The Possibility of Misinterpreting Improvements in the Value Added Ratio
- Christopher J. Bujak and Raphael L. Vitalo, Ph.D.
The value added ratio (VAR) measures the percentage of a process’s cycle
time that is expended in adding value to its output.1
The remainder of the time expended is, by definition, waste. On its face, an
improvement in the value added ratio indicates that a process cycle is more
value efficient. But that judgment would be misleading. The value added ratio
only measures the value efficiency of time expended as a product traverses a
process’s critical path. Only the activities on the process’s critical
path determine the interval between products exiting a process.2
VAR does not evaluate the total amount of activity time a process consumes nor
the total resources it uses. It also does not evaluate the worth, from a customer’s
perspective, of what the process produces (the real value of the output). A
judgment of the value efficiency of a process would require a different ratio,
one that related the worth of the process’s output as judged from the
customers’ perspective to the dollar value of the resources the process
This clarification of the VAR’s meaning reveals a potential problem
in its use as a measure of improvement—specifically, what its significance
is for deciding how well a business is implementing lean commerce at the operations
level. On its face, it would seem that the VAR’s significance is straightforward.
The higher the VAR the better a business is implementing the dictates of lean
commerce at the operations level. But, as you will see, that is not always the
case. In fact, it is possible to improve a process’s VAR yet harm operations’
contributions to realizing lean’s purpose.3
How VAR Improvement May Detract From Accomplishing Leanís Purpose
Almost always, improvements in a process’s VAR are constrained by the
requirement that the improvements made be either cost neutral or cost reducing.
However, this is not always the case. Hence, the following scenario is theoretically
possible. In the pursuit of improving VAR, a process cycle may be made to have
a greater ratio of value adding activity, as reflected in its VAR, while not
actually removing waste at all. For example, one might take a waste activity
(e.g., searching for a tool) and divide it among multiple people who pursue
in parallel, each searching a different possible location. Although unlikely
to occur—such a solution might well reduce the amount of cycle time wasted
in search and result in an improved VAR. The solution would, of course, add
cost and be reflected in the unit cost of each process output whose value content
would not have increased. Also, search time would not have been eliminated if
one added all the time expended by the people doing search and not simply the
search time reflected on its critical path. Further, if we evaluated the modified
process on the basis of the cost per unit of value it delivered, we would have
to conclude that the apparent improvement in the value efficiency of the process’s
cycle time (VAR) actually eroded the value efficiency of the process itself.
This would be so because the value of the output remained unchanged yet its
cost increased. This is problematic from a lean perspective because almost always—if
not always—minimizing cost from the customer’s perspective is a
customer value. Therefore, the improved VAR would potentially reduce the total
value delivered to customers and not raise it. Rather than be an indicator of
improvement, it would hide the fact that the process became less “lean.”
Reason for the Problem
The VAR only addresses the percent of cycle time spent in wasteful
activities, not the total operating resources spent in doing wasteful activities
nor the ratio of total resources expended to the actually value of the output
produced. It is possible, therefore, to reduce cycle time waste while increasing
the expenditure of operating resources on doing wasteful activities. It is also
potentially possible to reduce the percentage of cycle time that is waste while
diminishing the total value delivered to customers.
How to ensure that the VAR always provides useful information about a process’s
progress in better enabling a business to accomplish the purpose of lean enterprise.
This is not a simple problem to solve. Theoretically, one could
prescribe that any improvement in the VAR must also improve the value efficiency
of the process in terms of its ratio of total resources expended to the amount
of value its output delivers. But how do we measure the value efficiency of
the process in those terms? Logically it would require calibrating the value
content of the output and generating a cost per unit of value produced. Such
a ratio might legitimately be labeled the value efficiency ratio of the process.
If we had such a metric, one could then verify that a solution to eliminating
waste in the process’s cycle time also improved the value efficiency ratio
of the process. But operationalizing such a metric remains theoretical. It requires
devising a method for calibrating the value content of the output a process
generates.4 If such a metric were developed, it would perhaps be the most important
measure to monitor from a lean perspective.
An obvious alternative would be to require that VAR improvement
be cost neutral or cost reducing. But this solution has problems as well. First,
what if the solution that reduced cycle time waste actually increased the value
content of the process’s output but at added cost? That VAR improvement
would not reduce cost nor be cost neutral but it might actually improve the
value efficiency of the process. For example, what if a specific waste activity
in cycle time was due to how a feature of the product was specified and the
solution was to change the feature thus eliminating the waste activity. It might
also occur that the modified feature was even more desirable than what it replaced.
That change would both eliminate a wasteful activity (improving VAR) and enhance
the total value of the process’s output. Even if cost were elevated, its
increase might be more than offset by the increase in the value of the output.
Or, what if the improvement did not add value to the content of the output and
did add cost but resulted in the better satisfaction of customer values in total
because, for example, the added throughput due to reduced cycle time meant customers
would be able to access and receive the product they desired rather than be
denied it. These examples suggest that placing the constraint that VAR improvement
be cost reducing or cost neutral would not ensure a lean compatible result.
It seems that, in some way, one needs to calibrate the value
efficiency of the process in the manner described above so that it acts as the
constraint on the actions one might take to improve a process’s VAR. Yet,
the second example in the paragraph above suggests that this solution might
not always work. In that example, a specific process might lose its value efficiency
(value produced/cost per unit of output) but cease being a bottleneck that prevents
any value flowing to all the customers who desire it.
Exhibit 1 summarizes this paper’s analysis of the pluses and minuses of
VAR as a lean metric.
A Possible Work Around
In the absence of a definitive approach to ensuring that an improved
VAR actually means that a process is better enabling the achievement of lean
commerce’s purpose, here are a few suggestions.
- Never use a single lean metric to judge one’s progress is realizing
lean’s purpose. Always evaluate the meaning of any metric within the
context of all its other metrics. This may help avoid inappropriate interpretations
- Always assess the impact of a VAR improvement at the process level on the
value delivered to customers by the value stream to which the process contributes
and the degree to which it satisfies the expectation of all its stakeholders.
If either or both of these affects are positive, then the VAR improvement
may have merit. Otherwise, the VAR improvement as an indicator that a process
is better enabling the achievement of lean commerce’s purpose is suspect.
- Always assess the impact of a VAR improvement on unit cost and the value
content of the output the process produces. If the unit cost remains the same
or decreases and the process output’s value content is either unchanged
or improved and the impact of the improvement on its value stream’s
performance (2) is positive, then the VAR improvement is likely to be lean
Even this paper’s analysis of the VAR, however, is not the
whole story with regard to problems associated with that metric. An even more
fundamental issue concerning VAR is raised in the essay, Lean
Insanity. That issue addresses how VAR is actually computed. While everyone
assumes that it is done only one way—the way they do it—the lean
literature suggests otherwise.
Rather, M. & Shook, J. (1999). Learning to see. Cambridge:
MA, Lean Enterprise Institute.
1 This essay assumes that the
value added ratio (VAR) is computed by dividing total cycle time into the time
spent in activities that add value and multiplying that resultant by 100%. It
further assumes that (1) cycle time is the time spent by a product as it traverses
a process’s critical path and that (2) it can be measured either by timing
the interval between products existing a process or by observing the passage
of a process’s initial input as it is transformed along the critical path
and measuring the time consumed by every activity or wait state that occurs
as it progresses (i.e., doing a process observation).
2 This statement relies on
Rather and Shook’s definition of cycle time. See Rather and Shook (2003,
3 We define the purpose of
lean commerce as maximizing the delivery of value to customers while benefiting
all stakeholders inclusively.
Published October 21, 2014
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