The importance of operational excellence in a declining economy
Mike Schmitt
Published at
In the last two years crude oil prices have plummeted significantly. Some people attribute the price drop to the US shale-energy boom, whilst others cite OPEC’s failure to agree on supply restrictions. However, there is a broader perspective. The price of iron ore and many other metals are down. The same is true of sugar, cotton, soybean and milk prices. In fact, most commodity prices have been in continuous decline for several months now. If these price drops impact the success of your organization, it is very likely that variance-based thinking can help you to counteract these effects.
Although sector-specific factors affect the price of each commodity, the fact that the downswing is so broad suggests that macroeconomic factors are at work. It seems to me that these low commodity prices are here to stay for quite some time due to the slowdown of the global economy. The knock on effects of a declining global economy and subsequently low commodity prices have led to massive problems within the affected industrial sectors. Share prices have collapsed, budgets have been cut, margins eroded, profits have declined and employees have been laid off.
Complete halt
The situation has become dire for many organizations. The need for drastic cost cuts has lead in many cases to a complete halt on operational excellence deployment activities in desperate attempts to keep operating costs in check. As there is less focus on operational excellence, the speed of change slows down with an ever-diminishing impact. This is a vicious circle that most organizations are confronted with.
Variance-based thinking
Times of economic difficulties should be seen as an opportunity to transform organizational processes. Operational excellence and variance-based thinking, paired with effective strategy execution have much higher impact than basic panic decisions such as cutting budgets and laying people off. Anti-cyclical investment in performance improvement makes the organization fit to counteract threats from falling commodity prices.
Tenfold ROI
Investing little in organizational improvement will make the situation even worse. When organizations focus on eliminating ever-present hidden variances in production and supply chain processes, they will be rewarded with substantial performance improvements. These gains by far outweigh the costs with at least a tenfold return on investment.
Mike Schmitt is Partner at R&G Global Consultants in Germany
