31 December 2009

The New ERP – Part 35

Death by data

Writing for the Aberdeen Group, Matthew Littlefield and Shah Mehul suggest, "The only way for manufacturers to achieve world-class performance [is] by providing greater visibility into what [has] long been the black box of production. And the only way to do that [is] to start collecting a lot more data on work in process (WIP)." (Littlefield and Mehul 2009) This is an all-too-common misconception that originated long before the inception of the computer, but has been dramatically augmented and expanded since computing power was made available to the business at low cost and on an unprecedented scale with the introduction of the personal computer.

A never-articulated, but oft-held, belief amongst business executives and managers is that more data leads to better management. This thought has been sometimes carried to the extreme in the minds of some executives – and fully supported by their all-too-willing IT departments – to the point that the concept may be formulated along the following lines:

  1. More data will help me make better decisions
  2. Better decisions means that, as a manager, I will be more effective and make fewer mistakes
  3. If I can know "everything" – have all the data – about my operations, I can manage flawlessly
Even as I write this, I am certain that there are business owners, executives and managers busily scouring the Web for new "business intelligence" tools as the next real wave in ERP.

Nevertheless, all the data can tell an executive is what has happened. Data, by its very nature, is entirely historical. (Yes, there are "forecasts," but forecasts – if they are known for anything – are best known for being wrong. Not a reputation likely also sought by executives and managers in pursuit of "flawless" management.

What the historical data cannot tell the executive is, "What lever should I push or pull to produce some particular outcome in the future – an outcome that assures improvement and not just added cost, expense or consumed capital?" Only a sound theoretical framework about how the executive's "system" – read: whole organization – works (or fails to work) can aid him or her in finding "the right lever" and applying the correct amount of force in the proper direction.

Employing reams of data will not keep you and your management team from spending precious time, energy and money optimizing the efficiency of departmental silos while reducing the efficiency of the organization as a whole. Investments in business intelligence in the absence of a sound theoretical framework will not prevent you and your managers from building work-arounds to keep work moving instead of solving problems that repeatedly delay revenues or disrupt operations. In fact, data – wrongly understood and improperly applied – may actually move your management team to take actions that sacrifice quality and lead time in a mistaken attempt to increase production or meet standard cost goals.

What's wrong here?

As H. Thomas Johnson, professor of Business Administration at Portland State University, puts it, "Causing [such] destructive practices is the assumption that financial information not only defines the purpose of the business, it also provides the primary means to control the financial outcomes of a business…. A key reason [that] American companies fail to emulate Toyota's long-term financial results is their belief that managers can use financial targets as 'levers' to control those results." (Johnson 2006)

Professor Johnson's argument is precisely the reverse of that stated by Littlefield and Mehul. Johnson argues that U.S. executives and managers tend to believe that they can employ relatively linear and one-dimensional data – the data they use to report on the financial performance of operations – to "understand, explain, and control" the results of those operations, "even though the results emerge from nonlinear and multidimensional operations." Toyota's executives and managers do not make this same mistake.

In fact, while Littlefield and Mehul state that "world-class performance" can only be achieved by companies developing systems to give them "greater visibility into… the black box of production," Toyota has, in fact, achieved "world-class performance" by virtually assuring that accounting has no visibility into "the black box of production." In Toyota's arrangement, corporate finance knows only two things about "the black box of production": 1) what goes in, and 2) what comes out. Everything else is invisible to "accounting." In fact, it may be because "Toyota makes virtually no use of management accounting targets (or 'levers') to control or motivate operations" that they have achieved financial performance levels that are "unsurpassed in its industry." (Johnson 2006)

Understanding your operations

Inside "the black box of production," Toyota's managers are highly visual in their management style. They do not believe that they "know" or "understand" what is happening on the shop floor simply because they have worked in the plant ten years, or 20 years, or more. They believe that to understand how to improve again and again, they must thoroughly understand what is happening today – everyday. Toyota managers employ genchi genbutsu ("going to the place") to see first-hand where and why there is any delay or disruption in production of quality products. These managers understand that the sought-after financial "results ultimately emanate from, and are explained by, complex processes and concrete relationships, not by abstract quantitative relationships…." (Johnson 2006)

Whether you and your management team choose to employ the Toyota method of genchi genbutsu and asking "Why" five times to get to the root of what needs to change, or if you choose to employ the Thinking Processes (as we have discussed elsewhere on this site and in this series on The New ERP – Extended Readiness for Profit), do not fall for the line that "more data will help you manage better." Avid IT staffers aided by value-added resellers (who genuinely believe the mantra to be true) are more than happy to have you spend your money on systems to collect, organization and report on more and more data. However, if you do not yet understand your "system" thoroughly – if you have not yet developed a sound theoretical framework by which to manage your enterprise – most or all of what you spend to obtain "more data" will be wasted.

©2009 Richard D. Cushing

Works Cited

Johnson, H. Thomas. Manage a Living System, Not a Ledger. December 2006. http://www.sme.org/cgi-bin/find-articles.pl?&ME06ART83&ME&20061210&&SME& (accessed November 18, 2009).

Littlefield, Matthew, and Shah Mehul. Operational Excellence in the Process Industries: Staying Profitable Through the Downturn. White paper, Boston, MN: Aberdeen Group, Inc., 2009.

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