Book Excerpt: Value Focused Management in Wholesale Distribution
Value is a standard of worthiness characterized by usefulness or importance. Value plays a large role in our subconscious decision making. For example, when looking for a tool, we generally select the one considered most useful for the job.
When we have conflicts in our schedules, we normally give priority to those things that carry the most importance. As human beings, we constantly pursue the things we consider most worthwhile, those which possess value.
If managers will make an effort to utilize Value Focused Management, they can increase effectiveness. By centering their attention on usefulness and worthiness, managers can create higher levels of value. When managers create higher levels of value, they increase the potential for success.
The Value Equation
The business manager can increase value by adhering to the following rule:
Value is the net effect of Quality, Price, Lifecycle cost, and Hassle factor.
Quality refers to adherence to standard or lack of defect. Price stands for the short-term dollar investment someone must make to secure products and services. Lifecycle cost represents the long-term monetary consequence of our purchases. Hassle factor relates to the personal interpretation of how satisfied we feel about a situation.
Four variables make up the value equation: V=Q+P+C+H, where Q = quality, P = price, C = lifecycle cost, and H = Hassle Factor. This equation can help determine the overall value of a given product, service, person, idea, or activity. Lets look at the variables individually to see how each relates to value.
Value is not quality. Yes, in order for something to possess value it must be de-fect-free; however, value represents goodness of a higher magnitude than mere quality. Value denotes those things that we consider desirable, and at times this means more than absence of mistakes.
Price, the second variable in the value equation, represents the short-term dollar investment something requires. For example, if a customer is buying a car, the price is the sticker price less any negotiated discount. What someone pays for life insurance represents price. Employees wages make up the price a company must pay to secure their services. The obvious nature of price makes it an easily overused benchmark. The perceived importance of price needs to be lessened because it often blinds managers to a more important but less noticeable issue, lifecycle cost.
Whereas price represents a short-term measure, lifecycle cost represents a long-term one. Lifecycle cost equals the long-term dollar investment someone makes to own, use, apply, or maintain something. For example, the cost to own a car includes such things as fuel, maintenance, finance charges, and repair costs. If an employee has repeated absences, and the company must offer other employees overtime to pick up the slack, the overtime paid would have to be labeled lifecycle cost. As you can see, lifecycle cost is not nearly as obvious as price. It should be, though, because low price does not always equate to low cost. Managers and customers alike need to understand the importance of lifecycle cost, which correlates closely with the last variable: hassle factor.
In the value equation, hassle factor measures our feelings about something. Whereas quality, price, and lifecycle cost are somewhat objective, hassle factor is subjective. It accounts for things being pleasurable or aggravating, convenient or inconvenient. When we become terribly upset with a product, service, person, or situation, nothing not even low price can restore a sense of value. For example, if a consumer of a low-priced automobile experiences numerous problems, driving up both cost and hassle, the likelihood of the same car being purchased again is quite slim. If customers are faced with a high hassle factor, they will not perceive value, no matter how defect-free or inexpensive something is.
Since all four variables affect the value equation, they all need to be given due consideration.
The imbalance of even just one variable can completely destroy the possibility for value to exist.
The value equation needs to become a guiding force for managers: It helps bring a sense of clarity to the decision-making process. As a management principle, value can help managers lead with confidence, which is important if employees are expected to respond and behave in positive fashion. By elevating value levels throughout the organization, management stands a better chance of creating success.
Value is an irreplaceable principle, since it can be applied to any facet of a business: customers, employees, and processes. By simply making a few alterations to the value equation, a manager can effectively evaluate these three areas for the presence or absence of value. The different value equations need to be diligently applied because every organization needs a constant, unending quest for value: a standard of worthiness created by usefulness or importance.
One application of the value principle is specifically oriented toward the customer. The customer value equation is Vcustomer = Q+P+C+H.
Quality exists when products and services are free of defect. Price is normally evaluated by the customer, who asks two questions, How much do I have to pay you? and What does the competition charge? To the customer, lifecycle cost represents the ongoing financial consequences of the chosen product or service, and hassle factor measures convenience and satisfaction. In short, customers evaluate value by comparing what they get to what they pay. This goes for both products and services, each of which has its own value formula.
The Product Value Equation
Any item can be analyzed by the product value equation of Vproduct = Q+P+C+H.
In short, higher-quality items normally carry a higher price, but lower overall cost and hassle. Such a scenario high quality, high price, low cost, and low hassle gularly produces the perception of value.
For example, if a customer goes out and shops for the lowest price possible, he should be prepared to face the anticipated consequences of low quality, high lifecycle cost, and high hassle.
Now, does every customer want to have high quality, high price, low lifecycle cost, and low hassle? No. And this is an important point for managers to understand. Value, as defined by the customer, exists only when the product or service being offered is directly in line with the customers needs.
Its important to understand that product value depends on customer needs, and quality should be viewed as nothing more than a portion of those needs. That being said, its also important to know that the absence of quality destroys the ability for value to exist. If the cheap cooler happens to break during our trip, we would realize a failure in product quality and be dissatisfied with its performance. The absence of quality, in this case, would mean our needs were not met.
Understanding the value equation will help companies begin to reduce their tendency to conduct business as if price were the most important factor to all customers.
In my opinion, there are two ways to reduce the importance of price: 1) increase value in the customers eyes, and 2) offer something the competition doesnt. Doing these two things will reduce the customers desire to shop only for price. For example, by working closely with one distributors customers, I was able to better determine their needs.
Determining their needs helped me create value-added services for them, services that the distributors competitors did not offer. These services were so appreciated by the customers that they readily admitted to buying from the distributor that offered the services, even though its prices were not the lowest available. By getting everyone focused on the value concept, the customers were more satisfied, and the distributors gross margin dollars increased more than 60 percent! When value exists, everyone wins. The same cannot be said when business is based on low price.
Distributors should teach and explain the value equation to customers. If a distributor possesses high-value products and services, it should promote the potential for lower life-cycle cost and hassle. Though its not wise to speak poorly about the competition, if it has a reputation for low value, ask the customer to make comparisons. Asking customers to focus on value may not always work, but theres certainly no harm in suggesting they do so.
The Service Value Equation
The service value equation, Vservice = Q+P+C+H, closely resembles the product value equation. Any business can differentiate itself from its competitors by providing higher-value services. This includes even routine services. Reducing hassle can increase value.
When a customer experiences convenience, value rises sharply.
There are two things to consider when improving services: business resources and customer worth. Dont waste your valuable resources on customers that strong-arm you into ridiculously low prices or refuse to promptly pay you for your efforts. Protect your good customers by not catering to your bad ones.
Most customers do business with companies they consider to be most useful. By learning about and providing what customers consider to be most useful, any business can increase value and dramatically improve its position within its own marketplace.
The Employee Performance Value Equation
The value equation for employee performance is Vperformance = Q+P+C+H. In this equation, quality refers to error-free work. Employees making fewer errors possess higher value. Pay represents the wages and benefits a person receives. Cost consists of a persons impact on resources, customer service, and profit. Hassle factor entails the amount of energy and supervision a person requires before they regularly provide acceptable performance and behavior. Behavioral problems, poor performance, and resistance to continuous improvement cause the hassle factor to skyrocket.
Pay should always be indicative of an employees value. The most valuable employee produces the highest level of quality at the lowest cost without hassle. This person, therefore, deserves the highest pay, irrespective of years of service. As quality declines and cost and hassle increase, pay should go down.
Quality refers to an employees ability to perform to some standard, such as number of errors produced. By trying to reach this standard, the employee is forced to work inside the box, meaning he or she merely meets standards and no more. On the other hand, value refers to employees working outside the box. Employees who add value do more than just adhere to standards: They create new and better ones. Surpassing standards entails having a positive effect on coworkers or inventing better ways of doing something. We want employees to add value to a process, not merely adhere to it. Yes, employees must adhere to standards, but at the same time they should be looking to constantly improve them.
As a rule, I tell employees that their performance will earn them one of three grades: A, C, or F. Those who can contribute to tomorrows success by adhering to standards and increasing value receive an A. Those that merely adhere to standards receive a C. Those who fail to even meet basic standards receive an F. The last group can really hurt the company and must work diligently to improve, or the company cant afford to keep them. You dont need to threaten F employees: Just let them know, in no uncertain terms, that improvements are in order.
Lets look at three order pickers to understand the difference between the three grades. Picker 1 produces a large volume of work but also a considerable number of mistakes.
Since volume of work should never be the top priority and mistakes drive down value, this employee will probably get an F. Picker 2 produces an average amount of error-free work. This is the minimum level of performance that should be accepted. This employee receives a C, since value is neither added nor taken away. Picker 3 not only produces error-free work, but pushes the standards upward. This employee receives an A.
It is the managers duty to help F employees become C employees, and C employees become A employees. Though I do not expect all employees to receive As, I certainly do not expect there to be any long-term Fs.
A manager can determine value by observing how employees think and work. Consider the three pickers. Picker 1 picks items with a somewhat high error rate and then simply puts them on a cart headed for shipping. Picker 2 picks items with a lower error rate and also places them on the cart headed for shipping. The only difference between Pickers 1 and 2 is the error rate. Picker 3, however, pulls material with high accuracy and thinks to himself before placing it on the cart, Okay, this cart full of material is about to go to the shipping department. Since I know what the shippers job entails, Ill stack the material in such a way that the shipping department can more easily do its work.
It is first the thought process and then the accompanying action that makes this employee so valuable. Once Picker 3 does this a couple of times, the shipping department will ask that it always be done this way. The new standard, created by an employees thoughts and actions, helps increase value within the organization.
If Picker 3, the value producer, happens to show up 10 minutes late for work some morning, Im not going to make a big deal of it. On the other hand, if Picker 1, the value reducer, shows up late, Ill take the opportunity to address the situation. Yes, Picker 1 is likely to complain that Picker 3 was late and you didnt do anything. But this is a perfect time to say, Hey look, this doesnt have anything to do with me liking Picker 3 more than you. This is a work performance issue. Lets focus on your value for a moment and not worry so much about Picker 3. There are some things I would like to work on with you. Are you able to discuss them now or should we do it later?
Leniency and leeway should be granted only to those with exceptional value, not those with sour dispositions, extended years of service, or flattering charm. No double standard exists here when you consider the differing levels of value.
The employee value equation can be applied to teams as well as individuals. Lets say a company president has reporting to him six managers, representing six operational functions. Without the value principle to guide the management team, each member might work to fulfill an individual agenda: personal financial gain, minimal involvement until retirement, increase of control, avoidance of growth or challenge, and so forth. If the president allows this fragmented team environment to exist, he will be pulled in six different directions, addressing six different agendas. Such a team lacks cohesion and constancy of purpose. This team needs to focus on one thing: value. By evaluating everyone in terms of value, and not friendship, the leader can produce a stronger team.
Processes can also be evaluated by the value equation: Vprocess=Q+P+C+H.
By measuring the output of a process, we can easily determine quality. If the output is correct, quality exists. The employee receiving the output, the internal customer, can best evaluate quality. Having internal customers measure the output of internal suppliers represents the best means of determining quality, since the user of an output can better determine whether or not quality standards are met. Its important to have internal customers measure quality for three reasons: 1) Most people are unaware of the quality they produce, 2) low self-esteem causes some to be overly critical of their own work, and 3) ego causes others to be too self-flattering.
Managers must understand that two variables influence the quality of an output: process and employee. Of the two, process should receive the most scrutiny, since it normally accounts for upwards of 80percent of quality problems. If a manager works to remove problems from a process, employee performance will improve markedly. My rule of thumb: If a process has not been reengineered, the process should be scrutinized.
Value Focused Management in Wholesale Distribution is available from National Association of Wholesaler-Distributors Publications.
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