Book Excerpt March 2015
Manufacturing growth through resource productivity
By Markus Hammer and Ken Somers
resource productivity must be among the top priorities—if not the top priority—of industrial manufacturers around the world.
On the supply side, raw materials are increasingly scarce, making them more difficult and more expensive to procure.
We recommend the approach for enhancing resource productivity based on five new core beliefs:
Think lean. In lean systems, companies analyze the value stream of a particular manufacturing process and ruthlessly cut away anything that did not clearly add value. This methodology is highly synergistic with resource productivity. Companies have to seek and eliminate anything that leads to wasted resources, in both energy and materials.
Think limits. In the traditional approach to resource productivity, companies typically start with their existing process as a baseline, and then seek to make incremental improvements from there. The second of our core beliefs—think limits—flips this concept on its head. Instead of using the current process as a baseline, it calculates the theoretical limit of that process—meaning the output from an ideal version, with no mechanical or chemical losses and perfect energy utilization—and establishes that as the baseline.
Think profit per hour. Our third core belief—thinking in profit per hour—helps align objectives for the organization. This is critical, because different productivity initiatives often have different goals, which can conflict with one another. Production managers, for example, strive for improvements in output, while energy managers focus on reducing energy consumption. Which one takes precedence? More often than not, the managers themselves don’t know. Reconciling these issues requires a powerful new metric: profit per hour. At the highest level, profit per hour calculates an operation’s gross profit for any given period of time by subtracting overall costs, including energy and resources, from revenue. It is a real-time, operational metric that helps organizations break down silos, giving managers clear visibility into the relationships among different productivity measures.
Think holistic. Despite the best intentions, many companies fall short of their resource-productivity goals. Why? Success requires a thorough change-management effort. Managers must set meaningful and achievable goals, and persuade often reluctant organizations to embrace and pursue them. They must secure the
buy-in of their employees as well as equip them with the skills and deploy the new management systems needed to improve the way the organization functions. McKinsey spent three years surveying some 600,000 managers, 7,000 senior executives, and leading academics to explore why some transformations fail and others succeed. The results showed that successful transformations are based on three core elements that drive one another like interlocking gears. First are technical systems, meaning the assets and equipment a company owns and the processes people perform with those assets to create value. Second is management infrastructure—the formal structures, processes, and systems that companies use to manage people and the technical systems. Third are mind-sets and behaviors, or the attitudes that drive behavior individually and collectively. Successful companies apply a comprehensive approach that encompasses all three, making them better able to implement and sustain changes to improve resource productivity.
Think circular. At a basic level, the global economy relies on taking raw materials out of the ground and making them into finished products, which ultimately get thrown away. It’s a very linear logic—“take, make, dispose”—yet it’s not sustainable in the long run. Instead, the fifth and final core belief is that organizations need to move beyond this linear approach and “think circular.” That is, they should treat supply chains as circles, where they can create new value by looping products, components, and materials back into the production process after they have fulfilled their utility over the product life cycle. This is a complex endeavor—it requires designing products in a new way, adopting business models that go beyond a mere one-time sale, and revamping supplier relationships.
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