The Kraft Heinz company reported poor financial performance this past week, causing its stock price to dive more than 20%. It has lost nearly half of its value over the past year. A Wall Street Journal article said of Kraft’s management “cut costs relentlessly but failed to spend on new ideas when consumer tastes changed”. They failed to heed Peter Drucker’s warning, and found themselves too efficient at producing the wrong things.
The Kraft leadership, from the Brazilian private equity firm 3G, practice a method called Zero Based Budgeting. In ZBB, all expenses must be justified each and every period. All costs in every function are thoroughly analyzed, and where there is opportunity, reduced. For nearly a decade, the relentless focus on cost reduction worked. Zero Based Budgeting is well-suited for world of high certainty, where our processes are reliable and predictable to a high degree. This is true when making the same packaged food products over and over in high volumes. We can predict inputs and outputs through established food supply chains. We can predict that people will continue to need to eat tomorrow. But customer taste change. What the financial decision-making system at Kraft Heinz had in its ability to keep out wasteful spending, it lacked in agility, nimbleness and ability sense-and-respond.
This reminded me of a question I’ve had for most of my career; what is the right amount of slack? We pursue continuous improvement to “eliminate waste” from our systems. Waste is any resource that is not employed toward creating value as expected by the customer of that process. Slack can be defined as money, materials, people, space etc. not being put to use as we desire. But as the Kraft Heinz example shows, it is also nonsense to hyper-focus on removing all slack, making sure every cent and every moment is spent in service customers at the lowest possible cost, in service of the shareholders. Systems need slack to function.
The management term “Lean” equates fat with waste. This is unfortunate. We need fat. A healthy level of fat in human adult males is 15% – 20%. At 5% body fat or below, we experience health problems. Our cardiovascular, endocrine, reproductive, skeletal, and central nervous systems all begin to degrade. Athletes with low body fat must be careful not to remove all slack for their system, lest they look super lean but suffer health problems. If our bodies work best with between 5% and 20% “non-productive” fat that we carry around, what is the right amount of “fat” or slack in various other systems in our lives?
When used to describe the national economy, slack often means unemployment. More accurately, slack in the economy represents the amount labor and capital that is available to be employed productively but remains idle. It is the difference between the theoretical output of the economy and the actual. The navigators of national economies target “full employment” at around 3%-4%. Zero unemployment causes problems with rapid inflation, supply problems and makes the economy less resilient. But this is not a magic number. For example, the unemployment in Japan is 2.4% but their population is declining, so their inflation rate is negligible despite low slack in the system. What is the right amount of slack in an economy? This depends on each context and situation.
Our highways and road systems are another great example of when removing all slack is a disaster. Bumper-to-bumper traffic moves more slowly than on roads in which there is slack, or more space between cars. The slack allows for a cushion during sudden changes in velocity. Break lights cause a chain reaction that propagate slowdowns like a wave through the cars behind it. Once slowed, traffic takes longer to get up to cruising speeds. What is the right amount of slack in traffic? Transportation engineers have the answer. Many traffic problems could be relieved when driverless or AI-assisted driving becomes common.
Within the hierarchy of the seven types of waste, we say that overproduction does the most harm, as it consumes resources needlessly and multiplies the other wastes because we are doing more. By the same token, the least harmful waste is the waste of waiting. It is better to have people sitting idle because there is nothing to work on. It is even better if they are cross-trained and able to help upstream or downstream. It is great when they spend idle time on innovation, improvement, tidying up or anything other than busywork. This is only the “right amount of slack” when waiting is by design, or when waiting is clearly highlighted and escalated as an abnormality.
What is the right amount of slack? This depends on the specific system we are talking about. If all money spent in the world was only for strict survival necessities, we wouldn’t have much of a global economy. A significant portion of consumer spending is on so-called slack: leisure, entertainment, attire, luxury goods, various vices. Business enterprises must both reduce cost in existing operations as well as make some speculative investments for future growth. Project teams and knowledge workers who load their work to more than 80% of their max capacity experience errors and delays. Production systems in which people work on one thing at a time and experience occasional idleness outperform systems that aim to keep everyone busy building and managing WIP, in terms of overall cost. Humans need vacation, sleep, idle time and some body fat in order to function best. Rather than relentlessly removing all slack, we need to grasp the nature of the system and how it relies on slack to function at its best.