Puzzle of Value Addition

Why Board of Directors and Audit Committee Members should know about Lean and Six Sigma? These are not the buzzwords often used by this community. Although these words are little technical and used mainly by CEOs and middle managers, the new age professionals involved in overview function should understand these concepts clearly as they are very much relevant as far as Corporate Governance, Business Integrity is concerned.

Let's take an example of a company that incurred huge loss in the last year. The company's main product line had become obsolete, and its newer ones were under performing. There were many sigma defects and wastage it wanted to eliminate to become Lean and profitable. Stiff competition, ever-increasing customer expectations and shifting market conditions made the change an absolute imperative.

Unfortunately, despite the good faith, diligent effort, and professional judgment that went into the cost-cutting efforts, the results did not turn out to be as expected. In absence of appropriate professional guidance, the company decided to tackle cost by reducing inventory and capacity and implementing JIT technique. It focused its initial efforts at the process level, instead of applying a top-down, risk-based approach. Program lacked a consistent, methodical approach and no appropriate benchmarking effort took place to capture the leading practices and performance differences correctly.

Managers were focused on achieving short-term results to drive continuous improvement without adopting a long-term strategy. Managers failed to reinvest cost savings for correcting flaws in the control design in the higher risk areas. Without a risk-based approach, it incorrectly and inadvertently cut too many controls or the wrong controls. As a result, in wake of some worst scenario, and due to huge pressure on performance, creative accounting practices were resorted to by the management to cover up the under performance.

Management often slashes costs and adopts shortcuts that jeopardize controls and upset their audit committee and shareholders. If they ignore costs, they miss opportunities to enhance competitiveness.

Weed out the waste and focus on what creates value. No body can deny benefits of the best practices that make the organizations Lean; however organizations run risk of under performance and failure when lean principles are incorrectly applied by the enthusiastic middle managers.

Lean does not always mean elimination of extra capacity, achievement of zero inventory level, complete absence of paper work as it can make the organization vulnerable in an unforeseen crisis. When you are stripped to the bone, you are left with nothing to absorb the shock. Performance suffers and profits are less than the optimum. When companies lack resources, the Managers adopt a limited view of the Lean principles and they are not clear about where to focus their improvement efforts. More often than not they choose the wrong targets for improvement.

It is important to understand that not all the activities, transactions, and risks are equal. Their importance largely depends on the nature of the business; the inherent risk in the transactions, processes, controls, technologies; and the effectiveness of people in the organization. Like many ambitious initiatives, the potential rewards of Lean are great, but it is also critical to consider risk and control dimensions involved.

Boards of Directors and Audit Committee Members are required to cultivate an atmosphere of trust that enables the directors to challenge one another and the management. They must address their company's strategic challenges - emerging markets, competitors, and technologies - rather than seek quick fixes and CEO ousters when the company stumbles. They need to know Lean, Six Sigma and Internal Controls equally as they compliment each other in creation of value for the stakeholders.

When your company takes up an Improvement Project like Lean or Six Sigma, it's important that risk based method is adopted in conducting the initial diagnostic review so that the project targets global performance and brings significant business results for you instead of isolated local improvements that involve conflicts and control issues.

Now, a puzzle for you. Check out the following diagram and tell me whether the threaded cylinder of Value Addition will move or not. Or, how each cog wheels should move so that the threaded cylinder will move? Finding it difficult to visualize? Please solve the puzzle of Value Addition, if you can. It's a Challenge.

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