160407 Operational Excellence - Creating a High Performing Organization

© Eminence Consulting, Inc.© Eminence Consulting, Inc.

Creating a high performing organization

© Eminence Consulting, Inc.

Introduction

Overview of Operational Excellence

Leadership and Customer Focus

Confetti Game

The IPO model

Decision Making – Finance Example

Performance Measurement

Strategy and Tactics

Creating a High Performing Organization


Operational Excellence is a philosophy oforganizational leadership that stresses continuousimprovement, teamwork, and problem solvingthroughout the organization by focusing on theneeds of the customer, empowering employees, andfocusing management attention towards sustainableimprovement of organizational performance.

The focus of Operational Excellence is to alwaysachieve current operational goals, and strives toestablish a lasting positive change in organizationalculture.



Customer Focus and Leadership

Stable and CapableDelivery System

Continuous ImprovementCulture

Vision and Mission Strategy and Tactics Performance MetricsValue Analysis andValue Proposition

SynchronousFlow

CapableProcesses

EmployeeInvolvement

and Teamwork

Root Cause Analysis and Problem Solving

Operational Excellence

FocusedImprovement

Initiatives

WorkforceCapability and

Flexibility

SystematicCapacity

Expansion

Management System

Decision Making

Change Management

Sustainability Profitable Growth


The conventional way organizations usually look toimprove is to evaluate the current assets and howto better leverage them (inside looking outside)

In the value-based process the starting point isvalue from the customer, market, or productperspective (outside looking inside)◦ The quest to deliver the identified value generates the

needed assets required to create the competitiveadvantage.


“Value is created by removing a significantlimitation for the customer, in a way that wasnot possible before, and to the extent that nosignificant competitor can deliver.”

Dr. Eliyahu M. Goldratt



Establish and maintain stability◦ A system that does not have any special causes (or

assignable causes) of variation present, and all thevariation in the system is from common cause (orinherent) variation.

Eliminate special causes of variation◦ Having a stable Operating System means that the

time to complete all the processes in the system(the value stream), however defined, from start tofinish, is highly predictable


Special causes of variation Easy to identify

lack of supplies due to late deliveries from vendors or sub-contractors,

unplanned process downtime,

quality issues

Difficult to identify

processing easy items at the expense of the harder items,

jamming rush jobs into the system without consideration ofcapacity,

batching jobs together in order to be “efficient”,

pulling jobs ahead to “save” or reduce setups,

bad multi-tasking


What limits many organizations from making significantimprovement?

Management Attention

How to exploit Management Attention?By bringing ongoing Stability and Growth of the organizationby:

1. Building the decisive competitive advantage2. Capitalizing on the decisive competitive advantage3. Sustaining the decisive competitive advantage

Necessary Assumption:

The way to have a decisive competitive advantage is to

satisfy a customer’s significant need to an extent that no

significant competitor can.


Removing a significantcustomer limitation

Number of competitors

Changing aparadigm forthe customer

Changing a deeprooted policy

Quality

Price

Ocean

Time forcompetitors to

replicate


Regardless of the type of problem, to be goodproblems solvers, we must be excellent in cause andeffect thinking What is an effect?

an outcome that is a result or consequence of an action

What is a cause?

something that brings about an effect or a result

What is root cause?

the initiating cause of either a condition or a causal chain thatleads to an outcome or effect of interest.


“An ounce of prevention is worth a pound ofcure.”

- Benjamin Franklin


PLAN

Assess thecurrent

situation

Define theproblem

Analyze thecauses and

determine theroot cause

Implementpermanent

countermeasures

Check theResults

Standardize theImprovement

EstablishControls

DO

ACT

CHECK

ACT

Identifyprimarycauses

DO


The confetti game outline:

• The game consist of two rounds.

• Each round the participants will work on 2 projects:

yellow project

green project

• Each project consists of ripping the paper into strips andthen ripping each individual strip into pieces.

• Each round will explore different methods for managingwork in a multi-project environment.


After each round the performance will be measured:

Time to complete the project work

Average completion time

Range of completion times (variation)

First pass quality


1 2 3 4 5

1

2

3

4

5

6

Step 1: Make 4 rips in the length ofthe paper.

Step 2:Make 5 rips in eachstrip of paper

Note: You can only rip 1piece of paper at a time.Therefore you cannotcombine multiple stripstogether and rip them.

Round 1 rules:Starting with the yellowproject, make 3 rips.After 3 rips, switch to thegreen project and make 3rips. Alternate betweenthe yellow and greenprojects until all rips arecomplete.Record your time.

http://www.online-stopwatch.com/full-screen-stopwatch/


1 2 3 4 5

1

2

3

4

5

6

Step 1: Make 4 rips in the length ofthe paper.

Step 2:Make 5 rips in eachstrip of paper

Note: You can only rip 1piece of paper at a time.Therefore you cannotcombine multiple stripstogether and rip them.

Round 2 rules:Starting with the yellowproject, make all 29 rips.Record your time.Start the green project,and make all 29 rips.Record your time.

http://www.online-stopwatch.com/full-screen-stopwatch/


Round 1 Round 2

Average completion time

Range of completion time

First Pass Quality

2:30

45% 86%

1:30

1:30

2:00


A process a series of actions or steps taken in

order to convert inputs into desired outputs

INPUT PROCESS OUTPUT

The generic format is described by the IPO model:


A chain has two distinct measurable characteristics:

1. Weight = Cost Is determined by summing the weight of all the individual links

2. Strength = Throughput Is measured by the strength of the weakest link.


Management Decision Model

A15 min/unit

RM1$20/U

RM2$20/U

RM3$20/U

Purchasedpart$5/U

B15 min/unit

A10 min/unit

C10 min/unit

C5 min/unit

B15 min/unit

D15 min/unit

D5 min/unit

Product P Product Q

Demand = 100 Units/week

Selling Price = $90/Unit

Demand = 50 units/week

Selling Price = $100/Unit


Additional operating details

◦ All resources are available 8 hours/day

◦ Only 4 resources are available (A, B, C, and D)

◦ Zero quality issues

◦ Zero variability in cycle time

◦ Zero setup time

◦ Total weekly operating expenses is $6,000/week

◦ Direct labor rate is $10/hour ($1,600/week)


Cost accounting method

Product P Q Preferred

Raw material

Direct labor (min)

Direct labor cost @ $10/hour

Overhead cost allocation (Allocation % * Direct labor cost)

Total cost (Raw material + Direct labor cost + Overhead cost)

Selling price

Margin (Selling price – Total cost)

% Margin (Margin / Total cost)

Preferred Product

Note: Allocation % is calculated by dividing the total operating expenses by the direct labor expense forthe same time period(e.g. $4400/$1600 * 100% = 275%)

Judgment on Product Profit

$45.00 $40.00

60 min 50 min

$10.00 $8.33

Q

$27.50 $22.92

$82.50 $71.25

$90.00 $100.00

$7.50 $28.75

9.1% 40.4%

Q

Q

Q

*


Production quantity worksheet

Preferred Product Resource A Resource B Resource C Resource D

Production time/resource(min/unit)

Customer demand (units)

Resource capacityconsumed by product

Maximum capacityconsumed (min)

Available capacity (min)

Remaining capacity (min)

Non-Preferred Product Resource A Resource B Resource C Resource D


Maximum productiontime/resource(min/unit)

Quantity of non-preferredproduct (units)

Notes: Produce as much of the preferred product as possible with the available capacity

With any excess capacity, produce as much of the non-preferred product as possible


Q

10 min 30 min 5 min 5 min

500 min 1500 min 250 min 250 min


50

1500

2400

900

P

15

60



Weekly Profit and Loss Statement

Using Cost Accounting method and preferred product

P Q Total

Production quantity

Sales revenue

- Raw Material

- Direct Labor Variance =

Gross Margin

- Operating Expense

Profit or (Loss)

60 50

$5,400.00 $5,000.00 $10,400.00

$2,700.00 $2,000.00 $4,700.00

$600.00 $416.67 $1,600.00 $583.33

$4,100.00

$4,400.00

($300.00)



Production quantity worksheet

Non-Preferred Product Resource A Resource B Resource C Resource D


Customer demand (units)

Resource capacity

consumed by product

Maximum capacityconsumed (min)

Available capacity (min)

Remaining capacity (min)

Preferred Product Resource A Resource B Resource C Resource D


Maximum productiontime/resource (min/unit)

Quantity of non-preferredproduct (units)

Notes: Produce as much of the non-preferred product as possible with the available capacity

With any excess capacity, produce as much of the preferred product as possible

P


1500 min 1500 min 1500 min 1500 min


100

1500

2400

900

Q

30

30



Weekly Profit and Loss Statement

Using Cost Accounting method and preferred product

P Q Total

Production quantity

Sales revenue

- Raw Material

- Direct Labor Variance =

Gross Margin

- Operating Expense

Profit or (Loss)

100 30

$9,000.00 $3,000.00 $12,000.00

$4,500.00 $1,200.00 $5,700.00

$1,000.00 $249.90 $1,600.00 $350.10

$4,700.00

$4,400.00

$300.00



Throughput accounting method

Product P Q

Selling price

Raw material cost

Throughput dollars (Selling price - raw material cost)

Constraint production time (min/unit) *

Production rate (units/hour) (60 / Constraint production time)

Throughput rate ($/hour) (Throughput dollars * production rate)

Preferred Product

* Note : The constraint is determined by the resource that limits the amount of

product that can be produced (e.g. resource with the longest production time inmin/unit)

*

$45.00 $40.00

15 min 30 min

$45.00 $60.00

4

$120.00$180.00

$90.00 $100.00

2


Simple & easily understood at all levels of theorganization

The information must be timely

Provide data that is:◦ relevant for decision making

◦ consistent with the company’s strategy and tactics

Used for cost management rather than costallocation or variance avoidance



Should be both financial & operational

Must be aligned to the company’s strategy

Must provide timely feedback

Must induce employees to the take actions thatimprove company performance not localperformance

Operational:

Productivity

First Pass Quality

Delivery Performance

Lead-Time

Financial:

Throughput

Operating Expense

Net Profit

Return on Assets


“A Vision Without Execution is a Hallucination”

-Thomas Edison

“However beautiful the strategy, you shouldoccasionally look at the results”

- Winston Churchill



Introduced by Dr. Eli Goldratt in 2002

He defined “Strategy” as, simply, the answer to thequestion: “What for?” (The answer is the objective of aproposed change).

He defined “Tactic” as, simply, the answer to thequestion “How to?” (The answer is the details of theproposed change).

From these definitions, it is clear that every Strategy(What for?) should have an associated Tactic (How to?)

Therefore Strategy and Tactics must always exist in“pairs” and must exist at every level of the organization.


Strategy and Tactic trees are a logical structure fordefining and communicating all the necessary andsufficient changes to achieve the company’s strategy

They define:◦ The sequence of implementation of the changes to achieve

the strategy

◦ Not only what to change, but more importantly, what not tochange

◦ How to implement the changes and why.


Necessary Assumptions

Parallel Assumptions

Sufficiency Assumptions

Why is the change needed?

What ForWhat is the objective of the change?

Why is the change possible?

Why do we need more details?

How will the change be achieved?

How



Starts with developing the value proposition from thecustomers perspective

Then creating a Strategy and Tactics Tree with the focusof improving value (removing a significant limitation forthe customer)

Then developing and aligning the Key PerformanceIndicators with the Strategy (and eliminating metrics thatdon’t align with the strategy)

Then achieve buy-in from all levels of the organization bycommunicating the Strategy and Tactics tree andaddressing all reservation and negative implications


Customer Focus and Leadership

Stable and CapableDelivery System

Continuous ImprovementCulture

Vision and Mission Strategy and Tactics Performance MetricsValue Analysis andValue Proposition

SynchronousFlow

CapableProcesses

EmployeeInvolvement

and Teamwork

Root Cause Analysis and Problem Solving

Operational Excellence

FocusedImprovement

Initiatives

WorkforceCapability and

Flexibility

SystematicCapacity

Expansion

Management System

Decision Making

Change Management

Sustainability Profitable Growth

Documents

160407 Operational Excellence - Creating a High Performing Organization