Manufacturing Case Study
Don’t fix your people, fix your system: the business that did not have good employees
Many years ago, I had a life-changing experience that completely altered my view of what constitutes good business and management practice. A manufacturing site for the company I was working for (a few thousand km away from head office) was about to be closed down due to years of poor performance. However, the MD decided that the business was a strategic necessity and one last effort had to be made to save it. The production manager at the time was snowed under and did not have the time to attend to this effort. As the least loaded member of the management team and newly qualified in Managing the Theory of Constraints Way, I was approached. I would have a maximum of two days a month available on site, during which I would have to try and turn the company around.
Sales had been falling for five years in a row. Lead times were six to seven weeks but often as long as ten on some items. Customers were desperately unhappy; their tolerance time was less than two weeks. There was no direct competitor, but customers were moving to substitute products. The company’s own sales personnel found that a substitute product produced in-house could be sold with much less hassle and recommended this to their customers.
Signs of financial stress were visible everywhere. Given the chronic poor financial performance, pay levels had stagnated, and many personnel were paid well under the industry standard. Finance applied pressure for lower scrap (which required fewer changeovers and longer production runs) while sales screamed for shorter lead times and shorter runs. Because of reducing sales volumes, profits were under pressure and runs were extended to lower scrap. The production planner had a nervous breakdown trying to schedule these conflicting requirements. Quality standards had been relaxed in order to use cheaper raw materials. The inevitable thus happened as the product got a bad name and sales contracted further. As a result of these problems, the rest of the organisation found that any problem could be blamed on the production facility, the charges would be believed, and attention would be diverted from their contribution to the problem.
The production staff were despondent and could see no way out of the problems they were facing. When asked how he felt, a production member said, “I am in a dark room with no light, and I do not know where to turn.” They were caught in the middle of a conflict between sales and financial targets, which seemed insurmountable. Any solution they suggested that favoured one target over the other was quickly shot down by either sales or finance.
Negative attributes were attributed at head office to the intention of staff at this facility. They were uncooperative (according to sales), inefficient (according to finance). This was never communicated to staff, but the sentiment was known.
And yet, within a year this facility had turned around, within two years the staff had the highest morale in the whole of the company. The planner was unrecognisable from the person he had been before.
How did this happen?
To begin with, we had the typical filtering of information through layers to head office. All were aware of the poor financial performance of the manufacturing facility, but none understood the root causes. It was known that pay levels at the facility were below industry norms, but the conclusion was that the workers thus had to be of a low standard. The simple conclusion: the financial problems were due to poor quality staff. To my eternal embarrassment, this was also my view. Advice from many quarters was, “Get rid of as many underperformers as you can to save the facility.”
After a few visits and discussions with the staff, it became clear that the root cause of the problem was not poor-quality staff, as I had believed, but the way performance was being measured and incentivised. The mental model regarding the behaviour and needs of customers was also flawed. A full day per week was spent by the manager in charge scrutinising accounts and trying to save on expenses, while no attention was given to doing things that would satisfy the customers. Costs had been cut so far that product quality was being affected. Trying to run as efficiently as possible resulted in slightly lower costs but pushed out lead times and made them unreliable. This distortion was created by head office, with the best of intentions. The personnel at the facility were unable to articulate this to head office, and to be honest, even if they had tried, they probably would have hit a brick wall. Explanations under these circumstances are easily mistaken for excuses. This is a manifestation of the negative consequences of hierarchy and management traps.
Not having many years of experience in manufacturing (with the exception of training in Managing the Theory of Constraints Way) I realised that the solution would have to come from those working at the unit. My strategy was to give them purpose (identify an external enemy), to let them challenge the conventional way of doing business, find their own way of solving problems (create new mental models), protect them from the short-term consequences of the change processes, and celebrate every success.
In hindsight, it has become clear to me why the turnaround was so successful:
This understanding arrived through the work of Daniel Pink. He claims that in the modern fast-changing environment, companies will only excel if workers have a Purpose wider than just the business objectives, are allowed Autonomy in performing their work and are able to achieve Mastery in their work. At the time, my expertise in production was limited, and I had to generate a dialogue with the staff in order to acquire solutions from them.
I had to practise humility and ask those on the floor for their ideas. As a representative from senior management, I was able to get first-hand information on the nature of the problems on the floor. I also had the Autonomy to change processes around. The Theory of Constraints played a critical role in this implementation. It identified the customers’ significant needs and enabled the alignment of the organisation’s production and supply chain with this.
In this way, a few critical leverage points were identified, and only these were actively managed.
Since many of the actions required by Theory of Constraints seem counter-intuitive, we spent many hours with middle management on changing mindset, discussing the philosophy, why it would work and highlighting successes.
Once a month, a dialogue session was held to ensure that our mental models on the competitive environment and the direction in which we were changing our internal processes were still current. In many instances, measurements had to be set up to encourage actions that resulted in higher-level outcomes with a time lag. This is known as managing by means which is opposed to the traditional method of managing by outcomes. For example, supervisors were measured on the availability of accurate set-up charts. Once it became clear that these actions resulted in lower scrap, the supervisors took the responsibility on themselves to ensure set-up charts remained available and current. This ensured that run to run consistency was achieved.
As a manager, my views and philosophy on management were forever changed by this experience. It is now my firm belief that a group of average performers, managed according to the principles of Autonomy, Mastery and Purpose and guided by the Theory of Constraints, can outperform a group of top performers every time. The Theory of Constraints provides a shortcut to get results quickly, buys time and lays the groundwork for targeted Lean initiatives and culture change.
Results (2010): Customers loved the new market offering, employee engagement improved noticeably. Lead times reduced from 6 to 10 weeks down to 2, no stockouts occurred and almost no late deliveries. Margins increased by 20%. Three years later margins had increased by 66%, a compound annual growth rate of 19%. Sales volume had increased by 69%.
The Theory of Constraints is an excellent tool to enable companies to achieve breakthrough results in a very short period of time. But the soft side and people behaviour are just as important. This case study, published in the Goldratt Schools journal ” Leading People Through Change” deals with the hard and soft issues involved in transforming a manufacturing company that at first looked as if it would not be able to survive.