“Almost everywhere we turn, trust is on the decline. Trust in our culture at large, in our institutions, and in our companies is significantly lower than a generation ago. Research shows that only 49% of employees trust senior management, and only 28% believe CEOs are a credible source of information. Consider the loss of trust and confidence in the financial markets today. Indeed, “trust makes the world go ’round,” and right now we’re experiencing a crisis of trust.”

(From How the Best Leaders Build Trust by Stephen M. R. Covey)

A few other good quotes that I feel help to highlight the seriousness and importance of the need for trust and honesty include:

“Honesty is the cornerstone of all success, without which confidence and ability to perform shall cease to exist.”

By Mary Kay Ash 

“The glue that holds all relationships together – including the relationship between the leader and the led is trust, and trust is based on integrity.”

By Brian Tracy 

“The least initial deviation from the truth is multiplied later a thousand fold.”

By Aristotle

The Result and Cost of Failing Trust and Honesty

The ability to put a quantifiable result or financial measure as to failing levels of trust and honesty is extremely difficult within any organisation. But by simply focusing on it, much information and data will start to become apparent, and gradually numbers can start to be put against these elements.

The worst thing that will often result amongst poor management is to assume people are lazy, stupid and ignorant and this will create the largest element of mistrust and dishonest actions being undertaken. The many negative actions and resultant cost implications include:

• A value can certainly be put against “lost stock” which in reality may have been stolen or damaged by employees who then fail to own up to his fact.
• Fraud will tend to take place to some degree in all operations, exact values will vary across company and industry types, but in the USA an average of 6% of revenue is believed lost to fraudulent activities.
• Abuse of expenses and claiming unnecessarily for things not used or required is very common amongst management and senior levels in business. The typical action is to put everything on expenses regardless of necessity (a form of fraudulent behaviour).
• Personal greed and power, looking after oneself rather than what’s best for all is far too common in many companies, this only backfires over time.
• Broken promises are a regular occurrence from management levels. If you can’t keep the promise don’t make it in the first place, because future promises will become more transparent and have no status with people.
• Decisions, information and communication are slow to disperse and disseminate in companies with low trust levels, often resulting in misconstrued information and wasted time and energies.
• So all mistrust adds an extra work, time and finance cost into all relevant areas affected. The lower the trust level the higher the time lost and higher the cost incurred.

The Route to Establishing Greater Trust & Honesty

Any change that assists a company to establish better trust is movement in the right direction, but it’s a process of gradually re-building trust until total trust across all levels and operations results. To be able to influence your teams and offer quality leadership, will require you to build up the right characteristics, competency and performance and ultimately be trusted by all, and this can be helped by developing reliability and integrity in everything you say and do. The more you learn to trust others, the more they are likely to learn to trust you.

For a company to be successful at improving its trust levels it will need to start by setting this as an overall goal or objective for all levels of employees (top to bottom), which must be part of an appraisal and monitoring system (preferably with set guidance on how to measure). As trust develops in each person, their actions, reputation, reliability and authority will visibly be seen as improving, therefore helping limit wasted time and energies. Many actual behaviours or manners have been categorised as being a common and natural part of trusted leaders, but the behaviours will need to be appropriately balanced and offset with each other to achieve best practice, such behaviours include:

• Straight talking – giving regular clear and easy to understand messages / communications and feedback to relevant parties
• Demonstrating respectfulness – for everyone at work and connected operations, avoiding rudeness and ignorance in what is said and done
• Creating transparency – including greater freedom of speech, encouraging simplicity and not making promises that can’t be kept
• Righting the wrongs – by initialising change and improvement where needed and writing off the erroneous events of the past
• Showing loyalty – offering support to all around you and don’t ever go behind people’s backs
• Delivering results and performance – constant movement forward and achieving targets and expectations
• Getting better and keep improving – continue along the improvement path constantly
• Confronting reality – always be sensible and realistic through your approach taking everything necessary into consideration
• Clarifying expectations – keep up to date records through all processes, discuss, agree and confirm what is required and the next stages required upon completion
• Practicing accountability – being responsible and answerable for your results and installing this responsibility through your team and colleagues for their results
• Listening first – learning to take in information first before interpreting it and making decisions and taking actions
• Keeping commitments – always stick to what you have said and agreed, avoiding any unnecessary deviation
• Extending trust – be constantly building trust through all levels and connections by leading the way

Conclusions

For any organisation to grow and develop effectively and function in the most productive way, it is critical for it to build high levels of trust and honesty throughout their business and connected supply chain operations. Once these levels of trust are in place most companies will see very good improvements in how people interact and work together, with ideas and knowledge being shared, support and assistance will become evermore free flowing. Ultimately people’s skills and experiences will develop and improve, and their happiness, job satisfaction and motivations will be much higher than normal resulting in lower levels of staff turnover.

An honest trustworthy and happy workforce can result in a productive, efficient and effective company.

Information Sources:

How the Best Leaders Build Trust

The Speed of Trust

Honesty and Integrity Build a Foundation of Trust

Putting Your Trust in . . . Trust

As expressed by experts – numbers can tell many stories and are open to complete misinterpretation, especially when the situation suits the necessity to make things look better or worse than they actually are. By just saying something or highlighting it in the right place or at the right time can quickly be magnified into a wealth of supportive language and exaggeration on what the numbers really are. The reverse can also occur when interpretation of numbers results in negative reaction, which is further magnified to an extreme level. Some good quotes about using numbers in analysis include;

“Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital.”

By Aaron Levenstein 

“Statistics are like women; mirrors of purest virtue and truth, or like whores to use as one pleases.”

By Theodor Billroth

“Figures often beguile me, particularly when I have the arranging of them myself; in which case the remark attributed to Disraeli would often apply with justice and force: ‘There are three kinds of lies:  lies, damned lies, and statistics.’…..”

By Mark Twain

Example 1

A simple set of good data on an individual schools exam performance can create increased attention by future parents and pupils, which can have a knock on effect and make residing in the catchment zone appealing and therefore increase market attention and prices of houses beyond normal. Councils could react with changes to local rates and taxes and marketing of the area, which may also encourage further business interest and future developments within this region. The big question to ask is;

“Why does one set of data viewed in isolation have such a positive spiralling effect on the follow on events?”

It can be answered by realising it results from reaction and/or over-reaction due to simple isolated data presented in a positive way. If all relevant data was viewed alongside it, results and decisions might be drastically different. Such other factors to review as the total data set for this example include;

• competing schools performance in the region
• overall performance in general schools data
• background of parenting compared across different years
• changes to acceptance and restriction zones for school entry
• ethnic breakdown across the years
• etc.

Example 2

An oil producing company issues a brief statement to the media expressing “Major new oil discovery in Egypt”, this could send its share price upwards and have a positive knock effect within the industry competitors and suggest future finds are likely, thus encouraging investment in shares and oil futures and possibly changing crude oil prices as well. Without any other relevant data to assist decisions and reactions the result has been a positive knock on effect, other data should have included;

• other recent oil finds in area of Egypt
• actual estimated number of barrels within the field
• timescale for full extrapolation and infrastructure to be in place
• quality of oil located
• the full ownership rights to the oil
• etc.

Example 3

A manufacturing company pushing forward with its improvements in production processes quotes some basic year on year performance figures within a company report. The performance has seen a 10% improvement in turnover on the year; with a reduced material spend of £75,000. Immediate interpretation would be to believe the company has done very well and this may be reflected in share values improving and financial backing increasing and bonuses across management and directors comfortably increased. But reality is that numbers released are few and not in comparative format so do not say anything in particular, other aspects that would assist interpretation include;

• wider set of data on performance and product pricing changes
• all data being in the same format (financial figures preferably)
• if percentages are used there must be full description alongside each
• comparison details across a time frame of several years
• detailed cost breakdown per person employed
• manufacture quantity per person employed
• changes in materials supply and costs
• value stream map
• overall equipment effectiveness
• performance of competitors and industry in general
• etc.

Example 4

A delivery company is measured on the success of its on time deliveries, requiring it to meet a standard of 98% or higher to keep hold of the contact. It needs to supply a weekly record sheet of completed delivery dates and times against each order number, and complies with this being confident of successful 98% upward achievement the majority of weeks by having delivered the orders on the correct days, even though some orders might have taken several drops or vehicles but were on time in full (OTIF) during the required day. When the contract was withdrawn for regularly failing to comply with the 98% requirement because orders were not delivered on time in full first attempt (OTIFFA) a great debate and legal fight ensued. Unfortunately the actual definition of on time delivery was never properly put into place and each party were interpreting it in different ways, therefore in such an instance the deliverer would be within its rights to interpret the measure as it did, because the other party should have defined it.

Conclusions

Understanding numbers, calculating, interpreting and defining all have a role to play:

• Actual calculation of the relevant numbers is not the important factor, but instead it is really about what the numbers are saying.
• Numbers are open to interpretation and a varied picture book can result, so it has to be further reviewed and developed.
• It is the details that surround the numbers (wider picture) that can help pull everything into context and focus.
• To be able tell a more complete story for everything we must have a definition of the number, explaining how it is derived.
• It is important to remember the quality of a number can be dependent on quantity of data inputs, surveys and subjective measures are poor forms of data and are estimates rather than proven mathematic calculations.
• Develop a level of confidence for the information sources, because a poor source can quickly make numbers invalid.
• It will be preferable for numbers to be presented alongside comparable data to help overall understanding; stand alone data is generally pointless.

Information Sources:

Crude truth behind numbers that govern our lives

What the Numbers Say

How to lie with statistics

“Many senior managers, executives and directors don’t know what they are doing and act with levels of incompetence, leading businesses into the quagmire of losses and possible bankruptcy”

The Real Problem

A recent post I read helps to give some good pointers on such matters:

“In every organisation I have ever worked there is a huge amount of waste and frustration caused when people discuss, speculate and make decisions based on information that they do not understand.  As information flows up through the levels of the organisation it tends to lose a little bit of its validity with each step up the ladder……. As a result, many organisations are making their most important decisions at the furthest distance from the facts…… It is frustrating to see how often leadership gets caught up in never ending debate or worse make bad decisions based on problems that they do not understand.”

Source: “Seeing Things for Yourself” by Lee Fried at DailyKaizen

Those workers and managers who are closest to the situation will always have the greatest knowledge, so therefore should be allowed to make their own decisions where possible or at least be listened to and be involved in decisions, rather than having to constantly refer up to higher management levels who can misinterpret information and make erroneous decisions.

Another excellent article appeared in the recent edition of the Observer Sunday 12^th Apr 09, entitled “Learn from their mistakes? That’ll be the day”, it was within the Management column. It particularly looked at whether managers do actually learn from previous mistakes and therefore gradually improve with fewer and fewer failures. In reality the answer appears to be a categorical “No”, learning if it takes place is actually soon forgotten and mistakes of the same type and worse keep on occurring.

“Management by Mistake is a by-product of the Cult of the Chief Executive. The long prevailing culture of the corporation revolves around the principle that one individual holds the keys that operate the decision-making engine. If that individual falters and is axed (invariably a cumbersome and unwelcome process), another inherits the keys and sets off for glory.”

Source: “Learn from their mistakes? That’ll be the day” by Robert Heller at Observer

No matter what the industry is or the size of a business (even Government) being considered, most appear to be failing in very similar ways by not learning from the past or and continuing with poor decisions at wrong levels and times:

• Finance – UK, Europe, US and Worldwide banks are nearly all in desperate need of financial support from Government, plus stocks have fallen drastically in most countries;
• Automotive – General Motors, Ford, Toyota, Land Rover & Jaguar are just a few examples of where layoffs and excessive over production have occurred;
• Other Manufacturing - most manufacturing sectors have suffered downturn to some degree, including; furniture, electronics, packaging, chemicals, etc.
• Suppliers – smaller specialist producers who supply into larger failing manufacturers have possibly been hit the hardest;
• Services – IT, Telecommunications, Mobile Phones, Media, etc., are generally suffering reduced requirements, less advertising revenue and take up of services;
• Construction - major house builders and real estate developers are developing at much lower levels and debts are quite large and some barely serviceable, property values have also been falling;
• Etc.

Possible Solutions & Improvements

There is no such thing as one solution to a problem, in reality many can exist, but most will veer towards the same general direction of change. If anything it is necessary to take a step or two back to repair the issues and rebuild, but learn and install the “correct” future controls and directions. Truth is that the real solutions should all be based around the ideas of simplicity and common sense wherever possible, with no clutter and complicating elements. Beneficial actions would include:

• Understand the basics – senior managers and directors need to get away from their comfort zones and ivory towers of office and boardroom, plus excessive reward without performance, and spend time at the sharp end (shop-floor or equivalent) and get closer to the real world problems, get to understand them before trying to make decisions on such matters. If you actually see it, you can start to feel it and have a better chance of understanding it, so actions will be made with greater degrees of accuracy.
• Delegation of decisions - learn to delegate more of the important decisions closer to where the information and facts are best known, by spreading decisions through the levels and across the company spectrum it should result in generally better, more consistent and accurate decisions.
• Change company structure - more delegation could be incorporated into a change of company towards a flatter structure, moving to fewer layers with managers being closer to the action.
• Change company culture and leadership style - the company culture, communication systems and leadership styles could benefit from moving closer to an open structure, where all levels are involved in taking the company forward.

Simple and achievable changes to the company structure and styles should be rewarded with overall improvements and well known benefits from better culture and leadership, these include; productivity, morale and motivation, costs, profits, customer service, teamwork, relationships, attendance, staff turnover, etc. Obviously a reasonable period of time will need to be considered to successfully see through the relevant changes and improvements to have chance of developing and coming to fruition.

Introduction to VMI

The definition of VMI can be expressed as:

“It is a streamlined approach to managing inventory and replenishment. So it involves close collaboration between the supplier (vendor) and customer (vendee), with the vendor taking responsibility for maintaining required supply levels at all times.“

The process tends to work via an automated replenishment to previously agreed stock levels based on use over a specific time period, often this would be a daily replenishment, but could in fastest moving industries be hourly replenishment. A simple example is: If required stock is set at 50 and use for the 24 hour time period was 20, then 20 would be replenished to stock the next morning taking stock back up to the 50 level, if next day 30 are used, then 30 would be placed back into stock, etc.. Most forms of notification in this modern day tend to be electronic via computers, most likely a form of electronic data interchange (EDI). The overall outcome should be improved stock usage, improved service, improved communication and visibility, improved costs, and improved sales.

VMI is actually a form of continuous replenishment program (CRP) and it will fit into the improvement towards a “pull” system for manufacture and supply. The supplier is actually reacting to the customer demand, by only making what is needed, when it is needed, and where it is needed. It is moving ever closer to the ideals of continuous flow and small production runs. Use of VMI can result in benefits for both parties to the deal – customer and supplier.

• Customer benefits – they will have less hassle by not having to schedule orders to meet their own needs and guard against stock-outs, this aspect is now controlled by the supplier who can better schedule their processes to meet usage and stock levels. Improvements in service and costs are obvious alongside better focus and control of time.
• Supplier benefits - mainly revolve around better and longer contract basis helping its planning and production, but also aiding future development with greater ability to forecast income levels over time. Overall reduction in stocks and costs should be the end result, with fewer errors and no extra costs being incurred.

Several important factors will have to be discussed and negotiated between both parties when putting VMI into operation, because these will help keep it on track, guard against the many pitfalls and guarantee success for all. These factors would include:

1. Agree requirements & expectations – preference would be for both parties to gain over time otherwise it will be a less productive and committed process, areas to cover would be; who is to do what, when must it happen, what will happen if failure occurs, etc.
2. Agree information processes - this doesn’t mean every detail must be given over in the information, but sufficient to guarantee understanding and correct action. If the customers own planned schedules were available for the supplier it would aid their planning and production. Similarly any possible large demand changes in the future should be kept advised to the other party.
3. Quality open communication routes - if communication is not continuous and consistent, relationships will falter and possible failure result, fill as many gaps as possible, but keep on developing.
4. Build in flexibility - without a facility to renegotiate or forward plan it means reaction could be too slow. A process to gradually move towards could be jointly managed inventory (JMI), this is a much closer all encompassing and strategic relationship which warrants real time data access to each parties systems for customer and sales information.

Introduction to Consignment Stock

The definition of consignment stock (inventory) can be expressed as:

“It is a stock which is held at the premises of the customer (consignee) but legally owned by the supplier (consignor), on terms that give the right to sell or use the stock during the normal course of business or to return it unsold to the legal owner.”

The actual purchase by the customer only occurs after they have removed it from the consignment stock for using or selling. The actual stock control and ordering process still rests firmly with the customer, whereas it rested with the supplier in the VMI process. Benefits for the customer will be more apparent, but some benefits for the supplier will normally (but not always) occur but are less obvious and predictive and will be influenced by the actual industry.

• Customer benefits & costs – the most obvious benefit is having no capital expenditure and little or no risk occurs in stocking items and this is therefore a cost saving because the cost and risk is still held by the supplier until items come out of stock and are used. But costs do exist for the space given over to the inventory storage and the cost of managing of it (often separately to other stock).
• Supplier benefits & costs - benefits can be obvious to see within an end retail location, here stock is put into the public domain (point of sale) and viewed and purchased, but the cost of the stock is with the supplier until sale occurs. Also in a situation of critical components (often expensive) it would be advantageous to have them located with the customer in order to give a good service image and avoid possibly expensive freight costs. Overall the use of consignment stock will tend to actually increase the supply chain costs and not reduce as the aim may be; this will tend to be as a result of having to amend systems, installing new procedures and different procedures than are the norm.

There are actually several possible variations of consignment stock contracts dependent on when the ownership and cost actually changes hands from supplier to customer. The full details of these approaches can be viewed elsewhere and will not be covered in this article. But in general most consignment stock approaches do not work with any level of excellence; they struggle to correctly integrate information and procedures to be computer controlled (even some accounting systems don’t always have a facility for such transfers of stocks and costs), so often drift to more manual systems. It is possible to view constant calls and emails between the customer and supplier to try to keep everything in line and correctly paid, but disagreements do occur. Therefore continuous flow without intervention is highly unlikely to ever be achieved.

When drawing up any consignment stock agreement between customer and supplier, many questions need to be answered and confirmed where the various responsibilities rest, these would include:

1. Exact point when title and ownership passes over
2. Who bears the risk and insurance responsibility for stock
3. Setting up a release from stock and notification procedure
4. Does stock have any legal or custom implications
5. Stock control rules and stock-take responsibilities
6. Damage or loss from stock and where cost occurs
7. Payment & Credit terms, plus actions possible if payments are not made
8. Etc.

For further information see:

Vendor Managed Inventory – 1

Vendor Managed Inventory – 2

Collaborative Planning, Forecasting & Replenishment

Consignment Stock

Manufacturing & One Piece Flow

The definition of one piece flow (or continuous flow) has been expressed as:

“When products move through each manufacturing process one item or unit at a time, at a rate determined by the customer requirements.”

This is an opposite state to what has been the norm throughout industries world wide, that of batch production – production through each process in large quantities, before moving to the next stage and so on, therefore the larger the batch size the greater the delay before arriving at the next process. In reality this is still often the preferred practical route followed today by many companies both large and small.

The reasoning behind one piece flow fits within the ideals of just-in-time (JIT) manufacturing, you are making each single item/unit as it is required to flow to the next stage(s) or process(es), this would normally be incorporated into a cell to form cellular manufacturing. The most important result of this process is the removal of unnecessary inventory; instead all we have is work in progress (WIP). But unfortunately manufacturing in lot sizes of 1 and through interconnected processes is not always practical or profitable, so any company wishing to look at such possibilities will need to look into much greater depth for their ideals and possibilities.

An important focus of one piece flow manufacturing is to break each job down into simple and easily manageable components (materials, parts, fixings, etc.) and process functions (machining, cutting, drilling, pressing, assembly, etc.). This should help with speed through each phase and quality for passing to the next phase, and ultimately reduction in waste. To run smoothly there will need to be a balance of time (takt time – average speed of work) and production quantities through each process otherwise bottlenecks, idle or wasted time can result (inefficiencies) instead of the continuous flow desired.

Very important points to consider when looking at possibilities for one piece flow will include present assets; machine size, type and location, plus set up times and difficulties, the more complex the machine, the greater the difficulty to arrange for one piece flow:

• If it is a very large machine sited a major distance from other processes, then linking and making as a cell becomes very difficult without major upheaval and lost time.
• A machine that can efficiently make a number of items in the same time as only making one, suggests the need to make in batches not in multiples of one, but this could create greater issues to feed though the next stage.
• Machines that can do multiple tasks need to be dealt with in a different way to machines that can only do one function.
• The more difficult and time consuming the set up is for a machine can limit suitability for one piece flow.

All aspects such as those illustrated can possibly be eventually resolved, but will take time and money and this will have to be considered within analysis of costs and benefits for each project, which will mean some might change but others won’t, therefore an ability to adapt to all situations – one piece flow or batching – is a necessity for the business.

Office Services & One Piece Flow

What may be the preferred ideal within manufacturing cannot necessarily be transferred easily or profitably to the service sector, especially office based services. Offices will deal with pockets of information and knowledge (text files, spreadsheets, order inputs, emails, telephone calls, etc.) which cannot be balanced out to spend X amount of time on each pocket in sequence and then passing on to next station (continuous flow).

A mix and match approach will only create confusion for a worker, loss of concentration, wasted time, etc., this has been expressed by some as “multiple value streams” flowing though an office and staff. Also we must realise that office tasks are rarely in isolation from others and disturbances experienced are to some degree non controllable, emails pinging, phones ringing, colleagues asking, etc. (An office is not a factory production line and people are not simple machines).

Office based work will always have a tendency to be batched together, where a worker will concentrate on related tasks together or following in sequence, but these will not be in the order as they are received, or as they are required by the customer. As one batch of tasks are completed a person can then move on to the next batch, but the actual sequence of such batches and the size of such batches will be constantly changing dependent on others factors which are often beyond their control, most importantly the priority allocated (not always for logical reasons). In a way we can compare each worker who deals with information and knowledge as being like a complex manufacturing machine where batching is the only suitable and efficient production route.

An unfortunate outcome from this need for batching of value streams in an office environment can be a backlog of less important work (which is the equivalent to inventory in manufacturing) that will then need to be gradually worked through (examples are; post, emails, phone messages, etc.) but often there will be quieter periods where this can easily be resolved in a day, or set times at several points in the day could be allocated for these tasks. The flow definitely isn’t of one piece continuity or particularly smooth at times, but it gets the job done, it is the best workflow for the information and knowledge roles and therefore continuous within the constraints and boundaries being experienced.

Summary

The manufacturing ideal of one piece flow in general remains achievable for the vast majority of functions and operations in product manufacture, but examples of where it becomes very difficult can be put forward, mainly relating to size, complexity and output of machines. With office based information and knowledge functions then one piece flow is not the route to pursue because batching is more efficient.

One size certainly doesn’t fit all situations, but continuous flow within constraint boundaries can always be achieved.

Sources of information include:

One Piece Flow

Achieving One Piece Flow

Batching v One Piece Flow

“The budget evolved from a management tool into an obstacle to management”

“Tying a firm up in a budget straitjacket is madness”

“Fixed budgets don’t work today. A budget is a too static instrument and locks managers into the past”

“Business failures can be directly connected to unreasonable budget constraints on the management team”

The budget being a fixed contract is “A management tool of mass destruction”

In reality the arguments for the fixed budget have existed for many years, they were  in favour of budgets being formalised and documented prior to the start of each financial year, this would then work as a target and guide for successful achievement of standards and performance. Only now as the world has become ever more complex and global in its trading relationships, has the idea of this budget process being unnecessarily restrictive to real achievement been forwarded as a major issue. But the case against the setting in advance of a yearly budget grows stronger year on year, made more obvious by the constant changing market conditions having a range of different affects on each area of operation.

Every company will have slightly different approaches as to how they draw up the budget plans, but in simplicity they all revolve around making predictions and forecasts as to what they think will be needed over the coming financial year, but even the best forecasters are never completely right because they all use past information in the forecasting process. Once all the decisions about costs, revenues, orders, resources, expenditures, etc. are made, the budget must then be split across each department/division and for each month of the coming period. This complete process can be very time consuming for managers who will need to format the information for their department budgets and will constantly review and renegotiate until it is accepted and passed off by the finance team and company directors.

Likelihood is that reasonable accuracy might be present in the budget during the first few months, but as the months pass there will be less and less accuracy because of the changing market conditions and competition, aspects that could not be predicted, order books changing, revenues declining, costs increasing, resources not available, supplier failures, etc. It is at this point when managers are not in a position to make the decisions and actions to repair and/or overcome the problems and grab the opportunities, they are constrained by the budget and what they can and can’t do, so they stick within these constraints and so the business loses ground, customers are lost, revenues drop, respect falls, etc.

Remember that at the end of the first quarter the forecasts and budgets are now at least 3 months old, at the end of the second quarter the forecasts and budgets are now 6 months old, when you arrive at the final month of the year the forecasts and budgets are now a year old and drastically out of date.

“To be effective in a global economy with rapidly shifting market conditions and quick and nimble competitors, organisations have to be able to adapt constantly their priorities and have to put their resources where they can create most value for customers and shareholders. In order to do that, they need the right concepts, management processes and tools” (Juergen H. Daum)

What is needed in these modern times is a support for the decision makers and for managers to be given room for flexibility, so they can react in order to change decisions and priorities, to look to improve the situation and take advantage of the changing circumstances, ultimately managers should be given an opportunity to be dynamic. We need to move away from the mindset that the static annual budget creates, it is old data that doesn’t help focus on the reality of now, so lets move away from the fiction (inaccuracy derived from past data) to the point of real fact (what is happening now).

What offers a better alternative is to implement suitable rolling monthly or quarterly plans and forecasts, from which rolling budgets could be drawn up which focus on the reality of seeing the present and immediate future. In a sense it draws on the logic from the manufacturing principle of just-in-time (JIT), it becomes something of a just-in-time budgeting principle and based on continuous development and improvement, it is more effective and more efficient. The most important result to come from such an approach is much greater accuracy in data and financial rewards.

The major external factors affecting each company and therefore its budget have been put forward by Beyond Budgeting Roundtable (BBRT), and include;

• Shareholders are more demanding
• Talented people are increasingly scarce
• The pace of innovation is increasing
• Prices are falling and quality is rising
• Customers are in charge
• Demands for higher standards of ethical and social responsibility

With all of these elements always changing, budgets are therefore more unpredictable so need to have a drastically different process to the historical one that still runs through the vast majority of businesses. Exactly what is the best way to move beyond the historical budget is the point that leads to greatest debate, but whatever system is drawn up it will be necessary to encompass the external factors to gain greatest advantage, through which the operational management can grow and develop. One thing that is certain is that the system will have to revolve around factors including;

• Create a performance climate based on competitive success
• Motivate people by offering them challenge, responsibility, clear guidelines and shared rewards
• Devolve performance responsibility to operating managers; give them the freedom to decide
• Empower operational managers by giving them the capability to act
• Organise around customer oriented teams that are accountable for profitable customer outcomes
• Support transparent and open information systems that provide “one truth” throughout the organisation

To be able to complete such tasks it would be necessary to have the right infrastructure and support throughout the organisation, much greater detail as to how this needs to evolve can be accessed via the details below.

For further information see:

Business Intelligence – “Reinventing Planning and Budgeting for the Adaptive Enterprise”

http://www.business-intelligence.co.uk/reports/planning_and_budgeting/default.asp

Beyond Budgeting Roundtable http://www.bbrt.org/

Juergen H. Daum http://www.juergendaum.com/

A satisfied customer is someone who has no complaints or damaging comments to make about how you have served them or the product supplied. Every time a customer is not satisfied with either the product or service received, they are potentially a lost customer forever; every business needs to satisfy customers by providing correct standards in order for each customer to then, through word of mouth, spread the product and company name in a positive way (a very useful marketing tool).

Negative comments via the customer base when they experience poor quality can result in losing many potential customers; this can be made much worse when the media get involved who may then publish stories about such failures. Every company needs to give consideration to the worst case scenario in order to focus on never failing (or at least constantly improving to get closer to the point of perfection). Remember prevention is better than cure, but swift resolution of any customer dissatisfaction is an absolute must to assist in repairing the negativity felt and hopefully turning around to positivity.

A method I have used in industry for analysis of quality and customer satisfaction revolves around what has been financially returned to the customer account and the reason allocated. This customer financial return will be termed as CREDIT within my analysis; this is an accounting terminology because it represents a credit placed on the customer account rather than a debit, but there are many other words that are likely to be used within other businesses that mean much the same.

The overall analysis will be illustrated as a Credit Scorecard; in particular it is a way of monitoring the performance across company departments and reasons for customer failure within each department. There is an overall view of cost for each department rolling over a period of time, with back up detailed information for the failure reasons broken down for each department and each month of the time period. The illustration below shows an example for a company during the year 2008 and greater breakdown by reason for the month of October 2008.

Please see this as just an example; it is not saying this is representative of all businesses or highlighting a particular poor or good performing company, you would need to know total customer numbers and turnover to draw such conclusions. The conclusion for a business with a 100,000 customer base turning over £500m would be viewed totally differently to an SME with 1,000 customers turning over £5m.

The full range of possible reason codes for failure need to be agreed in advance in order for a suitable database to be developed, a suitable Access database would be adequate, alternatively a more specialist one could be developed by the IT team if preferred. This database would have details entered confirming department, reason and value allocated for each customer satisfaction failure. Obviously the final decision would rest with the customer services manager to confirm the categorisation details for input. Once all the details have been entered for the month a suitable report could be run and exported to Excel for formatting and analysing in the desired way. I have always found Crystal Reports a useful tool for developing reports that are then exportable into different formats including Excel.

When managers and directors sit down to review their monthly customer satisfaction performance, it is probably best to focus on each department’s worst areas of failure and agree a performance improvement expected in the next month. Solving the worst problem each month and putting the change and improvements in place should result in that failure being under control and not resurfacing as a major issue in months to come. Month on month solving of failures should over time see that control is happening correctly and only minor failures appearing.

The difficulties of developing an appropriate system revolve around deciding – What are the most important key performance indicators (KPI’s) for your business and market? But there are several that are suitable for all manufacturing companies and can act as the core measures, and for others to be developed gradually around them. I would suggest the better examples to use as KPI’s in a manufacturing company include:

• On time in full (OTIF) – is a measure for successful delivery of orders, it’s a way of highlighting the completion of required orders over a set period of time. It is easiest to measure as a percentage of total orders due that were delivered on time. A small variation of this measure is on time in full first attempt (OTIFFA) where you measure successful first attempt deliveries.
• Not right first time (NRFT) – is the measure of how successful a product matches its specification and will normally be measured as “number of defect parts per million”. It is a way of measuring scrap levels through a plant and therefore somewhere were waste removal can be focussed.
• People productivity (PP) – is a measure of the ratio between the number of good units made and the number of direct operator hours required to make those units. This can help control the people cost of the production, by looking to reduce process time or operator numbers.
• Stock turns (ST) – is the measure of how frequently the stock (raw material, WIP and finished goods) are turned over in relation to sales revenue of the product. It can assist material flow decisions and inventory levels, with preference to move to lower stocks of material and WIP.
• Overall equipment effectiveness (OEE) – is the measure of the availability, performance and quality of a process, highlighting how well a company utilises its resources, equipment and labour. The availability percentage compares the planned and actual time of the process. The performance percentage compares the actual and ideal output achieved during the running time. The quality percentage compares the number of good parts against total parts made.
• Floor space utilisation (FSU) – is the measure of sales revenue generated per square metre of factory floor space. The effective use of space can reduce the fixed cost element of the operation; it could be used for production cells or departments as well as for the whole site.

Obviously service based organisations would utilise a different range of KPI’s, mainly relating to people (e.g. absence, minutes per call, etc.) and delivery of customer service (e.g. service level achievement, customer satisfaction, etc.). But we mustn’t forget that many measures that will often be the main focus point relate to sales performance (e.g. sales turnover, new customers, sales per customer, profit margins, etc.)

The final selection of KPI’s with suitable target and trend details added help to develop the overall measures for the business and this can be termed a Scorecard – the continual score of measures against targets or goals. The graphical formatting of these measures can help form a visible and easy to follow picture of where a business is. Some businesses will use scorecards in their simplest forms and for specific departments or divisions, other larger well established businesses might use far more complex scorecards to measure whole company performance. I will highlight the simple and easy to use and understand scorecard system highlighting an example for an operations business area.

All graphs that are drawn up should be rolling graphs, over time periods (weeks, months and years) and therefore show the direction of where a business has come from and where it is heading – improving or failing. By illustrating the various measures as individual graphs sized on to one A4 or A3 sheet, it then becomes one easy to follow picture of where a business is in all categories at all moments in time.

Developing a weekly rolling scorecard system for operations areas (production, despatch, purchasing, etc.) is probably best, which must be reviewed weekly by relevant management team but a monthly illustration may be better for directors of the business. All graphs need to be very visible throughout every area of operation, let people see what is happening, by placing appropriate information on suitable notice boards in each department or cell is a good point to start.

For one example of a scorecard I have used within industry, see the slides below, and you can see what I mean about the visible presence across the different measures? Enjoy developing what is right for you and your business, trial and error is very usual until you get what you are happiest with. Anybody who has good Excel skills could do this project – input of data, mathematical manipulation, and graphical formation, or get the IT team to program what you need. 

Example 1

To use the tortoise and hare example: simple logical but steady forward motion (continuous movement) will see you arrive at the finishing line before the one that charges off with leaps and bounds but then rests back on their laurels and then find they are playing catch up (start and stop movement).

Example 2

A good example of trying too much too quickly relates to the finance sector collapse, when many companies dived in with open arms into the sub-prime lending market, seeing only profits (not thinking about possible consequences and risks), which then backfired creating massive losses and the need for government intervention and extreme financial support to prop up businesses.

Generally businesses have often tended to aim towards the extreme, especially within Western economies, wanting everything now before they are ready and before they truly understand the consequences. Rather than concentrating on the core and simple and logical ways forward. Why add something complex, confusing and therefore alien to your norm, when you could continue developing your norm and gradually expanding in a planned way out from the edges of the core?

Example 3

A good example here would be that of the newly promoted team into the English football Premier League, they would love to win the league title over their first season, but sense and logic suggest this is near impossible (lower value players, lower support levels, less finances). So what they aim for is to grow gradually and move into a better position each year and perhaps in 5-7 years they may be ready for the perfect result – winning the league and playing in Europe.

Having worked in a number of companies and industries over the years, mainly functioning in production and operational areas, it becomes more obvious to look to utilise the skills and knowledge gained over time to help move forward. Most importantly you quickly realise there are that many theories and opposing views (thesis, antithesis, synthesis) that nothing is ever completely right, and even when it appears to be right, it’s certainly not for very long. Therefore what always should come to the fore is the need to analyse and plan actions, but within the boundaries of simplicity and common sense, so gradual but continuous improvement can occur.

This logic is where many organisations can fail, they are trying too hard to move too quickly (running before walking), grabbing at the latest idea (thesis) and putting everything into the pot, only to result in a different idea emerging (antithesis), so they immediately look to change again, but then a newer idea emerges which combines aspects of what has gone before (synthesis). Therefore chaos and confusion is the problem that results, lack of real direction, plans that are not worth the paper they are written on, an ever changing core and skill base and possible disaster (losses and closure).

Therefore overall this keeps on suggesting a more logical, sensible, simple and steady approach to development is what will gain the most over time, it’s a continual motion of improvement in the right direction, but with the focus always on the core operation – what we know and what we do best. This isn’t suggesting change is not required, but rather it should be in a manageable and planned direction based on the evidence and analysis undertaken.

Organisations and managers need to move away from drifting to the extremes of change:

(a) Do nothing and wait too long.

(b) Jump in too quickly without understanding everything.

A certain point of direction between these extremes is actually the ideal.

1. MOTIVATION AND RELATED FACTORS

A company is full of individuals, each with their own set of values, attitudes, needs and expectations; these are what act as the flagstones for the development of behaviour, desires, personality and motivation. These will have developed through life as a result of psychological and physiological factors. So a company needs to consider these aspects to help incorporate and integrate all employees into the system. The overall result should see improvement in job satisfaction, motivation and performance.

Motivation is generally considered as a priority in the improvement of performance, with staff feeling greater fulfilment and satisfaction within the work environment. Different people will be motivated by different factors and in different ways, they will wish to be rewarded and/or recognised for their efforts and improvements, including; pay and working conditions, safety and job security, social and interpersonal relationships, recognition, responsibility and power, challenge and opportunity. Obviously it is difficult to satisfy everybody’s range of motivating factors all of the time, therefore a combination of approaches will be necessary to try to bring most, if not all, into the equation to some degree. Overall the improvement in motivation can lead to reduction in staff turnover and absenteeism, better commitment, effort and performance from staff. Unfortunately there are no guarantees, and great expenditure and change can take place with little or no improvements.

2. LEARNING, TRAINING & SKILLS DEVELOPMENT

People will continue to gain skills, learn and develop through their lifetime, but will develop at differing speeds and to different levels. Part of the problem is that people learn best only if they desire to learn something new, but also the standard of the training being given is very important, poor training is as bad as no training. Barriers to learning also exist, and these relate to peoples backgrounds and earlier experiences or limited communication skills.

Some basic skills and theoretical approaches will be classroom based and prior to joining the workforce, but also during in-house classroom based learning. Most important will be the continued learning and developing on the job – new methods, new processes, new products, new machines, new programs, new directions, new materials, etc. The wider the skill base, the greater the working flexibility, so this becomes an important objective. Ultimately the continued employee development and training will result in increased job enrichment, recognition and satisfaction, combined with job rotation to reinforce skills and keep them up to date.

3. MANAGEMENT, DECISION MAKING, LEADERSHIP & STRUCTURE

Making decisions is the overriding activity that distinguishes the manager’s job from other functional responsibilities; these decisions may be concerned with new products, methods, directional change and scope of operations. Some decisions may be made on an individual basis, whilst others will result from group decisions, this is dependent on the structure of a company and its decision making processes.

There is a tendency for decisions to follow predictable patterns and the actual level or importance of a decision will be dependent on the position occupied and the expertise held. Older structured hierarchical companies may have several layers of management, with each layer making decisions on different aspects, for example; the line manager will deal with the day to day issues in his team, whilst the executive manager is dealing with the wider all encompassing longer term strategic decisions. Modern integrated flat structured organisations have fewer management layers, so managers will tend to deal with a wider scope and both daily and longer term issues. The result can be quicker decisions and problem solving. Group decisions in any organisation can result in conflict, therefore delays may occur, or the manager with greatest power rules the day.

Leadership should go hand in hand with management decision making, but good leadership is not dependent on position and power, it is the ability to exercise influence over others. Many theories on effective leadership have been forwarded all of which are to some degree conflicting, but several skills do stand out in good leaders, namely; problem solving, seeing the bigger picture, desire to achieve, self confidence and self discipline, listening and communicating effectively, emotional stability, positive attitude, being analytical and intelligent.

Within a company the combination of managers needs to result in a good fit, where decisions and leadership styles are merged to create a good team, with each having areas of expertise and influence. Too many managers who think and act in the same way, can result in a bland structure where creativity becomes discouraged, resulting in mindset and stagnation. Also having managers who are too diverse in their thoughts and actions can lead to other problems like conflict, and lack of direction. Therefore the right mix of people will always be critical.

4. ORGANISATION CULTURE & COMMUNICATION

The culture that prevails within a company can encourage or discourage the way a person acts and reacts, and ultimately how decisions are being made and communicated. From the open, adventurous, risk-taking decision and quick change, to the slow change resulting from excessive rules and procedures. The company culture is the essence of the life of that company, its traits, customs and practices, including; mix of people, how people speak to or deal with each other, what people like or dislike, how comfortable people are at work, etc., these factors are often intangible. More tangible factors include; obedience level, initiative expected, working hours, level of autonomy, dress code and appearance of the work space.

Several different identifiable culture systems exist, each with advantages and disadvantages:

(i)               Power culture – like a spider’s web with control at the centre by one or few people, generally works best in small family businesses, where flexibility and quick action is taken on decisions.

(ii)              Role culture – bureaucratic system based around set roles and positions, with rules attached, generally hierarchical and authoritative decision making, it is a predictable and stable culture and suitable for organisations requiring economies of scale, unfortunately inertia is built-in and change is very slow.

(iii)            Task culture – no single power source, generally based around project teams working autonomously and cross functional, tends to be very flexible and can change extremely quickly to events, only suitable for short life cycle products needing little depth of knowledge or economies of scale.

(iv)             Person culture – common system found in complex organisations, the individual is important and the company helps serve their interests, lawyers and consultants are typical examples, this system tends to have a short lifespan as firms develop and expand.

 Whatever culture or combination of cultures exists within a company it will affect how communication occurs, and ineffective or inaccurate communication can result in major failure and losing ground on competitors. There is often a tendency or inability to recognise the relationship between employer and employee in how communication occurs; there is a requirement to work together as if in partnership. Only then will employees know and fully understand the company objectives and how they can contribute their skills in a beneficial way for future success. If communication occurs in an ad hoc manner from management to employee without any involvement or discussion with employees, there is likely to be a greater tendency for negative reaction and conflict. Communicating where both parties are fully involved, can help address specific problem areas; development and working relationships, discipline, absenteeism, staff turnover, improving working conditions, improving productivity, improving customer satisfaction, etc.

5. QUALITY, COST & DELIVERY

With an ever changing market and increasing globalisation, there is a need for businesses to adapt and remain competitive; this can be achieved by continuous improvements in all areas. Typical manufacturing techniques within continuous improvement include; quick changeover (SMED), removing waste, 5 S’s, and six sigma. The achievement of best practice and key measurements in quality, cost and delivery will help in the fight to get things right first time – increasing productivity, reducing scrap, utilising resources, and improving customer satisfaction.

Several measurements or Key Performance Indicators (KPI’s) exist for analysis, that cover areas of quality, cost and delivery, and can be used in any combination and for most industry sectors to aid continuous improvement;

(i)               Not right first time (NRFT) – is the measure of how successful a product matches its specification and will normally be measured as “number of defect parts per million”. Defects produced results in waste of resources and time, increased costs, and can result in customer dissatisfaction.

(ii)              Delivery schedule achievement (DSA) – is the measure of how well a supplier matches the planned delivery requirements of customers, this could be used for goods coming in or for goods going out.

(iii)           On time in full (OTIF) – is a measure for successful delivery of orders, it’s a way of highlighting the completion of required orders over a set period of time. On time delivery is a major requirement of most customers because of their planned production, but the step towards 100% target needs to be achieved without incurring costs.

(iv)           People productivity (PP) – is a measure of the ratio between the number of good units made and the number of direct operator hours required to make those units. This can help control the people cost of the production, by looking to reduce process time or operator numbers, and improving value added production.

(v)              Stock turns (ST) – is the measure of how frequently the stock (raw material, WIP and finished goods) are turned over in relation to sales revenue of the product. It can assist material flow decisions and inventory levels, helping to release cash and space.

(vi)           Overall equipment effectiveness (OEE) – is the measure of the availability, performance and quality of a process, highlighting how well a company utilises its resources, equipment and labour. The availability percentage compares the planned and actual time of the process. The performance percentage compares the actual and ideal output achieved during the running time. The quality percentage compares the number of good parts against total parts made.

(vii)         Value added per person (VAPP) – is the financial measure relating the number of direct people involved in the conversion process to add value to the product. It illustrates how well people are used to transform materials in to finished products; the requirement is to improve employee efficiency to improve value per person.

(viii)       Floor space utilisation (FSU) – is the measure of sales revenue generated per square metre of factory floor space. The effective use of space can reduce the fixed cost element of the operation; it could be used for production cells or departments as well as for the whole site.

Many other suitable performance measures exist and it is up to each company which they prefer to use in order to monitor performance and develop improvements against.