Business CAT Scan
By Tom Pryor

Inconveniences offer opportunities to improve.

The pharmacy would not refill my asthma medication last summer. The authorized refills had run out and my doctor had retired. After I described my symptoms to a new allergist, he replied, "Before I approve a refill of your prescription, I'd like a CAT scan of your sinuses." When I balked at the procedure, he said, "Over 50% of my patients who think they have asthma actually have a lingering sinus infection." Sure enough, my CAT scan showed an infection. After taking antibiotics for a couple weeks, I no longer needed my $170 per month asthma medication!

Inconveniences, like my inability to get a refill, are commonly viewed as one of life's irritating obstacles. If we pause before getting mad to ask "Is there a hidden reason why this happened?" the answer may open a door of opportunity.

While it's not logical to go looking for problems, organizations that need breakthrough improvements should begin with a list of repetitive inconveniences and irritations. This list of symptoms, coupled with a diagnostic exam called a business CAT scan, will reveal the changes that will be required to improve financial performance.

What is a business CAT scan?
Medical CAT scans use a combination of combine x-ray beams and computer imaging to produce pictures of a person's bone and body mass. Business CAT scans … an acronym for CostMapping™-Analysis-Technique … combines the principles of Activity Based Costing (ABC) with process mapping to produce a never-before-seen picture of an organization's activity architecture and financial condition. For more information on CostMapping™ and CostMapper™ software go to www.icms.net/costmapper-info.htm .

To demonstrate a business CAT scan and its benefits, the following two examples were created using ICMS' activity-based CostMapper™ software. For the purpose of simplicity, both scans share three things in common:

1. Both companies have 7 activities;
2. Both companies have the same cost per activity; and,
3. Both companies have the same cycle time per activity.
   

CostMapping™-Analysis-Techniques create a picture of a business' activity skeleton and the attached cost muscle and fat. We learn from the two scans above that both organizations share the same number of activities yet differ in three key ways:

1. The number of process paths differ… While both have 7 activities, Company #1 has 54 possible paths while Company #2 has only 2 possible paths. A process path is a series of activities.
   • CAT scan #1 is commonly found in a job shop (e.g., tool & die), hospital, consulting firm, newspaper, diversified distributor, artisan bakery or an organization with no process plan.
   • CAT scan #2 is commonly found in a process manufacturer (e.g., Dell Computer), specialized clinic (e.g., Cooper Clinic), home healthcare provider, specialized distributor (Tech Data) or overnight freight carrier (e.g., FedEx).
2. The cost of process paths differ… The highest and lowest cost paths through Company #1's process map are $47 and $22, respectively. Depending upon a customer's path through the process, total activity cost varies over 200%! The cost of both paths through Company #2's process are the same, $27.
3. The cycle time of process paths differ… The highest and lowest cycle time through Company #1 are 110 minutes and 65 minutes, respectively. The cycle time of both paths through Company #2's process map are the same 65 minutes.

Reading business CAT scans
Author Malcolm Gladwell confirms in Blink that "decisions made very quickly can be every bit as good as decisions made cautiously and deliberately" (1). All it takes is a blink at the activity costs and process map of a business CAT scan to quickly identify ways to improve performance. The following seven diagnoses were defined after a quick examination of the two example's DNA … Design Net of Activities:

1. Mass customization ... The DNA of Company #1 offers lots of flexibility (e.g., 54 different combinations). Those options commonly come at an added cost that customer's often distain. Unattended, the product or service can "bounce around" within the network of activities. A customer who asks Company #1 "When will I get my order?" will likely get the stock answer "It depends."
2. What's permissible is not always profitable ... CAT scans are used for traditional ABC purposes, e.g., customer profitability analysis, pricing, product costing, competitive bidding. If the average gross margin per transaction is $35.00, Company #2's CAT scan confirms that every customer transaction will be profitable ($35 - $27 = $8). Based on Company #1's CAT scan, however, only 30% (16 of 54) paths through the process DNA will be profitable.
3. Mission missed or accomplished … Mission statements are useful. But in the absence of a process plan to achieve the mission, employees revert to what leaders do, not what they say. Values are demonstrated by behavior (2). Analyzing the CAT scan examples, we can interpret the mission of Company #1 is mass customization (e.g., Kinko's) while Company #2's plan is to offer limited variety (e.g., Hertz). If that's not their mission, change the process. Does your organization's process support or sink your mission statement?
4. Take your best shot … Our culture focuses on weaknesses. If a child comes home with four A's and one C, what does the discussion typically center on? We wind up helping people spend lots of time trying to develop talents they don't have. Your best shot at improving your organization's performance is to better what you're already good at instead of focusing on non-value activities. For example, Company #2 should promote the 16 profitable paths found in their CAT scan. Emphasizing those process paths would be pleasingly profitable.
5. Bypass surgery … If an arterial blockage is found in a person's CAT scan, bypass surgery to prevent heart failure is commonly prescribed. In similar fashion, business CAT scans look for excess capacity and constraints ... process blockages. The following chart from ICMS' CostMapper™ software found excess capacity through most of Company #1 CAT scan but a constraint in Activity 6.
   
   

   Activity	Activity Cost	Activity Minutes	Activity Capacity	Workload	FTE's
   Activity 1	$5.00	15	65%	20,000	5
   Activity 2	$2.00	5	41%	15,000	2
   Activity 3	$5.00	15	98%	18,000	3
   Activity 4	$10.00	15	27%	5,000	3
   Activity 5	$10.00	20	52%	12,000	5
   Activity 6	$5.00	20	100%	9,200	2
   Activity 7	$5.00	10	72%	20,000	3

   
   While the unrestricted flow is desirable in a human being, that is not necessarily the case in a business. Activity 4 is operating at 27% capacity. The unused 73% is a non-value cost of excess capacity. Redeploying resources from Activity 4 to 6 will improve process performance.
6. Problem solver or giver … Business CAT scans often expose a costly condition called "daily workarounds", e.g. Company #1. A workaround is management's method to achieve a task or goal when the usual method doesn't work. Hospitals are notorious for workarounds. Activity Based Management studies of hospitals in 1999 (3) and again in 2005 (4) found employees spending 30% of their time every day resolving repetitive problems. "Leaders are not problems solvers, but problem givers." (5) Leaders that order a business CAT scan and direct employees to permanently solve problems, simplify everyone's workload.
7. Intelligent design or evolution … Processes in most organizations are not the result of intelligent design. Instead the work simply evolved over time to get the job done. CAT scans are useful in perfecting processes before new Enterprise Resource Planning (ERP) systems are installed. Americans tend to automate what they should have eliminated.

"It isn't that they can't see the solution. It is that they can't see the problem." G. K. Chesterton

Bad News Bearable
My annual physical at the Cooper Clinic & Aerobic Center was a "bad news-good news" affair. Upon arrival I got bad news… the clinic's computer system was down. The receptionist however smiled and said, "Don't worry. We're able to complete your tests as planned and get you out of here on time at 2 PM." Sure enough, I never waited more than 5 minutes for any of the battery of tests… including a CAT scan of my heart… throughout the morning.

My minor inconvenience at the clinic provided me a good learning experience. My guess as to how the team of technicians, nurses and doctors met their 2 PM commitment without a computer system was later confirmed by Cooper Clinic CFO Rob Nelson. "We're a process-based organization. They're all mapped out. Each person's physical is a charted process of activities. Our product is a satisfied patient who leaves at 2 PM knowing their health status and a written plan to improve in hand."

Does your organization need a written plan to improve? If so, it's time you scheduled your organization for a business CAT scan.

Send your comments on this article to TomPryor@icms.net.

(1) Blink, Malcolm Gladwell, Little, Brown & Co., 2005
(2) The Present Future, Reggie McNeal, Jossey-Bass, 2003
(3) Hospital Procurement Processes, conducted by ICMS, HIDA, 1999
(4) Hospital Procurement Study, conducted by KPMG, HIDA, 2005
(5) QBQ!, John G. Miller, Putman Publishing, 2004

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