Five Keys To Eliminating Non-Value Added Costs

Five Keys To Eliminating Non-Value Added Costs

It's not as hard as you might think to trim the fat

Rick Duris’ "Systems Integrator's Notebook" - September '99

One of the areas I am constantly asked about is how the system will eliminate or reduce…

Non-Value Added Costs.

It’s sort of become a mantra in business.

I despise these kinds of costs too. They’re costs that don’t make a bit of difference and mostly end up detracting from a company’s mission.

For some companies, it’s really hard to figure out where the "fat" is, or even to know that there is fat. There is a tremendous amount of effort and labor put into it. (For me, it’s really easy and sometimes intuitively obvious.) I think for people really close to the situation, the costs are extremely hard to see, let alone do anything about.

Since I have these two projects focusing on non-value-added costs right now, I thought it would be useful to give you a glimpse of my mindset (which is a scary thought in and of itself) of how/where/on what to focus if you want to impact non-value-added costs. This is a kind of a template I think would be readily adaptable to your project. Try it and see if it doesn’t help make your job/project (especially in assessing the return on investment or cost justification potential) easier.

Here goes…

· The first way I eliminating non-value-added costs is by seeing who has the pain in the organization. Who’s frustrated, angry, overworked, unappreciated, bored, etc. Pain is a quick indicator that something is "off" and worthy of investigation.

· The second key, at any company, is to eliminate mistakes from occurring permanently. Duh! But maybe common sense isn’t so common, especially when you’ve been doing the same thing the same way for 35 years, mistakes included. Sometimes we get used to fixing mistakes, especially when there is little that we can do about it alone, or we don’t have the authority.

· The third key to eliminating non-value-added costs is to increase the amount of commitment in the organization and then fulfill that commitment. This one isn’t as easy to understand as the first key. Overall, regardless of the area, fulfilling commitments creates trust in human beings.

Let me give you an example: If the information in my computer system is inaccurate, I won’t trust it. I’ll never make commitments based on that information, no matter how great the software or hardware is. I’ll find another way to get that information which I can rely on. "Finding another way" means incurring non-value-added costs. If trust is present, then non-value added-costs (i.e. safety nets or alternative strategies) disappear almost overnight. And the only way to create trust is to fulfill on your commitments (i.e. Keep your word). We want to create systems that give people the ability to make commitments and keep them (the vast majority of the time, allowing for our humanness) in a "no kidding, no doubt" manner.

Let’s try another example just so I’m clear: I think that the credit and collection departments are a non-value-added cost to a company. Why? Well, let me ask you this question: Why would you need them if all your customers paid their bills on time? The answer is you wouldn’t. So why does the departments exist? Because you can’t trust or expect customers to fulfill their commitments. So, if we could create a committed, trusting relationship between yourself and your customer, we wouldn’t need a credit and collections department.

One more example and then I’ll stop: What if you could trust that your vendors would properly identify/label their quality product, accurately count it and ship it on time? The answer is that all you’d have to do is put it away and accurately update the system when the shipment was received. (I know, some of you are at this point already.) Major inventory cost reduction. All non-value-added.

What’s the key indicator of non-value-added costs in this area? When commitments are made and then broken, or when commitments are made and then remade, or when people don’t make commitments at all (even though it would help), or when people have given up trying to get a commitment out of someone.

· The fourth key to eliminating non-value-added costs is to systematize/streamline the process. But there’s a big catch: I want to systematize it in such a way as to eliminate the "experts" from the process. Now this may be the most intimidating part of the conversation, but it is where a company needs to go in order to achieve its goals. And please hear me! I am not saying we will eliminate the experts. There is a huge difference. I have another use for the experts… Turn them into leaders and/or trainers. They should never be a "dependency" within the system. It turns the experts into slaves of the system, even though they should be out there generating new opportunities for the company in their unique areas of expertise.

· The fifth key to eliminating non-value-added costs is to eliminate delay. Any kind of delay is very expensive/costly. It forces decisions to be postponed, vital information to be withheld, labor and machinery to sit idle.

Now I also want to make a subtle distinction: There is a major difference between costs and non-value-added costs.

For instance, I could have written that another place to look is where all the human labor is focused. Sure, systems can impact labor costs, but that’s the kind of labor that’s potentially valuable (and the subject of another column). It’s different than non-value-added costs we’re focusing on here.

So, there you have it. I hope I have simplified and eased the process for you and given you some places to look to cost justify your system.

See you next month…

Rick Duris is the President of Business Technology Group, Inc., a systems integrator based in Libertyville, IL specializing in plant floor systems such as warehouse management system, bar coding and radio frequency applications. He can be reached by contacting RainMakers, 847-251-3327 or email: jon@rainmkrs.com