Continuous Improvement - The key to excellence

Continuous Improvement

By Robert R. Iversen and Melissa M. McCoy

The key to excellence in business processes

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It was the kind of meeting that should never have been necessary. The chief executive of a well-known Fortune 500 corporation wanted an explanation of why, after years of applying Lean Six Sigma methods and tens of millions of dollars spent on training and workshops, the company had so little to show for it.

Unfortunately, this is by no means an isolated instance. Although the need for ongoing improvement in business is more acute than ever, many companies’ management teams still have not found reliable ways to make it part of their organizations’ fiber. Despite being attuned to the concept of continuous improvement (CI), and in spite of decades of exposure to the fundamentals of process improvement and operations excellence, many senior managers struggle to master this “game of inches.”

It is a game they must now master if they are to emerge from the turbulence of a global downturn stronger than their competitors. At the core, continuous improvement methods are key to excellence in execution of business processes. In effect, they are a way to continually upgrade the organization’s responsiveness and its ability to change over time. They apply regardless of whether the business is conducting a series of tactical improvements or undergoing transformational culture change.

Accenture has observed that those methods become powerful engines for sustained value creation only when they are focused on the highest value business opportunities and supported by senior leaders with

Operational Excellence Translated Operational Excellence addresses the way the business is set up and how the work is executed on a day-to-day basis. Execution Excellence is specifically focused on how to out execute the competition.

For more about operational excellence see the Accenture paper The Five Hallmarks of Operational Excellence.

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For most companies, continuous improvement techniques produce tantalizing gains in the short term, but it’s usually a different story when it comes to benefits over the long haul. Accenture finds that leading companies do more than just apply improvement disciplines such as Lean Six Sigma—they concentrate those disciplines on the highest value projects and support them fully from the top down.

the right infrastructure and performance management. At that point, they become competitive differentiators—in effect, the kinds of distinctive operational capabilities that drive true high performance.

Now is the time to get continuous improvement right. Periods of economic difficulty can be exactly what is needed to put the spotlight on operational excellence—not simply on improving the implementation of each business process but on the infrastructure and management systems that can support excellence in execution over the long term. (see Operational Excellence Translated.)

This viewpoint article provides a refresher on the development of CI thinking, identifies the barriers that prevent organizations from benefiting fully from that thinking, and lays out proven ways to start breaking down those barriers.

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The art of the possible

When “In Search of Excellence” was published in 1982, the book not only resonated with the quality movement then very much in vogue in business—it struck a nerve with U.S. and European managers who were anxious for insights that would help them defend against Japan’s manufacturing muscle1. When “Execution: The Art of Getting Things Done” appeared two decades later, its success confirmed that a new generation of managers wanted help to make sense of an increasingly complex global business world2.

Of course, the books’ authors had neither reformulated the concept of excellence in business practices nor been the first to write about it. The central notion of making processes as economical as possible has been a hallmark of humankind since long before recorded time. The idea certainly gathered momentum during the Industrial Revolution and began to take shape as a replicable, teachable method after Frederick Winslow Taylor introduced his famed time and motion studies in the last years of the 19th century3.

Figure 1. Lean focuses on reducing non-value add time.

"Every process has value add and non-value add activities...

Mortgage application

Mortgage approval

Time

Time

In most processes, value added time is a small percentage of total lead time (10-20%)

CI attacks the 90% of non-value add time vs. the 10% of value add time

Continuous improvement focuses here

Non-value add activities Value add activities

Traditional improvement activities focus here

90% 10%

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But the concept of “Lean”—essentially, eliminating or at least minimizing all activities that add no value, as defined by what customers would willingly pay for4—was not popularized as a discipline until after World War Two, when Japanese industrialists, some of whom were beginning to experiment with just-in-time types of production, embraced the teachings of process-management consultants such as J. Edwards Deming5 and meshed them with the Japanese philosophy of kaizen, roughly translated as “continual improvement.” (see Figure 1.) Lean is best exemplified in the Toyota Production System, which emphasizes just-in-time demand-driven production flow6.

Lean is also a cornerstone of the Danaher Business System (DBS) which underpins all operations at industrial conglomerate Danaher. The company’s Web site describes the DBS this way: “Fueled by Danaher's core values, the DBS engine drives the company through a never-ending

cycle of change and improvement: Exceptional people develop outstanding plans and execute them using world-class tools to construct sustainable processes, resulting in superior performance.”

Although Lean as typified by the Toyota Production System is designed to minimize waste, it is another business system—Six Sigma—that has highlighted the value of reducing variation in repetitive processes. (In this context, “sigma” refers to a statistical measure of variation from a process norm.) Six Sigma methods were codified as a manufacturing quality metric at Motorola during the 1980s—the term translates as 99.9997 percent efficiency. (see Figure 2.) Six Sigma became one of the most popular quality control techniques of the late 20th century, spawning a mini-industry of educators, consultants, trainers, and certification specialists.

In recent years, Lean and Six Sigma techniques have come together, essentially integrating two complementary disciplines for controlling process variation. By itself, Lean cannot bring a process under statistical control, while Six Sigma alone cannot dramatically improve process speed or reduce invested capital. At one company that is now making rapid performance gains, senior managers who had launched Six Sigma initiatives had spent several months trying to reduce lead times, only to realize that they were actually reinventing Lean methods.

The authors believe it is possible to get the best of all worlds: to minimize waste and variation as well as complexity.

Figure 2. Six Sigma focuses on reducing process variation.

as well as variation"CI attackes the variation to increase certainty of outcome

Defects: service unacceptable to customer

Product or service output

Critical customer requirement

Mean

Variation

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So how does CI contribute value to the organization when properly harnessed? Accenture finds that companies that have implemented whole-hearted, end-to-end CI approaches typically break even on the investment by the end of the first year, and are seeing at least five-times returns by the end of Year Two. At Staples, for example, a Lean Six Sigma program has been the impetus for dozens of improve¬ments that, together, have generated tens of millions of dollars in benefit for the office supplies retailer and produced a 10-fold return on the company’s investment in its process improvement program.

Similarly, one of the world’s largest glass container manufacturers has used a CI initiative to build a structured, fact-based decision-making capability throughout the organization that would help keep the company from losing market share to competitors. Confronting price pressure on two fronts—overcapacity in glass-making and pressure from powerful customers—the manufacturer had seen its operating margins dropping precipitously. Knowing that the company needed stark increases in performance as well as effective and sustainable quality improvements, the CEO opted to introduce Lean Six Sigma methodologies.

The initiative quickly brought quantifiable results. Powerful operational diagnostics, such as value stream mapping, pinpointed areas for cost savings and improvements. After an initial assessment phase, improvement projects were conducted on five continents, in 22 countries, in 10 languages and at 88 plants. The projects affected all operations – from the sourcing of raw materials to the distribution and sale of final goods. Staff at all levels and in all areas were involved, and the CEO constantly demonstrated his support for the initiative throughout the initiative.

The improvement projects transformed the company’s culture and mentality, creating a positive environment focused on quality and efficiency. They also yielded hard returns and were cost-neutral inside a year.

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The case for continuous improvement done right

market premiums (multiples) and ROIC has only gotten stronger7. It is very unlikely that investors will invest if they believe that customer value is not being delivered efficiently and effectively.

If CI teams are not focused on projects that demonstrate that balance in value, they may end up, in effect, reducing costs for products that will never be profitable.

Invest in infrastructure This refers to supporting factors such as organizational structure and alignment, training, the degree to which qualified senior leaders have been made responsible for CI, the extent to which process owners are held accountable for sustained results, etc. The infrastructure is typically organized around a “center of excellence”—Staples’ Process Excellence department is a good example—that not only manages portfolios of improvement projects

but also serves as the conduit to capture and disseminate best practices. Other companies disperse the ownership of CI among their business units. There is no one right answer here; combinations of such approaches can be very effective.

For instance, the blend of a centralized center of excellence (CoE) and local ownership activities and impact has proved very effective for Freudenberg–NOK, a pioneer in CI deployment. The industrial manufacturer’s “Get Rid of Waste through Team Harmony” initiative, launched in 1992, is considered a key factor in its success8. The CoE sets direction; it develops the “standard approach & toolkit,” trains local managers in its deployment, and provides them with ongoing guidance and support. But ownership and accountability rests squarely at the local level.

In Accenture’s experience, an organization must demonstrate four key characteristics if it is to embed continuous improvement as a core capability:

Put the focus on value Most managers and employees do not realize that customer value and shareholder value typically are not created by the same activities and often can be at odds. As a rule, customers do not care what it costs to deliver a product as long as that cost is not passed along. But shareholders care a lot about the costs for which that product is delivered.

Striking the right balance is not easy. We suggest that managers go back to basics, revisiting return on invested capital (ROIC) as a fairly objective way to determine their company’s financial health. Since Copeland’s original research in 1998, the correlation between

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The four imperatives for building a successful CI capability

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Choose a standard approach and toolkit This may include Lean, Six Sigma or any combination of the methodologies. It can be divided into a set of tools for capability development and another for execution of the methodologies. Overall, the organization should adopt one common approach to problem-solving and process improvement.

Consistency in approach to project management and limits on the kinds of analytical tools employed—especially in the early days—will ensure a cost-effective ramp up with less time spent on classroom training, reconciling best practices, interpreting analyses, etc. The only absolute is that the approach to project selection must be rooted firmly in the issues that matter. “Value” is in the eye of the beholder: For example, it will not work to select a CI project based solely on its ability to progressively

take out costs if the underlying issue or cause is not addressed. In short, the best approach will be issue-based and value-driven.

Manage performance This is the “blanket” that wraps around the three other characteristics. It encompasses a wide range of functions, but its primary purposes are to effectively convey to the organization what success means for the CI initiative and to align the initiative with what drives value in the organization.

Performance management is difficult under most circumstances—particularly when it stirs up the emotions involved in holding people accountable. Employing strategy deployment and rigorous performance management is a critical step. Strategy deployment, often referred to as policy deployment or Hoshin management, is a way

to ensure that the company’s strategic intent is linked to the execution of its critical business processes and improvement initiatives9.

Performance management then ensures that three things happen: First, the proper metrics are cascaded through the organization, from the C-suite to the shop floor. Second: Targets are set against known opportunities, extrapolated from the technical limits of the business process and not simply from the improvements over the last period’s performance. And third: Rigorous review processes are in place to drive action and accountability.

The key to being successful at CI performance management is to always ensure that activities are clearly linked to their impact.

A three-phased approach to making CI work

Accenture takes a three-phased approach to CI. (see Figure 3.) The first phase consists of an evaluation of the business; it provides the focus that helps organizations examine their performance. The output of this phase is a well-syndicated “value agenda” that defines the value at stake and shows where the opportunities lie. These opportunities should be strategic and tactical.

The second phase builds a transformation road map to create a policy and procedures infrastructure that will support implementation. At this time, the management team for the transformation effort comes together, and the managers who will drive the implementation are identified. The quick wins identified in the first phase can be achieved at this point.

Large-scale transformation occurs in the final phase. The business improvement skills are transferred through training and on-the-job coaching so the CI program can become self-sustaining. The objective: sustained behavioral change throughout the organization.

Figure 3. Three phase approach to continuous improvement.

Phase ITarget Improvements

Identify opportunities

Execute quick wins

Engage & align executives

Develop rollout approach

Client Impact

Client Impact

Compile strategic project portfolio

Design sustainment approach

Refine project architecture

Engage management team

Identify execution talent

Manage project portfolio

Execute disciplined project management

Transfer capability

Build continuous improvement infrastructure

Transform organizational structure & support

Phase IIBuild Transformation Roadmap

Phase IIIExecute & Build Capability

Project Generation

Project Execution

Transformation

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Continuous improvement, encompassing proven Lean Six Sigma methodologies, needs to be part of the operating fabric of every organization, regardless of size or sector. Managed properly, it identifies and addresses inconsistencies in process execution. It drives consistent, predictable outcomes. And it provides the proper tools with which to address changes in the market.

But CI cannot be done right—cannot become an enabler of long-term high performance—unless it becomes part of the framework of operations excellence. Companies such as Staples, ITT, GE, and Danaher, each with a cast-iron commitment to process superiority, demonstrate the benefits of doing so.

Robert R. IversenRobert R. Iversen is a senior executive in the Accenture Process & Innovation Performance Service Line. He has applied operations excellence in numerous industries including; mining, metals, pulp & paper, refining, automotive, pharmaceuticals and food and beverage. Bob is a functional expert in lean manufacturing and maintenance has served clients across a broad span of business and operational transformations. Based in Tampa he can be reached at [email protected].

Melissa M. McCoy Melissa M. McCoy is a senior manager in the Accenture Process & Innovation Performance Service Line. She has over 20 years of experience in operations and consulting focusing on operations strategy & transformation, business process redesign, scheduling & warehousing, and capability building. Her consulting experience spans a diverse set of industries, including automotive, consumer products & packaging, pulp&paper, and food processing. Based in Atlanta she can be reached at [email protected].

The time is right to elevate CI as a core capability. Accenture’s recent discussions with chief operating officers confirm that tough times tend to provide the sense of urgency that can facilitate change initiatives and spark innovative problem-solving10. Meanwhile, other companies have been laying off skilled LSS professionals—talent that is eager to work again. And for the moment, shareholders’ expectations of performance are lower, making a bold push for operational excellence more practical now—and all the more valuable later.

Conclusion

About the Authors

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Polled recently by The Conference Board, CEOs rated "Translating day-to-day execution excellence into long term business results" as their top challenge for the second year in a row11. Many companies have been successful with employing Continuous Improvement to bridge the execution gap. However, we see several barriers to success:

Lack of clarity in linking strategy to execution Inadequate understanding of the true value drivers of the business and little transparency around which key performance measures really count toward creating customer and shareholder value.

Limited focus on process excellence The organization may not exhibit a process mentality; its leadership team does not “speak process.” Performance management—the means to link activity to impact and by which to hold people accountable—cannot be effective without a process mindset.

Little engagement from the leadership team Many senior executives espouse the benefits of continuous improvement but fail to build CI into the operating plans and metrics of the business. In such cases, accountability for CI is unclear and difficult to manage. Although responsibility for CI often falls to the quality manager to start with, it should be owned by the business and given corporate-level support.

Inadequate or insufficient metrics The organization lacks the metrics and measurement systems for gauging progress against goals. Managers are less likely to rely on fact bases to drive decision-making, and are unlikely to seek out data to guide future decisions. Conversely, some organizations are data-rich, yet they fail to identify and focus on the metrics that really matter.

Culture clash The leadership team says it is committed to change, but the organization lacks the processes and the culture to ensure sustained benefits from CI activity.

Short-termism At some companies, CI tends to be thought of as a “one-off” project or program rather than as a “journey”—let alone as a mainstay of long-term competitiveness.

Poor situational awareness Many well-meaning managers fail to properly diagnose their organization’s challenges at the outset of a CI effort. They do not grasp the importance of gauging the current state of their operations before embarking on their change journeys. The upshot: Their efforts are frequently focused on “fixing” the wrong things.

Short-term wins do not automatically convert to long-term gains. Companies that have not embedded CI disciplines deep inside are not able to properly gauge whether those efforts are

adding value in the first place; some will even kill off CI programs when they don’t see early returns. Something is seriously wrong when it becomes more cost-effective to eliminate CI than to leverage it.

Impediments to achieving lasting results

Copyright © 2010 Accenture All rights reserved.

Accenture, its logo, and High Performance Delivered are trademarks of Accenture.

About Accenture

End notes

Accenture is a global management consulting, technology services and outsourcing company, with more than 176,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.

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7 Copeland, T., Koller, T., & Murrin, J. (1990-2000). Valuation – Measuring And Managing The Value of Companies. John Wiley & Sons

8 Growth – Freudenberg-NOK Web site: http://www.freudenberg-nok.com/philosophy/growtth.htm

9 Akao, Y. (1991). Hoshin Kanri: Policy Deployment for Successful TQM. Productivity Press

10 “Operational Excellence: Choosing the path that works for you,” Accenture, March 2009

11 “Weakening Global Economy and Growing Financial Pressures are Increasing CEO Concerns,” The Conference Board, Dec. 2, 2008, http://www.conference-board.org/utilities/pressDetail.cfm?press_ID=3529