Operational improvement is vital to manufacturing survival. Three-quarters of executives say that process improvement will be important or highly important to their company’s success over the next five years.1
Moreover, Grant Thornton’s Value-Adding Strategies Survey
found that 79% of manufacturers are focused on reining in costs, while 70% are focused on improving quality (Figure 1).2
CFOs need to be at the forefront of spotting these performance improvement opportunities and guiding actions to address them. The most effective CFOs are actively involved in performance improvement.
"Improvement-minded CFOs — the kind organizations need today — walk the floors; understand processes; interact with all the departments and levels of staff; and build relationships that help them coordinate improvement throughout their organizations,” says Rob Tague, managing director of Grant Thornton LLP’s Corporate Advisory Services
. “The strongest organizations are those that take a holistic approach to performance improvement. These companies are growing, and moving toward doing things better, faster and more efficiently.”
Great CFOs search for problems, opportunities and solutions
CFOs have to do more than hope for improvement, they must take the lead in achieving it. These proactive steps include:
Identifying weaknesses (i.e., problems or missed opportunities)
Establishing short- and near-term performance targets
Evaluating potential ROI and risks
Funding initiatives that deliver the best returns
The first step is to assess and refine your internal key performance indicators (KPIs) and determine which ones are relevant to your industry or product, advises Tague. Specific measures and means vary dramatically by operation type, but they typically fall within five categories: speed, costs, quality, innovation and corporate responsibility (Figure 2).
“CFOs can then look at historical performance trends and benchmark where they stand relative to competitors or similar industries,” says Tague. “Outside advisers can be helpful to quickly identify KPIs and benchmarking sources, and supply additional benchmark data from privately held corporations. Since consultants typically interact with numerous companies and industries, they should be able to quickly identify and communicate the latest strategies and best practices being deployed industry-wide,” explains Tague.
Most CFOs recognize what needs to be done, but they often have difficulty building an actionable plan and getting buy-in. “Many are concerned that they are overstepping their knowledge boundaries, or don’t have sufficient skills related to departments and functions,” says Tague. “Only by going and seeing what’s going on in departments will they have access to the experiences, perspectives and, ultimately, support of those working in those areas. Performance improvement requires a culture change, and CFOs need to get out and experience the culture in order to lead the change,” advises Tague.
Carefully choose your improvement opportunities
Many factors influence a CFO’s selection of performance improvements, but not all considerations are weighted equally. A plant stoppage represents an expensive but easy decision because it requires immediate attention. Yet most decisions are more complex, requiring rigorous analysis of potential risks and rewards from performance improvement investments.
Increased revenues: Improved product development leads to sales increases.
Increased profits: Improved production processes (e.g., application of best practices and standardized work) boost quality, reduce costs and increase margins.
Increased customer value: Better forecasting and scheduling accommodate order changes and improve customer satisfaction.
Faster global growth: Enterprise-wide best practices allow the company to expand into new countries and regions.
Improved market/brand awareness: Enhanced business analytics provide insights into demand trends.
Larger talent pool: Improved HR practices attract higher-quality leaders and employees.
Lost sales: Late deliveries lead to canceled orders and lost customers.
Diminished profits: Aging equipment and unscheduled downtime increase costs (i.e., maintenance and an idle workforce).
Product compliance issues: Products are impounded at customs due to noncompliance.
Regulatory issues: An increase in OSHA violations puts workers’ safety in jeopardy.
Warranties/recalls: Production failures lead to product returns.
Legal liabilities: A failure to monitor procurement creates unanticipated legal problems.
Image/branding damage: Unrest at a supplier facility brings unwanted media attention to the manufacturer.
After identifying improvement targets, many CFOs rely on a prioritization matrix to help select high-impact, low-cost initiatives. This approach generates quick wins that build credibility and engage employees going forward.
Bringing in a third party can also help. Even a CFO with the right credentials (i.e., black belts and certifications) can find it difficult to criticize current staff and processes. An external perspective can jump-start thinking about where and how to improve.
It’s important to remember that not all improvement is about process. Manufacturers may identify a product that should be discontinued; a service line that generates insufficient returns; or an entire function, department or plant that no longer serves company objectives. In these cases, the CFO’s skill set is critical in assessing the financial impact associated with closed plants, canceled agreements and existing obligations to employees.
In addition, CFOs may want to explore divestitures or elimination of units or product lines. “It is useful to undertake a cost analysis, focusing on margins and whether a unit, department, product or service line is strategically core to the organization,” advises Tague. “A lot of companies actually manufacture things that are no longer aligned with their corporate missions. There may be opportunities for the CFO to generate cash and fund other improvements by carving out portions of a business and exploring M&A opportunities.”
CFOs need to drive execution of performance improvements
Knowing what to improve is just the first step. CFOs must actively participate in a Plan-Do-Check-Act (PDCA) cycle before embarking on improvements. A PDCA cycle:
establishes process maps and timelines
identifies appropriate people and resources
projects estimated cost savings or revenue increases
“The CFO is in a good position to identify the time, effort and money an initiative can deliver,” says Tague. For instance, how many more products can the company produce? How much additional capacity can be generated? How many more parts can a function handle? Based on this data, the CFO can calculate an ROI.
The CFO should also strategically align budgets and support services by balancing internal investments (i.e., new employees, upgraded equipment or technology) and external investments (i.e., acquiring a business unit or hiring consultants). Many improvements require both.
As with any PDCA cycle, improvements require SMART goals:
Specific: Precisely identify what is to be accomplished, by whom and why.
Measurable: Establish a firm metric that everyone can see; avoid vague or subjective targets.
Achievable: Although stretch goals have their place, unrealistic goals can discourage employees. Set realistic, possible goals.
Relevant: Ensure that the effort supports corporate objectives and improves the bottom line
Time-bound: Establish specific milestones to keep improvement efforts moving.
CFOs and senior executives won’t necessarily be on the front lines driving change, but they should request regular tiered updates. For example, an improvement team reports daily to a supervisor; the supervisor provides weekly updates to managers of the affected departments; and managers brief senior executives monthly. This upward cascade of periodic updates achieves two important motivational objectives: First, it keeps everyone informed of progress, and second, it lets the improvement team know that their efforts have been recognized.
Leading firms also make sure that improvements and best practices are documented and shared throughout the company. Conversely, if goals aren’t achieved, they try to determine why. Was the improvement plan poorly executed or was it simply a bad plan?
Tague urges CFOs to start small, with an “initial assessment, limited in cost and deliverables, giving executives a snapshot of the performance improvement opportunity.” Then, if there is organizational support for moving forward, CFOs should look to build a more developed roadmap of improvement options. Once they’ve nailed down the best options, a third phase of planning gets more specific about costs, time and ROI based on what the organization can execute,” Tague says.
“Many organizations have very strong operational capabilities. They just need a roadmap and some direction,” states Tague. But he cautions CFOs against the allure of detailed but unrealistic improvement plans — shelfware — developed by outside experts without firsthand knowledge of operations, problems and opportunities.
Performance improvement can drive new profits, but it may take time
Manufacturers have plenty of opportunities to improve. More than half of plant executives say their facilities have made some progress (43%) or no progress (10%) toward achieving world-class manufacturing status.3
Indeed, many of the world’s best manufacturers have been on improvement journeys that encompass decades (e.g., Toyota). That doesn’t mean improvement will take an entire generation, but it is an important reminder that these efforts are incremental, and that they increase in scope, magnitude and power over time.
In short, it may be a long road, but CFOs need to stay focused on the horizon and keep their eyes on achieving incremental goals. Savvy CFOs, those who motivate their teams to achieve steady, growing progress, enjoy steady, growing profits.