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 excellence. I have learned through the Baldrige National Quality Award process that all work is a process. In turn, if we are able to make all of our work processes excellent, it stands to reason that we will have organizations that are excellent as well. Certain organizations are choosing to focus on operational excellence prior to expanding their ‘excellence efforts’ across the organization. The following questions represent those that I have been asked to comment on in recent months.

What is Operational Excellence?

My definition of operational excellence is based 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 by words.  45% of the 1,000 points associated with the Baldrige award are results focused.  In order to maximize the degree to which these 450 points are attained, an organization must show sustained improvement over time, in all areas of importance, against ‘best in class’ organizations.

Operational excellence is therefore demonstrated by results that reflect (1) sustained improvement over time, (2) improvement in all areas of importance (both performance areas and segments within each area), and (3) performance at a level that is at, or superior to, ‘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 answer to this question is influenced to some degree by my operations background as a production supervisor and plant manager. To me, process excellence reflects a broader focus than operational excellence does. For example, with a process excellence focus, groups like the sales force, marketing department, and upper management teams are expected to consistently improve the processes they own, just like the people in operations are. I see the phrase “operational excellence” as being a little 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 obtained by those organizations who have received the Baldrige award for performance excellence at the state and national level have convinced me that viewing ALL WORK as a process is the focus we should have. 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, instead of using the time and money which has been saved to support increases in sales from existing and new customers. Has a limited operational excellence focus made it difficult to sustain your improvement initiatives?

How do lean and six sigma methodologies contribute towards operational excellence?

Stated simply, the goal of any lean initiative should be to minimize waste while maximizing customer value.  In an operationally excellent organization, lean practices are applied to all key processes, not just those of a operations nature.  Additionally, value is defined from the perspective of both the external and internal customer in a measurable manner – it 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 incidents in organizations include accidents, rework, downtime, material waste, 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).

Six sigma at its core is simply a measure of process variation. In an operational or process excellence world, process variation is both known and minimized as much as possible through the use of effective waste stream identification, root cause analysis, and project driven systems change. Kaizen and six sigma teams are used to support the daily continuous improvement efforts of each process owner, but they are not seen as the sole drivers of the operational excellence initiative. Too many companies are currently making this mistake – they are striving towards operational or process excellence as a goal, but they are (1) relying primarily on their kaizen or six sigma teams to drive their process improvement efforts and (2) in turn failing to attain high levels of employee engagement in the pursuit of process excellence.

How would you define ‘World Class’ in terms of operational excellence?

World class operational excellence is exemplified 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, while 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 with surpassing the industry average within their country of operation – this 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?

This question is in essence answered in my definition of operational excellence.  I will add however 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 to which the organization’s high performance work practices and approaches have been deployed.  You can’t achieve a significant percentage of the award’s ‘approach / deployment points (55% of the total) if your key approaches are not deployed to a high percentage of the workforce. In other words, a high level of employee engagement is a prerequisite for pursuing operational and process excellence..

Secondly, we review lots of documentation and talk to more people to help validate the degree to which what was said on paper actually exists in the organization.  Eleven core values serve as the foundation for the award and its criteria (things like 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 systems in place, they can rarely demonstrate how these systems have been consistently improved over time and have lead to improved results, again in all areas of importance.

EXPLORE MORE: Baldrige Performance Excellence Process Overview PDF

What is the most “critical factor” in making an improvement initiative successful?

This is a tough question, because I am torn between two possible answers.  An improvement initiative will not succeed if time is not allocated towards it, and that time, if allocated, is used effectively.  That said, an organization can allocate this time on paper (in a strategic plan, job description, or expense budget for example), but fail to require EACH of its leaders to demonstrate the degree to which they are personally using 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, because most people will find a way to reach a goal if that goal is clearly stated, along with significant consequences for failing to achieve that goal.

What is “Activity Based Costing” and how does its use support “operational excellence”?

My experience has convinced me that activity base costing (ABC) is a requisite for operational excellence.  Most importantly, activity based costing 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, the primary cost driver for each expense group (cost center) is identified, and then product specific percentages are derived for each cost driver.  For example, rental expense is allocated to each product based on the percentage of floor space that product occupies.  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.  Human resource costs might be allocated to each product based on the number of labor hours worked per product.

The key is that the cost driver type varies with each cost center – no single set of multipliers is used to allocate all overhead costs.  Using activity based costing helps more clearly define a product’s or service’s true profit margin, instead of allowing one product or service to carry an excessive amount of another product’s overhead burden.  For example, I have seen one candy bar type essentially die on the vine because it was carrying an excessive amount of sanitation labor costs. Because sanitation costs were allocated based on line hours of operation (both products ran for the same amount of time each week) instead of on the sanitation hours that were actually needed to clean the line (the other product was very messy, and required twice as many people to clean it), the ‘easy to clean’ product’s profit margin was understated, and in turn, management was hesitant to try to grow that brand.  Additionally, the profit margin for the messy product was overstated.

Activity based costing also helps an organization focus more on transaction costs instead of merely managing to a budgeted number.  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 served) 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 per person hired or per employee?  How has this number changed over time?

How can managers in a facility monitor the performance of supervision to ensure they are properly carrying out the daily tasks and duties necessary to maximize the effectiveness of the improvement process?

As with any type of supervision or process ownership, a balanced set of metrics and reporting should be used to track leadership behavior and task effectiveness.  A ‘bottom up’ Leadership Index should be provided to each supervisor by his direct reports at least once a year as a behavior effectiveness metric.  The process owner should also be held responsible for the safety, cost, quality, and people metrics that his or her processes produce over time (in the form of trend lines and a balanced scorecard). A key mistake which is made in most organizations is related to expecting 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 the following each month – 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). My “Process Excellence From the Inside Out” workshop is specifically designed to help you install a similar process for your process owners in your organization.

Keep improving! Kevin McManus, Chief Excellence Officer, Great Systems

If you would like more information about the process improvement and reliability enhancement tools I have to offer, please send me an e-mail at kevin@greatsystems.com.