately 20 minutes per appointment to negotiate the EHR. This system would take a significant amount of time to improve. Initial investigation showed that the existing EHR wasn’t upgraded and was behind by approximately 15 upgrades. It also showed that there were a lot of incompatibly components to the system. But let’s assume that we eventually reduce the effort required by the EHR to 10 minutes. Then we can reduce appointment times to 20 minutes, or 24 appointments daily. 5 Provides can now see 30,000 patients annually, for an approximate increase of 16,250 patients over the initial visits of 13,750, or an increase of 118%. The Value Capture portion is substantial. If your annual patient visits remain at 13,750, you can achieve that with less than 2.5 Providers. The additional investment in Medical Assistance and EHR improvement will be significantly less than the cost of 2.5 providers. The Value Adding part is the additional 16,250 patient visits.

Seeing the strategic whole is critical to capturing the initial gains and continuing them to the point of a strong competitive advantage against your competitors. You should try to capture this advantage before they do.

To recap, Value Capture through Lean Thinking leads to an ability to Value Add and capture new revenue sources. By improving your existing operations, you give yourself an advantage with every improvement in Value Capture. You do the same amount of work for less than before, and you can use that ability to do work for less to achieve Value Adding though increasing revenue. The Value Capture means your Value Adding is worth more to you. It gives you greater cash flow, more capacity and allows you to fund your expansion with internal funds. But this is only available for as long as your competitors aren’t using Lean Thinking.

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