Project Practitioners > Are These Benefits Real?

Are These Benefits Real?

By Niel Nickolaisen

Have you ever had the experience of watching a peer drive directly for a cliff? You can see where he is headed and know that the result will not be good. You try to warn him that he is about to get in trouble but he shucks off your warnings and just keep heading towards disaster. That happened a few weeks ago at one of our planning meetings. The CEO and I were meeting with one of our manufacturing groups to talk about the specifics of their plans to improve margins. The person that heads up this manufacturing group was describing how he had determined that he could save tons of money by reducing the number of equipment change-overs he did and increasing, in a "smart way", the on-hand inventory. His rationale for making this change was as follows:

  • Each change-over took approximately 30 minutes to complete.
  • Each change-over required two operators.
  • Each change-over required that the equipment be shut down during the change-over.

He had determined that if he cut back the number of change-overs (and produced in much larger batch sizes) he would directly save the 30 minutes times 2 persons of labor per change-over as well as the opportunity cost of the idle equipment. Combined, this equalled lots of dollars in savings. His plan was to reduce the number of change-overs by at least 15% as a way to cut his costs by at least hundreds of thousands of dollars.

As he was explaining how reducing change-overs was a cost savings, I saw the CEO start to bristle. The CEO started to ask pointed questions as to how the increased inventory levels would eat into and eclipse the expected savings from fewer change-overs.

I could see where this was heading and so I tried to give the manufacturing leader some hints. Had he done any pilots to see if the expected cost savings matched reality? No, he answered, his analysis was sufficient to prove that this was the right approach. Had they considered other ways to reduce costs without cutting change-overs? Two options were to first reduce the length of time that each change-over required. If he reduced the change-over time by 15%, he would get his projected cost savings without increasing the risk of obsolete inventory. Second, he could stratify the product line into high-, medium-, and low-demand categories and base inventory levels on these categories In effect, shifting to more of a demand-driven approach? No, that seemed too complex. As he brushed aside my suggestions, I decided to get out of the way and let him drive himself off the cliff. This took about two more minutes. As the CEO read through the cost/benefit analysis the manufacturing manager had prepared, the CEO asked the final, push-over-the-cliff question:

"Where are the names?"

The manufacturing manager looked perplexed, "What names?"

"In your analysis, you claim that reducing the number of change-overs will save you lots of money. Since reducing change-overs will not reduce inventory, I am guessing the cost savings will come through reduced staffing levels. I want to know the names of the people that you will no longer need."

The manufacturing manager looked at his staff members who either looked away or shrugged. "I don't think our analysis has gone that far."

The CEO countered, "I suspect your analysis has not gone that far because your analysis figured that if you saved an hour per line per shift on change-overs, that time equated to so many dollars. You then extrapolated those dollars for all your lines and shifts over the course of a year and determined that reducing change-overs would save your hundreds of thousands of dollars a year. The problem is, you will never see the savings. You will still have the same number of people working the same number of hours. What you will do is increase costs by building inventories that we might or might not need. If you want to really save money, figure out a way to reduce how long a change-over takes so that we can change-over more often and build less inventory."

In my career, I have seen business leaders make this same mistake about projected benefits. I once had a call center manager figure out that if we spent hundreds of thousands of dollars to modify her call center application, it would save 3.5 keystrokes per minute (I am still not sure how she arrived at this number). Factor in the number of call center agents, their cost, and the number of minutes and this project had the greatest ROI in the history of humanity. The only problem was that there were no financial benefits at all. Saving 3.5 keystrokes per minute did not mean that we could reduce the size of the call center nor did it mean that we would be getting our customers off the telephone faster. Yet this project was her highest priority; her passion.

I try to work closely with those requesting projects to make sure that their benefits statements are not highways to a cliff. With a little training and explanation, people soon catch on to the difference between real and unreal benefits.



Related Links
A thorough Cost-Benefits Analysis is just he first step. Assure everyone you're taking it seriously by creating a Benefits Realization Plan.


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