The CEO’s Balancing Act

Most of us have one ultimate goal in our work. For those with a Lean bent, it might be to increase customer value. For Operations it could be to achieve the perfect order or in Payroll, deliver the perfect paycheck. The CEO however, has the objective of achieving two goals. The first is success in their customer markets. The second is success in capital markets. What makes these two goals particularly difficult is that to be judged successful, they must achieve both goals simultaneously. To achieve the first goal, the CEO must deliver more customer value than their competitors through better products, services and effective use of their channels. As a measuring stick, most of us would gauge success in the customer market by a company’s revenue or profit. For CEO’s however, they must compete in a second simultaneous competition; the capital market. This market is comprised of investors that make up hedge funds, pension funds, mutual funds, private equity and banks. These investors only interest is determining the correct valuation of a company to ensure they make wise investment.

For the capital market, absolute profits are very important, but that’s not enough. Investors want to understand how a company earned that profit. That’s because the size of the profit doesn’t provide any indication about how much effort it took to earn. For example, two companies may be generating the same amount of profit at the end of the year on the same revenue. These two companies earn the same profit, but are valued very differently. The reason for this may be that one is competing through low-cost production and has high levels of debt due to automated factories. The second may be competing on high levels of service. It has no debt but high labor costs. Even though the revenues and profits are the same, investors will value these companies differently which in turn influences the behavior of their respective CEO’s.

Fortunately for the CEO, they receive lots of help figuring out how to balance the company’s performance in each market. The CFO offers recommendations on how to make the many financial ratios, which investors use in part to judge a company’s value, look better. To improve these ratios, companies can sometimes make decisions that are hard to understand. For example, it is not uncommon to see a manufacturer spin-off a slow growth but reasonably profitable plant because it is asset intensive. Simultaneously it enters into a contract to buy the exact same materials from the new owner. One likely explanation is that the company is trying to continue making the products it needs for its customer market while increasing its return on assets (ROA) ratio to increase its valuation in the capital market. Changing how a company operates to improve its valuation is extremely difficult. While the Return on Assets ratio might improve, it could easily impact the customer market: Operations must now incorporate a longer supply chain or absorb higher costs with increased SG&A costs from its new “supplier”.

Finding the right balance between these markets is where there are often spicy debates between Finance and Engineering, Production, Services, and Sales & Marketing. These operational groups can often find themselves at odds with the CFO as they help the CEO determine what is important in customer markets by understanding how external influences such as competition and regulation are affecting the customer market.

It’s obvious that with interdependent pressures acting upon a CEO as he or she tries to increase value in both markets that a continuous stream of really good ideas is required. This observation is supported by the CEO’s polled in the Council on Competitiveness’ latest Global Manufacturing Competitiveness Index: For the second time in a row, over 400 CEO’s around the world ranked an innovative workforce as the most important competitive driver to their company.

What’s surprising though is that with all the metrics a company puts in place to measure the fiscal and operational health of a company, very few are able to overtly measure and improve their employees’ innovative ability.

Fortunately, there are lots of great examples of an engaged groups of people exhibiting exactly the type of innovative behavior that CEO’s value. The example I’ll share is of magazine subscribers. I subscribe to Cook’s Illustrated and Fine Homebuilding. Both of which provide articles to improve their subscribers’ skills and knowledge. One feature both publications have is a reader’s tips and tricks section. Every issue, each magazine publishes dozens of ideas that its subscribers submit. These ideas are exactly the kinds of ideas a business needs:

  • How to use common materials to replace expensive materials.
  • How to use leftover materials rather than discarding them.
  • Creating simple techniques that turn a hard job into an easy job.

I don’t believe cooking and building homes attract individuals with an above average ability to innovate. Rather the cross-section of individuals tells me that under the right conditions all employees have the potential to be a part of an innovative workforce. The trick is to harness that same innovative and productive energy at work that they display about their personal interests.

To achieve this for my clients, I start with organizational behavior 101, but with a twist. Using Maslow’s hierarchy of needs as a framework, I simplify it into three stages: Security, Productivity, and Engagement.

maslow's hierarchy

Secure Employee

If individuals are insecure about their jobs or feel unsafe at work, they are not likely thinking about ways to incrementally improve the company’s use of an injection molding machine. Creating security has many common themes but is different for everyone. It doesn’t mean every job has to have the same level of security. Instead it means that the employee understands and is comfortable with their environment. Most employees would feel secure in the following environment:

  • Employees are paid in accordance to their agreement with the company (presumably risk adjusted)
  • Employees receive regular communications from leadership that provides transparency as to how the company is doing and where it’s going
  • Employees understand the rules within the company
  • Employees are treated fairly and equitably relative to fellow employees
  • Employees feel safe in their work environment

Productive Employee

With security complete, individuals can be productive. Secure employees want to contribute and add value to a company. They didn’t sign up to fail. Their ability to be productive is dependent on a workplace that creates an environment and situations where they can be successful.

  • Employees know what to do to be effective in their jobs
  • Employees can measure their individual and collective contributions
  • The workplace environment and processes work with them to be productive rather than introducing obstacles.
  • The company values an employee’s personal time as much as it values work time.

Engaged Employee

When employees are secure and productive, they become engaged. Companies who have engaged employees are receiving much more value from their employees than the wages paid. Similar to magazines’ tips and tricks sections, companies have the ability to harvest the ideas created by their engaged employees. To activate this potential, companies need to create an environment where:

  • Individuals are encouraged to contribute ideas and are recognized for their work and ideas
  • Individuals can map their contributions to the success of the company
  • Reasonable failure is tolerated and even encouraged

Similar to developing the process to create a new service or product, an engaged employee can be developed. Companies that have achieved an engaged workforce have figured out how to balance the constraints of the customer, the money, and their employees. For the CEO in the middle of a balancing act, their success hinges on creating an innovative workforce and improving their ROHC – Return on Human Capital.

Use 1970’s technology to improve your plant’s performance

One of the challenges AT&T faced in the 1970’s was the problem of knowing when to send a technician out to fix a problem with a telephone line. This challenge emerged as businesses began taking advantage of the analog phone lines to send data. While a voice call could withstand reasonable signal degradation, data was much more sensitive to signal quality. Some problems were easy to identify, like when the line was broken due to a pole being knocked down. But there were dozens of other reasons that signal quality could drop without completely failing such as a failing diode or transistor, or electrical interference due to incorrectly routed wiring, or a faulty ground system. Any of these and other problems could crop up at any time due to the constant aging, upgrades and expansion of the telephone system.

This was an important problem to solve. This was an important new revenue source for AT&T and it justified its monopoly at the time by arguing that only one company could keep all the technology working together at a reasonable price with the high level of voice and data quality that AT&T provided. But investing in aggressive line maintenance would mean rising labor costs. The alternative and inexpensive method of waiting for the customer to let AT&T know about a problem would reduce revenue and result in a push for the deregulation of a profitable monopoly.

When I first heard about this problem from a retired Bell Labs (AT&T’s R&D division) engineer, it sounded very similar to the labor problem that companies face today. Companies compete based on delivering high quality products and services at a competitive price. The ongoing challenge is delivering these products and services through an increasingly complex set of events working in harmony.

My first thought was that manufacturing companies avoid this problem entirely in a way that AT&T couldn’t. Companies today add buffers to cover up small quality problems. Excess WIP and finished goods inventory are increased just in case raw materials are late. Lead times are quoted that are longer than truly necessary in case machines break down or people don’t show up. Premium freight is used as the final back-up. Unfortunately, the phone company didn’t have the luxury of back-up systems. It was running a real-time service and only had one shot at getting it right because there was only one set of copper wires that ran from the switch to the customer’s phone. They couldn’t afford to run a “just in case” pair of wires to every phone that was going to be attached to a modem.

What struck me next is that if the phone company was able to keep a complex, real-time system operating with no back-up in the 70’s, what could we learn from that today? There might be new opportunities for companies to use those same techniques and shrink their buffers. This would of course result in lower costs and shorter lead times.

This was not an easy problem to solve for Bell Labs. Millions of different wires had to be monitored constantly and dozens of things might go wrong at any time. But instead of the traditional manufacturing approach of measuring all the things they knew typically went wrong, Bell Labs turned the problem around. Its engineers knew what the electrical signal of a perfect call looked like and it knew the limits at which point data would be garbled. Why not look for signals that were not perfect (I’ll wave my hands like it was easy, but they used some sophisticated statistical analysis to determine this). An “off” signal would indicate that data integrity was at the edge of degrading. This technique provided the technicians time to diagnose the problem and fix it before the customer noticed it.

So if we were to turn to my favorite topic, labor management, how could this be applied?

Historically and for many today in manufacturing, we report what happens at the end of the shift in terms of production, quality and performance. We might also measure and report on common problems such as overtime, unplanned absence, low performance and machine downtime. But this information is all history at this point. Sure we can address some of these when they start trending, but if we are going to start using statistics anyway, might there be a better way?

Best practice today is to measure some or all of these factors in real time so that they can be addressed as they occur, minimizing the disruption. We can also take that data and analyze the trends to make process improvements.

But that is not really taking advantage of what Bell Labs did to address their similar problem. We need to think of a way to point to a problem that is emerging and give supervisors more time to react. We need to provide new supervisors with instant experience about a production line.

I’m thinking about something like this:

We create a labor schedule for the next week. We have lots of information at our fingertips about the people on this schedule and the performance of this line. We know their tenure, if they are contract employees. We have records about their propensity for unplanned absence, and if that trends to specific days or times of the year. We understand their safety records. We might also know their historical performance on this line or operation and the level of quality they produce.

We know what a perfect day looks like in production and we can then use statistical analysis similar to AT&T to notify us when it looks like that won’t happen. This will focus supervisors on the highest risk lines and give them time to do something about the problem before it happens.

I’ll take the simplest example that I still hear about on a regular basis on every continent I have visited:

“We scheduled too many in-experienced people and the line ran slow.”

This is an entirely predictable situation that can be addressed long before the shift starts. It might not be just “green” employees. You could be scheduling a line that has a high likelihood of a “no show” tomorrow. It might be a combination of people and a specific type of product. What other combinations of employee attribute and personal history are going to cause production issues during that shift? Statistical analysis of a schedule will greatly improve your odds of knowing about a problem before the shift starts. This will give employees time to reduce the risk before costs and delays start piling up.

20 years ago we looked at past performance. Today we measure it in real time. Companies that want to gain the next competitive advantage through labor productivity will start using the data they already have to predict tomorrow morning’s performance and do something about tonight.

Operations, meet Payroll, your new best friend when it comes to understanding labor spend

I just returned from the American Payroll Association’s Fall Forum in Las Vegas. This was my first interaction with the APA and I have to say I was impressed with the organization and the attendees. I was invited to speak on the topic of the Perfect Paycheck to a group of senior payroll leaders. While this subject was not new to them, what surprised me was the amount of energy they had around the subject of Lean and continuous improvement. As it was the first time interacting with the APA I decided to stay a couple of days and see what I could learn. For those of you who are not familiar with the APA, it is an association of payroll professionals that has been ably led by Executive Director Dan Maddux for over 20 years. I had the opportunity to speak with Dan during the conference where he painted his vision for the organization. As he recounted various stories about the APA’s members, I was amazed to see how fiercely loyal APA members are. As one example, he noted that over the past couple of years as companies budgets have been cut, members have been paying their own way to attend the conferences. These conferences are heavily centered on continuing education. Dan explained to me that while community was a part of the reason these professionals attend the conference; the larger reason is that the knowledge required to run payroll changes so rapidly that professionals cannot afford to stop learning. Without continuous education their ability to do a good job diminishes and their career prospects dim as well.

I began to realize the complexity of what these people do every day and how rapidly the information that impacts payroll changes. Wages, taxes, stock options, pensions, one time bonuses, company policies, garnishments and benefits are all changing throughout the fifty states. And these are all coming from different sources. To add an entirely new level of complexity, Payroll departments are now being asked to consolidate their global payroll operations. In addition to the wage and tax variation, Payroll managers must now also contend with different types of tax filing requirements, restrictions on how cash can be moved around the world and data privacy laws limiting what data can be moved.

I also heard interesting stories about how payroll managers used the data that they know so well to help solve workforce issues. One person created a report that showed a specific department that was experiencing high turnover was actually being over-worked. She highlighted the amount of overtime this department was working and sent it to management. Management was shocked, they had never seen an “overtime by person” report and had no idea it was so concentrated in one department.

If there was one shared frustration in the group though: Many payroll managers feel they have much more to offer besides accurate processing. When it comes to labor spend, these people know exactly where every dollar, yuan, peso and euro are going. They are intricately involved in everyone’s pay and as a result know what is going on in the company.

If you are looking for hidden costs or capacity in your operation, payroll data is a treasure trove of information. Many companies view this role as a function necessary to pay their people. What they don’t realize is that the data required to process payroll can tell you quite a bit about how your operations are running. Those looking for a competitive advantage would do well to set up a meeting with their payroll director and start taking advantage of a new angle on operational excellence.

What Facebook Can Teach You About Lean and the Workforce

Employees have adopted Lean techniques faster than their employers realize. They’re communicating frequently with others so they can react immediately to changes in demand.  They’re using decision support tools to analyze total supply chain costs. And they are electronically recording and sharing their status several times a day with others who benefit from that information.

Unfortunately for businesses, employees are at home when they are performing these high productivity tasks.  Soccer moms are coordinating last-minute changes in their kid’s schedules. Consumers increased online sales through Amazon by 42% last year, and will increase total online sales to $250 Billion by 2014 according to Forrester Research. 500 million users on Facebook are regularly updating their own network of friends about the minute details of their life.

And yet when a company asks employees to improve the way they perform their work, perhaps tracking labor variances electronically rather than on paper, the company will face numerous reasons why it can’t be done. The basis of these objections lies in employee fears reflecting how the change will impact their ability to perform their job, the potential for wage loss, and potentially job elimination. In fact, in an Industry Week Continuous Improvement Survey conducted in 2010, respondents replied that employee resistance to change was the biggest obstacle in implementing Lean at their company.

The cruel irony of this employee behavior is that the same information management skills and behaviors employees possess and use personally are the major drivers of increased global competition at their companies. The web-enabled consumer is forcing companies participating along all points in the supply chain to lower costs and reduce lead-times faster than ever before.

Consumers wield significant power at the very end of the supply chain. With a click of a button, consumers can find a retailer anywhere in the world that has inventory or will ship for free. Products that are priced even a few pennies higher than the competition without delivering additional value are skipped as consumers scroll through their many purchasing options.

“Loyalty is gone” the grizzled veterans of retailing and manufacturing exclaim. The reality of this statement is their perception of loyalty was really only the lag in time between when a company’s product was no longer competitive and when their customers reacted. In the past, this could take years.  Today however, changes in the market are known as soon as websites refresh their data.  Customers react soon after.

The question remains: Why aren’t employees using the skills they have developed at home to improve their performance at work?  Companies have made it clear they need help from employees to survive. And yet employees continue to resist change.

While it’s tempting to blame the employees from holding back their newly developed skills, they are behaving rationally and predictably.  It’s not that employees are holding back their ability to make better decisions and act with agility.  It’s the environment at work that doesn’t let them perform at their best.

To understand why this is true, the table below compares the difference between why employees use technology differently at home than they do at work.

Consumer Employee
Technology Consumer applications and hardware are designed to be used without training. Enterprise applications are feature rich and have days or weeks of training required.
Benefit and Risks of Change The positive benefits of changing behavior are immediately evident. 

Consequences of failure are low.

Changing behavior can be risky in terms of lowered performance, failure and even job loss. 

Limited upside to the benefits.

Complexity of Decision Making Decisions can be made quickly.  Supporting information is available. Decisions are often complex and may require several steps and supporting information to complete.

What do you think? Are the employees at your company using their consumer skills to improve their productivity at your company?

In Lean Labor, I’ve outlined a number of methods that allow a company to look at its business in new ways and evolve its technology to adapt to change more easily. For a shorter version, send me an email and I’ll return a paper outlining a couple of specific examples that customers have already found successful.

Workforce kanban

Kanban is the concept of using visual signals to manage levels of work in process.  Its goal is to ensure just the right amount of inventory between operations.  Too much inventory is wasteful resulting in excess carrying costs, obsolescence issues and even storage problems on the production floor.  Too little inventory can result in an operation being starved if there is a disruption in upstream production.

Work in process isn’t the only resource that can be provided in too much or too little quantity at an operation.  Too much or too little labor at an operation also results in waste.  Too much labor results in excess cost added to the product or overhead costs.  Too little labor starves an operation resulting in delays or expediting costs just as a shortage of materials does.

With the success many manufacturers (and retailers) have had using kan-ban techniques in setting the right levels of material in production, can that concept be used to also set the right level of labor at an operation?

There are two steps to consider in workforce kanban.  First is identifying the right level of direct and indirect labor.  Direct labor is the people actually performing the operation.  Indirect labor supporting the line might consist of material handlers, clean-up crews or maintenance mechanics for changeovers or machine breakdown.  The second step is understanding what to do when there is an excess or a shortage of labor.

With inventory, the material is often separated into red, yellow and green zones.  Over time if the inventory never leaves the green zone, it’s an indication that there might be too much. If the operator is regularly in the red zone or running out, it’s an indication there might be a need for more inventory. Operators also know to signal for more material when they reach the yellow zone.

The first step for the workforce kanban is determining the size of the red yellow and green zones.  Comparing workload (converted to labor demand in hours) to scheduled hours is one method.  Below is an example of a real time report that provides workforce kanban for a distribution center.  Supervisors can easily see where there is too much or too little labor at a particular location based on the workload.

The second step requires supervisors to make a decision. Should the people currently working at the site be re-balanced (are they flexible enough in terms of skills, certifications and work rules?). Is more capacity required…call or transfer someone in? Or if there’s too much capacity is it possible to send someone home or have them begin working somewhere else where they are needed?

By providing visible indications of staffing levels, the same benefits of reduced inventory can be realized with labor: Improved resource utilization resulting in higher productivity.

Lean Labor is now Available

Lean Labor is now available for shipment at  Please click here to purchase the book.

Lean Labor is now available.  One of the first questions I regularly receive is “What’s the difference between Lean and Lean Labor?”  As the title implies, out of the 4 M’s (Man, Machine, Material and Method) this book is focused on labor.

People are an important component of Lean, one of the three pillars (Purpose, Process and People) as defined by James Womack.  They are the true expertise of production and the source of new ideas according to the creators of the Toyota Production System.

Lean also recognizes that the system is susceptible to the weaknesses of the fourth M, man (woman are included in this description of course).  This weakness is often exposed as a company successfully progresses with its Lean effort.  This exposure occurs because one of the desired outcomes of Lean is to reduce the buffers that protect production from daily disruption.  The “lean” production environment places a greater responsibility on the workforce to respond quickly and accurately to change.  As a result, the many variables of the workforce such as scheduling, skills, attendance and morale have an increasing effect on the outcome of production.

To date, there has been little published on strengthening the Lean enterprise against the variability so common in the workforce.  Implicitly acknowledged as independent variables in the production process, management of the workforce is often left to the experience of supervisors.  Lean Labor is an answer to the current management strategy.  It is a book about understanding how the workforce interacts with the other resources and demands of production and implementing change to increase workforce performance.

From ensuring that the right employee is at the right place at the right time to identifying the wide variety of waste commonly found in tracking, paying and managing employees, to improving and standardizing decision making, Lean Labor is a collection of practical experience gained in many different industries over several decades.

My goal in writing this book was to add new content to the wealth of information already available about Lean, my hope is that I provide the reader with ideas that spark new innovation in manufacturing.

What airport security has in common with manufacturing.

It’s too bad TSA employees can’t publicly tell their half of the story, I’m sure they are just as unhappy delivering “pat downs” as passengers are receiving them.  This is a process ripe for improvement.  It also has all the classic trappings of a manufacturing process that is full of constraints limiting change.

As I lined up at about 5:30 AM in the morning in the Dublin airport to go through security I was pleasantly surprised.  Change is possible:  Rather than the traditional process of picking up a plastic bin out of a large stack to place my laptop, belt, shoes and jacket there was a difference.  By looking at the passenger ahead of me, it was apparent that I was supposed to use the bin sliding towards me in a metal track mounted on the side of the x-ray conveyor belt.

It struck me that I was experiencing true one piece flow, the goal of a lean process.  As I placed my items into the bin and slowly moved forward towards the x-ray machine, the empty bins were sliding to my left for the passenger behind me.  Powering those bins were the passengers who had collected their belongings and had placed the now empty bin in the track that continued along the length of the whole conveyor belt.  A slight push from the passenger moved the bins to the left.

I stayed for a couple of minutes after I was cleared and continued to watch.  I really wanted to take a video, but figured that might be pushing my luck.

Some passengers weren’t quite sure what to do with the empty bin.  The fact that it was 5 am local time might have had something to do with it.  These people were helped by the security attendant who split her time taking bags back through the scanner and helping people put the empty bins into the track.

There was another difference too.  There were no stacks of bins sitting on carts on either end of the conveyor belt.  Because there were no stacks of bins, there were no bin attendants collecting the empty bins, stacking them and then pushing the full cart back to the beginning of the line.

Aside from the inconvenience of partially unpacking and undressing; delay and lack of privacy seem to be the primary drivers for customer frustration in the security line.  The one piece flow didn’t increase either of these.  I imagine that over a period of time, the speed is actually faster because passengers aren’t spending time pulling stuck bins from the stack or the inevitable wait for the bin cart to refresh the beginning of the line.  This reduction in time has many benefits throughout the supply chain.  Because the queue is reduced, so is wear, tear and stress on passengers as they drag along more luggage than ever.  The airline benefits from fewer angry passengers due to missed flights or delays in flights as the plane waits a couple of extra minutes for late passengers.

Can you think of a process that has more scrutiny than airport security right now?  Yet Dublin has been slightly improved without causing any negative media attention

This is a smart move by the team that designed the security lines at the Dublin airport.  In additional to reducing the material and labor costs of purchasing and continuously moving the extra bins from one end of the conveyor belt to the other, the changes also improve the customer experience, ensuring that passengers who pass through a security move a little faster and miss fewer connections.

Better service by reducing costs.  That’s an example of innovation we can all appreciate.  In my upcoming book Lean Labor (Look for it in February 2011), there are many examples of how manufacturers can make small changes in their workforce processes to reduce operational expense and increase throughput (or reduce the resources required to maintain throughput).  I’ll also continue to be on the lookout for other examples of workforce innovation that I can highlight on this blog.  If you have any you’d like to share, please send me a note.