Saving Money Through Structured Problem-Solving

Executives can’t lead effective organizational change just by sitting in their offices. As busy as they are, leaders need to find ways to observe fundamental work processes in their organizations. When they do, they usually discover that there are gaps between concept and reality in how work gets done. Michael Morales’ experience — in which identifying and addressing such gaps led to his company saving $50,000 in just 60 days — is a case in point.

Mike is the president of Corporación Industrial S.A. (CISA), a company based in Panama City, Panama, that makes corrugated boxes. Conceptually, making corrugated boxes is relatively straightforward. Wood is first turned into pulp, which is then treated, pressed, and dried to form large sheets of paper. Those sheets are then glued together to create flat pieces of corrugated cardboard. Finally, the cardboard is cut to size, folded, and glued to make a finished box.

That’s the process — in theory. In practice, however, it entails moving heavy loads among large, complex machines and executing a series of precision operations. As with most complex industrial processes, the box production process at CISA was designed carefully at the outset. Nonetheless, it was never as efficient as the company’s managers had hoped.

Prior to the project, Mike and his team had concluded that the biggest problem in their manufacturing process was unplanned paper losses — in other words, paper that was damaged during movement between operations or lost due to incorrect cutting. Paper represented over 80% of the company’s production costs and over 60% of its total costs, so any losses could have a significant effect on the bottom line. Prior to 2012, paper losses had been as high as 18% of the total paper put into production. In 2012, the company undertook a significant change initiative focused on reducing paper losses that included spending $3.5 million on new equipment and another $500,000 on training. Despite the effort and expense, paper losses hit a record high of 21.1% in 2012.

In the summer of 2014, Mike decided to apply structured problem-solving techniques to his plant’s paper loss problem. (Note: The structured problem-solving techniques Mike used are described in detail in our related article, “The Most Underrated Skill in Management.”)

The first step was to define a clear problem statement. Mike and his team knew that the paper losses were too high, but they had never quite taken the time develop a clear and agreed-upon problem formulation. After several iterations, the problem statement became:

Our paper losses are 5% higher than industry average, [and] this negatively affects our financial position and ability to be competitive.

That problem statement was supported by the following background information:

Paper represents nearly 88% of our production cost and 65% of our total cost. In the years leading up to 2011, our paper losses were as high as 18%. In 2012 we invested more than $3.5 million in property, plant, and equipment and an additional $.5 million in training but even so, our losses increased to a record of 21.1% in 2014.

The problem statement indicates a gap between a desired and actual state, and the background information does an excellent job of indicating why the problem is important.

One of the keys to effective intervention is watching the problem as it happens. So, Mike left his office and visited the factory floor to watch the work and understand its current design.

He quickly observed numerous problems. The paper was often too wide, resulting in extra losses from cutting. In addition, paper rolls were often damaged by the forklifts that moved them, and various machines were not properly calibrated.

Perhaps most notably, Mike observed that the main corrugator machine stopped at 11:30 a.m. Assuming it was an unplanned outage, Mike rushed to the machine only to learn that the machine was stopped every day at lunch. Stopping and restarting the machine at lunchtime not only decreased productivity but also increased the probability of both damage to paper and mechanical problems. Interestingly, the lunch break turned out to be a response that had been instituted years ago in response to instability in the electric power provided by the local utility — a problem that had been fixed long ago.

Such seemingly obvious problems might lead one to think that the plant was poorly run. To the contrary, this is often exactly what happens when a work process is regularly executed by a dedicated and experienced staff. An experienced team increases efficiency, but those gains come at the cost of not noticing the many little workarounds and accommodations that we all have learned to make over the years to get things done. We have discovered similarly “obvious” issues in almost every piece of work we have ever studied, and it is the rare organization that has used structured problem-solving techniques with sufficient intensity to exercise all the easy improvement opportunities.

Once Mike had observed the current process, it was straightforward to identify several root causes of the paper damage, mostly due to the plant operators and technicians not understanding the importance and cost associated with paper losses and how their actions influenced those losses.

Mike and his team proposed several improvements that followed directly from their observations and the root cause analysis they conducted. The forklift was retrofitted and holes in the floor were repaired to prevent damaging the paper in transit. Several standard procedures were either created or updated to improve the functioning of the equipment. A camera was installed to give the operators earlier feedback when paper was in danger of being damaged. Perhaps most important, the lunch schedule was staggered so that the corrugator machine could run for the entire shift without stopping.

Based on these interventions, Mike and his team thought they could reduce paper losses from 21.1% to about 19% within 60 days, which would save the company about $120,000 annually. They quickly developed an execution plan for the project, including dates and assignments.

The results exceeded their target goal significantly. Paper losses fell from more than 21% to 15.45% in the first month and to 14.7% in the second month, generating over $50,000 savings in less than 60 days. And the project produced several collateral benefits, including reductions in overtime costs, fuel use, and power consumption. When one of the authors (Nelson) asked Mike to explain the success of the project, Mike replied with the following email:

Believe it or not … our return to profitability as a company lies in our paper losses. It’s just that simple. If we can work through some of these issues (others have come out as well), we’ll make it through the storm.

I’ve been in the industry all of my professional career and consider myself a hands-on type of manager. That said, it took this process to … actually go see and talk with our operators to understand what was going on. Funny thing is, they already knew what the problem was, we just weren’t listening.

We couldn’t provide a better summary of the benefits of good problem formulation and structured problem-solving. Formulating a clear gap between the target and actual state focuses attention on the things that matter. Tackling those gaps in a structured manner provides the means to engage both our own cognitive strengths and the knowledge of others.