Energy Companies Need to Stop Worrying About Oil Prices

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This post was published to Avoiding the Corporate Deat... at 7:22:51 AM 6/23/2018

Energy Companies Need to Stop Worrying About Oil Prices

“It is not enough to do your best. You must know what to do, and then do your best.” – W. Edwards Deming

If recent history is any indication, energy companies expecting to survive in the years ahead are going to have to adopt a new business philosophy. As is the case with any commodity producer, market price is a factor for financial success. The problem, though, is that many companies have come to rely on it as the only factor and, as a result, surrendered the ability to control their own fate. While crude prices are contributors to financial success, they do not have to be the only factor in determining whether a producer is profitable or not. What is needed is a new business model – one that enables companies to produce oil responsibly and profitably whether prices are $70 or $30. If an energy company cannot figure out how to remain profitable in a world of wide swings in oil prices, it may as well find something else to do because its future, if it has one, is going to be severely compromised.

As companies in other industries have discovered over the years, a business model guided by lean thinking can help secure a future in a world of unpredictable and widely variable market conditions. Although the acceptance of lean in the energy industry has increased over the last several years, there is still significant misunderstanding about the need for transformation in order to achieve the level of success that organizations in other industries have experienced. After several years of failed attempts to achieve improvements through tools-focused approaches like 6-sigma – where improvement methods are placed within existing systems and the responsibility for solving problems is delegated – some organizations are starting to understand the need to apply a new philosophy that integrates improvement at all levels of the business in order to achieve the big gains that are possible in safety, environmental performance, production, and cost.

The industry is still in its infancy in understanding and applying lean to the point where it will reduce its addiction to oil price. When accompanied by true and fundamental transformation, lean can help an energy company take full advantage of the periods of high prices while preparing for the inevitable drops without feeling the need to implement drastic measures that damage long-term health.

COPYING DOESN'T WORK

Applying lean to an oil and gas producer, as with any company, requires a clear understanding of the philosophy rather than attempting to copy how Toyota – or anyone else – does it. Copying drives a focus on the tools and ignores what you can’t see – the fundamental changes in the company's systems (e.g., leadership, hiring, training & development, promotions, etc.) that are necessary for success. For years, though, Toyota provided the only real example of what many now refer to as lean, and those wanting to learn approached the deployment by rolling out tools like kanban, 5S, or value stream mapping. The problem is, without a clear understanding of lean as a system that requires transformation in the way the organization operates, the best one can expect is random improvements that are difficult, if not impossible, to sustain.

When people begin to truly understand lean, including systems thinking, psychology, and the application of the Plan-Do-Study-Act (PDSA) cycle, they begin to approach work differently, and become much more focused on what's truly important to the organization. The way people think about problems shifts and the organization starts to replace the traditionally overly complex, gut-feel, boss-knows-everything approach with a simpler, more scientific way of operating.

In the most basic terms, lean is about:

• Having clear standards based on the needs of the business;
• Following standardized work that enables the standards to be met;
• Quickly identifying when a standard cannot be met (i.e., when a problem occurs);
• Identifying and addressing the causes for not meeting standards (problem-solving);
• Knowing when a standard needs to be improved and having a method for doing it.

Although it sounds simple, making the above work effectively requires transformation in many of the company's systems as well as its culture. When a company ignores the signs that its systems or culture are interfering with improvement, lean becomes a burden and is seen by many as a waste of time.

WHAT TO DO

Once people in the industry begin to understand and appreciate the various aspects of lean, including a focus on continual learning and the connection to the organization's fundamental purpose, things will start to change. The thinking that drove improvements at Toyota like reducing setup times on stamping presses from 3 hours to 3 minutes or completely eliminating wasted paint during the body painting operation while reducing color changeovers to seconds, can help contribute to greatly reducing an oil producer's cost per barrel, shortening its lead time from exploration to first oil, and significantly reducing emissions while improving safety. It won't necessarily happen in one year or even two, but the improvements along the way will show the potential of a culture that is aligned and improvement-focused throughout the organization.

Some of the keys to assuring the successful application of lean to an energy company include the following:

• Leaders must understand and actively drive, rather than delegate, the transformation. To do this, they must be taught what to do, be open to coaching, and accept the responsibility of creating a culture obsessed with improvement;
• Establishing a culture where continual learning and development is highly valued and expected of every team member from the newest hire to the CEO; and holding leaders responsible for coaching and developing those on their teams;
• Developing a clear and consistent purpose (i.e., the mission and vision) for the organization – and staying true to the mission while ensuring that all activities are oriented toward achieving the vision, including helping everyone understand how the work they do connects to the purpose;
• Designing systems that enable problems to be shown quickly and clearly, and ensuring people feel comfortable showing the problems in their areas. Any area or team that does not have problems only means that they are not being shown, which is likely caused by cultural reasons;
• Ensuring a single clear and consistent approach to lean. Do not allow alternate training or tools to come into the organization unless it is driven by, and clearly connected to, the deployment. Do not let anyone add confusion by introducing new tools or methods that do not fit within the standard approach.

When deployed correctly, lean entails a vastly different approach than most people are capable of understanding at first. Through real-world practice, effective coaching, commitment, and patience, people will start to understand and see the big gains that are possible through an effective transformation. As the organization starts to unleash the talents of its people through the combination of daily problem-solving and breakthrough thinking, the ability to create an organization that improves profitability by producing energy safely, cheaply, and responsibly regardless of the price of oil will become a reality, and rather than blank stares, eye-rolling, or resistance when concepts like perfect safety, drastically shortened lead times, or zero emissions are presented, people will become energized and focused on making them happen.

Problem-Solving & Kaizen: Are They Different?

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One of the most important – and elusive – objectives of lean is creating a culture of continual improvement throughout an organization. In most cases, this requires changing the way people think and approach their work, and although helping people transform is never easy, it becomes even more difficult when those driving lean are not clear about the different types of improvements and how to approach each. Solving a relatively small, one-time problem, for example, requires different thinking than reducing fixed costs across the operation by 20%. It is far too common, though, to attempt both by using the same process - i.e., handing someone an A3, telling them to "do a kaizen," and asking them to complete it. Besides the wasted time this can cause, it can confuse and frustrate the person being coached.

The objective of this post is to provide some clarity about the different types of improvement. Although the subject often leads to considerable debate and disagreement, I believe it is an important one, and something that lean professionals need to understand to help move an organization toward a sustainable culture of improvement.


The Different Levels

As shown in the diagram, there are 3 basic levels of improvement within an organization. The two lower levels deal with solving problems, i.e., a situation where actual performance does not meet a standard. This assumes that the process or activity is capable of meeting the standard and has done so in the past, thereby focusing the effort on analyzing what changed or what recently occurred that had not been seen before.




The third level, breakthrough, involves raising the standard to a new level to meet current or future business needs. Doing this successfully often requires the ability and willingness to question previously held assumptions, and applying creativity to drive step-changes in performance.


In practice, this means that each requires a different type of thinking. By looking for clues regarding what went wrong, problem-solving requires analytical thinking, whereas a breakthrough, by attempting to challenge the status quo and develop new ideas and approaches, requires creative or flexible thinking. Both are needed for an organization to be successful, and both often require effective and consistent coaching to prevent people from being confused.

Because of natural forces and overall effect on the organization, there tends to be significantly more activity at the bottom of the pyramid than at the top, while, although fewer in number, efforts at the top of pyramid tend to result in more effort and a larger gain.


Daily Problem-Solving


Daily Issues
The most common and basic type of problem people face are the daily issues that are often small, one-time annoyances that, although still requiring action, have less effect on the system than the more complex and repeatable issues that the organization faces. These daily issues still require countermeasures because they interfere with the ability of people to do their jobs easily. Additionally, if we ignore them, we are showing disrespect to the people affected and sending the message that waste is acceptable. Addressing them also helps people begin to develop structured problem-solving skills in a fairly simple and easy way.

Those addressing daily issues are still expected to develop a clear statement of the problem, root cause analysis based on 5-whys, and a countermeasure that proves effective in addressing the root cause, but not to the level of a more complex problem being addressed with an A3.


The daily issues are often addressed by those closest to the process who face the problems firsthand and, because of the nature of their jobs, do not necessarily have the time to step back and look for trends and connections between the problems that occur. As with all levels of the organization, the team lead or supervisor is expected to coach and develop the ability of team members to identify and address the problems they face.


Efforts to address daily issues should be documented on a card or simple electronic system to use for coaching, collection of data, and as a means to assure that problem-solving is occurring. Care should be taken, however, to ensure that documenting the effort does not become a burden or the benefits in terms of developing analytical thinking across the organization will suffer.


8-Step Problem-Solving

Whenever a one-time issue recurs or appears on a dashboard as a gap or trend, more structured problem-solving efforts are required. For these issues, an A3 is necessary to assure that the problem is effectively defined, broken down, and addressed. Although it can still be done quickly, the effort is often coached more closely and focused on developing skills more deeply. Rather than a simple 5-whys exercise to determine a root cause, for example, an A3 problem-solving effort would require additional answers for each "why" and verification with data and visiting gemba to see firsthand before moving forward. Since an A3 effort often involves addressing a problem that is fairly complex and/or large, there is also an expectation that the problem is broken down into more specific and actionable issues to be addressed one-at-a-time.


Breakthrough: Raising the Standard

Within any business, there are times when the existing standard is not acceptable. Where problem-solving requires analytical thinking to understand what has changed and how to get a process back to where it once was, breakthroughs often need creative ideas to make the type of changes that will raise performance to a level not experienced before. Doing this successfully requires challenging assumptions to separate fact from deeply held opinions.


In spite of what many people think, everyone has the ability to think creatively and develop innovative approaches to business. The key is to coach and develop people to access and hone creative powers – something that is admittedly not always easy to do. The more experience one gains in a particular field or organization, the more the person tends to stick to what he or she already knows – or at least thinks he or she knows – becoming more and more set in one way of thinking. Success with breakthroughs requires breaking down this defense to get people to begin questioning what they accept as fact to see when it is actually nothing more than a strong opinion.

Analytical thinking, although critical for problem-solving, will rarely lead to innovative breakthroughs required to keep the company moving forward. In his book, Elastic: Flexible Thinking in a Constantly Changing World, Leonard Mlodinow writes that innovation requires "bottom up" thinking driven from inside the person versus the "top down" outside-driven thinking generally required for problem-solving.

An important point about the balance of analytical and breakthrough thinking is that a company cannot use innovation to stay ahead of quality and productivity problems. There must be a solid foundation of problem-solving and stable processes upon which to build and hold the breakthroughs.

Both are Required

What makes lean powerful, the combination of analytical problem-solving and innovative thinking, is also what makes the transformation so difficult. Understanding the different dimensions of improvement is fundamental to assuring a successful journey and avoiding the confusion and frustration that many companies experience.