Sunday, April 20, 2014

In Defense of Shareholders

. . . our whole attitude in [Berkshire Hathaway] and what we like to see with the businesses we own stock in is we want to run them for the people who are going to stay in rather than the people who are going to get out. “ Warren Buffett
______________________________

Whenever a lean blog publishes a post on the subject of shareholders, it’s usually focused on the negative effects that they can have on a company’s long-term performance.  This one is going to be different.  Reading Warren Buffet’s 2014 letter to Berkshire-Hathaway shareholders reminded me of the important role shareholders play in a company’s success and wonder what business would be like if all investors approached business the way he does.

Investing 101

Investors are a critical part of the operation and growth of a company.  Financing all investment opportunities with debt would be cost prohibitive, and result in stunting growth or sinking the company altogether if interest payments became due before revenue streams from the investments began to occur.  Since interest payments provide the bank’s revenue stream that supports its operation, it needs to be as predictable as sales of products are to a manufacturing or distribution company – which is why shareholders came into the picture.  In the most basic sense, banks finance an organization’s short-term needs while investors finance long-term growth.    Investors who have a “day job” generally rely on salary or wages to finance their day-to-day lives (i.e., their operation) and use investments to finance long-term needs.  Investors without a regular job usually buy stocks that provide little growth but stable income in the form of dividends.  [Note to Finance Professionals . . . this is very basic, so please just go with it]

A combination of the immense growth in stock prices over the years and the instant gratification society in which we live has led many shareholders to begin to act like banks and demand short-term returns for their long-term investments.  As a result, the balance between short-term and long-term performance has been upset.  In an effort to keep up with the demands of shareholders (and continue to efficiently finance growth), decisions are sometimes made that can actually damage the company’s long-term success (e.g., mass layoffs or curtailing needed investment).  Focus and energy are steered toward satisfying the needs of shareholders rather than customers and the death spiral begins (although the effects may not become evident for many years).  In an effort to assure that the value of a company remains high boards started basing executive bonuses on share price.  As a result, some executives ended up losing sight of the true target condition – lower the overall cost to finance long-term growth – and focused only on the share price by taking action that increases the short-term stock value while actually hurting the long-term.  Imagine how different things would be today if, decades ago, companies like IBM, Exxon, or Boeing focused more on short-term performance than long-term development and growth.

To survive and grow, companies must continually build new factories and develop new products, processes, or services.  And, although the leadtime for new developments has dropped, it still takes time to do it successfully.  Developing a new car model or explore and develop a deepwater oil field can take years and cost billions of dollars and, even though the payback may not be seen for many years, it is a necessary investment to assure an ongoing revenue stream.

Are We Are Part of the Problem?

Not surprisingly, I’ve met many people over the years who complained about decisions and actions taken by their employers because they appeared to focus more on the short-term share price than the long-term growth and overall health.  It is surprising, though, that many of these same people check the share prices of the stocks they own several times a day, and buy and sell stocks throughout the year in response to rising and falling prices.  It is easy to get disappointed when the value of a stock we own drops, just as it is to get excited when it rises.  As an example, after making resounding returns on Google stock, many people sold their shares in July of 2011 when the price dropped 20% within one month.  I wonder how many of these same people realize that, had they held on to their shares and thought more about the ongoing earnings and long-term growth potential of the company than the short-term share price, their investment would have increased more than 120% since that time.

We would all like the share prices of the stocks we own to increase every day, indefinitely.  This is not possible, though, so we have to invest in companies that have a high likelihood of increasing over the long-term – i.e., have a clear vision, high quality leaders, a believable estimate of future earnings, and demonstration of the ability to continually improve.  Once these things become evident and we make the investment, we need to get out of the way and let the company operate.  Over the last several years, following this type of philosophy would have led to the decision to invest in companies like Google, Amazon, Tesla . . . oh, and Berkshire-Hathaway.

The Shareholder Activist

In recent years, the activist investors have taken a much more prominent role in the business world.  In some instances where activists successfully shook up the company, the result has been positive while in others it has been disastrous.  I believe it comes down to a question of motives.  Those who have already invested in the company and, in an effort to protect their investment by stopping an ineffective management team from damaging the company often result in positive change and long-term growth.  On the other hand, those who are short-term investors or are on an ego trip can cause considerable destruction to its employees and its longer-term shareholders.  In either case, though, the battle between the activist and company leaders creates an ugly and stressful situation for everyone involved.

Advice from the Oracle

It continually amazes me how so many tend to ignore the advice of Warren Buffett who is arguably the best investor of our time, and instead follow the high-profile activist investors.  While we all respect Buffett and can’t wait to learn about his next investment, though, we continue to look at share prices daily and sell shares when prices fall over a given period of time.  His comment in the letter about his farm sums up the fallacy of this approach:

. . . if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his -- and those prices varied widely over short periods of time depending on his mental state -- how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.

We don’t expect the companies to act this way with markets and offerings, so why do we think it’s okay to do it with our investments?  The people who sold Google stock in 2011 reacted to the neighbor yelling a lower and lower price every day, even though the company had a strong revenue stream and many new products in the pipeline that would allow that revenue to continue to grow.  Many of the people who sold their shares did so because they did not understand this and feared that the stock was overvalued.

Where We Are

It would be great for companies – particularly well-managed ones – if all investors followed Buffett’s investment strategy.  Effective leaders could focus on what’s best for the long-term and build strong, healthy companies without worry of distractions from shareholders focusing on quick gains.  Since this is not – and likely never will be – the case, we’ve got to learn to live with the demands of investors.  They are, after all, important stakeholders in the business and their needs cannot be ignored. 

Taking care of shareholders, though, does not mean focusing on short-term actions that do nothing but increase share price.  It means focusing on the customer, developing new products and services that continually take care of customer needs, and doing it safely, quickly, and efficiently.  We need to partner with shareholders in a way that everyone wins.  Warren Buffett has done this by being very open about his focus and making it clear that Berkshire Hathaway is not a company for the short-term investor.  To be successful with this approach, however, requires effective leadership, clarity and constancy of purpose, and the ability to deliver as promised.  And even though adjustments will be required during downturns or when things do not go as planned, leaders must never make decisions or take actions that stray from the purpose.  They must keep investors updated on the outlook and planned adjustments (including the reasons for the adjustments), and respect the fact that they are partners in the business and have a stake in its success.

Interesting that it still comes down to effective leadership . . . something that companies like Amazon, Toyota, Google, and Berkshire Hathaway remind us every day.

Sunday, March 23, 2014

The People Formula

"All anyone asks for is a chance to work with pride." - W. Edwards Deming

When you get right down to it, the formula for creating an organization that performs at a high level and continually improves is fairly simple.  Although there are obviously factors that make implementing the formula more difficult than it appears, companies often further complicate things by ignoring the people aspects of the business or taking actions that actually detract from it.

The basic formula for organizational development is as follows:

HIRE WELL x CONTINUALLY DEVELOP x KEEP HAPPY

The reason the variables are multiplied is because ignoring any element (i.e., making it a zero) results in a zero for the entire process.  Although one could debate the “how” of each of the formula’s elements, it is difficult to disagree with the elements themselves.

Hire Well
The importance of the hiring well component of the formula is recognizing hiring a process that requires continual improvement to effectively support the organization’s higher-level objectives.

Hiring well means finding people who are competent and a good fit with the culture and direction of the organization.  Too often, businesses focus on the competency component and underplay the cultural fit requirement.  Because the search process often starts late – when the workload has grown beyond the point where current staff can handle it or the person currently holding the position is moving on – there is pressure to hire quickly.  The “easy” stuff like verifying previous employment and validating technical skills takes front and center while cultural fit tends to be assessed through gut feel.

Although not the subject of this post, there are a number of ways to verify the fit of a candidate’s personality and values with the organization.  The point here is to recognize that hiring is a process with target conditions that are aligned with the objectives of the company.  As such, it is just as important to apply the Plan-Do-Study-Act (PDSA) cycle to hiring as it is to any other process within the organization.

The target condition for recruiting and hiring could include things like cycle time, quality of candidates, cost of recruiting, offer acceptance rate, and overall employee turnover.  Once the target conditions are established, the process can be managed and improved through kaizen to continually improve its contribution to the organization, as a whole.

Continually Develop
It should come as no surprise that developing people is a critical element of organizational success.  With that said, though, there are really very few organizations that continually develop the abilities of the people working in them.  This includes coaching people to better understand the processes with which they work, improving problem-solving capabilities, and providing the opportunities to learn.

To do this well often requires that leaders improve their ability to coach, something drastically needed in most companies.  The best environments for developing people tend to be those that stretch thinking and learning is guided by experienced and qualified coaches.  Objectives are set aggressively and people are put in situations that force them to think differently to achieve them.  It is similar to working with a personal trainer.  Although it often hurts, sticking with the regimen and following the trainer’s advice often leads to improved physical condition.  In the workplace, developing problem-solving capabilities can also hurt, but lead to significant achievements if the coach is effective and the person is committed.

It should be noted, however, that missing a stretch objective should never count against a person as long as he or she learned and showed commitment to the process.  Punishing a person for missing a stretch target will only serve to halt learning and stop people from accepting such objectives in the future.

Keep Happy
Keeping people happy is another area where a kaizen mindset can help.  Although employee turnover may not be the best measure of happy employees, it is a start.  The ideal condition for any company should be 0% turnover, but getting there may require setting the target at a level that is better than the current rate.  Once it becomes clear where the organization’s current turnover rate is in relation to the target, steps can be taken to close the gap.

One first step that many organizations can take to quickly improve employee satisfaction is to eliminate the traditional performance review.  Although studies have proven over and over again that grading performance – especially when based on force-fitting results to a normal curve – results in far more dissatisfaction that satisfaction, many organizations refuse to let go of the process (see blog post on performance reviews here).

Hiring well (bring in technically competent people who fit within the culture) and continually developing team members should greatly improve the performance as the organization moves toward the “perfect” workforce.  As you move toward the ideal condition, applying a normal distribution to ratings is illogical and destructive to the organization.  Leaders often do not understand the importance of the system in employee performance, and that the system is the leadership team’s responsibility.  If leaders want a perfect workforce, and team member performance follows a normal distribution year-after-year, the fact that the situation is not improving is more of a reflection on leaders than workers.

Putting it Together

Keeping the formula in the forefront will help improve the organization’s focus on its people.  The traditional management force that is still so prevalent in western business, however, will continually interfere with true improvement of the people-side of the business.  Moving beyond attempts to improve motivation and performance through superficial means will require hiring and developing leaders who respect people and truly understand the connection between people and organizational success.

Sunday, March 16, 2014

Lean in Oil & Gas - Part Two

Lean in Oil & Gas – Part 2


This is part 2 in a series of posts related to applying lean to the oil and gas industry.  To read part 1, click here.

The previous post presented examples of applying lean to the development of oil and gas wells in shale plays and in the exploration process.  As further examples are presented, keep in mind that far better and sustainable results are achieved with lean when people gain a fundamental understanding of the philosophy, rather than copying the way others have done it or by focusing only on the tools.  This requires continually working to develop a mindset that, whether you are a completions engineer, financial analyst, or CEO, everything you do can be improved when you approach the work you do with a kaizen mindset, as follows: 
  • What do want to happen (what is the target condition)?
  • What actually happened (what is the gap between actual and target)?
  • What is causing the gap?
  • What will you do to close/reduce the gap – and how will you test it to be certain what you plan to do will work?
  • What is the new gap and/or target condition as you continually strive for the ideal condition?

In many ways, lean is as simple as approaching business in terms of the questions above.  As written in several previous posts, however, just because something is simple does not mean that it is easy.  There are a host of cultural, personal, and organizational barriers that need to be addressed to transform an organization from traditional thinking to lean thinking.  To further complicate the process, as the organization moves toward a lean mindset, there will always be a pull back to the old way of working that will continually need to be recognized and addressed.  It’s as if the lean journey is like climbing a mountain that has no peak.

Further Examples

Commissioning of Offshore Platforms

The target condition for commissioning an offshore platform includes handing a perfect facility to the operations team on-time and within budget.  The definition of a perfect facility should be clear from the start of the project and, in addition to technical specifications (gas/oil/water flow rates, tubing pressures, number of wells, etc.), should include quality expectations (e.g., efficient layout, equipment and instrumentation is in full working order, drawings are up-to-date, crew trained to operate/maintain equipment, etc.). 

Actual performance for commissioning and handover involves understanding how well the target condition was met, which includes among other things, delays, rework, equipment failure, cost overruns, and punch lists.  Each of these identifies a gap that needs to be closed – or an opportunity for kaizen.  Even if commissioning a new platform is a fairly rare occurrence for the company, countermeasures to close the gaps can improve processes in other areas, like maintenance and turnarounds.

One thing that becomes clearly evident during the commissioning process is that many problems that surface during handover actually result from work done – or not done – earlier in the development process.  An appreciation for systems thinking starts to take hold and people begin to focus on improving the upstream engineering, design, and construction processes.  When this happens, it becomes clear where some of the lean tools and countermeasures fit in the process, including things like establishing and managing buffers, creating pull, implementing kanban, and maintaining dashboards.  Although these types of tools can help the operation improve toward the target condition, they can also make things worse if the objectives and context are not clear.

Establishing Annual Plans
Every organization can benefit from utilizing kaizen – or the A3 process – to establish its annual plan.  At the organizational level, the target conditions are specific objectives for key areas like safety, production, reserves, and costs.  It is vital that the target conditions be clearly aligned with the company’s strategy and represent the journey toward the ideal.  As an example, suppose the total recordable incidence rate (TRIR) is running at 0.50 (one incident per 200 employees per year).  If the company wants to become one of the industry leaders in safety, it will recognize the need to significantly improve its performance in this area.  Its leaders may determine that, within three years, TRIR needs to be down to 0.22, and that for the current year, the company needs to improve to 0.40 (a 20% improvement).  The framework for business kaizen – has now been established as:
  • Ideal Condition: TRIR < 0.22 (it is actually 0.00 – but the company has recognized that 0.22 within three years means they are on their way to a perfect operation);
  • Target Condition: For the current year, the target condition is 0.40;
  • Actual Condition: 0.50 (it also needs to be determined how stable TRIR performance is – if there is significant variation, the 0.50 does not mean much);

The next step in the annual planning process is to reflect on the operation to begin to understand the root causes of safety incidents.  Since a 20% improvement in TRIR is a stretch, some type of breakthrough is needed to move the organization to a new level of safety.  Following the kaizen process, the next step is to determine countermeasures targeted at removing or reducing the root causes to safety incidents.  This could include such practices as standardizing the processes across assets that are causing the most injuries and near misses, increasing site visits by leaders and operations experts, improving training of team members on-site in kaizen and safety, or a host of other activities.  Just as with improvement of a local process, it is important to test countermeasures before rolling them out across the organization to assure they achieve desired results.  This is the STUDY step in the PDSA cycle, and allows adjustments when things are not working as planned.

Detailed plans are not developed beyond a one-year timeframe in that it allows for adjustment to keep moving toward the target condition.  It is difficult to know what will interfere with performance beyond the current quarter, much less the current year, and we want to make sure we don’t lose sight that the objective is ultimately to achieve results.  People can get so focused on implementing a plan that a “check the box” mentality takes over and achieving a target becomes secondary.  Within a lean culture, leaders don’t expect people to develop perfect plans.  They do, however expect people to continually study the effects of a plan and make adjustments, when necessary to close the gap between target and actual performance – all within the framework of scientific method.

Leaders also need to follow the PDSA cycle on a regular basis throughout the year to assure the gaps are closing and that improvement in one area does not negatively affect another.  For example, an organization can increase production while negatively affecting cost and safety.  To prevent this from happening, the organization’s leaders need to review performance at least quarterly to keep an eye on the business.  This represents kaizen at the business level, as the annual plan itself will require adjustment to assure organizational results are achieved.

Never-Ending Improvement

As people begin to understand the effect lean has on the way the organization operates, they begin to see how the process never ends.  As in the safety example above, although a TRIR of 0.22 within three years is thought to be world class in today’s world, it may not be three years from now.  Besides the fact that the industry will improve, the team will begin to understand that perfection means that no accident is acceptable and the only acceptable target is zero.

Further examples of lean in oil and gas will be provided in Part 3 of Lean in Oil & Gas.

Sunday, March 9, 2014

Lean in Oil & Gas - Part One

After several years of working with lean in the oil and gas industry, I've seen people go from open resistance, to active and, in some cases, enthusiastic support.  I've worked with different companies during this journey but I haven’t figured out yet if the shift is due to specific organizational culture or the awakening of an industry to the need for a new approach to drive sustained improvement in the areas of safety, environmental performance, production, and cost.  And following several years of failed attempts to achieve the improvements through a tools focus like 6-sigma, leaders are starting to realize that transformation can help assure success for companies regardless of price of oil.

UNDERSTAND - DON'T COPY

Applying lean to the oil and gas industry, as with any industry, requires a fundamental understanding of the philosophy rather than attempting to copy how Toyota – or anyone else – does it.  Copying tends to drive a tools-focused approach that, in the end, fails to achieve the type of gains leaders expect.  For years, though, Toyota provided the only real example of lean, so those wanting similar results approached the deployment by rolling out tools like kanban, 5S, or quality function deployment.  The problem with this is, without a clear understanding of lean and a system where the tools are used to address clearly defined problems, the best one can expect is random improvements that are difficult to sustain.

When people begin to truly understand lean, and particularly the Plan-Do-Study-Act (PDSA) cycle, they begin to see it as a system of improvement, and the approach becomes much more focused on identifying and sticking with what's important to the organization.  The way people think about performance and problems shifts and the organization starts to replace a traditionally overly complex, gut-feel, boss-knows-everything approach with a simpler, more scientific way of operating.

At the highest level, a fundamental understanding of lean means adopting a mindset that consistently approaches work in the following manner:
  • Understanding the value the organization or process provides;
  • Clarifying the target/ideal condition for the business, system, or process;
  • Determining the current condition of the business, system, or process to understand the gaps to be closed;
  • Identifying the causes of the gaps;
  • Developing a plan to address the gaps, including testing of the potential countermeasures;
  • Continuing to update the target/ideal and current condition to continually identify and close the gaps
In an oil and gas operation, this approach can apply to an individual process, an asset, or the organization as-a-whole.  To continue to improve and sustain the gains, however, it is critical to keep in mind that the ultimate objective is absolute perfection (including perfect safety, no spills, no delays, etc.).  Whether or not achieving absolute perfection is possible does not matter.  Everybody in the organization needs to feel responsible for making problems – or examples of non-perfection – visible, and working to continually close the gaps.  When looked at in this way, it becomes clear that lean involves looking at everything a business does as a continual experiment in the pursuit of perfection.  Whenever a problem occurs, the experiment has failed and change is needed, and the result is a tighter, more predictable, and more robust process.  By fundamentally understanding lean in this way, people will start to see that practices like 5S or kanban are merely countermeasures to address specific problems, rather than critical elements of lean thinking.

EXAMPLES

Viewing lean as described above helps guide the application of lean in the oil and gas industry.  It requires constantly understanding: (1) what needs/is planned to happen; (2) what actually happens; and (3) how the gaps between (1) and (2) are going to be closed.

One of the main objectives of the transformation to a lean mindset is to simplify the way the company operates.  Although, given the complexities of an exploration and production company, this is not easy to do, lean provides the framework to continually remind the team that streamlining and simplifying is the way to improve in the areas of safety, production, and costs.

Some of the simple and more common applications of lean in the world of oil and gas includes the following:

Shale Oil/Gas Development

One of the main objectives of a shale oil/gas development is to drill and complete a specific number of wells throughout the year safely and within budget.  Once the number of wells is known, the takt time can be calculated to determine the desired pace of putting a well into operation.  If, for example, we want to put 105 wells into production during the year, then our takt time is approximately 1.5 (calculated as 365/105), or a well every day and a half.  Combined with objectives for cost, safety, and loss of primary containment (which, for the latter two, should be zero), the takt time comprises the target condition.  Performance to target can now be tracked to determine the gaps to be closed or problems to be addressed.

The gaps can show up in late well deliveries, cost overruns, safety issues, or a number of other areas.  If there are no gaps, the operation probably has too many resources, inventory is building, people are waiting, etc. (all examples of waste).  The point is that there are always problems – and unless we see them, we have no chance of addressing them.  Comparing actual performance to takt time (the target condition), for example, will make the problems visible and force us to address them.  To assure that the operation improves requires that the problems are identified and addressed as quickly as possible after they happen.  This requires continual and effective communication around actual performance versus the objectives (takt time, costs, safety, spills, etc.).

Problems are also quickly prioritized in this example because everybody understands the target condition, and how well the operation is currently doing with respect to meeting the target.  For the overall operation to meet takt time, each individual process needs to operate at takt time so when a delay occurs, everyone will know that a problem exists and needs to be addressed.  Continually improving in this situation will only occur, however, when people feel comfortable about making their problems visible.  When excessive pressure is applied or people are beat up for missing deliveries, there will be a natural tendency to cover up problems and point fingers at other areas.  When leaders need to step in, however, is when it is obvious that an area is not addressing its problems.  If the completions team is consistently experiencing cost overruns, for example, and there is no apparent improvement activity occurring to address the issues, it will most likely be necessary to take action to get something going – including understanding why those leading the completions team are not addressing their problems.

When approached in this manner, some of the elements of lean, including standardized work, dashboards, and visual indicators start to make sense because they all work to identify or close the gaps between the targets and actual performance.

Exploration

The PDSA cycle drives learning through conscious testing, proving or disproving, and adjusting of hypotheses.  An exploration campaign, for example, is driven by a hypothesis that a certain amount of recoverable oil resides in a specific area.  Although a failed exploration can be very costly, it is even more costly when the team doesn't use the information to learn and improve the process for future projects.  

In the simplest sense, within exploration the PLAN phase in the PDSA cycle is a hypotheses about recoverable oil in place.  The DO is the drilling of exploration wells; STUDY is the review of samples and data from the exploration wells to determine whether or not to proceed with the project; and ACT is the action taken as a result of the study, including adjusting the exploration process to improve performance in the future.  When the decision is to not proceed, it is critical to understand why the team thought it was worth pursuing exploration wells and what proved to be incorrect about the projection.

Dashboards that are updated as information is received is critical to the process.  The team needs to see how the project is progressing so adjustments can be made quickly.  The dashboards also tell the story of exploration projects that keeps leaders apprised on the progress and probability of success.  Also, since the success of an exploration process for an energy company cannot be determined through a single project, the dashboards can provide a consistent and clear picture of the overall process by showing how things have gone over a given period of time.

Applying lean thinking to exploration requires a clearly stated hypothesis early in the process identifying what the team expects from the project.  As the project moves forward through each phase, the information collected will often require adjustment to the hypothesis, which is perfectly acceptable – and expected – as long as learning takes place.  The key here is to make learning a conscious activity and to standardize it as part of the process.

Further examples of lean in oil and gas to be provided in the next blog post

Sunday, February 23, 2014

It's All Kaizen

"Management is prediction."  W. Edwards Deming

One of the beliefs that often interferes with a successful lean deployment is the assumption that kaizen only applies to workers.  This happens when an organization attempts to overlay lean on top of a management system driven by traditional thinking and its leaders will consider kaizen as something that can be delegated to the shop floor.  A sign that transformation toward a lean mindset is begining to occur, however, is when leaders start to understand that kaizen applies to everyone.  Whether addressing a problem in a work process or dealing with a high-level company-wide issue, a kaizen approach can increase learning and the chances for a successful result.

The Basic Process

Building a sustained improvement process requires much more than merely getting people to submit ideas.  Basing improvement only on worker input often results in haphazard changes and a list of suggestions that continues to grow until people eventually give up believing that management is not serious about their input.

What is often misunderstood – or forgotten – about the kaizen process is that it is rooted in scientific method.  Success with kaizen requires application of the Plan-Do-Study-Act (PDSA) cycle to facilitate continual learning and a clear understanding of the problem being addressed.  Applying the PDSA cycle to the improvement process includes steps similar to the following:

·   Understanding the target/ideal condition based on what the process or system is intended to achieve;
·   Identifying the current condition to better understand the gap or problem that is being addressed;
·   Determining the potential causes of the gap between current performance and the target condition;
·   Creating a countermeasure to address one or more of the potential causes of the problem;
·   Testing the countermeasure to clearly understand whether or not it works as intended;
·   Taking action based on the test results, which can include adopting, modifying, or abandoning the countermeasure;
·   Continuing to watch results, if the countermeasure is adopted, to assure improvement is sustained.

Besides the obvious benefits to business performance with this type of approach, understanding that an idea to address a problem is really just a hypothesis that must be tested unlocks learning that can truly begin the transformation.

Higher-Level Kaizen

Although leaders generally agree with the use of PDSA to address shop floor problems, applying the same level of thinking to the work they do often requires transformation.  High-level issues like the need to improve the success of new product introductions, improving the development of future leaders, or expanding into new markets can be addressed much more effectively when approached with a kaizen mindset.

Whether dealing with defects on the shop floor or a high-level business issue, improvement must still begin with understanding the target condition, or what success looks like.  For example, to address a poorly performing product development process, we can’t understand what “poorly” means if we do not know what defines success.  This could include characteristics like cycle times for new product introduction, clarifying development costs, or expected sales levels during the life of a new product.  Without this type of clarification, the initiative will lack clear direction and likely have trouble staying on track.

Defining the target condition enables a clear definition of the problem as the gap between the target and current performance.  This focuses the effort on closing the gap rather than letting the initiative stray by allowing people to include pet ideas or random changes that don’t directly address the problem at hand.

Clarifying the problem also provides the ability to gage the effectiveness of improvement actions by continuing to measure the gap between the target and current condition.  This is the STUDY phase of the PDSA cycle – understanding whether the improvement actions (hypotheses) are actually improving performance.  If they are, we will want to standardize the improvements to assure they can be sustained.  If the actions have not led to improvement, we would want to know the reasons and possibly adjust or abandon the actions.  Although piloting business-level changes can be more difficult than with process changes, it is critical to try because of the potential damage that can result from a poor decision.  In those instances where running a test is not possible, changes must be watched closely – and objectively – to assure they are driving the type of results expected.

A Countermeasure Without a Problem

A huge benefit of applying kaizen thinking at the leadership level is that is puts a stop to random initiatives – i.e., those that don’t appear to address specific problems.  Actions like changing major systems or adding new initiatives to areas that are not necessarily experiencing problems with current methods are highly disruptive to the workplace and often cause more harm than good. 

Every day, consultants and writers present a variety of unique and interesting approaches to business issues.  Even when a new idea appears to be relevant to a business, though, it should not be attempted without clearly understanding the problem it is meant to address.  Actually, when the environment becomes guided by kaizen thinking, understanding the problem would be followed by investigating the causes rather than attempting to force fit a countermeasure like a software solution or changing a major system.  When a new approach does appear to directly address a problem facing the company, it should still be piloted to assure it works as intended. 

Transformation is Needed

Successfully deploying a continual improvement mindset across a company will not happen without transformation in thinking at all levels of the organization.  It is not possible to turn kaizen on and off depending on the type of problem being addressed or organizational level affected.  If leaders delegate kaizen to the “worker level” while applying a business-as-usual approach to organizational problems, transformation will not occur and lean will be doomed to fail. 


Sunday, February 9, 2014

Business Planning and the 85-15 Rule

A problem organizations commonly encounter during the annual planning process is overloading the plan with too many initiatives.  Although this shows a lot of enthusiasm and energy during the development of the plan, it often results in frustration and disappointment during the year as people get overloaded and confused by too many priorities.  Good intentions don’t always lead to good results.

When applied correctly, the A3 planning process can greatly aid in the development of a plan that provides clear and focused objectives for the team.  And integrating the Plan-Do-Study-Act (PDSA) cycle into the process can enable the energy – and clarity – to continue throughout the year.  A key to making the process successful, however, is to create a plan that focuses 85% of the organization’s effort on meeting current year targets and 15% on breakthrough improvement.

85% Effort = Maintain

The first step in creating an effective annual plan is to obtain clear understanding and agreement on the targets that need to be achieved during the year.  And generally, these targets should be set at a point equal to the capability of the company’s processes and systems.  As long as processes are maintained at current levels, the targets can be achieved.  Although unforeseen problems will undoubtedly occur throughout the year, they can largely be handled through the company’s meeting rhythm and kaizen process.

This is what I often refer to as the day job.  It involves putting effort toward maintaining the current level of performance and meeting company commitments.  As a general rule, assuring process capabilities are maintained to a level that meets targets should require about 85% of people’s effort.

15% = Improve

As important as it is to put forth the effort to maintain process performance and meet targets, if no energy is directed improving performance, it will only be a matter of time before the company is passed by competitors.  Step-change or breakthrough improvement must be a strategic focus if it is to become a reality.  To assure this happens, the annual plan should include breakthrough objectives that require about 15% of the organization’s effort.

The breakthrough objectives come from a thorough reflection of the company’s past performance and future direction.  A clear understanding of the big problems – i.e., where the organization’s performance needs to significantly improve – must be established in order to comprehend the root causes that need to be addressed.  Examples could include enhancing a weak product development process, establishing a system for coaching and developing future leaders, or significant improving safety performance.

During the year, an unforeseen problem can surface that affects current process capability and meeting targets that will require significant effort to address (e.g., a significant quality problem, repetitive machine breakdowns, or a rash of safety problems).  In situations like this, when the normal meeting rhythm and kaizen process will not be enough to address the situation, breakthrough improvement may be required, and a decision needs to be made whether or not the organization is going to undertake the effort.  If so, people need to be clear on which breakthrough projects may be delayed to maintain the 15% focus on improvement. 

Kaizen for Leaders

Confusion between the maintenance and improvement efforts often leads to the development of an unachievable plan.  There will always be distractions attempting to interfere with maintaining the 85-15 balance, so continued PDSA is required to maintain clarity and focus.  This is basically kaizen at the leadership team level, where annual targets and improvement needs represent the target conditions and the plan (breakthrough actions) and priorities – become the countermeasures.

Sunday, February 2, 2014

6-Sigma - A Common Cause of Failure

Building on the previous post regarding the differences between lean and 6-sigma, I have recently come to the conclusion that failure to understand the differences between the two is often the cause of frustration and disappointment with the results in a lean deployment.

Conceptually, 6-sigma is easier for people to comprehend than lean.  Implementing a problem-solving methodology aimed at attacking the issues with the largest financial impact makes immediate sense to most people.  Developing a few experts in the problem-solving process and sending them around to attack the big issues and help improve company performance requires a relatively small investment and does not necessitate a major shift in the way the organization operates.

So what's the problem?

The problem is that this is not lean.  It is fairly common for an organization attempting to adopt lean to have one or more people involved in the process who drive the change with a 6-sigma mindset.  This can create a significant amount of friction and frustration between the "lean thinkers" and the "6-sigma thinkers."  And if this gap is not effectively addressed, teamwork will break down and the initiative will fail.

Among other issues, a gap in improvement philosophy will lead to disagreement in the types of problems to attack.  6-sigma thinkers will want to address only the big problems while lean thinkers will focus on creating a system where all problems, regardless of size, can be addressed.

The Signs of a Gap

Signs that a lean deployment is being driven by a 6-sigma focus include the following:

Pareto Prevalence:  The use of Pareto charts or effort-benefit formulas to select the problems to address is a sure sign of 6-sigma influence.  Creating an improvement-focused culture will not happen if you tell people to ignore the problems that a chart or formula considers small.  Also, telling a person who faces a problem everyday that it is too small to warrant attention can be extremely demotivating.

An objective of lean thinking is to attack problems as they happen.  This requires turning everybody into problem-solvers and unleashing them on the issues that prevent them from meeting target conditions.  Besides the fact that small problems, when left unchecked, often turn into large ones, continually addressing issues allows people to get better and better at problem-solving.

Lack of Leader Involvement:  When trying to create a lean culture, leaders must be actively involved in kaizen efforts.  Assigning black belts to facilitate the process enables leaders to opt-out of, rather than participate in the process.  Within a true lean environment, the higher the position is within the organization, the more adept the person is at problem-solving.  Getting to this point will not happen when leaders are allowed to delegate improvement responsibilities.

Celebrating the Big Gains:  Creating awards or financial incentives to solve the big issues is a clear message to people that the small problems are not worth the effort.  There are areas within the company that, because of the nature of the work they do, spend significantly more than other areas.  Inconsistent behavior between areas will never result in the desired shift in culture, and since the areas with lower costs will not see participation in improvement worth the effort, transformation will not occur.

Understand What You Want

The point of this and the last post is to create awareness that, despite what many people believe, lean and 6-sigma are not the same, and confusing the two will lead to disappointment with an improvement effort.  It is not easy - and it is definitely not common sense - but being clear with the vision and objectives, studying the results, and adjusting the effort is important to assure the desired transformation occurs.