Misaiming about metrics

In order to protect the guilty, my source for some the silly statements I read about business management will not be revealed. Recently, I read this statement in a book about business metrics.

“Measurement is the connecting fiber that can make all the parts work together [in a business or government enterprise]. Achieving this kind of coordination and alignment is impossible without exceptional performance measurement.”

Let’s consider the metaphor of a multi-movement mechanical watch. You know: the kind of watch that keeps time in minutes and seconds, tells you the day of the week, the day of the month, and the phases of moon.

Now, without a doubt, a huge number of measurements were made, formulas developed, and calculations made about the sizes of the gears, the number of teeth in each gear, their placement in relationship to one another and more. A watch is all about measurement. A watch’s whole purpose “measurement.” It only exists “to measure.”

Nevertheless, it is not the accuracy of the measurements that make the watch fulfill its functions properly. When you get right down to it, it is not even the accuracy of the calculations that went into the design of hundreds of moving parts. It is not the accuracy of its manufacture that—at the root—cause the timepiece to function as a “system” and do precisely what is expected of it.

It isn’t any of those things—at the root!

What, then, is at the root of a “system” that functions smoothly, efficiently and effectively? At the root of that highly effective watch’s ability to function is something entirely distinct from “measurement.”

What is that mysterious thing that all too frequently escapes the business intelligence fanatics? What lies at the very core, but is often overlooked by the “metrics maniacs”? What seems to conceal itself from those who seem to be convinced that if management could just get enough “information”—enough metrics—they could manage flawlessly?

The answer is—as W. Edwards Deming told us years ago—“theory.”

The people who designed all of the components of the multi-movement “watch” that does what it does so smoothly, efficiently and effectively had a “theory” about watchmaking long before they ever drew the first plans or began fabricating the first gear.



The business metrics book from which I got the quote at the opening of this article contained a diagram similar to that above. But this diagram is wrong in lots of ways. But, really, only two are critical.

Here’s what the diagram ought to look like:



The foundation of making a business that works—and stays working—is theory. And, more importantly, if the only “goal” of your “measurements” and “management” is a bunch of departments surrounded by a compensation system, then your business probably won’t last too long—except by “luck.”

The “goal” of your “system” should be—indeed, must be—profit. And, as W. Edwards Deming put it so well, “Information tells you nothing without theory.” Theory is the context by which information is interpreted and made the basis for action to change the outcomes.

[Cross-posted at Kinaxis Supply Chain Expert Community.]

The New ERP - Part 3

Failure No. 3: Substantial -- sometimes even huge -- budget overruns
Unfortunately, the causes of the "go-live" delays typically are also the major contributors to exorbitant budget overruns, too. Executives and managers that have lost sight of specific and measurable objectives -- or they never had any such objectives in mind from the beginning -- are likely to make many foolish decisions related to customizations and modifications. Having lost focus -- or never having had any focus -- such projects will soon take on a life of their own. Managers may be incapable of bringing them back under control without the direst of actions.

Failure No. 4: Stopping or slowing production and delivery
This is clearly the worst-case scenario: the very technology investment undertaken with some vague and likely unquantified hope of delivering business advantages becomes an albatross around the neck of the whole organization. Rather than delivering a "sustainable business advantage," the new technology bogs down or stops the organization's ability to produce Throughput entirely.

Almost without exception, this dire result can be traced back to a poor understanding of the organization's real situation prior to the decision to deploy new technologies. The circumstances may be further aggravated by the fact that the organization did not obtain a valid proof-of-concept from the technology vendor before the purchasing decision was made and the Everything Replacement Project (traditional ERP) undertaken.


The Everything Replacement Project (traditional ERP) decision to buy

Since the introduction of the computer especially, executives and managers with money to spend on technologies have often carried about within themselves a peculiar mindset. That mindset tells them, "If I just had more data; if I just knew more details about my enterprise, then I could manage better. In fact, if I could know in detail everything about my enterprise, then I could manage perfectly."

Of course, traditional ERP (Everthing Replacement Project) vendors prey on this mindset. In fact, they often help instill and solidify this mindset within their prospects and clients. As a result, the decision-making process regarding whether executives and managers should buy new or more technology often follows along these lines:

There are at least two incorrect assumptions in this chain of reasoning.

The first wrong assumption is that "information" is the key to better management. Information is not the key to better management. Knowledge is the key to better management and information is not knowledge.

Data gathered and presented by technology is a representation of what your organization has experienced. That experience (history) may include what you sold, some cost data, some profit data, data about your expenses, and so forth. However, as W. Edwards Deming put it so plainly, "Experience teaches you nothing without theory." He also said, "Knowledge comes from theory."

[To be continued]

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The danger of "We know!" - Part 2

In Part 1 of this series, I discussed how many executives and managers fail to reap benefits from new methods and ideas -- especially if these new methods and ideas arrive in the form of a "consultant" -- simply because these executives and managers believe that the already know what can be known about their organizations and their industries. This prevents many organizations from growing to their full potential.

W. Edwards Deming put it bluntly: "Information is not knowledge. Knowledge comes from theory."

Unfortunately, what far to many executives and managers have is a lot of information about their businesses and their industries. What they desperately lack is "theory" by which to interpret and understand the information at their disposal.

G. K. Chesterton put it this way in Tremendous Trifles (Beaconsfield, Britain: Darwen Finlayson, 1968): "One of the four or five paradoxes which should be taught to every infant prattling on his mother's knee is the following: that the more a man looks at a thing the less he can see it, and the more a man learns a thing the less he knows it. The Fabian argument of the expert, that the man who is trained should be the man who is trusted would be absolutely unanswerable if it were really true that the man who studied a thing and practised it every day went on seeing more and more of its significance. But he does not. He goes on seeing less and less of its significance."

Think of Sir Isaac Newton and the story of his having begun his development of the theory of gravity because he had seen an apple falling from a tree. Surely there had been tens of thousands of individuals that had witnessed objects falling to the ground under the influence of gravity for several millennia prior to Sir Newton's experience. Yet, no one understood "gravity."

It has only been since Isaac Newton put a "theory" around gravity that men could take what they had experienced with gravity and put it into a framework -- a theoretical context -- that made the experience understandable to them. Furthermore, the framework (the "theory") gave men the opportunity to predict outcomes of certain actions relative to the gravitational affects. This meant that men could plan and execute with some real certainty as to the results they would obtain under "gravity."

Precisely the same is true of business.

Executives and managers have all manner of data in their hands relative to the performance of their enterprises. What they lack is a "theory" by which that data may be abstracted and understood for the purposes of effective management. A framework that will help them bring simplicity out of the complexity before them.

In all too many cases, the missing "data" for beginning the process of ongoing improvement is to be found within the organization at all. The missing component for executives and managers is quite often this simple point: there is a simple method available to help organizational leadership logically analyze what they already know internally.

In the absence of a "tool set" that helps management bring forth "knowledge" from their "information," executives and managers tend to continue "tinkering" with their businesses. They make changes here or there to see if the change helps.

Sometimes such change seems to help, other times the change actually makes things go worse than before. Still other times, the change is made and their is no perceptible affect on the organization at all.

This is no way to run a business -- or any other kind of organization!

Executives and managers are yearning -- sometimes without even recognizing what is lacking -- for a simple, effective tool to help them gain control of their enterprises once again.

[Next time: Gaining Control]

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...

The danger of "We know!" - Part 1

As a consultant, I meet folks in business very frequently that are pretty much convinced along one or more of the following lines:

1. "We already know about our business." By this owners and managers mean to express the sense that they already understand how their business works and what it will take to make the business better.
   
   
2. "There might be some room for improvement, but the returns on any improvement we could make would be so small, it's not worth the effort." This statement or mind-set by owners and managers is a restatement of the so-called "law of diminishing returns."
   
   
3. "Our business (or industry) is unique, so we have to work this way." This is an argument suggesting that a consultant, being an outsider to the business or the industry, can't possibly bring any valuable insight. Furthermore, even if he or she does, we probably couldn't make the recommended changes anyway.

On far too many occasions, when I meet such owners and managers, I am simultaneously witnessing an organization that started off great, grew rapidly, and still has the entrepreneurs that started the firm in the driver's seat. They are also, quite often, over-the-hill.

I'm not talking about the owners or managers being over 40 (or over 50) years of age. I'm talking about the fact that their once booming organization is now in a state of coasting on its earlier success or even in the early stages of decline. Sometimes management hasn't even recognized that fact yet. They may be thinking that they are just in a temporary slump, that things will inevitably pick up again, and their firm will regain its earlier vigor.

Sadly, the chances of such a revitalization are usually slim.

While it is unequivocally true that a consultant can never learn everything about an enterprise that the owners and management know from all their years in their industry and in their own business, it is equally true that there are more things that are similar about human organizations than there are things that are different between human organizations.

Among the key things that are TRUE about all human organizations is that they all rely upon the same three scarce resources:

1. Time
2. Energy
3. Money

Furthermore, contrary to popular opinion, managing the first two -- time and energy -- is more important than managing the third (money). This is true simply because if you had unlimited time and unlimited energy, you could have all the money you wanted or needed.

For this simple reason, focus is everything. As organizations grow and expand, the entrepreneurs who manage them start to lose focus, and they do not have within their knowledge or skills a set of tools to help them focus again on those few simple things that will revitalize their over-the-hill firms.

Having gained, perhaps, many years of experience in their industry and with their own firm, they frequently find that their experience really does not contribute that much toward discovering effective responses to the new challenges their firm now faces. What is missing is a method for discovering a new theory or framework that clarifies how their grown and expanded organization now works -- or doesn't work -- at making more money.

[Next time: Why is it so difficult for owners, executives and managers to discover how to effectively change their companies for ongoing, vital growth?]

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Government-Induced Economic Discontinuity

There is considerable upheaval in the U.S. economy right now, and your business could be in jeopardy if you do not have a framework and method by which to come to grips with the discontinuity that is likely to be introduced by federal government actions over the next several months.

Consider these facts:

1. Over the last 50 years, the federal government has controlled about 20% (+/- 2%) of our gross domestic product (GDP). They have done so through some direct controls as well as through the letting of government contracts for defense and so forth. However, with Congress pushing for a plethora of new programs, the drive toward a nationalized health care system, and the results of various so-called "economic recovery" actions being the virtual "nationalization" of some segments of some industries, we may see the federal government directly or indirectly involved in up to 50% of GDP in the near future.
   
   
2. Since about 1948, the federal deficit has hovered around 2% of GDP. Now, however, with so-called "recovery" bills pending and acts that have already been passed that run into the trillions of dollars, we could easily see the federal deficit leap to 15%, 18% or even 20% of GDP.
   
   
3. For nearly 30 years the Federal Reserve has grown the money supply at about 4% a year. That has changed dramatically! The Federal Reserve has doubled the money supply between October 2008 and January 2009 alone.

In essence, the U.S. may rapidly become "Europe" if politicians in Washington have their way -- and it is likely that this is largely unstoppable at this time. If we use for comparison Germany and France as "typical" Euro-zone nations, we find that in these countries the national government controls 40 to 60% of GDP and that these nations are dominated by massive social programs.

What are the results for business economics?

• Slower growth - the economies in these nations grows at a rate equal to about one-half or two-thirds that of the U.S. economy

• Higher inflation -Euro-zone inflation is about 10% higher than that of the U.S. over the last 20 or so years

What does all this mean for you and your business?

This government-induced economic discontinuity means that you and your business will find that "the rules have changed." You will discover that management tactics that may have worked before may no longer have the same positive effect.

In revolutionary times like these, my very best advice is for you to be sure that you and your management team have a sound framework of understanding by which to analyze and interpret the new reality in which you find your enterprise. I strongly recommend the application of the highly rational and easily understood "Thinking Process" tools as developed by Eliyahu Goldratt.

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(c)2009, 2010

World Class Manufacturing -- Really?

I found this quote on a Web site which will remain unidentified in this article:

World Class Manufacturing - A definition
World Class Manufacturers are those that demonstrate industry best practice. To achieve this companies should attempt to be best in the field at each of the competitive priorities (quality, price, delivery speed, delivery reliability, flexibility and innovation). Organisations should therefore aim to maximise performance in these areas in order to maximise competitiveness. However, as resources are unlikely to allow improvement in all areas, organisations should concentrate on maintaining performance in 'qualifying' factors and improving 'competitive edge' factors.... The priorities will change over time and must therefore be reviewed.

The author here identifies six "priorities":

1. Quality
2. Price
3. Delivery speed
4. Delivery reliability
5. Flexibility
6. Innovation

I would contend, however, that none of these 6 priorities may be achieved without setting the organization's primary focus on making money -- making money both today and in the future. Without making profit the first priority, there is no money to spend on improving quality; there is no money to spend on improving the speed or reliability of delivery; and there is no money to spend on improving flexibility or innovation.

One might say, "Well, if we improve quality, we will make more money." But unless the framework for the planning and focus of the organization has demonstrated by a rational method that improving quality will lead to improved profits, then that statement remains only a "hope" and not a plan or a true "goal." The same may be said for the other five "focus" points in the article.

If the manufacturer has no sound framework by which to determine precisely what steps it must take beginning today to increase its profitability -- to make it more effective at making money -- there is a chance it may not survive long enough to work on any of the six "priorities" listed above.

"Without theory there is no knowing." -- W. Edwards Deming

Having a valid theory -- a consistent "framework" -- by which to evaluate all that transpires within your business is critical to constancy of purpose and effective leadership by management.

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(c)2008 Richard D. Cushing

Extending the Power of Your Information Technologies

In today’s exceedingly challenging business environment, it is becoming increasingly important for executive management to establish corporate strategies that include extending the reach and power of the organization's information technologies beyond the four walls of the firm. If your company is not building "communities" of customers or con-necting with your vendors and customers in real time up and down your supply chain, then it is likely that you are falling behind your competition.

No Technology for Technology's Sake

I am not advocating new "gee-whiz" connections beyond your enterprise just so the CEO can brag about them on the golf course or in the steam room at the club. Before embarking on a spending spree to extend your IT systems beyond the walls of your enterprise, it is important that you determine what you want to accomplish by moving forward with such efforts. Generally speaking, the valid reasons for investing in the extended enter-prise may be reduced to three fundamental categories:

1. Increasing throughput,

2. Reducing inventories or the need for new investment, and

3. Slashing or holding the line on operating expenses.


Let's consider some of the thinking that might go into such an analysis.

Increasing Throughput

When considering increasing throughput, your team should ask questions like these: Could a CRM (customer relationship management) system, a corporate blog or forum, or other enterprise extensions improve our ability to connect with our customers? Could such efforts improve our comprehension of our customers' needs enough that fresh new insights would result from understanding them better? Could the new insights lead to improved products, enhanced market segmentation, and the ability to create superior win-win offers?

If the answers to any or all of these questions are affirmative, then the next step would be to quantify the estimated impact and to set specific goals for any investments in new technologies. Each individual part of the IT investment plan should be directly correlated to expected quantifiable results. How many new customers will be added? How many additional sales to existing customers are to be expected? What additional market share are we likely to gain as a result of these efforts and investments?

Reducing Inventories or the Need for New Investment

The questions that should arise regarding inventories or investments should be along these lines: Will improved supply chain visibility with our customers allow us to better manage and reduce the volume of inventory lying between our manufacturing plants and our products' end users? Will linking our inventory systems with those of our suppliers allow us to reduce lead times and, as a result, reduce the amount of inventory we keep on-hand? Will improved end-to-end supply chain linkages reduce losses due to obsolescence and shrinkage?Again, if asking these questions leads to some "yes" answers, then the organization should take steps to quantify the benefits that are likely to accrue to the organization from reduced carrying costs, managing and handling less inventory, and (if true) the reduction in a potential investment in additional warehouse or production space, for example.

Slashing or Holding the Line on Operating Expenses

Generally, this area faces a two-fold battle: First, most organizations today have already done all the cost-cutting that they really can (or should) do. This is no longer the 1980’s – the heyday of cost-cutting as U.S. industry was struggling against the onslaught of Japanese products. Second, when you are talking about implementing new technologies, it is really difficult to get buy-in from your organization if the move is likely to lead to a significant reduction in the workforce.
However, results stemming from efforts to increase throughput (revenues) and reduce inventories are likely to drive growth, on the one hand, and internal improvements, on the other. Normally, then, a case can be made on the basis of these combined factors (i.e., growth and internal improvements) that your organization can support 30%, 60% or even 100% growth in the near future with little or no growth in operating expenses. The net result is often estimated and stated as savings in FTEs (full-time equivalents, i.e., the average cost of a full-time employee). In this way, the effect of “holding the line on operating expenses” may be properly factored in to the benefits accruing from investments in new technologies.

Conclusion

There is no longer a place for business as usual. In today’s highly competitive markets – driven to a significant degree by the international reach of the Internet and other technologies – every business owner, CEO, and CFO should be considering how extending their information technologies beyond the four walls of their enterprise might lead to in-creasing throughput and reducing inventories, while holding the line on operating expenses. However, every investment in technology should be carefully planned, be geared to achieving measurable goals, and fully aligned with the enterprise’s strategic and tactical objectives.

©2008 Richard D. Cushing

Information Is Not Knowledge

"Information is not knowledge. Knowledge comes from theory."
-- W. Edwards Deming

When Sir Isaac Newton was conked on his head by the falling apple (as the story goes), he had information. The information was, "apples fall from trees" or, put more generically, "things fall to the earth."

However, Newton still had no "knowledge."

Newton's comprehension of the facts did not provide "knowledge" that would be useful in any significant way. After all, people had known for centuries that things fall to the earth and, if one didn't want them falling to the earth, one must be certain that the objects are held securely in their present location.

Once, however, Newton began to construct "theory" around the fact that things fell to the earth, valuable "knowledge" began to spring from the "information" at hand.

For example, based on the "theory" that gravity was a force that always acted in precisely the same way, experiments could be set up to measure just how gravity functioned. From these experiments and calculations, we now know that the gravity of the earth accelerates objects at ~ 32.2 feet per second-squared.

This principle applies in business as well.

Having worked in the world of business management and computers since the time of the introduction of the personal computer (PC) in the early 1980s, I have found that many, many business people -- from owners, to CEOs, to CFOs, to middle managers, and on down the line -- confuse "information" with "knowledge". In fact, a very common fallacy is the belief that more "information" will lead to better management which will, in its turn, lead to better results.

Therefore, organization spend a considerable amount of some very limited resources (namely, time, energy, and money) acquiring or creating systems to give them more "information."

When all is said and done, however, these business folks often are not significantly better off than they were before they spent their precious time, energy and money, simply because, like the world before Newton, they have no "theory" by which to interpret the information they have. Without this theoretical "framework" in which to fit their body of information, many of their management actions are not much more than flailing at the wind. Some of their efforts work and some do not, but they generally cannot tell you (specifically or accurately) why one initiative worked and another similar one failed.

There are three required steps to gathering what one needs to take timely and effective action:

1. One must take the data (the raw, undigested facts -- perhaps line upon line of numbers) and convert the data into "information."

2. "Information" is data "digested" and put into a form (i.e., a chart, a graph, summed, analyzed statistically) that allows the user to quickly assess the essential implications of the underlying data.

3. The resulting "information" must be placed into a theoretical context -- a "framework" -- whereby the potential outcomes of any actions that might be indicated by the information may be fully comprehended.

Without these three steps, your organization may drown in data or become infatuated with "information" and, yet, never be able to move effectively when times are the most challenging.

©2008 Richard D. Cushing