Joe interrupted. “I have a question. After selecting the right path to move the company to the next frontier, how do companies manage change? The people component is the toughest for us. If others are anything like our organization, the organization is hardwired for incremental, and continuous, improvement. The adoption of a new mental model flies in the face of conventional continuous improvement programs. We are good at the process methodologies of Six Sigma and Lean because they focus on gradual continuous improvement. How do you get the leadership team to risk disruption, to break some eggs, and then put the processes back together again to move to the next level?” Joe asked. “It sounds risky, and as you know, it's hard to get people to agree to risk putting their job on the line.”
“People put their jobs on the line all the time, especially by not taking action when action is required,” I said. “That's even worse, and plenty of people have lost their jobs because they failed by not even trying. You were the victim of a layoff because the management team did not have the courage to make tough choices.”
It was obvious that this point resonated, as Joe quickly retorted, “This is easier said than done. If you are stuck in the management of vertical metrics, you cannot see the big picture.”
“This is the secret to building systems with the Metrics That Matter,” I said. “You need to engage the entire team in a manner that not only gets mutual buy-in, but paves the future to deliver success. With incremental improvement, oftentimes one metric will win over another metric. Functional areas will become winners and losers. This is the power of defining a new frontier – you are all moving toward a common horizon that you've identified is desirable and attainable. To help you, I would like to share an interview that I recently completed with Marty Kisliuk of FMC. See if this resonates with your team…”
“Good idea,” said Joe. “Why, don't we have lunch and continue the discussion?”
The Journey of Managing the Effective Frontier
As leaders, we must move the frontier. It must be done strategically. Many times we get trapped to move one or two metrics instead of the entire frontier. To do this, we must see progress in the metrics that we measure. The rest will be victims of entropy.
To make progress, we have to be good at root-cause analysis. The organization must find the root cause and act quickly.
We must resist the temptation to focus on one or two metrics in isolation. When we do this, we cannot move the frontier to the next level. Instead, as a leadership team, you must find balance and then push to the next level of the Effective Frontier. It is a strategic activity. It is not a week-to-week or a month-to-month initiative. It needs to be focused end-to-end throughout the organization from the customer's customer to the supplier's supplier on an annual basis.
I don't think that we as business leaders recognize that we are on a frontier early enough. It is a paradox. It is the AND. You must move the metrics together while in balance and then redefine the process. Most organizations are not operating at full potential on their frontier and can make continuous improvements. However, when you reach full potential on the frontier, you must force a disruption and change the mental model.
Marty Kisliuk, Director of Global Operations, FMC Agricultural Solutions
The Efficient Organization Is Not the Most Effective
Over faded gray trays in the company cafeteria, I continued. “Computing power and connectivity made greater productivity possible. Over the course of the past decade, the average global multinational company invested 1.7 percent of revenue on information technology.” I pulled a recent research study from my purse and pointed to the data (see Table 1.3). “The impact was a dramatic improvement in employee productivity, as defined by revenue per employee, in all manufacturing sectors.
Table 1.3 Industry Progress over the Past Decade
Industry Average comprised of public companies (automotive industry: NAICS 336112), (brand apparel industry: NAICS 31522 %, where % is any number from 0 to 9), (combined food & beverage industry: NAICS 3112 %, where % is any number from 0 to 9, 311320,311520,311821,311941 & 312111), (chemical: NAICS 325188 & 325998), (consumer packaged goods: NAICS 3256 %, where % is any number from 0 to 9), (grocery retail industry: NAICS44511), (hospital industry: NAICS 62211), (mass retail industry: NAICS 452 %, where % is any number from 0 to 9), (medical device industry: NAICS 339112), (pharmaceutical industry: NAICS 325412), (retail apparel industry: NAICS 44812 %, where % is any number from 0 to 9), reporting in One Source with 2012 annual sales greater than $5 billion.
″ Calculated from 2001–2012 due to data availability;
* Calculated from 2002 to 2012 due to data availability;
^ Calculated from 2003 to 2012 due to data availability;
NC = no change.
Source: Supply Chain Insights LLC, Corporate Annual Reports 2000–2012.
“Technology was an enabler. For many, it was a disruptor. It permitted and empowered companies to increase potential and move to new levels of the Effective Frontier. Today, the belief that the efficient organization is the most effective defies conventional wisdom. The historic focus was to improve efficiency. The belief was that increasing efficiency would lower costs and improve performance.” The reduction in labor did not translate to an improvement in operating margin. As I showed him the chart, I said, “However, as shown here, this singular focus had an adverse effect on operating margin and inventory cycles in 7 of the 11 industry sectors.” Joe's eyes sparkled. He loved data, and motioned for me to continue.
“In some industries, costs were shifted. Three out of the 11 industries grew sales and general administration (SG&A) expenses. In an effort to spur growth, there was a shift in spending from the back office (manufacturing, distribution, procurement and logistics) to the front office (sales and marketing). There was a belief that we could save money in the back office, and move the money to the front office to fuel growth; however, this level of thinking was flawed. It was not that easy. Teams need to align to win together. Functions need to build potential on the Effective Frontier jointly as a strategy.”
Joe asked, “So, since most companies went for improving employee productivity, why didn't margins improve at the same time?” As I stirred my black coffee, I saw that it was as opaque as the answer to his question. “I like this line of questioning. This is something that I am doing more research on, but right now, I believe that it was a misaligned emphasis on the input metric (revenue per employee), not a focus on the output metric (operating margin). Most companies can put data into systems, but they cannot get data out to measure progress. As a result, the focus is misaligned to concentrate on input, not output. That's why metrics matter so much! Would you agree?”
The Need to Focus on the Right Metrics as a Complex System
On the walk up the stairs back to his office, Joe stated, “I get it. Companies want to increase, or accelerate, inventory turns and reduce cash-to-cash cycles. Improving inventory turns and decreasing cash cycles improves working capital; but, an increase in complexity will decrease margin and reduce inventory turns. They are connected and interrelated. Working these metrics as a complex system while on the effective frontier enables companies to build a road map to drive business strategy. The freeing of capital enables investment. Right?”
I nodded while laughing. Joe walked up the stairs two at a time leaving me out of breath as I struggled to keep up with him while continuing the dialogue. “In the past decade, the use of technology improved the results of large companies greater than $5 billion in revenue. While companies thought that the overall results