Costly alignment issues tend to reveal themselves at the point of execution, but the root causes can often be traced back to poor planning.
Here’s an example of how this plays out in a manufacturing environment: in a factory that produces industrial racking, the cost of production was higher than it needed to be. The financial analysis we conducted showed that the business was in fact, on plan, suggesting that there was either an issue with the plan, or the problem lay elsewhere. In the end, the issue could be directly attributed to the fact that leadership did not realize that the plan was incorrect, and the error fulfilled the prophesy that, “you are very likely to travel in the direction you look”.
The clearest example of poor alignment causing excessive costs was their use of paint. The financial analysis showed that paint consumption was on plan, however the factory actually consumed more than 2 times the required paint. This excess cost was equal to 2% of sales, or a potential 20% increase in EBITDA. Part of the problem was there wasn’t agreement across the organization as to an exact standard. Further, the actual amount of paint being applied on a daily basis varied substantially.
Planning Errors Manifest at the Point of Execution
Paint thickness on the racks was meant to be closely monitored. Too thin, the paint would not wear properly causing a quality issue. Too thick, the paint costs would be unnecessarily high. The paint operators were tasked with recording the thickness of paint applied to the racks. While observing these operators, we found that the recording of paint thickness appeared to be a loose approximation of averages from a number of separate records. The “loose” approximation showed paint application at about 4.5mils thickness. When asked what the standard was, the operator responded 2mils, but then added, “better too thick than too thin”.
Numbers Often Lie
When a thorough investigation of the actual applied thickness of paint was conducted, we found that the true average was closer to 6 mils of paint. When questioned as to the perceived standard thickness range, the answers depended on who you asked. The President gave the widest range at 2-4 mils. The General Manager was adamant that the standard was 3 mils. The actual standard as dictated by the customers was no less than 2mils and as much as 3.
Although the questionable readings, the weak operating standards, and the varied understanding of the requirements were eye opening, the real problem still sat unnoticed and hidden in the planning system. When the budgeted cost of paint was analyzed against the budgeted production, the implied “standard” for paint thickness was closer to 6 mils, which was almost exactly what they were getting.
When the leadership team assembled each month, they focused primarily on the variances rather than examine every cost and line item. In this case, and for many years, the paint costs were in line with plan and therefore did not present a variance to be discussed. Over the five years that could be analyzed, the business lost many millions of dollars EBITDA because their planning system was not aligned.
Conclusion
Lack of alignment is expensive. It tends to manifest itself at the point of execution, but often the alignment issues exist well before the front-line sees it. Implementing a planning system that aligns all levels of the organization is critical to more predictable and profitable operations. Alignment issues are relevant to every business. Join us at the Organizational Alignment Luncheon on March 27th, to delve into this topic deeper with Andrew Rush and get ideas from your peers on how they are dealing with their alignment challenges.
