A Systems Approach to Business - Part 3

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Note:  This is the third part in a three-part post on the subject of systems thinking in business.  To read the first two posts, go to Part 1 and Part 2.  To download the paper in its entirety, please go to the downloads section of www.praecedogroup.com.

Defragging the Company

Moving focus from individual components to the overall system requires a significant amount of commitment and patience by the company's leaders.  The steps to begin the process of defragging a company include the following:

• Promote the Generalists:  Move leaders from specialists to generalists to increase understanding and leadership of, people, information, material, products, and services- how they flow and work together to serve customers;
   
• Coach & Mentor:  Coach and mentor people to increase the level of understanding throughout the company regarding how each job supports other areas in the achieving the fundamental purpose.  Those who work in support areas need to clearly understand that they exist solely to support the company's main processes that serve customers (which, by the way, doesn't make them any less significant to the company).
  
  When done correctly, value stream mapping (VSM) is an excellent tool to help clarify the company's high level system, including the interactions of people and teams;
   
• Enable Relevant Feedback:  Implement a feedback system (e.g., a 360° system) that includes input from a person's internal customers, and is focused on improving performance - rather than documenting and blaming for poor performance;
   
• Clarify Expectations:  Set objectives based on supporting achievement of high-level (companywide) objectives and tie incentives to company or division performance - or, if done extremely carefully, based on success in supporting improvement efforts.  Clarify expectations regarding participation in change initiatives and improvement activities and focus efforts on the company's overall success - create an obsession for satisfying customers.
  
  As an example, a reward system for the plant managers in Situation #3 from Part 1 based on companywide results rather than individual plant results can lead to improved teamwork and cooperation between plants, and improved results for the company.

It's the Big Picture that Matters

Since there are few, if any, who would argue that company performance matters more than individual or department performance, it becomes a question of whether individual performance can be accurately measured as a contributor to company performance.  Although it's perfectly natural to want to evaluate how much value an individual or team is contributing, most organizations are far too complex to do it with simple, one-dimensional measures.  Most people are intelligent enough to do what it takes to meet virtually any goal or make any measure look good - even if it detracts from overall company performance.  There are unfortunately numerous examples over the last several years of unethical or illegal behavior driven by internal or external company measures.  Putting these examples aside, however, I truly believe that most people care about the success of the organization but have learned what to do to survive in today's business world.

Fragmented thinking is one of the biggest barriers to long-term success for a company.  Moving to systems thinking requires a fundamental shift that many will be unable to do.  Communicating the vision, clarifying expectations, and continual coaching must replace dictating and obsessive measuring and evaluation of people as a management style.  If you've hired the right people and are consistent in your approach, your move toward systems thinking - as measured by continually improving financial results - will occur.

A Systems Approach to Business - Part 2

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This is the second in a series of three posts on the subject of systems thinking in business.  To read the first post, please click [here]

Why We Fragment

I could cite many more examples in addition to those listed in the previous post where goals set for individuals or teams resulted in fragmenting the company and compromising results.  Although fragmenting is destructive to organizations, it continues to be used for a variety of reasons:

• Simplicity:  It's much easier to manage an organization by breaking it into components than to comprehend and manage the whole.  For example, holding a supply chain manager accountable for reducing material costs is easier than setting a total cost objective (which includes accounting for factors like incoming inspection, customer returns related to supplier quality, inventory carrying costs related to increased leadtimes and late deliveries, etc.).  From a systems perspective, however, total cost much more accurately measures the supply chain's contribution to the company than does material costs. 
   
• Lack of Trust:  Micromanagement - which is unfortunately very common in organizations today - results from a lack of trust in people, and cannot coexist with systems thinking.  Leading from a holistic perspective requires relying on vision, clear expectations, delegation of responsibilities, and encouraging people to support other areas, rather than setting easily measurable goals and dictating how work is to be done.  People must be given the authority (as well as a method, training, and the responsibility) to improve processes - including the hand-offs between processes - without detailed input from supervisors.
  
  Another factor that leads to fragmentation is a lack of trust and patience that the organization will achieve targets without knowing that the components are meeting targets.  Even if there is no proven relationship between the targets set for individuals or departments and the targets for the organization, people feel like they're being proactive when they can measure something.  And, as mentioned above, implementing an indicator that accurately measures a person's real contribution to the system is difficult and expensive to maintain;
   
• Functionally-Focused Leaders:  Leaders who lack experience outside of their own function have trouble clearly understanding how their areas support others in the organization.  As an example, a CFO who implements a system that improves productivity within the finance team but causes additional work for other parts of the company does not understand the role of finance within the organization.
   
• Layoffs:  Nothing can make people worry less about the company and more about their own jobs than a round of layoffs.  When layoffs occur, people turn their focus to pleasing the boss instead of pleasing internal and/or external customers, and will do whatever it takes to survive, even if their actions do not support the organization's performance.  Unfortunately, layoffs have become commonplace in U.S. organizations and the practice continues to fragment companies.

Many people know of no other way to manage a company than to break it into "manageable" pieces, but experience continues to show that the practice leads to suboptimal results.  Continual efforts throughout the organization to understand (see figure 1) and continually improve the system will yield much higher returns than worrying about measuring people and individual teams.

A Systems Approach to Business - Part 1

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Note:  This is the first in a series of three posts on the subject of systems thinking in business.  Systems thinking is an critical subject for organizational leadership that cannot be adequately covered in a single post.

"If you try to take a cat apart to see how it works, the first thing you have in your hands is a non-working cat."  Douglas Adams

In the most basic sense, an organization is a continually developing system of people, processes, equipment, and sub-systems working together to achieve a common purpose (the key word for this discussion being 'system').  Like any organic system, organizations are complex and need to be managed as a whole in order to achieve the purpose.  Efforts to break a company apart and focus on individual elements can negatively affect the balance and interfere with success by creating competition and fragmentation between components.

Although most people in business would agree that the performance of the company is more important than that of individuals or teams, the way many organizations are managed achieves just the opposite.  For a variety of reasons, leaders inadvertently fragment organizations, and set individual or team goals and objectives that often interfere with long-term success.

Consider the following:

Situation #1
In an attempt to reduce material costs, an incentive program for the supply chain team is implemented with rewards tied to containment and reduction of costs.  The program succeeds in reducing material costs but leads to increased production costs, customer returns, shipping delays, and warranty expenses due to the purchase of substandard materials and longer supplier deliveries.


Situation #2
Sales managers are rewarded based on revenues generated from the regions they manage.  The sales manager in Scandinavia has a significant opportunity with a new customer but, to secure the business, needs a good deal of technical assistance from the sales manager in France - who is very knowledgeable in this customer's particular application.  Although the French sales manager wants to help, he feels he can't afford to spend time on an activity that will not generate sales in his territory.

Both sales managers end up barely meeting their targets, but the company misses the opportunity to secure business from a new customer.  Also, teamwork between the sales managers has been damaged.

Situation #3
Plant managers in a global manufacturing company are measured and rewarded on meeting EBIT targets for activity in their plants.  Plant A has more demand than capacity, while Plant B has more capacity than demand.  The manager of Plant A decides to buy products from the outside to meet demand.  In order to meet the EBIT target, however, he orders product from a competitor instead of Plant B because of a lower price (the manager of Plant B priced the product high enough to assure the order wouldn't negatively affect his plant's EBIT).

As a result, the manager of Plant A met his targets and received a bonus while the manager of Plant B did not.  Because Plant B did not meet its targets, the company as a whole failed to meet its targets.  Teamwork between each of the plants, which was already strained, has deteriorated further.

There are numerous examples like the above where goals or measures encourage behavior that fragments the organization.  Although it seems perfectly logical to evaluate performance of a team member on a measure like EBIT or sales revenues, it can easily cause someone to act in a way that is detrimental to the performance of the organization, as a whole.

Organizations are far too complex to objectively, accurately, and easily evaluate an individual's performance.  Extreme care must be taken when setting objectives and basing rewards on achieving individual targets. 

The more one adopts systems thinking and understands how it is important to continually focus on improving the overall system - especially the hand-offs between people and teams - the easier it is to abandon traditional measurement and reward systems and move to a more holistic approach to leadership.

Speeding Up New Product Development

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As we emerge from the worst economic downturn since the Great Depression, it is clear that speed will be a critical competitive advantage for businesses.  Companies that are flexible and able to adapt quickly to customer demands will be the most successful as the recovery continues.

When it comes to developing new products, companies can no longer afford long cycle times or introducing products that customers do not want to buy.  Quality will also be a given, as people will no longer expect or accept problems with new products.  This means that companies will need to put a renewed focus on the process for developing new products.  Success awaits those organizations that are able to frequently and consistently introduce high quality, reliable products that satisfy the needs of the market.

Lean for New Product Development

There are many companies that practice lean methods for product and service processes but fail to apply the same type of thinking to the development of new products.  Like any process in business, attacking waste in new product development will benefit the company through increased revenues, lower costs, and higher customer satisfaction.  Also, the faster an organization can turn ideas into new products, the faster its investment will produce an income stream for the company.

I have worked with many companies over the years to improve the process for developing new products and services.  The approach to improve the quality, costs, and cycle times for new product development is similar to applying lean to a manufacturing process in that it requires high levels of systems thinking and teamwork, and consistent focus on the customer.

Some of the best practices I have seen from companies that have made significant improvement in new product development include the following:

• Customer Obsession:  The entire process is based on the customer - which, doesn't necessarily mean directly asking customers what they want and building products based on the feedback.  When it comes to products, customers can only convey what they want based on what they have received in the past.  Since they really do not know what is possible, they will rarely provide direct  feedback for innovative products.
  
  Understanding the customer's frustrations with your (and your competitors') products, and why and how they use the products will result in much more clarity regarding the customer's fundamental needs; and it is in the fundamental needs where the real value lies.
  
  
• Team-Based Development:  Representatives from every area affected by the introduction of a new product are actively involved throughout the project.  In a typical company, this means, as a minimum, including people from engineering, marketing, operations, procurement, quality, and finance.
  
  Having all areas involved throughout the project helps avoid potential problems by discussing and addressing concerns as the work progresses.  It also helps each area assure the necessary processes are ready when the product is released, and to confirm that the processes are designed to protect the needs of the customer.
   
• Project Management:  New product development projects are led by people with project management capabilities.  Typically, new product development is a cross-functional activity involving effort from marketing, R&D, engineering, manufacturing, and other areas.  Because of this, the person responsible to manage the project does not need to an engineer (in fact, assigning the role to the engineer - or anyone on the team - can distract the person from performing actual design work).  The project needs to be someone who is organized, able to keep the work progressing, and with enough authority to request additional resources or project scope changes, when necessary.  Depending on the size and design of the organization, this can consist of a single, full-time project manager or a project management office (PMO) that can handle multiple or cross-divisional projects.
  
  
• Logical Organization:  To increase the focus on customers when developing new products, some companies have moved the R&D function to report to marketing.  Others have combined engineering and operations to improve communication and teamwork between the two areas.  The key is to understand where the current organization interferes with success and to have the courage to make changes that will improve the situation.
  
  Some organizations physically relocate team members on a temporary basis in an effort to assure clear and continual communication throughout the project. 
   
  
• Knowledge Management:  Systems that improve organizational memory can significantly reduce new product development time.  Without a system that collects design, testing, and customer information, extra costs and delays can occur because of redoing work that has been done in the past.
  
  
• Process Simplicity:  The development process is simple with very few approval gates.  The team clearly understands their scope and is given the freedom to develop and qualify the product within these limits;
  
  
• Patience:  Improving quality while reducing costs and cycle time for new product development requires consistent focus, commitment from the company's senior leaders, and a good deal of patience.  It is a continual process that, similar to improving a manufacturing process, consists generally of many small improvements that add up over time to significant improvement.  Conducting post-mortem reviews of projects can provide valuable feedback regarding delays, cost overruns, and problems in order to improve future efforts.

Designing a product people want to buy is only one part of the equation - doing it quickly, reliably, and assuring that problems do not occur after release makes up the rest.  There is significant investment involved in attempts to turn ideas into profits, and the better this process operates, the better the return on the investment will be.

Satisfying Internal Customers: It's Still Important

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What everyone in a company does can be reduced to one of two functions:  to serve the customer or someone who does.

W. Edwards Deming

One of the most basic but difficult philosophies to ingrain into the culture of an organization is the internal customer concept.  The silo mentality is so common today that it interferes with the ability to focus on the needs of anyone who is in another part of the company.  The level of distrust that exists tends to be so high that we feel others will take advantage of us if we focus on making their jobs easier (or that making others look better will in some way jeopardize our own jobs by making us look worse).

I once facilitated a lean project with a technical group in a global organization.  When I asked why there were no representatives from the operations team (who directly received the output of the technical group), those in the meeting commented that the people in operations were lazy, did not understand what they needed, and would ask for anything that would make their jobs easier without regard to the effect it had on the technical group.  The discussion identified a serious problem in the organization that had to be resolved before the lean initiative had any chance of being successful.

Looking at it Objectively

Since very few jobs deal directly with external customers, it stands to reason that most people only work to serve internal customers.  If people are unwilling or unable to satisfy their internal customers, the organization has very little chance of satisfying its external customers on a continuing basis.

If the organization is truly committed to satisfying customers, the people in finance, IT, maintenance, human resources, and many other parts of the organization must develop a clear understanding of how the work they do impacts the external customer by serving internal functions.  Without an emphasis on internal customers, these same groups can begin to think that the work they do is an end in itself.  This captured market mentality - believing that others have no choice but to accept the output provided - often leads to process changes that reduce costs for these groups without regard to the effect on internal customers.

Perhaps the best example I've seen of a company that clearly understands the importance of internal customers is the inverted pyramid at Nordstrom.  The pyramid (shown on the Nordstrom website) depicts the organizational structure with customers at the top and each successive layer supporting the one above it.  As shown in the figure, customers are supported by sales and support people who, in turn, are supported by department managers, etc.  The objective of the pyramid is to make it very clear that customers are at the top of the company's priorities and the job of everyone is to support those who directly serve customers.

Achieving an Internal Customer Focus

There are a number of steps to achieve an internal customer focus within an organization.  The obvious first step is to assure that the company's senior leaders believe in its importance and are committed to making it happen.  If the company has poor teamwork and/or a number of functionally-focused leaders, there is very little chance that they will understand or be concerned with those in other parts of the organization.

Beyond assuring a level of understanding and commitment from those at the top of the organization, the following steps will help institute an internal customer focus:

1. Encourage open communication with internal customers and suppliers on how to improve the quality of what is provided to external customers;
   
2. Talk with people at all levels to better understand the reasons why a focus on internal customers does not exist.  The interviews are best conducted by someone outside of the organization if the level of fear and distrust within the culture will prevent people from openly expressing their thoughts;
   
3. Discontinue the practice of promoting people who do not understand the company's overall system and how the work performed by the teams they lead is used to help others satisfy external customers.  Leaders who are generalists tend to accept and practice the internal customer concept more than those who are specialists and focus more on their functions than the company as a whole;
   
4. Include internal customer input in feedback systems and hold people accountable for continually improving the products and services they provide internally;
   
5. Continually coach team members and lead by example;
   
6. Be patient and consistent.  Like any change initiative, shifting the culture to increase focus on internal customers can be a long-term process that will be tested over and over again as the change occurs.

I have found that, when facilitated effectively, value stream mapping sessions can be very beneficial in communicating how the output from one function becomes the input for another.  It also provides a method for identifying the problems that occur in the hand-offs between internal suppliers and internal customers.

Shifting the culture to one that is focused on satisfying internal, as well as external, customers often results in the identification of deeper cultural issues that need to be addressed before success can be achieved.  As these issues are resolved, however, the improvements in teamwork and communication will translate directly to the customer in the form of improved products and/or services.

The Revolving Door at GM

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General Motors CEO Edward Whitacre is at it again.  Apparently frustrated with the company's lack of U.S. market share growth (it has actually fallen 0.4% since January), Whitacre replaced VP of Marketing Susan Docherty with ex-Nissan and Hyundai marketing chief Joel Ewanick [story link].  Ewanick now becomes the fourth person to lead marketing for the company in the last 12 months.

Besides the obvious effects on motivation created by demoting or firing someone, the fear that can ripple throughout the organization when it occurs over and over again can be immense.  The rapid pace of changes in leadership positions can cause significant damage to an organization that is in desperate need to pull together and focus on rebuilding its health.  It's important to note that executive-level replacements are the only ones reported - there may (or may not) be turnover in other positions that did not make the news.

The Destructive Effects of Fear

The potential effects of the fear created by this type of situation can include:

• Teamwork:  When people fear for their jobs, they tend to shift into survival mode and focus more on their own survival than the company, as a whole.  When this happens, the level of political gaming within the company often significantly increases;
• Risk:  People tend to be much less willing to take risks if they feel that failure can cost them their jobs.  And a careful approach to business and markets is definitely not what GM needs right now to resotre its competitiveness;
• Creativity:  People need to feel relaxed and comfortable in their jobs to develop and use their creativity, while prolonged periods of stress has been shown to have the opposite effect.  Survival and growth in today's highly competitive auto industry will require GM to become much more creative and innovative in its products and processes;
• Speaking Up/Voicing Concerns:  Fear can crush the willingness to disagree with or questions someone higher in the organization.

I understand that Whitacre is trying to create a sense of urgency in a company that has apeared lethargic for many years.  Developing a clear vision with aggressive objectives, getting in front of people to build enthusiasm and urgency around them, and removing the barriers that interfere with success, however, is much better than firing people to get this point across.

Short-Term vs Long-Term

Ewanick is apparently a highly talented marketing professional with an impressive resume.  However talented he is, though, I wonder it it is possible to develop programs that will quickly increase GM's share of the U.S. market.  A clever ad or marketing campaign may increase sales in the short-term, but sustaining sales and market share increases can only occur by getting close to customers and developing products that meet their needs and wants better than any other automaker.  This is not something that can happen within a few months.

Don't Ignore the Culture

I once worked in an organization where the CEO regularly fired senior leaders (among others) for "underperforming."  As a result, fear and backstabbing became the norm as people worried more about preserving their own jobs than they did about working together to improve the company.  It was a truly bad experience.

GM has suffered from a compromised immune system for many years, and to become competitive again, it must restore its health, which requires improving its strategies, systems, processes, and culture.  These things can't be done without a certain amount of stability at the top.  Continuing to hire, fire, and demote senior leaders can frighten and confuse the organization, something that GM really can't afford to let happen in its current weakened state.

Supply Chain Management: Misunderstood & Misapplied

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Like so many excellent concepts in business over the years, supply chain management (SCM) will probably never live up to its potential.  Too many people are unable to broaden their understanding beyond basic procurement and move toward a more systems approach required to truly optimize a company's supply chain.

What is Supply Chain Management?

The American Production & Inventory Control Society (APICS) defines supply chain management as the design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally.  This definition inherently assumes that a systems thinking approach is necessary to be successful.

The suppliers that provide materials, products, and services to a company should be managed and optimized just as if they were internal to the operation.  Since they represent the starting point for a company's operation, they potentially affect everything throughout the value stream and ultimately what is provided to the customer.

To be truly effective, SCM should focus on improving quality, cycle times, and total costs in dealings with suppliers.  In theory, the process should involve understanding and optimizing the entire value chain from the very first level suppliers (those in which the company may never deal with directly) to the end customer.  Since it can be overwhelming to fully understand and take the time to build relationships with a lengthy supply chain, a more practical application of SCM involves working with a company's first tier suppliers and customers.

The way that SCM is approached in most companies, however, is to solely focus on negotiations with first tier suppliers on price and payment terms, which have very little, if any, effect on quality and cycle times, and only barely addresses the subject of total costs.

Total Costs

The total cost of dealing with suppliers involves so much more than price and payment terms.  Far too often, though, companies - even those that claim they follow an SCM approach - focus only on these aspects of the relationship while virtually ignoring the other factors that can have a much greater effect on costs (see table below).

Improving the total costs associated with the supply chain involves:

• building close relationships with suppliers (based on trust, mutual benefit, and clear communications);
• continually working on the factors that reduce total cost (see above table);
• understanding and optimizing the systems of logistics for products and services procured (inbound) as well as those provided to customers (outbound) that are consistent with the company's operational and marketing strategy;
• working with customers to understand how the supply chain affects their operations.

Once the supply chain strategy is developed, implementation begins initially with the first tier and slowly and continually expands to cover more of the supply chain.  How much of the chain depends on many factors, including the size and complexity of the supply chain and how much of it can be effectively managed.

A Generalist Approach

The topic of SCM is far too complex to adequately cover in a relatively short blog post.  The point is, though, that effective supply chain management involves so much more than negotiating price and payment terms with key suppliers.  It requires developing close relationships with customers to understand how the supply chain contributes to their needs, and systematically implementing improvements throughout the system to reduced waste and improve performance.  Those directing an organization's SCM efforts need to be systems thinkers who are much more adept at leading improvement efforts than negotiating contracts with individual suppliers.