Operational Excellence FAQs
by Kevin McManus, Chief Excellence Officer, Great Systems
Are Your Operations and Processes Excellent?
It is my hope that the last great fad is process / operational excellence. I have learned through the Baldrige National Quality Award process, and Phillip Crosby, that all work is a process. In turn, if we can make all of our work processes excellent, it stands to reason that we can build organizations that are excellent as well. Certain organizations choose to focus on operational excellence before they expand their ‘excellence efforts’ across the organization. Here are some common questions that people ask me on this topic.
What is Operational Excellence?
I base my definition of operational excellence on the criteria of the Malcolm Baldrige National Quality Award, and how I have seen recipients of the award apply these criteria to make their organizations more sustainable. Operational excellence must be demonstrated by results, not just in words. 45% of the 1,000 points that make up the Baldrige award criteria focus on results. In order to earn the maximum of these 450 points, an organization must sustain improvement over time. Also, they must do this in all areas of importance, against ‘best in class’ organizations.
Great organizations demonstrate operational excellence by results that reflect three things. First, they sustain improvement over time. Second, improvement is evident in all areas of importance (both performance areas and segments within each area). Finally, this mix of performance results should be at a level that is at, or better than, ‘best in class’ organizations.
Common areas of importance for a cost center are safety, quality, people, and cost. Profit centers add the revenue generation performance area to this mix. Common segments within each performance area include employee groups, facilities, departments, and external customer types.
How does operational excellence compare to process excellence?
My operations background as a production supervisor and plant manager influences my answer to this question to some degree. To me, process excellence reflects a broader focus than operational excellence does. For example, with a process excellence focus, leaders expect groups like the sales force, marketing department, and upper management teams to also consistently improve the processes they own, just like the people in operations do. I see the phrase “operational excellence” as being potentially restrictive. Process excellence encompasses all work, whereas operational excellence may focus more on those processes that exist directly in the value stream.
My preference is to pursue process excellence over operational excellence. The superior results that Baldrige recipient organizations are able to sustain convince me that we should view ALL WORK as a process. Many lean initiatives are difficult to sustain simply because we fail to involve all work groups in the lean effort. In other words, the operations people make improvements, but the sales and marketing teams fail to improve in a similar manner.
In turn, companies find that they need to layoff people as a result of their lean operations improvements. They fail to use the time and money they save to support sales growth from current and new customers. Has a narrow operational excellence focus made it difficult to sustain your improvement initiatives?
How do lean methodologies contribute towards operational excellence?
Stated simply, the goal of any lean initiative should be to minimize waste and to maximize customer value. In an operationally excellent organization, leaders apply lean practices to all key processes, not just those of an operations nature. Additionally, they define value from the perspective of both the external and internal customer in a measurable manner. Value is not just what management thinks the customer wants. Lean tools are just that – a set of tools that can be used on a regular basis to help you pursue operational and process excellence.
According to Womack and Jones, there are seven types of process waste – rework, overproduction, excess inventories, non-value added process steps, excess people movement, excess material transportation, waiting, and non-value added goods of services. Common examples of process waste in organizations include injuries, rework, downtime, and material waste. Additional examples include absenteeism, equipment damage, product damage, customer complaints, and lost customers. A variety of lean tools are used to reduce and minimize these common causes of waste across the organization’s value stream (from supplier to end customer).
How does the use of six sigma and project teams affect operational excellence potential?
Six sigma, at its core, is simply a measure of process variation. In an operational or process excellence world, all work teams track and work to minimize process variation. They do this via the use of effective waste stream identification, root cause analysis, and project-driven work systems change. The use of process improvement teams helps support the daily continuous improvement efforts of each work team leader. Both work team leaders and process improvement teams drive the operational excellence initiative.
Too many companies exclude their work team leaders and teams from the continuous improvement effort. They push towards operational or process excellence as a goal, but they rely primarily on their process improvement teams to drive their process improvement efforts. In doing so, they fail to attain high levels of employee engagement in the pursuit of process excellence.
How would you define ‘World Class’ in terms of operational excellence?
Organizations exemplify world class operational excellence through the selection of ‘best in class’ benchmarks that are global in nature. For example, an organization might be able to demonstrate ‘best in class’ performance within its industry in the United States. Globally, an operationally excellent organization at the world class level would be able to demonstrate superior performance against organizations that extend beyond its industry and country of operation. Most organizations are content to surpass the industry average within their country of operation. This, however, is not world class excellence.
As an Examiner for the Malcolm Baldrige National Quality Award, what attributes do you look for to gauge operational excellence?
I essentially answer this question with my definition of operational excellence. I will add that there are three key things we examiners look for, especially when we visit a finalist for the award. First and foremost, we try to ask questions of a high percentage of the workforce to help validate the degree of high performance work practice deployment. You can’t achieve a significant percentage of the award’s ‘approach / deployment points (55% of the total) without key approach deployment to a high percentage of the workforce. In other words, a high level of employee engagement is a prerequisite when you truly pursue operational and process excellence.
Secondly, we review lots of documentation and talk to more people. We want to validate the degree that what was said on paper actually exists in the organization. Eleven core values serve as the foundation for the award and its criteria. These core values include fact-based management, visionary leadership, and valuing employees. Most organizations can talk a good game, but few can back it up in the workplace.
That’s where the third thing comes in. Even in those cases where an organization might have the right work systems in place, they can rarely demonstrate how they consistently improve these systems to produce better results, in all areas of importance.
What is the most “critical factor” that makes an improvement initiative successful?
This is a tough question, because I am torn between two possible answers. An improvement initiative will not succeed if leaders fail to allocate time towards the effort. Once leaders allocate that time, they must use it effectively. That said, organizations often allocate this time on paper (in a strategic plan, job description, or expense budget for example). Unfortunately, they fail to require EACH leader to demonstrate how they personally use this time to improve the key processes they are responsible for. If I could only change one thing, I would change what I expect from each of my leaders. Most people will find a way to reach a goal if leaders clearly state that goal, along with the goal achievement consequences.
What is “Activity Based Costing”?
My experience convinces me that activity base costing (ABC) is a requisite for operational excellence. Most importantly, ABC helps you allocate overhead to each product more effectively, instead of using ratios based on a percent of direct labor dollars, pounds per labor hour, or line hours. With ABC, leaders identify the primary cost driver for each expense group (cost center). Then, they derive product specific percentages for each cost driver.
For example, we might use a percentage of floor space a product occupies to allocate rental expense to each product. Engineering or sales wages and benefits are allocated to each product or service based on the amount of time each engineer or sales person reports spending on a given product. You can base human resource cost allocations on the number of labor hours each product totals.
The key is that the cost driver type varies with each cost center. We don’t use a single set of multipliers to allocate all overhead costs. Using ABC helps more clearly define a product’s or service’s true profit margin. Without its use, one product or service may carry an excessive amount of another product’s overhead burden.
How does the use of “Activity Based Costing” support “operational excellence”?
For example, I have seen one candy bar type essentially die on the vine because it carried an excessive amount of sanitation labor costs. Sanitation costs were allocated based on line hours of operation, instead of on the sanitation hours that were actually needed to clean the line. Both products ran for the same amount of time each week. The other product was very messy, and it required twice as many people for clean up. In turn, the ‘easy to clean’ product’s profit margin was understated, and management was hesitant to grow that brand. Additionally, the profit margin for the messy product was overstated.
ABC also helps an organization focus more on transaction costs. Leaders don’t merely manage to the monthly budget numbers. In an operationally excellent organization, the goal should be to consistently drive down the cost per transaction (i.e. the cost per pound or the cost per customer) in EACH process area, not just overall. ABC helps non-production groups in particular, because it helps clarify the primary reason they exist. For example, what is the human resource cost for each person you hire or per employee? How has, or might, this number change over time?
How can managers in a facility monitor the performance of supervision to ensure they properly carry out the daily tasks and duties necessary to maximize the effectiveness of the improvement process?
As with any type of supervision or process ownership, we should use a balanced set of metrics and reports to track leadership behavior and task effectiveness. For example, you can provide a ‘bottom up’ Leadership Index to each supervisor at least once a year as a behavior effectiveness metric. Hold work team leaders responsible for the safety, cost, quality, and people metrics that his or her processes produce over time. Results should be evident in the form of trend lines and a balanced scorecard. A key mistake most organizations make is to expect an external department, such as Safety, Quality, or Human Resources, to manage the process results in these areas across multiple process groups.
I also expect each of my process owners to provide ‘evidence of excellence’ each month. Such evidence includes a key project list for their processes, a monthly summary of their key accomplishments and challenges, and a performance summary spreadsheet that shows DAILY process inputs and outputs. Because I expect my supervisors to spend 30-60 minutes a day on these items and use a spreadsheet to compile and organize them, I can review their progress at any time by simply looking at the spreadsheet itself, the results trend lines posted in their process areas, and/or their hard copy monthly report (or intranet web page).
Would you like help in your pursuit of process excellence?
The design of my “Process Excellence From the Inside Out” workshop will help you install a similar process for your process owners in your organization. If you would like more information about the process and work system improvement tools I have to offer, please send me an e-mail at firstname.lastname@example.org!