Quantifying Waste

Why & How

Bill Conway always said that at least 50% of improvement is working on the right things. Organizations that are able to engage people in making good, fact-based decisions about what to work on and then execute with laser focus reap huge gains. An opportunity search is key.

That means that we must identify and act upon the opportunities for improvement that will potentially yield the greatest results. In other words, we must identify and quantify waste.

Quantifying the waste helps in three significant ways. First, it helps distinguish between the big‐hitters and the nice‐to‐have improvements so you focus on the most important opportunities first.

Second, it makes the organization aware of the cost of a delay in tackling a ‘big‐hitter’. If a problem is wasting $5 million a year, every week of delay is wasting nearly $100,000, so the organization wants to make sure nothing slows this improvement effort.

And third, quantifying the waste enables you to have more meaningful discussions with other parts of the organization whose support you need to change the processes that cause the waste.

Here are a few guidelines for “how” you might go about the quantification step:

  1. Identify if and how the problem affects the four forms of waste: lost sales, material costs, time, and capital costs. 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? Many problems will affect more than one of the four forms — lost sales, material, time, and/or capital. 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 it. All these factors can be reasonably estimated with some historical data and getting close enough to the work.
  2. Quantify the impact, recognizing that assumptions and estimates will probably have to be made. If you have or can gather data, use the data and document where you got it. If you must use assumptions or estimates, document how you came up with that — who did you talk to? Perhaps document a range that you are pretty confident about. The Conway Waste Calculator can help with the documentation.
  3. Do the math to roll it up into annual dollars.