Not long ago, I wrote about a concept known as “sunk cost.” The Sunk Cost Fallacy is a cognitive bias that compels us to cling to an investment even after there is little to no chance of a beneficial return. We feel an unnecessary commitment to decisions of the past, even where we’ve lost our initial investment, and so we keep pouring more resources into it. For example, continuing to invest in a failed business or clinging to a relationship even after it's gone bad.
I’ve heard Annie Duke, a World champion poker player, discuss the Sunk Cost Fallacy, and I’m fascinated by her lessons on sunk cost, loss aversion and Decision Science. She recently wrote a blog about supermarket lines and sunk cost. There are valuable lessons for manufacturers in her blog when you consider the amount of money you spend on infrastructure.
Sunk Costs on the Shop Floor
As Annie Duke explains in the blog, “Our problem is that we don’t recognize that we have later chances to make a new and better decision… Instead, we either think we are done deciding and ignore new information, or think the new decision should give weight to irrelevant factors.”
Much the same could be said of manufacturing. You have to invest to stay in business. Sometimes that investment is in software. Many companies, if not most, are loathe to spend money on these systems as the software or the people who sell it don’t seem honest or can’t be bothered to understand your problems; they’ll sell you whatever they can whether it works or not.
(CIMx tries to eliminate these problems through our sales cycle, but that’s not the focus of today’s blog.)
Once you pay for software, it becomes a sunk cost. You can’t consider the initial investment in the next decision you make. So, what do you do when the software isn’t giving you the return you need? What do you do when the system isn’t working like it should, or the supplier tells you the project is running late and significantly over-budget? At that point, you need to consider your Return on Failure.
Maximizing Your Return on Failure
We have a history of working with companies that need to improve manufacturing software. Companies come to us almost monthly with failed software implementations; some of these companies need help, others need an all-out system rescue. We’ve helped with a total system replacement, ensured the data they needed was in the system, or just consulted and supplied services and software to help the manufacturer get back on their feet. You’d be amazed at how many software providers desert their customers before the system they installed was fully usable.
In an article from the Harvard Business Review, authors Julian Birkinshaw and Martine Haas describe the theory of Return on Failure and how the most successful companies in the world use failure to grow rapidly and sustainably. Return on Failure is measured by the information you obtain through the failure (call this “lessons learned”) and the amount initially invested. No matter the investment, if you can maximize the information learned, you come out ahead.
To apply this in manufacturing, once you’ve selected and started to implement a system, all is not lost if you find it does not meet your needs. Learn where the holes are. Create a list of what’s still needed. Rapidly identify what’s broken. Then, and most importantly, apply the concept of sunk cost.
The amount you’ve already invested in a system is irrelevant to the problem you’re trying to solve – a software system that’s currently not doing what you need it to do. Unless the provider of the failed system can bail you out for the best price with the best result, why should you continue investing in failure? The money you’ve spent shouldn’t factor into your next decision. Are you worried about introducing another vendor and creating a bigger failure? If you do nothing, then you’re accepting a shop floor digital infrastructure that will always be less than optimal. You’re basically crippling the profit driver of your company.
I would suggest it is MOST dangerous to continue investing with a supplier who has failed. I’d also suggest a consultant can help identify the problems, but they can’t sustainably deliver an ROI for the future. That’s not the strength of a consultant. You need a solution to the problem.
Increasing your Return on Failure involves learning from failure and creating a strategy for improving results in the future, and that’s where CIMx can help.
We’ve done it before. Numerous times. Our procedures are built to rapidly identify the gaps in your processes and determine the optimal strategy and solution. With a full staff of engineers, shop floor analysis tools and products that can rapidly and robustly help you move data, we work with you to determine and implement a solution to get you up and running as quickly as possible.
Customers come to us not only with software implementations that failed, but also aging systems that are now failing or crippled by obsolete infrastructures. We’ve even worked with customers (multiple ones if you can believe it) buying parts for aging servers off e-Bay. Continuing to invest in systems like these represent sunk cost bias. Continuing to pour money and resources into a failing system is not only foolish, but it’s holding your business back from optimizing production and profit.
Lessons Learned from Failure.
Each time we work with a manufacturer confronted with a failed (or failing) software system, we do our own lessons learned. Here are a few areas that we can help, addressing each area Birkinshaw and Haas refer to:
Costly customers cost you dearly
If you are losing money regularly, you may not know your production costs. Add manufacturing variability to that (customers changing one or more parameters on standard product), and the production estimate guessing game gets ever more dire. With a solid system in place you can confidently estimate your production costs, and then run comparisons to determine the actual costs. Track it daily, weekly, monthly or yearly. You’re in control of the data.
Lack of market knowledge steals profitability
Do you know what’s really going on in your industry? Plug competitive data into your analytics engine and see how your operation stacks up. What if you were able to save 5% on the time it takes to complete a single shop floor operation? Would that be the difference between a productive, profitable project and one that costs you and your customer time, money and aggravation? The benefits you accumulate with a successful software system can be the difference between success and failure.
Alignment with the corporate strategy increases customer success
If your company were to make a broad change in how they manufacture for customers, could you identify how it would affect your ability to deliver for independent accounts? Manufacturing software can provide a view, part by part, of how change impacts you and your customers. If you were able to implement that change without increasing costs across your customer base, wouldn’t that increase your ability to compete?
Supporting a strong culture keeps you fully staffed
Failing systems have a negative impact on your team as well. In a world where it is increasingly difficult to acquire and keep great employees, you need to do everything possible to help your shop floor staff to do their work. Make their job easier by getting them the information they need. Give them a system that empowers employees, providing access and feedback to both engineering and sales, increasing collaboration across the company. We can provide you tools to do this.
Looking to the future provides continued improvement
Once you’ve got the right system in place, don’t stop there. You need to continue to improve to remain competitive. Business and manufacturing analytics provides a view into future trends. We use trailing twelve charts to help us see forward trends. Use this information to overcome production issues and make better decisions.
Next Steps to Increase Your Return
We’re proud of our expertise in overcoming failure for manufacturers, and want to continue helping companies in need of a technical lifeline. We’re experts at rapid installation with a focus on strong investment returns, and our expertise will ensure you quickly replace failing systems with software that empowers production and manufacturing.
If you don’t want a heavy sales pitch, contact me directly to hear more about this, or talk to any member of my team. We’ve made a business out of helping manufacturers improve production, and we’re ready to share our expertise.
Talk to you soon.