Article originally posted by CFO Magazine
You’re sitting in a senior leadership team meeting and someone asks the vice president of manufacturing what the improvement goals are for this coming fiscal period. “How much can we expect to reduce production costs and improve quality?” She looks across the table and responds “We’ve had a pretty good run at this continuous improvement thing, but I’m afraid we’re all tapped out.”
There are few manufacturing companies where the next question wouldn’t be, “How long will it take to find a new manufacturing VP?” Continuous improvement has become so critical that ignoring it is no longer an option.
Now ask the same company what it is doing to get more out of its investment in new product innovation and you’ll hear a different story. When someone asks about year-over-year, much less month-on-month, innovation improvements, they are more likely to get a blank stare or hear some mumbling about having a “stage-gate” process. But few will be able to speak to performance against key growth and innovation metrics, or to be able to explain what they are doing to continually improve new product throughput by getting more high-impact new products to market in less time.
Couple this seeming lack of enthusiasm for continuous improvement around innovation with conventional resource and project management practices that actually obscure the real problem, and a picture of hidden capacity begins to emerge.
A big part of the issue is that innovation is knowledge work. In manufacturing, work-in-process inventory is pretty obvious so it can be easily managed. But in R&D, WIP consists of ideas, intellectual property and projects in varying degrees of completion. Of course, none of these are highly visible or take up any real estate. So it can be really tough to visualize the magnitude of the issue, but it’s there and big time. And the bad news is that new product WIP goes stale even faster than physical inventory.
As a CFO, you might recognize this as an 80/20 problem. Twenty percent of that WIP returns 80% of the results. Or even more importantly, 60% of the effort delivers almost 100% of the results. Top performers learn how to cull out underperforming projects early. So the important question is how do they keep the underperforming 40% out of the portfolio?
The answer is having a good firewall at the front end of the process — one that screens out poor performers early by establishing commercial, technical and manufacturing feasibility. But for that firewall to work, the company also has to have visibility into the portfolio. And that leads us to the root cause of poor visibility: too many programs in execution.
There’s a pervasive view that resources (sometimes referred to as people) need to stay busy to be more efficient. That’s a false efficiency. Combine that with the equally pervasive belief that R&D or engineering has to run more projects to get more new products out of the pipeline and the company quickly overfills the portfolio and loses visibility into what’s really happening with each project.
“If you think of the new product development pipeline as a highway running at high capacity, it’s easy to see how letting in too much traffic, in the way of new projects, can cause problems with shared resources across the portfolio.”
What happens as we approach 100% capacity utilization? Wait time increases, causing cycle time or, more importantly, time-to-revenue, to soar. Experience shows the same thing. If you think of the new product development pipeline as a highway running at high capacity, it’s easy to see how letting in too much traffic, in the way of new projects, can cause problems with shared resources across the portfolio. In fact, that’s why freeway entrance ramp meters exist — to reduce the number of traffic jams from slugs of traffic entering at the same time.
Of course, the company may be more interested in the impact of this wait time — reduced cash flow. To see why this is the case, let’s look at a simple example.
Let’s say a company has two similar new product opportunities each of which ramps up to $1 million in annual cash flow within 3 months after launch. However, it only has enough resources to finish one project in six months and then the other six months later. Alternatively, the company can spread its resources across both.
Being honest with itself, what are the chances that the organization would choose to run the first and let the other wait? Because of the pervasive beliefs already mentioned, most companies choose to spread their resources. When they do, the ramp up to cash flow for both new products is pushed out to 12 months. Actually, the negative impact of multitasking will push it out another six months or more, but we’ll save that for another article.
Alternatively, if the projects are pipelined into execution one at a time, the first finishes in six months and the other still finishes within the same 12 months and creates an additional $500,000 cash flow.
It’s very important to mention that I’m not suggesting that a company can work on only one project. The point is that limiting the number of projects in execution at one time, based on resource bandwidth, gets more projects finished and does so in less time. This approach also reduces risk since you can delay committing to the second project for six more months. That can be critically important if the market changes or a better opportunity comes along.
The solution here is as simple (and as difficult) as metering work into execution based on projected capacity utilization. A system like this staggers the start dates of projects so that individual resources are never overwhelmed. This ensures continuous task flow and helps a company optimize the number of projects that make it across the finish line. Additionally, with fewer plates spinning at the same time, the management team will have better visibility into what’s really entering the pipeline so it can capitalize on the critical few and avoid the trivial many.
Mike Dalton is the managing director for Guided Innovation Group, where he helps technology intensive companies accelerate new product growth and get more desirable new products to market. He’s also the author of Simplifying Innovation: Doubling Speed to Market and New Product Profits with Your Existing Resources.