When I talk to Visual South customers about using their ERP system to guide them to manufacturing process improvements that could be made, I always ask who is responsible for the variance in estimated vs. actual costs in a completed work order. In some cases, I get a quick answer with a name. That speaks volumes to me because it means they are proactive in looking at cost data. Companies who do this become comfortable with the accuracy of the data. This doesn’t mean they like all the data; but that’s the point. If there is an unacceptable variance, they find out what caused it. Perhaps the standard was wrong (in either direction). Perhaps the execution was flawed or exceeded expectations. The important thing is they know about it, and can do something about it.
Many times when I ask who is responsible for the variance in estimated vs. actual costs in a completed work order, there is silence. This also speaks volumes to me. The most powerful thing it says to me is the amount of opportunity for manufacturing process improvements there is! I’m data driven; so the first thing I figure out when trying to improve something is how to measure it. Once you have a good measurement in place, it’s easy to see what does – and doesn’t – need improvement. It’s easy to see the effect (or lack of effect) of your changes.
In order to implement a cost variance review, there are three things that need to be in place, in this order:
I know all this because I did it all as an Operations Manager and as a Plant Manager. In my role as an Operations Manager, I had seven supervisors reporting to me. Before data, my management style was pretty typical – lots of walking around, talking, and cheerleading. Oh, and we monitored bathroom breaks and idle chit-chat between employees. You manage the information you have.
Once we started measuring our actual performance (actual costs) against our expected performance (estimated costs), our whole world changed. We now knew where to focus our efforts for improvement. We saw those efforts pay off in better overall performance. Our overall efficiency went up over 40 points in less than four months. Once we had data, we managed that, not employee chit-chat and bathroom breaks; and got better results.
In my role as a Plant Manager, I introduced the same discipline and achieved similar results. Measure what you want to improve and then use the results to focus your actions.
Now let’s dive a little deeper into the process. As I mentioned, you want work orders that have accurate estimated and actual costs. I know that is easier said than done. I know it can be difficult. You know what’s even more difficult? Running a business efficiently without this information. Not having it limits your potential for greater profits.
The second thing you need to create is a methodology to review closed work orders. It’s important to remember this is a process; this is ongoing. You aren’t ever going to fix everything. Your goal is to improve the accuracy of your estimated and actual costs; not make them perfect. Tackle the big discrepancies first, then when they start disappearing, start going after the orders that are outside of what you define as acceptable. Your goal isn’t to review every order, just the ones that aren’t considered acceptable.
Last but not least, be comfortable that this is all going to feel awkward to begin with. You aren’t going to have all the answers; don’t pretend you do. Let the data guide you to the problems that need to be solved. As time passes, and you start seeing positive results, the process will become more comfortable.
As more time passes, it will become part of your culture. Employees will tell you when they are having a problem, because they know they are going to be asked about it. On the flip side, employees who meet or exceed the rate on the work order are going to feel a sense of pride and accomplishment. You will also, knowing that you were part of creating that culture.
If you’d like to talk about this with me, let me know. I’m happy to have that discussion.