OPERATIONAL EXCELLENCE IS RELEVANT AGAIN The challenges of implementing operational excellence and their proven solutions

INTRODUCTION

What is Operational Excellence. ?The definition of Operational Excellence according to Chat GPT is: A business philosophy and strategic approach aimed at continuously improving processes, systems, and practices within an organization to achieve superior performance and sustainable competitive advantage. It involves optimizing every aspect of operations - including efficiency, quality, reliability, flexibility, and innovation - to deliver value to customers, minimize waste, reduce costs, and maximize productivity.

Why Operational Excellence is a business need.? The business need for Operational Excellence is particularly compelling at this moment in time, as current markets are heavily impacted by disruptive forces. There is a real need to be both efficient and flexible to offset the losses caused by high inflation, materials and energy crises, and supply chain disruptions. Importantly, it is more crucial than ever to retain highly-skilled people who embrace and lead this continuous improvement journey. All companies need Operational Excellence strategies to ensure their people across the E2E operational value chain are properly trained and organized to deliver the business results and to support a sustainable continuous improvement journey.

Why we need to know about Operational Excellence. Failure to have a good Operational Excellence strategy results inevitably in operational inefficiencies that drive undesired results such as poor quality and service, high costs and inventories, low standards, demotivated people and conflicts between individuals, departments, and functions. Not only do these inefficiencies hurt the reputation of the company, but also on occasion, weaken business results.?

Why this article is relevant. In our 30 years of taking on operational leadership roles, ranging from line operator to supply chain leader, with the additional long experience in consulting, we have been able to directly witness a diverse scope of problems and solutions which are found in all? kinds of business environments all over the world. From very large, stable corporations to small companies and everything in between. We have experienced many successful and unsuccessful Joint Ventures, Acquisitions and Mergers. Furthermore, we have personally led great Operational Excellence programs, becoming recognized and celebrated as “best in class” worldwide multiple times. We have also seen the most spectacular failures in implementing Operational Excellence strategies many times.?Having invested three decades into studying all theories related to the subject, we feel as though our knowledge of Operational Excellence is of outstanding quality. And because of our extensive understanding of its real-world business implications,? we firmly believe that there is no substitute for first-hand personal experience on the floor, in order to provide the most meaningful insights on Operational Excellence.??

What is this article about? This article is addressed to the leaders who want to make a change in implementing their Operational Excellence strategies. This article will describe the common causes that drive poor Operational Excellence strategies, both in design and execution.? We are then going to describe the most pragmatic proven solutions for successful implementation of Operational Excellence. We know fully well that a solution fit for all situations doesn’t exist. However, the solutions that we will propose cover all ranges of possible situations.?

THE COMMON CAUSES FOR FAILURE TO IMPLEMENT OPERATIONAL EXCELLENCE?

It always starts with Leadership. The role of leadership is to set specific strategies and execute them. Strategy is by definition a set of choices to focus on to build the business. At higher possible level of analysis, the two causes for failure to implement Operational Excellence are:

• Operational Excellence is not a strategic choice made by the leadership of the company to deliver the business results.?
• Operational Excellence is a strategic choice on paper, however the execution on the floor lacks a well-structured implementation approach, i.e.? global and local leadership set up, organization design, skills required, funding, and all other relevant enablers.???

The following sections aim to summarize the few specific and common reasons why the key leaders in many companies do not choose to work on Operational Excellence or they choose to work on it but they do not implement a structured execution plan.?

Why Leaders do not choose Operational Excellence as their focus area. There are many different reasons why Operational Excellence does not find its way into formal companies’ strategies. Below is a list of the most common of them, however the list is not exhaustive.

Operations are not considered strategic.? All business leaders would love to have better service and quality, lower cost, inventory and more flexibility, especially on innovation delivery. However, there is the general tendency to consider operations like a cost center, rather than a lever for strategic competitive advantage. Lack of focus from senior leadership on the strategic value of the operations is surely the number one reason why many companies don’t have an Operational Excellence strategy. There have been many market dynamics in action that diverted the attention of senior leaders from core operational excellence: The acceleration of innovation cycle, mainly driven by globalization and e-commerce; the tendency to centralize and outsource operations to low wage countries; the acceleration of digitization and automation as productivity improvement levers; the focus on social themes like sustainability and diversity, equity, and inclusion. All these dynamics have had higher strategic priority vs. operational excellence in the last three decades. We believe that recent supply chain disruptions caused by COVID-19 pandemic and wars in Europe and Middle East and consequent inflation and supply chain crises is triggering a renewed focus on operational re-shoring and therefore on Operational Excellence, with a special twist on “resilience”, that is the capability of an organization to return to normal after a disruptive event or crisis. Contrary to common beliefs, only Operational Excellence can drive resilience. The principle is simple to understand: Healthy and stable organizations can and will handle crises better than those unhealthy and unstable.?

Leadership focus on short term results. Typically, company leaders need to deliver results quarter by quarter, month by month and day by day. To be profitable, they are under incredible pressure to ensure that the income from sales is consistently higher than the operating costs by a big margin. It is not infrequent that the short-term strategy to cut all costs associated with the maintenance and improvement of the organization is the only available lever to meet the profit targets. The need to reduce short term spending is definitely the second reason why Operational Excellence is not a strategy in some companies.? Our personal experience is that all leaders understand unequivocally the negative consequences of short-term focus cost cutting.? It is generally known that cutting costs in maintenance and improvement is going to generate operational inefficiencies and higher costs in the future. However, very rarely can leaders escape the short-term results trap. It requires an unimaginable dose of courage to keep investing in maintenance and organization capability when the company is not profitable, or when a public company is at risk of not meeting the profit commitments.?

The rate of return of Operational Excellence programs is not easy to calculate.?Healthy and profitable companies would obviously benefit from investing in Operational Excellence programs, yet, frequently they do not. The reason for said phenomenon is that Operational Excellence does require initial investments and there is a high level of skepticism on the returns from these investments.? Investments in additional people to staff continuous improvement roles, additional people to work proactively on loss elimination or loss avoidance, people training and education, restoration of base asset’s conditions, sometimes consulting fees. There are two very specific reasons why senior leaders, and finance leaders are skeptical on getting the returns from investing in Operational Excellence:

• The first is very technical. Companies might have very sophisticated calculations of returns from investments or might not have any method at all. In any case, while it is easy to measure the cost of Operational Excellence, it is very difficult to precisely measure its gains. The most straightforward situation is when Operational Excellence drives a direct and measurable reduction in waste, energy consumption, labor cost, maintenance cost, reduction in inventory, etc. Even in this easiest situation, not all companies have cost/financial reporting systems that are able to track and reliably report these gains. In other words, the money spent is easy to track while the unspent money (savings) is complicated to track.??
• The second is emotional. In order to invest in Operational Excellence senior leaders must believe that the performance improvements will occur in the future as planned in the program. There is very well-documented literature on the human bias towards avoiding a sure loss vs. an unsure gain. Unfortunately, due to the high rate of failure in Operational Excellence programs – a topic that we will cover in the next chapter – many senior leaders are extremely skeptical on the actual probability to generate returns from the investment.?

In summary, lack of tracking mechanisms for the returns and skepticism are the two main reasons why operational excellence is not part of the company strategy, even when it should be.?

Why Operation Excellence implementations fail. ?Operational Excellence programs fail for the same reasons any other big company program fails. Listed below are the classic topics found in the well known and established "change management" literature. At the end, we will add a few specific comments on operating excellence failures.

• Lack of sense of urgency. Not establishing “why” Operational Excellence is a strategic lever for the company, and “why” it plays a key role in the company’s compelling business need.
• Lack of highly influential Steering Team that drives the change management from design to implementation. The Steering Team must be built to have as many members from the most competent, credible, and influential leaders at all levels in the organization.?
• Lack of formalization of the specific Operational Excellence vision and strategy.
• Lack of communication and deployment of the Operational Excellence vision and strategy. Lack of engagement of the people in the organization.
• Lack of removing the barriers for change.? No proper organization design and staffing. No committed leaders at all levels. No funding or budget to eradicate losses with structural interventions.
• No pilots, or lead models to drive short term visible successes that create commitment.
• No structure in place for developing and maintaining the operating standards, anchoring them in the existing culture and sustaining them over time.

Our experience is that all the above really matters. Companies shouldn’t embrace an Operational Excellence journey without having checked all items in this list, whether this is an implementation strategy at global company level, in an operational site (manufacturing plant, warehouse, distribution center, planning or engineering centers) or even in a single department. The last point is extremely important. There is no Operational Excellence program in place without the implementation and sustainability of rigorous operating standards. Defining which are the core work processes along the supply chain - the actual work that adds value - and standardizing them to eradicate losses is the most important aim of any Operational Excellence program.?

THE PROVEN APPROACHES FOR EFFECTIVE IMPLEMENTATION OF OPERATIONAL EXCELLENCE

Assuming that the decision has been made by the company to include Operational Excellence as focus areas in its business strategy, and if all the risks of failure listed above have been properly addressed, the remaining important choice to make is the approach to the implementation that best fits with the company situation and culture. There is no fit-for-all approach and there is no approach that is absolutely better than the others. However, there is a range of options that have been proven to be very successful if implemented properly. The last chapter of this article describes the three most significant among these approaches.?

The classic “Production System” approach, based on the Toyota Production System.

What is the Production System Approach? This approach is known under different popular names which mean different things in different companies. Total Productive Maintenance (TPM) and LEAN are the two most common names, although, Integrated Work System (IWS), WCOM (World Class Operations Management) and sometimes 6 Sigma, are also in use.? Although there are many differences in the details between these approaches, the core principles and logical structures are the same.? All these different names can be grouped as one approach.? This one approach is broadly known by all practitioners in the field of Operational Excellence, and it is supported by a vast collection of available literature. For that reason, this article will focus on describing the main principles and features of the approach, commenting on its strengths and weaknesses as a guide for readers to decide if it is the correct approach for their companies rather than investing time in describing it in detail.?

The most common high-level description of the production system approach is that it focuses on achieving:

?ZERO Losses. Total eradication of the losses identified.??

100 % involvement of the people on the floor in the loss eradication.?

ONE standardized way of running the key work processes in the company.?

To achieve the ZERO 100, ONE goals, the main feature of the production system approach is that it is structured in “pillars”, horizontal organizations that are embedded in the existing company’s vertical organization, forming a matrix. The best way to describe the matrix concept is to look at it from the perspective of people working on it. People in the matrix organization have their classic vertical roles and additional horizontal roles, as members or leaders of a pillar. The pillar’s mission is to build capability around a certain operational topic, by involving operating people in the creation and implementation of their own operational standards. The process of building capability in each pillar is achieved through a step-by-step process that always follows the logic flow of loss identification, loss eradication and loss prevention. This flow guides the pillar members to understand and restore base conditions, solve problems from their root cause and standardize the work processes.? Importantly, the last step of the process is always the qualification and verification of people’s capability based on adherence to the key fundamental standards relative to their job description. Another important feature of the production system is that it comes with rigorous formal external audits to assess the progress toward each pillar’s steps and to recommend corrective actions, if needed.???

Strengths of the Production System approach. There is no doubt that the production system approach is the best available option to all companies that have a very stable management and want to invest in a long-term Operational Excellence program, as it is validated over many decades by many success cases all over the spectrum of industries and all over the world. Its focus on thorough loss eradication through the involvement of people on the floor is guaranteed to result in sustainable success, if well implemented. The approach is rigorous, it reaches all corners of the organization, and it is sustainable over time. It enables horizontal uniformity of implementation across the different sites in large companies and it consequently enables benchmarking, cross learning and reapplication. It is also a great approach for hiring and retaining talents, as highly skilled people prefer to work in a dynamic, continuously improving environment, rather than in a firefighting environment.?

Weaknesses of the Production System approach. There are a few important reasons why this approach has become less and less popular over the last decades. They are all connected to the fact that businesses have become much more volatile:? the cycle of innovation is shorter and faster than in the past, technologies change more frequently, leaders also change their roles very frequently, joint ventures and acquisitions happen more and more frequently.? To be successful the production system approach requires long term stability in the organization, steady and consistent intent from leadership and patience to wait for financial returns. The first and most important problem linked to volatility is that this approach requires a huge organizational investment in additional resources and in setting up the pillar matrix. It is a long-term journey that delivers tangible results after years of implementation. In current business environments senior leaders rarely have visions and strategies that go beyond the next couple of years. They will not invest in an initiative that will take more than a couple of years to deliver returns. The second problem linked to volatility is that the production system’s relentless focus on rigorous “process steps” can generate inflexibility and resistance to sudden changes needed by the business, especially in the innovation area.? Also, many people find that the focus on “process vs. results” might become too bureaucratic.? Many times, we have experienced the first-hand frustration of operating people who went through a successful production system journey and were very proud of their achievements via this approach, when suddenly from one day to another their leaders changed, their operational strategy changed, their technology changed, their plant or their company was acquired. Again, this approach is not designed to adapt fast to sudden changes. We also experienced the frustration of operating people when they get instructions to follow a process that doesn’t make any sense for them, or - even worse – they get instructions to produce fake documents just for the audits.??

The “Key Element Assessment” approach?

What is the Key Element Assessment approach? This approach is a diluted and simplified version of the production system. The concept of “pillar” is replaced with the concept of “key element”. For each key element, instead of a step-by-step implementation process, there is a set of standards to be implemented and there is an assessment designed to rank the implementation status, typically according to 1 to 5 criteria:

1. No standards exist and no effort has been done to define the standard.
2. No standards exist but some effort has been made to define the standards.
3. Standards exist but they are not followed consistently.
4. Standards exist and they are followed and improved consistently with supervision.
5. Standards exist and they are followed and improved consistenlty without supervision.

An expert and competent external auditor should typically run this assessment annually or bi-annually. The outcome of the audit is a list of suggested actions to move the audit’s score up one or two points before the next audit.??

Strengths of the Key Elements approach. This approach has been validated over the course of many decades in order to ensure its success. It surely became the standard way to audit organizations in specific competence areas that are also externally regulated by law in the countries in which the companies operate. Hygiene, Health and Safety, Quality Assurance, Finance Internal Controls, HR Integrity are the typical areas in which all companies are required to have periodic audits and formal certifications following this approach. It is an extremely effective approach because it is simple to understand, it drives continuous improvement towards the building of the right standards and it has all advantages of an approach that drives uniformity of application of certain standards, across the company internally and across companies externally. It therefore enables benchmarking and reapplication. It requires few competent auditors that can, by themselves, drive uniformity across different organizations. It is extremely flexible, meaning it can be modified at any point in time. It can be stopped and started with no consequences. It can be even outsourced. This approach is therefore more suitable for companies that have less resources to invest and have a shorter time frame horizon for return on investments.?

Weaknesses of the Key Element approach. Given this approach is proven to be working well and already in use in regulated business areas, we always wondered why it didn’t reach a? more popular status as an Operational Excellence approach, especially in the typical core areas of operational excellence, like in example organization, leadership, maintenance, process control, planning, training, etc.? There is no straightforward explanation for this lack of success. We can underline the weaknesses of the approach, which may help to explain it indirectly. Firstly, the approach doesn’t suggest the step-by-step process on how to achieve their desired standards. While this leaves freedom to the people in the operations to choose their own processes, it might drive confusion on the “how” to create, implement, and sustain operational standards. Secondly, as a consequence of the lack of clarity on “how”, it frequently generates a lot of unnecessary paperwork, just for the auditors. With this approach we also experienced frustration for the need to prepare fake documents never used in the real life of the operations, just to pass the audit. Third and more importantly, as it is only one auditor visiting once or twice a year, the approach completely lacks day-to-day high-quality training and coaching on the floor needed to establish how to improve the work processes. While with the pillar matrix this day-to-day work is embedded into the organization and enabled by the pillar members, with the key element assessment approach it is left to the line of operational leaders.? They frequently don’t have the time or the skills to do it. This is probably the single reason why this approach works well in all areas outside of the core operations, like HSE, QA, Finance and HR. People working in these non-core operational functions are somehow disconnected from the day-to-day pressure of running the business and therefore have more time and opportunity to work and document the standard work process improvements.?

The Run To Target or Boost approach.

What is the Run To Target or Boost approach. The fundamental difference between this approach and the Production System approach is not found in the core principles that remain the same: Zero Losses, 100% involvement of the people and One standard for each work process. The difference is that instead of applying these principles to the operations through the pillars and across the entire organizations, it is a focused intervention in implementing the core standard work processes where it matters most, with priority given by the pareto loss analysis. Typically, the implementation steps of a Run To Target program look like these:

• Run a loss analysis and prioritize the losses to eradicate. This can be done across multiple sites, for one site or for one department.?
• Select a pilot area. It must be the area with the biggest losses. It can be an entire site, a department, or a single operational line, either a production line or a work process flow.?
• Set the loss eradication targets for the pilot area.?
• Build a team of competent people who have the skills to eradicate the losses in the pilot area via solid problem solving and work process standardization. Within the team define the ownership of the core “work processes”.
• The team will document the final version of the operating standards at the end of the problem-solving process. The team will involve the operating people, will provide them training and coaching until the standards are fully implemented and sustained autonomously.?
• Implement a Daily Direction Setting process, aimed at ensuring adherence to the standards and their continuous improvement.?
• Once the first pilot area reaches the target results, all the standards are in place, and the daily direction setting is robust, reapply the same model to the next priority area. This can be done by the same team that will move from the first pilot area to the next, or by building a new team. To optimize the learning process across the pilots, it is recommended that at least one member from a successful pilot will be leading the next one.?

Strengths of the Run To Target approach. This approach undoubtedly works well mainly because it drives both results and capability building in a very short time in the pilot area, generating positive engagement from the operating teams that experience an immediate improvement of their work processes and the quality of their working life. It sharply focuses on eliminating first the biggest losses, so the return on investments is also very visible to senior management, making it the best way to overcome leadership skepticism on Operational Excellence programs. The direct connection between loss eradication and the standard work processes implemented in a short period of time is an ensured method to engage operating people in owning their operating standards. It is less inclined to become a bureaucratic approach due to its focus on results and few standards directly linked to the results.??

Weaknesses of the Run To Target approach. Our frequent experience operating in consulting has shown that the Run to Target approach only fails for three reasons.?

• The first team that works on the pilot doesn’t have the time or the skills to solve the problems that generate losses, to engage the operating teams in developing the required operating standards and to train and coach them.?
• The problems that generate losses can’t be fixed by the team. This is very frequently the case when the problems to solve require solutions that involve changes in materials, technology, or organization design (i.e. staffing, or role descriptions), especially when these changes require budget and non-forecasted funding. In these cases, unless there is strong support from leadership to fund the improvements, the pilot will not be successful.?
• The roll-out from the pilot to the other pilots and to the rest of the organization is not properly designed nor implemented. This is also a very typical case. A very successful pilot delivers great results, but it remains an isolated experiment that can’t be reapplied due to lack of meaningful reapplication strategy.

In summary, while the Run To Target approach requires less initial investment than the production system approach, it still requires initial investment in staffing the pilot teams and the roll-out and it requires funding for the problem solving.??

The other disadvantage of Run To Target versus the classic Production System is that it requires strong local leadership - committed to it and competent - in place to implement it. Therefore, although it is well-designed to be scalable and re-applicable across large organizations, its scalability heavily depends on large availability of leaders with a specific skill set that it is not easy to acquire in a short period of time. Constant presence on the floor, great personal connection and trusting relations with operating people and maintenance technicians, high technical problem-solving skills, bias towards action, passionate follow-through on standards’ execution and real time problem solving. All these skills can be surely acquired over time; however, in our experience over the years, we have learned that it is an extremely difficult transformation process for leaders who have been working in traditional manufacturing environments for many years. Traditional leaders are not required to be dedicated to supporting the operating teams in their daily problem solving and providing training and coaching in real time. They are mainly in a traditional “supervisor” role, that is restricted to staffing coordination and occasional firefighting. Rarely do they have technical problem-solving skills and are frequently seen by operating teams as “controllers” rather than coaches.? The switch from a traditional leadership role to a Run To Target leadership role takes significant effort and? often fails.? On this topic, there is an on-going debate among Operational Excellence experts on whether it is preferable to choose a top-down or a bottom-up or approach for Run To Target. A sort of chicken-egg problem: should we train and first qualify the leaders and then deploy the program to the operating teams, or should we implement the program directly with the operating teams, and in the process, train the leaders?? Obviously, there is no answer that works for all situations. It depends on the specific situation, on the existing leadership and culture. And obviously the best solution is to plan a parallel top-down and bottom-up implementation.? Train and qualify the leaders while implementing the plan with the operating teams. Our experience is that the operating teams are never the barrier to implementation. More often than not, they appreciate the approach regardless, as it improves the quality of their daily job and their job satisfaction. If the leaders become a visible barrier to the? initial implementation, then it might be worth it to temporarily by-pass them, continue the implementation directly with the operators and a team of external experts. Leaders will eventually follow when the approach delivers the expected results.?

CONCLUSIONS

Obviously there are many other approaches that, for the sake of being concise, this article will not discuss, as we strongly believe that the three described above represent the best possible options on how to propose and execute Operational Excellence. Our suggestion to leaders of the operations is that the first decision to make should be to exclude the option of designing and implementing a classic Production System if there is no firm and solid commitment to support it from senior management in the company as formal strategy to deliver business results.

If there is strong support for the Production System approach, then the next step is to ensure proper implementation through the change management process described above.? If there is no support for a Production System approach or not budget and funding, then our opinion is that the best way ahead is a combination of Run To Target with Key Element Assessment. Designing and implementing Run To Target and periodically assessing its sustainability over time to avoid drifting is currently the best alternative to a production system. Doing nothing is always an option, unfortunately the most common option adopted by many companies, although it is an option that makes the company less competitive in the future.?