Monday, December 4, 2006

Cause and Effect

Is low cost achieved by focusing on cutting costs?
Is high utilization achieved by trying to utilize resources full time?
Does standardized work mean that work processes are followed without challenge?
Does everyone in your organization agree on the answers to these questions?

When Jane Beseda took over Toyota’s North American Parts Operation (NAPO), she knew that really dramatic results required breaking down the barriers between departments [1].  So she set three year Stretch Goals that were all but impossible – a 50% reduction in inventory, 25% increase in throughput, 25% reduction in freight costs, 50% reduction in packaging expense, 25% increase in space utilization, 50% decrease in backorders.  After a year of effort, department managers began to realize that that they were not going to achieve the Stretch Goal targets unless they changed their focus to cross-organizational projects.  Project teams had been struggling to coordinate their work through the traditional functional department planning approach. This was changed; the departments started to consider potential impact of their plans on other functions and areas of the broader organization. Only then were truly significant gains in eliminating waste and reducing cost realized. After three years, the results at NAPO were truly amazing; almost all of the Stretch Goals were achieved. But this would never have happened if everyone in the organization had not focused on overall system waste rather than individual department costs.

Low overall costs rarely come from lowering costs in individual departments; they come from lowering system costs. Lean companies have learned that this requires a keen understanding of underlying cost drivers and a system-wide effort to eliminate waste.  Consider Zara, a huge women’s fashion clothing chain headquartered in western Spain. It fills retail store orders twice a week, shipping garments around the world in two days – not folded compactly in boxes – but ironed and hanging on hangers ready to display. Zara realizes that it lowers overall costs by getting the clothing that women are asking for on shelves very rapidly.  Zara has fewer markdowns and unsold clothes, and it drives more business to stores with less advertising than its competitors. These tremendous savings would disappear if Zara focused on reducing shipping costs. This is systems thinking at work.

Over time, individual departments will find ways to drive out costs, but rarely do organizations attack the larger costs that occur between departments, divisions, functions, and companies.  A quick and easy cost reduction approach for a department might be to outsource work to obtain lower labor costs.  However, in most cases, outsourcing simply adds more boundaries to cross, and boundaries typically add 20 to 30% to overall costs [2]. One company I know outsourced the process of engaging contractors.  Since training is included in this outsourcing arrangement, all trainers must work through the outsourced contractor management company.  The amount of time and paperwork necessary to set up a training engagement at this company is about an order of magnitude greater than at any other company I have dealt with. However, the arrangement appears to be a cost reduction for the company, because contractors pay the contractor management firm through a fee imposed on their payment. This financial arrangement hides the tremendous waste in the engagement process, which includes a great deal of problem resolution by employees in the company receiving the training. But because of organizational barriers, these same employees have no way to change or improve a very burdensome process.

Standardized Work
In studying Toyota, many companies notice that standardized work processes are a key element of the company’s success.  What they generally miss is that at Toyota, standards exist to be challenged and changed by the front line employees doing the work.  Toyota actively encourages all employees to question any part of their job that is annoying or gets in the way of doing a good job. Employees are expected to look for a better way, prove with experiments that the new way is better, and then implement a new standard.  Taiichi Ohno, father of the Toyota Production System, wrote: “Something is wrong if workers do not look around each day, find things that are tedious or boring, and then rewrite the procedures. Even last month’s manual should be out of date.”

There are those who believe that standardized processes should be imposed from the outside and followed without question. However, companies with a Lean perspective believe that the essence of eliminating waste is to encourage everyone to attack and change the things that annoy them about their jobs. Only by engaging people in doing their job better on a daily basis can you get the sustainable gains that companies like Toyota enjoy. Work standards in a lean company spell out the current best known way of doing things, and they are a baseline for change. New standards are developed through constant experimentation by work teams, using the current work standards as the baseline against which improvement is measured.

At Toyota’s Georgetown, Kentucky plant the paint department has always been the biggest bottleneck preventing one-piece-flow of vehicles through the plant.  Over the past few years, however, things began to change [3].  First the people in the department devised a way to paint any color in any order – instead of piping paint to a robot through a tube that needs cleaning between colors, they now pipe each paint color to a canister just the right size to paint a car.  The robot picks up the right canister and Viola! the cost and time needed to clean out paint lines is eliminated.  The bottom line:  30% less paint used, a huge drop in the use of cleaning solvents, and cars can now be painted any color in any order. The throughput of the shop has increased from 33 to 50 an hour while the space required for painting was reduced by a third and employees were freed up for other work.

At most auto companies, this achievement would be cause for celebration – but at Toyota, constant improvement is the day-in-day-out job of the paint manager. There are no black belts, no outside process experts – just the people doing the work led by their first line managers. Everyone’s job is to keep on improving their work processes, every day, every week, every month. All workers are engaged in the relentless pursuit of perfection – the elusive goal which keeps everyone looking forward rather than patting themselves on the back.

In software development, we have been led to believe that “maturity” involves documenting best practices and making sure that they are followed. On the contrary, a truly mature organization expects development teams to constantly challenge and improve their processes.  The day an organization settles into believing that it is perfect is the day it invites its people to stop thinking. Real, sustainable improvement on all fronts comes only when all workers are expected to challenge and fix anything about their job that annoys them or keeps them from taking pride in their work.

Managers in manufacturing plants, supervisors of computer operations, and highway engineers agree on one cause and effect relationship:  if your resources approach full utilization, response time slows to a crawl. Queuing theory is widely applied to servers and highways and manufacturing equipment.  However, in a development environment, managers seem to be unaware that attempting to achieve full utilization slows response time to a crawl and decreases actual utilization. Development organizations are no more immune from the laws of queuing theory than airlines. We see how constantly full airlines with no slack cause cascading problems whenever a slight perturbation is introduced into the airline system. And weather being what it is, perturbations happen all the time.

Similarly, when a slight perturbation is introduced into a fully scheduled development organization, cascading problems are inevitable. Knowledge work being what it is, there will always be perturbations to the most carefully laid out schedules. The only way to deal effectively with these perturbations is to follow the advice of queuing theory:  work in small batches, minimize the length of queues of work to be done, and never, ever schedule an organization beyond its capacity to deliver.  Do this and utilization will increase.  Focus directly on utilization and it is guaranteed to be sub-optimal.

Many organizations queue up requests for software development into large batches of work to be done, presumably because better decisions can be made if the whole picture is visible before work begins.  Challenge this assumption.  Why is it better to respond very slowly to a pile of accumulated requests rather than respond very quickly to the current most important outstanding request? What good, really, does it do to have a long list of work to do?  Looked at closely, it's hard to make a case for piling up lists of work-to-do that are far longer than you have a hope of accomplishing. You're pretty much wasting your time keeping track of stuff you can never get around to, and you're probably setting incorrect expectations on the part of the requestors. Just say no.

Unfortunately, once software has been around for a while, we often see that it takes longer and longer to run the regression tests as each new feature is added, since every feature increases the regression test load.  We call this increasing regression load the regression deficit, and unless it is systematically tackled and reduced, the code base will become increasingly difficult to change.  You will be tempted to release software in larger and larger batches, because regression testing takes so long. Similar to the paint shop manager, a software development manager’s job should be to help development teams chip away at the regression deficit every day, every week, every month, until throughput is increased and one-piece-flow of small feature sets becomes practical.

Cause & Effect
In order for organizations to perform brilliantly, there are two prerequisites:  First, everyone has to agree on what they want, and second everyone has to agree on cause and effect [4].  Let’s assume that everyone in your organization agrees on the results they want, their values and priorities, and the trade-offs they are willing to make in order to achieve those results.  The question to ask is – does everyone agree on cause and effect?

Is there general agreement on what actions will result in system-wide cost reduction?  Are individual departments expected to reduce costs independently, or is it clear that departments must work together to reduce overall system costs, even at the expense of costs in individual departments? Are the measurements in place to reduce the costs of crossing boundaries?

Is there general agreement on the best way to achieve consistent results through standardization?  Are standards always followed?  If not, do you really understand the root cause – are the standards irrelevant or inaccurate, too complex, or too far from the actual work being done? Are standards maintained by a central process group, or are they continually improved by the people doing the work?  Are front line people expected and encouraged to continually challenge and change standards?

Do you have a project scheduling system aimed at optimizing utilization?  Does the management team believe that the system is in fact optimizing utilization? Do people believe that full utilization is the right measurement to emphasize? Is time-to-market an important factor in your business? Does everyone agree on the relationship between time-to-market and utilization?

Lean thinking is counterintuitive; it flies in the face of conventional wisdom concerning cause and effect. No matter how well proven the results, no matter how intellectually sound the arguments of systems thinking are, it is almost impossible for those who have been successful with conventional wisdom to change their habits. It is very difficult for leaders to address the system costs that flourish between department boundaries if they believe that lowering costs in each department will add up to lower overall costs. When leaders believe that standardized processes are an end rather than a beginning, they have a difficult time leveraging the wisdom of front line employees. For those leaders who believe that focusing on full utilization will increase productivity, the outstanding productivity gains that come from focusing instead on throughput will not be available.  It all comes down to measures – small measures cause small results; global measures promote globally optimized results.

Those who have seen the dramatic results of Lean Thinking have come to believe that concentrating on throughput, making front line employees the center of focus of the company, and eliminating waste across the system are the tools of choice in a competitive environment.  Most management teams that have been threatened by fierce competition and survived have changed their habits and adopted the counterintuitive tenets of Lean Thinking. Virtually all companies facing fierce competition from Lean companies that have failed to adopt similar thinking have failed to thrive in the long run.

[1] This story is from The Elegant Solution: Toyota’s Formula for Mastering Innovation, by Matthew E. May, Free Press, 2007, p. 139.

[2] Management Challenges for the 21st Century, by Peter Drucker, HarperBusiness, 2001, p. 33.

[3] From “No Satisfaction” by Charles Fishman, Fast Company, Dec 2006 / Jan 2007

[4] See “The Tools of Cooperation and Change,” by Clayton Christensen and co authors, Harvard Business Review, October 2006.

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