Can You Fight Inflation with Process Improvement Efforts to Keep Afloat?

Picture 1: staying afloat. A view from Helsinki’s South Harbor with M/S Silja Symphony on tour to Stockholm and M/S Ocean Majesty and M/S Amorella to the left at Katajanokka Harbor.

The short answer is most likely, but it depends on what improvement performance your solutions actually provide.

You can improve your operations to match a rather high inflation level, potentially even without increasing the price of your outputs to the paying customer, and without cutting the profit level that the owners and financiers need to be happy. In some cases the process improvement work may even result in a scenario where it may be possible to both increase the price and sell more. But there are some “catches” to the improvement work that should be understood, both when fighting inflation and taking the improvement work beyond traditional reactive improvement work, or pseudo improvements due to getting or keeping a quality certificate.

Your company’s ability to unleash unrealized, and many times also undisclosed, improvement potential depends fully on your current and past process improvement yield (PIY) level (see Picture 2 below for a PIY calculation example). If this has been low (<10%) for a long time, then there is a great potential for improving the company’s value proposition through a sustainable and systematic process performance increase. This performance increase affects both the top-line and bottom-line of your company’s financials, depending of course on how you position your offerings. Here it may be even possible to both increase the price and sell more. This scenario is a rather hard improvement task to solve, but it may be done if both the performance and performance increase of the key processes shine constantly regarding the core process (order-delivery process, incl. invoicing), the research and development (R&D) process, the marketing process, the sales process, and in some cases where applicable also the after sales process. There may be also other processes such as the administration process (incl. general management, human resources, finance, etc.) and the maintenance process that have to be properly considered to improve the whole. These processes may be either global, international, national or local, depending on the company structure and your company’s geographical reach. From a high-performance process improvement (HPPI) perspective this does not matter as can be observed via the process definition used by all high-performance process improvement compatible improvement solutions:

“A process is the interaction of people, machines, materials and information to produce a certain service or product.”

Fromm, H. 1992. “Das Management von Zeit und Variabilität in Geschäftsprozessen.” CIM Management. 5, pp. 7-14.

Simply put, process improvement means thus enhancing the interaction of these four process components. How well this interaction works is directly related to the process performance that can be measured with regards to time, quality and costs. This performance, on the other hand, is probably the most important factor to satisfy the stakeholders in the long run. How to improve systematically and result-oriented the interaction of the four process components for each relevant process, well enough and using as little resources as possible (cp. the improvement time, quality and costs), is the essence of high-performance process improvement. In the end, the question is how to organize and improve over time the four process components so that their interaction has an optimal impact on the process performance and stakeholder satisfaction. To really do this, you need solutions fit for the purpose, i.e. that are designed from the outset to be HPPI compliant, because there are so many issues that need to be considered, optimized and implemented thoroughly. In practice, every single improvement effort has to be customized, including also the improvement education and training at the individual level.

Based on the above it is easy to analyze, as a “by-product”, the shortcomings of e.g. the improvement work based on lean thinking. Solutions based on the lean concept do not contain any actual component, logic or systematic solution assuring the improvement effectiveness and the improvement performance from a total perspective. As a result, the real-life process improvement yield is, and will be low, until the end of time, as there is not even a theoretical possibility to increase the ambition level of the improvement work after the lean concept has been implemented throughout the company “by the book”. The “Then what?” question cannot be answered properly, unfortunately. Another issue to bear in mind is that the interaction of the four process components may also deteriorate even if you think you are improving your operations. Here many IT/ERP projects may serve as an example. Also, you can test the performance of lean solutions simply by adapting these solutions to the improvement work itself.

Improving sufficiently the costs, time and quality of your key processes provides a good protection to inflation concerns, although it is important to notice that also the improvement efforts themselves have to be effective and efficient. In addition, it is crucial to keep in mind that the real-life average PIY level for a company is only at a 2-3% level, often despite all the improvement efforts throughout the years.

If your company truly runs its improvement efforts at a PIY level >85%, then you should revise the ambition levels both for the key processes and the improvement work. Analyzing the processes at a higher ambition level may provide clues about the undisclosed improvement potential that would provide the means to fight inflation and provide competitive flexibility towards crucial stakeholders (customers, employees, owners). This setting is, however, more or less hypothetical as a PIY level of 85% even at the basic ambition level is rare. The theoretical output of the applied improvement solutions applied in many companies, such as e.g. lean concepts and related tools, restricts the score to a 60% PIY level. If practical issues are considered then the ceiling will be reached at about a 15% PIY level. Getting a real-life PIY score higher than 7-10% is thus likely due to a miscalculation/misunderstanding of the PIY.

To swiftly get a realistic view of the unrealized improvement potential for a specific process, it is advisable to first check the workable improvement options and likely financial outcomes using the improvement plan VISTALIZER® Report. This solution can be delivered using the Microsoft Teams or Zoom solution as the communication platform.

To calculate your PIY level you can use the PIY Calculator (incl. the Implications feature) in the app VISTALIZER® for Enterprises (iOS/iPadOS/Android) that also considers your company’s improvement knowledge level and ambition level (Picture 2).

Picture 2: The PIY Calculator in the app VISTALIZER® for Enterprises (screenshot of iPad Pro 12,9″).

Running high-performance process improvement efforts provide multiple benefits with only a moderate risk. In stormy business conditions you really need to consider your improvement approach so that it is fit for the purpose. Continuous improvement means that you can improve the operations sufficiently, despite the conditions. Here also the absolute and relative improvement performance, and the change of these two aspects (to the better or to the worse), should be considered to understand how your company’s is prepared for current and future challenges. In that sense it costs a lot also to do nothing. You can, generally speaking, do much improvement-wise by just assuring that you use high-performance process improvement solutions with a sufficient coverage as the improvement effectiveness (=improving the right issues) and efficiency (=improving the issues right) is by definition built-in such solutions.

Is Your Organization Driving with Zero Improvement Visibility?

Original Title (in Finnish): “Ajaako organisaatiosi lasit jäässä?”

Original Publisher: The Finnish Pharmacists’ Society

Publication: Proviisori Journal 1/2012 (pages 24-26)

The article is the third in a series of three articles providing a general introduction to high-performance process improvement.

——————————————————————————————————————————–

The improvement planning quality and dynamics in many organizations are comparable with a car with zero windows visibility except for one tiny clear area at the rear. Increasing the visibility of the rear window does not improve the visibility of the windshield. Already the data collection method affects which windows areas may be clear. Focusing on wrong issues wastes a great amount of opportunities and resources.

The key issue in process improvement is no more the identification and decrease of quality costs, but the identification and realization of opportunities regarding three closely interrelated wholes. These are the improvement activities, the activities to be improved and the produced output. 

The quality costs include all costs due to not producing the output correctly from the outset. There are four types of quality costs: external and internal, appraisal and preventive.

The real quality costs represent 15-75 percent of an organization’s revenue depending on the industry. The reported or perceived quality costs are typically only a fraction of this amount because they cover only a part of all quality costs. Utilizing the quality cost concept it is possible to grip issues related to productivity. This is, however, only the other side of the coin, as one needs to cultivate also the effectiveness.

In high-performance process improvement the opportunities are reviewed based on the gap between the current and desired ambition levels regarding the improvement activities, the processes and the outputs. The ambition level differences can be quantified via three cornerstones, i.e. time, quality and money, the effect of which together form a considerably greater value waste than the quality costs.

The value waste due to lost opportunities is billions on a national level. This waste affects negatively the satisfaction of all stakeholders, and more generally on the employment level, the tax revenues and the well-being. This value waste is many times not disclosed simply because traditional improvement methods and systems do not identify this issue. You cannot know what you do not know.

 

The Quintet of Process Improvement

In addition to decreasing waste, quality defects and variation, high-performance process improvement requires that you master many other issues concurrently – with scarce time and money resources. There are five key issues, implemented via a process approach, that provide the solution to this challenge :

  1. The assurance of the improvement effectiveness and efficiency.
  2. The management and improvement of the improvement performance at different ambition levels – in addition to improving the performance of the operations.
  3. The seamless improvement of both the processes and the produced output at ever higher ambition levels – in addition to improving processes or the output in isolation.
  4. Improving large and complex wholes and networks – in addition to improving local processes or functions.
  5. Identification and realization of opportunities – in addition to identifying and decreasing quality costs.

An end-to-end perspective regarding the improvement value chain provides concrete means to manage and improve this complex whole in a good way. When the concepts of the Kano model to output development are integrated seamlessly to process improvement work and the required processes that deal with research, development, marketing, sales, production, delivery and after sales of the offered outputs, a great synergy momentum is created compared with applying the concepts of the Kano model in isolation.

 

Data, Information and Knowledge

The assurance of the improvement effectiveness means that the organization or network is improving the right issues. The key issue is a good enough identification and selection of the improvement objects, considering well enough the affecting circumstances and prerequisites. To do this, knowledge is always required as knowledge is the prerequisite to make decisions. This calls for a sufficiently performing data collection, and the cultivation of data into information, i.e. an analysis, and the cultivation of information into knowledge, i.e. a synthesis.

The performance of the information process used in the improvement value chain determines to a great extent the quality of the improvement activities in practice. A elementary problem in many organizations is a lacking or defect information process. One example of this is the collection and utilization of such data that is easily obtained, but not such data that would be needed. Another common issue is the cultivation of irrelevant or even wrong data into information.

Additional problems emerge when information or emotional reasons form the decision basis. Information lacks from the outset one crucial cultivation phase that provides the understanding of the requirements and total effects of the actions. Data lacks two cultivation phases. Without a high-class synthesis (knowledge) it is impossible to make high-class decisions. Jumping from data to decision making is a big leap. Very few, if any, are able to conduct a non-trivial analysis and synthesis of a sufficient quality only based on the data provided by the performance measurement system.

The meaning of an analysis in an improvement context is not to provide ”nice to know” information, but to serve in a relevant way the synthesis, decision making and the implementation phase. For this reason score cards, satisfaction surveys, maturity and quality award models offer a misleading platform to manage the operations. These approaches may direct thinking in the wrong direction as they do not offer a synthesis but only a partial analysis. A simple “Then what?” question in the different phases of the improvement work helps many times to clarify the thoughts.

 

Garbage In, Garbage Out

Knowledge is the basis to make decisions. Assuring the improvement effectiveness means assuring the quality of the decisions. A rather small improvement in the decision quality increases the improvement gain considerably. In comparably small improvement efforts tens of decisions are made in the beginning affecting the quality of the data collection (timing, correctness, usefulness, amount, form, place and price), ending via an analysis and synthesis with the selection of the improvement objects and their implementation.

Customer and employee satisfaction surveys represent only a part of the required data, and for this reason it is not always possible, or even reasonable, to utilize this kind of data as such in the improvement work.

The management’s capability to make high-class decisions from a total perspective is affected by, among other issues, the stress and vitality level, interest, know-how, the vision and the potential external and internal pressure. Another person or another management team could end up with a total different solution. Who is right, or is nobody?

If there are problems in the data collection, analysis and synthesis phases, there is an evident risk that the principle “”garbage in, garbage out” will materialize also in the decisions. The problem areas are not often even recognized, which make the problems hard to remove.

From an improvement perspective the first issues an organization needs to focus on are the bad decision quality and the big variation of the decision quality. Implementing the wrong issues wastes a great amount of opportunities and resources. Often is advisable to improve and measure the strategy work and the quality of the created strategy. In large organizations it may also be motivated to evaluate and improve the quality of the improvement project portfolio and the quality of the project approval process.

 

Building Quality into the Improvement Plans

How well an organization is able to consider all crucial improvement aspects can be evaluated well enough based on the written improvement plan. If the quality of a process improvement plan is evaluated at the lowest ambition level, the level is on average 16 percent. This figure is based on the measured average score of 30 companies in the electronics industry. In practice such a level does not support high-class decision making, although such an improvement plan is sufficient for certification purposes.

In real life very few of us would drive with a car anywhere should the visibility of wind shield, side windows and rear window be restricted to one small area at the rear left. The selection of the data collection method and approach decides from the outset what window area can at best be free from visibility obstacles. This affects without a doubt the quality of the analysis and synthesis. If the rear window visibility is improved, this will not affect the visibility of the wind shield to any considerable degree. If clearing the rear windows lasts two hours or the whole day, it is clear that such a performance does not serve anybody. The need and motivation to move may already have vanished in this time frame. Putting in the reverse gear and driving backwards provide no lasting solution, at least when aiming at driving a long distance. This depicts the planning level and dynamics in many organizations.

In car driving, as in improvement work, it is problematic to focus only on one issue as the whole is what matters. In different situations one has to consider and prioritize things right. Without a high-class logic to create high-class improvement plans the organization does what it knows, not what it really should do. When talking about plans, it is utterly important to understand that if only one part of the operations is covered by the plan, then the low planning coverage, e.g. one process out of five, will not provide a sufficient improvement momentum to create a great impact.

Gaining and maintaining a sufficient improvement effectiveness is a very challenging task. The problem cannot be solved without a high-performance logic to create process improvement plans. With modern methods an improvement plan with an 100 percent quality level is achievable in about 14 days consuming less than one working day for the attending key persons.

 

Towards Very Satisfied Stakeholders

The improvement results are not only about improving the absolute performance, but also about improving the relative performance compared with the competitors and other organizations. A higher improvement yield than the reference group improves both the absolute and relative performance. The improvement performance increase is not only counted in euros, seconds or quality defects. The question how much better the organization is able to satisfy the changing and often contradictory needs and requirements of its stakeholders, first and foremost its customers, employees and owners, is more important. The total satisfaction of these three stakeholders is the core that needs to be treasured when improving the operations. If these stakeholders are dissatisfied from a total perspective, then there is no basis to satisfy other stakeholders either. Just remaining in the same spot requires that the improvement work advances with the same speed than the needs and performance requirements increase or change.

 

Swamp There, Water Here, not Dry Anywhere

The fact that the others improve their operations also with the same low performance level provides only an expensive illusion regarding the current improvement level of the own organization or even a whole industry sector. Increasing the speed in this improvement swamp is not possible without increasing considerably the costs or affecting negatively the quality.

Swamp running is a skills sport where the stumbling and decrease of energy lower the motivation even for a seasoned runner. When the energy level is close to zero, then you find yourself even more far out at the swamp – and lost. This provides the swamp specialists with new opportunities to help the customer out of the mire. This will of course newer happen. After the investment a new, slightly different swamp with mirages will appear.

Wading in the improvement swamp towards new mirages is surprisingly popular. The years pass by, but the same problems, such as e.g. information quality and IT system related problems, remain. In such a mode it is hard to find any positive aspects.

When the performance of the organization is sufficiently bad, or is not improving according to the plan, then the easiest way to tackle the issue is to lower the ambition level, or refer to bad management. The root causes of the problems will not vanish by improving the effects. The structural problems of the improvement methods cannot be fixed with good management.

 

An Aha! Moment is Needed

Getting on the right track requires embracing a new improvement perspective and often also an Aha! moment. Satisfied customers, employees and owners do not show as such that the organization is performing well. Not until the customers, employees and owners are very satisfied, the right track has been found. In addition, efforts have to be conducted to increase the satisfaction of other stakeholders as well, and to that the mentioned three stakeholders are very satisfied also in the future.

The world, the organizational requirements and improvement needs have change a lot during the past few years, not to mention since the days of the quality gurus. The pace of the change does not show any signs of slowing down. The improvement performance needs special attention during good, mediocre and bad times. A high process improvement yield assures for any organization that this is the case. This simple principle will go a long way. The time for high-performance process improvement is always.

The Process Improvement Yield Reveals Your Actual Improvement Traction

It’s striking that much is written about improving the quality and performance of processes, whereas little has been written about the quality and performance of the improvement methods themselves. If the quality of the improvement method is low, it is of little help implementing it correctly. A bad, undisclosed improvement performance not only wastes resources and opportunities, but more importantly also lulls the organization into a false feeling of security, resulting sooner or later in a harsh awakening. When asking executives or improvement experts what’s the quality of the improvement methods they use in their organization, most of the people do not even understand the question.

To achieve a mode of systematic and result-oriented improvement throughout the organization, you need to truly know what kind of performance your set of improvement methods deliver. The tricky part is not to understand the cost implication, or even the time dimension of the applicable improvement method, but to understand the quality of the delivered improvement output.

The crucial issue in process improvement, as in all operations, is to achieve as good an interaction as possible between people, technology, information and material to produce the desired output. The quality of this multidisciplinary interaction can be evaluated based on how well it satisfies the stakeholders as a whole. The desired output of process improvement efforts is the achievement of a better real-life interaction in the value chain, organization or process. Thus, the organization needs to master and improve two kinds of interactions, the one required in the improvement work, and the ones required in the wholes that are being improved. Sticking to improvement methods that do not support the organization’s current and desired ambition levels is a bad strategy that many companies do not recognize. Improvement methods should come with a best before date, just like groceries.

How well a specific set of improvement methods deals with today’s improvement needs should be judged based on how well it is able to solve the fundamental business equation: how to lower the costs, increase the price of the output, and sell more, without constantly sacrificing the satisfaction of one or more stakeholders. This can be done simply by analyzing the quality and scope of both the improvement plans and the practical realization of the improvement potential. The synthesis of such an analysis, i.e. the process improvement yield, can be quantified as a percentage point score (0-100%) that reveals how effective, efficient, and impressive the company’s improvement work is in real-life.

My analysis of the process improvement yield in some 30 companies in the electronics industry reveals that the average yield level is somewhat below 3%. To put this in perspective: What would Toyota’s estimated score be using the same analysis and synthesis logic? The well-known improvement methods of Toyota, hoshin kanri and nichijo kanri, have a combined theoretical score of 60%. However, a well-educated estimate of Toyota’s real-life score suggests that the level is approximately 15%. This score, achieved in some 20 years and maintained at that level for some additional 40 years, is more than five times higher than the average company. Although the end-results achieved by this yield level include lean thinking and the Toyota Production System, it is, nevertheless, modest from an improvement performance point of view. For a company that really wants to improve its operations in today’s dynamic business environment, it does not make much sense following the best student that did not pass the test.

What’s the quality of your organization’s process improvement plans? The quality level of the improvement plans in the average company is 16%. With such a low-quality improvement plan, it is likely that the organization improves, more or less randomly, within its comfort zone and current understanding what it can, not what is actually needed. Despite rigid and formalized project approval procedures, the actual quality of the improvement project portfolio in many large companies is so low that the customers, employees and shareholders should beware. There is no need for an organization to find or implement other improvement objects until it utilizes high-class improvement plans that assure the improvement effectiveness.

Achieving and maintaining a process improvement yield level of at least 75% within a few years should be high on any executives to do list. Such an improvement performance would work wonders in any company – including Toyota.