Ever since childhood, we all want to know what grades we get on our report cards, and what these grades mean in terms of how well we are doing. We want to be evaluated based on parameters we understand and we can affect by our efforts.

A key issue in manufacturing is consistency as we go from a shop to an department to an entire plant and to the company as a whole. We don’t want to use parameters in terms of which which excellent local performance can aggregate to poor global performance. Once performance measures are identified, the next challenge is to use them as a basis for management decisions that are in the best interest of the company while being fair and nonthreatening to employees. In particular, actions taken to improve one aspect of performance must not degrade another. In addition to these issues, in a lean environment, we need to consider the impact of improvement projects, before and after they are carried out.

Measuring process compliance or results?

One possible approach to performance evaluation is to measure how closely our practice matches a standard of how things should be done. This is how you will be evaluated if you apply for the Malcolm Baldridge award or for ISO-900x certification. If matters little whether your outgoing quality is any good, as long as you follow the “right” processes. Iwao Kobayashi’s “20-keys” approach follows the same logic. The keys have names like “Cleaning and organizing,” or “Quick changeover,” and each key has 5 levels of achievement. By definition, a plant that is at level 5 in all 20 keys is excellent.

The advantage of process measures is that the corrective action for bad performance is always to bring the plant closer to compliance. But is it impossible for a plant to be at level 5 in all 20 keys and still chronically lose money? Don’t some of the keys matter more than others? The world would be simpler if a process existed such that compliance guaranteed excellence.

In fact, all the stakeholders in a factory care much more about the results it achieves than the processes by which it does. Most commonly used are the five dimensions of Quality, Cost, Delivery, Safety, and Morale. More generally, Harvard’s R. Kaplan has proposed a “balance scorecard” to measure multiple aspects of business performance, as opposed to just manufacturing performance.

Requirements on metrics

Metrics should be focused on results rather than process compliance. The Malcolm Baldridge award criteria, ISO-900x, or Kobayashi’s “20-keys to workplace improvement” promote performance measurement based on check lists of how close actual shop practices are to some norm. The problem with this approach is that it is possible to score high on any of these check lists and still go bankrupt. In other words, it’s not what you do that counts but what good it does. The key requirements for metrics are as follows:

1. Ratings by external agencies for consumer goods. The JD Power and Associates Initial Quality Surveys rate products based on the number of problems reported by buyers within the first three months of purchase, which reflect manufacturing quality. Consumer Reports publishes reliability and maintainability ratings for cars that have been on the road for several years, which are more indicative of design quality.
2. Counts of customer claims. For parts sold to OEMs, Quality Problem Reports (QPR) are the equivalent of traffic tickets issued by customers. They require failure analysis by the supplier’s quality department and a report to the customer in a prescribed format, such as Ford’s “8D” or Honda’s “5P.” The rate at which such claims are issued is clearly a metric of the customers’ perception of your product quality.
3. Rejection rates. Defectives are weeded out at Receiving, at various points inside the manufacturing process, at final test, and at customers’ Receiving. Rejection rates are calculated at each of these points and fed back to the managers in charge. There may, however, be too many of these rates to be usable by top management.
4. First-pass yield. The first-pass yield may be the most useful measure of in-process quality for top management. It is the percentage of the production volume that makes it through the entire process unscathed — that is, without failing any inspection or test, and without being waived, reworked, or scrapped (See Figure 2).

Figure 2. The First-Pass Yield

Part 3: Equipment

The aggregate metric for equipment most often mentioned in the Lean literature is Overall Equipment Effectiveness (OEE). I first encountered it 15 years ago, when a client’s intern who had been slated to help on a project I was coaching, was instead commandeered to spend the summer calculating the OEEs of machine tools. I argued that the project was a better opportunity than just taking measurements, both for the improvements at stake for the client and for the intern’s learning experience, but I lost. Looking closer at the OEE itself, I felt that it was difficult to calculate accurately, analyze, and act on. In other words, it does not meet the requirements listed in Part 1.

The OEE is usually defined as follows:

OEE = Availability × Performance × Quality

A perfect machine works whenever you need it, and is therefore available 100% of the time. It works at its nominal speed, and therefore its performance is 100%, and it never makes a defective product, so that its yield is 100%, and so is its OEE. The OEE of a real machine is intended reflects the combination of its failures to live up to these ideals.

Availability

The first problem is the meaning of availability. When we say of any device that it is available, we mean that we can use it right now. For a production machine that does one operation at a time, it would mean that it is both up and not in use. The main reason for it to be unavailable is that it is busy, which really shouldn’t count against it, should it? In telecommunications, availability for a telephone switch is synonymous with the probability that it is up. This is because it is supposed to be up all the time, and to have the capacity to handle all incoming calls. In principle, it could be unavailable because of saturation, but the availability formula does not even consider it. It is only based on uptime and downtime, or on time between failures and time to repair.

But a lathe doesn’t work like a telephone switch it at least two ways:

1. It is rarely expected to work all the time: it may work two shifts a day, five days a week, and, whether it is down the rest of the time has no effect on performance.
2. If you have one work piece on a spindle, you can’t load another one at the same time, and the spindle is unavailable.

In the OEE context, we are not talking about the machine being available in the sense being up and ready to take on a new task but instead of time available to a scheduler to assign it work in the course of a planning period, which may be a shift or a day, or whatever time interval is used for this factory.

If, in a 480-minute shift, a machine stops during a 30-minute break and has up to 60 minutes of unscheduled downtime and setups, then the planner can count of 480 -30-60 = 390 minutes in which to schedule work, which yields a ratio of: Availability = 390/480 = 87%.

This assumes that the machine’s ability to do work is proportional to the time it is up. My first moped as a teenager was a hand-me-down from a relative that had been garaged for 7 years. It started fine when cold, but the spark plug started malfunctioning once it was warm, about 15 minutes later. It would stay up for 75% of a 20-minute ride but that didn’t mean it completed 75% of the rides. It actually left me stranded about 100% of the time; it was unusable. Likewise, your link to a server may work 99% of the time while uploading a large file and break every time you try to save it. The formula makes it look as if it has 99% availability when in fact it is 0%.

There is also an issue with deducting setups from available time, because, unlike breakdowns, it is not just an issue of the technical performance of the machine but is directly affected by operating policies. The planner can influence the amount of time used for setups, reducing it by increasing the size of production runs or, if setup times vary with all pairs of from- and t0-products, by sequencing them so as to minimize the total setup time.

This is not to say that the formula is wrong but only that it commingles the effects of many causes and that its relevance is not universal. There may be better ways to quantify availability depending on the characteristics of a machine and the work it is assigned. Companies that calculate OEEs often do not bother with such subtleties and simply equate availability with uptime.

Performance

Performance is a generic term with many different meanings. As a factor in the OEE, it is the ratio of nominal to actual process time of the machine. If the machine actually takes two minutes to process a part when it is supposed to take only one, its performance is 50%. The times used are net of setups and don’t consider any quality issue, because quality is accounted for in the last factor. This factor is meant to account for microstoppages and reduced speeds, and it is a relevant and important equipment metric in its own right.

Quality

As discussed in Part 2, Quality is not a metric but a whole dimension of manufacturing performance with many relevant metrics. In the OEE, this factor is just the yield of the operation, meaning the ratio of good parts to total parts produced. It is not the First-Pass Yield, because reworked parts are still counted as good.

Conclusions on the OEE

While the OEE summarizes metrics that are individually of interest, not much use can be made of it without unbundling it into its different factors. Since the meaning and the calculation methods for its factors vary across companies, it cannot be used for benchmarking. Within a company and even within a plant, it is not always obvious that raising the OEE of every machine enhances the performance of the plant as a whole.

In principle, it should. Who doesn’t want all machines to be always available, perform to standard, and make good parts? The problem is that, in practice, increasing the OEE is often confused with increasing utilization, and that there are machines for which it is not a worthwhile goal. Such machines may be cheap auxiliaries to expensive ones, like a drill press following a large milling machine in a cell, or they may have been bought for their ability to take on a large variety of tasks on demand.

Unbundling the OEE into its component factors yields a more easily understandable set of equipment metrics that is less likely to mislead management. While these metrics can be collected on each piece of equipment, management must then be wary of aggregating them over machines that are intended to be used differently.

Part 4: Gaming and How to Prevent It

As massively practiced today, Management-by-Objectives (MBO) boils down to management imposing numerical targets on a few half-baked metrics, cascading this approach down the organization and giving individuals a strong incentive to spin their numbers. It is a caricature of the process Peter Drucker recommended almost 60 years ago, and he deserves no more of the blame for it than Toyota does for what passes as Lean in most companies that claim to implement it.

A non-manufacturing example of decadent MBO is the French police under former president Sarkozy, which was tasked by the government to decrease the crime rate by 3%/year while increasing the proportion of solved cases. According to the French press, this was achieved by gaming the numbers. The journalists first latched on to a reported yearly decrease in identity theft, which seemed unlikely. They found that police stations routinely refused to register complaints about identity theft on the grounds that the victims were the banks and not the individuals whose identities were stolen. A retired officer also explained how crimes were systematically downgraded with, for example, an attempted break-in recorded as the less severe “vandalism.”

The fastest way the police had found to boost the rate of case solutions was to focus on violations detected through their own actions, such as undocumented aliens found through identity checks. The solution rate for such crimes is 100%, because they are simultaneously discovered and solved. The challenge is to generate just enough of such cases to boost the solution rate without increasing the overall crime rate… To achieve this result, packs of police officers stalked train stations in search of offenders, as reported both by cops who felt this was not what they had joined up to do, and innocent citizens who complained about being harassed for their ethnicity.

In organizations affected by this kind of gaming, members work to make numbers look good rather than fulfill their missions. It is a widely held belief that you get what you measure and that people will always work to improve their performance metrics, but this is not a simplistic view of human nature. This behavior does not come naturally. On their own, schoolteachers focus on educating children, not boosting test scores, and production operators on making parts they can take pride in. It takes heavy-handed management to turn conscientious professionals into metrics-obsessed gamers, in the form, for example, of daily meetings focused entirely on the numbers, backed up by matching human resource policies on retention, promotion, raises and bonuses.

But enough about police work. Let us return to Manufacturing, and list a few of the most common ways of gaming metrics in our environment:

1. Taking advantage of bad metrics. As discussed in The Staying Power of Bad Metrics, many metrics commonly used in manufacturing are poorly defined, providing gaming opportunities, such as outsourcing in order to increase sales per employee.
2. Stealing from the future. In sports, nothing is more dramatic than the game won by points scored in the last seconds of a game. The bell rings right after the ball spirals into the basket and the Cinderella team wins the championship. In business, the end of an accounting period is the end of a game, and, as it approaches, sales scrambles to close last-minute deals and manufacturing to ship a few more orders. This is what Eli Goldratt called the “hockey stick effect.” Of course, this is done by moving up activities that would otherwise have taken place a few days later, during the beginning of the next accounting period. As a consequence, the beginning of the period is almost quiescent. Not much is going on, but it will be made up at the end…
3. Redefining 100%. Many ratios, by definition, top out at 100%. A machine cannot run 25 hours/day, and a manufacturing process cannot produce more good parts than the total it makes. This is why ratios like equipment uptime and first-pass yield top out at 100%. Any result under 100%, however, invites questions on how it could be improved. A common way to fob off the questioners is to decree, for example, that a particular machine could not possibly be up more than 85% of the time, and redefine the scale so that 85% uptime is 100% performance. For production rates in manual operations, the ratio of an operator’s output to a work standard is often used instead of process times or piece rates. Such ratios have the advantage of being comparable across operations, and are not bounded in either direction. But their relevance depends on a work standard, and, when everybody in a shop performs at 140% of standard, chances are that the standards are engineered for this purpose.
4. Leveraging ambiguity. Terms like availability, cycle time, or value added are used with different meanings in different organizations, creating many opportunities to game the metrics. If the product’s market share in the first quarter went for 1% to 2%, it doubled, but, if it went back to 1% in the second quarter, it went down by 1%.
5. …

Why do people who, in other parts of their lives, may be model citizens, engage in such behaviors, ranging from spinning to cheating? One answer is that, with what MBO has degenerated into in many companies, management is co-opting metrics gamers into its ranks. It is not that gaming is human nature, but instead that you are actively weeding out those who don’t engage in it. Changing such habits in an organization is obviously not easy.

Assume, for example, that your goal is to be competitive by having a skilled work force, and that your analysis shows that it requires employees to stay for entire careers so that what they learn at the company stays in the company. You then apply a number of different methods to make it happen:

• Communications. You make sure that all employees know what you are doing.
• Career planning. You have human resources develop a plan with all employees so that each one knows what he or she can aspire to by staying with the company.
• Organized professional development. You organize formal training, on-the-job training, and continuous improvement to provide opportunities for employees to develop the skills they need to execute their plans.
• Job enrichment. You redesign the jobs themselves to make more effective use of each employee’s talents.

If employees appreciate their jobs and have long-term career perspectives within the company, few of them should quit or make excuses not to come to work today, and the results should be visible in lower employee turnover rates and absenteeism.

The metrics are there to validate the approaches taken to reach the goal, but the goal is not to improve the metrics. It is a subtle difference. If you have the flu, you have a fever, but your goal is to heal, not just to bring down the fever. Once you are healed, you fever will be gone, and the decrease in your temperature is therefore a relevant indicator of your healing process, but it is not the healing process. If bringing down the fever were the goal, you could “game” your temperature and bring it down without healing. This distinction existed in Drucker’s original writings about MBO, but got lost in implementation.

So, what can you do to prevent metrics gaming? Let us examine three strategies:

1. Review the metrics themselves. Use the requirements listed in my first post on this subject. You may not be able to completely game-proof your metrics, but at least you could make sure that they make sense for your business and are not trivially easy to game.
2. Decouple the metrics from immediate rewards. Piece rates used to be the most common form of payment for production work, but have almost entirely vanished in advanced manufacturing economies, and been replaced by hourly wages. Performance expectations are attached, but there is no direct link to the amount produced in a given hour of a given day. There are many reasons for this evolution:
   • The pace of work is often set by machines or by a moving line, rather than by the individual.
   • The best performance for the plant is not necessarily achieved by every individual maximizing output at all times.
   • More is expected of all individuals than just putting out work pieces, including training or participating in improvement activities.

   One consequence of this decoupling is that time studies are easier and more accurate than in a piece rate environment. The same logic applies in management: the more direct the link between metrics and individual evaluations, the more intense the gaming. Don’t make the metrics the key to promotions or to prizes representing a substantial part of a manager’s compensation. Use them only as indicators to inform discussions on plans and strategies.

3. Increase the measurement frequency. The longer the reporting period, the more opportunities it offers for gaming the metrics by stealing from the future, and the more pronounced the hockey stick effect. Conversely, you can reduce it by measuring more often, and eliminate it by monitoring continuously, as is done, for example by the electronic production monitors that keep a running tally of planned versus actual production in a line during a shift. Periods exist in accounting because of the limitations of data processing technology at the time the accounting methods were developed. In the days of J.P. Morgan, closing the books was a major effort that a company could only be do every so often. In 2012, there is no technical impediment to the “anytime close,” but the publication of periodic reports continues by force of habit. Metrics in the language of things as well as the language of money can be monitored continuously.
4. Have third parties calculate the metrics. In principle, counting chips should be done more accurately by agents with no stake in where they may fall. In practice, it is not only expensive but does not always produce the desired result. It is the approach used in Management Accounting. A plant’s accounting manager, or comptroller, is not chosen by the plant manager, he or she reports directly to corporate finance, and has no motivation to humor the plant manager. This is a double-edged sword because, with neutrality, comes a distance from the object of the measurement that may cause misunderstandings, and Management Accounting leaders like Robert Kaplan, Orrie Fiume, or Brian Maskell have been struggling with the challenge of providing relevant, actionable information to managers for the past 30 years. Outside of Accounting, for metrics in the language of things, the closest you can come to having a 3rd party produce the measurements is to have a computer system do it, based on automatic data acquisition. There is no opportunity for gaming, but the issues of relevance are as acute as in Management Accounting.

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Editor’s note: this is part of a continuing series by Michel Baudin.  As new sections become available we will add them to this article.  You can also check out Michel’s blog here.

Many organizations view lean as a program to eliminate waste and quickly cut costs expecting the accounting results to appear at the bottom line this month. Operations are “leaned out” and the assumption is that if well-trained experts properly implement the tools, the efficiency gains will be self-sustaining.

These companies are impatient to see the results and too often lay people off as a result of the process improvement.  Laying people off is not an objective of the Toyota Production System (TPS) and a key component is patient expectation that the fruits of daily continuous improvement will develop the associates and operation improvements will result over time. While process improvement improves quality, reduces waste and increases productive throughput, the impatient company misses the very essence of the Toyota Way.

The Toyota Production System (TPS) aims to use the management tools to identify and intentionally expose problems in order to engage the associates in solving them. These two points are usually missed in the common “Lean Implementation” where Leadership delegates Lean to a set of champions or “belts” and then asks them to select projects and report cost savings. Leadership goes about business as usual while the champions are out cutting costs. The problem is that many times these tools are used to reduce people which results in losing a valuable resource to those that leave and the trust of those that stay. Leaders asking for the number of people layed off is an old technique of the traditional operation and indicates that company leadership either doesn’t understand or need a lean organization. Meanwhile, the improvements that were made in such an environment do not usually last because they were not systemic and did not include the people doing the work.

The approach that has worked for Toyota is much more broad and holistic.  It starts with a philosophy that the strength of the company is based on continuous process improvement and respect for people.  Measurement of success is multidimensional across the success of the enterprise and not just at specific projects with problems.  Solving a specific problem is expected and if the company leader stops there, they have missed the essence of the TPS.   At every level, the results the TPS Leadership looks for includes the answer to the question: what did the team members learn and did they develop their skills by solving this problem?   Over time at Toyota this is the way “culture” has developed toward teamwork and process improvement. As a result, permanent sustainment has been achieved.

There are a broad set of methods available for improvement but the unit of improvement is primarily at the level of the work group led by a group leader. That is where the work process takes place. The group leader is supported by hourly-team leaders who facilitate kaizen at the team-member level. Improvement is not focused only on large lean projects, but by many small improvements led by team members so there is strong ownership of the process and the results. Over time, continuous improvement by identifying and solving problems develops the employee and strengthens the company toward sustaining the improvements and becoming a learning organization. Many companies look only for the results of projects as a return of the cost of the project and pay no attention to the development of the associates. Only Leadership who practice both goals will have a successful Lean Transformation.

A vital, yet commonly missed component of a Lean Transformation is a strong Human Resources Department that is given the proper role in a Lean organization and then has the knowledge and experience to perform that role. The Lean Transformation responsibility in many companies is often assigned to a lean champion in operations or engineering to implement the tools of lean six sigma. The lean champion must use people as the team for solving the problems but generally assumes no responsibility nor is aware of the need to develop the skills of the team members.  Such skills as teambuilding, conflict management, supervision or project management  are just as important to success in the workplace as the analytical and statistical tools of lean and six sigma. Many times HR isn’t even included in the lean implementation model. HR in the traditional company manages training program budgets, maintains personnel records, manages the hiring processes and maintains the company benefits system.  In such traditional companies, the work of HR is not designed to develop the link between training associates and raising skill levels by work process improvement. The Leadership of a true Lean organization understands that Lean depends on Leaders who can build purpose, trust and partnership in the organization and who understand the lean processes and will be the coaches of the “army of problem solvers.”  This philosophy dramatically changes the role of HR as well as the culture of the company. Why? HR is focused on developing the human resources by raising knowledge and skills to new levels. Engineering, operations and accounting focus on the fixed assets of the company and the return on investment.

Human Resources then become the “keepers of the values” of the organization, owning the processes that will make “continuous improvement and respect for people” a reality. This process starts with hiring (and promoting) the right people who “fit” the lean organization.  People who share the same values, can solve problems, work in a team, and in the case of leaders, coach others. After selection, these processes continue with training and development, daily engagement with employees, evaluation, compensation and communication. The essence of the TPS is first developing the skills of the associate for improving the process and second, achieving the actual ROI results of the improvement.  This is a difficult and sometimes impossible shift for many companies. It is a complete turnaround in management practice as the traditional experience treats the human participation in the enterprise as a cost and not as a partnership worthy of investment.

Lean Transformation is not an easy thing. But once you get started and can see the power of people at work, it is contagious. People want to be a part of a larger vision and purpose and they want to be involved. Everyone wants to contribute their skills and abilities and to be productive. We just have to lead and structure the organization in such a way that gives them that opportunity.

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Michael Hoseus, Center for Quality People and Organizations

Cash Powell, Center for Competitive Change, University of Dayton

We all agree that Lean tools and methods are very important, but we have yet to come to grips with the fact that with just the tools and methods, the best one can hope to achieve is more efficient batch-and-queue processing. Zero-sum (win-lose) outcomes will be prevalent, and flow, which requires much more than just tools and methods, will never be achieved. There is now a common view that Lean has realized some significant, albeit limited, success. Namely, that “We’ve won the battle of ideas on how to operate and improve processes” (1). Meaning, people broadly recognize that the tools and methods work and many people use them.

This was not, in fact, a battle, and there was nothing to win (but lots to lose). Managers hungry for better results have always gobbled up new tools and methods to improve productivity and cut costs. They love that stuff. The “We’ve won the battle…” characterization is off the mark and conceals the reality of our situation. Lean practitioners must always see reality as it is, to help assure that the PCDA problem-solving cycles they engage in reflect the right problem to work on.

The best that can be said regarding the spread of Lean tools and methods since the early 1990s is that we have not lost ground. However, it would be more accurate to say that we have actually lost substantial ground. If there was a battle in our era, we surrendered on day one sometime in the late 1970s. The battle, therefore, has yet to begin. Yet we have lost precious time and a huge amount of goodwill among the employees due to widespread zero-sum Fake Lean. Organizations rely on workers to recognize and solve problems every day, which they will not do if harmed by Lean.

The tools and methods used to improve productivity and reduce costs are to executives what salt, fat, and sugar are to dieters: irresistible temptations, but which can also cause great harm. Throughout the history of modern progressive management, executives have cherry-picked the tools to achieve short-term gains, usually at the expense of employees, suppliers, and communities. The pioneers were very troubled by this.

Frederick Taylor and his team were frustrated that executives did not adopt the Scientific Management system in its full form. Instead, they used only the parts they felt were appropriate to their current needs. There was also rivalry and bitterness between Taylor’s team and the legions of consultants that sprang up overnight claiming expertise, and who were very successful in selling senior managers only the tools of Scientific Management (1, 2). Among their biggest concerns were that improvements would be short-lived and the consistently negative outcomes experienced by employees.

Frank Woollard had this to say about the importance of achieving non-zero-sum (win-win) outcomes for employees and other key stakeholders (Principles of Mass and Flow Production, p. 180):

“Unless the eighteenth principle is satisfied the [flow production] system cannot reach full stature…This principle of ‘benefit for all’ is not based on altruistic ideals – much as these are to be admired – but upon the hard facts of business efficiency.”

Taiichi Ohno experienced the cherry-picking phenomenon first-hand when he introduced Toyota’s production system to Toyota’s suppliers in the early 1970s (NPS: New Production System, p. 153, 155):

“Companies make a big mistake in implementing the Toyota production system thinking that it is just a production method. The Toyota production method won’t work unless it is used as an overall management system… those who decide to implement the Toyota production system must be fully committed. If you try to adopt only the ‘good parts’, you’ll fail.”

The pioneers of progressive management saw their work as a battle to replace conventional zero-sum management in its entirety with a non-zero-sum progressive management system. That must be our battle too.

We still have much to learn from the successes and failures of these pioneers, who worked so hard to establish progressive management in organizations on a broad basis. Shame on us if we ignore them and claim a meaningless victory.

Only Heather didn’t go along with the deal.  In California small claims court, the rules are no claims over $10K and no lawyrs allowed.  Heather, being a California resident, said no thanks to the hundred bucks and filed a claim in small claims court.  The ‘no lawyers allowed’ rule meant Honda had to send someone from management to defend the case.  The facts being on Heather’s side, she won a shade under the $10K max, and lawyers got zip.  She launched a web site to help everyone get the same deal, and the class action lawyers are facing the pathetic reality that, for years they have been getting rich while adding next to no value for their clients, and the jig may very well be up.  They are facing the brutal reality that they may well go the way of the horse and Blockbuster Video store.

In like fashion, the Super Bowl garnered some 115 million viewers, and peddled ads for $3.5 million a pop to reach them – about 3 cents a look.  The folks at Old Milwaukee, after pounding a few of their own products to get the creative juices flowing I imagine, opted out of the $3.5 million national spot and sprung for $1,500 to run a local spot during the big game in North Platte, Nebraska – the second smallest market in the nation.

They then followed it up with a social network blitz and to date have had better than 150K looks – about 1 cent per view, and it is getting more YouTube action than all of the big time ads.  Seems as though better than 99% of the $3.5 million ad price wasn’t adding much value.

These kinds of things are happening all the time, where long standing assumptions about the way things simply are and have to be are being stood on their ear.  In my seminars I typically grab any two identical items I can find – water bottles, coffee cups, pens … and hold them up and ask people if they would pay more for one than the other because the provider of one of them had to ship it from 2,000 miles further away than the provider of the other one; if they would pay more for one than the other if it had a higher inventory carrying cost, or had to cover the cost of a larger IT department.  Of  course the answer is no.  None of those things make the product any more valuable to the customer.

The attendees, however, quite often come back by telling me that those things are necessary – logistics, administration, IT, quality control are costs that are necessary – no avoiding them – so they are an essential element of creating the product, and therefore are an element of the value of the product.

They are an essential element right up until someone comes along and figures out how to provide the product without them.  Lawyers were necessary to right a coprorate wrong – right up until Heather came along; and Super Bowl ads were the purview of the mega advertisers, and the associate cost structure was necessary, until the folks at Old Mil had an idea.  Rationalizing costs that do not add value in the eyes of customers as necessary and unavoidable is just so much whistling past the graveyard – a graveyard full of buggy makers and Blockbuster Video store owners, with holes being dug as we speak for lawyers and ad execs, and there is apt to be plenty of room in that graveyard for you if you believe that ‘necessary‘ and ‘valuable‘ mean the same thing.

Don’t get me wrong – I’m a huge fan of Apple… products.  I made the leap from PC to Mac a few years ago and haven’t looked back.  I also own an iPhone and iPad, a 27″ Thunderbolt display, use iTunes – the whole kit and kaboodle.  Those that haven’t used Apple products for more than a few hours simply don’t understand – the bloomin’ stuff just works – and works like I want it to work – every time all the time.  That has value, and is why I happily pay more for Apple products.  Just this past weekend I watched a friend spend nearly an hour trying to get his Android phone to do what he wanted it to do.  Wow.  Really?  There’s a reason why less than 1% of Apple users leave Apple.

I’ve heard several people call Tim Cook the world’s greatest supply chain executive.  Sorry, I’ve never bought that.  Tim Cook executed a traditional “chase cheap labor” supply chain strategy in a great way.  But in my book that’s not excellence – that’s being the shining star of lemmings – the golden sheep if you will.  The China factory isn’t necessarily a bad thing – one valid reason to have a factory overseas is to be closer to your customers, and there are a lot of potential customers in that part of the world.  But as nearly a singular factory serving the whole world?  With employees that are abused?  Sorry, no dice.

Apple, and Tim Cook, has done some good things.  They do audit their supplier’s factories more than most companies.  They are taking some strong workers rights positions in their industry.  They are opening their kimono and exposing more of their dirty laundry.

Apple has $96 billion in the bank – think of what they could do.  More than just words and policy statements and such.

They could significantly increase the wages of their employees in China – even if they doubled their wages Apple would still have record profits.  But that could actually cause more harm than good.  Many workers simply want to earn enough to eventually go back to their home town or help their remote families.  Some social destabilization dynamics need to be understood.

However consider this, Mr. Cook:

How about immediately hiring and sending an Apple observer into every plant, perhaps every line in every plant, full time.  That way Foxconn wouldn’t be able to shift workers from one line to another to hide abuses before audits occurred.  How much would that cost?  A million or two a year?  Put Foxconn on notice that this is not acceptable, with milestones that could transfer manufacturing elsewhere.  Difficult?  Sure.  Ethical business often is.

How about publicly saying (words…) that chasing low cost labor is not a long-term “manufacturing” option and then back it up by sinking a billion or two into developing truly innovative manufacturing methods and systems. Imagine what could happen if the same level of design prowess that was applied to product design was applied to manufacturing design.  Perhaps Apple could become the next Toyota – instead of just another cheap labor chaser lemming.

I could go on – and I’m sure there are lots of other ideas out there.  The bottom line is that thanks to its success – built on the backs of abused workers – Apple has the unique opportunity to change a global dynamic.  But that will take more than just words.

As my friend Shrikant Kalegaonkar tweeted this morning, the world is changing.  Voice of the customer now extends beyond products, and now includes the process for making the product.  As an Apple customer – and also a shareholder – I care about Apple’s financial performance.  I want it to do well so it can return value to me in terms of new products and direct shareholder gains.  I don’t have a problem with wealth being created and distributed commensurate with individual effectiveness.  But I also have a conscience, and increasingly I hate battling my conscience when using my Apple products.  I bet many Apple customers are feeling the same way.  That’s dangerous for any company, and especially one like Apple which claims to embrace people.

So imagine.  Imagine what would happen if Apple took the high road, then backed up the words with serious, solid, perhaps expensive action.  Action that would change a global dynamic, showing that it is possible to be very profitable, very global, and very human-centered.  $96 billion gives Apple the ability to do something truly incredible.

In addition to the actual improvement of the global condition, I bet a lot of folks would be impressed with the company – and would be inclined to buy its products.

Besides these alarming legacy costs, many Government sectors have identified that there are enormous wastes/costs involved in delivering current services.  The Governor of Connecticut, Dan Malloy, mentioned in his statewide budget address on February 16, 2011 some examples of this waste:

• There are 10 agencies in CT to make sure the other agencies do their job
• There are 5 agencies for business to work with to do business in CT, when there should be one
• There are 7 agencies focused on energy, when there should be one

In Minnesota there were 25 different agencies that a person with disabilities had to interface with, instead on one.

In the March 1, 2011, General Accounting Office (Federal, Non-Partisan) report:

“presents 34 areas where agencies, offices, or initiatives have similar or overlapping objectives or provide similar services to the same populations; or where government missions are fragmented across multiple agencies or programs. These areas span a range of government missions: agriculture, defense, economic development, energy, general government, health, homeland security, international affairs, and social services. Within and across these missions, this report touches on hundreds of federal programs, affecting virtually all major federal departments and agencies. Overlap and fragmentation among government programs or activities can be harbingers of unnecessary duplication. Reducing or eliminating duplication, overlap, or fragmentation could potentially save billions of tax dollars annually and help agencies provide more efficient and effective services. The areas identified in this report are not intended to represent the full universe of duplication, overlap, or fragmentation within the federal government. We will continue to identify additional issues in future reports.”

http://www.gao.gov/products/GAO-11-318SP

It’s very interesting to note in the GAO report that savings in the Billions/year can be achieved without hampering any programs!  In fact, implementing these recommendations would actually cause existing services to run more efficiently and effectively for their intended Customers, generating additional savings.

At the root cause of these organizational wastes, many are based on the services, processes, and procedures being “Government focused” as opposed to “end-customer focused (taxpayer)”.  Who really is the customer and how should they be serviced most effectively?

Lean is a set of tools and techniques that allows organizations to attack these wastes.  Some examples of State Governments using Lean/Kaizens:

Minnesota (http://www.lean.state.mn.us/LEAN_pages/results.html):

• Dept. of Human Services – Reduced the elapsed time for processing professional/technical contracts by 40% and reduced the amount of staff processing time by 30%.
• Veteran’s Affairs – 70% reduction in task time and a 58% reduction in wait time in the process for reviewing and approving financial benefits for qualified veterans seeking assistance.

Iowa (http://lean.iowa.gov/results/index.html): 142 Kaizens already done, such as:

• Dept. of Natural Resources – The construction procurement process – process steps were reduced by 46%, handoffs by 62%, and decisions were reduced by 56%.
• Iowa Workforce Development – Unemployment Insurance Tax Collection – reduced steps by 35%, delays by 56%, decisions by 30%, loop backs (rework) by 44% and handoffs by 78%.

Local Government is also utilized by (to name a few):

• Cape Coral, Florida
• Grand Rapids, Michigan
• Erie County, New York
• Ventura County, California

Links to these and other Government sites utilizing Lean can be found on:http://leangovcenter.com/govweb.htm

Similar to what would be done in the private sector; a more holistic approach to Lean embodies top management in the initial Lean training and, more importantly, how to introduce major change (Lean) into an organization.  Experience has shown that Lean, like any other major initiative, is more about changing the culture (Culture = “the way we do things around here”) of the organization (85%+ of the factors driving success), versus just a tools and techniques approach (15%).  If the actions, behaviors, systems & structures in the organization aren’t modified, success will be limited.  Ultimately, the broader the use of Lean and embedding it in the actual organizational culture, the more leverage/savings the organization achieves.

When Lean is coupled with annual employee attrition rates of 4% (historically) to now 6%+ due to baby boomers, Government can utilize Lean to provide improved services/capacity at less cost by removing the waste, while not having to replace departing employees.  In Lean Government deployment, attrition is advocated instead of layoffs.

A caveat when applying Lean is that the metrics for the “Measures That Matter” should have two components – the better, faster component for speed of service to customers/greater capacity and the cost/cheaper component to ensure the delivery of these services have less unit cost.

So, if Lean is so great, why hasn’t it spread like wildfire in Government?

1. Lean is a foreign paradigm to Government.  It’s new and seems like a panacea – how can something deliver less costs, reduce wastes and also provide better service and capacity at the same time (Lean does!)?
2. The “cost of not knowing” since Government leaders don’t know what or how to do Lean, it’s politically risky to take a leap of faith forward and use Lean.  So, slashing costs and increasing taxes through the old traditional methods wins out, leaving less service/capacity.
3. There is no competition in Government.  If you are the Mayor of a city, there aren’t 3-4 other Mayors competing for the city’s business or governance.  With no competition (except for elections), there is no outside driving force causing Lean to take hold, even in the face of huge budget issues

In summary, Lean is a clear solution for Government to provide greater service and capacity at reduced costs = Better, Faster, and Cheaper.  Finding good leaders in Government is the key to utilizing Lean and being successful!

People have a basic expectation of fairness in their interactions with other people. This expectation also exists among people conducting business transactions because business is a socio-economic activity. The principle of fairness is accepted as a fundamental moral construct for human interaction. Therefore, outcomes in business that are unfair can be seen as immoral. However, that is usually not the case, as people can be very forgiving: an outcome is fair as long as it is not too unfair. But if unfairness goes beyond commonly accepted limits, or is seen as outrageous, then a judgment of immoral practices may be made. The following three examples illustrate unfairness going beyond commonly accepted limits, which makes people upset and causes them to disengage or look for ways to get even.

The first example is the use of online reverse auctions (ORA), in which a buyer pits new and incumbent suppliers against one another in real-time dynamic bidding to drive down purchase prices. While ORAs may have a broader purpose than to drive down prices, rapid price reduction is the main focus and principal desired outcome from the buyer’s perspective. The process is clearly zero-sum in its intent: suppliers’ financial losses are buyers’ financial gains. The use of ORAs has been so divisive that people have worked to soften the zero-sum outcomes for suppliers, such as introducing ORA codes of conduct – but to avail. ORAs are nothing more than technology-assisted zero-sum power-based bargaining. Suppliers soon realize there is nothing in it for them and refuse to participate. Importantly, the employees who run ORAs are caught between management’s mandate for cost reduction and the company’s ethics policies, which almost always cite fairness as a fundamental requirement for how business will be conducted. Thus, management has put purchasing people into a position where they are forced to deviate from ethics policies, yet will surely be held accountable on an individual basis for failure to comply with ethics policies. That too is unfair – to one’s own employees.

The second example is that of Fake Lean. Most organizations’ Lean efforts are nothing more than a large-scale zero-sum effort to reduce costs. The rapid introduction of zero-sum Fake Lean is due to a combination of short-term thinking, ignorance of what Lean management is, and ineptitude on the part senior managers and consultants. Nevertheless, the resulting zero-sum outcomes negatively impact one or more key stakeholders: employees, suppliers, customers, investors, and communities. The most common and most damaging outcome is to lay employees off as a result of process improvement. This quickly results in a tangible sense of unfairness that destroys employees’ desire to participate in continuous improvement. It also fundamentally contradicts the “Respect for People” principle. The cause-and-effect is obvious, yet managers choose to ignore this reality and continue to expect employees to participate in continuous improvement. Can this be seen as anything but unfair, and unreasonable? Note also that continuous improvement engineers are put in a position by management to cut costs by improving processes, which often means unemployment for their colleagues, yet also abide by the company’s code of ethics – which will usually cite fairness as a fundamental requirement for how business will be conducted. This too is unfair to one’s own employees. Fake Lean is unfair Lean.

The third and final example relates to corporate wealth; creating shareholder value, which is one of the responsibilities of senior management (not maximizing shareholder value). In the early 1970s, two U.S. business school professors wrote a paper in which they argued that granting stock options to top executives would compel them to think like owners and make decisions that better reflected owners’ interests. The professors and others continued to advocate for changes in executive compensation as a means of improving decision-making and to increase shareholder value. Within about 10 years, the idea had begun to take hold in corporate boardrooms, and annual executive compensation for American executives went from about 90 percent cash salary and 10 percent stock options, to about 10 percent cash salary and 90 percent stock options. As might be expected, what has happened in the U.S. since the early 1980s is a never-ending stream of new tactics designed to increase stock price, usually at someone else’s expense – most often employees.

The tactics are many and include: mergers, acquisitions (and usually overpay); lay people off; stock buybacks (usually at peak prices, which consume the greatest amount of cash); eliminate defined benefits pension plans; cut wages; limit wage increases to 3 percent or less; cut current employee benefits; cut retiree benefits; underfund pension and benefits plans; take out life insurance policies on employees to fund deferred executive pay; use pension funds to finance retiree healthcare benefits; hire contractors to do the work formerly done by employees (thereby reducing headcount, wages, and benefits expenses); rapidly grow the company (to be so large through acquisitions that it cannot be managed effectively) then split it into two or more independent pieces; conduct online reverse auctions to reduce the purchase prices of goods and services; outsource work; offshore work to lower wage countries; hire cheaper labor (women earn about 16 percent less than men; hire cheaper B.S. grads instead of M.B.A.s [that one is OK]); increase (or decrease) dividend payments to investors; and sell bonds to finance certain activities. Have I missed anything? Yeah, probably. How about creating shareholder value by improving the value proposition for end-use customers!

During the last 40 years, American workers’ productivity has increased nearly as much as in the period 1947-1975, yet median real wages have steadily declined and household income has declined more than 10 percent since 2000. Despite all the merger and acquisition activity over the last 30 years, which has greatly reduced the number of competitors in most industries and increased economies of scale, most companies have little pricing power because workers’ wages have decreased substantially. That, plus year-over-year increase in healthcare insurance premiums, forces companies to continue to cut costs via process improvement and outsourcing, both of which result in more layoffs. Thankfully, however, the stock price continues its upward march. (Note also that flat wages and layoffs cause tax receipts to decline, which, in turn, lays the groundwork for privatizing public assets. This is how citizens unfairly lose their public assets).

What has emerged among U.S. workers over the decades is a sense of unfairness that has gone from tolerable to intolerable, resulting in discontentment and conflict. The actions taken to increase stock price have left the workers who add value to goods and services, and other stakeholders, behind. Is this the outcome that executives, who were incentivized to think and act as owners, wanted? As a business owner, this is not an outcome that I would want.

REAL Lean business is moral business because it seeks to ensure that outcomes are fair – no perfectly so, but reasonably so. One party may not gain as much as it wants, but it does not lose as much as it could. Perhaps the moment for Lean management to take off has finally arrived, but for a reason far different than anyone of us could have imagined: as an antidote to long-term systemic unfairness in business.

REAL Lean business is fair business.

When someone says the cost of a first class letter is X, while the cost of a piece of junk mail is Y, the only way they could have arrived at those numbers is to have made a bunch of allocations. The actual cost of delivering a letter is pretty close to $NADA. The cost of opening up all of those post office doors and firing up all those trucks, however, is astronomical. They get to the cost of each type of item by going through some undoubtedly very clever arithmetic that ends up telling them x.xxx% of funny truck expense is assigned to letters and y.yyy% is assigned to magazines. Just because someone conjured up a slick equation, and has some pretzel logic to justify the math doesn’t make it so, however. The cost of the truck does not in any way shape or form depend on what sort of stuff it is being used to deliver on any given day. It is simply the cost of the truck and trying to make it into the cost of anything else leads nowhere other than to bad decision making.

So here we have Senator John McCain introducing the Postal Reform Act of 2011, stating, “Additionally, there are certain types of mail upon which the Postal Service routinely loses money. This bill would require that the vendors responsible for this mail be responsible for covering their costs. In Fiscal Year 2010, the Postal Service lost nearly $1.7 billion on these type of ‘underwater’ postal products that failed to cover their costs. For example, the Periodicals class of mail, which includes newspapers and magazines, has not covered its costs for 14 consecutive years, generating total losses of $4.3 billion over that period.”

The reason the post office lost $8.4 billion last year is not because their prices were too low on some products. It is because they have a huge installed capacity (and the associated fixed costs) that was grossly under-utilized. The solution is greater volume. No matter what the price charged for the volume, since the direct cost is zip, any revenue they get for the additional volume will help to cover the fixed costs. That being the case, the key to increasing volumes is not to raise prices – it is to lower them. That is Price Volume/ Price Elasticity / Economics 101 / Basic common sense.

Periodicals did not, with all due respect to the senator, lose money. Their direct cost is nothing. What he is saying is that they were priced at something less than enough to cover the allocation, in light of the actual volume. The Senator should stick to what we pay him for – that is to look damn good for a man of his age, shake hands, kiss babies, and make pointless speeches in the well of the Senate – and leave things like pricing and strategic marketing to people who know what they are doing. If the Senator wants to help, he should start by abolishing PUBLIC LAW 109–435—DEC. 20, 2006, which says the Post Office is “To allocate the total institutional costs of the Postal Service appropriately.”

The idea that some products are profitable and others are not is a foible limited not to the Post Office. A whole lot of businesses unhampered by federal law make the same foolish mistake. Allocating costs leads to silly conclusions like believing delivering magazines is unprofitable, which leads to price increases, which leads to lower volumes, which leads to allocating the same fixed costs over smaller volumes, which leads to cost increases, which leads to further price increases … you get the picture.

Cost allocating is sending the Post Office down the drain – and a whole lot of our money with it.

Pricing has nothing to do with cost. It is set by the market as a function of the value created relative to the value proposition of the competition. It is destructive thinking to believe that COST + PROFIT = PRICE. Toyota told us a long time ago that PRICE – PROFIT = COST. There is a huge difference. So long as the government institutionalizes the wrong formula, the Post Office is doomed. Private enterprise, however, has no such excuse.

My thoughts on China change with each trip – perhaps just as the country is changing rapidly. You can’t help but wonder about the true meaning of communism when you get off the plane and are hit with a barrage of ads on the jet way for various luxury items. Today’s state-sanctioned Shanghai Daily even had a feature article discussing how many Chinese were on the list of the wealthiest in the world. Unlike in the U.S. the article, and by extension the government, praised their success. Go figure.

On my last trip I was amazed with the accelerating improvements in this potentially monster economy. I visited medical device companies that had technology on par with the best in the U.S. and who were investing in their future growth by creating 10,000-student engineering universities of their own. I noticed how discussions with trade show attendees had changed from “here’s a sample of a product from our competitor in America – can you back-engineer and build me a million” to “here’s exactly how we’d like to improve on our competitor’s product”. Society had become, for better or worse, very westernized with teenagers wearing the latest fashions to a Starbucks on every block.

This time I’m not as optimistic. I talked to a lot of customers as well as several expats running the local operations for foreign companies. Times are changing, and not necessarily for the better. Wage inflation is accelerating, restrictions on foreign control of local outsourced manufacturing operations are increasing faster than the ability of local Chinese to manage such complex operations, and the disparity between the upper and lower class is growing.

Basic services are becoming very strained by growth, and one expat living in Shanghai told me that healthcare quality had significantly declined just in the past year – to the point that she now goes to Hong Kong or back to the U.S. for even basic care. Technology does not create great service – knowledge and experience using the technology does. The human factor, once again. I fear significant social upheaval in China’s future, and the impact that will have on the world.

Local governments have monstrous infrastructure loans that are becoming a problem. In the past they would seize property by eminent domain, sell it to companies to develop into infrastructure, and use the funds to seize more property. Lots of homes and businesses seized with as little as 90 days notice, which is why a primary consideration for multinational companies building factories is to develop in an area where seizure isn’t likely – i.e. not on a straight (potential rail) line between two cities. The problem is that the amount of property that can be seized has dried up, thereby drying up the ability of local governments to repay loans. Oops.

But what has really struck me on this trip is the lack of consistency and adherence to standards. It is pervasive and makes me wonder if this is the goal, and then the hurdle, of great civilizations. How’s that for a deep thought?

I don’t necessarily mean regulation-enforced standards, but simply an inherent desire to do things right, the same way, and an inner knowledge that consistency is efficient and practical. It is also an awareness that something is wrong and needs to be changed.

A few examples to illustrate what I mean, beginning with the very basic. In our hotel, a five star by local standards, light bulbs are inconsistent in the same type and application. Overhead lighting cans may have incandescent, compact fluorescent, etc. At the breakfast bar the coffee is in a different location each morning. Sometimes there’s low fat milk, sometimes not.

Trivial? Perhaps – it didn’t strike me as all that unusual or systemic until I came across or heard about the following other examples.

An expat I talked to who is running the local operations for a large U.S. multinational told me of her frustration mentoring her Chinese leadership team – and why she believes it will be a long time before the company entrusts the operations to them without an expat chief. One example she gave was how on her gemba walks she noticed trash on the floor, every day. Her management team simply doesn’t see it, let alone take action to improve it. She then connects it to understanding the financial statements and data required to run the operations – if they can’t see trash on the floor, can they see the minor and what may appear on the surface to be trivial, but still potentially important, issues in metrics and data? Let alone do something to correct it?

Recognizing, digging into, asking why, then improving is a fundamental requirement for solid autonomous leadership. In her opinion it’s not there yet.

A third and final example, one that will scare most people flying in and out of Shanghai’s Pudong airport. A different expat was telling me about the amount of news that really is censored, especially including safety issues. The world witnessed some of this recently with the derailment of a high-speed train in China and how it was initially covered up to the point even having train cars buried before an investigation could take place.

According to a good friend of hers, a commercial pilot, the actions of planes around Pudong are scarily similar to the cars and buses on local streets – effectively a free for all. Instead of the highly-ordered sequencing, positioning, and following commands of traffic controllers that you see at U.S. and European airports, in China commands are often ignored. Just last week a Qatar jet had declared a fuel emergency and was given a direct approach into Pudong. Still, on final approach, two local airliners dove in in front of the Qatar jet to land sooner. Disaster was narrowly averted. Perhaps this is why United turns off Channel 9 when landing in China?

Understanding the value of consistency and standards, regulation-enforced but more importantly an inner knowledge and understanding of the value of consistency and adhering to standards, appears to be a key to an efficient society.

Similar to that, understanding that standards can and should be changed and improved upon with appropriate review is also key. Otherwise stagnation occurs. I see the U.S. as having a high level of standards and consistency, but struggling with creating the ability to improve and move forward.

Creating and adhering to standards and standardization are both a critical goal, and a critical hurdle. For both societies and organizations.

As we shall see, the countermeasures for our situation entail Compression Thinking, changing how we think from expansion to coping with Compression. While this may be necessary, most of us like our comfort zones, and see no reason to change thinking. Our optimism bias is to keep working harder as we do now, and surely the economy will take off again. And it might, a time or two, but not forever, and for many reasons.

Common definitions of “compression” include squeezing anything mechanical, compacting redundancy out of data, and cramming for a test. It’s an apt analogy to describe both our impending global situation and proposing what we can do about it:

• Population growth leads to densely packed populations to feed, clothe, and shelter.
• Squeezed resources; earth is a finite planet. Its resources are also finite, even if their limits cannot precisely be known.
• Compress unnecessary activity (waste) out of all work processes, eliminating everything unnecessary for the purpose.
• Compress resource footprints for all human activity.
• Compress work organizations’ learning cycles: Complexity is increasing, so we must collectively learn more, integrate the learning, and put it into action faster.

The last bullet point is italicized because dealing with a difficult situation is seldom pleasant. Documenting a doomsday scenario is much easier than actually doing anything: First we must convince ourselves that we should. Second we have to learn what to do, and keep learning. Third we have to substantially change how we look at the world. Fourth we have to change our habitual actions. Anyone designing an election campaign would quickly rate the probabilities of this as near zero, but lets try anyway. Once people regard new goals as important, they are capable of amazing accomplishments.

The Case: Why We Need Compression Thinking

The case for Compression rests on no single, clinching thread of evidence. That for practical purposes the world is finite should be self-evident, yet optimistic bias in the simplest of financial formulas for compound interest presumes growth; perhaps unending growth. Presuming that a higher price will bring a greater quantity to market assumes that more can be had – somewhere, somehow. But if no more can be had at any price, a market in any conventional sense no longer is possible. That is, recognition that we live in a physically finite world turns many of our rules of economics, and for living, upside down.

We’re not in that kind of world yet, and may not be for years, but humans keep globally consuming more resources at a faster rate. Humans do not change quickly, and unless we begin to act, the consequences of this will be on us before we learn to cope. Why?

Figure 1. More Global Issues Than a Single Mind can Absorb in Detail

In Figure 1 the scattering of issue headlines on a fractal image is intended to crudely illustrate that all these issues interrelate. Exactly how things will play out is not precisely predictable. These issues have been classified in four headings in the four colored balls.

1. Finite Resources: Evidence is that at the present rate of growth in their use, we are near peak extraction for many sources of energy and materials. Peak oil has had the most attention. No one knows whether we are at peak oil now, or within another decade or so, but it does not have an infinite horizon. Peak does not mean that we run completely out. It means that we can no longer extract at an increasing rate. After hitting peak, the annual draw of any virgin material cannot support continued growth in its use. Indeed, assuming two percent annual growth in use, even iron ore will hit a peak within 50 years.Another key to understanding the nature of shortage is yield on energy. After rich natural sources of materials are worked out, subsequent ones are more dispersed, so it takes more energy and technology to get them. That is, it takes more energy to obtain energy. This is obvious today in the deep drilling for oil, hydrofracking for natural gas, and so on.The same is true of minerals; they take energy to obtain. Basic physics: the more dispersed any source is, the more energy it takes to concentrate it into useable form. Improved technology can improve this return, but it cannot beat nature’s basic physics. And all known sources of fossil fuel alternatives have energy yields far below the 100/1 or higher of the first Spindletop oil gusher.Water is another impending shortage, water we can use, that is. Fresh water is scarce in many places around the world. The Colorado is not the only river nearly tapped out. How climate may affect this is not precisely predictable, but in most places we can use water far more frugally and still maintain quality of life. But we may not able to maintain lush golf courses in the middle of deserts. And to maintain supplies of fresh water, we had best be careful with toxins. Don’t dump them in rivers or pump them into the ground to contaminate water tables.
2. Precarious Environment: While it’s always possible that a sudden tipping point could dramatically wreak environmental Armageddon, so far a steady diet of human abuses has only made nature’s balance ever more precarious.  Even environmentalists cannot keep up with all the threats in detail. Dig into a few, and unknowns are of more concern than the problems already mapped. One reason is delayed effects. For example, the slow build up of dioxins in tissue was not discovered until well after they were widely dispersed (as from incinerators), which made large-scale remediation much more disruptive.An illustrative issue now is the size of the Pacific Gyre garbage patch, and whether the tiny subsurface plastic particles that constitute nearly all of it contain plasticizers that are endocrine disruptors adversely affecting sea life. Several unknowns factor into clarifying this possibility: how much stuff is out there, what is in it, and will it seriously affect sea life or the carbon cycle? This will take a while. In the meantime, skeptics want to see evidence no one can ignore to believe that a patch “bigger than Texas” even exists. Debates on this are now limited to “crying wolf” arguments vs. “boiling frog” arguments. Without resolving every detail, however, one course of action is possible. Stop growing the garbage patch. Whatever problems it contains, why keep making them bigger?The media cannot front-page many old issues that are still with us; like the ozone hole, or dead zones at the mouths of rivers. When not kept in consciousness, and when consequences appear in places far removed in time and distance from potential causes, both problem solving and remedial action are delayed.Of all these concerns, ocean acidification and the carbon cycle are two with catastrophic potential. About half of all atmospheric oxygen is from the ocean, and here also, too much knowledge remains “gray box.” However, it is known that acidification damages coral reefs and inhibits calcification of zooplankton. Seriously depleting the activity of all oceanic plankton would not only disrupt the food chain at the bottom, but could start shutting down our own supply of oxygen.Without the related uncertainties of climate change, plenty of evidence suggests how human activity could nudge the global ecosphere out of a Goldilocks zone. By conventional wait and see thinking, we will take little preventive action, and waiting for scientific investigations to be conclusive is like experimenting with the fuse of a bomb while sitting on it. We’ll never be able to foresee every unintended consequence coming. However, we can keep our problems to a minimum by making them smaller. Just produce and use a lot less stuff.
3. Overconsumption: The mere existence of a global population of 9-10 billion people might not overtax the resources of the planet, but living in the industrial society style to which are accustomed will. We use too much.All industrial economies have high consumption rates, but the United States remains the world’s consumption champion. On average, Americans drink 50 gallons of cola per year. We burn more than our body weight in petroleum every week. While we may not think that we consume much, everybody has seen such numbers, plus health warnings about obesity and sedentary living, all suggesting that we consume more than is good for us. Nonetheless, cutting back is hard when the companies persuading us to buy don’t want us to cut back either.Measured by GNP, mining, agriculture, and manufacturing are small parts of the economy. The lion’s share of it consumes. Governments consume resources. Service companies consume resources internally, and most of them encourage their customers to consume more and more besides.However, the growth of our trash trails has slowed. During the last decade American solid waste leveled off at about 4.5 pounds per capita daily. Because of recycling and incineration, only about half of it goes to landfill, but total solid waste still grew 6 percent during the decade, equal to the increase in population. Waste disposal has stabilized, but it remains a big, messy problem.Industrialized regions having less than 20 percent of the world’s population burns about 75 percent of the world’s energy. The remaining 80 percent of the global population can better use what is available to them, but can’t be expected to reduce the use of resources that they are barely using now. It’s pretty clear from whence the heaviest cuts and greatest imagination must come, but industrial societies can also apply more advanced technology to these goals.

   Were there no real shortages, why anyone would want to use resources just to be using them makes no sense.

4. Pushback: Environmentalists push back on wasteful commercialization, some quietly and some noisily, but when personally pushed, others squawk too. Almost anyone whose property or mode of living is degraded by grubbing for resources is apt to affiliate with a NIMBY (not-in-my-backyard) movement, even if a project has a purpose like alternative fuels. Most of us like the benefits of an industrial society. Few of us like to absorb its costs in our pocketbooks. Some of us don’t like its costs to nature either.Much pushback is an exacerbation of age-old resentments fueled to flash point by shortages. For example, “Arab Spring” uprisings began where food costs were high and water short. Tunisian and Algerian unrest began with food riots. If shortages are long-term, not temporary price spikes, whether new governments can deal with this is questionable. (Food riots factored into the French Revolution. Louis XVI could not repress hungry peasants for decades, but some governments do; North Korea is a case in point.)When doomsday possibilities remain abstract concepts, they are hard to concentrate on. If they begin to affect us personally, human reactions shift rapidly, but then we have little time to grasp Compression in a holistic way. Doing that easily meanders off into economics, business, philosophy, psychology, and a few other topics. Trying to do this while people are still civil is a noble objective, if a bit of a stretch. For most action-oriented executives the first challenge is just taking breaks to personally give thought to a long-term future.
5. Complexity. Almost everything in business is more complex than 50 years ago: taxes, regulations, international competition, financial systems, software… An all-mechanical car became a rolling network of computers. Anyone using all the burgeoning social networking channels available has no time to do anything else. Add the earth’s problems to this mix, and complexity overwhelms us.What we have done is concoct a great deal of human system complexity in addition to that which nature serves up to us. Uncertainty about the future is probably the most confounding aspect of this complexity. Executives keep looking for the “new normal,” meaning a different stable state from which they can resume conduct of business in a predictable way. But suppose that never happens? Worse, suppose that, given our mindsets today, the business world will never again be simpler than it is right now. Then the only way to find a “new normal” is to create it ourselves by looking at our situation differently.

Compression Thinking

Since the world is obviously finite, expecting to use more and more resources forever is unreasonable. Even if a breakthrough like solar power lets us maintain a high level of energy consumption, always expecting to use more and more of it, or to consume more and more other virgin resources indefinitely makes no sense. However, that is exactly what the simplest of formulas used in business, like compound interest, implicitly assume. They are growth formulas.

If we dump the growth assumptions, our rules go upside down. Bigger is not necessarily better. At some size, economy of scale starts becoming diseconomy of scale.

If we pursue that old Toyota ideal of lot-size one, the concept runs outside the bounds of production for volume markets. Why not give a customer what she needs, designed to her real needs, where the customer is, or very close? Doing so is no longer attempting to “win” in a volume market. It revolutionizes business models; operations and production become the enabling side of a service business model focused on one customer at a time.

Keep going with this logic, and one questions why our processes are designed to use low concentration ores when the customer is discarding high concentration refined product? Yes, there are all kinds of problems with metallurgy and materials separation, and with reverse supply chains to pull this off, but posed simplistically, the question begs us to fundamentally rethink what we do, on what scale, and why.

All the issues in the case for Compression are global, but each has roots in actions we take locally. Nonetheless, translating grand global issues into working level action is an intellectual exercise. To help, Compression Thinking poses an arbitrary global challenge:

By the year 2040, globally improve quality of life to an industrial society equivalent using no more than half the energy and half the virgin raw materials as in the year 2000, and with virtually no known toxic releases.

Sounds impossibly idealistic, doesn’t it, but posing a challenge in an operational way simplifies a great deal of complexity about what to do:

1. Using a lot less stuff is a tough goal to execute, but easy to understand. With thought, almost any work organization can figure out how to start.
2. Improving quality of life is harder to quantify; it’s subjective, depends on each person and their culture, and many people conflate quality of life with having more stuff. But to make headway on the Compression challenge, paying attention to quality of life may move us along much quicker reducing our use of stuff.
3. Goals with dates start to become an operating plan. Most work organizations can set up goals and work plans related to this outrageous challenge.
4. However, these goals are glaringly inconsistent with how we have thought in the past, so our biggest challenge is our old nemesis – us. We begin using different kinds of tools, but we end with a different view of life, a change in values.

OK, how do we start? Can we follow principles, rules, tools, or road maps?

Yes, one can devise general “principles.” These can extend endlessly, but even more than with lean, quality, or any other difficult-to-digest mouthful, thinking and learning are the digestive juices for absorbing them. Do that and you too will soon devise “principles.”

Space being insufficient for endless lists, the compressed tabulation in Figure 2 is only a starter kit. Even more than lean, Compression Thinking is a practice. (The author is still practicing – awkwardly.) With no fixed body of knowledge, there is no stopping point. The idea is to greatly reduce resource consumption by greatly expanding our learning.

Much of the thinking attempts to reconcile the obvious clash between goals 1 and 2 in Figure 2. Going on down to goals 3 and 4, the use of tools gradually leads to a shift in values.

Figure 2. A Few “Principles” of Compression Thinking

Compression Thinking attempts to overcome a shortcoming of lean and quality thinking in practice. All too often, we remediate processes, that had we been wiser, should not have been designed. Improvement of existing processes is commendable, but Compression Thinking attempts to elevate our thinking so that we design a better future.

Vigorous Learning Enterprise

The ideas for a vigorous learning organization are a composite of the best seen in a number of companies over a 25-year span, so it is possible for real people to do these things. Migration of an existing organization to this state would take years, so it is not easy, but it seems possible.

The operational objective of a vigorous learning organization is to create that elusive ability to be both highly disciplined and highly flexible – not an easy match. In an attempt to become highly efficient, most 20^th century organizational successes became too rigid to adapt quickly. Henry Ford vs. GM in the 1920s is a classic case. GM did not try to beat Ford building Model Ts, from which everybody (including Ohno) learned a lot. Instead, GM flat out-innovated Henry, who could not adapt quickly enough to hold his market. But all that was from an earlier era, and we are entering a very different one.

Figure 3. Vigorous Learning Organization

Figure 3 shows five major aspects of a Vigorous Learning Organization. All parts interrelate, so development of such an organization is not by independent structured projects that stack up like bricks in a wall. Instead, begin initiatives to develop people, including leaders, and use systemic structure as a framework on which human capabilities can grow. (A concept of developing people in that way is why TPS senseis, if they tried to articulate development of TPS at all, used some verb like “create” and never one like “install” as if one were wedging in another software package.)

Meta-Vision: This philosophical term means the ability to see a picture of any organization from an outside-in perspective. It includes the ability to see yourself somewhat as others see you, which is not implied in the trite phrase, “seeing from the 40,000 foot level.” While no one can completely master this, the ability of leadership in particular to stop and think about a bigger picture than the P&L statements is necessary to comprehend the issues in Compression. Change starts here.

Common Mission and Goals: In the sense used here, a mission is not a goal like making a record profit, nor even a vision of some future state. It’s a statement, or common understanding of what the organization exists to do, which could be as simple as “help people dig dirt.” If they consider it socially vital, people will unite around a common mission, and some will dedicate themselves to it. Sometimes, as with health care, a mission is so obvious that it hardly needs stating. Other times it’s not obvious, so a stated mission inhibits people from flying off in multiple directions. Of course, they will not always agree on everything, but it helps if all are working for the same cause.

Missions don’t change very often. Goals change regularly. They are statements of overall transformations or improvements that everyone can work toward in the course of a few months or a few years. Two to four of these will do. Multiple people can’t keep too many in mind at once. If you are familiar with annual strategic plans developed by hoshin kanri, the upper level objectives would be goals in this sense.

Why is all this important? People can unite around common missions and goals. Throw many monetary incentives in the mix and the carping about fairness starts.

Rigorous Learning Systems: This begins with problem recognition and problem resolution using some version of scientific logic, like PDCA. It includes asking 5 whys or 500 whys, going to the gemba (which may be with a customer, etc., not just a factory), and learning how to think critically. That’s a start; there’s more.

Common issues using such frameworks are not probing deeply or widely enough to frame a problem in context, whether it is important or symptomatic when deciding where to invest learning power. A second is not retaining what we learn so that we rework the same problem time and again. That is, collectively absorbing what individuals learn so that it is shared and becomes standard practice is not as easy as it sounds.

A learning system is incomplete without a way to capture what is learned so that it is easily accessible when new situations are faced. The filing system need not be complex; it’s better if it is simple. A3 paper files are a form of such a system, but files are useless repositories if unused. And use of a record system is two-way; as input to it as well as output from it, expected as a regular part of work. Human psychology factors in because we do not like to report negative findings or failures in detail, but that is some of our most important learning.

To explain why design and development of this system is important, consider a description of a university library, used to explain to graduate students why they should know the history of their field. “The library is our past speaking to our present so that you can make our future better than today.”

Behavior for Learning

Vigorous learning refers to collective learning by an active working organization, which can extend to big external networks. It is more than individual learning just for self-interest, although that can be a valuable source of innovative ideas. Collective learning implies sharing what we learn that is relevant to our mission or to immediate challenges. Some of us like to hide what we know. Indeed a company’s reward system may perversely encourage this by overemphasizing individual performance.

Thus behavior for learning digs into the worm cans of organizational culture, the composite of “how we do things around here.” Culture is influenced by everything, but notably history, reward systems, and leadership behavior. Changing it may be like restructuring noodles, but it can be done.

So what behavior encourages collective learning? Just developing people for teamwork, for starters. Many people have been through forming, storming, norming, and so on. Beyond that, three factors seem to help:

1. Encouraging the reporting of negative outcomes. Before people will do this, they have to actually experience that doing so is not a career impediment. They are still valued.
2. Set up a code of behavior. Better yet have employees from all areas devise one. That may take time, but the outcome is thought out from many angles, and it is theirs. Even better, have some form of organizational recognition that people actually commit to abiding by the code; like they put their John Hancock on a big thing on a wall that everybody else can see.
3. Devise a code used in meetings to straighten up someone straying off, especially if discussion is degenerating to personal attacks, or a hidden agenda is sensed. It could be a code phrase like “Are we going below the belt here?”

For most of us, behavior for learning – collective learning – is not normal. Neither Mother nor schooling fully prepared us. Instinct is to revert to form because conflict may be more fun. So once a code of behavior is in place, leaders need to be exemplars of it, and little “ceremonies” should regularly reinforce it, sort of like standing for the national anthem every time you go to a ball game.

Servant Leadership: The foundation of servant leadership by that name is a book with that title by Robert Greenleaf. However, the military version of it is short, no-nonsense, and equally applicable to any organization. In military organizations, the mission has to be the primary motivation, not money. Few people go into combat because of immediate financial incentives, so leadership has to be of the people.

The nub of this kind of leadership is recognizing that an organization’s purpose is to carry out a mission with excellence. It’s not to maximize profit. A military commander developing troops has to be aware that the next mission may be something unexpected. Versatility and preparedness are important. Finally a good commander realizes that in any tough situation, the welfare of everyone depends on top performance as a unit.

So the key ingredients of becoming this kind of leader are personal attitude, integrity, and priorities. Four simple rules of behavior sum this up:

1. Mission comes first.
2. Welfare of the troops comes second.
3. My personal welfare is third.
4. Always tell the truth (good, bad, and ugly).

(Because of this, ex-military commanders usually make good lean leaders too.)

The Compression Institute

This fledgling organization is in the process of being incorporated. It’s puny compared with the global challenges presented, and it’s busy with the simple tasks necessary to get any movement started, but one must start somewhere.

Its mission is to create learning action groups to make Compression Thinking a common practice.

Of course, this is a leap into the unknown. Few people, if any, have done anything like it, but if you know of an exemplar case, we’d love to hear about it.

To learn a little more, visit www.compression.org. If you sign on for the newsletter there, about every two weeks you will get an update, and we hope to be reporting some progress soon.

Most of all, if you are eager to join this adventure, e-mail Doc Hall: doc@compression.org.

And yes, Compression paints a scary scenario, but if you follow global news, scenarios that are even scarier are pretty easy to concoct. We’re not pessimistic. If we wake up to the situation that we are in and take action, there’s reason to be optimistic.