The Case for Value Streams

   

A piece in the HBR blog the other day serves as a great case for the value stream structure. To summarize it, the writer, George Stalk, describes a family owned construction business that was doing well, but was considering a more aggressive growth strategy. The strategy was fairly general, in nature – mostly a set of goals rather than a real strategy.

Stalk (who was a consultant to the business) looked things over and told them that their success had come in jobs that had a heavy engineering content with tight time and space constraints. He called that their “sweet spot”. He recommended they stick to such work and expand from a regional company to a national one – looking at acquisitions to do so – and stick to what they did best. According to him, “only 15% of the jobs bid in the last several years fit the sweet spot, the win rate for these jobs was near 50% (compared to a loss rate of about 80% for jobs outside the sweet spot), the average operating margin for jobs inside the sweet spot were twice as high as those outside it, and 70% of the company's engineering resources were going into bids that the company either lost or completed at very low (or even negative) profitability.”

I would look at the matter in a much different light (as I expect just about any lean thinker would – or should). For one I would pay pretty short shrift to data suggesting that some jobs were “profitable”, and some weren’t. 99.999% of the time such determinations of profitability, or lack of it, is based on allocations of fixed expenses and utterly worthless. 99.999% of the time, all jobs/products contribute to covering the fixed cost pool and profits, it is just that some jobs contribute more than others. Any time someone says ‘we make money on this product, but lose money on that one’; or ‘this customer is profitable and that one isn’t’, they are drinking the standard cost/allocation Kool-Aid and heading down a potentially dangerous path.

That said, I imagine he is right – the company does better at those engineering-intensive, tough jobs than it does on others. The solution is not to only do the jobs it is good at, however. It is to organize the company into two or more value streams.

The root of this company’s problem (if it can even be called a problem) is one-size-fits-all management. It seems as though the company has a very effective management infrastructure for executing the engineering heavy, constrained jobs. Their engineering and project management capabilities create value for those customers who need it. For other customers, however, those elements of their management and execution processes do not create value. In fact, they may detract from it.

They need to organize around a value stream – all of the functional resources needed to execute from start to finish – that continues to pursue those heavy engineering, constrained jobs they do well; and another value stream with those functional resources needed to succeed in jobs that are not so engineering intensive, etc…

The engineering staff in one value stream will be much different than the staff in the other; the project management approach in one will be mush different than the other. In fact, just about everything will be different because the value streams are aimed at very different types of customers with very different definitions of value. It will also result in two very different cost structures. Customers that value heavy-duty engineering and complex project management will have to pay for those things, but customers who don’t value them won’t.

The root of the limited advice the author gave is the assumption that management is management and that there is one best way. With a single, one-size-fits-all management approach a company has to do the sorts of things he suggests – limit itself to certain customers, channels or markets. Quite obviously one size does not fit all – else the company would not be so successful in some areas and not so good in others.

Any time a company says it does well with some sorts of customers, but not others, it is a cry for value streams – ‘we make money selling components to the Ag industry, but we don’t make very much selling similar components to aerospace’, for instance. Ag and aerospace have different definitions of value, and the infrastructure that serves Ag well is not particularly good at creating value for aerospace.

Were I the consultant for the company in the article, I could have saved them a lot of money and trouble. I would have suggested they watch the “ATC Value – A Way of Doing Business” video. They would have figured out the rest on their own from there.
http://www.youtube.com/watch?v=HpysKrqYxCI&feature=youtu.be

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