Tag: Finance

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Does More Efficient equal More Productive?

It is often assumed that efficiency and productivity are the same thing – and this assumption leads to the conclusion that if we use our resources more efficiently then we will automatically be more productive. This is incorrect. The definition of productivity is the ratio of what we expect to get out divided by what we put in – and the important caveat to remember is that only the output which meets expectation is counted – only output that passes the required quality specification.

This caveat has two important implications:

1. Not all activity contributes to productivity. Failures do not.
2. To measure productivity we must define a quality specification.

Efficiency is how resources are used and is often presented as metric called utilisation – the ratio of how much time a resource was used to how much time a resource was available.  So, utilisation includes time spent by resources detecting and correcting avoidable errors.

Increasing utilisation does not always imply increasing productivity: It is possible to become more efficient and less productive by making, checking, detecting and fixing more errors.

For example, if we make more mistakes we will have more output that fails to meet the expected quality, our customers complain and productivity has gone down. Our standard reaction to this situation is to put pressure on ourselves to do more checking and to correct the erros we find – which implies that our utilisation has gone up but our productivity has remained down: we are doing more work to achieve the same outcome.

However, if we remove the cause of the mistakes then more output will meet the quality specification and productivity will go up (better outcome with same resources); and we also have have less re-work to do so utilisation goes down which means productivity goes up even further (remember: productivity = success out divided by effort in). Fixing the root case of errors delivers a double-productivity-improvement.

In the UK we have become a victim of our own success – we have a population that is living longer (hurray) and that will present a greater demand for medical care in the future – however the resources that are available to provide healthcare cannot increase at the same pace (boo) – so we have a problem looming that is not going to go away just by ignoring it. Our healthcare system needs to become more productive. It needs to deliver more care with the same cash – and that implies three requirements:
1. We need to specify our expectation of required quality.
2. We need to measure productivity so that we can measure improvement over time.
3. We need to diagnose the root-causes of errors rather than just treat their effects.

Improved productivity requires improved quality and lower costs – which is good because we want both!

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How Do We Measure the Cost of Waste?

There is a saying in Yorkshire “Where there’s muck there’s brass” which means that muck or waste is expensive to create and to clean up. 

Improvement science provides the theory, techniques and tools to reduce the cost of waste and to re-invest the savings in further improvement.  But how much does waste cost us? How much can we expect to release to re-invest?  The answer is deceptively simple to work out and decidedly alarming when we do.

We start with the conventional measurement of cost – the expenses – be they materials, direct labour, indirect labour, whatever. We just add up all the costs for a period of time to give the total spend – let us call that the stage cost. The next step requires some new thinking – it requires looking from the perspective of the job or customer – and following the path backwards from the intended outcome, recording what was done, how much resource-time and material it required and how much that required work actually cost.  This is what one satisfied customer is prepared to pay for; so let us call this the required stream cost. We now just multiply the output or activity for the period of time by the required stream cost and we will call that the total stream cost. We now just compare the stage cost and the stream cost – the difference is the cost of waste – the cost of all the resources consumed that did not contribute to the intended outcome. The difference is usually large; the stream cost is typically only 20%-50% of the stage cost!

This may sound unbelieveable but it is true – and the only way to prove it to go and observe the process and do the calculation – just looking at our conventional finanical reports will not give us the answer.  Once we do this simple experiment we will see the opportunity that Improvement Science offers – to reduce the cost of waste in a planned and predictable manner.

But if we are not prepared to challenge our assumptions by testing them against reality then we will deny ourselves that opportunity. The choice is ours.

One of the commonest assumptions we make is called the Flaw of Averages: the assumption that it is always valid to use averages when developing business cases. This assumption is incorrect.  But it is not immediately obvious why it is incorrect and the explanation sounds counter-intuitive. So, one way to illustrate is with a real example and here is one that has been created using a process simulation tool – virtual reality: