Tag Archives: how to quantify waste

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.

Free Engagement ROI Calculator

The Enterprise Engagement Alliance recently announced that their Enterprise Engagement Academy has created a free ROI Calculator that is available to any organization at no cost (see link below).

The tool can be used to track the potential return-on-investment of an engagement initiative, and also provides a report showing the estimated impact of improving employee engagement.

According to Allan Schweyer, Curriculum Director for the Enterprise Engagement Academy and founder of the TMLU professional learning platform, the ROI Calculator is based on “very conservative estimates of the impact of lower and higher levels of engagement created by the Center for Talent Solutions.”

Full article…ROI calculator

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.

Get Further Faster: The Goal-Driven Approach to Continuous Improvement

quantify2As noted in our previous post, when working on continuous improvement many organizations do not focus on identifying or quantifying waste, but instead come up with lists of ideas on things that might be improved… in other words, an “idea-driven” approach to making  improvements.

The problem with this approach is that there is typically very little correlation between the list of ideas for improvement (perception) and the biggest problems or opportunities for improvement that actually exist within the organization (reality).

One alternative method of identifying and quantifying waste first is the “goal-driven” approach, which starts by identifying the most pressing organizational goal and then drilling down to find the waste that affects that goal.

Do you want to save time, money, improve quality, conserve capacity, or what?  The goal driven search for waste takes that goal and looks for any problem that affects it.

For example:

  • If your goal is to free up people’s time, you would then study the time to identify and prioritize every aspect that waste’s time. A work sampling study would provide you with a great deal of information about this.
  • If you want to free up production capacity, you would study and prioritize all the factors that waste your capacity – bottlenecks, set up times, producing the wrong thing (product that sits in inventory), yields – all the capacity spent producing product that cannot be sold, production capacity devoted to rework.
  • If you want to free up cash, you would search for waste in all the cash expenditures, such as utilities or component inventories. Can you accelerate collections? Can you shorten the time between order and delivery to accelerate invoicing? Can you shorten the time to collection? Can you ship more from inventory without adding to it? Are you expending cash on overtime that could be reduced if you reduced time wasters?
  • If you want to increase revenue, you would focus on identifying and quantifying the waste in all the factors that get in the way of sales. Use of sales reps time, selling methodology, lead generation and lead yield, causes of lost sales, delays in installations or shipments.

The distinctive feature of the goal driven approach is that not all waste is treated equally. Instead of looking for waste in all its forms, this approach zeros in to identify and prioritize for removal of all the waste associated with a particular important goal.

How Do You Quantify Waste?

quantify2Our previous post shared some insight on the importance of quantifying both the opportunities for improvement as well as the “waste.”

A number of questions along the lines of “how” to do this have arisen, so here are three guidelines:

  1. Identify if and how the problem affects the four forms of waste:  lost sales, material costs, time, and capital costs.
  2. Assess and determine 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.
  3. Do the math to roll it up into annual dollars.

Once you have quantified the waste associated with a problem, a follow‐up question must always be: “how much can we eliminate?”

When evaluating what to work on, consider not only the quantification of waste, but also the best estimate of how much can be eliminated by studying and improving the work.

It does not matter how many improvements you start and finish, but how much they will matter to the business that determines your long term success.  Use quantification of the waste to identify the vital few opportunities in your organization.

3 Steps for Quantifying Waste & Working on the Right Things

decisionsIn previous posts we have written about the importance of working on the right things and the importance of not only identifying waste, but also quantifying that waste.  If we fail to “quantify” the waste, or opportunities for improvement, then we run the risk of working on the less important or wrong things.

Here are three steps for quantifying waste:

  1. Identify if and how the problem affects the four forms of waste, which are 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?
  3. Do the math to roll it up into annual dollars.