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In a recent workshop, I asked the team to state their goal. The number they gave me—expressed as a volume of safe, reliable tonnes—was a good deal less than the design capacity of the plant. A little surprised, I asked them what was going on.
[ Listen to audio version, read by David Hodes]
This is Part 2 of our series on The 5-Step FOCUS: Part 1 | Part 2 | Part 3 | Part 4 | Part 5 | Part 6 | Part 7
One after the other, they told me that they had never, for an entire financial year, reached the design capacity of the operation. They knew they could hit the desired rate for a month or two, but something always dragged them back below the designated number. We’ll come back to why later.
Improving the performance of a system implies that you have identified the system under examination. But you can’t improve performance without knowing what you’re aiming at. Thomas Carlyle had it right when he said ‘a man without a goal is like a ship without a rudder’. Suppose you have assembled your human and material resources into an organisation capable of performing value-adding work. You’d think that defining the goal of that system would be the first order of business.
It doesn’t matter if your organisation is for profit, for cause, government-owned or any other sort. Whatever the case, you need to think about your goal and how you’re going to count goal units. A for-profit business will be looking to deliver a sustainable competitive return to its shareholders over the long haul. A for-cause organisation, such as a charity, would want as much of the money it raised to go towards its cause with the least amount of spend on administration. A government agency would want to deliver the best possible value for every tax dollar raised.
To differing degrees, we never quite achieve our goal. There is waste, incompetence, corruption, rent-seeking, competition and so on. But to be unclear about your goal means that, as with the rudderless ship, you’re probably going round in circles.
As you proceed down the hierarchy of a strategic business unit, people have opinions on the goals for their own functions and departments. Salespeople might talk about revenue, marketing people about product launches, production people about safety, cost and volume. But all those subordinate goals are meaningless if not properly aligned to the overall goal of the enterprise.
“To be unclear about your goal means
you’re probably going round in circles”
To understand who has the right to set the goal, we should ask what achieving the goal must accomplish. At a minimum, you would think that you’d have to at least provide a competitive return to your shareholders. But, you wouldn’t be able to do that without having staff who are engaged, skilled and motivated. Further, you’d have to be sure that you were meeting the needs of your customers while abiding by any statutory requirements that are a part of your licence to operate. In addition, the best of businesses look at their sources of supply as a critical component of competitive advantage, so you’d expect the goal might have something to do with them, too.
But all of that can be very confusing. What should we focus on? Shareholders? Customers? Employees? Suppliers? Regulators? The truth is that satisfying any of those system participants is not the overall goal. Each of them, though, is a necessary condition for the fulfilment of the organisation’s mission.
To keep things simple, let’s stick to the for-profit organisation. The goal for such an organisation has to be to provide a sustainable competitive return to its shareholders. Setting the goal is, therefore, the prerogative of those shareholders, exercised through the board, in conjunction with the CEO. That group must make the call about balancing risks and returns, and costs and benefits, while putting in place the appropriate governance and operational structures and processes for doing so.
Put simply, the better the sustainable return on investment, the more money there is to invest in the customer experience, through the continuous development of people, technology and processes.
So far, so good. But, why have I so often found the idea of clearly setting a goal to be such a rare occurrence? For some, it’s because of the confusion the system participants have in articulating the difference between an overarching goal and the necessary conditions required to achieve it. But there is often something deeper going on. Of the hundreds of engagements I have had in my career, I can claim, without fear of contradiction, that there are but a handful of organisations willing to lead with what Jim Collins described as a BHAG—a Big Hairy Audacious Goal.
No doubt, Kahneman’s observation in Thinking Fast and Slow that people are twice as likely to want to avoid loss as they are to achieve a benefit has something to do with it. Another factor is surely that in a market of good-but-not-great performance, you don’t have to risk your job and reputation in the pursuit of greatness. You can be good enough—until you aren’t.
Perhaps because of those and similar reasons, I have witnessed what I call the spiral of diminishing expectations. Let’s go back to the workshop I mentioned. The team had become wary of offering the design spec as the goal, as they’d become accustomed to not meeting it. In that failure, they incurred the wrath of the group COO and CEO, who loathed nothing more than having to explain to the market that they were unable to set an expectation they failed to meet. For three or four years in a row, they had progressively lowered their sights. Paradoxically, they found that, even when they set low expectations, they managed to underperform. Rather than doing a pole vault, they were on a year-on-year limbo dance until they would ultimately not be a viable unit of the business.
“Rather than doing a pole vault, they were
on a year-on-year limbo dance”
As is so often the case, when we started to analyse why the business was underperforming, the usual suspect cause came to light. The business, which included a mine and a processing plant, was a complex system of interacting parts, all of which had to be in sync to deliver the aspirational goal. The trouble was that the way they set up their measures and KPIs led to different departments working at cross purposes.
They measured the mine by the daily tonnes it could produce. This measure encouraged the mine manager to pay insufficient attention to the grade of ore sent through the crusher and on to the processing plant. The manager of the processing plant, however, was heavily dependent on the consistency and quality of the blended ore grade that would enable her to deliver her KPIs in terms of flow and yield.
At first sight, they argued that delivering more tonnes from the mine was always a good thing. It meant they used the mine resources efficiently, leading to the computed unit-cost-per-tonne being below budget and in positive territory. This ignored the fact that the mine could always outproduce the processing plant. Evidence of this fact was the stockpile of ore sitting in front of it. This ‘mountain’ represented so many days of production that only the one-in-one-hundred-year event at the mine would see it reduced to the extent that would have the effect of halting processing. Every so often they would run out of space in the stockpile yards, and only then would they stand down the mining crews to allow for some processing catchup.
In the workshop, we drew a simple lesson from this. If we wanted to achieve our goal, we had to pay attention to the constraint: the processing plant. This meant resetting the subordinate goals of the component parts of the value chain to establish a single goal for the business as a whole.
We did the calculations to demonstrate that we could hit, at a minimum, the volumes as stated in the plant design. We used the Constraint Accounting framework to assure ourselves that the increase we would get from safe, clear flow resulted in an increase in throughput that far outweighed any losses we might incur from a less ‘efficient’ mining process. Then we developed a plan to deliver the benefits gained from our insights.
The team began to understand the true meaning of living in a throughput-world, rather than cost-world, paradigm. No matter how efficient the mine was in recovering its operating expense by overproducing offgrade ore, the mine alone could never lead to the ability of the business to meet its operating goal. Instead, what they got from such a strategy was working capital tied up in inventory and a processing plant unable to deliver a high-performance outcome.
My lesson from the assignment was that it’s a good thing to challenge people to set a Big Hairy Audacious Goal. But, if it’s not to be met with a cynical smirk, or sheer terror, you have to provide the means by which the team can achieve it, or else they’ll revert to the downward spiral of diminishing expectations.
We know that the system can only be as strong as its weakest link. That knowledge calls on you to examine your system bottleneck as a way of determining whether or not, given your available human and material resources, your goal is achievable. Aspirational goals, coupled with sound reasoning on how you will achve them, make for good bedfellows.
In my next article, I’ll be exploring ways to find your system bottleneck.
This is Part 2 of our series on The 5 Step FOCUS.
Part 1: Identifying the System
Part 2: Setting the Goal
Part 3: Find the Constraint
Part 4: Optimise the Constraint
Part 5 : Collaborate Around the Constraint
Part 6 : Uplift System Performance
Part 7 : Start Again
The change from standard thinking to Theory of Constraints (TOC) is both profound and exhilarating. To make it both fun and memorable, we use a business simulation we call The Right Stuff Workshop.
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