A formal capital planning process in manufacturing typically includes several stages: Project Evaluation, Project Initiation, Planning, Implementation, Monitoring and Documentation.
But even with a formal process in place for capital projects, there is one simple question that prevents effectiveness at virtually every one of these stages:
Where are we going?
We say simple, because it’s the obvious question influencing the likelihood of success for any business. If a firm doesn’t know where it’s going, it’s not likely to get there. Strategy 101.
Yet we all know it’s not that simple.
What makes this question so difficult to answer is that it’s not a single question. It reveals a vast multitude of questions and/or uncertainties that, if not articulated, analyzed and resolved, lead to significantly decreased effectiveness during capital planning and, therefore, significantly compromised projects.
At the highest level, these uncertainties include, but are not limited to the following:
- What opportunities are we seeing?
- What information are we missing?
- What are the current market needs?
- What are our overarching business goals?
Even seemingly lower-ranking uncertainties (those questions that are simply part of how a manufacturer operates), can be difficult to answer when the stakes are as high as they are for capital projects:
- Who needs to be involved in making these types decisions?
- What expertise should we be leveraging?
- What checks and balances should be in place?
- How will we measure success?
While our downloadable Move Toward the Future of Manufacturing Readiness Checklist (found at the end of the article this link will take you to) lays the groundwork for answering many of these high-level and operational questions, and also helps with actual implementation, effectiveness gaps can still creep in during capital planning.
It’s not that manufacturers are especially lacking when it comes to capital planning know how. It’s that companies in every industry are challenged by the uncertainties that stem from the original “where are we going?” question.
This means that the goal for everyone involved in taking a company to the next level (whether that person is in a C-level position or on the plant floor) is to create an organization that operates from certainty and is protected during the growth process by a tight process that’s designed to lock out risk to the greatest extent possible.
The following outlines the most common effectiveness gaps in capital planning and EFI Group’s insights and recommendations for closing them:
Inferior Capital Project Evaluation Process & Weak Initial Project Justification
While it may be clear to most industry professionals that selecting the right projects to pursue is make-or-break decision number one, 42% of respondents participating in TAPPI’s 2012 capital planning survey of over 8,000 industry professionals stated that there was no formal preauthorization evaluation process for capital projects at their firms. By no means does this imply that projects are green lighted with no forethought, but it does point to one of two less than ideal scenarios:
- Either the firm has no set criteria for selecting projects; or
- there is set criteria, but it’s allowed to shift based on who’s making the decision.
Both scenarios can create an effectiveness gap at the early stages of capital planning, because, clearly, decision-making is not being driven by business objectives in either case.
Further, firms that do have a formal preauthorization evaluation process will still be less effective at selecting and justifying projects if process exists only for process’s sake. In other words, process is meaningless without overarching direction.
But even if the evaluation process is based on a company’s long-term focus, weak initial project justification can trigger additional effectiveness gap in the initial stages by limiting a team’s ability to gain consensus and, therefore to garner adequate support. Strong project justification sets the stage for high-performing, aligned teams and successful outcomes.
Ill-Defined Project Scope
The effectiveness gap caused by an ill-defined project scope doesn’t require much explanation. It’s obvious to most that any lack in defining scope risks an outcome that doesn’t align with expectations and/or meet company needs.
Yet, inadequately defining scope is one of the most common mistakes firms make.
The good news is that it’s also one of the easiest to address through progressive project management techniques such as Lean PM. We covered the differences between traditional project management and lean project management in our Lean PM webinar in 2013. Those of you who took part in that will remember that failure to identify all customers in advance (including all internal customers) is one of the most common causes of an ill-defined scope. Doing this thoroughly will flush out all expectations and company needs in advance and effectively works to further define the scope.
If you’d like to see our slide comparing traditional PM to Lean PM, email EFI Group’s Jim Solich at firstname.lastname@example.org with “Lean PM Slide” in the subject line.
Inaccurate Cost Forecasting
Thanks to the tough economy, manufacturers have become highly judicious about controlling costs. Even so, an effectiveness gap can easily arise from a multitude of scenarios that result in inaccurate cost forecasting, including:
- Scope not well defined initially
- No appointed “owner” of forecasting
- Faulty tools for determining supply and demand
- Reliance on third-party suppliers
- Erroneous vendor charges
- Cost misallocations
Although inaccuracies in cost forecasting can also stem from factors beyond the manufacturer’s control, the single best action manufacturers can take to avoid forecasting mistakes is still to simply employ standard financial best practices company wide. After all, it’s very difficult to improve cost forecasting accuracy for any single project if the company’s financial function is not airtight overall.
Lack of Skilled Team Members & Resources
The close relationship between capital planning and future overall growth and success dictates taking an especially hard look at potential effectiveness gaps in capital planning that could stem from lack of skilled team members and resources or the availability individuals with those skill sets.
The key question to ask here is: What resources do we need to get where we’re going?
Answering this question broadly first and subsequently shoring up skill and resource gaps accordingly can smooth the way for capital projects related to growth, and can also guide the manufacturer in making hiring vs. outsourcing decisions for any single project. In other words, if the skills or resources fall outside of the infrastructure required to “get where we are going,” outsourcing may be the most viable option. But if those skills and resources are directly related to long-term business objectives, it may be more cost effective to consider hiring and/or acquiring.
We say “may” because tough economic times have caused many companies to (wisely) decrease their overhead. Therefore, today’s manufacturers typically do not retain all the skills and resources necessary to handle new projects. Here, again, outsourcing can be the smartest solution, enabling a firm to bring in necessary talent only as needed.
For those interested in the skills gap challenge, here are two previous articles in which we explored the problem and potential solutions:
Missing or Misaligned Metrics
This effectiveness gap includes failure to identify appropriate metrics, or reliance on a single metric (or too few metrics) in measuring progress and impact.
Further, it’s critical to select metrics that are directly tied to the desired result, as well as overarching business objectives – which again reinforces the importance of having a clear answer to the “where are we going?” question. In fact, when it comes to selecting metrics, this cannot be stressed enough as, too often, valuable time is wasted on measurements that ultimately have no bearing on project or business success.
At EFI Group, we also recommend that our clients employ screening questions such as “Can you measure it?” to flush out those qualitative attributes that need to measured in alternative ways. We also suggest determining the cost to measure each metric ahead of time. The reality is that while some metrics may be “nice to have” the cost is not worth the information they provide.
Sub-Par Management & Inferior Project Coordination
The failure of a project is rarely the result of failed technology or equipment or any other project “part.” Ineffectiveness more likely comes down to lack of communication, collaboration, business intelligence and/or other more “human” issues. Thus, in many ways, this effectiveness gap stems as much from fractures in organizational culture as it does from an individual’s or team’s weaknesses.
This means that the investment a manufacturer makes to ensure a strong organizational culture, as well as strong individuals and teams cannot be undervalued.
If the culture is strong (supports communication, collaboration, etc), shoring up this effectiveness gap can be as easy as finding a better PM process. If the culture is weak, the organization would be well advised to take a look at its global ineffectiveness issues – those “human” challenges that may be thwarting success across the board.
The Ultimate Solution
As stated throughout this article, closing effectiveness gaps in capital planning starts with knowing where the organization is going as a whole – and “knowing” is the constant theme from that point forward.
It’s not that uncertainties won’t arise or that something won’t happen that’s beyond the control of the organization – but the clear articulation of what we are doing, what we need to do it, what strengths we already have and what gaps we need to fill, are truly the underlying “missing pieces” in capital planning effectiveness and in project effectiveness generally.
The good news is that getting better at any point or stage in capital planning can make a big difference right away. We would even go so far as to say the investment you make in ascertaining where the problems might be before your next venture begins could be the single most important capital project your firm undertakes this year.