Some years ago I was asked to take a look at whether or not Kraft should divest a particular manufacturing operation. The operation was on the supplier end of the value chain and senior management was not favorably inclined to being that vertically integrated, especially considering the slim margins, and wanted to sell it.
I really liked the assignment. I had the opportunity to look at the operation from all angles. I did some initial top-down performance and valuation work and then I did the all-important feet-on-the-street work by visiting the operation and determining how it fit in to the overall value chain. That’s where I saw one of the very few examples in my entire career of how cross-functional end-to-end optimization should work.
I have done numerous end-to-end value chain assessments over the last couple of decades. They ALWAYS uncover many new incremental opportunities to reduce costs or dramatically improve cash flow. Some even lead to other significant strategic initiatives to reshape the value chain. Even when companies have aggressive, world-class cost reduction programs in place, these opportunities remain.
You probably refer to it as ‘silos’.
It’s what Charles Duhigg refers to in his book The Power of Habit as fiefdoms. Basically, the processes between functions or departments or steps in the value chain “create truces between potentially warring groups or individuals within an organization”. But in doing so, they sub-optimize the whole and trap value.
Or maybe you’ve heard of the TV series titled, A Game of Thrones. It’s like that. Departments and functions operate in a mistrusting, uncooperative way with their neighboring functions. Born out of a number of causes and following multiple plot lines, leaders of functions operate as independent “kingdoms” with their own thrones, each with their own agenda, serving their own interests. The procurement kingdom optimizes their interests at the expense of the manufacturing kingdom and so on. You get it…
As a result, end-to-end value chain analysis indicates it costs businesses as much as 5% COGS in lost or trapped value.
But back to my assignment…
To my surprise, that wasn’t happening at this one Kraft operation. In fact, this supplying operation was taking a hit so that the costs could be optimized further down stream saving Kraft much more money than what was lost up stream. Additionally, the operation was in daily contact with downstream operations in order to make adjustments and optimize finished product quality for consumers.
It saved the operation from divestiture since the NPV of downstream advantages were 4 times greater than the NPV of the sale; not to mention the quality advantages.
I bring this up because it gives me hope; hope that businesses can transform themselves in such a way as to overcome the lost opportunities associated with silos. They can reclaim that trapped value. People can work together across organizational boundaries. End-to-end optimization is alive and well after all.