Tuesday, 3 December 2013

The cost of not involving people

To build on the previous post, one company I know went through the trouble of quantifying the cost of non-involvement at the time the company was sold. We're talking a billion dollar company that tripled its value in four years. Over the period, they had a strong people involvement in waste reduction program and they found overall that manufacturing cost as a percentage of sales reduced by 7% whilst materials, R&D and overhead remained constant - 7% that corresponds to the 7% increase in EBITDA (in percentage of sales) over the period. EBITDA overall increased by 60% over the period.

The interesting part of the analysis is looking at the situation plant by plant. In the 6 plants least involved with improvement efforts, as measured by operator involvement and speed of improvement, the percentage of manufacturing costs over sales varied from 5% increase to 12% decrease. In the second group 6 plants group of high involvement efforts, manufacturing cost to sales reduced by -9% to -30%.

Rigorous estimates such as these are rare, but the company explicitly considered that improvements in people engagement and customer satisfaction directly led to a $ 600 million increase in company value. Hard results obtained from "soft stuff." Why so many senior managers simply shrug off cash potentials of this magnitude remains a vexing (and enduring) puzzle.


  1. "Hard results obtained from soft stuff"....a very interesting approach which reminds me the debate, a few years ago, around the necessity -or not- to include "human assets" in the corporate balance sheets.
    Your post is proposing a more radical approach: rather than debating about how to measure the potential value of human assets, let's measure the cost of not using them!

    1. Good point, it's probably easier to measure because we can compare learning sites (speed of operational improvement) from non-learning sites, and then compare bottom lines. Inventory reduction might be enough to look at. Let's do it :)