Operations of any nature (manufacturing, project, service operations) mean processing.
Whether we recognise it and admit it - or not (in many enterprises nobody is even conscious that processes exist.....) - manufacturing products, constructing buildings, designing web sites, booking a flight or providing a medical insurance policy is achieved through processing.
Processes, in cascade, or in parallel, or in combination, generate outputs.
The final output of the "processing chain" is the product, or the object of a project, or a service.
The sole judge of the output's goodness is the client, the monster client, who wants pure, abundant value.
The output value of a processing operation cannot exceed (it seems obvious) the value inherent in that operation and generated by that operation.
A process is made of activities, performed by humans, machines, or combination.
In order to ensure an adequate level of process output value, one must zoom-in deep inside the process and analyse the activities composing the process, searching for value.
Activities (performed by humans or machines or combination) may be of 2 very different types:
- Non-Value-Adding Activities
An activity is said to add-value when it contributes to increase the value of the activity's input, thus generating an output which has a higher value than in origin.
A) In manufacturing and in construction work the inputs of an activity are (or could include): materials, labour, machine time, jig/die/mould time, instructions, drawings, tools usage, energy, ancillary services (light, steam, compressed air....), etc.
The output of an activity is a product, or part of a product, or a sub-assembly of it, or a quasi-product, or a component.....
So, a manufacturing activity could be: drilling a piece of metal, gluing together two pieces of wood, packaging a product, labelling a bottle, sewing the edges of a mattress or maturing brandy in an oak barrel...
A construction activity could be: digging a trench, casting concrete in a foundation plinth, laying bricks, tarring a road, wiring an electrical wall socket or laying roof tiles.....
B) In the service industry, an activity's input could be: data, information, paperwork, forms, stationery, labour, machine time (computer, fax, printer, photocopier, medical equipment, kitchen equipment.....), instructions, procedures, tools usage, energy, facilities (office furniture, light, air conditioning, lifts, waiting room....), etc.
The output of a service activity is a service, or part of a service, or.....
So, a service activity could be: checking a form and stamping/signing it for approval, printing a travel ticket or voucher, performing a surgery intervention, cashing a cheque, receiving a guest in a hotel reception, serving a pizza or publishing a web site.....
Irrespective of the industrial sector, a value-adding activity contributes to increase the value of the overall input, generating an output which carries a higher value than the sum of all input values.
This seems obvious, but deserves an explanation.
The activity "laying a brick" (one brick) has as inputs: the one brick, some mortar, some labour, some tools usage (trowel, scaffold, bricklayer line....), instructions, drawing/s and some supervision.
Each input item carries a value (the cost value of the brick, the mortar, bricklayer time, tools depreciation, supervisor time, fraction of the cost of making a drawing.....).
The output of the activity - "one brick laid" - also carries a value, which is greater than the sum of the input items' values, because it includes the construction company profit (a fraction of the overall work's profit).
So, by laying one brick, value has been added. BUT, it has in fact been added only if the customer (whoever has commissioned that brick-laying work) is happy with the final result (the QUALITY parameter); is happy with the timing of delivery (the TIME parameter); is happy with the final price he has to pay for (the cost to the customer - the COST parameter); is happy with the overall service received (courtesy, punctuality, goodness of the overall relationship, smile.....).
So, if the brick has been laid in the wrong place - if it has taken too long in respect of the contractual terms - if the construction company has put too much profit on it - if the customer has been neglected when he asked for a clarification...... it is well possible that the customer, the final judge of the overall output value, is not satisfied.
To come to a preliminary conclusion, the judge of the value added in or by an activity is always the customer.
But an enterprise cannot wait until a wall is built to find out if the "right" value has been added in each individual activity that contributes to build a wall. There must be rules and criteria available "before".
New-world rules and criteria are very simple: on condition that the profit margin included in each activity is adequate under the current market conditions, an activity adds value only if the customer is prepared, in the current market situation, to pay the corresponding price.
This brings, however, only a limited help to the new-world enterprise.
In fact all enterprises know well that, in order to be competitive, activities must be done efficiently (at a competitive cost) and effectively (producing the wanted result), so that customers will pay for the overall costs plus for the enterprise's trouble of being in business, which is the enterprise's profit.
Traditional enterprises have understood the rule so well (they think...) that they have paid large attention to maximising activities' efficiency and activities' effectiveness, in an attempt to enhance activities output value. How?
They have focused on efficiency - efficiency of all significant activities - and brought it to extreme levels. In manufacturing, they have gone for the fastest mass producing machines, capable of processing an incredibly high quantity of pieces per minute..... In construction they have gone for "specialised" activities (bricklaying, plastering, plumbing....) performed by expert, specialised artisans, capable of laying 500 bricks a day or plastering so many square metres an hour...... In the service sector, they have adopted the same principles, assigning "specialised" fragmented activities to specialised workers capable of processing so many paper forms per hour or typing so many lines per minute......
And they have focused on effectiveness, effectiveness of all significant activities, and brought it again to extreme levels. In all industrial sectors, they have gone for Quality Control, aiming at checking that the output of an activity is "right" and conforming (so that no error, mistake, defect, or non-conformity will be passed downstream and eventually to the customer....).... and they have set-up sophisticated QC systems and methods, and they have invented SPC (Statistical Process Control), and QA (Quality Assurance) procedures, and.....
However, traditional enterprises, have missed the most important question and its answer:
....but, which activities do add value to the final product or service we offer?
World-class enterprises know this question and its answer very well.
There is no point in having an efficient and effective activity, even it increases the ratio between output and input value, if that activity does not contribute to add value to the final output product/service. Value for which the customer is prepared to pay for.
Now, the focus shifts from value added in the activity "per se" to value added by the activity to the final output.
1) Beer is bottled, then cartonised, then palletised. Pallets full of cartons of beer are brought from the bottling/cartonising/palletising line to storage, by means of fork-lift trucks.
The activity "transporting pallets of cartonised beer to storage" could be perfected to extremes in terms of efficiency (speed of transporting) and effectiveness (no damaged pallet - each pallet positioned in its correct storage place).
So, it might seem a valid, value-adding activity.
BUT, it does not add any extra value to the finished product (a carton of beer).
In fact, in spite of beer manufacturers passing (or trying to pass) the transport-to-storage cost to clients (plus a bit of profit), no client would be prepared to pay for it.
Clients want good beer, and don't care at all about how many Km it must travel inside the manufacturer's factory before getting to the market. So, clients (if they knew how many cents a bottle they are paying for that transport) are not prepared to pay for it: it's a problem of the manufacturer... if the manufacturer has a factory so huge that those huge fork-lift trucks must travel for a huge number of Km is not a client's problem, it's a manufacturer's problem....
2) A customer goes to his bank to request an International Bank Draft. Assuming there is no queue, the overall process of issuing the Bank Draft is something like: customers explains to a Customer Attending Official (CAO) what he wants - CAO ask the customer to fill a Bank Draft Request Form with all details (customer's details, beneficiary details, currency, amount.....) and sign it - then CAO calculates the overall debit to customer's account by converting local currency into foreign currency at present rate of exchange and by adding bank's commission - all details are inserted in the form - then CAO gets a blank International Draft cheque and goes nearby to type it by typewriter, filling amount, currency, name of beneficiary, date... - then CAO takes the typed Draft, the original request form and her calculations to a supervisor - assuming the supervisor is not busy, he checks CAO's calculations, checks all data in the form, checks the Draft, signs calculation sheet for approval, signs form for approval of debit and inserts his signature in the Draft - if the amount of the Draft is above a certain level, then the CAO goes to department manager, who checks the calculation sheet, the form, the Draft, and inserts a second signature on the Draft - then CAO goes back to her desk, sorts all paperwork out, files each copy of each paper in the correct place, inserts details of the transaction in her computer terminal including the debit to customer's account, and finally hands over the Draft to the customer.
How many value-adding activities are there in this simple process?
In spite of each step of the process being very efficient (in terms of time consumed) and effective (no mistakes made) the only VA activities in this process, from the customer's angle of view, are: giving/getting Draft's details - printing Draft - signing it (one signature) - updating customer's account. Finito.
All the others, to skilled clients, are pure, fresh, fried air.
NB: to skilled clients, to clients monsters !
The majority of clients of that bank will consider "normal" and acceptable that process.
Monsters clients, instead, know they are paying (service fees and commissions) also for all non-value adding activities, for all that supervision and control, for all those calculations and re-calculations, for that typing time, etc. etc. not to mention the fact they are also paying with their time (waiting time until the Draft is produced....).
In a world-class environment, value-adding activities in a process are only those that add value to the output of the process, value "tangible" by or "perceivable" as such by the intelligent monster client.
In manufacturing, construction work, and continuous process type of operations, value-adding activities are those that "transform" chemically, physically, (or nuclear-ly) matter (materials, components....) into a finished product.
In pure service operations, value-adding activities are those that elaborate data and information contributing to output the service.
In certain service operations (restaurants, medical services....) there can be a combination of the two definitions above.
In all cases, value as such is added by an activity to the final process' output only if the activity is effective (e.g. it has been performed up to standards).
They are all the others.
Their main feature is that they do not contribute to add value to the output of a process.
It is not always easy and straight-forward to classify an activity as non-value adding, but some guidelines are available to all industries.
It is important to note that we are referring to the central process and we are focusing on activities belonging to it and to all related core processes.
Under this angle of view, it is possible to establish some guidelines valid for all industries. (more »)