Operational Improvement Opportunities: Cost benefit analysis should always be step one
Friday 6th May 2011 - By Leo Alarcon Share
Operational improvement opportunities exist in most operations, no matter the industry, the size or the extent of the efficiency of the operation or how well the business is performing. The analysis that should be carried out by the management team of any business before embarking on operational improvements should include the cost and resources required to achieve the improvements required versus the improvements in cost, efficiency and output that will be achieved by investing resources into the improvement efforts. Identify the sources of wasted resources and quantifying the savings that can be achieved is not enough to gauge the true value add to the business.
Many managers will have a view on the size of the cost saving or improvement in plant performance they need to achieve, but few will actually spend time in assessing the resources required to achieve this and if it is in fact an efficient allocation of capital to create shareholder value. In most businesses there are cases where improvements can be achieved specially in the areas of waste minimization where many of the lean manufacturing concepts can be employed and inventory management improvements can yield reduced requirements of working capital and a boost in cash flow, but at what point do you hit diminishing returns to the point where the marginal cost of the improvement resources outweigh the marginal benefit? This is an important consideration and a cost benefit analysis should be done as to quantify the actual return on capital employed to boost efficiency or reduce the overall cost base of a business.