Value Stream, Self Deception, & Enormous Cost

Source: Product Design & By: Alan Nicol, Executive Member, AlanNicolSolutions

At the heart of the Lean methodology are the 7 classic wastes (8 or 9 if you subscribe to evolved methods). Waste is the enemy of Lean. Strategies such as pull systems, first-in-first-out prioritization, takt time management, and kaizen are methods we use to minimize and eliminate waste in our productivity.

At the heart of waste management is the value stream. The value stream is the means by which we identify, track, and understand the business advantage and the cost savings of the war on waste. A proper value stream structure enables ready and easy focus on value-added work and waste activity. It also provides a metrics structure to measure our waste.

If we choose to use cost trade-offs as justification for the expense, the time, the effort, or the long-term decisions that support the Lean strategy and methodology, then we must have a solid value stream structure. Without our production and business systems aligned to the value stream, we cannot correctly and accurately assign cost or account the true cost of production and waste. This is a very important understanding that is very often missed or ignored.

Unfortunately, for most of us, aligning fundamentally to the value stream is difficult. I believe that the difficulty of the task is the reason that most of us choose not to adhere to the intent and rule of the value stream strategy. Let me describe a real scenario from my own experience to try to explain the importance of the value stream for accounting for Lean costs and the danger of not following through.

There are dozens of ways I have witnessed an incomplete value stream structure drive waste instead of eliminate it, but here is one that is both common and huge in total business impact. I’ll even go so far as to say that this behavior has affected U.S. economy.

For a true-to-strategy value stream structure, everything necessary to support or facilitate the development and production of a product or service must be aligned and singularly assigned to that product or service. The supply chain is singular to that product, the production equipment exists to serve only that product, the personnel only work on that product, and even the business overhead elements such as engineering, quality, management, and human resources are allocated only to that single product. Such is the purest alignment of value stream.

Given the above understanding of a value stream structure we can easily see why very few businesses actually fulfill that vision. First, the rules may be bent slightly if a suite of products work together to fulfill the needs or expectations of a specific customer base. They may share the same supply or engineering and quality resources for example.

The problem is that as soon as we start making those common sense concessions, it becomes difficult to perceive where we are breaking the rules instead of simply flexing them and we violate the value stream strategy. Most of us, unfortunately, break the rules.

Many of us build multiple products for multiple customers and we don’t feel like we can practically segregate our resources, assigning specific ones to specific product groups. Instead we share resources across multiple product lines or product groups. In truth, this is a necessary “Lean evil” for most of us. It doesn’t have to violate Lean’s value stream structure rules either, but establishing the accountability and systems to accurately report that sharing is difficult.

That difficulty drives the problem. Our example scenario expresses it and shows the danger of neglecting the purity of the value stream. Imagine a large corporation with multiple design centers and production centers around the U.S. and elsewhere in the world. The production lines are basically broken into value streams, but the “overhead” elements of the business such as logistics and supply, engineering, quality, management, marketing, etc. are shared across manufacturing plants, design centers, corporate sectors, or across the entire corporation in some cases. It’s typical.

Consider a single manufacturing facility inside that corporation that also houses engineering, supply chain, and all of the other typical business functions. While these functions, particularly engineering, supply chain, and quality absolutely do serve the production lines in the plant, they also develop products and solutions for other manufacturing facilities in the U.S., China, and Mexico, and collaborate with design centers across the globe.

Trying to separate out how much of any given resource’s work is aligned with any other given value stream is too difficult to seem practical so, to keep the accounting simple, the resources on site are allocated to the production value streams on site. It’s a sensible resolution.

As things grow and change, as old product lines are retired, and as manufacturing plants become more efficient, there are opportunities to reorganize business elements for better productivity and cost savings. Those locations with space or equipment to spare cry, “waste,” referencing the 8th waste of underutilized assets and skills.

The business leaders do an investigation to determine if it would be cost effective to close the plant in the U.S. and move production to Mexico. The answer is no, not by a long stretch.

It would cost the business millions of un-recuperated dollars to make the move. However, a separate investigation on a smaller scale reveals that it would be a cost savings for the business to re-locate the production of a long-time, well-established product line from the plant in the U.S. to a plant in Mexico. The decision is made, the move is made, and the cost savings reported and celebrated.

Now for the danger to reveal itself… None of the engineering, quality, or other business elements assigned to that plant changed, but the value streams to which those overhead elements are allocated did; they are one fewer. Suddenly, the efficiency numbers for each of those value streams and for the plant itself are no longer on target.

The new efficiency numbers invite more investigations and Lean projects to get them back on track. Since the overhead numbers can’t be reconciled with the value streams, and are effectively detached, they aren’t perceived as something that can be fixed. So the rest of the value stream process is scrutinized. It’s already as Lean as it can get after years of kaizen and Lean practice, so only one viable solution remains. Move them someplace cheaper.

Thus, the next product line and value stream is moved to a lower-cost manufacturing facility. Even considering the increase in total lead-time and inventory due to international shipping, and the costs associated with those, the overall cost equation predicts a cost savings.

Of course, the overhead is once again reallocated to a smaller set of production lines and value streams and the self-feeding cycle continues until the plant is closed and every line it once housed is now produced in Mexico or China. It should sound like a familiar, sorry tale.

Let’s not spend days digging through all the possible account-balance and cost savings analyses. Let’s just look at a single juxtaposition. When the entire plant was considered in total for relocation, it was inconceivable that any cost savings could be had. However, when each line in the plant was considered by itself, moving each by itself seemed to make sense. Given that single observation, which analysis told the truth?

Do we really believe that the business is more cost efficient after moving those lines to low cost countries? Given that it didn’t seem to make sense when the plant was considered in total, I think we must doubt it. How does that happen?

It happens a lot! In fact, I’m confident that most readers have either experienced it first hand or witnessed it second-hand through a friend or relative. It happens because we believe we are using Lean and Lean methods to assess our waste and our operating costs. Unfortunately, our value streams are not complete in their structure or segregation, and our measures are confounded with other strategies.

In other words, we think we are being Lean smart, but really we have deceived ourselves about where the cost is or how to address it. The decisions we make according to our cost-benefit analyses are, in fact, distinctly not Lean. The self-deception takes place because we are basing our analyses on an incomplete picture or understanding of the value stream with which we are tampering.

To avoid this trap we have two simple, but not necessarily easy, options.

  1. We complete due diligence in establishing our value streams from customer contact to customer delivery
  2. We do our cost-benefit analysis according to a different strategy and do not try to pretend we are looking at a complete value stream when we have only a portion of it accounted

If our business is not a simple structure with a simple set of products and services, it can be very difficult and complicated to establish the true value stream. If you can reveal your system such that every action, purchase, mistake, or change can be accounted to a contribution or impact to a product line value stream, then I recommend that you do.

It is an extraordinarily powerful business improvement tool to be able to show how each activity affects the cost of each product line. Few things will enable process improvement and business performance than such an accounting system, which is what the Lean strategy behind the value stream is all about.

One of my favorite Lean success stories involves the Buck Knives business. Faced with having to shut down operations in small-town, Midwest U.S. and move it all to China to remain competitive, the Buck Knives business decided to call for help from the Lean experts. The experts advised and helped Buck Knives re-construct their accounting practices around value streams.

That change enabled Buck Knives to see true waste and improve processes to an efficiency level that allowed them not only to remain in their home towns where generations of families relied upon the business for employment, but they improved their operating costs such that profits were over and above what was projected from moving operations to a lower-cost region.

It is fundamental and essential to complete the value stream structure according to the Lean methodology in order to reap the true, measurable business rewards of a war on waste. Unfortunately, because that is often the most difficult change to understand and to make, it is the one that isn’t done.

If you simply cannot conceive of a system that would enable such a thing for your business organization, or you are forced to honestly admit that you are not going to try, then don’t fool yourself by pretending that a production line is the same as a value stream and use the Lean cost-benefit model to estimate production costs. Your analyses will be deluded.

Instead, be sure that your analyses, whatever metrics and measures you choose to use, are based on the impact of a total business system. Do not, for example, look at the cost of the production line alone with the assumption that overhead is a fixed value, or worse yet, that one location’s overhead is traded for another’s. They both remain.

Anything that touches or is allocated to a single system must be considered in the total cost analysis. It must not be ignored as a “fixed,” independent entity. When we do so, we create an illusion of cost savings because we refuse to “look behind the curtain.” In the example above, the business did not consider the cost burden picked up by other product lines when the “fixed” overhead number was re-allocated.

We must wonder if in the example above the business didn’t take into account a great many things. Was there a change in cost due to a change in quality? Were expedite fees, increases in overhead due to increases in logistical demands, increases in overhead at the recipient facilities, insurance costs, or defects in logistics considered?

When we pretend that overhead is a separate cost instead of a fundamental, active, adjustable element of a value stream, we make cost-accounting assumptions that don’t reflect the truth. I agree that in the end, it’s all estimation, but some estimations and assumptions can lead to huge costs that we didn’t see coming or, worse, don’t ever truly understand.

Don’t make the mistake of cost-benefit analysis of a value stream that isn’t complete in its structure or allocation. It can be a very detrimental, self-deluding, practice. Whether you use the Lean methodology or another, be sure to account for the impact of a change to the entire system. An analysis that shows that moving production from one place to another will keep everything the same except the relative labor and logistical costs is almost certainly deluded. Don’t fall into that trap.

Stay wise, friends.

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