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Create a Bias for Eliminating the Unnecessary

Jan 31, 2008
Visit any information technology (IT) organization, and you will find a group overwhelmed with writing custom software to create special reports that often number in the thousands. Each time a database package from a new vendor is installed, chances are that new software has to be written to accommodate the existing reports while the request for new reports continues unabated. And what are all of these reports used for? No one knows. Chances are that many of the reports aren't being used at all.

Having suspected that the proliferation of reports represented one-time curiosity more often than continuing needs or usage, one IT professional decided that each time his company upgraded its software or hardware they wouldn't continue to offer any of the old reports that required new custom software unless someone asked for the report.

What was the track record of this policy? He reported that in more than 10 years, no one had ever asked for one of the old reports. The savings from this policy were worth tens of millions to his company.

What's the lesson? Regularly simplify your internal and external processes and offerings to eliminate what's expensive on a test basis, and measure the results to see what happens. Then, just restore the parts of what you eliminated during the test where a real need is demonstrated.

Pass Along the Cost Information

Many organizations operate in functionally isolated units that don't talk to or understand one another very well. In a manufacturing company, these functionally focused units will often include R&D, production, service, quality marketing, sales, human resources, and finance.

Most such organizations keep financial records mainly for regulatory requirements. When that type of accounting occurs, each function will probably not understand its cost impact on the rest of the organization.

Additionally, each function speaks a different language and has a different focus. Those differences can make it as difficult to work together as for a Thai monk and a Brazilian circus performer trying to build an airplane from plans written in Russian.

Ultimately, there's a fundamental contradiction that needs to be understood and overcome: What's best for one function's low-cost effectiveness is often accomplished by harming every other function's low-cost effectiveness. As a result, the organization's results falter when functions fight it out to look good in their own eyes and to win kudos from their bosses.

Here's an example: A company decided that its focus should be on putting the customer first. That's a noble and potentially beneficial approach. The way the company pursued that focus, however, soon proved to be a problem.

The product managers who worked in the marketing department were put in charge of deciding what it meant to put customers first. Most of these product managers were young people with limited business experience and no knowledge of non-marketing functions except for what they picked up while earning their MBA degrees. At the start of each year, the finance department told the product managers what their discretionary spending budgets and costs were going to be, and the product managers took actions to maximize near-term profits from that perspective.

What the product managers didn't realize was that the choices they made influenced the costs they were incurring. For instance, it appeared to a product manager that there was no increased cost for adding a new package size. But in reality, there were substantial added costs.

Production lines had to be adjusted, changeovers of tooling had to occur more often, and error rates rose in the manufacturing operations. With another package size there was an increased likelihood of being out of stock in a store, which would reduce revenues.

At the same time, some stores would buy too much of an item, the product would be less fresh when purchased, and consumers would be less pleased with the brand . . . which would further cut into sales and profits. To take up more space on the shelf, the company had to pay another slotting allowance to the retailer.

For the accounting people, the new size was another item that had to be kept track of. The IT people had to add the item to all of the reports that were being generated.

And so forth. As you can imagine, the hidden cost increases were even greater if the product manager decided to introduce a new product that failed in the market place.

At the end of the year, each product manager would complain loudly when profits were reduced at the last minute by variances in the form of cost overruns that were charged back as additional overhead to the product manager's items. But none of the product managers ever figured out that they were the cause of these variances. Instead, the product managers wondered why the manufacturing people were so incompetent.

Over time, the cumulative effect of putting the customer first in this way was to add all kinds of unnecessary choices for customers that increased the price to 25 percent higher than would have otherwise occurred. Over the years, many of the customers migrated to competitors who offered fewer choices but charged lower prices.

The problem was solved when a new information system and a new management process were established that required the product managers to ask how their decisions affected costs . . . before a change was made. With that added perspective, product managers started to act more like general managers, and better decisions followed.

When changes are being considered, all organizations would do well to investigate the implications of those changes before embarking on them. Sharing potential cost impacts among functions is a good place to start. But you should also inquire about delays, mistakes, and other problems that will arise from the change.

At the same time, organizations will benefit if they look at how changes may eliminate costs that would otherwise occur. Some time ago a company had a fast growing product that had been cheap to make. Because of a shift in raw material costs, the product became much more expensive to supply. By projecting the trends in prices, costs, and volume, the company decided that it would be better to charge more for the product . . . even though this price increase meant volume growth would be lower.

But the corporate head of facility planning never got the message. He kept working on building a new facility to handle the projected future growth for this product based on the trend of what had formerly occurred.

After the new facility was built, the plant never produced a single case of this or any other product. Tens of millions of dollars were wasted on a plant that didn't fit anyone else's needs either. No one ever used the facility for anything.

Where are you pursuing the unnecessary?
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through 2,000 percent solutions and receive tips by e-mail by registering for free at

http://www.2000percentsolution.com .
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