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Silo Goal-Setting May Jeopardize Profit Generation

Businesses are continually on the lookout for ways to contain and reduce escalating costs. When I started thinking about how the OEM marketplace approaches this ongoing concern, it occurred to me that there's an opportunity for some real savings that many companies are missing.

In today's streamlined business model, it's a common practice to develop goals in departmental “silos,” then set overall business goals, objectives, and annual performance review criteria based on the departmental goals. When goals are developed this way, there's a risk that one department's goals will be at odds with another's or that there won't be appropriate resources available to implement successfully. Here's an example of how this works:

Engineering sets goals to:

  • Reduce field failures to less than .0025 percent
  • Deliver new products on time.

Purchasing's goals are to:

  • Deliver a five percent cost reduction on raw materials
  • Reduce the vendor base by 20 percent.

There's nothing inherently wrong with these goals. However, in this scenario, issues arise when Purchasing asks for the engineering resources it needs to actualize the cost savings its plan will generate. Engineering's resources are allocated to meeting its departmental goals. While Engineering won't openly refuse to help Purchasing, the way these goals are set up, chances are good that Purchasing's needs will take a back seat to the engineering department's own goals. After all, that's what Engineering will be measured on at the end of the year. The product must be delivered. Yet, without Engineering's support, the purchasing department's opportunity to realize cost reductions that will positively affect the entire company will be lost.

This isn't simply hypothetical. Take a look at what happened to one real OEM client. This high-volume OEM presented Engineering with multiple ideas that had the potential to generate annualized savings of more than $250,000. These ideas were part of the plan to meet the purchasing department's goals, but they needed Engineering's review and approval to implement. Engineering resources were tied up in projects to meet their goals, so the necessary reviews and approvals didn't happen and the savings did not materialize.

When you consider that many projects have life cycles of seven to nine or more years, that $250,000 in lost savings quickly grows into the millions. And this is a scenario I've seen play out time and time again. Here are some best-practices that can turn a loss like this into a big success:

  • Make cost reduction a goal of every department
  • Have a top-down mandate that requires departments to act quickly to support cost savings ideas, even when they are part of another department's goals
  • Assign a liaison to ensure that resources are available when needed to support cost reduction programs originating in another department
  • Schedule periodic interdepartmental meetings to review progress on the cost savings goals
  • Make sure that a department providing support for another department's goals gets a fair share of the credit for achieving the cost savings.

Developing collective goals based on overall organizational needs first, then developing departmental goals to support them, can eliminate missed opportunities. When the goals of the company supersede departmental goals, real and positive changes can occur. Have you seen cost savings opportunities missed because departmental goals got in the way of company goals or cases where big savings were realized when the goals of the organization were the priority? What's worked for you and what hasn't? I look forward to your comments and suggestions.

6 comments on “Silo Goal-Setting May Jeopardize Profit Generation

  1. prabhakar_deosthali
    September 27, 2011

    The manufacturing company I worked for had a good success in reducing cost by having a department called as “Value Engineering”  directly reporting to the managing director of the company. This department's role was to see , where and how much the cost can be saved – either in the process, in the material used, in the design, by choosing alternate vendor, in logistics, in the payment terms  and what not.

     

    So the value engineering would work independent of the individual departments whether it was purchase, concept, design, engineering or finance.

     

    This approach worked very well except in a couple of cases where the value engineering went too far in cost reduction resulting in sacrificing the quality.

  2. Jay_Bond
    September 27, 2011

    This is a very informative article that brought up some very good points. I've seen this happen many times when companies set goals for different departments. These departments focus on their goals and put other things on the back burner if it interferes with the departments goals. In the end the company loses. I was glad to see your rules of how to avoid these pitfalls. It seems like when silo goals are set, everybody forgets that they are one big company with an ultimate goal and that everybody contributes to the company’s growth.

  3. saranyatil
    September 27, 2011

    Mark,

    Nicely said. Indeed this is a big issue. Companies loose out a lot on money and time. Engineers are busy targetting to reach their goals and forget the budget allocated.

    When it comes to purchase they are only keen on reducing cost but never try an understand why we need to pay so much. for instance lets say an engineer decides to develope an ASIC it calls for NRE costs. When this details are passed on to the purchase guys they start arguing to use an available part instead of going in for customization. With this discussions comes to standstill engineer would have started working on different parts of the system. Both lose track on what they are doing, again when necessitiy arises they call for discussions again which results in delayed time and there is increase in over all cost.

  4. Eldredge
    September 27, 2011

    Whether they are cost cutting goals, or new business opportunities, setting goals at the corporate level and requiring departments to support those goals makes a lot of sense.

  5. Himanshugupta
    September 27, 2011

    The company i last worked in had different level of yearly goals and the profit sharing was tied to the goals. 50% of the profit sharing points were tied to the department goals and the rest were other goals such as corporate goal or inter-department goals. This way there was no need to have inter-department meeting to keep a check on the progress made. I think, this way any goal which has the highest priority can be given the highest point of profit sharing so the departmental goals do not supersede it.

  6. Ms. Daisy
    September 27, 2011

    @Saranyatil, the silo goal-setting that is a common in many organizations shows the lack of understanding of systems approach to organizational managment. Each department in an organization is really a subsystem that need to work inter-dependentedly and interlrelated to form a functional whole. The generation of profit is the goal of all for-profit organizations and each department must understand how other departments are related to work together to achieve this goal. Hence the need for strategic planning that involves all stakeholders in the various departments defining specific goals for each department that works towards the one main goal of the organization. 

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