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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SME's Way Forward

Many SMEs operate successfully from an operational and a financial perspective but sustainability needs innovation and professional discipline. There is always a gap in implementing ideas in a better way with improved planning and prioritising. Strategic Risk Consulting can improve their discipline in applying priorities and identifying planning schedules for projects and help them maintain focus on priorities on an ongoing basis.

SMEs make both cost and time savings as a result of an improved business planning and prioritising strategy. Timely implementation of projects can be crucial as it would result in significant direct and indirect cost savings. This will also allow SMEs to reach the market sooner than anticipated resulting in opening up of newer opportunities which they might miss otherwise.

In Strategic Risk Consulting, on-going communication and a high level of commitment is required. A broader comprehension of issues and a reality check on any proposed way forward or actions requires both communication and commitment. Assurance that SMEs are heading along the right track in a highly professional manner is provided.

To gain competitive edge, it is crucial for SMEs to utilise knowledge efficiently and to enhance their innovation potential. Managing Intellectual Capital and reporting it to customers and stakeholders systematically is becoming increasingly important for future-oriented organisations. Conventional balance sheets and controlling instruments have lost some of their value because Intellectual Capital, i.e. value-adding knowledge, internal processes and structures along with important relationships with customers and stakeholders are becoming more and more important. The systematic management of knowledge and innovation potential will help SMEs transform from traditional enterprises into "learning organisations".

Strategic Risk Consulting provides measures of a successful transformation such as process maturity, organizational benchmarks and best practices. Recommendations are made for implementing specific models, tools, and procedures that can most usefully be adapted by SMEs. Effective transformation is always purpose-driven. SMEs should bring change by introducing innovative products, services and processes. Innovative Financing, Innovative Designing, Using Innovative Materials, Innovative Approaches, teaming with Innovative People and striving for continuous improvement.

Strategic Risk Consulting starts with identifying and discussing crises, potential crises, or major opportunities in light of the market, organisational and competitive realities. Identifying and engaging a group with enough power to lead the change and getting the group to work together like a team is the second essential step. The third step is creating a vision to bring the change, developing strategies for achieving the objective and constantly communicating the new vision and strategies.

Get rid of obstacles, change the culture, systems or structures that undermine the change vision. Encourage risk taking and non-traditional ideas, activities, and actions. Hire, promote, and develop people who can implement the change vision. Generate short term wins and reward people who made the wins. Consolidate small wins for producing more change. Rejuvenate the process with new projects, themes, and change agents. Achieve better performance through customer and productivity oriented behavior, better leadership, and more effective management and ethical corporate governance processes. Develop means to ensure leadership development and succession.

So what's the message for SME leaders? Read on. . .

If fear stands between you and something you want to achieve, the only route is through it. As you approach your goal, your fear will diminish and your confidence will increase. Don't fear for making mistakes as they are opportunities for learning. Mistakes can also provide impetus to carry out a change you may have wanted to make for some time, but lacked the motivation to carry through. When you have made a mistake, think of the words of Walt Disney. "You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you."