Return on Investment (ROI)

[Vishwadeep Khatri 268]

Q 346. The fundamental idea behind the Kaizen approach is that small changes add up to a big one. In such an approach, should the emphasis be on justifying the change (via ROI) or should it be on empowering people to make these small changes? Can over-emphasis on ROI’s of such minor improvements undermine the value of empowering people to identify and make such changes?

 

 

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[Rajesh Chakrabarty 17]

For most Investors, the purpose of the business/ initiative is to harvest more money from the money invested, which is a fair objective. The top three business matrices that is on top of mind is self sufficient Cash Flow, ROI and Profitability- ideally in the mentioned order. Hence, it is common to see that profit & ROI responsibility is delegated down the line. In many organizations, where the investor has maximum say/power, ROI has become the system of management control.

Simultaneously, the top management is also keen about operational excellence, revenue generation and brand building. Continuous improvement across all processes is a core necessity. Kaizen is a proven approach that brings about continuous improvement and contributes towards profits for the organization.

It is but common knowledge that the Kaizen methodology has to be implemented as a culture within the organization – a culture of continuous improvement by;

-      Encouraging commitment throughout the organization- Involvement.

-      Making kaizen a part of the routine

-      Binding it back to everyone’s job, through Improvement targets and attached incentives. - Departmental KPI /KRA which are allied with KPI /KRA of other departments

-      Measuring and announcing results

-      Communicating – across the organization

-      Being Deliberate and patient

-      Repeating/ replicate/ scale up  what worked well, wherever applicable.

Both Individual initiative and Team effort is required at all levels, across the organization to build a culture conducive to Kaizen approach. Cross functional collaboration is essential for overall efficiency and a smooth value chain.

 

On the other hand, Return On Investment (ROI) is calculated by taking the difference of the income and cost of an activity / project – The profit generated. This is then divided by the cost.

ROI = (Net Profit/Total Cost)

The Base is thus cost and the ROI is best when the cost is lowest.

If the costs are higher than the immediate estimate of sales, there is a risk of negative ROI, which means that the investment lost money, so you have less than what you would have had if you had simply done nothing!!

 

The above mentioned mathematical thinking may actually inhibit initiative levels. The fundamental idea of kaizen approach is defeated and will undermine the value of empowering people to identify opportunities for improvement and make small changes if required

For Example, if ROI is given too much importance, say in a food production unit; The urge for improvement in quality / taste will be taken over by the necessity to reduce cost of production. This can lead to compromise in QA which will impact the overall customer satisfaction and resultantly less revenue and profitability for the organization. Thus, though the ROI may be improved in the production process, it is at the cost of company profits.

Another point is that overemphasis of ROI on improvement initiatives may not anyways give a correct picture of the ROI, immediately, in many cases.

For Example, an improvement in the quality of a product or a new product that has been developed will affect performance significantly only in the future, over a period of time. Similarly, any changes of small improvements, in various levels of the organization will collectively affect the future performance of the organization. Such changes or improvements will not reflect in current profitability or ROI.

The best example I can think of, which most of us will relate to is, a sales improvement programme in an organization will take improvement steps in marketing campaigns as well, along with other initiatives. But focusing on immediate ROI of these activities can hurt the brand and the long term goals and vision.

I believe, Immediate results can be strong indicators of how potentially successful your initiative is, but a proper follow up and continuous improvement will only ensure that the immediate returns do not disappear as quickly as it came.

Thus, as mentioned above, it might not be possible to evaluate performance / impact of improvement initiatives on the basis of the objective of ROI.

It is best to get away from blindly emphasizing on ROI from the minor improvement initiatives and develop procedures that best suit the requirements of each organization/ process. The ideal method would be to develop a proper Kaizen culture across the organization and keep the ROI calculation at the organizational P&L level. Periodic reviewing of the improvement initiative(s) at departmental levels which are intended to contribute to improvement in the organization’s performance, is a must!!

[Sundeep Kailwoo 6]

The expectations to strike a maximum Via policy of Maximum gain with Minimum investment is age-old. The philosophy to optimize the resources and gain maximum profits is always the underlying objective of a profit-making organization or a Function within an organization. The same holds true for a Continuous Improvement Function in an organization where they would want to gain maximum improvement in a process with minimal effort, disruption, and Cost. When we put Investment ( In Money, People, Material, Time, etc.) and Return ( Profits, Better Skilled Employees, Improved Durability, etc.) in a functional Equation to get an ROI ( Return on Investment)= (Net Profit / Investment)*100.

The Continuous Improvement team as one of the Objectives is to build a Quality culture from the Bottom Up or Top Down will encourage the teams across all levels to participate and contribute to be part of Quality Culture in an organization. Apart from Training the employees on various Quality Tools and Techniques, familiarizing them with the concepts and theories, actual participation in identifying, Implementing the changes would be the ultimate success rate for the CI function as far as Employee Engagement in Quality Practices is concerned.

This brings us to the Topic of the Day whether the ROI gained through improvement projects Via multiple small projects weigh heavy than the number of improvement ideas that engage the Employee to be part of Quality culture and Practices.

Employee engagement as part of an Organizational wide Practice is critical to gauge the success rate for a Practice that I rolled out universally, bypassing Functional boundaries. This holds true and Pivots towards the CI Team metrics post-training the population in an organization on Quality practices.

Kaizen, not only refers to driving continuous improvements in an organization but it's equally essential to engage all levels of an organization to drive these Improvements. Thus not all Improvement idea , opportunities may lie in a Bing Bang Bucket but small , quick , low hanging fruit can yield a greater ROI over a period of time for a Function. Encouraging and acknowledging the Employees who are motivated to pursue their learning into a practical outcome , will only lead to a culture which is built organically within an organization rather than always engaging few experts to Drive strategic improvements in an Organization. CI team is the Experts that can mentor , guide the Employees to explore Kaizen in their day to day activities and make the change on ground for the team they work in .

Finding a fine balance and following the strategic vision of an organization , Driving small Projects with Limited ROI Vs Big Projects with Visible Bottom and Top line Impact, should hold its own merit in an organization. One shouldn’t discount The Impacts and requirement of an ROI driven project vs Employee Engagement to drive small yet work impacting improvement projects .

[Shiddalingesh Sukali 0]

One of the fundamental aspect of developing continuous improvement culture is 'Empowering the People' and involving & engaging people across hierarchy to be part of improvement journey. So when we look at the stages of quality evolution is any organizations, it always passes through these 4 stages -

1. Ad-hoc fire-fighting

2. Single, stable quality processes

3. Integrated quality system

4. Quality excellence

 

The Kaizen is used to involve employees in this evolution journey and improve the overall organization especially in stage 2 and 3. Even though we look for ROI in a typical L6S world, but many of the Kaizen projects may not directly provide the ROI, rather they may lead to the areas where we can generate better ROI. For ex: Kaizens are done on standardize & harmonizing the processes, establishing process controls, deploying operation basics such as VMS, Tiered accountability structures etc. So ROI is always preferred, but may not be a primary goal when it comes to Kaizen. But people empowerment & engagement is a primary goal of a Kaizen way of working!

[Mayank Gupta 41]

Rajesh Chakrabarty has given the best answer to this question by supporting his answer with examples.