Can You Fight Inflation with Process Improvement Efforts to Keep Afloat?

Picture 1: staying afloat. A view from Helsinki’s South Harbor with M/S Silja Symphony on tour to Stockholm and M/S Ocean Majesty and M/S Amorella to the left at Katajanokka Harbor.

The short answer is most likely, but it depends on what improvement performance your solutions actually provide.

You can improve your operations to match a rather high inflation level, potentially even without increasing the price of your outputs to the paying customer, and without cutting the profit level that the owners and financiers need to be happy. In some cases the process improvement work may even result in a scenario where it may be possible to both increase the price and sell more. But there are some “catches” to the improvement work that should be understood, both when fighting inflation and taking the improvement work beyond traditional reactive improvement work, or pseudo improvements due to getting or keeping a quality certificate.

Your company’s ability to unleash unrealized, and many times also undisclosed, improvement potential depends fully on your current and past process improvement yield (PIY) level (see Picture 2 below for a PIY calculation example). If this has been low (<10%) for a long time, then there is a great potential for improving the company’s value proposition through a sustainable and systematic process performance increase. This performance increase affects both the top-line and bottom-line of your company’s financials, depending of course on how you position your offerings. Here it may be even possible to both increase the price and sell more. This scenario is a rather hard improvement task to solve, but it may be done if both the performance and performance increase of the key processes shine constantly regarding the core process (order-delivery process, incl. invoicing), the research and development (R&D) process, the marketing process, the sales process, and in some cases where applicable also the after sales process. There may be also other processes such as the administration process (incl. general management, human resources, finance, etc.) and the maintenance process that have to be properly considered to improve the whole. These processes may be either global, international, national or local, depending on the company structure and your company’s geographical reach. From a high-performance process improvement (HPPI) perspective this does not matter as can be observed via the process definition used by all high-performance process improvement compatible improvement solutions:

“A process is the interaction of people, machines, materials and information to produce a certain service or product.”

Fromm, H. 1992. “Das Management von Zeit und Variabilität in Geschäftsprozessen.” CIM Management. 5, pp. 7-14.

Simply put, process improvement means thus enhancing the interaction of these four process components. How well this interaction works is directly related to the process performance that can be measured with regards to time, quality and costs. This performance, on the other hand, is probably the most important factor to satisfy the stakeholders in the long run. How to improve systematically and result-oriented the interaction of the four process components for each relevant process, well enough and using as little resources as possible (cp. the improvement time, quality and costs), is the essence of high-performance process improvement. In the end, the question is how to organize and improve over time the four process components so that their interaction has an optimal impact on the process performance and stakeholder satisfaction. To really do this, you need solutions fit for the purpose, i.e. that are designed from the outset to be HPPI compliant, because there are so many issues that need to be considered, optimized and implemented thoroughly. In practice, every single improvement effort has to be customized, including also the improvement education and training at the individual level.

Based on the above it is easy to analyze, as a “by-product”, the shortcomings of e.g. the improvement work based on lean thinking. Solutions based on the lean concept do not contain any actual component, logic or systematic solution assuring the improvement effectiveness and the improvement performance from a total perspective. As a result, the real-life process improvement yield is, and will be low, until the end of time, as there is not even a theoretical possibility to increase the ambition level of the improvement work after the lean concept has been implemented throughout the company “by the book”. The “Then what?” question cannot be answered properly, unfortunately. Another issue to bear in mind is that the interaction of the four process components may also deteriorate even if you think you are improving your operations. Here many IT/ERP projects may serve as an example. Also, you can test the performance of lean solutions simply by adapting these solutions to the improvement work itself.

Improving sufficiently the costs, time and quality of your key processes provides a good protection to inflation concerns, although it is important to notice that also the improvement efforts themselves have to be effective and efficient. In addition, it is crucial to keep in mind that the real-life average PIY level for a company is only at a 2-3% level, often despite all the improvement efforts throughout the years.

If your company truly runs its improvement efforts at a PIY level >85%, then you should revise the ambition levels both for the key processes and the improvement work. Analyzing the processes at a higher ambition level may provide clues about the undisclosed improvement potential that would provide the means to fight inflation and provide competitive flexibility towards crucial stakeholders (customers, employees, owners). This setting is, however, more or less hypothetical as a PIY level of 85% even at the basic ambition level is rare. The theoretical output of the applied improvement solutions applied in many companies, such as e.g. lean concepts and related tools, restricts the score to a 60% PIY level. If practical issues are considered then the ceiling will be reached at about a 15% PIY level. Getting a real-life PIY score higher than 7-10% is thus likely due to a miscalculation/misunderstanding of the PIY.

To swiftly get a realistic view of the unrealized improvement potential for a specific process, it is advisable to first check the workable improvement options and likely financial outcomes using the improvement plan VISTALIZER® Report. This solution can be delivered using the Microsoft Teams or Zoom solution as the communication platform.

To calculate your PIY level you can use the PIY Calculator (incl. the Implications feature) in the app VISTALIZER® for Enterprises (iOS/iPadOS/Android) that also considers your company’s improvement knowledge level and ambition level (Picture 2).

Picture 2: The PIY Calculator in the app VISTALIZER® for Enterprises (screenshot of iPad Pro 12,9″).

Running high-performance process improvement efforts provide multiple benefits with only a moderate risk. In stormy business conditions you really need to consider your improvement approach so that it is fit for the purpose. Continuous improvement means that you can improve the operations sufficiently, despite the conditions. Here also the absolute and relative improvement performance, and the change of these two aspects (to the better or to the worse), should be considered to understand how your company’s is prepared for current and future challenges. In that sense it costs a lot also to do nothing. You can, generally speaking, do much improvement-wise by just assuring that you use high-performance process improvement solutions with a sufficient coverage as the improvement effectiveness (=improving the right issues) and efficiency (=improving the issues right) is by definition built-in such solutions.

Where Can I Learn More About How the VISTALIZER® Report is Able to Detect the Best Process Improvement Objects?

The kernel of the logic used to identify the best process improvement objects in the VISTALIZER® Report is thoroughly discussed in section 5.5.1.2 of my book High-Performance Process Improvement (p. 140-142).

In essence, the identification logic distinguishes the trivial many from the vital few improvement objects in a HPPI compliant way. These vital few objects are then further analyzed to prepare an adequate input to the overall synthesis. This improvement object identification logic is thus a very crucial backbone to assure an overall high process improvement yield level, achieved with the use of as little resources as possible.

One of the essential building bricks of a high-class process improvement plan is the use of a high-class logic for identifying the best (overall) process improvement objects. This calls for a robust analysis logic that has to master multiple analyses to produce a high-class process analysis that is fit for the synthesis. In the end, improving the process performance is all about selecting the best improvement objects for the implementation phase. If the improvement object identification phase is inadequate, it is clear that this will affect the synthesis negatively. As a result, wrong improvement objects are likely selected for the implementation phase, resulting in a low PIY level.

The Essential Rule of High-Performance Process Improvement

I get frequently the question why lean methods do not work. From a high-performance process improvement (HPPI) perspective the answer is rather straight forward, but let’s ponder the question a little bit.

It’s easy to just put e.g. “lean flaws” in Google to have an educated view on the topic. However, if you analyze the findings, then it may strike you that most answers boil down to the fact that the companies or persons adapting the lean principles, or more correctly philosophy, have not been able to grasp that the fundamental part is to change the culture so that the whole organization supports the lean philosophy.

Such a synthesis underlines the fundamental flaw of lean, i.e. not even the lean criticism detects that the lean philosophy is inadequate in today’s business world. The synthesis is in itself productivity-oriented, as is the case with the whole lean approach. From an improvement point of view, this means that one needs to implement the lean principles correctly. To continue the logic, wouldn’t it then be best to adapt the lean principles to fix this conceptual issue?

The answers is no. Using methods or principles aiming at productivity issues, won’t address issues related to effectiveness. This is easily verified via the process improvement yield (PIY). Adapting improvement concepts or methods with a low PIY output to an improvement process producing already a low PIY level will not have any larger impact on anything, besides producing lost opportunities, time and money. Toyota runs its improvement work with an estimated 15% PIY level, whereas the score for the average company is 0-3%. It is thus fair to assume, that the lean philosophy won’t provide for any company a higher score than Toyota’s. It took tens of years to achieve that level, using concepts that are already 50-90 year old. Still, many companies try to go he same path today, conquering at best the wrong mountain.

However, a low PIY output is only the other side of the coin. To really score in terms of process improvement, the methods should also deal properly with the 4/40 rule. It states that a person cannot devote in the long run more time than 4% of the working time to process improvement activities, as also the normal work tasks have to be performed. This time, about 10 working days a year, include all improvement activities such as the process analysis and synthesis, the (improvement) education and training, the actual implementation and follow-up.

The other part of the 4/40 rule states that not until 40% of the staff understand in practice the improvement philosophy, approaches and tools, large gains can be realized. Bearing in mind that every individual has his or her individual profile that is formed based on, among other issues, the personal history, (un)learning pace, and motivation and current stress level, it is clear that it is very hard to gain the right momentum. It is not sufficient to just take part in an education or training session, as each individual needs no master well-enough the required improvement substance in practice.

So, the proper answer why lean initiatives cannot be successful, is that the related lean methods produce at best a low PIY, and the methods applied cannot deal properly with the 4/40 rule. The real, and most expensive, flaw of the lean philosophy is that it may be impossible for quite a large amount of companies to change the lean biased mind-set to really understand how to run the improvement activities from a total perspective. After all, even a 15% PIY level is very low considering the time and money spent. Besides, it may diminish rapidly. After all, adapting 50-90 year old concepts and methods to business problems of today and tomorrow is in itself symptomatic.

A high PIY level, and a continuous compliance with the 4/40 rule, is the essential rule of HPPI.