Lean project iceberg

Lean project iceberg

A senior engineer works for a construction company. He was offered to sign up for an MBA program after his manager identified him as a high potential employee. This articles describes a hidden factory of projects.

This engineer’s teacher suggests to assess a recent major project for his thesis assignment. The management team expect that he will take on a key financial topic. Profits declined in a concerning way during the last two years. Bids are hard to win and margins decline. As a response, the board was extended with a Chief Financial Officer. Despite low pricing, however, competitors are reporting profits. Our MBA candidate will be mentored by a senior manager, who in fact founded the company. The experienced MBA teacher convinces the mentor and the management team to support the topic he proposes. Both parties agree that one project will be studied, having typical characteristics for their business.

Lean projectWorking top-down, he starts with the project errors, only a few. These resulted in major repairs and a compensation payment, since the contractual requirements were not met. Our engineer was flabbergasted by the size of the “cost of non-quality” as it was called in the books. For late completion 3% of the total value was paid. It was caused by late delivery of the heating systems. Actually they were ordered very late in order to reduce blocked capital. The vendor then could not complete the order in time. Eventually it was obtained through a traditional vendor that they stopped using because of the high prices. You can imagine that full price was charged: 2% of total project value was lost. With a few similar issues the total was 7% of the project total value, thus taking half the anticipated profit. He hesitated to share his findings with his mentor, still surprised by the amounts. His mentor was not surprised though, he explained this was common in construction. He suggested the engineer always to offer bids with a margin of 10% at least.

The second part of the thesis was more difficult. Major costs from the first part were well documented and visible to higher management. But now the engineer traced many costs that he interpreted as non-quality first, but when talking to people involved he was kindly suggested to change his opinion. He remembered a discussion with a project leader on a crane that arrived on an early date because the project leader had forgotten to notify the crane company. Although the crane company eventually did not charge the costs, the single day rental prices were increased to compensate. Thus the extra invoice was never sent, and the costs were spread. Many more similar examples turned up, counting to a total of 5 to 10% of total costs. Behind his back the project leader complained to the management about his academic, naïve approach. Our engineer was reproached not to understand project reality. If his mentor would not have taken stand, his thesis work would have been stopped by some senior project leaders. The reflection with his mentor gave new insight; 5% of the costs were simply avoidable, but the second 5% was a consequence of risks, taken to achieve project speed. And speed was also a key parameter that the customer actually was willing to pay for, although definitely less than 5%.

For the third part of the thesis, data was not available at all. Having in mind the negative responses of the project leaders, our engineer anticipated hostility from his former colleagues this time. When he started his data collection, very carefully, in his former discipline group, he could not have been more surprised. Without exception he was overloaded with detailed stories by colleagues who reported it as “only examples”. All were stories that never had been told before, and most were originating from personal frustrations with project decisions. It was difficult to estimate a value, two examples struck his mind. The first one was the roof construction. The roof beams had been over designed by a misunderstanding. But when the responsible engineer wanted to reduce the size (and thus the costs), project management urged him to keep silent. The heavier beams would not be noticed by anybody and the financial impact would be small (0,1% of the total). Changes itself, however, would become visible in the number of changes, a negative KPI which was introduced with the Lean Program “First Time Right”. The second example was very different. All engineers complained about the time it took to get their work signed off. The fact, that somebody would verify their work was not a problem. But it frequently happened that an engineer was summoned to send his work, when it was actually in the sign off loop. Several engineers estimated at least half an hour a day spent in chasing. He could have counted this for 1/16 = 6%. But the MBA teacher suggested asking a second question: “what part of your workday is available time?” Since the half hour was subtracted from only 5 hours remaining (3 hours overhead total), it counted 10%! This was chasing signatures alone, not even other costs of non-quality. The reflection with the mentor was helping a lot to calm our engineer again. They agreed wisely to report again 5 to 10% in a similar way, knowing it was much higher. But both recognized there was a world to win. At this stage it was not wise to generate numbers that would block people’s mind. The mentor took responsibility for reporting equal values in each area, as a political decision.

The consequence of the finding was startling though. The data would indicate that the company was 30% overstaffed? If employees would intuitively have understood, could that explain the failure of lean introduction some years ago? A frightening thought for both. Was the iceberg still melting? The mentor confided the engineer, that he really gained new insights. The thesis work would explain the financial problems in a way that management would not accept easily. The mentor would schedule a full day with the board, using his authority as a founder. He promised that the messenger would not be blamed this time. The management summary was very short and simple. The MBA teacher suggested using a picture as key messenger (see first page), to reduce resistance against the message.

MBA-preliminary conclusions:

Cost of non-quality is at least 15% avoidable cost on total project value. This explains profit drops. A high level of trigger events in engineering builds up via invisible project costs to eventually some serious errors. If the conclusions are true, the company has always approached the problem in a wrong way. Top down each error was punished and extra checks were introduced to prevent it from happening again. The result has been that information is covered, but costs remained. Would we need a bottom up approach to remove the trigger events. That sounds like the basic lean concept: First time Right? Be aware of the staffing implications, it will be a true transformation process!

Leo Monhemius
    Vitalizing struggling Lean Six Sigma programmes is what I do. Or starting from scratch! My challenge is simplifying methods to the minimum, thus only keeping the essential. Many projects require a simple tweak to bring success. Apart from academic knowledge and balanced approach, many programs just need raw energy as well. The new training facility in Zuilichem provides an inspiring accommodation for training or reflection sessions.Specialties: The handouts and course material is all full written text (not powerpoint!) and Dutch text. A specialty are the many hands on training tricks, of which the "paper factory" is the most extended one. This factory enables the training of the organisational development of a group, using sequential simulation runs of table top process industry. http://www.dutchsixsigma.nl

    2 Comments

    Mar 3, 2017 at 10:23 AM

    Hello, Mr. Leo Monhnemius. It’s a great article with the proper illustration of some important possible issues at an organization when significant consideration wasn’t done before a start of the project. I have gained ample information with this article.

    It was mentioned, an approximate negotiation of 10% -15% is expected as project silent cost wastage. When it is true, there will be a huge imbalance in profits of multinational companies with their giant projects. Will that negotiation be the only remedy to overcome this issue or it may vary from project to project?

    A clear quotation is made with every single, which is needed to spend and have spent, before and after the project start. where was the overlook took place leading towards a rise in hidden costs? Does a project manager plan a project with Lean six sigma applied in it can neglect further hidden costs, overdue delivery of the project and labor costs?

    What is the best approach for this types of issues in the projects?

      Mar 3, 2017 at 3:26 PM

      Hello Prudhviraj, thank you for your kind comments,
      It is my opinion, that in many area’s of project work, this 10-15% is included in the quotation and perceived as fact of life costs, rather than waste. A first project organization to control these costs will make huge profits and at the same time erase competition.

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