Tuesday 3 December 2013

The cost of not involving people

To build on the previous post, one company I know went through the trouble of quantifying the cost of non-involvement at the time the company was sold. We're talking a billion dollar company that tripled its value in four years. Over the period, they had a strong people involvement in waste reduction program and they found overall that manufacturing cost as a percentage of sales reduced by 7% whilst materials, R&D and overhead remained constant - 7% that corresponds to the 7% increase in EBITDA (in percentage of sales) over the period. EBITDA overall increased by 60% over the period.

The interesting part of the analysis is looking at the situation plant by plant. In the 6 plants least involved with improvement efforts, as measured by operator involvement and speed of improvement, the percentage of manufacturing costs over sales varied from 5% increase to 12% decrease. In the second group 6 plants group of high involvement efforts, manufacturing cost to sales reduced by -9% to -30%.

Rigorous estimates such as these are rare, but the company explicitly considered that improvements in people engagement and customer satisfaction directly led to a $ 600 million increase in company value. Hard results obtained from "soft stuff." Why so many senior managers simply shrug off cash potentials of this magnitude remains a vexing (and enduring) puzzle.

2 comments:

  1. "Hard results obtained from soft stuff"....a very interesting approach which reminds me the debate, a few years ago, around the necessity -or not- to include "human assets" in the corporate balance sheets.
    Your post is proposing a more radical approach: rather than debating about how to measure the potential value of human assets, let's measure the cost of not using them!

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    Replies
    1. Good point, it's probably easier to measure because we can compare learning sites (speed of operational improvement) from non-learning sites, and then compare bottom lines. Inventory reduction might be enough to look at. Let's do it :)

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