By Tom Cassidy, Guest Contributor

Everyone Provides Value

When I first started in continuous improvement, I was trained that steps in a process were either value add or non-value add.

To be considered value add, the step had to change the form or function of the product or service, be done right the first time, and be something the customer would be willing to pay for. While the concept sounds simple, the conversation was never easy. In these same training classes, we had legal, engineering, finance, customer service, and other functions. These folks all felt they also added value to the organization.

It felt like we were asking a large portion of the organization to help with process improvement, all while telling them everything they do is non-value add!

Over time, I did see subtle changes. But, like many concepts, depending on your level and role in the organization, this concept can be ambiguous.

While I would never try to discount the importance of the paying customer, we often downplay the importance of other stakeholders. For example, many companies have investors who seek to understand and mitigate their risks. These investors value a strong legal and finance function. While investors might not even buy the product, their perspective needs to be considered if the organization aims to be sustainable.

In this article, I will attempt to define and give examples of value add, business value add, and non-value add. My goal is to give examples which make you think about the value of understanding all requirements for all stakeholders.

Let’s look closer at the three types of value.

3 types of value

“I watched, in horror, as a lean charlatan proceeded to tell 95% of the class that they were all non-value add. The guy was an idiot.” – Mike Loughrin, Lean Coach and Champion For All Stakeholders

Value Add

3 types of value

Value add are activities which are necessary for meeting customer requirements.

In the purist sense, this is what the organization gets paid to do, and nothing more. It’s important to have this perspective; this keeps the paying customer front and center.

A few examples:

  • You work on an assembly line making telephones
  • You drive a truck delivering those telephones
  • You help customers understand their options before buying those telephones
  • You are an author writing a great article on the three types of value
  • You are a lawyer providing legal services

The list of value add activities seems endless. The important point is to understand customer requirements and focus on the things your customers will pay for.

A word of caution is to recognize that identifying value add activities can be a lot harder than it sounds.

“An economist is someone who knows the price of everything and the value of nothing.” – misquote of Oscar Wilde

Business Value Add

Value gets more complicated when you include more abstract business goals, such as sustainability and social responsibility. Who are the customers for these activities?

I personally like the term Business Value Add for the types of activities which do not go directly into your products and services. These are the activities which are necessary for meeting stakeholder requirements, often related to maintaining the sustainability of your organization.

Consider, for example, attaching a company logo to a product. If I was a purist, I would probably say this step is non-value add. Does it change the form or function of the product? Is the customer willing to pay for it? In many cases, I think the answer to these questions would be no. So why, when I look around my home, almost everything has a logo on it? Even the garbage container I put out on the curb has a company logo on it. If I pull the logo off of my refrigerator, it still keeps my food cold.

Now, of course, there are exceptions. The Levi’s logo on the back pocket does add value as we all know a pair of blue jeans from Levi’s is worth more than some generic brand.

While more nebulous than value add, there are many examples of business value add:

  • You create a marketing campaign for the launch of a new service
  • You audit the books and report financial performance to shareholders
  • You are the project manager for the lean transformation at your organization
  • You onboard new employees and get them all squared away with their benefits
  • You are the executive leading development of the annual plan and identifying strategic initiatives
3 types of value

Non-value Add

3 types of value

By process of elimination, non–value are those activities which are not valued by any stakeholder. These are the activities which can be classified as waste.

Non-value add activities cannot be tied back to any stakeholder requirement.

As I mentioned earlier, this value add stuff is not as easy as it seems. We often make assumptions and quickly move waste into the business value add category, just to end an argument. For example, you may create a report which only one executive claims to read. It takes resources to create and no one identify how creating the report is non-value add. We convince ourselves how the one executive must be using the report for making some critical business value add decision.

In many ways, non-value add is the easiest type of value to identify. For example:

  • You wait outside your supervisor’s office seeking their rubber stamp on some paper work
  • You second guess the forecast provided by an optimistic sales person
  • You move product into a warehouse so it can sit and wait for some customer to place an order
  • You inspect the work of others who are not trusted to get it right the first time
  • You call customers to notify them that their order will not be shipped on time
  • You cut off your customer’s ear while giving them a haircut

Measuring Value

To extend the value analysis, I’ve seen many organizations create a ratio, or percentage, of value add activity.

For a value add ratio, you compare the value add time to the total time of the process. For example, if you have value add time of 5, business value add time of 7, and non-value add time of 28, then you have a ratio of 1 to 8.

measuring the value add ratio
calculating the value add ratio
finding the value add ratio
.

For a value add percentage, you divide the value add time by the total time of the process. For example, if you have value add time of 2, business value add time of 3, and non-value add time of 15, you get a value add percentage of 10%.

measuring the value add percentage
calculating the value add percentage
finding the value add percentage
.

A value add ratio or percentage gives you a great indicator of where you might start looking for improvement opportunities. It’s also a way to get agreement from management to allocate resources to a process improvement project.

In my opinion, the value of categorizing activities into value add, business value add, and non-value add is how you will spark a conversation. Learning how little time is actually value add will generally create a discussion around what can be done to improve the process and provide more value to customers and other stakeholders.

You do not want to get lost in the weeds and waste time fine tuning your numbers. For most, the data is hard to find and debating what to label each activity is non-value add.

Use the analysis to rally around getting to work.

Summary

3 types of value

Like many of our lean tools, understanding the three types of value is a key to gaining alignment and collaboration.

The important output of any value analysis activity is to understand why and for whom we are doing something. Just like root cause analysis, you may need to ask yourself “why” five times in order to get at the true reason something is being done.

But, taken too far, these activities can actually cause more problems than they help solve. Without understanding all stakeholder requirements, we can easily change processes and eliminate a source of value.

When analyzing value, you need to be very clear on what your stakeholders need.

About the Author – Tom Cassidy

Tom is a US Army Veteran with over 20 years of strategic and operational leadership, specializing in solving complex multi-dimensional problems across the supply chain. Tom has worked with medium to large organizations in retail, business services, information technology, oil & gas, and the federal government. He has trained and led global improvement teams, provided coaching and facilitation to executives, and never hesitates to get his hands dirty with the people who do the work.

Tom currently works with Senior Executives to develop programs to reduce risk and improve operational performance. Most recently, Tom has worked on projects to optimize inventory, reduce commercial risk, and reduce transportation costs.

Contact: Tom

See: LinkedIn profile

3 types of value

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