Oxymoron: Budgeting For Breakthroughs

Today’s organizations face a major challenge. They’re all looking for breakthrough levels of improvements, but they’re shackled by traditional budgeting processes that, at best, lead to incrementalism.

There are two major issues with traditional budgets that prevent organizations from making a transformation:

  • Budgets still contain significant amounts of cost that the customer does not want to pay for.
  • Organizations can’t reduce those costs, because they lack either the methodology to identify the opportunities, or the skills to attack them.

I’ve worked for 40 years with Milliken & Company, and not long ago, we faced a burning platform. Low cost, offshore competition posed a growing threat. All our domestic competitors decided to either go overseas or go out of business. While Milliken dedicated more to R&D than any company in the textile industry, we had to address its fundamental cost structure to survive.

Historically, Milliken was very budget-driven. Major cost and quality improvements were achieved through capital expenditures, and management closely controlled and monitored all of them. Milliken did make improvements and was recognized internationally (Malcolm Baldrige Quality Award, European Quality Award, Fortune Best 100 Companies to Work For, etc.), but the company failed to sustain those improvements. To remain competitive, Milliken needed a better approach, and in the mid-1990s, we found it in Japan.

The concept is called the “Zero Loss” approach. The Japan Institute of Plant Maintenance (JIPM) taught Milliken that a “Loss” should be defined as the use of a resource that isn’t recognized by the external customer as meeting their needs. All “Losses” are calculated from a zero base. The concept is based on measuring yourself to “Perfection.” JIPM recommended 16 different categories for “Losses,” but Milliken expanded it to 20. This was highly emotional. We soon discovered that 57% of our cost of goods sold was a “Loss” that brought no value to customers. The categories ranged from the obvious to the emotional, including quality, yield, breakdowns, changeovers, training, planning, inspection and testing.

The initial reaction to the concept of “Losses?” Rejection. The financial community considered it just an exercise in activity-based cost reduction and operational leadership thought being measured to perfection would be punitive and unattainable. In time, though, we found four key benefits to the “Zero Loss” approach, and we’ve now taught them to more than 350 other organizations.

1.“Losses” tell the organization where to go work.

Working with other companies, we have found the typical “Loss Landscape” ranges from 45% to 65% of COGS. The stratification of “Losses” is actionable. In traditional, budget-based organizations, costs are segmented into categories such as labor, waste, materials, supplies and energy. With “Losses,” the non-value activity can be specifically addressed, eliminating just the costs that do not benefit the customer.

To unveil the blind spots in your value stream and determine the actual costs associated with each loss, you must look at the lowest level possible. This translates loss improvements into a net improvement of cash flow, as well as a new level of analytics.

Milliken worked with a concrete company, for instance, that prided itself on a 98 percent accuracy rate on its drawings. That was considered best in class. And the 2 percent that had problems took only 1 hour for a craftsman to correct. But the company failed to consider an important piece of the puzzle.

Those 1-hour fixes froze the 40 people working that shift, wasting their hourly wages. In some cases, it also wasted cement that was curing in a truck with nowhere to go and needed dynamite to be removed. The total calculation: a 2 percent error – caused mostly by outsourced craftsman in an effort to save $300,000 – actually cost the company $1.7 million.

2. Everyone is trained in the tools and techniques to eliminate “Losses.”

Most opportunities do not require a certified Master Black Belt to solve the problem. When the entire organization is trained in the appropriate tools, everyone becomes a problem solver, working on the right things. The process is very much about pushing the knowledge and decision making to the lowest possible level in the organization.

Once you know what to track, develop a dogged devotion to measurement. These metrics help win support from frontline workers, who own their quality and their safety. Consider what would likely happen if management stated a goal to reduce labor costs or supplies. Panic or hoarding would surely ensue. Focus on reducing breakdowns, though, and employees take their daily team maintenance seriously. It’s a mindset and culture that varies greatly from other manufacturers. And this level of employee engagement has meant little management oversight is necessary.

3. “Zero Loss” thinking changes the mindset of the organization.

Many organizations struggle with the large number of “Losses.” We have been trained over the years to meet expectations. Those organizations must change the cultural mindset and start to “Celebrate the Red.” The more “Losses” the organization can identify, the more the opportunity for improvement.

4. You never get to zero.

In well-implemented approaches, an organization should expect to deliver a third of their “Losses” to the bottom line in three years. That is what we experienced in Milliken and have seen in other organizations. These are breakthrough improvements, with much more to obtain.

In summary, organizations cannot make breakthroughs by simply planning for them in the coming year. There needs to be an organizational mindset that perfection is possible. Also, it is critical that there is a measurement system to capture all “Zero-Based Losses”. And finally, the proper tools and techniques are taught and practiced to continuously move the organization directionally to perfection. It does require thinking differently about your business, as the path to perfection is a reality today.

This article was originally published on LinkedIn by Craig Long. Craig Long has spent his 40-year career with Milliken & Company in a variety of executive leadership roles. In 2007, Craig helped launch the Performance Solutions by Milliken business to assist other organizations with the same challenges that Milliken has overcome. Craig’s experience includes business management, quality, continuous improvement, corporate education, industrial engineering, product development, and complexity reduction. For the past two decades Craig has led successful MPS implementations within Milliken and with 350 client operations in 23 countries to date. To learn more, visit www.performancesolutionsbymilliken.com.