80/20: What can possibly go wrong?

80/20: What can possibly go wrong?

THE FABRICATOR® MARCH 2014

March 18, 2014

By:

The necessary conditions must be in place to implement the 80/20 method of management successfully.

Local 80/20 activities must complement, not impede, the global objectives. 80/20 activities must be coordinated and aligned with companywide objectives.

Last month I reviewed the time-tested 80/20 methodology of management and improvement. Its appeal is its power to focus on just those things that have the most favorable impact on results. Companies often can succeed brilliantly with extraordinarily low overhead costs. These organizations are often characterized by the speed and fluidity of their decision-making and operations. Who wouldn’t want that? This sounds like some kind of magic wand. Is it?

Well, not really. 80/20 has practical implementation considerations, and it has pitfalls that can sabotage its success. It takes practice and discipline. But, when the conditions are right and the company has firmly decided to embrace the methodology, no other management practice I know of yields results like 80/20.

I have been involved in business turnarounds of one form or another for most of my management career. A turnaround situation usually is characterized by serious negative cash flow that has occurred over six to 18 months. The company’s very existence is severely threatened, or soon will be. Time is not the company’s friend.

A successful turnaround, one that is timely and doesn’t cause real damage, always involves company leaders rapidly identifying the real and necessary core drivers (customers, activities, processes, and people) behind the business’s survival and future success. It further involves making tough decisions about what stays and what has to go to ensure cash stability. It takes an 80/20 mentality, including the discipline and focus the method demands. Every manager, including me, who is experienced in turnarounds uses the 80/20 method.

That 80/20 works under the time pressures and stress inherent in turnarounds—one of the most difficult of all management challenges—is more proof of the method’s power. In the right environments, the method works in many if not most business situations. So, let’s examine the environments that are right for 80/20 management to thrive.

  • Size and number of locations of the profit and cost centers. It’s much easier to implement 80/20 with smaller profit/cost center operations than with massive ones—better a single location with fewer than 200 people than 25 locations with 20,000 people. The cost of managing the process in very large organizations often confounds the benefit potential. This is not to say it’s impossible to implement it in large companies, though it usually takes a serious, life-threatening event. It’s been done in organizations as large as the U.S. government: the Manhattan Project and the massive industrial focus to support World War II are good but rare examples of huge organizations keeping the “main things” the “main things.”
  • Potential for leverage. These are conditions in which small changes in inputs can cause outsized benefits in output. For example, simple changes in the organizational structure or procedures can cause large changes in responsiveness and, therefore, sales and profit growth.

Every fabricator or specialty manufacturer I know easily satisfies these conditions. Remember the two major recessions in the past 13 years? You probably used 80/20 to survive without even knowing it.

So what can go wrong? Why isn’t every attempt at 80/20 management successful? Why do too many companies that use this strategy to survive distressing situations suddenly forget it when times improve? Answering these questions will help create the necessary conditions to implement 80/20 successfully.

A Layered Approach

Perhaps the biggest reason for failure is not understanding how 80/20 is designed to work. It’s designed to support the company’s objectives—often themselves defined through an 80/20 exercise—not necessarily the objectives of any one or more of the company’s functional activities. For example, if the company’s objective is to increase sales significantly, it may have to trade off optimization of certain processes or activities. Optimizing the whole does not mean optimizing each of the parts.

A common example, particularly applicable to high-product-mix operations, deals with changeovers. They negatively affect throughput and efficiency, so it’s natural to want to either reduce the time it takes or reduce the number of changeovers required.

The latter can be done to some extent using scheduling strategies, but this approach has severe limits. More often the individual work center decides to improve its efficiency and throughput by reducing changeovers through cherry picking, independently going out of work sequence. Sure, this improves efficiency metrics, but it’s also a counterproductive local 80/20 action. When even one work center does this, the results usually confound, sometimes disastrously, the results desired by the company.

Any 80/20 activity must support the objectives of the whole company. The global objectives must always trump the local objectives, or individual functions or activities. The local 80/20 activities must complement, not impede, the global objectives. The major root cause of the preceding example is the work center efficiency metric itself. If you measure and judge the performance of each work center and not the whole value stream, bad things like poor delivery performance and long cycle times almost always occur (see chart).

To ensure you meet the necessary conditions for a successful 80/20 implementation, try a layered approach:

  • Identify 80/20 objectives for the whole company. This sets the framework for …
  • 80/20 for functions. This in turn sets the framework for …
  • 80/20 for individuals and teams.

Each layer requires proper metrics to keep the methodology on track. You also need to coordinate the improvement efforts throughout the company to test whether any given initiative is compatible with, contrary to, or neutral with respect to the global objectives. You can see how complex this can be for very large organizations. Companies that have a continuous improvement coordinator have a built-in means of coordinating the 80/20 methodology once he or she understands the global versus local prioritization.

Another major cause of failure is insufficient discipline. This occurs in many forms. It sometimes comes from the false allure of low-hanging fruit, which really could be identified as “20/80”—80 percent of your effort brings about only 20 percent of your desired result. Recall the “Adding rocks to the knapsack” column in October (available at www.thefabricator.com). Failure sometimes comes from the inability to put the many but trivial distractions (the annoying things that get your dander up) in the background so you can focus on the important few. This can be really difficult. It takes iron will.

The Important Few

I like to think of the following scenario: You’re in a swamp facing a 12-foot alligator, and you gauge your escape route depending on where the gator decides to go. You can get out if you react quickly. You’re also being stung by thousands of sand fleas. If you keep your eye on the gator, you’ll be itchy but OK. If you start swatting fleas because they’re so annoying, you’re lunch. This shows why 80/20 works so well in turnaround situations: You have no choice but to focus on the important stuff.

Quite often a company either hasn’t isolated the important few or identified their relative impact on the company’s success, poor performance, or potential failure. The organization has no sound methodology for robust examination. I also see failures in assessing reality—the current state. When getting to the real drivers, eliminate the phrases “would have” and “could have” and the word “was” from the discussion lexicon. Focus instead on the present, and use two simple verbs: “is” and “are.”

The required discipline starts with finding the important few. Failure here ensures that your 80/20 initiative is, as in the swamp story, lunch. Also note that when you’re uncovering the important few, know that one of them is always revenue surety.

80/20 works and has been proven to yield outstanding results, but it is not automatic. It requires understanding, training, and practice. The great 80/20 companies are always improving their own implementation and management means, including how to figure out what the future’s “important few” will be so they can accommodate them in advance.

If I had to pick one method of operating, it would be 80/20. In fact, it is.



KDC & Associates Ltd.

Dick Kallage

Consultant
KDC & Associates Ltd.
522 S. Northwest Highway, Suite UL-8
Barrington, IL, IL 60010
Phone: 847-525-6109

Related Companies

More in Shop Management from TheFabricator.com

Published In...

The Fabricator®

The FABRICATOR® is North America's leading magazine for the metal forming and fabricating industry. The magazine delivers the news, technical articles, and case histories that enable fabricators to do their jobs more efficiently. The FABRICATOR has served the industry since 1971. Print subscriptions are free to qualified persons in North America involved in metal forming and fabricating.

Preview the Digital Edition

Subscribe to The Fabricator®

Read more from this issue

comments powered by Disqus