Columbus never achieved his goal but we celebrate the outcome of his failure.

Columbus was obsessed with finding a westward route to Asia from Spain. Finding it would enrich not only his Spanish patrons, primarily Queen Isabella, but himself as well.

Columbus attempted and failed four times to find a westward route to Asia. On his first voyage in 1492 he failed to find a route to Asia but found North America. His second and third voyages were likewise failures but nonetheless led to his discovery of South America.

And on his fourth and final voyage in 1502 he crashed on a Central America beach. The site where Columbus ended his sailing career is where centuries later mankind would dig the Panama Canal providing ships the westward route to Asia Columbus set out to find.

Columbus failed to sail westward to Asia but succeeded in discovering North, South and Central America.

Like Columbus, I experienced an unexpected benefit from a failure.

As a controller at Motorola, I set out in 1986 to discover a more accurate cost management system to support Six Sigma. I discovered Activity Based Costing (ABC) but failed to convince Motorola senior management to implement it. So I resigned from Motorola and became an entrepreneur. I started an ABC software, consulting and training company, ICMS, Inc., in 1988. And in 2016 I’m still helping companies improve their cost systems 29 years later!

Moral of the Story

When your intentions are good, the outcome is usually positive, although not always specifically what you set out to achieve.

But when your intentions are evil, bad or self-centered, none of the results are ever good.

I believe Columbus would be shocked to know that we created a national holiday to celebrate what he considered a failure.

What outcomes of failure do you celebrate personally or professionally?

It took the dentist and his assistant only 10-minutes to perform my scheduled treatment. But I spent 60-minutes in the chair staring at a computer screen.

What are the root causes for me wasting 50 minutes waiting for my treatment to be completed? To answer that question, I’ll use The 5-Whys method I was taught decades ago in Six Sigma class.

1. Why wasn’t the dentist immediately available at my appointment time? He was working on two other patients in adjoining rooms that had arrived just before me.
2. Why did my dentist have more than one patient in the office? Because switching back and forth between 3 chairs is how most dentists believe they can maximize revenue.
3. Why does the dentist need more revenue? To pay for the overhead costs of having 3 fully-equipped treatment rooms, space costs for 3 rooms plus 3 dental assistants to tell patients “The doctor will be right back“.
4. Why don’t most dentists treat one patient at a time? Because they believe treating one-patient at a time is good for the patient but not for the dentist.
5. Why don’t dentists believe treating one patient at a time is good for them? Because dentists are either unaware of lean principles, they think lean is a manufacturing practice not a medical best practice or they’re unaware of the profit and customer satisfaction benefits of one-patient-flow Lean Dentistry.

I like my dentist and his staff. But I hate their process.

If you manufacture automobiles and every third car rolls off the production line missing a right front fender, your system is perfectly designed to produce that result. Or if you’re a distributor and every other delivery is missing an item from the packing slip, your process is perfectly designed to provide customers that result. If you are not pleased with your organization’s performance, a perfect place to begin your search for improvement is the process.

“People don’t make mistakes, processes allow people to make mistakes.” That principle is the only thing I remember from my 1986 Total Quality Management (TQM) training. As controller of Motorola, I assumed that part of my job was to catch people making mistakes, e.g. overspending monthly budgets. After TQM training I realized that my job should have been preventing the variances from happening.

I needed to create mistake-proof processes.

A business process is a series of activities that cross over functional boundaries. Traditional systems do not quantify processes. Activity Based Management (ABM) systems do quantify processes.

• Traditional systems report cost by function and type of expense. ABM systems report cost by function,
activity and business process.
• Traditional systems report cost of cost centers, e.g. Purchasing Department. ABM systems report the
cost, cycle time and quality of processes, e.g. the Procurement Process includes all the activities performed during the acquisition of raw materials, products or services.
• Traditional systems “account” for departmental spending. ABM systems “measure” departmental and process output.

Using the principles of ABM to define and improve a process can result in significant cost and timesavings.

• Scott Ransom D.O. used ABM to improve the process of ordering and administrating an antibiotic at the time of a caesarean section. The process that once took 22 steps was simplified to 4. According to Dr. Ransom, “We developed a new process that included four steps with dramatic
improvement in compliance and quality with a reduction in cost.”
• Southwestern Bell found that a simple change to a costly process could result in big benefits. Traditionally, telephone repairmen would report to the company garage to pick up their truck before
going to the first customer. Managers recently changed the process. Now repairmen take their truck home at night, allowing them to go directly to the first customer each morning. By eliminating the 30-45 minutes each morning picking up their truck, more customers (output) can be served each day without increasing headcount (cost)!
• McDonalds focuses on creating mistake-proof processes. Next time you visit one of their restaurants, look at the French Fry “process”. Each activity of the process is mistake-proof. For example, the aluminum scoop will consistently put 26 fries in each carton. Another benefit of a mistake-proof
process is reduced training. It takes only 4 minutes to train a new employee how to consistently make good fries!

No organization can afford to ignore the pattern and performance of its daily activities. Measuring and mapping activities helps managers and employees synchronize and simplify their work. If you are not happy with your organization’s results, today is the perfect time to re-design the process.

Please e-mail comments about this article to: TomPryor@icms.net.

If this article has inspired you and your organization to cut costs this year, e-mail your needs to tompryor@icms.net.

Most people try starving themselves while running on a treadmill. But if you go to any health club and walk into the cardiovascular room, what do you see? At my gym, you’ll see lots of people on treadmills, StairMasters and elliptical trainers. Notice that the vast majority of these individuals are overweight!

Now, go to the strength and resistance room. What do you see? The majority of people lifting weights and using strength machines are in vastly better shape. Why? While aerobic exercise is certainly worthwhile, strength training increases lean muscle tissue. Muscles consume more calories, leading to faster loss of fat.

Becoming a lean manufacturer, lean distributor or lean service provider is not instinctive. You cannot become a lean and healthy organization by starving yourself of inventory, headcount, training and capital investments while simultaneously running yourself crazy. Diets rarely work. Instead, lean organizations must change their “eating” habits by feeding and strengthening themselves with flowcharts of business processes, financial facts from an Activity Based Cost system and finite goals. Goals should be providing customers the right products/services, in the right quantity, at the right time, and at the lowest cost, by doing the right activities.

Ten Tips to become a Lean Manufacturer, Lean Distributor or Lean Service Provider

• Lean Thinking… In their 1996 book, Lean Thinking, authors Jim Womack and Daniel Jones focused on the Japanese word “muda”. Muda is waste. Muda is “any human activity which absorbs resources but creates no value. Fortunately, there is a powerful antidote to muda: lean thinking.” In short, lean thinking is believing that it is possible to do more and more with less and less, while providing the customer exactly what they want. To be lean, think lean.
• Lean Accounting… Lean managers need lean measures. Activity Based Costing (ABC) converts muda into money. Many lean organizations are using ABC systems to dollarize waste by measuring non-value added activities, excess capacity, excess inventory, wait time and duplicated activities. The most successful lean organizations reduce the size of monthly accounting reports. Accounting managers should cut out the financial fat.
• Lean Variation… Process variation is lean’s number one enemy. Error prone processes, downtime and binge inventory purchases bleed organizations of their resolve to become lean. For example, the single most important principle in the design of a lean distribution system is understanding that a warehouse is not a place to store products. It is not a big box where raw materials and finished goods go to sit or die. Instead, a distribution center is a “factory” that never varies from its primary purpose… quickly convert products into customer orders.
• Lean Pockets… Closing the gap between process steps is a key step in achieving leanness. Move machines closer together. Move workers closer together. Move organizations closer to the customer. Movement and build-up between activities is a non-value added cost. Efforts to synchronize the activities between manufacturers, distributors and customers in the automotive, food and healthcare industries during the 1990’s were marginally successful in reducing pockets of cycle time, inventory and cost. A 2002 food industry goal is a 50% reduction in cycle time by 2005.
• Lean & Mean… Lean manufacturing, lean distribution or lean services will not work unless you mean it.Lean behavior is controlled by the consequence or response it receives. Define positive and negative consequences to insure that employees, suppliers and customers focus on fat reduction. Reward lean customers with lower prices. Split cycle time savings with lean suppliers. Recognize employees for lean ideas. If no consequences exist, it signals that management didn’t really mean it when they said “We’re gonna get lean and mean.”
• Lean Leaders… Leaders are the lid of lean. Employees will never surpass senior management’s understanding of lean manufacturing, distribution or servicing. If senior management can’t explain lean, don’t expect the employees to perform lean. An onsite “Lean Workout”is a great way to educate, train and implement at a distribution site. NOTE: For more information on Lean Workouts, send a request to tompryor@icms.net.
• Lean Rules… The February 2002 issue of FAST COMPANYmagazine published four rules that set the stage for lean innovation: (a) list the tasks and activities of your key processes; (b) simplify process flowcharts; (c) experiment at the lowest possible level by asking employees for continuous improvement ideas; and, (d) connect suppliers of know-how with customers who need help. Lean rules should be liberating, not limiting.
• Lean Fasting… Resource fasting is a good way to bring focus to your lean efforts. Throughout the Bible, fasting refers to abstaining from food for spiritual purposes. While the human body can survive for only a short time without water, it can go for many days without food. Fasting reveals the things that control us. Select inventory items, open job requisitions or budget requests as fasting targets. Fasting will expose non-essentials.
• Lean Forward… Getting lean is not easy. Tests, trials and temporary setbacks are a normal and important part of getting lean. Resistance makes you stronger. Tests make you wiser. Quitting, on the other hand, is a permanent solution to a temporary problem. When you fail, fail forward by adding an “R” to lean. Learn from your tests, trials and setbacks.
• Lean Focus… It is very difficult to be a lean organization with a fat mission statement, e.g. be everything to everyone. Lean organizations, such as Southwest Airlines, Dell Computer and Tech Data, use focus to remain lean, strong and profitable. For example, Dell’s mission statement says they will strive to be the best for “those markets that we choose to serve.”

What does a lean organization look like? It’s like a sleek racing skull. Everyone in the organizations is in the same boat, sitting close together, working at a synchronized rhythm that is spoken by a single, strong voice. Each person with an oar has prepared their lean body to share the workload as the skull cuts through the water towards the goal line. Is that a picture of your organization? It can be if you’ll apply the ten lean principles.

“The three variables to weight loss are eating, exercise and the right mind-set”, says Jim Karas in “The Business Plan for the Body“. Changing our diet to lose weight is instinctive. Selecting the proper combination of diet, activities and mindset to become lean is not instinctive. It has to be learned. Manufacturing and service organizations will learn that lean savings multiply into fat profits. And city, county, state and federal organizations that apply lean principles will add muscle to the annual budget. Remember, lean does not mean little. Lean means low fat!

LEAN ON ME… call Tom Pryor at 817-475-2945 or send an e-mail to tompryor@icms.net if you want to learn how to use an Activity Based Management system in your organization to support a lean program.

EASTER… The entire ICMS family want to wish you and your family a very happy and holy Easter holiday.

MARCH MADNESS … It’s that time of year again. And if you’ve never read it, take time to read the following article:http://www.icms.net/news-28.htm

CTQ
The need for an improved quality and costing method confronted most manufacturers during the 1980’s. Pressure from Wal-Mart in the consumer sector and the Big Three in the auto sector for lower prices, just-in-time delivery and defect-free products caused manufacturers to heighten their search for process improvements. Customers in all sectors of the economy grew to expect products and services with “CTQ” … a combination of low Cost, quick cycle Time and high Quality. This was especially true for my employer in 1985 … Motorola.

“While it’s great that the Fort Worth factory is meeting its defects and cost per unit goals, how do the best manufacturers in the world measure quality, cost and cycle time?”

Dick Buetow, Motorola’s Director of Quality, asked this question during a quarterly operations review at our Texas factory. None of our management team, including me, the division controller, had the answer. Like most organizations, managers at Motorola set quality, cost and cycle time improvement goals by looking at our previous year’s performance. To answer Dick’s question, we had to benchmark outside the company and our industry. After several months of research we identified a twin-set of best practice methods … Six Sigma and ABM.

Separated at birth
Six Sigma and ABM were separated at birth. Six Sigma, a rigorous and focused method of creating error free processes, was grown and nurtured by Motorola’s engineering staff from 1986-90. Most organizations operate at three sigma … 67,000 defects per million. In 1990, using new methods and measures, Motorola achieved Six Sigma … 3.4 defects per million!

ABM, on the other hand, took a different path of development. ABM was defined and developed by a cooperative research project team from 1986-88. The research was supported by over fifty worldwide organizations, including Motorola. Serving as the Project Manager, I watched Activity Based Cost Management (ABM/ABC) grow from a simple principle … activities consume resources and products consume activities … into a universally accepted method of cost management by 1990.

ABM and Six Sigma grew at different rates during the 90’s. Very few organizations adopted Six Sigma following Motorola’s success. With the exception of General Electric’s Jack Welch and Allied Signal’s Larry Bossidy, most leaders did not believe Six Sigma was possible or practical in their own organizations. Activity Based Cost Management (ABM/ABC), on the other hand, was widely accepted as “organized common sense”. Thousands of manufacturing, service and governmental organizations worldwide implemented ABM/ABC systems during the ’90’s. By year 2000, a family reunion took place.

Together again
Best practices should be combined, not separated, to maximize benefits. Costs are not predictable when processes are out of control. As a result, unpredictable costs caused by poor quality processes negate many of the advantages of an ABC system. Correspondingly, if costs and profits do not improve as the result of Six Sigma projects, the commitment to improving quality often wanes.

Six Sigma brings processes under control thereby enhancing the benefits of ABM cost management. And by quantifying and eliminating the non-value added waste associated with poor quality, ABM enhances the benefits of Six Sigma. They’re fraternal twins. They belong together.

A recent search of case studies shows that more and more organizations are combining ABM and Six Sigma to maximize and sustain CTQ. Here are three examples:

• Honeywell
In 1999, Honeywell’s Six Sigma/ABM savings amounted to $600 million. According to Ed Romanoff, communication director of Honeywell’s Six Sigma program, “ABM helps us to understand the profitability of our products and services and to tailor our business models appropriately.” Ken McIntyre, instrumental in refining their ABM system says, “Moving from direct costing to ABM has been very beneficial in helping Six Sigma to be successful.”
• Navistar
Six Sigma savings measured by ABM totaled $15 million in fiscal 1998 at Chicago-based Navistar. They have an ABC/ABM analyst at each plant site that works on the Six Sigma teams. “ABM knows where activity waste lies, and Six Sigma chases defects, so the convergence of the two was a natural.” stated Max Gordon, manager of the company’s Six Sigma initiative in Business Finance magazine.
• com
Using a combination of Six Sigma and ABM techniques the past few months, Amazon.com has moved from last year’s three sigma (30% waste) to this summer’s four sigma (10% waste). Taymour Tamaddon, Amazon.com finance manager, is self-implementing ABM to support Six Sigma. In addition to quantifying the cost of poor quality, Taymour was quoted in the New York Times saying, “The system analyzed a $10 pack of Polaroid instant film. It starts with a reasonable margin, but after all the costs of handling the product, Amazon loses $1 a pack.” Six Sigma will turn that loss into a profit.

Fraternal
Just like my grandsons, Six Sigma and ABM are not identical. They are fraternal twins. Fraternal twins don’t look alike, but they’re from the same family, have the same birthday and share much in common. Six Sigma and ABM both focus on work, not the worker. Both Six Sigma and ABM use series of process improvement projects to achieve benefits. And Six Sigma and ABM use the same five steps to create process improvements … Define, Measure, Analyze, Improve and Control (DMAIC).

Dr. W. Edwards Deming developed the five DMAIC steps. He is also famous for his 14 Points for Management. Point five is“Improve constantly and forever the system of production and service, to improve quality and productivity, and thus constantly decrease costs.” If Deming were alive, I feel certain he would openly embrace the twin techniques of Six Sigma and Activity Based Management “to improve quality and productivity”. Are you ready to double the benefits in your organization? Now you know how.

For additional information on how ICMS can help you link Six Sigma to ABM, check out our new workshop: Fraternal Twins: ABM & Six Sigma, or send an e-mail for more information to tompryor@icms.net.

None of his staff had been on a field trip since elementary school. As a result, the Crossroads Christian Church employees were surprised when senior pastor Barry Cameron announced in February 2004 that everyone was going on a one hour, onsite visit to the local Krispy Kreme doughnut shop.

Question:
What was the pastor’s purpose for taking the church staff to Krispy Kreme?

Answer:
Prepare for a transition from the existing 15-acre site to a new 150-acre campus. Staff ate, watched, learned and made notes of Krispy Kreme’s successful practices. People adapted what he or she saw to their job or ministry. As documented in a popular new book Making Dough, every organization can benefit from practicing Krispy Kreme’s commitment to quality, consistent standards, practical uses of technology and giving back to the community. People telling other people about a positive experience is the most powerful, least expensive advertising Krispy Kreme, Crossroads Christian Church or any organization can buy.

Transitions are the process of moving from one situation or activity to another. They are mini-life cycles that take us from the familiar to the unfamiliar. Some transitions we initiate. Others are cast upon us. Are you or your organization experiencing a transition?

Types of transitions:

1. Job loss
2. Marriage
3. Divorce
4. 9/11
5. Unprofitable
6. Retirement
7. Relocation
8. Out of working capital
9. New technology
10. Death in family

As discussed in my article Recession or Transition?, recessions are easier to handle than transitions. Recessions are predictable. Transitions are not. There are decades of records showing bear markets followed by the bulls. Transitions are less predictable. Using the three steps… Terminate, Timeout and Transform… you, your organization and I can control our transitions.

Terminate
Every transition begins with an end. “We have to let go of the old thing before we can pick up the new — not just outwardly, but inwardly, where we keep our connections to the people and places that act as definitions of who we are.”(1)

Noble improvement iniatives…ABM, Six Sigma, Lean Manufacturing, New Years’ resolutions, losing weight, stop smoking… are abandoned 90% of the time because the implementer never ended their hold on previous practices, policies or procedures. For some people and organizations, a known negative is preferred to an unknown positive.

Three Ways to Terminate:

• Prioritize… “We live in a favored age yet do not feel favored.” (2)Separate wants from needs. I want a Lexus but I need a car. Define what you or your organization need, not want. If that need is not being met with existing people, systems, practices, processes, products or procedures, terminate the old and germinate the new.
• Write… Prepare two lists: things you enjoy and things you don’t. Or a list of things your company enjoys and profits from followed by a list of things it doesn’t. In I Don’t Know What I Want, But I Know It’s Not This, author Julie Jansen provides a series of multiple-choice questions to help understand what bugs you and what thrills you. Stomp the bugs and go in search of a thrill.
• Forgive… One form of endings is letting go of a grudge or hurt with forgiveness. According to Gregg Easterbrook in The Progress Paradox, people who forgive when wronged have better outcomes than people who hold a grudge. “That is to say, whether someone forgave for reasons of faith or of secular ethics, the benefits were the same.” (2)

Who Moved My Cheese? is a popular book about transitions. After their usual source of cheese dried up, Haw and Hem were confused as to what to do. Haw refused to change. He returned to the old source everyday, even though there was nothing to eat. His partner Hem terminated reliance on the old source and bravely ventured out into a maze of rooms. Hem soon found lots of cheese but could never get Haw to follow.

Time Out 
The second phase of transition is Time Out. It’s the neutral zone between the ending and the new beginning. In the foreword of Who Moved My Cheese, Ken Blanchard says, “The ‘Maze’ in the story represents where you spend time looking for what you want. It can be the organization you work in, the community you live in, or the relationships you have in your life.” (3)

Time Out is difficult. It’s when you’ve let go of one trapeze with faith that the new trapeze is on its way. In the meantime, it seems like there’s nothing to hold on to.

• Anxiety rises.
• Tempers rise.
• You feel disoriented and self-doubting.
• Old weaknesses, long patched over or compensated for, reemerge.
• Mixed signals prevail… should I go or not?

To survive and thrive during the second step of transition, I recommend:

• Lean… Have something solid to hold on to. Something that will not and does not change. During transitions, I lean on my faith in God. Change needs to be deeper than outward behavior. “Change always begins in the heart of an individual.” (4)Be quiet. Listen to your soul … both your head and heart holds the answers for your new beginning.
• Listen… Talk one-on-one with people who have successfully transitioned. Listen and learn from their experience. Wisdom will prevent relapses and move you towards your new beginning. To foster mutually beneficial relationships of CEO’s and COO’s caught between jobs, my friend John Casey founded Netweavers in 2001. “From assistance with job searches to identifying consultants, suppliers and vendors with reputations of excellence, CEO Netweaverssupport one another through a spirit of trust, altruism and solid business acumen.”(5)
• Leave… Find a time and place to be alone. In business, they’re called sabbaticals. Moses, Jesus and Apostle Paul called them wilderness visits. The marooned character played by academy-award-winning-actor Tom Hanks in Castaway “finds himself a different man – much deeper, much more observing, much less demanding – all because of the lessons learned in solitude, quietness, and obscurity.” (6)If a weekend sabbatical to a secluded cabin is not practical, set aside a 30-minute daily quiet time, as I do, to ponder your past future and picture your future.

Transform
The third step of transition is to transform. Endings can be sad and the time following painful, but nothing is so sweet as a new beginning.

Mom and Dad died within 62 days of each other during the Fall 2003. The following weeks were filled with probating wills, handling the estate, emptying their home and mourning. But in Spring 2004 I am being renewed, for the birth of my third grandson, Addison Noel King, is expected within days. Birth transforms sadness to great joy.

“Genuine beginnings begin within us, even when they are brought to our attention by external opportunities.” (7) Here are three steps I’ve found useful to transform opportunities into successful transitions:

• Process… Transformation is a process, not an event. Transitions are not microwaveable. The event of winning the lottery does not make the winner a wise investor. In fact, most lottery winners are broke and/or divorced within five years of winning. In contrast, study the financial process used by Jim and Sue McIntyre, a middle-aged couple making $50,000 annually featured in David Bach’s new book The Automatic Millionaire. By saving 10%, tithing 10% and spending the rest, their net worth exceeds one million dollars! Transition and transformation take time but it takes a plan.
• Plan… “Plans are immensely reassuring to most people, not just because they contain information but because they exist.” (8)The Israelites likely murmured more than once, “Do you think Moses has any plan, or do you think he’s making it up as he goes along?” One of the steps in my family’s plan to become debt free by 2010 was to downsize our home and mortgage. We did that in 2003. Do you have a financial plan … at home or at work … or are you making it up as you go along?
• Picture… “Purposes are critical to beginnings, but they are rather abstract. They are ideas and most people are not ready to throw themselves into a difficult and risky undertaking simply on the basis of an idea.” (8)For example, Moses translated the idea of a Promised Land into a picture of a Land of Milk and Honey. You have a clear picture of your situation before the transition. Create a picture after the transformation takes place. To help ICMS clients transform, I create an actual Activity Based Management picture from their organization instead of totally relying on my textbook of words.

Can you picture any of these transitions taking place in 2004?

• End gross margin pricing and begin gross margin profiling.
• End fast foods and begin food fasting.
• End managing the workers and begin managing the work.
• End focusing on wants and begin focusing on needs.
• End nightmares and begin dreaming.
• End excuses and begin action.
• End pricing the product and begin pricing the service.
• End mourning and begin a new morning.

Recessions have a beginning and an end. So do successful transitions. I used the lyrics from a song titled “The Storm is Over Now”, to encourage me through a couple of transitions last year. The chorus says…

“The storm is over now

I can feel the sunshine

Somewhere beyond the clouds

It’s over now, over now

Heaven is over me

So come on and set me free, set me free” (9)

Transition can seem dark and cloudy. But on the other side of the cloud is the light of a new, great, exciting beginning. Are you or your organization being transformed? Me too! Let’s meet at Krispy Kreme. First round of coffee and doughnuts is on me.

(1) Transitions, William Bridges, Addison-Wesley Publishing, 1980
(2) The Progress Paradox, Gregg Easterbrook, Random House, 2003
(3) Who Moved My Cheese?, Spencer Johnson, M.D., G.P. Putnam’s Sons, 1998
(4) The Maxwell Leadership Bible, John Maxwell, Thomas Nelson, 2002
(5) http://www.ceonetweavers.org
(6) Paul, Charles Swindoll, Word Publishing, 2002
(7) Transitions, William Bridges, Addison-Wesley Publishing, 1980
(8) Managing Transitions, William Bridges, Addison-Wesley Publishing, 1991
(9) The Storm is Over Now, Words & Music R. Kelly, T.D. Jakes & The Potter’s House Choir, 2000

The regional government of Madrid, Spain took an unexpected stance in September ’06. Being too lean is unacceptable! (1) North American manufacturers, service providers and governmental organizations would be well served to take note of Madrid’s imposed restrictions and adopt a similar stance, but at both ends of the scale… budgets that are too obese or too lean should no longer be acceptable!

Madrid banned models with a Body Mass Index (2) of 18 or less. For example, at 5 feet, 10 inches tall and 100 pounds, the BMI is 14.3, considered too lean, i.e., anorexic. Bigger is not always better. At the same height but 220 pounds, the BMI is 31.6, considered obese.

Manufacturing, service industry and governmental managers need a quick assessment tool, like the BMI, to assess whether budgets are too small (14.3), too big (31.6) or just about right (15.0). That measurement tool is called a Lean Money Index (LMI).

What is an LMI?
The Lean Money Index (3) (LMI) combines the principles of Lean Manufacturing with the practice of Activity Based Costing (ABC). By definition, lean is the systematic elimination of non-value added activities that do not directly create a product or service a customer wants when they want it. In complimentary fashion, ABC measures the financial resources, time and workload of those value and non-value added activities.

Initially named Lean Manufacturing because of its Toyota Production System roots, the principles and practices of lean have expanded in recent years to include lean offices, lean distribution and lean six sigma. Likewise, Activity Based Cost Management, initially viewed as an improved product cost system, has expanded during the past decade to include service industries such as banking, insurance, distribution, big box retailers, healthcare providers and government.

Lean thinking and ABC share common principles and practices, including the identification of activities, processes, output capacity and non-value added waste. Ineffective use of capacity is the largest non-value added cost in most organizations. “Capacity refers to an organization’s ability to ‘do something.’ An activity’s costs are in excess of what they need to be where too much capacity exists for a given activity. Thus, excess capacity drives up process cost to the organization.” (4)

A proven business proverb states, “You can’t manage what you can’t measure.” To identify and manage the non-value added costs of excess capacity requires a financial measurement method. LMI is that measurement method. LMI measures capacity cost at three levels within any organization:

• Cost Center or Cell Level
• Value Stream or Process level
• Enterprise level

Level 1 LMI: Cost Center Assessment

Before drilling for oil, exploration companies use technologies to assess what may exist below the surface. Level One LMI’s provides managers and employees a quick assessment of what waste, if any, exists below the surface of traditional budget and accounting reports.

For example, the following traditional Customer Service budget report signals that all is okay because there is no variance to budget. Waste, however, does exist. This traditional report measures the resources provided to Customer Service but it does not measure what the employees did with those resources to create value or waste.

To determine how much waste exists in a cost center, combine (a) total spending; (b) three pieces of lean data, e.g., capacity, cycle time and customer demand; and, (c) a simple time-based Activity Based Cost model. The Level 1 LMI quick assessment below indicates that $240,000 or 43% non-value added waste may exist in Customer Service.

Level 1 LMI

The LMI Level 1 uses the following data and formula:

• Annual Cost is gathered from the accounting system.
• Annual Capacity Minutes = 7 employees X 420 minutes per day X 238 work days = 700,000 minutes. NOTE: If the department or cell is machine-paced, use the machine’s practical capacity minutes.
• VA Cycle Time per Output is defined by employee interviews, sampling and observation.
• Annual Customer Demand represents the actual or budgeted quantity of volume required by the customer.
• LMI $ = Cost per Minute X Capacity – [(Customer Demand X Cycle Time)], e.g., $.80 X [700,000 – (50,000 X 8)]
• LMI% = LMI $/Annual Cost, e.g., $240,000/$560,000 = 43%

Level 1 LMI’s are useful as a:

• Quick assessment method to determine whether a department, cost center or cell contains enough LMI dollars to be a worthwhile target for applying lean techniques (i.e., Mistake Proofing, 5S, SMED, Kanban, etc.).
• Payback predictor. A Level 1 LMI is a quick method to use before, during and after a lean kaizen event to calculate and confirm the financial impact and payback of activity and process improvements.
• Muda measure. A Level 1 LMI serves as a performance measure that publicizes the importance of improving process lead time, eliminating bottlenecks, reducing cycle time, serving customers and continuously reducing non-value added activities, all forms of muda in a lean organization.

Show me the Muda!

An LMI measures the percent and dollars of muda contained in an organization’s value stream (5), business process, department or cost center budget. Muda is lean manufacturing’s word for waste, i.e., fat.

Muda is a broad and aggressive definition of waste, similar to the ABC/ABM concept of Non-Value Added. For example, both lean and ABC/ABM consider over production, excess inventory, ineffective use of excess capacity, waiting, transporting, long lead times and unnecessary tasks of a value activity as waste.

Unlike ABC/ABM, zero waste or zero muda is not the objective of lean. Lean systems are created with an objective of maintaining a small measure of excess capacity. A small amount of extra capacity provides flexibility to respond to customer’s needs and avoid the most sinister waste of all – overproducing product earlier, faster or in greater quantities than the next step in the process.

How much muda is too much or not enough? The answer lies in an LMI muda measurement table.

LMI Muda Measurement Table

According to the LMI Table, Customer Service’s LMI of 43% falls into the morbidly obese category. Waste reduction is highly recommended!

Lean’s prescription for Customer Service, however, is not reducing muda from 43% to zero. A LMI of less than 15% may indicate that no flexibility exists to respond to up ticks in customer volume. Having no excess capacity could create a bottleneck or constraint. To confirm that assessment and define specific targets to improve a morbidly obese cost center like Customer Service, a Level 2 LMI of the Value Stream that consumes customer orders is recommended.

Level 2 LMI: Value Stream Cost Assessment

Lean implementation teams commonly draw Value Stream Map of product or service families. Value Stream Maps are specialized ‘process maps’ lean implementers use to document the flow of information, material and activities to meet customer needs. Using the activities, cycle times and volumes defined in a Value Stream Map (6) coupled with time-based ABC, a Level 2 LMI measures each category of value and non-value costs.

Level 2 LMI report

A Level 2 LMI Value Stream Cost report augments a Value Stream Map with valuable financial information a continuous improvement team can use to apply lean’s waste reduction tools and techniques. The Level 2 LMI reports activity costs in four categories:

• Assigned VA Cost is the exact amount of output or production required and valued by the customer to meet their needs.
• Assigned NVA Costis output required to meet customer needs but not something a customer is willing to pay for, e.g., Resolve Problem.
• Overproduction NVA Costis output not required (e.g., safety stock, work-in-process) to meet Customer Demand.
• Unused Capacity NVA Costis unused output that could be created with the resources consumed.

For demonstration purposes, the Level 2 LMI shown above reports detailed lean financial information about the Customer Service activities combined with a one line summary of All Other Value Stream #1 activities that convert the order to a final product or service. Value Stream #1 has 27% waste, most of which is Over Production and Unused Capacity.

While many lean implementers will use only Level 1 & 2 LMI’s, some management teams need to measure the percent and dollar amount of value and waste in an entire organization. After Level 2 LMI’s are completed, they can be combined to create a enterprise-wide Level 3 LMI.

Level 3 LMI: Enterprise-wide Assessment

LMI’s can be used to measure the muda in one activity, one department, one value stream (e.g., series of activities), one process or an entire organization. Department and Value Stream LMI’s are shown on pages 3 and 5, respectively. To demonstrate LMI on a broader scale, compare the traditional P&L below to the enterprise-wide LMI perspective on the following page.

Using the principles of Lean and ABC, the Traditional P&L above is converted into a Level 3 LMI P&L below. Sales and Pre-Tax Profit, $40 million and $5 million respectively, are the same in both P&L’s. The bodies of the P&L’s, however, are much different.

The Level 3 LMI P&L offers three advantages over the traditional format:

• LMI P&L’s provide a vision of potential profit. Traditional P&L’s infer that budget is the best the company can be. The Level 3 LMI instead shows that the organization could have a $13.7 million or 34% pre-tax profit if non-value added muda is eliminated.
• LMI P&L’s promote teamwork. Traditional P&L’s divide costs into vertical functions, e.g., manufacturing, marketing, finance. LMI’s organize material, labor and expense resources into horizontal value streams that cross functional boundaries to serve customers.
• LMI P&L’s encourage non-financial employee creativity. Instead of managing fixed and variable costs, LMI’s encourage people to focus on used, unused and ineffectively used capacity. And instead of classifying people as direct or indirect, the work activities of all employees are labeled as value or non-value.

Next Steps

• Test it.Enter actual or budgeted data for one or more of your organization’s departments or work cells into a Level 1 LMI Excel template. Compare your findings to the LMI Table. Does your LMI seem reasonable?
• Take it slow. Lean is not a crash diet. Take your time. Don’t rush to Level 2 without a Value Stream Map. And don’t rush to Level 3 until your organization has LMI results that can be celebrated.
• Teach it. Don’t keep the principles and practices of Lean, ABC/ABM and LMI to yourself. Learn by doing and then teaching others.

Conclusion

According to The Wall Street Journal, it became fashionable in 2006 to implement lean manufacturing. “A year ago, it took 20 to 30 craftsmen to put together each Louis Vuitton tote bag. Over the course of about eight days, separate workers would sew together leather panels, glue in linings and attach handles. Today, clusters of six to 12 workers, each of them performing several tasks, can assemble the $680 shiny, LV-logo bags in a single day.” (7) The WSJ reports that Burberry, Cartier, and Giorgio Armani are also implementing lean systems.

Why did it take these fashion firms several decades to adopt lean manufacturing methods? The answer is likely “Management was watching the models, not measuring the muda.”

Improving an organization’s financial results never goes out of style. Use Lean Money Indexes, value stream costing and lean tools to help your organization to look, perform, and feel better.

(1) Yahoo News, September 8, 2006
(2) www.cdc.gov/nccdphp/dnpa/bmi/index.htm
(3) Pending trademark of ICMS, Inc.
(4) The Handbook of Process-Based Accounting, James Brimson, AICPA, 2002
(5) Process map of the current and future state value stream of information and material flow from customer to supplier used by Lean practitioners.
(6) Value Stream Map example: http://csob.berry.edu/faculty/jgrout/processmapping/Value_Stream/value_stream.html
(7) Louis Vitton Tries Modern Methods on Factory Lines, Christina Passariello, Wall Street Journal, October 9, 2006

Mad Libs®, as you may recall, are short stories created by filling in blanks with an assortment of names, nouns, verbs, and adjectives. Miles and time would pass by as Mom, Dad, my brother and I took turns offering up random words to create funny stories.

Mad Libs® also have practical applications. Combining pre-existing items to create a new outcome… commonly called a hybrid… is a time-tested, but sometimes overlooked method, for solving problems or creating opportunities.

Past Hybrid Mad Libs®

You likely own several “Hybrid Mad Libs®”. Trevor Bayliss had an idea years ago to combine his wind-up alarm clock with his electric radio. Today, clock radios are commonplace. Someone put a luggage cart and a suitcase together to produce the rollerboards, commonplace at any airport. Or how about the person who had the idea of putting a copier and telephone together, now commonly called your fax machine.

Present Hybrid Mad Libs®

Inventions and solutions don’t always start with a blank sheet of paper and pen. Combining pre-existing methods and items has given birth to several hybrids the past couple years:

• Lean Six Sigma… “Lean Six Sigma combines the two most important improvement trends of our time: making work better (using Six Sigma) and making work faster (using Lean principles).” [1]Led by Mayor Graham Richard, the employees of Fort Wayne, Indiana have had success in using Lean Six Sigma to simultaneously improve stewardship of tax dollars while improving the quality of city services.
• Hybrid cars… With the advent of $3 gas, gas-electric hybrids, once considered a Mad Libs® idea by Detroit, are selling out at premium prices. “Competitors used to pooh-pooh the hybrid gasoline-electric motor as an expensive gimmick appealing mainly to tree-huggers. But now that Toyota is on track to sell 400,000 hybrids next year, they’ve changed their tune.” [2]
• Great American Songbook… What do you get when you combine a sixty year old rock-star with 1940’s pop songs? The answer is over ten million CD sales in the past couple years. Rocker Rod Stewart has rejuvenated his career singing the old standards.
• CostMapping… Combining process mapping with Time-based Activity Based Costing gave birth toCostMapper, ICMS’ exciting new software product. Combining pictures, words and numbers into one screen, CostMapper makes ABC a simple “point & click”. To watch a demo of CostMapper, go to ICMS.net.
• Hybrid classes… College courses that combine 50% classroom with 50% web-based online instruction are growing in popularity. California State University Long Beach and the University of Wisconsin use hybrid classes to add student capacity without adding expensive buildings and professors.
• The Principles… What do you get when you combine the clergy with a consultant? Some might say “an argument” or others “naptime”. In this case, the result was a popular business book titled The Principles. It combines Biblical absolutes with business best practices to form a personal and professional life-changing story.

Steps to create Hybrid Mad Libs®

Are you or your organization searching for a fresh approach to improve sales, costs and profits? Instead of starting over, use what you’ve already got. Look for combinations of existing products, services, activities and partnerships to create value.

Hybrid Mad Libs® is a simple method to create practical ideas by looking for weird combinations of things that pre-exist. The three steps to create Hybrid Mad Libs® are:

Step One: Instead of nouns, verbs and adjectives, on a sheet of paper label five vertical columns: (1) Suppliers; (2) Product Lines; (3) Services (e.g., activities); (4) Processes; and, (5) Customers.

Step Two: Create a list of items in each column. For example, Kinko’s might list:

Step Three: Scan horizontally looking for new combinations of products, services, activities or partnerships. Most new ideas are hybrids of things that pre-exist. Scanning the example above, it should be no surprise why my local Kinko’s store has a new Hybrid Mad Libs® name: FedEx Kinko’s!

Potential Hybrid Mad Libs®

Hybrid Mad Libs® are the result of left brain logic and right brain creativity:

• Combine the cost of auto insurance with gasoline. According to authors Barry Nalebuff and Ian Ayres, “This would eliminate the need for uninsured motorist coverage and allocate liability costs to people who drive the most.” [3]
• Combine nutritional value with monetary value. To encourage food stamp recipients to eat wisely, Arkansas Governor Mike Huckabee has proposed positive and negative consequences linked to choices … $1.00 of food stamps used for a healthy food would equal $1.25 at checkout while $1 spent on junk food would be worth only 75 cents.
• Combine conventional ideas with weird ideas.“Reward success and failure, punish inaction.” [4] After graduating from college, I worked for Johnson & Johnson. CEO Jim Burke never fired people for mistakes. J&J fired people for either repeating mistakes or never making mistakes.

When I trade in my Ford truck next month, I will seriously consider purchase of a hybrid. How about you? Do you need to purchase or create a hybrid? Fill in the blanks:

If I combined _________ and __________ I’d get _____________ .

Let me know what Hybrid Mad Lib® you create. Send your Hybrid or your comments to me at TomPryor@icms.net.

[1] What is Lean Six Sigma?, Mike George, Dave Rowlands & Bill Kastle, McGraw Hill, 2004
[2] Hybrid Envy, Alex Taylor, Fortune Magazine, October 3, 2005
[3] Why Not?, Barry Nalebuff & Ian Ayres, Harvard Business School Press, 2003
[4] Weird Ideas That Work, Robert Sutton, Free Press 2002