Winter in Canada

For those of you that aren't aware, Canada is called the Great White North.  I never could understand this parlance, but maybe the following 2 pictures might help you to understand why we are given this rather unfavorable frame of reference.

The first picture is my house, at least I think it is my house under the snow and the second is ice coming off the roof in front of my bar-b-q.  Yes the crazy Canuks bar-b-q all winter.  Although I have to wear my hockey helmet to prevent the ice from crashing down and giving me a concussion. 

I have been off the net for a while because I am starting a new venture and it is keeping me incredibly busy.

Anyway, I am writing this to wish you all a merry Christmas, Happy Hanukkah, Happy New Year and what ever else you celebrate.

I will write more on this in the new year.  

Best regards
Ron

Goodbye November

As many of you know I am a Canadian who lives about 150 kilometers north of Toronto on beautiful Georgian Bay, which is part of Lake Huron.  Today I am celebrating the end of November, the dullest, rainiest, bleakest month of the year, or at least it is here.  For my Swedish friends this month is a bit like your whole winter.  Yuk! With the coming of December, we start to get the cold, clear days of winter, which I enjoy greatly.

Today I would like to follow up my last post on measurement by introducing you to two of my new friends Marty Goldberg and Todd VanNest.   I have never met these guys, we have connected through LinkedIn and I have been lucky enough to have them comment or critique my perspectives.  One of the cool things about the social network is, if you are open to it, you get really interesting and intelligent comments that may not agree with your perspective, but cause you to think.  That is what these guys have done. 

Todd VanNest

"I wouldn't be so quick to pooh on your friend Steve's perspective--you and he are not so different in viewpoint. I call the breakdown you highlight in org structure, measurement & reward the great curse of 100 Years of "Management Science." Of course, if we wallow in that and reward related behavior for years, it only serves to LIMIT what we can achieve through organizations and tends to make us extremely LAZY (if not outright neglectful) over time--Change this course and managing for optimal growth and profit DOES require heavy lifting" 

You are right Todd, Steve and I don't really disagree.  It doesn't really matter what the cause of this superficial, knee jerk kind of management response, but without good metrics you are flying blind. What I am trying to do through this blog is to add my piece to the creation of the new management sciences.

Now that leads me to a very different comment coming from Marty...

Martin Goldberg

 "First, I've been increasingly struck by the unreality of the commonly expressed view that 'if you can't measure it, it isn't real (or it isn't manageable).' What a silly--and, counter-productive, and simply wrong--concept if innovation is the aim. Clearly, all great breakthroughs may have milestones of a sort associated with them (the Manhattan project was a huge example of complex collective effort of sophisticated knowledge workers searching for something new and practical--and highly scientific and mathematical to boot), but "metrics" of the sort that people in organizations normally speak of would have been absurd--and in fact precluded the kind of expansive, creative thinking and interdisciplinary dialogue needed for the task. I'm inclined to see metrics as helpful for operational disciplines and activities, but not for truly innovative, inventive, or creative tasks. These require a certain freedom that belies metrics--certainly as customarily practiced--and what they seek to "reify."  

Can I both agree with Marty and at the same time disagree?  God help me, I am becoming a politician.   But at times like this it is always good to focus on real life cases.  To do that I would like to spend a minute looking at the 3M corporation.

For those of who have been following my posts you will note that I have a strong admiration for former CEO of General Electric, Jack Welch.   After Jeff Immelt won the top job, James McNerney who was I believe one of the 3 finalists, was quickly snatched up by 3M.

McNerney was the first outsider to lead the insular St. Paul (Minn.) company in its 100-year history. He had barely stepped off the plane before he began driving the kind of change GE and Jack Welch had become famous for. McNerney axed 8,000 workers (about 11% of the workforce), intensified the performance-review process, and tightened the purse strings at a company that had become a profligate spender. He also imported GE's vaunted Six Sigma program—a series of management techniques designed to decrease production defects and increase efficiency. 

McNerney jolted 3M's moribund stock back to life and won accolades for bringing discipline to an organization that had become unwieldy, erratic, and sluggish.

Then, four and a half years after arriving, McNerney abruptly left for a bigger opportunity, the top job at Boeing.

Now his successors face a challenging question: whether the relentless emphasis on efficiency had made 3M a less creative company.  That's a vitally important issue for a company whose very identity is built on innovation. 3M was touted in the 1994 best-seller Built to Last by Jim Collins and Jerry I. Porras as the compay capable of sustained growth.

However, it has been a long time since the debut of 3M's last game-changing technology: the multilayered optical films that coat liquid-crystal display screens. At the company that has always prided itself on drawing at least one-third of sales from products released in the past five years, today that fraction has slipped to only one-quarter.



"Invention is by its very nature a disorderly process," says current CEO George Buckley, who has dialed back many of McNerney's initiatives. "You can't put a Six Sigma process into that area and say, well, I'm getting behind on invention, so I'm going to schedule myself for three good ideas on Wednesday and two on Friday. That's not how creativity works."    This of course is Marty's point.

BUT, I think this presents a different problem.  It is not a surprise that Six Sigma negatively impacted innovation.  This reminds me of the old adage that if the only tool you have is a hammer, everything looks like a nail.    The issue isn't to say measurement doesn't work. 

The problem is how do you drive corporate value by  measuring and driving innovation, which of course is Todd's point.  One thing I can say for sure is that while Mr. Buckley has removed the ineffective measures, he and his management team are struggling with the development of a new set of performance metrics that will drive the value of the company.

The point of this is value creation happens many different ways and for an organization to survive it has to create more value than it loses... a very simple equation.  Since value creation changes, look at IBM, the issue becomes how do you continuously create value.

Let me tell you about another friend of mine I just spoke to today.  His name is Gautam Mahajan and he lives near New Delhi.  If you get a chance read his book Customer Value Investment.  He had an interesting perspective.  

"We send all these bright young people to schools to become the next generation of manaagers and when they graduate we give them a Masters Degree in Business Administration.   Administration?  What we need to do is create a new course on creating business value and give these people a Masters of Value Creation for Business".

 I am a great admirer of Sun-Tzu the great Chinese General, who is considered one of the greatest strategic minds of all time.  His book is a primer in all military colleagues and most graduate schools for the development of strategy.  (Given some recent wars, you have to wonder if the current Generals slept through this part of the curriculum.)

It seems that at this point of my journey it might be appropriate to use some of his enlightenment. 

To Sun-Tzu, the foundation of any strategy comes from information...you must know both the enemy as well as your own strengths, weaknesses, desires, timeframes and vision.  He used spies to evaluate his enemy and he created a formal structure to provide him with information on his own capabilities.   He also imposed a level of discipline that most modern organizations would envy.

Sun – Tzu… 

• If you know the enemy and know yourself, you need not fear the result of a hundred battles. 

• If you know yourself but not the enemy, for every victory gained you will also suffer a defeat.  

• If you know neither the enemy nor yourself, you will succumb in every battle.

The Art of The Bull's Eye is a metaphor for continuous learning in our quest to achieve perfection.  
 
To achieve a bull's eye requires the individual mastery of... 

•  both the perspectives of art and science; 
• finesse and strength;
• the capability to both adapt to various conditions and yet be extremely decisive;
• the practical applications of mathematics through the understanding of wind, barometric pressure and heat;
• the discipline to keep refining the process and a feedback mechanism to drive the refinements.

Is Large Scale Change Impossible?

Gail Severini, one of my new cyber friends that I made on LinkedIn had the following to say...

"So how do you create change when there is this insidious contradiction to change? How do you get people to focus on the needs of the whole system, when they only get rewarded for the outcomes of their sub-system?"

I didn't want to give you the impression that I thought it impossible to drive large scale change.  The point is if you don't understand how people are being measured you will fail.  And changing those measures is sometimes very hard. 

Let me give you a brief case where I was succesful...

The client was Blue Cross. 

We were hired to improve their productivity and quality of work life.  The area of focus initially was the customer service group which was under incredible pressure. 

They had hired a large of number of people, but call waiting time was still unacceptable.  The manager had become so overwhelmed by the stress that she had taken sick leave. 

The management team wanted to reduce the average call time significantly, but the data showed time getting longer. 

So what was the problem? 

After doing a review of the work processes I met with the management team and told them that reducing the call time would be easy. 

I proceeded to demonstrate how this could be done by sitting at a phone table.  I picked up the phone and conducted the following dialogue....

'Thank-you for calling Blue Cross.  I am sorry you have this problem with your claim, but this is the best we can do.  Good-bye."

The management team looked at the consultant with disbelief and were about to throw me out, when I made it clear that I was being facetious to make a point. 

The actual problem was not in the customer service group, but in the claims administration group. 

The two groups reported to two different managers.   The new manager of the admin group had put in very tight time frames for the administering of a claim and had thus been able to reduce staff.

Unfortunately the only way the administrators felt they could meet the standards was by taking short cuts which resulted in a significant increase in errors.  This wasn't a problem because the Customer Service Group would handle the errors. 

As you can see the measurement system was rewarding the shoddy work done in the claims area.  

Without going into all the details, the way we fixed the problem was by creating a learning organization that analyzed and categorized claim administration problems and then tracked them back to the administrator that handled the claim.  

We then built training programs and IT programs to improve the quality. 

The customer service group became  the hub of creating this leaning organization.   Product quality went up, overall cost went down, and the real speed in process handling also went down.  But most important quality of work life improved.

This kind of positive solution seemed impossible to achieve with another of our clients and it took years to finally drive the desired change.  The problem was we couldn't change how the marketing people were rewarded.

Thanksgiving

American Thanksgiving is truly a holiday to be envious of.  For those of you who have never been caught in the U.S. on the night before trying to get home, this is the highest single travel day and when the weather decides to act up and flights get canceled it can be brutal.  This is a holiday not about shopping and buying presents (although black Friday is one of the best days for shopping).  It is a holiday about family and that is what makes it great.  It is also the day you can listen to 'Alice's Restaurant', which for some reason I can't get enough of.

Thanksgiving is a time of reflection.  Over the last few months, I have been trying to write a weekly blog focusing on using systems thinking, learning and measurement to drive organization change.  One of my favorite characters in this saga is Jack Welch, because to me he is still the epitome of a manager who understood these principles.

Welch never professed to having all the answers.  He was a man who understood how to ask the right questions and used measured data to drive the answers.  As his career progressed he became more aggressive in creating process that would drive the directions he wanted to go.  (see previous blog for more on this subject).

I see patterns in mathematical process analysis and when I can't see them I know that we are not asking the right questions of the data.

Unfortunately, as my friend Steve McClung says, 'a lot of people aren't interested in doing the heavy lifting that this kind of analysis requires'.  (Steve is currently  manager of Rhodia's plant in Spartanburg and the Asset Manager for one of its business'.  He is also one of the best Plant Managers I have ever worked with).

But, in this case I don't agree with Steve.  I favor Michael Hammer's perspective that he lays out in his book, 'The Agenda' ....  

A company's measurement systems typically deliver a blizzard of nearly meaningless data, that quantifies everything insight, no matter...

• that it is devoid of any particular rhyme or reason;
• that it is so voluminous that it is to be deemed unusable;
• that is delivered so late that it is to be virtually useless;...

In short measurement is a mess.

We have created a whole generation of managers who have this belief.    But unfortunately the situation has more complex and troublesome outcomes.


To understand the problem, one has to take into account how organizations are built.  To cope with the complexity of organizational life functions are divided into divisions such as manufacturing, marketing, R&D etc.  For each of these functions performance measures are created, supported by key performance indicators.   The people in each function are rewarded or punished for how effectively they attain those goals.  When all the functions achieve their goals the organization will prosper, or, so the theory goes.

In fact, in most organizations this isn’t true and it underlies one of the biggest problems we as consultants face in trying to effect change.

It is also why we meet significant resistance to change from some sectors.  We are trying to change 'to something better', but the resistors often see their positive reward system stripped away and not replaced.  From their perspective this means that the change will have a significant negative impact on their bonus system, on the satisfaction of their job and ultimately on their life.

So how do you create change when there is this insidious contradiction to change?  How do you get people to focus on the needs of the whole system, when they only get rewarded for the outcomes of their sub-system?

This kind of zero sum game plays out everywhere we look.  We now realize that the recent melt down in the financial system was not just a random affair.  Many key players in the banking system understood the risks they were taking.  They even had a term for the impending disaster.  But, it wasn’t their problem.  The rewards were so substantial that they were driven to take on more and more risk.  By the time things got bad they would take their money and run.

There isn't one answer, one process, one software package that drives that change.

The real answer can only come about when the organization learns how to learn.  This is called double loop learning.    Unfortunately for adults, the learning process is slower, more complex and much less natural than it is for children who often just behave like sponges.

Adults, need a goal which I call a target and a process to measure how far they are hitting off the target to adjust or learn.    In conjunction with this we need practice and rewards and here I am not talking about money.

Now what does all this have to do with Thanksgiving? 

Thanksgiving is a time of reflection.  Are you learning 'The Art of the Bull's Eye?

more soon....

Customer Value Management...the next Reengineering process

In 1990, Michael Hammer a professor of computer science at MIT, published an article in the Harvard Business Review in which he claimed that the major challenge for managers is to obliterate non-value adding work, rather than using technology for automating it.  He called his concept reengineering.  The concept was to help organizations fundamentally rethink how they do their work in order to dramatically improve customer service, cut operational costs, and become world-class competitors.   Reengineering primarily became a mechanism for cost reduction.  It made a lot of manufacturing leaner and a lot meaner, but it focused on the inside of the organization.  Any linkeage directly with the customer for the most part was insignificant.

I have a good friend and client who was until his retirement the Senior Vice President at Nalco Chemicals, which is the largest water treatment company in the world.  Dan was famous for saying that you can't save your way into prosperity, that only comes by growing your profitable business.

However, research has shown over and over that organizations still don't have a handle on true customer profitability.   The truth is that some customers are deeply unprofitable. Simply doing business with certain customers can have a significant impact on reducing profits and shareholder value. On the other hand other customers are fabulously profitable--but too often in my experience the effect of the bad-news buyers over-whelms the stars.

Further, we know that the corporate understanding as to how the customer views the intrinsic or extrinsic value of the products is even farther down the comprehension pole.

What does any of this have to do with customer value management?

First a definition.  I will use Jim Anderson's from the Value Merchants...

"Value is the worth in monetary terms of the technical, economic, service or social benefits a customer receives in exchange for the price it pays for a market offering."

Understanding Value

 There a 3 views of value...

1. The value attributed by the product value proposition
2. The customers view of the products value
3. The real value today for the company

Value will be created for the company as a result of the product deliverables in terms of its performance, customer cost savings or other added value. 

Let me give you two examples where superior value drives my buying proposition.

Gillette Razor Blades

I recently brought two types of Gillette razor blades to a conference on value management to test their value parameters and assess to what degree they compete with each other.  One was a pack of 12 Gillette Good News disposable razors that sell for approximately $12 Canadian and the other was 1 Fusion Power razor with 1 extra blade that sells for approximately $16 Cdn.

I use the Fusion, which I love and offered both razors to the group.   I couldn’t give away the Good News blades, but all the participants were happy to accept my Fusion, which I wouldn't part with.  When I questioned the group on their spendthrift ways, their response was…’my face is worth the extra money.’

Synthetic Oil

I use synthetic oil in my sports car instead of regular oil even though the price is approximately double.  Why?  Its better, I love my little car and this is good for it.  

However, there are many more examples where the value difference is insignificant or unclear. 

Value is Transactional

Customer value must be transactional with the measure of value based upon...

1. the actual profitability of the product;
2. the product profitability as measured against its value proposition;
3. the product profitability as measured against the portfolio of customers that it fits into.

The chart below is an analysis of products by volume, margin, and profit velocity. 

• The products within the circle are all directed at the same market segment and carry the same value proposition.  
• The size of the ball is based upon the current evaluation of the products margin.  
• The X axis on the chart measures margin per unit of time through the 'constrained vessel'.  I call this profit velocity and will spend more time discussing this metric in later posts.

The implicit goal of any manufacturing facility is to drive as much margin as possible through its constrained vessels per unit of time.  Using this measure we can see that the actual value of the products are significantly different.  However, in most manufacturing environments products are not measured by profit velocity and therefore this group would be seen as having both equitable and positive margins driving positive value.   The organization would not see this differential.   Therefore this value opportunity is lost. 

What is the difference?  Where are the problems?  What is causing the value differential?  Those aren't easy questions.  But to truly manage customer value, the differential must be clarified.

In this example all of the products within the circle are coils of aluminum that are produced as second tier automotive parts that the customers will make into radiators or condensers.   The customer specifications of the blue product at the bottom of the circle requires a 12 centimeters diameter spindle to wrap the coil.  All of the other customers in this portfolio have converted to a standard 16 centimeter spindle.   The impact of this seemingly innocuous difference is that the coil is less stable and must be produced more slowly, resulting in significantly lower run speed, lower yield and lower value than its peers.   Neither of these problems are picked up by the cost accounting system as costs are averaged.

If this differential were to be addressed the value gain would obviously be very substantial.  But to accomplish this requires two critically important outcomes.  The organization must move to create a  learning organization, that utilizes the data from customer value analysis such as the chart above as an input to drive change.  The second component is to think without boundaries.  Today, partly as a result of the work done on reengineering the common belief is that the next wave of cost cutting can only be achieved by more effective management of the supply chain.

Organizational learning is really a misnomer.  What we mean by this is to create an environment ...

'where people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, and where people are continually learning to see the whole together.'  (Senge 1990: 3)

Senge's very powerful and widely read book, was unfortunately not widely translated into actionable outcomes.  How do you create an organization...

• where learning and adaptation is a natural part of core process, and 
• removes boundaries to improve the cohesiveness from suppliers right through to the customer?

The answer of course is to build in new corporate wide feedback systems and appropriate reward systems that recognize and drive the new behavior.  Unfortunately, this is much easier to write down than deliver.

I have struggled with how to create and then teach the requirements for a learning organization.  What I needed was a way to provide an easy conceptual framework that linked feedback to learning.

The idea of using the metaphor The Art of the Bull’s Eye to create the link between feedback and learning a very complex task came to me several years ago when I was at a friend’s house in the country.   He took me out on the deck and proudly presented his new high-end air rifle.    With a sly grin David turned to me and pointed to a cup that was attached to a post about 30 feet away and said, “Let's have a contest to see who can hit the cup the most out of 20 shots.”   I am a competitive guy and I like nothing more than a good challenge.  Even though I had little experience with shooting a rifle I knew I could take this guy. 

Twenty shots later, sigh, I hadn’t hit the target once.   My ego was damaged!  While sitting down and having a beer (its true about Canadians, cottages, and beer) and contemplating my failure, I realized that I had no idea where the pellets were flying and therefore had no idea how to change my behavior, how to learn. 

So, being the enterprising guy that I am, I went into the garbage and found a piece of cardboard (probably the bottom of the beer box), took out a magic marker and drew a bull’s eye.  

With the new target in place I took my first shot and missed the cardboard completely. (not good).  So I guessed it went high and lowered the gun and found the upper left corner.  Now I had feedback.  Over the next 20 shots I slowly began to learn how to aim that rifle and gradually began to move the pellets into the middle of the target.

More next week...

The Art of the Bull's Eye


 

The Art of the Bull's Eye is a 7 step structured process that helps manufacturing organization's create organizational learning and drive customer profitability and customer value.




We chose the metaphor of a Bull's Eye since the process of becoming a marksman requires...

• both the perspectives of art and science;
• finesse and strength;
• the capability to both adapt to various conditions and yet be extremely decisive;
• the practical applications of mathematics through the understanding of wind, barometric pressure and heat;
• the discipline to keep refining the process and a feedback mechanism to drive the refinements.

But, what is even more cool about the concept of the Art of The Bull's Eye is that it is also a metaphor for striving for perfection.

"Don't focus on the numbers"...Jack Welch

My goal in writing this blog is to present a perspective on root drivers for organization change and support these strategies with effective transformation processes.   Theory is interesting and talk is cheap.  To best understand this phenomenon my experience is to use real examples and case studies of change drivers.  Some will be my examples and some will be from the public domain.

Jack Welch, the infamous CEO and Chairman of GE for more than 20 years led a series of revolutions at GE, seeking to recast a highly bureaucratic, labor-intensive corporate giant into a highly productive machine that would function with the speed and simplicity of a series of small entrepreneurial companies.   Welch was all about measurement, yet one of his more famous quotes...

"Don't focus on the numbers, numbers aren't the vision, numbers are the product."

To me this statement perfectly articulates the what and why of measurement and some of the current problems with organizational measures.

You will hear me say over and over again, there has been a drive in organizations to create better and more copious measurements, which is obviously a very good thing.  Unfortunately, too often this has translated into... 'surely if we measure everything, we will find an abundance of important data that will help to drive productivity and profitability.'   Nope!

I was working in a large rolling mill that had poor productivity which we were trying to improve.  I sat down with the plant manager for a briefing and he produced what seemed like a hundred different analytical spread sheets that seemed to analyze the process down to the minutia, but all it did was confuse me.   His presentation was designed to convince the consultant that they had analyzed this problem to death and I could not possibly add anything to the equation.   He was partly right.  The data showed an organization working very hard at process improvement with little to show for it.  

Everyone has heard the statement...

"There are three kinds of lies: lies, damned lies, and statistics."  This phrase describing the persuasive power of numbers is attributed to the 19th Century British Prime Minister Benjamin Disraeli (1804–1881).

To return back to the rolling mill example, the problem was that they were so focused on measuring the sub-systems in the mill that they were not measuring true system outputs, which brings me back to Jack Welch.    If we look at Welch's career at GE,  he made at least 5 major interventions.  For each of those interventions measures were both the product and the steering mechanism for the change process.

The following are his major change strategy interventions...

1. Being Number One or Two in the Market Place...search out and participate in the real growth industries and insist on being number one or number two in every business that they were in - to become the  leanest, lowest-cost, world wide producers of quality goods and services;
2. People Differentiation, Creating the Vitality Curve... this was a process to differentiate management into 3 groups, A - the top 20% performers, B - the vital 70%, C - the problem 10%;
3. Work Out...taking unnecessary work out of the system and measuring the impact;
4. Boundary-less...the concept of removing boundaries both inside the organization, between manufacturing, marketing, finance, engineering, etc (measure the impact) and outside the organization to create a single process from supplier to customer (measure the impact);
5. Six Sigma Quality...driving productivity, reducing variance span and measure the impact.

I spoke to a friend of mine today who was CFO of a large international chemical company.  He said that his perspective was that since the recession hit large companies have 'hunkered down' and focuced entirely on cost reduction.  Now they and are waiting.

Too many managers are afraid to change.  They believe that standing still is the safest business strategy.  The problem with that approach is that the world is changing.  In fact it seems to be changing at an ever increasing rate.  Therefore to stand still is to meet yesterday's demands, with yesterdays products and yesterday's organization. 

The U.S. Marine Corp teaches what they call the 70-percent solution—It's better to decide quickly on an imperfect plan than to spend time considering every angle and roll out a perfect plan when it's too late.  Learn to move fast, change on the fly, and inspire employees—or die.

 Hard nosed, effective measurement is really about creating organizational learning that allows the management team to steer a course through the rapids of a world in the process of continually reshaping itself. 

The Art of the Bull's Eye
 

The Art of the Bull's Eye is a 7 step structured process that helps manufacturing organization's create an effective measurement system that evaluates customer profitability and customer value.  




We chose the metaphor of a Bull's Eye since the process of becoming a marksman requires...

• both the perspectives of art and science;
• finesse and strength;
• the capability to both adapt to various conditions and yet be extremely decisive;
• the practical applications of mathematics through the understanding of wind, barometric pressure and heat;
• the discipline to keep refining the process and a feedback mechanism to drive the refinements.

But, what is even more cool about the concept of the Art of The Bull's Eye is that it is also a metaphor for striving for perfection.

Jack Welch for me is an example of a manager with a continuous compulsive drive for perfection.  Did it work? First quarter profits in 1996 reached $1.67 Billion  more than the company earned during all of 1981, the year Jack took over. 




More next week.
 

                                                                                                                                                                       

Measures are a lens through which people see the world

I was hired by the CEO of Rhone Poulenc Canada to improve the profitability of his largest and most important plant in Canada.  Rhone Poulenc, now called Rhodia, is one of the most successful chemical companies in the world.  Its origin is France, but in the early 90’s they came to North America to establish their presence.

The plant was clearly in trouble.  Morale was poor, safety was a problem, tension existed between management and operations and output was nowhere near what was projected.  A new plant manager had just been parachuted in to address these issues.

I will admit to you that the project seemed daunting.  There was so much wrong with this plant, that it was hard to clarify where to begin.  What was clear, was that the plant lacked direction, focus, teamwork and was not going to survive for long unless things changed radically.  So where to begin?

I didn’t have long to ponder that question when the new Plant Manager brought me in to facilitate a meeting between he and the Vice President of Marketing.  The meeting quickly turned abrasive and aggressive.  The VP Marketing was angry that he could not get more cycle time to produce what he argued was the best product with the highest margin produced at the plant.

The VP was bonused on the average margin over the volume in his portfolio.  Not producing high volumes of this product was hitting him directly in the pocket book.  The Plant Manager’s retort was that this product was a resource hog and his people couldn't meet their production requirements if more of this product was produced.
 
To be honest, it sounded pretty dumb to me.  If this was such a high value product why not make more time for it and bounce out other products?  I sent each of the two fighters to their respective corners and told them I would be back in a week with some answers to this seemingly easy dilemma.

I learned quickly in my work in manufacturing that a spread sheet will only take you so far.  If you want the real story sit with the operators and learn how products are made. 

Alchapaste was the product in question and it had a margin of 80% since it was a very simple concoction of water and paste mixed up to produce wallpaper paste.  

The first issue of note was that Alchapaste was being produced in one of the large reactors that had heating, pressure, and mixing capability.   The high tech capability was useless for this product and to make this even more perplexing the reactors mixing capability was poor.   As a result, the paste powder had to be poured very slowly by hand and allowed to mix.  This process consumed the reactor for 3 days until the consistency met the correct specifications.

Since the reactor was also used to produce a large number of other products it had to be thoroughly cleaned of all the sticky paste that was left inside.  An outside company was brought in with high pressure hoses and over the next 4 days the paste was removed from the reactor walls and hoses.

That seemed like a long time, but they made substantial profit, didn’t they? 

At some point it occurred to me that I really could not translate what it meant in dollars to earn 80% margin.  Also, if this product took 7 days.  How long did other products take?  How much margin did they make?

I began by looking at what other products could be made in the reactor and chose a low margin, relatively simple, high volume product called CO630.  This product was a commodity, produced in 12 hours and earned a poor 30% margin.  The operators however loved to make it.  It was a simple, straight forward production process.   Once it was set up, it was simply allowed to ‘cook’.

Something didn’t sit right. 

Follow the Money

At this point I began to think as a TOC consultant.  If the constraint was the key to output, then it followed that it was critical to understand how much money each product drove through the constraint, over a period of time...say an hour?  I went and got the spread sheets to look at the numbers. 

Alchapaste

• Production time (including cleaning) 7 days - 168 hrs.
• Margin $15,000. 
• Margin per constraint hour - $89.

CO630

• Production time (including cleaning) 12 hours (1/2 day). 
• Margin $3000. 
• Margin per constraint hour - $250.  

If the plant made nothing else in this reactor for the 7 operating days that it took to produce one batch of Alchapaste, it could theoretically produce 14 batches and earn an astounding $42,000!

How was this possible?

To understand the problem, one has to take into account how organizations are built.  To cope with the complexity of organizational life functions are divided into divisions such as manufacturing, marketing, R&D etc.  For each of these functions performance measures are created, supported by key performance indicators.   The people in each function are rewarded or punished for how effectively they attain those goals.  When all the functions achieve their goals the organization will prosper, or, so the theory goes.

In fact, in most organizations this isn’t true and it underlies one of the biggest problems we as consultants face in trying to effect change.

It is also why we meet significant resistance to change from some sectors.  We are trying to change 'to something better', but the resistors often see their positive reward system stripped away and not replaced.  From their perspective this means that the change will have a significant negative impact on their bonus system, on the satisfaction of their job and ultimately on their life.

In this instance...
Manufacturing was measured from a productivity perspective by COGS (cost of goods sold), which is a measure of volume produced, divided by the total manufacturing cost to get an average per pound or per kilo cost. 

The goal of every plant manager is to drive as many pounds or kilo’s through her operation.  This reduces the average cost, making the plant more likely to survive.   Under classical measures, product with lengthy production cycles will hurt volume and negatively affects COGS. 

Marketing on the other hand was measured on the average margin of products within their portfolio.  Obviously if all your products are high margin the company will make a very good return and drive shareholder value.   The problem here and in most organizations who use a cost accounting process to analyze cost is that this system doesn’t work well.   I won’t spend time dissecting the problems associated with cost accounting, but it is fair to say that this is a rather archaic process doing a very poor job of measuring true cost.  The true margin of Alchapaste, when opportunity costs are calculated to produce other products in the same time slot, is significantly below 80%. 

The implications were astounding for me.  The more Alchapaste produced, the more the marketing people were rewarded, the higher the COGS and the worse the plant was seen as functioning.  As this progresses the business becomes less profitable.

That was the first time I really understood the irrationality of most organizations.

The two managers who were at each other were behaving in a manner that was driven by how they were measured.

I knew from my days as a psychologist that knowing how people are being measured is a predictor of behavior.

This process plays out everywhere we look.  We now realize that the recent melt down in the financial system was not just a random affair.  Many key players in the banking system understood the risks they were taking.  But, it wasn’t their problem.  The rewards were so substantial that they were driven to take on more and more risk.  As I understand the thinking, by the time things got bad they would have taken their money and run.

The Alchapaste situation, presented an interesting and difficult problem.  Clearly, the obvious answer to the assignment was to stop making Alchapaste and produce more products like CO630.  But, I knew I would have to wear body armor before making that presentation to the VP Marketing.

The solution was relatively simple once the problem was understood.  Find a used and inexpensive blending vessel, modify it slightly to improve the mixing capability and devote it entirely to this product.  The result was cycle time reduced to 12 hours and Alchapaste now earned a margin of $1250/hr. 

This was the first time that I realized that the most critical problem in organizations is the measurement systems.  If the measurement systems were wrong, the decision process would also ramble through a maze of what seemed to be ineptitude but really wasn’t. 

Let’s use a metaphor to understand this.  Think American football.  What if you couldn’t trust the measures?   If you were smart you would set up a safeguard system.  The fact was that Commissioner of football came to that conclusion.  There were too many bad decisions that had huge impact on the results.  Which is why they put in a challenge flag.