Let’s start by defining what we mean by “operational excellence goals” and why they are needed, and then discuss how you run your company around these key indicators. And let’s not forget that this is within the context of a company trying to transition from its traditional batch manufacturing approach to a new strategic approach using lean management as the basis of everything.
In my opinion all companies are fundamentally the same. They are nothing more than a group of people and a bunch of processes trying to deliver value to a set of customers. The traditional management approach, with its functional structure and batch mentality, tends to vastly complicate this. Its overriding focus on results tends to take both its people and processes for granted. Lean management on the other hand takes a much simpler approach. With lean the focus is on constantly removing the waste from your own operations in order to deliver more value to your customers. The only way to do this is to concentrate on improving your people and processes. Just the opposite of the traditional management approach.
The lean company believes that focusing on improving your processes—not your results—is what will ultimately give you better results. Removing the waste from every process is the daily work of the lean company. It understands that doing so will allow it to better conform to the needs of its customers and thus provide competitive advantage. Having a 2-day lead time, for example, will always trump the competitor with a 6-week lead time. The lean company competes on time while the traditional company still thinks about competing on cost.
Being a time-based competitor doesn’t happen just because you wish it to. You must remove enough waste to create the operational excellence required to outpace your competitors. In effect, the lean company understands that it needs to compete on its operational excellence. Starting out from a traditional batch state, you are in no position to do this. So you need to think about what your future state should look like. What operational excellence goals would distinguish you from your competitors if you achieved them? These targets can’t be anything like your current state. They must all be stretch goals that are aspirational in nature. You can’t, for example, say that you want to take inventory turns from 3x to 5x. Your people will think they might be able to get there by staying on the same path but just doing it a little better. If, on the other hand, your operational excellence goal is to go from 3x turns to 20x turns, you are on the right path. Getting there will require a total change in what you are doing and how you think. In fact, when setting operational excellence goals, you’re probably not setting the bar high enough unless the initial reaction from your organization is along the lines of: “What? You can’t be serious.”
Setting the right operational excellence goals will of course vary depending on the industry or type of business. While manufacturing and non-manufacturing businesses share the same structural elements of people and processes, delivering value to a set of customers, they have key differences. For manufacturing companies, pretty much any manufacturing company, I believe that the following example of operational excellence goals will work every time:
OPERATIONAL EXCELLENCE GOALS
100% On Time Customer Service
20x Inventory Turns
50% Reduction In Defects Each Year
20% Productivity Gain Each Year
Visual Control and 5S Every Where
Obviously these are ambitious goals for most companies. But that’s what you want. You are trying to change the conversation. You are trying to focus everyone on where you want to go, not just on incremental gains from where you are. You won’t hit the “every year” ones every year but if, for example, you can take productivity gains from 2-3% to 14-16% you are making huge strides towards your operational excellence goals. The same is true for inventory turns. If you are starting at 3x, then getting to 20x will take some time, but getting there is extremely important to establishing operational excellence.
"Choose operational excellence goals tied to processes—these types of metrics will naturally produce better results once you reach them. Don’t focus on results; driving towards these goals means you are pushing the organization toward your future results."Note that these goals focus on inputs—not outputs or results. There is nothing here that says you want to increase ROI from x to y, or improve gross margin by 5 points, or similar financial measures that are common in most traditionally run companies. Those numbers are however results. Choose operational excellence goals tied to processes—these types of metrics will naturally produce better results once you reach them. Don’t focus on results; driving towards these goals means you are pushing the organization toward your future results.
Note also that these types of goals orient you to look forward. The traditional company focuses on make-the-month, which means they can’t close the books until three weeks after the end of the month and then put a huge analytical effort into examining what happened. Thus they are always managing looking backward at something that already happened. Nothing can be done about these historical figures at that point. What you can do instead is focus on the things that will improve your future results.
So, ok, now you have operational goals and an understanding of why you need them. The next question is: how do I get people to pursue these goals? Don’t forget that they are ambitious (very “stretched”) targets and that the initial reaction of almost everyone was, “you must be kidding me?” If you just put the operational excellence goals out there but continue with your historical monthly budget review process not much will happen. You need to follow up on these goals with an aggressive kaizen or continuous improvement approach that involves everyone in the company. This means being rigorous about removing foundational barriers like long setup times, poor 5S practices and no visual control.
That’s a given, but even kaizen, kaizen, kaizen won’t get the job done or provide the leverage that you need. How do you deploy these operational excellence goals down in the company so that everyone is focused on them all the time? In effect, you need to run the company based on these operational goals and not on the traditional approach of make-the-month based on the budget.
To achieve this two things are necessary. First you need to establish a value stream organizational structure. For a manufacturing company this can be done along product family lines. The value stream/product family leader should be given all the resources needed to make the product family complete, from raw material all the way to the customer. This is a dramatic change from the traditional functional organization where most of your employees only see some small segment of the product that is being made. They build even this to a forecast and as a result never feel the pull of the customer. A product family team on the other hand makes the product complete from raw material and directly feels the pull of the customer.
Creating the value stream structure results in a flatter structure; more importantly, the bulk of your people are now part of one value stream or another. So the next step is to deploy the operational excellence goals down to the value stream leaders and then run your company based on these goals. Our management approach at Wiremold was to have the value stream leaders report how their product family team was doing on the company’s operational excellence goals every Friday. They reported this to myself and my senior staff. They each had only ten minutes and their report had to include what improvement (kaizen) activities they completed this week and what they had planned for next week.
This not only made the operational excellence goals a living breathing reality but also had the effect of deploying them down to everyone on the product family teams. We still created a budget every year and closed the books at the end of the month. But we never spent much time analyzing and reviewing this. All our time was spent reviewing progress on the operational excellence goals. We never beat up the team leaders in these reviews. We were there to help them if they got off track. We had all the decision makers in the room so we could make instant decisions and the communication to every one of what we were doing was very clear. There were no surprises. By doing this weekly it was very clear to everyone that we were serious about hitting these goals and what we felt would be the result once we did. Oh and by the way, we more than quadrupled the size of the company in a little over 9 years, increased operating income by 13.4x and enterprise value by 2,467%, so at least in this case this approach worked.
The Lean company competes on its operational excellence goals. This is what distinguishes it from its competitors and creates unfair competitive advantage. These stretch goals must all be aggressive in nature and deployed down to every person in the company so that they all are focusing on hitting these goals every day. Creating a value stream as opposed to the traditional functional organization is necessary to achieve this deployment. Reviewing the progress of each value stream team towards these goals every week with the CEO and senior management team as you basic management approach will give you tremendous leverage in becoming a lean enterprise. It is the way to manage forward to future results as opposed to the traditional make-the-month approach which is managing backwards by looking at historical results.