To meaningfully impact financial results, performance improvement needs to sustain. Performance improvement projects, by design, jump performance from one level to another. Unfortunately, it is very difficult to jump to a higher level of performance and stay there; there’s a powerful force that wants to return an operation to the old way of doing things.
There is one fundamental reason for results not sustaining: the integrity of the management system breaks down.
Management systems give managers the tools to affect performance. It's how they forecast work, plan it, resource it, execute it and report on it. It is the primary driver of the management behaviors that every organization wants: planning, communicating, problem solving and innovating.
Unfortunately, management systems can become disconnected quickly. Some of the most common problems include:
- Managers play games with budgets, because they know their first set of numbers will be rejected. Budgets are usually numbers-oriented and often don't effectively account for the impact on key performance indicators (KPIs). The budget numbers are also often connected to management compensation, so they become the focus of management attention, rather than the underlying drivers that managers actually have to manage.
- Forecasts are inaccurate or not trusted, so managers of different functions develop their own versions.
- Planning standards become outdated. Last years "actuals" can become this year's "plan," effectively building in any problems that were experienced the previous year.
- Schedules get changed too frequently, which results in excessive work changeovers and imbalances.
- Performance feedback boards are not kept up to date, and reporting doesn't tie back to planning.
Managing at a higher performance level is also simply more demanding. Managers sometimes stop doing the very things that moved them to the higher level of performance. Seemingly basic tasks like setting clear expectations, scheduling work by time, and following up on schedule attainment all require management-system integrity, and a genuine and ongoing diligence and commitment. People can tire of that kind of diligence, especially if the system tools are not trusted and it's not reinforced from above.
How to keep management systems effective -- and front-line managers energized and inspired -- is ultimately the difficult task of senior management.
One of the more common complaints we hear about consultants and internal improvement projects is that the savings that are promised or reported never really hit the financial statements. People may be complimentary about the consulting work that’s been done, and the consultants (or internal teams) may claim real savings in their reports, but no one can analytically identify the savings in the P&L or balance sheet. (This is also a common complaint about IT systems that get purchased with lofty ROIs.) So what actually happens?
For those situations where results simply don't hit the bottom line, there are three main reasons:
- The improvement didn't sustain long enough to impact the financials.
- There may be an improvement in productivity, but no actual financial savings.
- Savings are measured against an incorrect performance baseline.
In the next three Observations blog posts, we will explore each of these reasons for “nonsavings” and why they commonly occur.
Incidentally, there is one "legitimate" scenario in which improvements may not be visible in the financial statements, i.e., when steps are taken to avoid costs that likely would have occurred in the future, either capital costs or operating costs.
When we look at organizations to understand where they might be able to make improvements, we do so from three different, but related perspectives: the process; the management system; and management behaviors. This turns out to be a critically important way to ensure that improvements actually sustain over a period of time. Problems are often more multi-dimensional than they first appear. To borrow the slightly over-used three-legged-stool analogy, solutions that only address one or two of the legs are inherently unstable.
Some years ago we were working for an injection-molding company and noticed that the crew shut down their machines 10 minutes before the end of each shift in order to wash up. Then the next crew arrived and spent the first 15 minutes of their shift cleaning out the machines because the plastic had congealed. Our simple solution was to do a hand-off at the shift transition to keep the machines running and eliminate the downtime and waste.
That simple solution took two full months to implement. Changing the process affected the way crews were scheduled (it also appeared to ask people to work more than they had previously): the way machines and work-in-process inventories were scheduled (planning standards and staging areas needed to be changed to reflect the new output expectations); and the way managers behaved (they now needed to be physically on the floor at shift change to make sure the transition ran smoothly). Co-ordinating all of the above between different shifts and different departments was more complicated than it looked on paper.
Therefore we always try to always keep the three perspectives of sustainable improvement in mind when analyzing problems and developing solutions. From our experience, when you are considering changing methods, we recommend you think about the following:
- How and where will the process physically change?
- How does the change impact the way managers plan, execute or report on the process?
- What new or different behaviors do you need from management to reinforce these changes?
If you spend enough time trying to improve processes, one of the fascinating things you will observe is that sometimes the root problem has nothing to do with the process you are trying to fix. You can apply the "Five Why?" technique until you have exhausted every avenue, and you can still entirely miss the real problem.
For example, we were once doing work for a hotel company that experienced a problem at the start of each shift: there were too many people waiting for work in a stewarding area. The simple solution was to stagger the shift start times. However, the solution wasn't simple at all. Most of the workers in the stewarding area lived in a nearby town and all took the same bus to and from the hotel. Staggering the shift times didn't work with the limited bus schedule, so the real problem became trying to figure out how to get the workforce transportation more aligned to the work place demands.
Another company, a retail store, experienced intermittent demand. The simple solution was to create split shifts. However, the introduction of split shifts would have created a whole series of issues for the existing workforce -- and losing employees during the transition would have been a significant blow to the chain's service reputation.
Clearly, the academic solution is often only part of the answer. (Experienced managers are usually better at understanding this than freshly minted MBAs.) Often it's more critical to understand how changes to the process or method affect the work environment of the employees, even when they seem relatively simple. Changing work patterns destabilize employees and often puts management in new and uncomfortable situations. This is the real problem that you need to solve.
A number of years back it was popular for consultants (and a few executives) to draw the company organization chart upside down. The idea was that organizations needed to recognize that managers actually worked for employees, and not the other way around.
The chart concept didn't last very long, either because it was a little contrived or because it got trampled by the advent of PowerPoint templates. Upside down org charts did look awkward but it's too bad because the concept was a good one. It visually made an important point that is often lost: the key to successful organizations is to remove the obstacles that keep front line employees from being more effective. They are the people who sell, design, fabricate, store, ship and deliver products and services that generate the revenue needed to pay for everything.
Managers exist to support these valuable assets, and executives exist to guide and support managers, so visually it does seem more appropriate to place employees at the top level and managers below, supporting them. But organizations were originally created based on a command and control framework, and even the language we use (e.g. supervisors and subordinates) suggests a top down hierarchy.
Organization charts best depict compensation hierarchies, they don't do a great job of reinforcing what kind of management approach a company wants to create. The most effective organizations we see try to never lose sight of who actually works for whom, and why that is critically important for their success.
When we are trying to figure out how effective a process is or isn't, one of the basic studies we do is to spend a day in the life of an employee at some key part of the process. We simply shadow a person for the day and try to see the world through their eyes, capturing what they do, what happens around them, and who and how they interact with others. They are always interesting studies even though they sound both intimidating and boring at the same time. If you think about it, there are really few better ways to understand what issues an employee has to deal with every day.
People often ask if the studies show higher productivity than normal because the person being studied would be self-conscious and have a tendency to be more focused than they might otherwise. This turns out to be somewhat irrelevant. People are naturally a little more focused, and take a few minutes to get comfortable with the observer, but these studies are effective because most operating problems have little or nothing to do with how hard someone works.
As much as 90% of the issues we see that cause waste are a result of how the process is designed, how information or material is coordinated and flows, and how effective management planned out the day. All these issues will happen through the day regardless of whether or not anyone is watching.
During a project we do these studies with managers. The studies are very useful for helping managers visually see how operating problems, within their span of control, affect their employees' performance. This helps change the mindset from thinking improvement is wholly dependent on the actions of employees or other departments, to understanding the critical role the manager plays in engineering change.
Management systems are tools created to help managers plan work, execute the plan, and then measure and report on the results. Most management systems we have looked at in the past two decades, in many different industries and functions, suffer from the same fundamental break down: the execution tools are the weakest part of the system (and are often missing entirely).
There is usually no shortage of tools to help managers plan what should happen, and even more tools to report on what actually did happen, but there often isn't much right at the point when things are actually happening. Execution tools are things such as time-based schedules, visual feedback monitors or boards, and controls to help a manager follow up on schedule attainment and performance through the day.
This is a problem for a few key reasons. First, it means problems and lost productivity can be occurring without management knowing which obviously creates waste and rework and can frustrate employees. Second, it causes employees to create "work-arounds" which can frequently end up adopted as the actual process which hides problems within future planning standards. Third, it can effectively turn a manager into either an administrator or a reactive fire-fighter (rather than a proactive manager).
The root cause of this gap in the management system is usually ineffective time-based scheduling. Without a meaningful schedule, managers can fire-fight larger obvious problems but they can't follow up on work with a purpose and they can't identify or remove smaller day-to-day obstacles that create waste. In high performance organizations, this is where critical incremental gains are made.
When we study processes, one of the first things we think about analytically is to break the process down into two components: volume and rate. These are the two main drivers of cost in any process. It's very useful for helping identify what you need to focus on if you are trying to improve productivity.
Volume is simply the number of times you do something. We often find things are done more often than they need to be. To reduce the number of times you do something, we look at both the actual volume and the frequency. Common causes of unnecessary volume are basic over-production (e.g. building too many parts to optimize a machine run or producing too much food for a buffet), and rework usually caused by errors or inaccurate information upstream. In one large distribution company we worked for, most of the accounts payable work volumes and activities were correcting supplier invoice errors. For frequency, we challenge how often you really need to do something. We try to determine the degree of risk if you changed the frequency of an activity, for example, doing random quality checks rather than 100% audits of incoming parts.
"Rate" refers to the cost per unit. To reduce the required rate for a process, we focus on using less labor or material per unit. We try to achieve three basic objectives:
- Reduce the hours required by reengineering the steps or sequence of the process.
- Reduce the hours required by reducing the waste (or non-value added time).
- Reduce the material cost by using alternate suppliers or materials.
So to improve the productivity of any process, focus on volume and rate.
One of the things we look for when we examine organizations is the degree of variability present. The more variability, the harder it is to manage. Variability can be both inherent in the nature of the industry and it can be self-imposed through policy or errors.
Variability is inherent in some industries. In restaurants, for example, the actual demand patterns may be fairly predictable (e.g. people eat lunch during a certain time period) but the volume of people coming into the restaurant may be affected by variables that are more difficult to predict (e.g. weather).
Variability can also be self-created. Policies related to things such as inventory levels, buying practices, shift scheduling, or customer service levels can all impact the degree of variability in a business. Errors in the process are another cause of variation. Inconsistent processes, operator error, and mechanical downtime all cause variations. Managers either have to fix the variation or build it into their planning and scheduling parameters.
Determining how much variability you have currently in your processes, and separating the inherent from the self-created is a good start to understanding how much your processes can be improved.
In many organizations the link between the financial and operating world is missing. Financial results can't be managed on a daily basis, but the activities that create them need to be.
It's often very hard for managers and employees to know how the activities they are performing today are actually affecting the financial results of the company. Sometimes it's because activities that are being performed today are being done for a future benefit, like sales meetings trying to progress a sale, or building parts destined for some downstream assembly operation. The missing links in these two examples might be not knowing how many sales meetings are needed to generate enough revenue in the future, or how efficiently parts need to be produced to eventually achieve the planned operating margins.
Accounting systems tend to be historical records of what happened and less what needs to happen to achieve a result. The information is often aggregated too late to be overly useful for front-line managers. The tool organizations try to use to align the financial and operating worlds is the budget. Unfortunately budgets summarize operational outcomes, which is helpful to set financial targets but not overly helpful for identifying the underlying "activity drivers". For example, budgets identify sales by region or market, but not the number of new prospects required to eventually create those sales.
Converting outcomes to the actual activities that create them is critical to providing managers with the tools they need to properly manage an area. These conversions (or assumptions) are built into every budget ever created, they are just not often explicitly identified. We call these missing links "profit drivers." They are what managers actually manage on a day-to-day basis and when properly linked they align the financial and operating worlds.