FEATURE - Every day we see the shortcomings of strategies based solely on financial statistics. The author discusses how Lean thinking offers an alternative that leads to better and more sustainable results.

By: Tshepo Thobejane

The recent horrors and unfortunate events at Boeing got me thinking about the impact of measurement and how it drives behavior. While researching this, I came across a number of articles correcting Deming's famous quote, "If you can't measure it, you can't manage it." The full and correct quote found on page 35 of W. Edwards Deming's book The New Economics states that: "It is wrong to assume that if you can't measure it, you can't manage it - an expensive myth." It is amazing how leaving out a few words and taking a quote out of context can cause people to unwittingly spread a message that contradicts the original.

There are hundreds, if not thousands, of articles describing the problems at Boeing, but one that particularly resonated with me was written by an Improvement Practitioner who worked at Boeing from 1989 to 1999. On his Web site, The Lean Thinker, Mark Rosenthal shared his personal story about his past experiences as an industrial engineer at a company plagued by delivery problems, inefficient production methods and cost overruns. He then recounted the time Boeing decided to transition from an engineering-focused organization to a process-oriented organization focused on meeting customer needs. This journey included training staff, holding kaizen events and eventually led to the introduction of flow manufacturing in the form of a moving assembly line. All of these changes led to quality improvements and the on-time delivery of the first Boeing 777, following the launch of the design program.

Mark's article tells us that a major change began in 1999 when the focus of the organization's management shifted to prioritizing financial metrics. The management team was instructed to use "shareholder value" as the primary consideration for decisions. Shareholder value was understood to mean maintaining a high stock price and focusing on financial ratios such as Return on Net Assets (RONA). Eli Goldratt liked to say, "Tell me how you measure me, and I will tell you how I will behave. If you measure me in an illogical way.... then don't complain about illogical behavior." In the case of Boeing, when RONA became the main measure of performance and rewards, the management team used short-term approaches to drive up the measure (outsourcing business units to improve balance sheet ratios). This change undid all the gains made during the continuous improvement era and led to a decline in quality focus and performance.

Financial statistics are not in themselves a problem. The problem is when we forget that financial results are outcomes of a process and not the means to an outcome. In The New Economics, Deming admonishes us not to focus on numerical goals because this leads to distortion and faking, especially when the system is unable to meet the goal. Instead, he advises us to work on methods to improve the process. Another challenge in focusing only on financial ratios (lowering counters to improve the ratio) is that we forget to recognize that organizations are living and social systems. The numbers recorded do not necessarily reveal the value of all social interactions in the organization.

In his 1963 Informal Sociology :A Casual Introduction to Sociological Thinking, William Bruce Cameron wrote: "It would be nice if all the data sociologists needed could be counted, because then we could run them through IBM machines and draw graphs the way economists do. But not everything that can be counted counts, and not everything that counts can be counted." If we have to make structural cuts based on numbers and ratios, it is in our interest to make sure we understand what is behind each number. We must go to the Gemba and ask questions to understand the potential risks of such actions. Without this, we may even lose critical institutional memory.

So how can we use measurements as reliable tools for managing business performance? For this, we need to start with a few words about what Lean is. The definition that has always stuck with me was given by John Shook in one of his presentations on the Lean Transformation Framework. John talks about Lean Thinking and Practice as a management approach to "systematically develop people and continuously improve processes to create value and prosperity with minimal resources." Looking at this definition, we can see how the various elements of the Balanced Scorecard work together.

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The concept of the Balanced Scorecard was introduced in 1992 by David Norton and Robert Kaplan, who took previous metric performance measures and adapted them to include nonfinancial information. The word "balanced" indicates that they recognized that financial measures alone were not sufficient to manage the performance of an organizational asset. Based on the above definition of Lean Thinking and Practice and the concept of the Balanced Scorecard, we can see that using metrics to achieve results must follow an integrated process structure.

In this process, we start by making sure we have the right skills and follow plans to develop the capabilities of our people. They are developed to improve the processes and methods used to deliver products and services. We track the number of improvement activities at different levels of the organization. Improvement must be aligned with our strategic focus in the market and therefore result in higher customer satisfaction and more sales. In addition to more sales, process improvement should lead to cost reduction and the combined result is higher profitability for shareholders. This process requires more effort and time to improve RONA, but on the other hand, it ensures future sustainability of the organization. Employing strategy - Hoshin Kanri - can help an organization ensure that we arrive at balanced statistics with alignment across business functions. Setting goals is only part of the process. We must apply the PDCA process to detect and respond to deviations as we work to achieve desired results.

It naturally follows that leaders will take shortcuts if boards of directors reward their executives solely on the basis of short-term financial results. In the case of Boeing, we should not have been surprised to learn that the former CEO, Dave Calhoun, received a 45% salary increase while his organization had organizational deficiencies in quality and safety controls. Every management team must ensure that a long-term vision and balanced metrics are used to make decisions.

To learn more about Lean Thinking, come to the Lean Global Connection 2024 - the largest online Lean-event in the world! Register for free here.

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