Steps for Quantifying Waste

Noting that at least 50% of improvement is working on the right things, our previous post shared insights on “why” identifying and quantifying waste within our organizations is so important.

Now, the question is “how” to do it…

The first step is to identify areas of waste, many of which may have previously gone unnoticed. This step often requires the use of historical financial and operational data, and also that we think “outside of the box” when examining our work processes. Involving people at all levels, and people from cross-functional areas, can help the team look at each problem or bottleneck without bias.

Once problems are uncovered, review how each affects the four forms of waste:

  • Lost sales or opportunities (typically the largest waste)
  • Material costs
  • Capital costs
  • Lost time

If the problem causes delays, think through and estimate the form of waste that the delay results in.   Does it increase capital such as inventory or receivables?  Does it delay sales and revenue?  Does it cost you customers and future business? Does it require additional people time?

Keep in mind that many problems will affect more than one of the four forms of waste.

For example, excess inventory not only ties up capital, but may increase the number of people who need to manage it, the warehouse costs to store it, and the probability of scrapping All these factors can be reasonably estimated with some historical data and getting close enough to the work.

Next we must quantify the impact of each problem, recognizing that some assumptions and estimates will probably have to be made.  Try to document a range that you are pretty confident about.

Finally we can “do the math” to prioritize the improvement projects we’ll undertake first. Key criteria will be the overall potential savings (i.e., the problems creating the most waste), and the estimated time-frame for implementation.

These two determining factors are important, and sometimes it is better to opt for a smaller “return” if the project will involve fewer complexities and a significantly shorter time-frame. We’ll take a closer look at this perspective in our next post.