Operations are NOT “Cost Centers”!

Rick Bohan

One of my constant refrains is “Don’t implement lean as a cost reduction initiative.  You’ll just screw it up.”  Implementing lean as a cost reduction project is a sure fire way to failure but it’s probably the most common foundation for getting started.  I think this comes from the idea that manufacturing operations are “cost centers” rather than “strategic value creation centers”.

I read a good article in Industry Week yesterday that contained the following statement:

“First, most manufacturing plants are cost centers, i.e., they do not have their own sales, marketing, finance, legal, etc., on site and some don’t have their own design engineering. If a factory had all of these functions at the site, it would likely be a very small company and the site manager would be reporting to the CEO. Those are the types of organizations where the plant is a profit center.”

Now, the article was a good one because it went on to enumerate and discuss “must have” metrics that manufacturing plants should track.  But this premise, that manufacturing plants are cost centers because they don’t have lawyers on site, is specious.  And it’s an important error because managing manufacturing as if it’s only a “cost center” has led to much of what’s wrong with manufacturing today.

When manufacturing operations are managed only as a “cost center”, managers acquire a mind set that spending money is bad, even if it is an investment in improving product performance, customer satisfaction and saving money is good even when it diminishes the value customers receive.  Operations managers see their jobs as merely controlling the budget, rather than one of keeping present customers happy and helping  to acquire new ones.

In my experience, this “cost center” focus is too often taken to extremes.  Machinery, tooling, equipment, materials are not kept viable.  Facilities are inadequate to product flow and employee comfort, much less employee safety. The smallest requests for improvements in supplies and equipment are ignored or turned down altogether.  Employee and management engagement diminishes when they come to believe that no investment in product or process improvement will be approved, no matter how beneficial that investment would prove to be.

I’m sure that many who are stuck in the “cost center” frame will respond,  “Yeah, but you can’t just throw money at problems.  Cost is important, after all.”  But it’s not a binary choice, is it?  We have more options available to us than either “control costs at all costs” or “spend profligately on any idea that comes along”.  Managers (and their associates) who see manufacturing operations as “strategic centers” are effective at improving product quality and customer service while keeping costs low.

Managers stuck in the “cost center” mindset imagine that the only reason that they gain or lose customers is price. My experience is that’s not true, even for companies making what the rest of us might consider to be “commodity products”.  I had a client who bought aluminum strips from two sources, one in China and the other in Indiana.  The source in Indiana eventually lost my client’s business but not because of price.  Product quality and customer service got to be really bad and the company was unable (or unwilling) to fix the causes.  I’m certain that the Indiana supplier kept a close eye on its expenses.  I’ve worked for a coal company and a steel maker that are both out of business now.  Both of them had a very strong “cost center” focus.  Believe me, variances in copier paper expenses were tracked.

I think I’ve mentioned that I once had a client for whom I conducted regular assessments of their operations using the Baldrige Quality Award framework.  When I’d ask plant managers about the “strategic plan” for the operations they oversaw, many of them simply handed me their budget.  I’d then say, “But what I want to see are your goals for improvement and development of these operations.”  Their response was, “Meeting this budget is the only goal I have.  And if I admit to having others, my career would be in jeopardy.” Meanwhile, some of these plants had equipment being held together with vise grips, industry high scrap rates,  and finished goods inventory that couldn’t be sold because it had gone bad.  They were managing their operations as “cost centers” even as waste within their plants was immediately evident to the most casual observer.

I hope my point is clear…that managing operations as a “cost center”  too often gets exactly the results managers don’t want…high cost operations that don’t serve customers well.


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