Over our 50 years of combined executive experience with profit and loss responsibility, annual budget management, merger/acquisition analysis, and operational excellence implementations (TPS, Lean, Six Sigma, Lean/Sigma, DFT, TOC), we have seen the difficulty in truly measuring if a business has added value for growth from its improvement activities. Rarely do annual financial results happen as outlined in the budgeting process. Usually, very soon into the new year the actions turn to how close are we going to come to our plan or can we make a new plan? Planed business is lost, new business is captured or sometimes the year does not go as budgeted and planned. So how does a business adjust in a timely manner and still obtain results required for growth? The traditional Key Performance Indicators (KPIs) are indicators of a miss to a goal at a point in time and then that miss is displayed as a trend to the goal over time. The difficulty with choosing KPI’s is finding the ones that will indeed drive improved performance. Many organizations struggle to select the appropriate leading indicators and submit to the traditional financial lagging indicators. What if the trend of the KPI shifts? Does that mean the business results automatically improve? Sometimes the KPI’s can be gamed in the reporting process to obtain a desired outcome or to explain why we are close to a goal. Should this practice be acceptable? Is that the hard black and white results a business requires with correlation of actions to results? Are we growing our cash? The same KPIs will tell a different story from facility to facility, therefore leaving gaps in the management’s interpretation of the KPI’s. Actions that work in one facility will not always work in another therefore, leading to varying or poor results. KPI’s are important and should be indicators at the earliest point of measurement within the process, preferably at the point of impact where action can be taken as required to obtain the goal. An indicator is not a result. What if there was a business index that in good times and bad times shows how your business is growing the available cash for growth? What if there was one index that is black and white that illustrates when you do the right deliberate actions, your business will obtain results?
Who should read this?
This article is intended for:
- The CEO who wants to assure that their business plans tactical roadmap are maximized and the resources are quantitatively focused on the largest opportunities within the organization to produce the results required for growth in a timely manner.
- The CFO who needs assurance that the operational improvement plan investments are going to be maximized and not fall in the typical 90% failure rate.
- The COO that needs assurance that the proposed operational excellence plan is indeed the best opportunity within the organization, knowing that the year will bring challenges both up and/or down but with the right index, the right results will be obtained .
- The operational excellence leaders and front line managers that want to make sure their efforts and tools are going to achieve world class sustainable results.
Why Should You Read This?
Regardless of what is going on in your business, do you fully understand the efficiency of your resources, capital, and cash available to produce growth for the future? Would you like to know how much opportunity is available within your business based on your data to see what you could obtain from your improvement actions? Would you like to compare your business to others on an even playing field? Would you like to trend your business during the year to determine if it is truly improving in value? Are you looking to acquire a business and wondering how much value opportunity is left to improve to justify an EBITDA multiple? Are you trying to react to the market conditions and still improve available cash for future growth at the right pace? If any of these apply to you, please continue reading.
The Viewpoint Exam & Index
Our many years of combined Executive and Operational Excellence experience has shown us that the above-mentioned problems continue to occur every year. It does not matter what your approaches to improvement and excellence are or have been, knowing what results you can obtain and how to measure the results in any market condition is the key component that is usually missed. This has left a lot of businesses wondering why do we spend money on these improvement initiatives and how do I determine where my real growth opportunities are? Similar to the body mass index (BMI) that looks at a person’s weight to height ratio to determine an indicator of whether a person is overweight or underweight, this index shows the true value created by your business actions. That is why over the past 5 years we have worked to develop the Viewpoint Exam (VPE) and Viewpoint Performance Index (VPI). The VPI is the baseline measurement of a business that can determine what opportunities are within a business based on the businesses data and the business processes. Again, the identified growth opportunities from the VPE are based on your specific business processes and data not an assessment to a subjective criteria interpreted by the assessor. Your exam generates your VPI baseline for you to determine your desire rate of improvement. The VPI can be utilized in any industry or facility to determine if there is opportunity to improve cash within the company for growth from your data.
The other benefit we have seen with this process is that we were able to perform multiple facilities assessment within a short period of time to quantitatively determine which facilities should have a focused activity. Over the years, we have seen organizations take a qualitative focus on facilities based on opinions, assessments, or past experience from other industries and these businesses have struggled year over year to grow cash in good times and bad. Wouldn’t it be useful to have a multi-site assessment within a couple of weeks using your data, seeing it from a different viewpoint, and having an agreed measurement to obtain better results? Too good to be true?
A case study to validate the exam & index process
An initial exam was performed on company XYZ in January 2016 and showed the VPI score of 202 on a scale of 1000, showing that there was significant room for cost and working capital improvements. Within the VPI score, we have determined that facilities with a score of 0-400 have both cost and working capital opportunities. We have determined that facilities with scores of 400-800 must either focus on costs or working capital and facilities with a score over 800 are world class and opportunities are minimized. Every business based on their processes, products, services, supply chain and customers’ requirements will have a unique VPI. Once the initial VPI is performed, we can determine the highest obtainable VPI score and cash opportunity. This comparison data of initial VPI to the optimal VPI is used to identify the range and the value of a point of the VPI.
Company XYZ had budgeted significant top line growth for 2016. The 2016 game plan was to improve the VPI from the baseline of 202 and was based on anticipated growth. Each VPI point of improvement was estimated $32,000 to the bottom line. The target to improve for 2016 was $1.5 million of a total identified opportunity by the VOE of over $3.0 million of total opportunity. Unfortunately, early in the first quarter of 2016 the business was showing signs of a double-digit decline in the top line. The decline in the top line continued for all of 2016 and by year end, XYZ had a top line sales decline in business of 16%.
How did XYZ react? The plan was in place to move the VPI from 202 TARGETING $1.5M of opportunity. The deliberate actions from the plan to move the VPI were implemented and in most cases accelerated to obtain results in a declining market. Just because the top line changed, our emphasis was on the index movement in the right direction, not the movement of the top line. The VPI was updated monthly and the final year end VPI score went from 202 to 237 in a 16% declining business. What does that mean? There was a 3.4% improvement in Net Income and an additional $1.2M of available cash. Individual productivity (pieces made per person) improved by 30%, Cost of poor quality reduced by 50%, and Raw Material Inventory was reduced by 47%. Clearly, improvement was made in a declining business. But, there is still room to improve with a 237 score, and the value of continued opportunity through the second exam is in excess of $2.5M going forward. This available cash can be used to pay down debt, reinvest into working capital for growth, or increase shareholder value.
Conclusion & next steps
How much effort is required by CEO’s, CFOs, COOs, and other business leaders to determine how much opportunity there is and where to apply their limited resources to maximized return on investments for growth? Wouldn’t it be a luxury to have a black and white index that as you take your deliberate actions, your bottom line changes and improves? The VPI will reflect the results and if there were to be no results, no change in VPI, then there would be no growth in available cash. Improvement in the VPI means more cash for growth.
Viewpoint Results has developed this innovative game changing process and we are so confident in this process that we are offering to perform a FREE exam of your business, which will provide you with your VPI and a different “Viewpoint” of your business’s opportunities ahead of you.
By Joe Gasparino & Robb Kirkpatrick
Founding Partners at Viewpoint Results LLC – www.vpresults.com
50+ years of reactive operational excellence to develop the Viewpoint Exam & Index