Best practices: making the good great.
The phrase best practice is found in a myriad of professional journals designed to improve the performance of the reader's organization. The question however is what constitutes a best practice? Is a best practice merely a good idea presented in social media or is it more? A best practice is actually a method or technique that shows consistent results superior to other approaches. For a best practice to be relevant however, it must relate to the operations of the organization where it is being applied. Looking at two foundational approaches to developing best practices, Lean Six Sigma and Knowledge Management, and exploring their application will help demonstrate how best practices are a vital part of improving governmental financial operations.
Lean Six Sigma (LSS) leverages the sharing of information across organizational boundaries, relies on the discovery, refinement, and implementation of best practices to propel organizations to higher levels of performance. Additionally, LSS seeks to reduce waste and minimize errors in daily activities and is a great option for organizations looking to find best practices that can improve their performance. The most common resistance to LSS I hear from financial managers is the belief that their jobs do not produce manufacturing like outputs, therefore LSS is not relevant. I would contend otherwise. In financial management at base or installation level, financial managers produce travel orders, budget briefings, or other transactional based outputs. At higher levels financial managers respond to Congressional questions, produce Service inputs to the President's Budget or other data calls. Each of these activities suffers from rework leading to a final output. These areas are exactly the type of processes LSS can help financial managers improve.
Finding activities that do not add value to a final product is a key part of LSS. When organizations reduce or eliminate waste you can create a best practice. Think of a base that takes time to reduce travel voucher computation from 5 to 3 days. This reduction in processing time is a best practice that can be replicated at other installations. If every travel pay office applied this best practice, the hours saved across the enterprise would be staggering.
In addition to LSS another approach organizations can use to harness the power of best practices is Knowledge Management (KM). KM is an approach to codify the information in an employee's mind and turn it into repeatable and defined knowledge. Think of the 35 year veteran that retires and takes their experience and knowledge with them. The tacit knowledge (information in their head) leaves the organization when they depart. If organizations can turn that information into explicit knowledge (documented information) other employees can access and apply it.
The use of KM can take several forms and has evolved significantly over the past 20 years. Prior to the ease of capturing information within information systems, employees relied on play books, continuity books or desk top guides. With increased on line storage, organizations turned to share drives, blogs, Wiki's, communities of practice, SharePoint, instant messaging and dashboards. All of these approaches sought to capture the information in the mind of the employee and place it in a location anyone could access any time.
The advent of just in time learning allowed organizations to empower employees to use best practices at the time they need them. The use of LSS and KM are two ways organizations can harness the power of best practices both internally and across their enterprise to improve performance not only in financial management but any functional area. Turning our focus to tangible examples of KM and LSS in action will demonstrate their power.
One best practice that has been accepted in several organizations across the Air Force that leverages the tenets of KM is the development and implementation of a Zero Based Budgeting (ZBB) tool. In 2011 Headquarters Pacific Air Force's (PACAF) Financial Management team began developing an automated ZBB tool to capture line item budget level requirements for every organization in the command down to the unit level. This information empowered decision makers to view requirements across the command and determine proper funding levels by linking line item requirements to historical execution.
The application of ZBB fundamentally changes how an organization requests, allocates, and executes their operational funding. Most DoD organizations apply a straight line budgeting technique. Under this construct, organizations receive funding similar to last year's budget plus or minus a fixed amount as determined by higher echelons. This approach does not consider what the organization plans to purchase nor the typical historical execution of their budget. While it provides a simple approach to financial planning, straight line budgeting does not provide leadership the ability to determine if funded requirements in one unit are strategically more or less important than another organization's requirements.
ZBB on the other hand looks at every requirement at every organization every year. ZBB results in a significant increase in the amount of information provided to leaders. This information allows leaders to make strategic trade-offs when allocating funds. Within PACAF, senior leaders were able to track funding requests, historical execution, and the requestor's relative funding priorities down to the commodity level. The use of ZBB quickly identified disparate levels of funding across installations. One example was the discovery of capabilities that had been contracted at one location but were performed organically at another. At both installations, the organizations were staffed to perform the function in house. The reduction of the contract support costs for discoveries like this resulted in over $10M in savings across the command in one year.
Another example of ZBB as a best practice occurred during the first year of sequestration. PACAF was able to link reductions to specific commodities and programs. Because of ZBB, PACAF avoided a flat tax to all organizations and empowered smart resourcing decisions tied directly to strategy. The use of ZBB and the associated tool became recognized as a best practice within the Air Force. Within 3 years, other Air Force commands adopted the concept and tool. The powerful implications of using this best practice across the Air Force, have led the Air Staff Budget Office to begin the development and implementation of an Air Force wide ZBB tool that will be rolled out in time for the FY17 Execution Plan build.
This best practice when folded in with other ongoing efforts will allow Air Staff financial managers to link dollars to capabilities. Once that linkage is created, a further correlation can be made from capabilities to the Secretary of the Air Force and Chief of Staff of the Air Force's top priorities. Imagine being able to present to senior leaders how a budget build aligns to priorities before the budget is implemented. This unparalled level of decision support will let senior leaders adjust organizational budgets to ensure the right financial focus is applied at the right time for the right requirement.
One other example of how best practices can improve financial management is found in work I did with a private sector aircraft manufacturer during a two week LSS project. Company X was losing money each year on the sale of replacement parts. Company X sold a combination of proprietary parts they produced, mid-tier non customized parts, and smaller replacement parts consumers could obtain from a myriad of parts wholesalers. Using the best practice of LSS, we dissected the pricing strategy of the company and found some areas for improvement.
While the company did mark up their proprietary parts to a price that resulted in a profit, the company sold over 85% of their smaller replacement parts at prices that did not cover the cost of overhead associated with stocking, ordering, and shipping. The cost of a 15 cent washer was marked up to $2 but using a LSS best practice of value stream mapping we determined the true cost of the part to the company was around $18 when accounting for labor, packing, shipping and handling. Every washer sold resulted in a $16 loss.
Once this flaw in pricing was identified, the company changed their prices on mid-tier non customized parts and divested itself of selling smaller replacement parts. As an aircraft manufacturer, the company could not sell these parts at a price that covered their costs or the market would support. Additionally, parts warehouse companies that specialized in these parts were able to sell the parts at significantly lower costs.
Looking at the application of Knowledge Management and Lean Six Sigma as examples of best practices presents clear evidence that financial management can easily be improved through their use. Knowledge Management applied through Zero Based Budgeting helped one Air Force command save over $10M in one year, and LSS helped a small aircraft manufacturer prevent over $200,000 in loses each year. How could your organization benefit from the use of best practices like KM and LSS, the bounds of your imagination are the only limits to these tools.
by Colonel Steven J. Minkin, D.M.
Colonel Steven J. Minkin, D.M.
Colonel Steven Minkin is the Chief of Budget Operations and Integrotion at the Air Force Pentagon in Washington D.C. He holds a Doctorate in Management from the University of Phoenix, and has been published in numerous journals for his work on leadership and virtual teams. Colonel Minkin has served as the Chapter President for the Aloha Chapter in Hawaii and served as Adjunct Faculty for the University of Phoenix's MBA and M.Ed, program.
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|Author:||Minkin, Steven J.|
|Publication:||Armed Forces Comptroller|
|Date:||Jun 22, 2016|
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