That was the opportunity presented to Pinnacle Strategies CEO Mark Woeppel when BP surprised him with a call for help fighting the oil spill in the Gulf of Mexico. The call would lead Pinnacle on an international mission to boost output of spill fighting equipment and then to help organize a historic mop up — the cleaning of more than 10,000 boats, ships and rigs.

As the magnitude of the spill became clear last April, BP put out the order to buy all material that could possibly be of use. But it found the entire U.S. production of critical cleanup resources was not enough. Oil was spreading — often where no workers, booms, skimmers or other equipment existed to contain it.

As with many success stories, Pinnacle’s involvement started with an incidental connection. Clint Wood, the BP executive in charge of supply, recalled a time years earlier when he briefly collaborated with Woeppel to boost production.

Now, Wood needed decontamination suits, boats, detergents, real estate for clean up sites, containment boom, dock space, boats, and other scarce material. More than equipment, Wood realized he needed to mobilize minds.

“I sifted through old e-mails and found one of Mark’s marketing letters,” Wood said. “I’ve always been an early adopter. I wanted to see if we could use Theory of Constraints to increase throughput.”

Within 48 hours of Wood’s Friday evening phone call, Pinnacle launched a marathon of visits through North America and Europe to work with BP’s key suppliers to increase production.

One early visit was to a Walker, Michigan factory. Prestige Products was asked by BP to supply as much oil containment boom as it could…

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Many organizations struggle with their continuous improvement (CI) efforts; achieving real bottom line results, whether in cost savings or increased revenues, has proven to be difficult.  In spite of the widespread implementation of Lean and Six Sigma principles, poor results persist. The TLS process generates 15-20 times better performance than Lean or Six Sigma.  I’ve written a new paper (18 pages!) that shows the root causes of poor CI program performance and a systematic framework to create ongoing bottom line results.

You can get a free copy (requires registration) by clicking the link below.
TLS Theory of Constraints Lean Six Sigma

Obstacles to Implemeting Lean

At the heart of continuous improvement is the matter of change.  In order to improve the process, we must change it.  However, not every change results in an improvement.  We would not bother to make a change if it didn’t result in something positive, yet many changes we make result in little real improvement.  Why is there is there such a mismatch between our expectations for change and the results?

In 2007, the Lean Enterprise Institute surveyed Lean practitioners about the biggest obstacles to their Lean Implementations.  Most practitioners cite “resistance to change” as the biggest obstacle; from every level of management, the middle, front line, and employees as well. 

Note that unrealized financial value ranks very low in obstacles, indicating the practitioners do not connect the lack of bottom line results to organizational resistance.  Rather, they seem to be focused on implementation “maturity”, which is another way of saying that the organization is using all the tools.  These results indicate that there is a disconnect between the goals of lean practitioners and management; emphasizing tool adoption over results achievement.

Why is everyone resisting the change?  Why wouldn’t the organization want to use these tools?  Certainly the lack of results is part of the problem, but it doesn’t explain the seemingly universal resistance.  To find the answer, we looked at a management fad from the past, Total Quality Management (TQM).

Malcolm Baldrige National Quality Award Research Results

To get insight into the reasons for CI success or failure, look at the Malcolm Baldrige Award, the award for business excellence in the United States.  The award establishes benchmark practices  and processses for business excellence, “To enhance the competitiveness, quality, and productivy of U.S. organizations for the benefit of all residents.”.  It has been criticized as being irrelevant to organizational competitiveness because many of the early recipients of the award subsequently failed.  In recent years this issue has been corrected and the award is focused more on the results the nominees achieve, with the tools adoption taking a secondary position.

Quite a bit of research has been done on the relevance of the Baldrige Award criteria.  In the spring of 2000 a study was commissioned to answer the question, “Is there a causal link between the Baldrige Criteria and actual performance of firms?”[1]

The research had several significant findings related to our discussion.

First, the most significant driver of system performance is not process, but leadership.  Leadership pervades everything the organization does, but those organizations that score well in leadership, score well everywhere.  This doesn’t mean that tools are not important, but they’re not as important as the core skill of leadership.

Process management is twice as important when predicting customer satisfaction as when predicting financial results.  We can conclude that having good processes are important to customers, but there is not a straight line from process excellence to financial performance.  So you might have happy customers, but unhappy stockholders.

The lesson for management and continuous improvement program directors is that the soft skills of leadership are very important to delivering results and that the program, to be financially successful must have strong leadership from the real leaders of the organization.  The real leaders must be commissioning, guiding, and delivering real accountability to CI teams.  CI and business excellence initiatives cannot be delegated to the “business excellence department”.  Leadership must be fully engaged in continuous improvement. 

Continuous Improvement and Business Excellence is not something to be added to the work of managers, it is the work of managers. 

Many organizations struggle with their continuous improvement (CI) efforts; achieving real bottom line results, whether in cost savings or increased revenues, has proven to be difficult.  In spite of the widespread implementation of Lean and Six Sigma principles, poor results persist.

The TLS process generates 15-20 times better performance than Lean or Six Sigma.  This presentation will show the root causes of poor CI program performance and a systematic framework to create ongoing bottom line results.

You can view the entire presentation by registering here

Focus on customer service. I’m not talking about being nicer, I’m talking about the basics of performance.  The number one reason that customers change suppliers is because of reliability issues.  Not price, not quality.  On time delivery.  Are you delivering on time?  Are your lead times consistent with the competition?  Don’t give your customers a club to hit you with.  This is entirely under your control.

I have a number of customers that improved their on-time performance and not only improved the customer service, but actually increased revenues.  They became the suppliers of choice simply because they could be counted on to delivery the goods when the customers were in a tight spot.

Build customer relationships. I’m not talking about buying more steak dinners or tickets to the ball game (although building relationships is always good), I’m talking about finding new ways for your firm to add more value to your customers.  Take a look at your value proposition.  Can you find a way to deliver more value?  You have all those skilled people.  Can you redeploy them to find new ways of helping your customers?  New services?  Modifications to existing products or services?

One of my customers was able to increase the amount of business with a key customer because they added a service to keep their product on site for on demand consumption.   It cost them very little, but it cemented a critical relationship, locked out other suppliers and positioned them for more business with that supplier.

Conserve cash. Eliminating non-essential spending is a common strategy, but there are other opportunities to improve your cost structure now and position yourself for even better profitability when things turn around.

• Look at your receivables risk.  Maybe it’s time to offer discounts on those old debts to encourage customers to pay immediately.  Better something now than nothing later.
• Renegotiate your materials pricing.  Now is a good time to re-evaluate your supplier’s performance and pricing.  There is never a better time to negotiate long term agreements than when the price is low, just ask Southwest Airlines!  They saved nearly$2 B in fuel costs in 2008 because of their hedging strategy.
• Look at your compensation strategy, especially sales commissions.  Are you paying for results achieved lately or a long time ago?  Often we believe that sales reps are due a commission for life. That turns hunters into farmers.  In this economy, you need hunters.  Are you creating the incentive to generate new business or hang on to old business?
• Take a fresh look at outsourcing.  Do you have the capability to bring some of  that work you had sent offshore back home?  Sure, your people cost more, but anything you can do in-house will go a long way to cover your fixed costs and help you retain your people.

Focus sales efforts on the stars in your product portfolio. Don’t waste your effort on selling marginally profitable products.  Make sure your sales efforts are geared to sell the products that maximize the highest rate of return.  That means focus on the products that generate the fastest return.  It may not be the highest margin products that deserve the attention, but those products that earn the highest turnover.

For example, if you have a product that generates $5 in gross margin once a month, it’s not worth as much as a product that generates $2 in gross margin every week.

Reduce your lead times; finish early. Focusing on project or product lead times improves your rate of cash generation.  Reducing your lead times also reduces your cash requirements.  Less work in process equals less investment equals more cash flow.  If you have projects in the pipeline, early finish equals early benefit.  It may be worth the investment to focus on bringing those projects in early.

When business is down, managers often take a defensive approach and hunker down and wait for the storm to pass.    Use this time as an opportunity to make your business more competitive.   You’ll be healthier now and in a great position to respond when the economy picks up.

Stop it.

Take control of your improvement efforts by forcing the CI organization to justify their existence.   The return on your improvement investment should be at least 5 to 1.  Every year.  Without realized returns, the continuous improvement organization is mere window dressing.  Rather, it’s worse than window dressing, it’s poison; it is harming the organization.  Hurting your ability to move forward.

Fortunately, taking control is fairly straightforward:

Insist that all “improvement” projects are commissioned by a senior manager who is accountable for the results.

Being “commissioned” means being “sent”.  The senior manager sends a group to get something done, a task they’re quite accustomed to.  They’re given a budget, specific goals, and a time line.

This ensures that every project will be linked to the strategic objectives of at least one senior manager and linked to the global objectives of the organization (presuming the senior manager’s goals are in line with the rest of the organization).  It prevents local projects that are done just for the sake of “progress” or “tool adoption”.  After all, if the project doesn’t move the organization towards its strategic goal, how could it be called “progress” at all?

Ensure the local process owner is accountable for achieving the results.

No improvement project is done in a vacuum.  It’s done in someone’s area of responsibility.  That “someone” should be actively involved in the project, ensuring that the results are achieved by the people doing the work.

The senior manager gives the task to the project team and makes the process owner accountable for results.  This ensures that the project doesn’t become something extra the process owner has to do, but is central to what the process owner is doing.   If there’s resistance to change, it will rectified quickly!

Put teeth into your structure by reducing budgets of organizations that improve.

This may seem counter intuitive, because we shouldn’t reward improvement with penalty.  That’ s not what I’m suggesting. A cut in the budget is not a punishment, it is a reward (if your process owner sees it otherwise, you have a different problem that I can’t discuss here).   When the project is completed, a portion of the improvement goes from the local area back to the general fund or to other uses.

For example, let’s say that a project reduces expenses by $10,000 per month.  The process owner’s budget would then be reduced by that amount.  A portion of that, say 40%, would go to fund the continuous improvement department, 10% would go to a reward fund, and 50% is returned to the corporate budget for reallocation (to profit!).  If the savings is in payroll, people don’t get released, they are reallocated to areas where they can contribute.

In a sense, the process owner writes a check from his budget back to corporate.  This encourages him to be certain the improvements are real, not simply phantom “savings” that are bookkeeping tricks.

Building financial and organizational accountability into your continuous improvement process forces the improvement community to focus on the real needs of the organization and on projects that have concrete results.  Without accountability, your improvement efforts will be a show with the rest of the organization watching and applauding, but not participating.

• Over-production; Making more than the customer (or the next step) requires. Usually manifested as batching behaviors and
• Releasing work too early into the system (allowing overproduction); resulting in high work in process inventory.

These two deeply embedded behaviors are the result of management’s beliefs about the proper way to deploy resources to the work. There are countless policies, procedures and measurements that reinforce the erroneous idea that in order to manage well means to keep workers and/or machines producing as much as possible, as fast as possible. We have been taught that idle resources are major waste. Those that have implemented ToC (and Lean) realize this thinking is fundamentally flawed.

Managers must change their processes, policies and measurements to reinforce behaviors that lead to more flow, not greater resource efficiency. The very nature of efficiency must be redefined, from the resource level to the system level, from individual production to system production.

How do you get managers to realize that this deeply held definition of efficiency (the sum of local improvements is equal to improving the system as a whole) is leading to shortages of capacity?  It’s  not a small task.  The thinking is institutional; managers are not even aware of this hidden assumption. Beyond the realization that the assumption is wrong, how do you get changes in behavior? Despite conventional wisdom, behavioral research demonstrates that people don’t necessarily act from the beliefs they have, but from the reinforcements they receive. Therefore, in order to get people to change behavior, you must not only find the erroneous assumption(s) and kill it, you must also identify the reinforcement mechanisms that drive the undesirable behaviors and change those, too.

Many companies think they at capacity because their delivery performance is suffering. This is a logical conclusion, but most organizations waste at least 20% (I think it’s really closer to 50%, but I’m being conservative) of their available capacity through synchronization mistakes and poor policy choices . Managers must remember that the output a system generates is a function of how resources are managed, not just the total number resources it owns.  To find this lost production capacity, managers often use lean manufacturing techniques to increase their output. However, when applying these techniques the results are uncertain. A recent study (see related article on this blog) demonstrated that only 2% of companies implementing lean techniques fully achieve their objectives and less than a quarter (24%) achieve significant results.

While Value Stream Mapping looks at behavior, it doesn’t look at the causes of the behavior.  It does not identify the root causes for organizations losing output from their capacity.  Without eliminating the causes for behaviors, you cannot eliminate them.  For example, you cannot stop people from eating unless you can eliminate the cause of it – hunger.  You can remove the food to prevent people from eating, but once food appears, they’ll eat again.  In the same way, we must address the behavioral causes for lost capacity and create new reinforcements for the correct behaviors.

With a few changes focused on identifying the causes of behavior, you can improve the results of your VSM efforts.

• Create a process map of the value creation process
• Identify excess and shortages of inventory
• Identify the behaviors that create the inventory, delay and shortages
• Identify the formal behavior reinforcement mechanisms
• Identify the informal reinforcement mechanisms
• Identify process activity errors that waste capacity
• Assess information quality for decision making
• Assess decision processes for downstream impact

To make the most of the system’s capacity one must ensure management is reinforcing behaviors that maximize flow. Flow behaviors are most often blocked by local efforts to achieve high efficiency, but there are deeper manifestations of the efficiency concept that must be identified and rooted out before a process can be transformed.

By modifying the existing tools of process mapping and value stream mapping, one can get an understanding of the main behaviors that hide system capacity. This can result in an early stage transition from efficiency behaviors to flow behaviors, providing a systems level guide to process capability and development of the “to-be” state of the value creation process. By increasing the understanding of current capacity utilization and finding the behaviors that block systems level improvement, one can reduce the capital risk associated with adding additional fulfillment infrastructure.

A recent study done by the London School of Economics and Stanford University shows that a standard of management practice is linked to the favorable financial performance of the business. The way an organization is managed has a strong effect on its performance. It also states that “Management excellence is a matter of internal policy and not just the business environment”

The study cites practices such as:

The study shows that practical management techniques actually do deliver financial results for the company, yet many organizations do not even attempt to implement such practices. “For companies, the research is good news, suggesting that they access to dramatic improvements simply by adopting good practices used elsewhere.”, says the authors.

The study of 4,600 factories in 12 countries, referenced in the September 8 issue of The Wall Street Journal, found that, “a one-point increase in a factory’s management rating (on a one-to-five scale) translated to a 25% increase in labor productivity and a 65% increase in return on invested capital.”

These results, which Harvard Business School said are, “pioneering work,” and, “a real innovation in the study of management,” led experts to conclude that, “common management techniques such as setting targets, monitoring performance and ‘lean’ manufacturing actually help companies become more productive and profitable.”

Another convicting – and humbling – finding in this research relates to the apparent inability of factory managers to accurately assess the strengths or weaknesses of their own leadership skills.

“Good management appears to be so strongly linked with good performance that it might be reasonable to expect all firms to make better practices a priority,” shares a Stanford University report about this research. “The techniques of good practice are, after all, available in the public domain in a wide range of easily accessible forms. Yet many firms are still poorly managed…The majority of firms are making no attempt to compare their own management behaviour with accepted practices or even with that of other firms in their sector. As a consequence, many organizations are probably missing out on an opportunity for significant improvement because they simply do not recognize that their own management practices are so poor.”

The authors also note a disparity between family run organizations and those that are not: “Family-run and government-run businesses are less well managed and less productive than similar plants with professional managers. Promoting successive generations of family management “significantly damages company performance,”

Remember the London School of Economics research finding above that, “a one-point increase in a factory’s management rating can translate to a 25% increase in labor productivity and a 65% increase in return on invested capital,”

You can read the article here

You can download a copy of the study here

“Just because something is popular, doesn’t mean it’s working according to plan…” cites the author.

Managers seem to employing these techniques for the wrong reasons. The survey shows that market strategies are build around quality and service. Most of the lean tools are geared towards driving time from the system.

The Theory of Constraints continues to demonstrate superior performance in dimensions the customers care about; lead time and reliability. As a method of continuous improvement, it has no peer. A study by Mabin and Balderstone report that using ToC, organizations achieved a mean lead time reduction of 70% and an improvement to on time delivery performance by over 40%. Coupled with short implementation times, often less than 90 days, dramatic results are reported over and over and over.

Moreover, Theory of Constraints implementations actually improve the bottom line performance, doubling profitability in many implementations.

The article also cites that 14% of manufacturers are implementing ToC, up from 3% in 2007. Managers are starting to wake up to the power of the theory of constraints. Are those managers working for your competitor?