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2014

There is no shortage of articles and whitepapers on the Internet about how to get the most out of your ERP (Enterprise Resource Planning) system. My Google search on this topic returned more than 1.66 million results in 0.36 seconds.

 

FIG-ToC-AccountingToActionLinks.jpgThe problem is that too many of these articles are written by VARs (value-added resellers) and consults with a predetermined agenda. They have a technology or a service or a solution to sell to their readers.

 

And, even for those that do not have "a package" to sell, too many have a "cookie cutter" approach to consulting.

 

Like one of the "Seven Habits," (practiced in a bad way) they are likely to arrive at your doorstep "with the end in view." And, while such "one-size-fits-all" approaches may give some small return on your investment, the benefits are far more likely to provide short-lived and incremental improvement, not far-reaching or delivering a sustainable competitive advantage for your enterprise.

 

This topic comes to mind because I recently read an article online about "getting the most out of your ERP system." The article was written by someone promoting a ADMS (automated document management system) as an add-on for ERP systems.

 

Now, don't get the wrong idea here. I am not opposed to ADMS add-ons. I've even recommended them to my clients from time to time over the years.

 

What I am opposed to is jumping to the conclusion that "more automation" and "increased efficiencies" in some department or even a few departments equates to "getting the most out of your ERP system."


Getting the most out of your ERP system isn't the point


Getting "the most out of your current ERP solution" is'nt the point. The essential thing is to "get the most out of your entire system," meaning getting the most out of the entire flow of steps and processes that lead from customer acquisition (sales and marketing) to booking the profits on the bottom-line. This is true "system thinking."

 

Your system is a chain.

CHAINweakestlink_C_thumb.jpg

 

That means that, in order to strengthen the chain, you must strengthen ONLY the weakest link. Strengthening any other place in the chain adds only "weight" (e.g., complexity, additional operating expenses) and requires investment of the companies most precious resources: time, energy and money.

 

When we want to help the companies with whom we work improve (read: make more money), we guide them through a process to help their executive and management team discover those very few those things that need to change in order to have the desired effect on the following key metrics (and in this very specific order):

  1. INCREASE Throughput (where Throughput is defined as revenues less only truly variable costs--or TVCs)
  2. REDUCE Investments--including reductions in inventory, but also delaying or eliminating entirely the need for new capital investments in buildings, equipment, and technologies
  3. SLASH Operating Expenses (where these are defined as all the money paid out month after month that are NOT included in TVCs or Investment) - or - hold the line on Operating Expenses while sustaining significant growth in Throughput (say, 30 to 300 percent growth)

 

Many times our advice to clients is actually to not spend money on new technologies until they have exhausted improvements that require no new investment of any kind. This advice frequently stems from improvements designed around inherent simplicity--the concept that simple solutions are the best way to solve complex problems.


Calculating POOGI Project ROI and determining project priorities


Furthermore, we help the executives and managers prioritize every improvement option on the basis of this simple equation for POOGI (process of ongoing improvement) ROI:

 

This formula is read as: ROI (return on investment) = (delta-T - delta-OE) / delta-I

Where:TOCROI_thumb.jpg

  • delta-T = change in Throughput
  • delta-OE = change in Operating Expenses, and
  • delta-I = change in Investment

 

If delta-I is zero for some, then those POOGI projects should be considered first, and they should be prioritized based on (delta-T - delta-OE) in descending order. This approach places those projects most likely to increase profits and improve cash-flow at the very top of the priorities list.

 

Using this approach, we have help some organizations discover and enact dramatic improvements in their operations, or even across their supply chains, that cost them virtually nothing and could be implemented in a matter of days. No "cookie-cutter" here! Each POOGI concept was the invention of the management team assembled and they determined its value and how, when and why it should be implemented.

 

The very real side-effect of this approach is that there is seldom anyone who remains skeptical of the solution or is likely to try to sabotage the implementation of the improvement. Instead, eagerness abounds.


Every POOGI project should have expected and measurable outcomes (no "pie in the sky")

 

Every project should have EXPECTED (estimated) and MEASURABLE outcomes and these values should be measured before and after the POOGI project implementation.

 

To be even clearer: NO PROJECT should be undertaken with a NEGATIVE delta-T - delta-OE values, nor should any project be undertaken that has a POSITIVE delta-I with a ZERO delta-T - delta-OE value). Such projects have a negative ROI.

 

Simply pouring in new technologies in "hope" that somehow the technologies will produce some expected "rule of thumb" result provided by the VAR, or even your IT staff.

 

If your management team cannot estimate a positive ROI and explain how the POOGI will contribute specifically to the estimated changes in T, OE and/or I, then chances are no real ROI exists for the project.

 

We call this approach "The New ERP -- Extended Readiness for Profit."

 

It works within the four walls of an organization, but its powerful concepts can be leveraged to help re-engineer entire supply chains, as well.

 

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We would like to hear about your experiences with improvement projects and how you prioritize such projects and measure their outcomes. Please leave your comments here or, if you prefer, contact us directly.

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Some years ago, Ian Glenday was working with a team analyzing product sales by country for a Fortune 500 company. While he--and we--are generally familiar with the old 80/20 rule, which says that 80 percent of revenues will come from 20 percent of the products (or customers, or whatever), as Glenday and his team repeated their analysis across country after country, they noticed a far more significant pattern starting to emerge.

 

Glenday Sieve - Customers by Revenue Time after time, they discovered amazingly that six percent (6%) of the products accounted for half--that's right, 50 percent--of the sales. Almost equally amazing was the discovery that 95 percent of sales were produced by 50 percent of the SKUs (products). Of course, that meant that the other 50 percent of sales were scattered hither and thither across the remaining five percent (5%) of SKUs. This analysis became known as the Glenday Sieve.

 

You can read more about this discover here: Glenday, Ian, and Ricky L. Sather. Lean RFS (Repetitive Flexible Supply): Putting the Pieces Together. Boca Raton: CRC, 2014. Print.

 

A few months ago, I wrote about applying the Glenday Sieve in managing production and your supply chain. You can read about that here.

 

In this article, I would like to point out how our clients might benefit applying the Glenday Sieve for segmenting their market.

 

The illustration above (names have been changed to protect privacy) is a Glenday Sieve analysis of the revenues for a real company.

 

When we discussed this analysis with the firm's management team, we highlighted the fact that this analysis functions merely as a starting place for asking lots of good questions that may help the firm make more money tomorrow than it is making today.

By the way, the result of the Glenday Sieve analysis is to break down products, services, revenue streams, activities (or whatever is being analyzed) into "streams." The six percent leading to the top 50 percent of volume is called the "Green" stream. The next ~44 percent of that adds 45 percent of the volume (to the 95 percent cumulative level) is referred to as the "Yellow" stream. In many cases, the last five percent (5%) of business volume is distributed across the remaining 50 percent of SKUs, products, customers or whatever aspect is being "sieved," and is referred to as the "Red" stream.

 

(In some cases, the "Red" stream is further segmented. In the accompanying figure of "streams," the "sieve" was being run by SKU. In our case presently, however, we are doing the analysis of activity based on revenues.)

 

Here are some questions that might come quickly to mind when we look at the Glenday Sieve analysis of revenues by customer:

 

  1. Should we be managing the GREEN stream homogeneously with the rest of the customer base? Or, does the consistency of the GREEN stream justify its own dedicated resources? In other words, is GREEN stream production really "one kind of factory" and production for the far more volatile (in terms of percent of change) YELLOW and RED streams "another kind of factory" altogether?
  2. Should our approach to marketing and sales be different for each of these streams?
  3. What do we know about customers in the YELLOW or RED streams that we can leverage to help move them from the YELLOW or RED streams and into the GREEN stream (which is much easier to manage and is likely producing the bulk of our profits)?
  4. What else do we know--probably, "tribal knowledge"--about customers in our GREEN stream that we can leverage to help make them even more profitable and yet happier customers than they are today? What can we do to make them "customers for life"?
  5. What kinds of activities do we engage in most frequently with our GREEN stream customers? How can we improve our approach to execution with these customers in order to create impeccable customer service or slash away at lead-times for them? (Such analysis will not only help us improve and accelerate service to the GREEN stream, but these improvement will simultaneously lead to increases in capacity without adding new resources so that, as we move more customers from the YELLOW stream into the GREEN stream, we can do so without increasing our overhead expenses.)
  6. What are our GREEN stream vulnerabilities? Are there existing GREEN stream customers that are likely to fall out of the GREEN stream in the near future? If so, why? What can be done to keep them in the GREEN stream or replace their GREEN stream revenues in the future?
  7. For existing GREEN stream customers ask:
    *  What was their condition when we were first introduced to them?
    *  What have we done to help them improve overall?
    *  What can we learn from our experience with thesTypical Glenday Sieve streamse customers that might help us with other clients or to open new markets?

We are certain that there are plenty of other good questions that a close review of a Glenday Sieve of various aspects of your company or supply chain might trigger. But the questions will vary by industry and even your firm's specific circumstances. Those given above are just intended to examples and far, far from an exhaustive list of such questions.

 

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We would like to have your feedback on this important matter. Please leave your comments below, or feel free to contact usdirectly, if you would prefer.

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In an article entitled "CIOs need to re-brand themselves as drivers of digital innovation, says EY's David Nichols,"* Brian Taylor (writing at TechRepublic.com) brings out some important points. He begins by saying, "The role of the CIO is starting to look a lot like a business strategist."English: Cover to Capt. Billy's Whiz Bang, Apr...

 

Over the years, as we have worked with an array of small to mid-sized business enterprises in a number of different industries, we have been trying to make the point with our clients that everyone in the business--from the production floor all the way down to the CEO--should be in the role of "business strategist."


Of course, this assumes that the role of the "business strategist" is to find ways to help the company make more money tomorrow than it is making today! When the CIO--or, technology, in general--is involved, we call it "Turning Gee-whiz into R.O.I."

 

Return on investment (R.O.I.) is what most business owners and investors are after, we think.

 

Few enterprises anywhere in the world have been more consistent or more successful at producing profits in good times and not-so-good times than Toyota. They have achieved success that dwarfs the Big Three automakers in the U.S. Since sometime in the 1980s, Toyota's market capitalization has been more than the sum of the market capitalization of the U.S. Big Three combined.

 

Furthermore, for more than three decades, Toyota has produced profits with consistency while the Big Three in the U.S. have had extremely unstable profits and eroding capital over the same period of time.


MAKING EVERYONE A "BUSINESS STRATEGIST"

 

How has Toyota achieved this stability and success?

 

Well, as with most things, there are many factors involved. However, it is clear that Toyota places high value on the input managers and executives received from their production-line workers. Workers are encouraged to innovate and find ways to slash away at any work effort that does not add value to the product being delivered to the customer.

 

Toyota managers and executives firmly believe that no one knows more about the machine--any machine or any system--than the one who "runs" the machine.

 

Workers in the Toyota Production Systems (TPS), whether implemented in Japan or in the U.S. plants, are encouraged to stop production and call for immediate review by managers and team members any time they identify something unusual--not fitting the standard--affecting the flow or work. (It is a fiction that such stoppages halt the work throughout the plant. Typically such stoppages only affect a small portion of the whole plant, unless the stoppage lasts more than a few minutes or, in some cases, up to several hours.)

 

The goal, in the TPS "meeting" that occurs when a worker halts production is not "firefighting" to get things running again--as it is in most U.S. facilities. Instead, the focus is two essential matters: 1) identifying as quickly as possible what went wrong at the 'root' of the problem, and 2) figuring out what steps should be taken to prevent such an occurrence ever again.

 

This calls for the quickly assembled team of managers and production workers to become "business strategists" in the very best sense of the term. They must think, not tactically about how to put the "fire" out, but strategically about what steps should be taken--or, at least, initiated--to assure that quality remains undiminished and the flow of product to their customers is not stopped (or even slowed) by such occurrences.

 

What is the ultimate focus of every worker or manager participating in the team that assembles to see what went wrong?

 

Throughput--the continuous flow of product from raw materials to finished product through many value-added steps with as little waste as possible through non-value-added activity.


THE RESULT

 

What is the result of this for Toyota?

 

Toyota is able to produce a greater variety of products with higher quality and at lower cost than its competitors. It is able to bring new models from the drawing board to production in far shorter time than any of its U.S. or European competitors. And the workers on the line have a better sense of who their customers are and what their customers desire in product and experience of ownership than any of the line workers at the Big Three here in the U.S.

 

This demonstrates clearly, in my mind, how the Toyota Way makes every employee a "business strategist," and how doing so produces better and more consistent products--not just year after year, but decade after decade. Most U.S. companies can only dream of such stability and success.


APPLYING THESE PRINCIPLES

 

We are convinced that, when we help small to mid-sized business enterprises begin to apply these same principles and they also begin to create for themselves a process of ongoing improvement (POOGI), these companies with whom we work will become more stable and more successful.

 

Additionally, if these firms will work extend these practices up and down their supply chains, their supply chains will similarly experience greater stability, lower risk, higher profits and improved ability to bring products to market faster than competing supply chains in their industries.

 

So, don't stop at turning your CIO into a "business strategist." Take steps beginning today to make everyone in your enterprise a "business strategist." Get them all involved in reducing risk, improving throughput, and help your profits increase and stabilize.

 

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We would be delighted to hear your thoughts on this topic. Please leave your comments here, or feel free to contact us directly, if you'd prefer.

 

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* Taylor, Brian. "CIOs Need to Re-brand Themselves as Drivers of Digital Innovation, Says EY's David Nichols." TechRepublic. TechRepublic.com, 15 Apr. 2014. Web. 17 Apr. 2014.

 

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When we meet with executives, business owners and management teams for business consulting /$CHAIN weakest link_C[7].jpgrelated to Lean and Theory of Constraints implementations in order to establish a POOGI (process of on-going improvement), we frequently discover that these folks have been trying for some time to find and apply just the right KPIs to motivate their employees and achieve higher CHAIN weakest link_C.jpgprofits. However, almost as frequently, these managers and executives have discovered that they have, in the long run, been about as ineffective in making progress toward achieving stable and improving profits as “baseball managers trying to coach their team by looking at the scoreboard”—a phrase used by Peter Senge in his foreword to Profit Beyond Measure (H. Thomas Johnson and Anders Bröms).

 

Unfortunate, but true: “Those who manage by results focus on the bottom-line target and consider that achieving financial goals justifies inherently destructive practices,” Johnson and Bröms observe

 

Johnson and Bröms remind us that W. Edwards Demingsaw the same thing when he used to tell managers and executives: “if management set quantitative targets and makes people's jobs depend on meeting them, ‘they will likely meet the targets--even if they have to destroy the enterprise to do it.’”

 

A different path to enduring profitability


Profit Beyond Measurebrings to light a different path: “The alternative to managing by results... requires disciplined practices, sustained attention to how work is done, and nurturing every step of the work at every moment. Managing by means requires all managers in an organization to focus, as does nature, on minute particulars. Such attention to detail involves encouraging employees to cultivate their creative talents so that they may best serve a customer's specific needs. Management behavior manifests the belief... that the means are ends in the making. The job of managers who manage by means is to cultivate and nurture conditions that bond company talents and customer needs in a profitable union, not to drive work with destructive financial targets. Instead of a quest for relentless growth of quantitative targets that burns out companies before their time, managing by means... can enable a company to profit beyond measure for generation after generation.”

 

The authors have studied companies that have demonstrated sustained profitability over an extended period of time—decades, in fact. One of the firms mentioned in their excellent book has sustained a run of more than 65 years of operating without a loss.

 

Interestingly, even though I have been an adherent and practitioner of the Theory of Constraints for many years and have applied the Thinking Processes many times across an array of clients, it was this book, Profit Beyond Measure, that helped me to see just why the Thinking Processes are so powerful an aid to helping companies make more money.

 

On pages 40 and 41, it says:

“Instead of trying to control or regulate financial results by manipulating parts [of the organization] with quantitative measurements or scorecard targets, the task of management in a business organization [or a supply chain, for that matter] should be to nurture relationships and help people master natural-system principles. That nurturing is the essence of genuine learning, and helping people in an organization [or supply chain] discover and implement the principles that govern systems in nature is genuine leadership....

….

The surprising truth… is that changed thinking, not ‘problem-solving,’ answers [the] problems” of systems required to produce both variety and quality at low cost. [Emphasis added.]

“Changed thinking,” they say!

 

Indeed, we have found that the biggest obstacle to helping many companies dramatically improve their performance and profitability is what they think they know. That is, the biggest hurdle is getting them to change their thinkingabout how they organize their work and manage the flow of goods and services from customer-to-cash (and profit).

 

Thinking outside the “box”


Profit Beyond Measurefurther elucidates on this matter saying, “Popular wisdom urges problem solvers to ‘think out of the box’ or to ‘shift paradigms.’ Such phrases express an important truth. How we think does define constraints and boundaries—a ‘box’—that shapes the world we inhabit. To get outside this box requires evaluating the thinking that produced the constraints and boundaries that themselves generated problems. In other words, the solution to the problems often demands that we appraise the thinking that gave birth in the first place to the initial situation from which the problems arise.

 

When applying the Thinking Processes, we don’t even like to call the symptoms the system is displaying “problems,” since “problems” tend to stimulate a “problem-solving” response from managers and executives.

 

Instead, we encourage the company’s team to list “UDEs” or “un-desirable effects,” since most firefighting is focused, not on the real “problems” (i.e., the root problems), but on the effects that flow from these roots and that break out as “fires” here and there across the organization.

 

Also, in complete agreement with Theory of Constraints thought, Johnson and Bröms refer to the work of Gregory Bateson, who concludes that quantitative measure cannot determine where a system will fail. The failure is found in qualitative factors in the organizationand these cannot be measured using management KPIs. Here is the excerpt:

Gregory Bateson compared the consequences of imposing quantitative decisions on a qualitative system to placing tension on a chain. Quantitatively increasing the variable called tension predictably causes the chain to break. Where the chain will break, however, cannot be predicted. So it is when we impose quantitative demands on a natural system that operates according to patterned and qualitative relationships [as all human systems do]. In Bateson’s words, “every quantitative change we impose upon the system is in the end putting stress on the qualitative patterns whose breaking strains and whose evolutions and transformations we do not understand.”

 

The Thinking Processes are specifically designed to help managers and executives (and the whole team, really) unlock “tribal knowledge” and come to understand the “patterned and qualitative relationships” that cause the system to deliver—or fail to deliver—according to the customers’ expectations.

 

Well, enough of my rambling. Suffice it to say, I think you’d gain much from reading this book, if you haven’t already.

 

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Let me know your thoughts when you have a chance. You may leave your comments here, or feel free to contact us directly, if that’s your preference. Thanks.

 

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Johnson, H. Thomas, and Anders Bröms. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. New York: Free, 2000. Print.

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W. Edwards Deming

W. Edwards Deming (Photo credit: Wikipedia)

"Big Data" isn't all bad. It is, after all, possible to use big data and business intelligence to spot trends and identify (from history) factors that may not be intuitively apparent—like the fact that customers in Australia buy a lot of product, but always in small quantities—under $2,500 per order.

 

The use of business intelligence and "big data" is virtually always measuring something that is “history” and has stopped "living"--that is, stopped "moving." The data cannot be included for measurement until it is a "fact" and it does not become a fact until it has "come to pass." Even if we measure velocity, we measure it based on facts at a point in time in the past—perhaps only moments in the past, but in the past nonetheless.

 

Furthermore, these data only tell us about the state of things and cannot inform management as the reason for that state. We must always look outside of metrics to discover the reasons for successes or failures. The reasons for the successes and failures are not even found just in the people, but in the interactions between the people involved.

 

As W. Edwards Deming so cogently assessed: the really important numbers to a business are both unknown and unknowable.

 

Therefore, we must come to understand that we are managing a living system—one composed of human beings that carrying out millions of minute interactions moment by moment, day after day, to create success, failure or mediocrity. Attempting to drive those interactions using external metrics ultimately and invariably drives organizations toward mediocrity.

 

H. Thomas Johnson and Anders Bröms, writing in Profit Beyond Measure, say, “Instead of trying to control and regulate financial results by manipulating parts with quantitative measurements or scorecard targets, the task of management in a business organization should be to nurture relationships and to help people master natural-system principles…. [N]urturing is the essence of genuine learning, and helping people in an organization discover and implement the principles that govern systems in mature is genuine leadership.” [Johnson, pp. 40f]

 

Putting ourselves in boxes

 

Chances we have all heard the phrase, “thinking outside the box,” and we have some intuitive sense of what that means—not only generically, but for ourselves or our company, too. However, Johnson and Bröms describe the essence of “the box” more succinctly than I have ever found it elsewhere.

How we think does define constraints and boundaries—a “box”—that shapes the world we inhabit. To get outside this box requires evaluating the thinking that produced the constraints and boundaries that themselves generated the problems. In other words, the solution to the problems often demands that we appraise the thinking that gave birth in the first place to the initial situation from which the problems [now] arise. [Johnson, p. 44]

Moving past “problem solving”

 

What we need is a change in the way we think about our world, our industry, and our business to find new and innovative solutions.

 

We must stop seeing our business enterprises and supply chains as abstractions defined by metrics like profit, return on investment, quantities of goods moved, sales, revenues and costs. Instead, we need to gain a deep grasp of what really constitutes our enterprise, our industry and our supply chain—the minute human interactions that drive inexorably toward success, failure or simply mediocrity.

 

Eliyahu Goldratt has devised a method to do just that—a method that allows managers and executives to stop seeing their businesses solely through the abstraction of numbers, and to begin to see the details exposed in the human interactions that are actually causing their enterprises to succeed or fail—or to be stuck in mediocrity. This method is commonly called the Thinking Processes (Theory of Constraints).

 

Goldratt didn’t see this as a “problem-solving” mechanism. In fact, he urged business leaders and managers to stop calling what they were experiencing “problems,” at all!

 

Why?

 

Because, whenever a manager or executive encounters a “problem,” they feel it is somehow incumbent upon them to “fix” that “problem.” This leads to repeated cycles of fire-fighting, since most of the “problems” being addressed are not “problems” at all. They are, instead, the effects of broken conditions in the underlying system of human interactions. (See: system thinking.)

 

There is no sense in treating only the symptoms if the disease remains in the organization.

“Ignoring the qualitative patterns that characterize the internal operation of all organizations results in irrelevant, even harmful, decisions.” [Johnson, p. 48]

 

Johnson and Bröms highlight the difference between quantitative and qualitative understandings of a system or organization:

Gregory Bateson compared the consequences of imposing quantitative decisions on a qualitative system to placing tension on a chain. Quantitatively increasing the variable called tension predictably causes the chain to break. Where the chain will break [the weakest link], however, cannot be predicted. So it is when we impose quantitative demands on a natural system that operates according to patterned and qualitative relationships. In Bateson’s words, “every quantitative change we impose upon the system is in the end putting stress on the qualitative patterns whose breaking strains and whose evolutions and transformations we do not understand.” [Johnson, pp. 48f]

 

Our consulting practice has discovered that the application of Goldratt’s Thinking Processes in a conscientious program of ongoing improvement and experienced professional guidance helps executives and managers break out of their “box” and gain a clearer understanding of how their organizations work—or fail to work—from a qualitative aspect. Companies who undertake to break the “enormous tyranny of patterns” (as Bateson calls them) almost universally experience newfound success, innovation and vigor in their operations.

 

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We would like to hear about your experiences and thoughts on these matters. Please leave your comment here or contact us directly, if you prefer.

 

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Johnson, H. Thomas, and Anders Bröms. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. New York: Free, 2000. Print.

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In the 1920s (almost 100 years ago), Henry Ford devised a manufacturing system that outperformed every other manufacturing operation of its day. Ford’s plant at River Rouge (near Dearborn, Michigan), along with another plant in Detroit, produced about 15 million Model T automobiles by 1927.

MassProduction wOut Variety ca1920.jpg

 

Amazingly, in 1925, the River Rouge plant produced about one Model T per minute with a total lead time—from steel-making to finished automobile—of about three days and nine hours (33 hours). [1]

 

Granted, Ford was building only one model in only one color, but still this was quite amazing for its day.

 

Two different views of River Rouge’s supply chain

 

In 1929, Kiichiro Toyoda made the family’s first pilgrimage to Ford’s River Rouge plant to learn how to make automobiles. Twenty-one years later, in 1950—just five years after the end of World War II, Kiichiro’s nephew, Eiji Toyoda, made a second three-month visit to River Rouge. At that time, Toyota Motor Company had produce a total of slightly fewer than 2,700 automobiles. By comparison, River Rouge was producing about 7,000 vehicles a day.

 

What Kiichiro and Eiji Toyoda saw at River Rouge would drive their thought-processes as they labored to build what was to become the largest and most profitable automobile manufacturer in the world over the coming five decades.

 

In the meantime, Ford Motor Company and the rest of the U.S. auto industry would take a different approach to manufacturing and supply chain management and find themselves increasingly unable to compete or be profitable.

 

Toyota built its success using inherently simple (see: inherent simplicity) solutions to what appeared to be complex problems. The U.S. automakers, on the other hand, invested millions upon millions of dollars to build “data factories” alongside and within the facilities that manufactured the automobiles and components.

 

By the late 1970s, the simplicity and success of Ford’s River Rouge manufacturing concept had been turned into something like this:

 

MassProduction wVariety by Batches ca1970.jpg

Ensnared by cost-world thinking

 

While Eiji Toyoda put all his resources to work seeking ways to reduce change-over times as variety increased in consumer demand, U.S. automakers were caught in cost-world thinking and sought only to minimize total accumulated change-over time. To do this, they increased batch sizes.

 

While River Rouge’s success had been driven by Henry Ford’s “assembly line” or one-piece flow, managers and executives at U.S. automakers decided that manufacturing by batch and reducing the number of setups required was the way to save money and make manufacturing with variety efficient.

 

However, because arbitrary or calculated batch sizes are never in sync with actual market demand, U.S. carmakers opted for complex solutions in their attempts to keep actual production from getting too far out of line with actual demand.

 

They decided that they must spend time, energy and money on forecasting systems (to try to project demand into the future) and even more time, energy and money on advertising and sales promotion to try to keep actual demand in balance with actual production.

 

The result was that any savings that may have accrued in the real factory from reduced setups through batching of production was quickly swallowed up—and then some—by the expenses heaped upon the organization for advertising, marketing, schedulers, controllers, expediters, software, hardware, networks and an ever-growing IT staff.

 

The expenses of running the “data factory” consumed all of the savings earned in the real factory.

 

Instead of finding themselves more profitable for having chosen “cost-savings” in the real factory, they found themselves increasingly falling behind in profits and profitability.

 

The effectiveness of “flow”

 

What has become known as “The Toyota Way” is built upon the foundation of leveled production (Heijunka) and Toyota has put its efforts into removing every roadblock to leveled production—especially in reducing changeover times so that tremendous variety can be supported without loss in production.

 

Toyota’s relentless pursuit of waste and its elimination—“waste” being defined as any part of the effort that does not add value from the customers’ perspective—has led to its ability to dramatically slash waste in changeovers. Over several decades, Toyota has been able to cut away at changeover times, reducing many to less than 20 percent of the original changeover times. Some changeovers have been even more drastically reduced. That that formerly took more than a full shift have been reduced to a matter of minutes.

 

In short, Toyota does not rely upon—nor bear the heavy overhead—of the parallel “data factory” to manage their manufacturing operations. Virtually everything that the factory floor needs to know is encoded in the work and work practices themselves.

 

And, to the finance and accounting departments at Toyota, the factory floor is “a black box.” Finance does not set quantitative goals for the factory and production is not measured for “efficiency.”

 

Yet, the proof is in the profits.

 

Market capitalization for Toyota has consistently been equal to or greater than that of the sum of the Big Three automakers in the U.S. for most of the last 35 years.

 

This certainly shows the value of emphasizing “flow” over attempts to artificially affect “costs” in a “numbers game” run by the cost-accounting department.

 

And, as for “the data factory” and its tremendous overhead, I’m beginning to wonder if “Big Data” isn’t just a further excursion down the same costly road.

 

What do you think?

 

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[1] Johnson, H. Thomas, and Anders Bröms. Profit Beyond Measure: Extraordinary Results through Attention to Work and People. New York: Free, 2000. Print.

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RDCushing

Profit beyond measure

Posted by RDCushing Apr 2, 2014
W. Edwards Deming

W. Edwards Deming (Photo credit: Wikipedia)

I’m not sure why I avoided reading this book for more than a dozen years. Perhaps it was its title that turned me off—thinking it was just too crass. Nevertheless, I am glad I finally found a reason to read Profit Beyond Measure: Extraordinary Results through Attention to Work and People by H. Thomas Johnson and Anders Bröms.

 

Unlike my original conception of the title, this book isn’t about immeasurable profits (although it is certainly about making more and more consistent profits). This book is about how trying to manage a company by looking at “the numbers”—e.g., profits and return on investment—is like “baseball managers trying to coach their teams by looking at the scoreboard.”

 

Indeed, this book is about the tremendous and enduring success of companies like Toyota and Scania, which is achieved not by “management by results,” but by “management by means”—learning to manage a living system made up of real human beings. This book directs us toward “management by attentiveness.”

 

“What firms like Toyota and Scania have learned to do is develop sophisticated [yet, simple] methods of paying close attention in the production and design processes, so that high levels of performance and high rates of learning occur naturally,” says Peter Senge in the book’s foreword.

 

“Management by results creates ‘needs,’ goals we feel we must achieve for our survival or for personal gain. Management by means nurtures aspirations, aims that we pursue because they matter to us. The difference is subtle yet profound…. As poet Robert Frostput it, ‘All great things are done for their own sake,” Senge cogently highlights.

 

So what has management by means done for Toyota and Scania? Toyota is the most profitable automaker in the world today and Scania has produced more than 70 profitable years in succession—regardless of the ups and downs of the world’s economy. While both of these companies have taken significantly different paths to achieve high levels of profits, neither have taken the path of traditional American companies in setting cost or profit objectives and then resorted to driving people to meet those targets.

 

As W. Edwards Deming warned [also quoted in the foreword to the book], “[I]f management sets quantitative targets and makes people’s jobs depend on meeting them, ‘they will likely meet the targets—even if they have to destroy the enterprise to do it.’” We have seen such self-destructive behaviors in U.S. manufacturers over the last several decades, but hardly is it more plainly evident than in our U.S. auto industry.

 

I think you’ll appreciate how Profit Beyond Measure brings humanity and humaneness back to management while also achieving high levels of profitability. I am confident that you will find great personal relief and satisfaction in discovering—or, perhaps, re-discovering—a management philosophy that allows us as executives and managers to really feel that helping our employees and vendors realize their full potential in serving our customers is also the best way to help our companies achieve durable success and ongoing profits.

 

I encourage you to pick up a copy of this book and read it. Let us know what you think after you’ve had a chance to do so.

 

Note particularly chapter one’s “Lessons from the Rouge,” and how U.S. automakers felt compelled to invest huge amounts of capital and overhead into “the information factory” alongside their materials production factory, thus adding layers of complexity to their operations. On the other hand, Toyota sought solutions that were inherently simple, but extremely effective. I think it is likely that you will find parallels in your own company’s experience if I am not mistaken.

 

By the way, I think this book is “the missing link” in my own thinking as to why the Thinking Processes and Theory of Constraints is so powerful. While couched in entirely different language, the Theory of Constraints and its Thinking Processes endeavor to “unlock tribal knowledge,” thus humanizing, comprehending and documenting the real human interactions that occur within an organization, and then, linking those unmasked and very real human interactions to the hindrances that are keeping the organization from producing more and more consistent profits.

 

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