Breaking Business Silos, A Few Surprises

Is getting all of the functions in your business to work smoothly together holding your business back? Then you’ve got a silo problem.

Senior executives overwhelmingly complain about the difficulty they face in breaking the silos in their business. A recent survey of top executives, placed

• the challenges of getting teams to work together,
• addressing conflicting priorities, and
• struggling to get consistent execution of their strategy across the business,

in the top 5. Sounds like breaking business silos is a challenge for everyone.

In order to tackle a problem as widespread and challenging as this, its critical to first understand some of the underlying reasons it exists in the first place. I think you’ll find the one I’m going to talk about more than a bit surprising. And believe it or not, it’s largely self-inflicted. 

Cost Management and Silos

Cost reduction has been used to improve efficiency for years and with great success—so much so that most organizations struggle to find additional savings of real significance. Unfortunately one unintended consequence of driving cost reductions across an organization is that it actually promotes and reinforces the silo mentality. “Huh, how is that?” you ask.

The issue is actually pretty simple. Costs exist across the organization, and in virtually all companies the managers of each department have their own cost reduction targets they have to hit. Engineering has theirs, Manufacturing a separate target, Quality too, and Production Control and Purchasing also. So each of these departments naturally strives to lower the costs in its area of responsibility. No surprise there.

The problem is that each function is part of the whole and often the actions that one department takes impacts others. A common example I point to in my workshops is purchasing. Purchasing always has the target to reduce the cost of the goods and materials it buys for production. There’s even a widespread metric that many companies use called purchase price variance (PPV) that measures the actual purchases against a standard or established cost. If you have a positive variance it means you bought things for less than the target or standard price. You did well, you achieved your cost reduction goals and you get a great review at the end of the year and maybe a promotion.

But what is the impact on Manufacturing, or Quality, or Production Control, or Engineering? Sometimes when we buy a cheaper item, the vendor is less reliable, or in order to get the lower price we have to buy a larger volume, or the new item comes from overseas and has a long lead time.

Maybe it’s harder to hold the tolerances of the cheaper item so manufacturing has to do more re-work, increasing its costs. Or because the lead time is long they need to do overtime to catch up on late orders when the part finally arrives. Quality may have to inspect more of the parts because the vendor is new or less reliable. Or maybe it has to review more borderline parts that are close to the tolerances.

Production Control could have more parts it needs to store and manage that could increase its costs. While Engineering might have to spend more time adjusting manufacturing processes to compensate for differences in the new parts triggering other additional work to maintain machine programs and other processes.

One doesn’t have to look far to find examples of how cost cutting decisions in one department can negatively impact costs in another area. Manufacturing may decide to increase batch sizes to show lower set-up costs over the year. This might result in delayed orders and longer lead times that increase premium freight or cause customer service people to spend more time expediting and placating angry customers.

Local Metrics Build Silos

It’s not hard to see how these local cost metrics drive decisions that create friction—and build the silo walls—within an organization. But cost reduction metrics are only the tip of the iceberg. There are other common local metrics that also create silos and thwart needed collaboration.

A common metric for sales forces is the sales quota (annual, quarterly, monthly). Most organizations motivate their sales teams to hit these quotas, and even exceed them, though usually not by too much. The outcome I have seen in numerous companies is that when salespeople “max-out” their quota for a period, they hold or delay orders until the next period. This creates spikes in orders—typically at the start of a new quarter or year—creating a flood of work for all the supply functions leading to overtime, delayed orders, and the like.

Sales targets can also create inefficiencies—more bricks in the silos—when companies are behind in achieving their quotas. To “make the target” companies often use promotions to spur buying towards the end of the period. This discounting not only reduces margins and profits but often creates spikes of demand that drives further inefficiency in other parts of the business.

In work we did years ago with P&G, the analysis that was done on promotions actually showed that they had “trained” their customers to wait for the promotions. The data clearly showed that customers were waiting to place orders until the promotions were announced, and then buying large quantities to carry them through until the next promotion. Not only did this create significant peaks and valleys of load on the supply plants, but they discovered that more than 50% of their sales were not done at promotional prices.

No wonder costs were up and revenues down.

When they realized the problem they had created for themselves they took swift, well-thought out steps to shift their internal metrics and substantially change how they used promotions. In just two quarters they had “re-trained” their customers and profits were back on the rise.

So if you’re organization is suffering with the silo-blues, take a look at the cost and other local measures you use—you might actually be building the silos yourself. Adjusting your metrics is a lot easier, less-painful and far more effective than going through a major restricting that is likely to create the problem anew all over again.

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And now I have a question for you. Have you ever seen local measures that build and reinforce the silo-mentality in your world? If so please let us know about them, and what you did to try to fix them.

Exposing the next level of efficiency and savings requires a different approach, one that addresses the biggest challenges businesses face today–cross-silo coordination.

Yet most cost reduction efforts and continuous improvement initiatives like Lean and Six Sigma strive to improve efficiency WITHIN the silos. And these very efforts often magnify the coordination problem. So a local improvement in one area creates inefficiency and added cost in another. Continuing to try to extract results from the same tapped out mine is an exercise in futility. This is why companies complain that it takes forever to get results from these efforts and it’s a constant battle to sustain momentum.