The 1st Element of the Management System | Operational Excellence Quick Hits

Speaker 1: (00:05)
Today’s session, we’re going to talk about the necessary and sufficient conditions for the management system of operational excellence. The necessary conditions are: effective decision-making, profitable growth, change management, and sustainability. The first element we’re going to talk about is effective decision-making. When we talk about effective decision-making, we’re talking about decisions no matter where it is in the organization, that that decision-making is aligned with the operational excellence strategy. So it’s aligned with our vision and mission, our value proposition, our strategy and tactics, and our performance, our KPIs for the organization. Part of effective decision-making is making sure that we have the right measurements in place to induce people to make the right decisions.

Speaker 1: (00:55)
So what’s the measurement’s purpose? The purpose of measurement is to provide judgment on the current state of the organization, and to induce people in the organization to take action that is aligned with the goal of the organization. Provide immediate feedback on the effectiveness of the decision-making process, so not only do we need to make the right decisions, we need to have that immediate feedback to understand if it wasn’t the correct decision that we can recalibrate and change our decision-making. So people behave in the way that they’re measured. Dr. Goldratt had a quote that said, “Tell me how you measure me, and I will tell you how I’ll behave.” If we’re getting the wrong behaviors, we have the wrong measurement system.

Speaker 1: (01:36)
Of course, a lot of companies have lagging indicators, which means they’re looking back in the past to see how the company performed last week, last month, or last quarter, but we really want leading indicators that are looking forward. So the lagging indicator, measurement of past performance; leading indicator, it’s a measurement of future indication of success of the organization. So the example I like to talk about is trying to drive home looking through your rear view mirror, that’s a lagging indicator. Or is it better to drive home looking through the front windshield? That’s a leading indicator. So an example of that would be, “Oh, we looked at our sales revenue of what we sold last month,” versus, “What’s our sales backlog of our future success?”

Speaker 1: (02:24)
So a good measurement system needs to be simple and easily understood at all levels of the organization, needs to provide timely feedback on a daily or a weekly basis, provide data that is relevant for decision-making consistent with the company’s strategy and tactics, and used for cost management rather than cost reduction or cost avoidance. It’s important that the cost mentality isn’t driving the decision-making, meaning we’re not looking to make cost reduction decisions. Too many times I see cost reduction decisions in one department cause huge negative effects in other departments. We really want decisions that aren’t based on cost reduction, but are based on improving flow within the organization.