Who is the Customer for a Commodity?

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Teaching lean in an organization generally involves discussing activities that do not add value to the company’s products or services - with value being defined as anything for which the customer is willing to pay.  However common this approach is, though, it can be much more meaningful to companies in some industries than others.  For industrial or consumer products industries - a car or medical instrument, for example - people are generally able to think like their customers and comprehend fairly accurately what they would and would not be willing to pay for.

But what if the company’s product is a commodity?  Commodity producers tend to be so far removed from the customer that it is difficult to think in terms of what consumers would consider value.  Also, commodities lack differentiation on the basis of quality and, since prices are directly set by markets, the idea of determining value based on what the customer will pay for does not necessarily make sense.

For products like oil and gas, precious metals, grains, and even some financial instruments, it doesn't theoretically matter how much waste is inherent in the company's processes; when prices rise,  revenues rise and when prices fall; revenues fall.  Products are delivered to a broker, terminal, or market where they are sold without regard to who supplied them.

THERE IS ALWAYS WASTE

Market prices have such a dramatic effect on the financial results of commodity producers that when prices are high, little attention is given to waste, and when prices are low, costs are often slashed without regard to improving the processes that produce the product.  Providing clarity around the definition of waste, however, can drive improvement and lower the commodity price point at which the company can remain profitable.  Also, reducing waste in processes, as compared to slashing costs, tends to result in improved safety  and higher levels of production.

ExxonMobil and Chevron are examples of highly successful commodity producers, each consistently reporting net income in the billions of dollars.  The quality of the oil and gas that each produces is much more related to the geographic area than their own processes and they have no control over the price they receive.  It’s a pretty safe bet, however, that like most organizations, both have a significant amount of waste within their operations

At the most basic level, the profitability of Exxon and Chevron are determined by the difference between the market price of oil and the costs to extract it from the ground.  And since they have virtually no control over the price of oil, they must focus on what they can control - the costs to find and produce the oil - and it is here where waste can be found.

BACK TO BASICS 

So how does a commodity producer define waste?  Since the market is the customer and inherent waste cannot be passed on to the customer, the concept of what the customer will or will not pay for does not really apply.  To clarify the meaning of waste, commodity producers have to look to their purpose and product for a more usable definition.

For example, it is important for people working in a company that mines gold to understand that the operation exists to "mine gold safely, efficiently, and in a socially responsible manner."  When this is clearly understood, waste can then be defined as anything that does not contribute to mining gold in a safe, efficient, and socially responsible manner.  Improvement can begin when people realize that their jobs exist to either mine, transport, and sell gold or support someone else who does.

Basing waste on customer satisfaction can apply to internal customers, but only after there is clarity around why the company exists and what it is trying to do.  Identifying internal customer requirements and measures will be very difficult, if not impossible, without first establishing what constitutes waste for the company's end products.

TEACHING FIRST REQUIRES UNDERSTANDING

Lean professionals must understand the company and its processes before attempting to teach or coach people about continual improvement.  Relying on canned approaches like defining waste in terms of what the customer will or won't pay for can confuse people or strengthen the perception that lean is another management fad that doesn't apply to the company's situation.

The Significance of Catchball

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“A goal without a method is nonsense!” – W. Edwards Deming


A critically important element of business planning that often gets downplayed or completely ignored is the catchball process.  The books and articles I've read on the subject of hoshin kanri tend to oversimplify the role of catchball and rarely go into the level of depth the subject deserves.

Catchball is a process whereby leaders and team members discuss objectives and plans to make sure everybody understands and is in agreement with expectations.  The conversations go back and forth between levels to assure that the objectives, as well as the plans to achieve the objectives are clearly communicated.

Catchball is often limited to the discussions at the executive level to sort out high level goals.  By not carrying the process through all levels of the organization, however, leaders are missing an important opportunity to communicate expectations and concerns before problems occur.

The objectives of catchball include:

Clarification:  Clarifying expectations to team members upfront rather than waiting until the performance review to criticize them for not meeting objectives that may never have been understood in the first place.  We tend to spend more time evaluating performance than we do making sure expectations are clear, which makes it appear as if we want people to fail more than we want the organization to succeed.

Consistency: Gaining comfort that a person can meet objectives through methods and behaviors that are consistent with the way the organization operates.  When the only concern is whether or not an objective is met (i.e., the "how" is ignored), we can easily create an Enron-type environment that undermines values, breaks down teamwork, and where improvements are not sustainable.

Coaching:  Providing a vehicle for coaching team members on the methods and behaviors required to be successful.  A critical component of development is to provide team members with objectives that stretch thinking and take them out of their comfort zone. Doing this without adequate coaching and direction, however, can be destructive to the person's development.

Communication/Dialogue:  Allowing people to communicate concerns to leaders about meeting objectives and asking help that may be needed to be successful.

Alignment:  Assuring that there is clear alignment between lower level plans or A3s and higher level plans and targets.

When implemented correctly, catchball can make up for many of the problems that companies experienced during the MBO-era.   It forces communication between levels and improves a leader’s understanding of the implications that objectives have on the people to which they are assigned.  Like anything in business, however, catchball requires continual improvement to be successful.  It requires patience and a willingness to listen to concerns, as well as a sincere effort by leaders to coach and mentor team members.

No Time For Heroes

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One of the issues that can arise during a lean transformation is figuring out how to deal with the corporate heroes that exist in virtually every organization.  These are the “go to guys” whenever a major problem arises.  They are generally hard workers, know their processes well, and measure their worth by the number of highly visible problems they are involved in solving.

This can become a significant issue because a lean thinking organization values those who prevent problems and work well in teams more than those who wait until problems occur and swoop in to save the day.  The behavior often exhibited by the heroes is the opposite of what you are trying to establish in the transformation.

On the positive side, heroes tend to be hard working, smart, and highly experienced in the company’s operation – all things that are valuable to the organization’s success.  On the negative side, however, these people often have a hand in creating problems, or at least have the ability to address problems before they become critical or high profile issues.  They also tend to keep important process information close to the vest because they view it as a key to their success.

The Difficulty in Changing Hero Behavior

One of the biggest issues in dealing with the heroes is that, for years we have rewarded them for the behavior they exhibit.  Heroes tend to like a lot of attention and publicly delivered compliments for their actions.  As the organization becomes more lean-focused, though, it becomes clearer to people that addressing problems means understanding and addressing root causes so we can reduce the likelihood that they will occur in the future.  We cannot tolerate people who have the ability to prevent problems but wait until they occur before taking action.

Getting heroes to understand the consequences of their behavior will require a lot of coaching and one-on-one discussions to help them realize that they may have been rewarded and promoted in the past for the wrong reasons. And although changing behavior is a difficult and often futile undertaking, it is the responsibility of the leader to make the effort because the problem we are addressing is most likely one we created.

In many instances, it is critical to get the hero involved in the development of standard work because they understand their processes so well.  We must attempt to document and make available to everyone information that they have most likely held close in the past.  This is a process that will have to be tested and retested in order to assure that all necessary information has been extracted from the person and effectively documented.

Step 1: Recognize the Problem

Addressing the problem of hero worship will not be easy.  Correcting behaviors first requires admitting that heroes are, in fact, a problem. Chances are, you and others have come to rely on these people when high impact problems occurred. Recognizing that is is a crutch for ineffective processes, however, will help you see the situation more clearly.

Expect a lot of complaining, pushback, and even attrition as you embark on the process of bringing heroes back down to earth. Like any change process, though, succeeding will require clarity in the vision and consistency in the message.

2012 Annual Management Blog Roundup – Steven Spear: The High Velocity Edge

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This is the third installment of my favorite management blogs as part of John Hunter’s 2012 Curious Cat Management Blog Carnival.

Back in 1999, Steven Spear and H. Kent Bowen wrote the HBR article, Decoding the DNA of the Toyota Production System.  The article has become one of the most widely read accounts of why and how the Toyota Production System (TPS) works.  It’s one of those articles that needs to be read over and over as one learns more about lean and transformation.

Spear has continued to write about learning and improvement in his blog (The High Velocity Edge) and his latest books, Chasing the Rabbit and The High Velocity Edge.

I’ve enjoyed reading the books and articles written by Spears, as he digs into some fundamental elements of transformation and why companies like Toyota and Alcoa are different from traditionally-led organizations. 

Rather than review posts from a few blogs posts, I would rather approach this one with a series of excerpts that I thought were valuable to those involved in organizational transformation.

“ . . . there is the ideal as a consistent source of concern . . . Observed departures from ideal were triggers for the question: what is it we don’t understand that causes us to have defects, delays, waste, and risk?”  Triggers and Objectives for Processes Change-Shortfalls, failures, and imperfections

“Lean never becomes self sustaining.  Never ever ever.  No way, no how.  It simply cannot.” Does ‘Lean’ Become Self Perpetuating?

“To focus on trade offs – that to get more of something means you have to give up something else – means you assume you are extracting as much cumulative value out of your work as possible.”  Asking What Quality Initiatives Get Sacrificed Under Budget Pressures Asks the Wrong Questions 

“Often confused are “continuous improvement” and “innovation, . . . The differences between the two may have more to do with time frame and scope and less to do with approach.  In either case, the key issue is deliberating converting ignorance into useful knowledge.”  Continuous Improvement versus Innovation

Spears posts tend to be fairly short and to the point, which is nice when you have a lot to read and little time to actually sit down and do it.

Additional information about the Curious Cat Annual Management Blog Carnival is available at http://management.curiouscatblog.net/category/carnival/.

Should We Focus on Strengths or Weaknesses?

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It takes far less energy to move from first-rate performance to excellence than it does to move from incompetence to mediocrity. – Peter Drucker

Most people would agree that developing people is an important component of building a successful company.  Although it is fairly common for organizations to have some sort of process aimed at developing people, however, very few seem to be effective at truly improving individual performance.
In many organizations, the development process consists of little more than an annual or semi-annual meeting between boss and worker where strengths are briefly mentioned and weaknesses are covered in detail.  After all, we feel good about a person’s strengths, so why should we waste time discussing them?  If we can improve or eliminate a person’s weaknesses, the individual and the organization will improve, right?

In The Effective Executive, Peter Drucker wrote that, by focusing on our weaknesses, the best we can achieve is mediocrity.  If, on the other hand, we work on further developing our strengths, we can achieve greatness.

We excel in the areas that motivate us, while our weaknesses tend to consist of the things that do not interest us or, for whatever reason, we are unable to improve.  Focusing attention on developing the things we either can’t improve or aren’t interested in improving leads to frustration, stress, and de-motivation.

Motivation results when people when we are able to create a workplace where people can have fun.  One important aspect of this is assuring that people are able to effectively utilize and develop their strengths.

Addressing the Organization’s Weaknesses

While it is important to understand the skill gaps that exist within the organization, closing them requires an effective hiring process that enables the right mix of talent and ability to operate effectively.  In other words, successful leadership requires putting together a team where individual strengths complement one another and people are able to effectively cover each other’s weaknesses.

Besides the negative effects on motivation, attempting to close gaps by forcing people to work on their weaknesses takes attention away from further developing strengths which can be much more valuable to the organization and the individual in the long run.

2012 Annual Management Blog Roundup - John Shook & the Lean Enterprise Institute

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This is the second installment of my favorite management blogs as part of John Hunter’s 2012 Curious Cat Management Blog Carnival.

John Shook is one of the most recognized names in lean thinking.  John spent 11 years at Toyota, and has authored (or co-authored) several books on the Toyota Production System.  He is currently Chairman and CEO of the Lean Enterprise Institute (www.lean.org) and maintains a blog on the site entitled John Schook’s eLetters, where he has been posting since 2008.

In Encouraging Signs of Leadership, John addresses the complexities of leading a lean journey.  An organization is a system and transformation needs to take place on many dimensions.  Change must be driven on the system, not the components of the system.

In the post, Shook writes that, “Leadership is integrated into the work and not overlaid onto it.  And yet many prevailing conceptions of leadership fail to grasp this simple but essential truth.”

In another post (Learning Lean – Collaboratively), Shook writes on my favorite lean topic: learning.  Lean practitioners are obsessed with learning but, as Shook writes, learning does not happen just because one wants it to.  It results from the application of tools and methods that enable a PDCA mindset.  Through PDCA, mechanisms like standardized work, kata, kaizen, and hoshin kanri all enable learning to occur faster.

In So What Are You Going To Do About It? (I love the title) Shook addresses the changes taking place in the world and the resulting impact they are having on business.  By once again returning to the idea of appreciating the system, he talks about the importance of understanding and improving the value stream as the way to deal with these large-scale changes.  By addressing problems in isolation, we’re doing nothing more than pushing costs from one part of the value stream to another.

W. Edwards Deming used to say that the system is as large as we’re able to manage.  I think the complexities and interactions in today’s world require us to see the system as much larger than was required in years past.  Understanding the supply chain, company processes, distribution, and customer tiers, although complex, is necessary for the long-term success of any organization.

 
Although Shook tends to push products and services of the Lean Enterprise Institute in many of his blogs, one can gain a wealth of information by merely reading and reflecting on his posts.  Focused directly on the application of lean, the influence of Deming is very evident. 

Additional information about the Curious Cat Annual Management Blog Carnival is available at http://management.curiouscatblog.net/category/carnival/.

Blog Carnival 2012 - Peter Drucker's Management Philosophy

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One of my favorite blogs on leadership is John Hunter’s Curious Cat Management Improvement Connections.  Besides a number of informative posts on a variety of improvement-related topics, John regularly hosts a management blog carnival, where various business and leadership blogs are featured.

This year, I’m happy to participate in the carnival with information on some of the blogs I read on a regular basis.  Reviews of all of the blogs featured in this year’s carnival can be found at http://curiouscat.com/management/carnival_2012.cfm. 

My first review in this year’s carnival is Peter Drucker’s Management Philosophy by Jorrian Gelink.  I don’t know Jorrian personally, but after reading his blog, he is obviously a Drucker zealot with excellent insight into Peter Drucker’s management philosophy.

Peter Drucker’s teachings are closely aligned with a lean mindset.  I have always found the information he provided to be a great fit with W. Edwards Deming’s System of Profound Knowledge, and a necessary component of effective leadership.  Although Deming regularly attacked Management by Objectives (MBO), I believe he was more disappointed with how MBO was implemented than the method itself.  In fact, Drucker even said that MBO only works if objectives are carefully thought through, and that 90% of the time, they aren’t.

I believe much of Drucker’s teachings have been lost over the last several years, as companies look for quick and easy ways to “become lean.”  I applaud Gelink for keeping it alive and using it to teach current and future leaders that Drucker’s philosophy is as relevant today as it was when he was alive.  I enjoy reading Gelink’s posts and expect to continue to learn from the Peter Drucker’s Management Philosophy in the future.

Gelink organizes the blog into four main sections:  Executive Basics, Management Basics, People Management, and Entrepreneurship.  There is also an excellent search tool that makes it easy to find posts on a number of management topics.  A sample of Jorrian’s posts is listed below:

Fear of Conflict – Why Conflict is Necessary  An excellent summary of the benefits of healthy conflict in any organization.  The post reminds me of The Abliene Paradox by Jerry B. Harvey; a story where family members agree to drive 53 miles to Abilene for lunch, even though nobody really wants to do it.  To avoid conflict, however, they all go along, have a terrible time, and blame each other upon returning home.  Unfortunately, too many organizations suffer from the Abilene Paradox because of the absence of open, healthy conflict.

In the post, Jorrian writes, “the result of a stronger, discussed plan is increased effectiveness, and overall satisfaction of those involved because their input was considered into it.”

What is Our Mission?  The Heart of the Organization  Whether deploying lean or not, the importance of a clear and unchanging purpose is critical to success.  Without a clear mission, there is no team – there is only a group of individuals who define success on their own terms.  Any success without a consistent purpose is accidental and destined to be short-lived.

In providing direction for defining the purpose, Jorrian wrote, “the mission starts with what is on the outside of the organization; not with what is inside.  Entrepreneurs that fail are the ones that do what they want to do, instead of what their customer wants.”  Examples of mission statements from successful technology-based companies are provided within the post.

In Personal Development – Becoming Effective in Your Role, Jorrian provides the distinction between being effective and efficient, specifically that effectiveness results from doing the right things.

The post hits on one of Drucker’s most important teachings – the idea that understanding, developing, and continually using your strengths is what leads to success.  Jorrian writes that aligning individual strengths with the organization will lead to increased effectiveness and personal success.

I have so many interesting books on reading list that I will never have the time to complete.  As with Deming, I learn a great deal each time I re-read one of Drucker’s books because he had so much to teach.  Reading Peter Drucker’s Management Philosophy allows me to keep up on Drucker’s theories even when I don’t have the time to re-read his books.

More information on the 2012 Management Improvement Blog Review can be found at http://curiouscat.com/management/carnival_2012.cfm.  For specific posts from this year’s carnival, please go to http://management.curiouscatblog.net/category/carnival/.