Many businesses consider relocation as a solution to any given problem. However, as tempting as it may seem, relocation is not always the solution. But considering relocation may serve as a catalyst to modernizing your business, its operations and much, much more. It may be the key that can move your business forward.
Every year hundreds of businesses relocate for any number of reasons: cut costs in the long term, expand capacity, easier access to their market, or sometimes it is a pure real estate decision. The appeal of a new facility to fix current operational problems can be tempting, and appear to be a quick fix when the current operations appear to be falling behind.
While the grass may look greener on the other side, that doesn't mean a simple relocation will transform your business. Rather, a relocation can be an opportunity to modernize your business, whether than means an upgrade of the current facility (which can prove to resolve many problems and save your business the significant risk and cost associated with picking up and moving shop) or setting up a new modernized facility that will provide significant operational improvements. Only by performing thorough due diligence on the decision will a company be able to be confident in the path forward.
Regardless of the motivation for relocation, the decision itself presents a company with a unique opportunity to investigate its ongoing operations. As mentioned, this deep dive as part of the due diligence process can prove that relocation is not necessary and there is another way to achieve the same goals or it may validate the decision to relocate. Far too often, companies stop here only performing due diligence as a means to validate the relocation, and as such miss out on the opportunity to modernize operations.
In order to capitalize on this opportunity the due diligence process needs to be asking not just “what are the statistics?” but also “how can improvement be achieved?” By considering the second element the company will be able to forecast the impact of making certain operational improvements whether it negates the need for a relocation or it improves the operation in a new space.
This can be an overlooked part of the relocation process because leadership is typically focused on two key factors during due diligence; what are the anticipated ROIs for all alternatives and how will continuity of the business be addressed. Ensuring continuity of business is always a top priority of a relocation and represents the most critical risk that a company will need to manage. Because leadership teams are typically caught up with ensuring continuity there are frequently opportunities to improve that are ignored.
How are opportunities identified?
During the due diligence process there is typically a significant focus on financial data to be used in modeling, but the opportunity lies in gathering that data but additionally applying a proven improvement methodology such as DMAIC. The goal can be Defined as achieving operational improvements for which ever area of the business is in focus. The due diligence process on its own will Measure the current performance. The first challenge is having a team Analyze the root causes for current performance. Next, the team will evaluate the options how to
Next, the team will evaluate the options how to Improve each area, prioritizing the most critical improvements. Finally, the team will have to establish Controls which will sustain the improvements and set the mechanism to continuously search out improvement. These final 3 steps in the methodology require dedicated resources which can be very difficult to manage effectively especially while planning a potential relocation.
What does this look like in practice?
There are many ways to perform this due diligence, based on what is the current state of the company and what its operations will allow for. Tefen recently completed several projects in this area with different methodologies. Each engagement had different motivations and key considerations, but the end results were similar – a plan to modernize operations.
Sometime the initial analysis or measurement will be difficult to conduct in an efficient manner; a perfect example of this is operational efficiency. Unless the company is advanced in using standard work and some form of tracking mechanism, trying to arrive at a relatively close estimate of efficiency can be daunting.
In order to address this Tefen has developed the Multi-Observational Study (MOS) methodology which provides actionable insights into the types of activities employees are engaged in. The principal is to observe workflows for 3 or more full days of operation to understand what % of time is spent on various activities that workers perform and identify which activities are Value Added (VA), meaning the customer will pay for it, versus Non-Value Added (NVA), which are the activities that the customer is not willing to pay for.
By categorizing the data in this manner Tefen next asks the people on the shop floor why they spend X amount of time on one activity or another with a specific focus on NVAs. This allows investigators to identify root causes for the prevalence of certain activities so it becomes easier to identify how to improve. Even for companies with standard work and tracking mechanisms this can be a powerful tool in understanding how efficient their standards really are. For example, if the standard is 1 hour to produce 1 unit but 55 minutes of that is spent walking, it would suggest that if walking time is reduced output should increase.
*Sample MOS outputs
Tefen recently used this methodology in helping a specialty department of one of the United States’ largest healthcare systems modernize. The hospital had decided to relocate to a new centralized facility that would allow all of its physicians to practice in the same clinic instead of several dispersed across the hospital’s main campus. Further complicating matters, the department would be implementing a new (EHR) system that would change the way work is done. Lastly, the practice was losing patients and unable to bring in new ones, due to its excessive lead times for appointments and wait times. The leadership expected the relocation to help expand their capacity, but they knew that they could not keep working the same way in the new space.
Through the MOS methodology Tefen identified workflow issues and the processes were redesigned to create an optimal flow of patients following the Lean principal of waste removal. The results were clinic workflows that would cut wait times by over 50%, improving flow of patients, which would allow the clinic to implement scheduling best practices that would shrink lead times for new patients from 6 weeks to next day service. To develop these schedules Tefen applied the Theory of Constraints (TOC) and elevated the Physicians as the key constraint of the system, then subordinated all other process to the Physicians. This allowed for a schedule that would increase physician VA time by over 20%.
The relocation itself would not increase operational efficiency or speed, nor would it have alter the hospital's scheduling process. The practice leadership partnered with Tefen to modernize their department ahead of the move. The new space would have over two times the employees, patients, and families of the patients as the previous main space. With that many more people to manage, the clinic workflows and schedule that had caused the clinic to routinely run 30+ minutes behind schedule in their old space would have only compounded in the new space.
Overall Equipment Effectiveness
What if the resources in need of investigation are not human but rather the systems and machines used to produce product? In this case the best practice is to calculate Overall Equipment Effectiveness (OEE). The OEE calculation is quite granular, but at a high level it measures the effectiveness of equipment by measuring availability, performance, and quality.
Each of these 3 areas has many different inputs that determine its overall ranking. Once the investigator calculates these components they can easily target specific factors for improvements by asking “why are 1/10 units produced at sub-standard quality?” etc.
This is also an opportunity to identify if new equipment is needed. For example if the current OEE is only 35% and the site needs to produce 2x as much in the future, should the company buy new equipment? In this case it may prove more valuable to invest in increasing the OEE rather than purchasing new equipment (it is important to note without OEE optimization the new equipment would also likely be severely under-utilized).
This was the case at Tefen's recent project with a global manufacturer that was unable to handle demand at its plant in New Jersey. The company was considering moving operations to China or to a larger local facility and was concerned about the financial feasibility of a move as they struggled to meet the rapidly rising demand with their existing production lines.
The company sought out Tefen to perform the due diligence on the options they had researched. During the diagnostics Tefen investigated the OEE of each of the existing manufacturing lines and determined that the facility was operating at lower than 40% efficiency. Through a strategy of optimizing the supply chain, implementation of best practice manufacturing processes, and purchasing new equipment, the company would be able to cut its lead time in half while realizing the untapped capacity that its facility had. All this at only a fraction of what relocation would have cost.
The manufacturer had not even considered the potential value of operational modernization until Tefen was contracted to comprehensively analyze its current capacity. Had the company moved without making operational improvements, it would have ended up with a very expensive and severely underutilized new facility.
The key theme is detailed investigative techniques that provide data that actionable insights can be derived from. By digging into the data and looking to an organization's employees to understand why the data is what it is, the investigator can then systematically analyze improvement opportunities and their expected impact for both the existing and future operations.
Relocation as a catalyst to modernization
In these examples, the companies had initially looked to relocate to fix their problems, but would find out that their problems actually stemmed from not keeping current. Had these companies been complacent with their current capacity, they would have continued to operate with limited effectiveness. Thanks to leadership partnering with Tefen to understand future business needs, each company was able to uncover ways to modernize as either a superior solution to relocation, or a concurrent initiative to ensure maximal effectiveness of the new operation.
The decision to modernize
In the digital age it is difficult for a company to keep up with technological advancements as they develop faster and faster each year. Costs of modernization can be quite high up front but typically will provide incremental improvements for years to come that dwarf the initial capital expenditure. Therefore companies should make sure they always keep up with the latest and greatest, right?
Not exactly. With the speed at which new technology becomes available it would force a company into a nearly perpetual state of implementation to always have the newest and most efficient systems at their disposal. With any implementation, there is an initial learning curve where productivity will be lower until the organization can capture the full benefits of the upgrades. If a company is always upgrading it will not only be costly in terms of capital expenditure but in productivity losses as the organization never breaks out of that adjustment period.
What is the right balance?
This is the million (sometimes billion) dollar question. If advancements are made too frequently it can appear to be a money pit, but if made too infrequently the organization will steadily become less competitive. Leadership needs to devise and adhere to a long term strategy for keeping current, which includes ongoing review of the latest and greatest systems and equipment that are available on the market and those that are being used by competitors. How will they know when is the right time to make an upgrade?
It can be tricky, but the first step is having a very detailed understanding of current operations. A company must understand if all processes are optimized and use a balanced scorecard to evaluate its current performance on an ongoing basis.
With optimized processes and a good understanding of performance it is much easier to understand the ROI of implementing a system or equipment upgrade, because projections will be more accurate. For example, if a company has a 6.5% scrap rate on their production line and has the option to purchase a new $500k technology that promises a 4% scrap rate, the company can then easily estimate how long it will take to achieve a ROI by looking at the annual scrap savings.
Without this the company could make a major expenditure that does not provide tangible benefit for years to come, simply because the equipment was new and therefore would reduce scrap, but they wouldn’t know for sure when or even if the project would achieve a ROI.
Similarly, if a company does not have a good understanding of what the demand is for its product, it could make an equipment upgrade that boosts its capacity and cuts down on per unit costs, but results in gross overproduction of a product that cannot be sold. If the company does know its expected demand will not increase drastically, it may opt to keep its current equipment since it will not achieve a benefit by significantly increasing throughput or may invest in reducing costs rather than expanding the capacity.
Unfortunately, many companies do not have a deep understanding of their current performance or what options are available for modernization. Rather than using a balanced scorecard they rely only on the P&L. In these situations, leadership tends to delay modernization until it absolutely must, which can really hurt its business. It is not a conscious decision; the company’s leadership just does not have enough information to know when the right time is so it waits until it sees losses accumulating or the inability to meet demand.
Ideally, a company should not make modernization a one-time initiative; ongoing monitoring of a balanced scorecard, available technologies, and both short and long term forecasts will allow a leadership team to stay modern with less risk of becoming obsolete.
Tom Ambrogio, Sr. Consultant Tefen USA